MUCH has happened since I wrote last fall in these pages.[i] Then the European Recovery Program was in its initial exploratory stage. Following the completion of the Paris report of the 16-nation Committee of European Economic Coöperation, and of the Harriman, Krug and Nourse Committee reports here at home, President Truman submitted to Congress a program of European aid from which, after extensive hearings, emerged the Economic Coöperation Act of 1948 (Title I of the Foreign Assistance Act) signed by the President on April 4. Mr. Paul Hoffman was appointed the American Administrator, and Mr. Averell Harriman the American Special Representative in Europe. The program got under way at approximately the April 1 deadline that had been set, with no real break after the Interim Aid program which Congress had passed in the special session last December.

This is a record of bipartisan coöperation in foreign policy in which we may well take satisfaction. It was entirely understandable that the debate in Congress should center upon the amount of aid and the method of administration. Between July 1, 1945, and December 31, 1947, we had made to the Western European countries loans and grants of nearly $12 billion, of which about $10 billion had already been used up. When, on top of this, the Paris Committee -- after substantially slashing its first draft in conference with Mr. Clayton -- presented in September an estimate of $19.6 billion for the next four years, it intensified the discussion which had been going on ever since Secretary Marshall's speech in June. There were sharp differences of opinion as to how much more European aid our economy could stand without bringing on an inflation here that would defeat the program; whether dollars really were the cure for Europe's ills; and how we could make sure they would be spent effectively to promote recovery rather than merely to postpone the corrective measures which only the European countries themselves could undertake. The Harriman Committee reduced the estimated four-year cost to the Treasury to an amount which ranged from $12.5 billion to $17.2 billion depending upon whether more or less favorable assumptions were adopted; and the President in his message to Congress of December 19 proposed a $17 billion four-year program.

But it was quickly recognized that any figures beyond the first year were highly conjectural, and the debate centered upon the initial amount to be appropriated. The President asked for $6.8 billion for 15 months, and the only change made by Congress, in response to Senator Vandenberg's suggestion, was to reduce it to $5.3 billion for 12 months from April 1, 1948, thus giving Congress an opportunity to debate the matter anew early next year in the light of the first year's experience. Whether this is enough for the first year is of course a matter of conjecture. It can be affected either way by many circumstances. But it has, I think, been generally accepted both here and in Europe as an adequate indication of our serious intentions, and at the same time it is not so large, when spread out over the 16 countries and Western Germany, as to remove desirable pressure upon our Administrator and upon the European countries for making sure the funds are spent effectively. One great merit of the Act is the large measure of discretion left to the American Administrator. We are embarked upon an unprecedented program, involving diverse and to a large extent unforeseeable conditions in different countries, in which wise management will count for much more than detailed legislation. Meanwhile, the "watch-dog" committee set up by the Act will give Congress ample opportunity to keep in touch.

My chief concern, as I watched the Economic Coöperation Act take shape, was that in our absorption in the size of the appropriation and the form of the American administration, we appeared to have lost sight of what I had understood, after the Secretary's speech, to be the essence of the Marshall Plan -- the need of an integrated program of European coöperation and self-help, upon which American aid was to be contingent. Our experience after both wars had been that piecemeal aid to individual countries is of doubtful effectiveness; and it was from this kind of procedure, as I understood, that we sought to get away.

The report of the Committee of European Economic Coöperation last September, made in response to the Secretary's request, was an impressive document, considering the short time in which it was prepared; but despite much excellent analysis and much emphasis on the need of European coöperation, what mainly emerged from it was the statement of the amount of aid required from us. This was understandable, since we had asked for such an estimate. The method adopted by the Committee in estimating the amount of aid was to aggregate the international deficits of the 16 countries over a four-year period. Though everyone who has attempted to make such estimates knows how much guessing is involved, there is probably no other way to reach a first approximation. In arriving at its estimates, the Committee tried to take account of the nature of the European problem as a whole and how much intra-European coöperation could be expected, including such difficult questions as the recovery of Western Germany and its future rôle in the European economy. The danger, nevertheless, in this approach is that it tends to put American aid on a bilateral basis.

