LAST July in these pages I discussed the task of European recovery.[i] We were then in the initial stage. The Economic Coöperation Act had been passed at the beginning of April. The far-flung organization of E.C.A. had been set up, with its central office in Washington under Mr. Hoffman, its Paris office under Mr. Harriman, and its American delegations in the individual European countries[ii] covered by the Marshall Plan. Sir Oliver Franks' European Committee (C.E.E.C.), which at Secretary Marshall's invitation had made the original survey of the problem in Paris in the summer of 1947, had been followed in April by the permanent Organization for European Economic Coöperation, consisting of a Secretariat under Robert Marjolin, an Executive Committee under the chairmanship of Sir Edmund Hall-Patch, and a Council headed by Premier Spaak of Belgium.

It was a strenuous period, with everything needing to be done at once -- the recruiting of personnel, the finding of quarters, the setting up of administrative procedures, the determination and allotment of the amounts and kinds of aid and sources of supply, first for the spring quarter of 1948 and then for the first full year, July-June 1948-49. From the start it was recognized that means must be found to revive trade within Western Europe itself, which was seriously lagging behind the recovery both of European production and of trade with the outside world; and, as one main approach to this problem, the European and American organizations devoted about four months to the difficult task of working out the Agreement for Intra-European Payments and Compensations, which was adopted last October. By then it was time to prepare the program for the second year, 1949-50, for presentation to Congress in February.

All this, quite apart from the immense detail involved in the day-to-day administration, suggests a most busy calendar for the first year of the recovery program. Yet it leaves out the year's most significant development. The Marshall Plan had been conceived from the beginning as a long-term program, combining self-help, and mutual help, on the part of the European countries, with the provision of aid on our part, with the objective, as stated in our Act, of making Western Europe independent of "extraordinary outside assistance" by July 1, 1952. Mr. Hoffman, therefore, in July of last year called upon the European Organization to produce a master four-year plan for reaching this objective. The O.E.E.C. Secretariat promptly sent out a questionnaire to the 19 European participants with a request that they prepare their individual four-year plans. In November and December these plans were presented to the Executive Committee by each country in turn and subjected to discussion by the others. Meanwhile, the Secretariat and the Executive Committee undertook an over-all analysis of the plans, which was approved and published by the Council on December 30 in the form of an "Interim Report on the European Recovery Program."

II

This report has been hailed by The Economist as "one of the great economic texts of our generation." It is not a "master plan," but a further step in the analysis of the problem in the light of the composite picture which emerges from the 19 individual plans. It was to be expected that, at least on paper, the individual countries, faced with their solemn undertaking under the Marshall Plan to achieve viability in four years with our aid, would find a way to do so. But it was to be expected also that the plans, prepared separately, would when put together reveal incompatibilities. One thing that the summing up brings out is that the countries in the aggregate were counting on an intra-European surplus to pay part of their dollar deficit, and when this manifest impossibility is allowed for, they come out with a dollar deficit of $1.3 billion, a sterling area (outside Europe) surplus of $700,000,000, an almost even balance with the rest of the world (a $200,000,000 deficit), and a net dollar deficit of $800,000,000. But this the O.E.E.C., after a most thorough analysis, finds much too optimistic; and it concludes that, unless "drastic changes in present policies" are made, Western Europe will in 1952-53 fall short of covering its planned imports from the outside world by $3 billion. This means that as compared with the current year, July-June 1948-49, when the amount of aid being provided is $4.875 billion, we shall by June 1952 have gone considerably less than halfway toward our objective, unless "drastic changes in policies" are made.

This conclusion, if accepted as valid, will come as a shock to the American people, who have been assured that the Marshall Plan is a program of aid to end aid. It should also shake whatever complacency there may have been in Europe. But the report, though realistic, is not defeatist. A joint recovery program, as it points out, must be prepared in three stages: first the individual plans, second their examination in the present report, to isolate the problems and clarify the issues, and third the "plans of action," which, in association with E.C.A., the European Organization now proposes to undertake "to resolve the serious problems that have emerged."