An integrated plan of European coöperation could not, of course, be worked out in a few weeks or months, and the Committee emphasized the desirability of establishing a continuing organization. But apart from setting up a few committees or study groups to work on special problems, such as the possibilities of intra-European multilateral monetary clearance and customs unions, the Committee seemed almost to have disappeared from September until March, and the only organization functioning effectively was the United Nations Economic Commission for Europe in Geneva. This Commission includes some of the Eastern European countries that rejected the Marshall Plan, as well as those in the west which accepted it. It would be interesting to know whether this apparent lapse was due to action or inaction on our part or on the part of the Western European countries.

But whatever may have been going on backstage to retard Western European coöperation in the winter months, two events in March and April went far to restore the emphasis of the original Marshall Plan. On March 17 -- perhaps in response to Mr. Bevin's speech in January calling for Western European union -- Britain, France, Belgium, the Netherlands and Luxembourg signed in Brussels a 50-year Treaty, which provides for joint military defense against aggression and for coördination of efforts "to create in Western Europe a firm basis for European economic recovery." The Treaty sets up a permanent Consultative Council of the five Powers, and provides that they "may, by agreement, invite any other state to accede;" at the same time it leaves untouched their obligations under the United Nations Charter. The fact that concurrently with the signing of this Treaty President Truman called upon Congress for expansion of our defense program as well as for speedy passage of the Economic Coöperation Act should serve notice that, unlike the situation of 1914 and 1939, there can now be no lack of certainty as to the consequences of further aggression in Europe.

On March 15, the Committee of European Economic Cooperation was reconvened in Paris. It began its meeting with the adoption of a report which made an unfavorable impression upon American observers and confirmed the view that not much had been accomplished since the September report. Its keynote appeared to be that not much could be done, even by way of preparation, until our aid was forthcoming. Of the ten "measures of coöperation" cited in the report, seven were the work of the Economic Commission for Europe in Geneva, which had been set up, and its program laid out, by the United Nations, well before the 16 countries had held their first meeting in Paris the preceding summer. In agriculture, the coöperation cited had been accomplished by the Food and Agriculture Organization of the United Nations; and on manpower problems, apart from an inconclusive conference in Rome, progress had been entirely due to bilateral negotiations quite outside the 16-nation Committee. Of the customs union projects cited, the Benelux program, which long antedates the Marshall Plan, was the only one that had been actually adopted. A mixed commission has reported favorably on the prospects for a French-Italian customs union. Græco-Turkish and Scandinavian unions are still in the discussion stage.

The only measure to which the Committee could point as its own work was the Inter-European Monetary Compensation Agreement, for the clearing of trade balances of 10 participating countries, acting through the Bank for International Settlements as agent; and the results of the first three monthly compensation operations had been so meager that the Committee concluded that the agreement could not be "fully efficacious so long as the monetary crisis in Europe persists." My view is that only dollar reserves supplied for the purpose would make it work, and it seems clear from the first 12 months' allocations of American aid which have now been tentatively made by the Administrator that dollars for this project will not be supplied. This is one of the many difficult questions we shall have to face. Intra-European clearance, if it could be realized, would be an important step toward the breakdown of the network of bilateral trade and payment agreements in which the European economy is now entangled. But it may be that it will come most effectively at a later stage when more progress has been made in developing production and restoring monetary stability in the European countries. This need not mean, however, that there may not be at least partial alternatives, through the use, for example, as Belgium has suggested, of the local currency deposits which will arise from our grants, for the financing of intra-European trade.[ii] Another possibility would be a loan from the International Bank to serve as a clearings reserve, which would be entirely in line with the stabilization -- as against the "specific projects" -- conception of the Bank's function.[iii]

But though the Paris Conference began lamely it ended most constructively. Spurred on, no doubt, by the Brussels Treaty and by the passage of our Economic Coöperation Act, it adopted on April 16 a Convention setting up a permanent Organization for European Economic Coöperation, including the 16 countries and the western zones of Germany, with headquarters in Paris. The Convention provides for a Council under the chairmanship of Premier Spaak of Belgium; for an Executive Committee of seven members, under the chairmanship of Sir Edmund Hall-Patch of Britain; a permanent Secretariat, with the French economist, Robert Marjolin, as Secretary-General; and a number of technical committees. The rôle that this European organization will play, in coöperation with our Administrator and our Special Representative in Europe, may well be the decisive factor in determining whether we shall have a truly integrated plan of European recovery, or merely a series of loans and grants to the individual countries, based on their external deficits.

II

From this brief survey of how the means and the machinery of the European Recovery Program have been provided we turn to the task itself. It is begun under better conditions than seemed probable a year ago. Some of the sense of impending crisis has passed. As regards our own economy, it now seems clear that the program will not produce such inflationary pressures as were feared. In magnitude it represents a continuation rather than an expansion of our earlier postwar aid to Europe. Pressure upon us of world demand as a whole has somewhat abated, and our export surplus this year promises to be considerably less than last. We appear now to have a better balance of inflationary and deflationary forces than at any time since the war ended. It seems not improbable that the great growth of our national product since 1939, combined with the pronounced rise of prices that followed the breakdown of OPA and continued with intermittent interruptions to the end of last year, may by now have caught up with the wartime expansion of our money supply; we perhaps have more to fear from specific pressures upon goods in short supply than from over-all inflation. But even in this respect our situation has improved. The break in the grain markets in January and February was in response to the changed statistical outlook in agriculture, both here and in the world at large. No other single change would do more to lessen inflationary pressures in Europe, both internally and externally, or provide more favorable conditions for the first year of the Recovery Program, than the agricultural improvement that seems in prospect.

Meanwhile, we must take account of the fact that some new inflationary threats have appeared at home. Not the least is the third round of wage increases whose outcome, as I write, is still unclear. In addition, we have had the tax reduction and the new program of rearmament. As regards the last, as the President's Council of Economic Advisers pointed out in its April report, there has now been enough abatement of demand, including foreign, to permit us to absorb safely some expansion of military expenditures. It seems clear, too, that such expenditures will come mainly next year rather than this. If, by then, the combined pressures of postwar demand for consumption and capital goods that have been taxing our economy to capacity have somewhat eased off, and if the foreign situation is not more acute in its political aspect and shows the economic improvement that seems now not unlikely, the general effect here may be one of sustained high activity rather than more inflation. All in all, it now seems probable that we shall have a better balanced situation than in previous years, and that our immediate problem will be mainly one of guarding against bottlenecks, as, for example, in steel, that might require some method of compulsory allocation.

In Europe, also, the situation is becoming clearer, and seems in many ways more encouraging than a year ago. The complete absorption of Czechoslovakia by the Russians was a severe blow to our hopes for east-west coöperation, but in France and Italy the Communists' bid for power has been withstood. On economic conditions, much the most illuminating and comprehensive survey that has yet appeared is that published by the Economic Commission for Europe on March 30. It shows that by the end of last year, for a group of 15 European countries including Western Germany, industrial production had recovered to about 90 percent of the 1938 level, and, excluding Germany, to about 105 percent. This is a much more rapid recovery than after World War I, when the prewar level of output was not reached until 1925. From this and other sources it seems clear that the only countries in Western Europe where production is still seriously lagging are Italy, Austria and Germany; and it continues to be true, as I emphasized in my paper last fall, that Germany, where production is still less than 40 percent of prewar, constitutes the most serious drag on recovery in Europe.

From this evidence of improvement in Europe two most interesting questions arise. How, in so short a time, and before the Marshall Plan had even gone into effect, could so pronounced a change for the better, as compared with last summer's sense of crisis, have come about? And why, if recovery has been so much more rapid than after the first war, is such a large-scale, four-year plan of American aid required? The answers to these questions go far to indicate the nature of the postwar problem. It is necessary to recall that the depression in this country in 1920-21 gave a severe setback to European recovery and that the failure to provide a governmental program of American aid halted the recovery abroad. Also, Europe's inability to finance her raw material and other capital requirements contributed heavily to depression here when our export surplus collapsed in the second half of 1920. The progress that has been made since 1945, with American aid less coördinated but quite as large as that now planned, provides grounds for hoping that our present program may succeed, but not for concluding that it is unnecessary.