Thus far, though substantial progress has been made in expanding European production, and some countries, notably Britain, have made definite headway in closing the gap in their external balance, there has been little coördinated attack upon the problem as a whole. The emphasis in Europe has been mostly on self-help rather than on mutual help; and here at home, except perhaps in point four of the President's inaugural address, our thinking seems not to have got much beyond the providing of aid on an ad hoc, year-to-year basis.

III

The important question, of course, is how good a case the report makes out for its conclusion. In work of this sort the margins of error are inevitably large. The national programs vary widely in quality and contain various sorts of estimates, many of them merely forecasts in areas of economic activity in which governments exert little positive control. The general outcome in 1952 will be much affected by conditions in the outside world. It must be recognized, too, that the external balance is a net figure; even the O.E.E.C. estimated dollar deficit is only 12 percent of the planned imports, and about 7 percent of total foreign transactions, export and import; and a very small fraction indeed of total Western European production, which is estimated for 1952 at $170 to $180 billion.

On the other hand, the report itself, though decidedly more pessimistic than the individual plans, contains, as I shall indicate later, some estimates that might be considered optimistic. But perhaps the most significant fact is that all three surveys that we have had of this problem -- the C.E.E.C. report of September 1947, the Harriman Committee appraisal of that report, and now this one -- have come out with a substantial dollar deficit still remaining in 1952. One of the things that interest me most about the present report, as compared with the initial Paris report, is that while in the earlier years the deficits are this time smaller -- the Paris report estimated a deficit in 1948 of over $8 billion against an actual deficit of about $5 billion, and a 1949 deficit of about $6 billion against perhaps $4.5 billion actually -- the estimated deficits for the later years are in this new survey larger than in the old one. For some time it has been my view that such an outcome might well be expected, and that the problem might increasingly present itself as an approach to a plateau, which might be fairly quickly reached, but which once reached might prove difficult to get beyond.

IV

Granted that the estimated dollar deficit after the Marshall Plan has ended may be subject to a considerable margin of error, what we are mainly concerned with is the nature of the problem, and the reasons why, after this more intensive analysis, the O.E.E.C. is led to conclude that the gap will be serious. I would not myself hazard a guess as to what the deficit may be in 1952, but I am much impressed with the stubbornness of the problem, which is not merely whether the deficit can be wiped out in 1952, but whether means can be found to prevent its reappearing.

There have developed in the literature two schools of thought that are traceable as far back as the controversies over German reparations after World War I. They might be called the national income approach and the balance-of-payments (or, as we then called it, the transfer) approach to the problem. The difference lies mainly in the emphasis placed on internal and external aspects. The old problem was how to (a) produce within Germany and (b) transfer to other countries substantial yearly amounts of reparation payments. This time the question is how to expand Western Europe's production sufficiently beyond the prewar level to enable it to pay with current goods and services for imports which formerly were received in payment of "invisible" income representing the earnings from foreign investments, built up over generations, and from services. Western Europe's invisible income before the war was roughly $2 billion a year, whereas in 1947 there was a net deficit on invisible account of about $750,000,000. The actual trade deficit in 1947 was, of course, much larger than this shift of $2.75 billion in the invisible account, the difference representing in large part the wartime destruction and disruption of production and trade. But the loss of invisible income is the hard core of the problem. To overcome it involves much more than simple recovery from war.

This brings us back to the question of relative emphasis on internal and external factors. By emphasizing the expansibility of production and making optimistic assumptions about the external trade and payment adjustments expected to follow, the attainment of Western European viability by 1952 can be made to appear less difficult than the O.E.E.C. report suggests. The national programs call for an expansion of 30 percent beyond prewar in industrial production, and 15 percent in agriculture, for a combined total of $170 to $180 billion by 1952. Though the report estimates that actual production may fall short of this goal by 4 to 8 percent, or by as much as $15 billion, it would still seem that, unless the external aspects of the problem are very difficult indeed, such an expansion of production should be adequate to overcome Western Europe's dollar deficit. Moreover, the expansion that has already been achieved is impressive. For the full year 1948, industrial production, excluding Western Germany, was 14 percent beyond 1938, and including Western Germany, about equal to 1938; whereas after World War I, production did not recover to the prewar level until 1925. Even in Western Germany there has been marked improvement since the currency reform last June, though it is yet too soon to say whether inflation has been permanently halted.