Important aspects of the European recovery thus far have been its irregularity and its limited character. It was really pronounced only up to the end of 1946, and was achieved in part through the depletion of available domestic stocks; when these had been drawn down to abnormally low levels, the expansion came to a halt and in some cases was reversed. Last year was mainly one of recession and subsequent leveling off in production. Among the retarding factors were the severity of the winter of 1946-1947, the summer drought, the resulting food crisis, and the fuel shortage. But even apart from these, as after the first war, the shortage of industrial raw materials needed from abroad severely limited the further expansion of output. Over the whole situation hung the interrelated maladies of domestic inflation and external deficits; and it was the dramatic deterioration in these two fundamental factors in the last half of 1947 -- punctuated by such events as the British convertibility crisis and the astonishingly rapid melting away of our loan to Britain, and by the runaway rise of prices in France and the threatened exhaustion within a few months of French gold and dollar reserves -- that most decisively indicated the need of a large-scale, long-range program of American aid integrated with European coöperation and self-help.

This year the reports from Europe have been much more favorable, and leave little doubt that the recovery has been resumed on a substantial scale. In the first quarter, production in Great Britain, Norway and Denmark was some 20 percent above prewar, and some 10 percent above in France, Sweden, Belgium and the Netherlands; all had reached levels considerably higher than in 1947; but apart from Ruhr coal, production in Germany, Italy, Austria and Greece was still seriously lagging. Basic in the resumption of recovery has been the much improved availability of coal, which normally furnishes about four-fifths of Europe's fuel supply. American interim aid and the mild winter helped build up stocks. Polish coal exports have steadily expanded. In Britain, the efforts to speed up coal mining are now meeting with substantial success; it now seems probable that the target of 211,000,000 tons for this year which Britain gave to the Paris Conference last summer will be more than reached; and British coal exports are again becoming an important factor. The one bright spot in Germany is the marked expansion of coal output in the Ruhr. Surely one of the most hopeful signs of recovery in Europe is the prospect that Europe will soon again be self-sufficient in coal. Along with this has come substantial improvement in the output of steel and of nitrogen fertilizers, badly needed for the rehabilitation of European agriculture. In Britain the yearly rate of steel production in April exceeded 15,000,000 tons, an all-time record, while in France, where steel output had been seriously lagging, the level has now reached that of 1938. Other important indications of European recovery are the rapid restoration of the transport system, and the steps that have been recently taken to relieve labor shortages by the shifting of Italian workers to France and Belgium, and of some displaced persons from Germany to Britain.

III

These signs of progress in Europe, and quite possibly of a better balanced situation here at home, are most encouraging. They indicate that, with wise management, we may by 1952 have got a long way toward our goal. But it will help our perspective, and guard against undue expectations, if we examine more closely the nature of the goal and what its accomplishment involves. The external deficit is the crux of the European problem. To find a solution of it has been the main object of our efforts. As stated in the Economic Coöperation Act, the objective is "the achievement by the countries of Europe of a healthy economy independent of extraordinary outside assistance."

But the subject is complex and has given rise to a great disparity of views, among economists as well as laymen. As so often in economics, the differences may be mainly in emphasis, but it is just such differences that determine policy. Undoubtedly to some extent the deficits in the balances of payment of the European countries are a consequence of the internal inflation, which raises the cost of exports and attracts imports; and this condition points to the need for correcting the internal inflation as the cure for the external deficit. This is the basis of the view that "dollars cannot save Europe," but may only postpone corrective measures. A view allied to this is that the European currencies are overvalued and that the cure of the external deficit is to let them depreciate to the point where the external value of the currency is brought into line with the internal price inflation. Within this general framework there have been numerous analyses which attempt to show with more precision what the inflationary pressures are and how they might be cured. Obviously, when demand exceeds supply at the existing price level -- and that is what inflation is -- the reasons must be excessive expenditure for private consumption, or for capital goods, or for the needs of government; and it is just as obvious that such expenditures absorb resources that might otherwise produce exports, and (if foreign loans or gifts can be found to finance them) invite imports to fill the gap between home production and expenditure. It is thus literally true that reducing home demand relative to home supply would remove the external deficit.

But many such analyses seem to me little better than exercises in arithmetic. Familiar prescriptions advise tightening the consumers' belts and balancing the governments' budgets. Another which has come in for special emphasis during the past year has been to reduce capital expenditures. This is the thesis of Roy Harrod, the English economist, whose book "Are These Hardships Necessary?" has commanded wide attention and run rapidly through two editions.[iv] His answer, quite simply, is no; Britain has only to reduce her capital expenditures to reduce her foreign deficit. His arithmetic is impeccable. But any other reduction of home expenditure would give the same result, and one is led back to the economic question of what can actually be done, and what it is advisable to do, in the given situation.