This improvement in production is encouraging. But its implications for the future are subject to important qualifications. European recovery since the end of the war has been irregular. There was pronounced expansion up to the end of 1946, followed by a serious setback in 1947 because of bad harvests, the drawing down of domestic stocks in the preceding expansion, the fuel shortage, and the need of raw materials from abroad. Over the whole situation hung the interrelated maladies of domestic inflation and external deficits which led to such events as the British convertibility crisis and the astonishingly rapid melting away of our loan, and to a runaway rise of prices in France and the threatened exhaustion within a few months of French gold and dollar reserves. But by the last quarter of 1947, the recovery had been resumed, and the most significant fact about 1948 appears to be that the level of output, though much above 1947 as a whole, has revealed a sidewise tendency, not much above the level reached at the end of 1947. As stated in a recent United Nations report, "in many branches of industry production seemed to have reached the limits of available capacity and manpower."[iii] Even in England, an approach to a plateau seems to be indicated in the figures of production (though not as yet in exports) since the last quarter of 1947. In Italy there is substantial unemployment, and even Belgium, which was a leader in the earlier recovery, has been recently encountering difficulties, with reports of unemployment in certain industries.

Another important qualification, of course, is that European progress thus far has been accompanied, practically throughout the postwar period, by substantial American aid and affords by itself little indication of what the level of production will turn out to be when the aid is cut off. This leads to the investment aspect of the problem. The Western European countries have been quite right in recognizing that it is only by increasing their productive capacity and their productivity through investment that they can hope to overcome their external deficit. With the level of consumption some 20 percent below prewar, there is surely not much further room for belt-tightening. On the contrary, it seems clear, for political as well as economic reasons, that the scale of living must be raised, at the same time that exports must be expanded relative to imports. The European Recovery Program, if it is to be anything other than a subsidy indefinitely continued, must be directed toward investment. But an investment program for Western Europe presents difficult questions of timing, composition, and size. Most of the countries have investment programs amounting to 20 percent or more of gross national product, a ratio that is high even as compared with that of the United States in boom years. These plans will need to be examined carefully in relation to such factors as their possible inflationary effects, the level of consumption implied, the monetary, fiscal and direct control policies the programs will require, and the relation of investment to the changes in international trade and payments which constitute the goal of the Recovery Program.

In breaking down the aggregates, there should be a strong presumption in favor of shorter-run as against longer-run investment, and in favor of capital outlays that contribute directly to increased output and productivity as against (within the tolerable limits) those for housing and general welfare which contribute only indirectly. The most essential consideration is that the investment programs should be properly geared into the foreign trade and payment changes contemplated in the four-year programs. As they now stand, the national programs include much uneconomic duplication, and seem in considerable degree directed toward achieving national self-sufficiency rather than an integrated expansion of production and trade for Western Europe as a whole. The timing in some of them also seems badly conceived, since they attempt to crowd into four years plans for mechanization of agriculture, for example, which might require 10 or 15 years. There is excessive emphasis on oil and oil refining, for a continent that can be self-sufficient in coal, and should so far as possible make do with what it has when it is under the necessity of holding imports to the essential minimum. There is a very large emphasis on textiles, traditionally a major European export, but one that historically has proved particularly vulnerable as other parts of the world have become industrialized. One of the most significant announcements made by O.E.E.C. officials since the publication of the report is that they now propose to examine these investment programs intensively in consultation with the European Governments in an effort to obtain this year a better balanced and coördinated program.