Interwoven with such analysis, and a great storm center of debate, is the question of methods -- whether to return to a free-market economy, bring the inflation out into the open, and cure it by general monetary and fiscal measures, or to continue with the direct controls (a heritage of the war) that have resulted in the "repressed" inflation which threatens to paralyze the whole economy. This is a most tangled subject, and it is often difficult to separate objective analysis from philosophical predilection. We saw, in all countries, that free-market methods are not workable in a war economy. It was a question of the magnitude of the changes involved and of the adaptability of the economy to such changes. This is still the question in Europe, but with the important added facts that, first, the will to submit to direct controls is weakened in peace, except in a police state where the individual will does not count, and second, that the production-consumption objectives are not nearly so concentrated and clean-cut as in a war economy.

But it comes down to a choice of evils. Open inflation, too, can be a most destructive process, as we saw after the first war. Moreover, the European countries are by no means wholly free to choose, and what we find in practically all of them is some combination of free-market methods and direct controls. In all there is a tight control over the balance of payments and a network of bilateral trade agreements. Internally, Belgium and the Netherlands, and more recently France and Italy, have been working away from direct controls and relying increasingly -- and with considerable success -- upon monetary and fiscal controls, though one might question whether anti-inflation is not being somewhat overdone in Italy. But in England the response to last summer's crisis has been in both directions. This year's new budget calls for a substantial surplus, imports of consumption goods have been further curtailed, and capital expenditures reduced; but also further direct steps have been taken to control labor mobility, and to stabilize prices, costs and profits. There is, of course, much complaint that the economy does not function well, but how much of the blame to assign to the severity of the problem and how much to the defectiveness of methods is the difficult question. As regards production, and the ratio of exports to total output, Britain's record after all is among the best in Europe. But so serious is the balance-of-payments problem that, despite the improvement in output, British reserves are still substantially and rapidly diminishing.

This brings me back to the external deficit. If Europe's problem were only that of repairing war damage and reconverting to peace, it would still call for some external aid during the transition period; and inflation, whether open or repressed, could best be fought by a combination of such aid, to help restore production, and of internal measures to restrain demand. There would, I think, be a strong presumption that in the course of the transition period -- though not as rapidly as in the United States, because in Europe the scarcities were more acute and productive capacity much less -- direct controls should give way to free-market processes. But this is not at all the correct picture. There is nothing in economic history comparable with the structural change that has occurred in Europe's international position.

The pattern of international trade that developed in the nineteenth century has been entirely altered. We saw this only gradually after the war, and the Marshall Plan is the product of our better insight; but we shall probably be long in realizing its full implications. I have in my own thinking dropped the distinction between "transition" and "normal." It is now three years since the war ended; the Recovery Program is to cover another four, and no one knows what the structure or the condition of the world economy will be then, except that it will conform to nothing that we heretofore have known as normal.

Before the war, Europe had a deficit in trade with the western world but a surplus with the east. Within Europe, trade rested upon a triangular relationship in which Germany sold on balance to the other countries, while England was a net importer from the Continent. Throughout the world, trade rested on multilateral relations, in which sales on balance to Europe were the characteristic feature. Underneath such arrangements lay Europe's income from foreign investments built up over a long period, and from shipping and other services. This is the structure that has now been swept away. As given in the E.C.E. report, Europe's income from investment and services has declined from $2.1 billion in 1938 to a deficit of $0.6 billion in 1947. The British "Economic Survey for 1948" compares a net surplus of receipts from non-trade items of $928,000,000 in 1938 with a net deficit of $904,-000,000 in 1947. But even such figures do not give the full magnitude of the change. With Germany partitioned, the adverse foreign balance of the western zones, at a prewar living standard, would be not less than $2 billion. To cover this by any other method than American relief would require a corresponding expansion of their exports. And to this must be added substantial allowances for the disruption of east-west European trade, and for the pronounced lagging of intra-European trade generally, which is a point particularly stressed in the E.C.E. report.

IV

This is not a picture which suggests an early or an easy remedy. Though European recovery thus far has been encouraging, production will have to be carried very much beyond any previous level to achieve "a healthy economy independent of extraordinary outside assistance." For the new international structure, prewar benchmarks have no meaning. In the background of the problem lies the fact that there was evidence before the war that the structure of trade was changing in ways now so dramatically brought into the light. I tried in my earlier paper to trace the course of change, the resulting contraction of trade, and the decay of multilateral trade. Deep-seated in the whole process has been the growing predominance of the United States, resting on cumulative advantages of size and technological progress, and expressing itself in the so-much-discussed chronic dollar shortage.

What ultimate answer there may be for this disequilibrium in which trade runs persistently in our favor and against Europe -- a disequilibrium now so greatly intensified by the war -- one cannot foresee, but two parts of an approach to the answer do seem clear. We must think of the objective of the Marshall Plan in terms of reshaping the European economy and adjusting it to its changed world position, and of making the necessary adjustments in our own. We must also regard it as the beginning rather than the end of the adjustment process.

It is not my purpose here to discuss in detail the policies or procedures of the Recovery Program. Perhaps at this stage, from the outside, one can do little more than prepare the ground for such discussion. But some points must be emphasized. One that I mentioned earlier is that the task is one of clear thinking and good management. Another is the importance of seeing the problem as a whole, and getting Europe itself so to regard it. The permanent Organization of European Economic Coöperation is a long step forward, though valuable time was lost. I have not been much impressed by the "study groups" or the thinking about European coöperation in terms of customs unions or some of the other "measures of coöperation" which hold out little hope of reasonably short-term results. As the Benelux experiment indicates, a customs union (or even a low-tariff union) is at best a long-drawn-out process of negotiation, which then leads on to questions of coördination of fiscal and monetary policies, and implies more yielding of sovereignty than countries will accept save by a slow process. Such studies should continue, of course, but they seem to me quite secondary to the central task of analyzing the European economy as a whole, and accepting the responsibility, in the first instance, for an integrated plan that sees beyond the immediate national interests of its members.

The O.E.E.C. should be the counterpart in Europe of our own Economic Coöperation Administration, with the individual European countries working through it rather than directly with ourselves. One of its chief tasks should be coöperation with our Administrator, through our Special Representative in Europe, in making decisions about the uses of the foreign currency deposits which are to be set aside by the participating countries in amounts equivalent to the dollar costs of goods supplied as grants-in-aid. Since these grants will be much the larger part of our aid (though the ratio of grants to loans will vary from country to country), the uses made of them will be a major determinant of the success of the whole program. The problem is complex and delicate, and could easily be a chief source of friction and confusion both at home and abroad. We have wisely left almost complete discretion to the Administrator, beyond a general statement that the purposes should be to promote production and trade and correct inflation. But with conditions so different in the various countries, it will be difficult to say in advance what the operations should be or how they should be timed; and the placing of initial responsibility upon the O.E.E.C. should not only result in a better integrated program, but go far to meet the charge that we are interfering in the internal affairs of individual countries.

One other point that must be emphasized is that the Recovery Program is primarily a program of investment, even though this will involve food as well as raw material, equipment, or other kinds of capital goods. It may well be true, as the Harriman Committee indicated and as Mr. Harrod contends for England, that European capital expenditures have been excessive. But this is relative. It is important to distinguish between capital outlays that increase output and productivity and those for housing or general welfare that do not contribute so directly; and it is important also to distinguish between longer and shorter-run investment, with a presumption in favor of the latter. But it defeats the whole program to lose sight of the fact that Europe's most essential need is for capital expenditure. This would be true even though the task were merely that of postwar rehabilitation following wartime underinvestment. But the picture which I have tried to draw of the structural change in Europe's international position can point to no other conclusion than that the way out, if Europe is to become independent of "extraordinary outside assistance," must be through the development of her export capacity and of home production in place of imports.

Another major aspect of the problem is to revive intra-European trade, and to break down, so far as may be, the obstacles to east-west trade. It would be a shortsighted policy to coöperate with Russia by playing her own game. The best way to meet it is to promote Western European production to the point where Eastern Europe cannot afford to forego the advantages of trade. There have been some indications from Geneva that Russia is not wholly impervious to this kind of persuasion, and the continued existence of the Economic Commission for Europe might well be the vehicle for such developments. Given continuance of the recovery such as now seems in prospect, and enough evidence of determination to stand together militarily and politically, Western Europe, with the aid of the Recovery Program, might produce a changed attitude toward east-west trade. In view of the predominantly agricultural character of Eastern Europe, the concentration of industries in the west, and the need for outlets for industries in the in-between countries like Czechoslovakia and Poland, it is difficult to believe that the economic relationships will not in the end prevail. At any rate, short of supplying war goods, the better policy is to keep the door open.