One of the chief difficulties thus far has been the effect of investment on inflation. Investment expenditures increase money incomes without producing, until some time later, goods on which the incomes can be spent. Unless, therefore, increased investment is accompanied by increased saving, prices rise, pressure for wage increases follows, and there ensues the familiar inflationary spiral; or if attempts are made to hold down prices and wage rates by direct controls, the excess purchasing power generated by investment expenditures presses into less essential employments requiring ever-widening circles of control. Investment has been a major dilemma for most European countries. They cannot achieve external viability without it, but if its effects are inflationary they defeat the purpose by stimulating imports, reducing exports, and diverting to home consumption production and expenditure needed to reduce the foreign deficit. The cure is to take off the excess purchasing power through monetary and fiscal restrictive measures (supplemented in varying degree in different countries by direct controls), [iv] and so far as these are not fully effective to cut back the investment programs. Following the British convertibility crisis in 1947, Sir Stafford Cripps found it necessary to use all of these methods, though still leaving British investment at 20 percent of gross national product; and the success of the anti-inflationary policies has undoubtedly had much to do with Britain's marked progress over the past year and a half in overcoming her external deficit. The Bizone currency reform, though the final outcome is still uncertain, is having similar effects. Belgium's method has been to follow up her early, and strikingly successful, currency reform with a policy of keeping the gap between money and goods filled with consumption goods produced for home and foreign markets. But this policy not only collides with the need of other countries to restrict consumption -- the "austerity" policy -- but is definitely short-run since it threatens to leave Belgium behind in the race for productivity and productive expansion which the logic of Europe's position makes imperative.

The most stubborn case of inflation has been that of France. Traditionally, the French economy has been the best balanced, as between industry and agriculture, in Western Europe, and France has today less of a problem of structural change in her balance of payments than most of the other major countries. Yet she is now receiving, directly and indirectly, the largest amount of E.C.A. aid -- more than a quarter of the whole -- and Britain, which has the most difficult international problem (unless it be the Bizone) and the one of greatest consequence for world trade equilibrium, is now in effect sharing in the provision (or more precisely in the direction) of that aid under the Intra-European Payments Agreement. The main road to viability for France is through correction of inflation, and the chief question to be asked of the French program is whether the corrective measures outlined will be adequate and will be feasible. Until an answer is given, inflation constitutes a threat not only to viability for France but to the success of the entire E.C.A. program. While it lasts, French imports will remain abnormally high and exports abnormally low; the flight of capital, both externally and into hoarding at home, will continue; and France will threaten to divert increasingly to herself E.C.A. aid which should go to others. The French inflation presents a many-sided problem. One thing, if the statistics are right, it seems not to be is a scarcity inflation, which is always more difficult to correct. The increase in production, and particularly in agriculture since the bad harvest of 1947, has apparently kept pace with that of other countries. But bank credit has been too readily available, including borrowing from the Bank of France; taxes have been too low and tax evasion widespread; capital flight indicates a fundamental lack of confidence in the currency and in stability of the Government. The problem is more political than economic, and a strong government might, as once before, work a miracle overnight. The worst feature has been the outrunning of wage rates by prices; this is definitely an inflation at the expense of the poor. The solution must be to bring prices down, rather than put wages up; and until that happens, France may continue to be fertile soil for Communist-inspired unrest. There may, however, now be grounds for hoping that the French inflation has passed its worst phase.

V

Until inflation is overcome, we cannot get the true measure of Western Europe's external problem. But the relation runs both ways, and in varying degrees the pressures imposed upon the countries by their international position are a cause as well as an effect of the internal inflation. Even where inflation has been arrested, the expansibility of production is dependent upon finding foreign outlets for goods and foreign sources of supply. In 1938 imports were 13 percent of national income for France, 20 percent for the United Kingdom, 29 percent for the Benelux countries, and 32 percent for Norway, as against less than 5 percent for the United States. In 1952, according to the national plans, 80 to 90 percent of exports to the outside world will consist of manufactured goods; and on the import side raw materials and fuel supplies will constitute 55 percent, and food 38 percent. One of the greatest difficulties for such countries is that the close interdependence of imports and exports imposes severe limitations upon the possibilities of reshaping the structure of trade, and hence the internal economy. It is from this point of view that the reducibility of Western Europe's dollar deficit presents its most stubborn aspect; and it is in this light that the loss of invisible income is most serious. In 1938, 65 percent of Western Europe's imports were financed by exports to the outside world, 30 percent by invisible earnings, and 5 percent by reserves, borrowing and gifts; in 1947, these proportions had changed to exports 38 percent and use of reserves, borrowing, and gifts 62 percent, with a net deficit of 4.8 percent in invisible earnings. According to the national plans for 1952-53, exports and invisible earnings are expected to expand to a point where they could pay for 94 percent of the imports from the outside world.

How this is to be attempted, and with what prospects of success, is the central theme of the O.E.E.C. report. As I said earlier, some of the report's own assumptions may be optimistic. Though not without some questioning, it takes over from the individual reports a conversion of a deficit of $750,000,000 on invisible account in 1947 into a net surplus of $1.3 billion in 1952. This is to consist wholly of income from services (with income from investment showing a net deficit of $200,000,000), which would mean more than doubling the income from services in 1938. Generous allowances are made for the growth of tourist expenditures, immigrants' remittances, shipping earnings, and "other items" ($555,000,000), which appear principally to be earnings from oil properties and to derive mainly from the British plan. This expected change in the invisible account must be emphasized, because, though the figures are not large as related to total foreign trade, they are large in relation to the net dollar deficit. A change of $2 billion, such as is here indicated, is more than twice the size of the net dollar deficit shown in the individual plans, and two-thirds as large as the deficit estimated in the O.E.E.C. report. To the extent that the loss of the invisible earnings can be thus restored directly, the need of changing the structure and pattern of Western Europe's trade is reduced, quite out of proportion to the total magnitude of trade. This should surely be one main line of attack on Western Europe's problem; and it raises serious questions -- for example, about shipping and oil -- as to how American policies and actions are involved, in ways that go beyond merely charging the taxpayer for E.C.A. dollars, if we really want to see a viable Europe.

But it is only after allowing for this favorable change in invisible income that the O.E.E.C. report makes its estimate of a net dollar deficit of $3 billion in 1952. This is based on an analysis of the trade changes envisaged in the individual plans. The focal points of the problem are the behavior over the next three years of the United States balance of payments in relation to that of Western Europe, and the behavior of both toward the outside world. These relations, together with any change in the proportions of intra -- and extra-Western European trade, embrace all possible alternatives. As to intra-Western European trade, the plans reveal that the volume, which in 1947 was about 60 percent of the 1938 level, is expected to recover by 1952-53 only to the 1938 level. This at first sight seems surprising. There is a presumption that an area which has lost its means of obtaining an excess of imports (the invisible income) from the outside world would feel compelled to provide a larger proportion of its needs from within. Yet the fact that thus far this trade has lagged so badly is perhaps the most striking proof that the loss of invisible income is the hard core of the European problem. Formerly the pattern of intra-European trade rested on a German export surplus to the others and a large surplus of imports (some half billion dollars) by Britain from the Continent; but this triangle rested in turn upon Western Europe's -- and particularly Britain's -- invisible income from overseas. With the loss of the latter, the whole internal structure has collapsed. Now Britain is a net exporter to the Continent -- though only our E.C.A. dollars makes this possible -- and in her four-year plan she is counting on a moderate export surplus with Western Europe after 1952, while the plans of the other countries reveal that they are counting on getting back their export surplus with Britain, on about the prewar scale. Meanwhile, with the German economy so drastically altered by partition, and with a compelling urge throughout Western Europe toward austerity, which works heavily against luxury goods previously so important in intra-European trade, there are strong arguments for the view that Western Europe must be more, rather than less, dependent on its trade with the outside world than she was before the war. The figures, moreover, are large. To regain the 1938 level of intra-Western European imports by 1952 will mean that these imports must be increased by $3 billion, or about 50 percent, over their level in 1947. No other trade change in a single area contemplated by the plans approaches this in size, excepting only the planned contraction of imports from the United States, which is the other main horn of the dilemma. Though there is not space for discussion, it seems clear that one thing badly needed for recovery of intra-Western European trade is revision of the Payments Plan, which as it now functions provides the wrong incentives. Bad performance by a country (in the sense of failing to expand exports to the other participants) is rewarded by that country's getting in effect a larger share of E.C.A. dollars, through the operation of the scheme of "drawing rights" and "contributions," and good performance is penalized. Perhaps the most feasible objective for the next few years with respect to intra-Western European trade, and the one promising the most expansion of trade, would be to aim at more balanced trade within the area, reducing the present substantial debtor-creditor positions.