The lagging of trade among the Western European countries seems to me preëminently a problem for the Organization of European Economic Coöperation. As I suggested earlier, it is partly a question of financing and of developing a clearings mechanism. But it is partly also a question of trade negotiations, which might be worked out through the O.E.E.C. into something approaching multilateral trade, as part of a program of coördination made possible by American aid in expanding output. For the present, this seems to me a more promising approach than our actually financing an intra-European clearings mechanism.

V

As I said earlier, the Recovery Program must be regarded as the beginning rather than the end. A new pattern of international trade must be developed, and with it a much more complex body of principles and procedures than applied to the old one. Though Americans are thinking about Europe now, the internal stability and external relations of our own economy present questions no less difficult. The object of the present program is to reduce Europe's external deficit by 1952 to a level that will obviate the need for extraordinary outside assistance. But in the new pattern, world trade will require American foreign investment as the balancing agent and the means of growth almost as surely as the pattern of the nineteenth century was evolved through European foreign investment. This seems the basic aspect of the structural change in international relations which, starting perhaps before the first war, was brought into full effect by the second.

What is meant by the goal of the Marshall Plan, therefore, is that, as we hope, the formal machinery of American administration of aid, mainly in the form of grants, can be terminated. But it would be a mistake to assume that by 1952 the European problem will be solved, or that we can foresee now what the further processes of adjustment will be. So far, since the war, we have had a condition of sellers' markets, and while this has not been an unmixed blessing for Europe because of the effects of inflation on the terms of trade, it has meant that exports have been limited by capacity to produce much more than by competitive costs. But besides the great changes in the underlying structure of world trade, there have been changes in tastes, in growth of secondary production in newer countries, and in productivity; and when the present abnormal demands for goods have abated, these changes may well have an important effect upon the trade position of the European countries. The restoration of European equilibrium will have to be a process of increasing productivity through capital investment, and perhaps also in part a process of turning inward, with home trade growing in relation to foreign trade. Some European economists favor this latter as the ultimate solution; but it is difficult to see how populations so dense as those in Europe can subsist on a reasonable living standard by turning inward. A more likely course would be the development of colonial areas and other relatively undeveloped parts of the world; but this suggests a long process.

As the creditor country in whatever new trade pattern is to be evolved, we should be prepared not only to invest abroad after 1952 -- though increasingly in the form of private investment -- but to import the goods our capital creates. Unfortunately, this is more than a question of reorienting our commercial policy, difficult though that is. Much more deeply, it is a question of correcting the disequilibrium arising from our cumulative productivity advantage, combined with abnormally strong demand for our consumer durable goods and capital goods. International trade theory in the nineteenth century took no account of such chronic maladjustments. The answer to this problem -- or to England's problem, now that her trade position built up through generations has turned against her -- does not readily suggest itself. No less a question is the maintenance of economic stability at home. It was our great depression of the thirties that caused other countries to turn their backs on multilateral trade and seek security in protective trade and currency devices. A recurrence is what Russia hopes for, and the rest of the world fears. One can thus find plenty to temper undue optimism as regards the longer future. But for the present things are not going badly, and the outlook for the Marshall Plan seems much better than a year ago.

[i] John H. Williams, "Economic Lessons of Two World Wars." FOREIGN AFFAIRS, October 1947.

[ii] Since this was written, it has been reported that a proposal of this nature has been tentatively agreed upon by the finance ministers of the five Powers of the Brussels pact.

[iii] For discussion of this important distinction, see my "Postwar Monetary Plans." (New York: Knopf, 3rd edition, 1947, Ch, 1, p. xxix-xxx.)

[iv] Roy Forbes Harrod, "Are These Hardships Necessary?" London: Rupert, Hart-Davis, 1947.

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  • JOHN H. WILLIAMS, Nathaniel Ropes Professor of Political Economy at Harvard University; Economic Adviser, Federal Reserve Bank of New York; author of "Postwar Monetary Plans"
  • More By John H. Williams