VI

Though one of the main tasks for Europe this year, in appraising and coördinating its national programs, must be to see to what extent and in what ways intra-European trade can be developed, the solution of the dollar deficit problem must be mainly sought through expansion of Western Europe's exports to the outside world, and through a shift in the sources from which it draws its imports. The national programs call for imports from outside the area in 1952-53 about equal in volume to those in 1938, and very slightly larger than in 1947; but within this aggregate Britain is planning a drastic reduction, to 78 percent of 1938 (she has got imports down already to about 82 percent), and most of the others are planning increases -- France 7 percent beyond 1938, Western Germany 14 percent, Italy 37 percent. Granted that real income is higher in Britain than on the Continent, and that her ability to make direct controls effective is superior, it does seem questionable for the Continental countries to put the whole burden of achieving viability upon the expansibility of exports. Britain began that way, but after the convertibility crisis of 1947 when our loan ran out, she had to tighten import controls further, cut consumption further, and supply a larger fraction of it out of home production. Britain is planning a 50 percent expansion in agriculture over prewar, France 25 percent, and the others, in the aggregate, no change. More food from within, less of nonessential or less essential imports (I have mentioned oil), in these and other ways there should be some room for reducing imports even though, as I said earlier, the scale of living on the Continent must be raised above its present dangerous level.

Yet the main solution must be sought through expanding exports and shifting the sources of imports. The national plans call for an expansion of exports to the world outside Western Europe by one-third beyond 1938. But in 1947 such exports were only about two-thirds of 1938, so that what is involved is virtually doubling the 1947 exports by 1952; this would be an increase of $5.1 billion over 1947, and $2.65 billion over 1938. In what markets could such a volume of goods be sold, and where, except here, could the necessary materials and food supplies be found? It is after asking these questions and examining the data and the conditions area by area throughout the world that the O.E.E.C. report concludes that the plans are unduly optimistic. It concludes that, unless the policies of the Western European countries are "radically changed," it is unlikely that total exports to the outside world will greatly exceed the 1938 level. The individual plans call for exports in 1952-53 of $10.6 billion; this the report reduces to $8.5 billion, which would be only 7 percent above 1938 but 57 percent above 1947.[v] A further very interesting conclusion is that even a "radical change" in policies (what is meant I will consider later) would not, in O.E.E.C's opinion, increase exports by more than $1 billion or $1.5 billion and would thus still leave a substantial dollar deficit in 1952.

It is the area analysis that is the high point of the O.E.E.C. report. The two chief questions are how to shift Western European imports away from the United States, and how to find markets for exports. Before the war, less than a third of Western Europe's imports came from North and Central America, as against about 60 percent in 1947. Imports from the rest of the world in 1947 were down $3.6 billion from 1938,[vi] and those from North and Central America were up $3.2 billion. The national programs propose to swing the composition back to something like that of 1938, to cut the imports from North and Central America by nearly half, a cut of $3.5 billion, and make this up by expansion of imports from the rest of the world. To do this, and at the same time find markets for an increased volume of exports, the plans strike out boldly in every direction. By 1952, exports to North and Central America are to be increased by nearly half over 1938 (more than double 1947) and exports to South America almost doubled (165 percent over 1947); exports to the sterling area are to be increased by two-thirds, exports to Eastern Europe are to be increased to 80 percent of 1938 (almost treble the volume of 1947), and those to the Far East are to be expanded to beyond the prewar level.

The export targets to the areas outside North America constitute the main grounds for pessimism in the O.E.E.C. report. With the chaotic conditions in the Far East not much can be counted on there. About South America, the facts are that imports have expanded by 75 percent over 1938, and will probably have to contract, now that the South American countries are running out of gold and dollars. Practically all of the increase in imports has been from us; to reach the export target set in the O.E.E.C. national plans ($1 billion over 1938, and $1.25 billion over 1947) would require a "reduction of at least one-half in the United States market in South America in 1947." Prospects for expansion of exports to the sterling area are not encouraging. This is the only area in which Western Europe's exports have already recovered to the prewar level; she has 70 percent of the market there for manufactures. But South Africa is now in trouble, through the fall in the purchasing power of gold, and must restrict her imports. India has a program for industrialization, involving restriction of competing imports. Australia's and New Zealand's ability to import has been stimulated by high prices for their agricultural exports, but now the tide is turning. A further increase of a billion dollars, such as the plans call for, in Western Europe's exports to the sterling area by 1952 does not seem likely.

It may well be that the most promising area, apart from exports to us, is in the east-west European trade. Before the war, Western Europe's exports to Eastern Europe amounted to $2.5 billion. The collapse of this trade after the war represents one of the most damaging gaps in the whole trade structure. But, as I said in my paper last year, it may be fully as damaging to the east as to the west. Since then, there have been a number of signs that point in that direction. In 1948, there was a substantial revival of east-west trade. British trade, in particular, is now higher in money terms than in 1938, and about two-thirds of it in volume; and British determination to develop it further is evidenced by the recent Anglo-Polish five-year trade agreement. What is now mainly lacking to restore east-west trade to the prewar level is the participation of Western Germany and Russia, with the former -- so far as the trade comparison with prewar is concerned -- being much the more important. The Bizone four-year plan calls for a rise in exports to and imports from Eastern Europe of half a billion dollars each. Ambitious though this is for so short a period, it has a solid basis in the prewar exchange of German manufactures (including capital goods) against Eastern European food and raw materials; and it deserves the most careful consideration by the Economic Commission for Europe in Geneva, which includes representatives of both eastern and western countries. That Commission is now engaged, apparently with general consent, upon a systematic survey of export-import requirements by each group from the other. Such a study, if it results in action by the governments, could be an important supplement to the work of O.E.E.C. in Paris. The O.E.E.C. countries, according to the national programs, are planning to import $2.3 billion of goods from Eastern Europe in 1952-53 (17 percent of their total imports) and to export $2 billion (19 percent of their total exports). Next to the relations with ourselves, nothing would go farther to create a viable Europe than the success of these plans for east-west trade.

VII

The main problem, however, lies in the direct trade with us. Western Europe's exports to North and Central America in 1941 amounted to only $1 billion, against imports from this area of more than $7 billion. We provided 60 percent of Western Europe's imports but took only 20 percent of her exports. Her total imports were about equal in volume to those of 1938, but her total exports were only about two-thirds of 1938. These figures give the main explanation of the dollar deficit, and the magnitude of the problem involved in trying to remove it with our E.C.A. program by 1952. If the program is to succeed, the imports from us will have to be cut back at least to the prewar volume, a cut of some $3.5 billion, or financed by some other means than E.C.A. dollars. It would seem, too, that exports to us would have to increase by about as much, if the figures of the O.E.E.C. report are to be accepted. No other way of removing the $3 billion net deficit which the report estimates for 1952 is suggested by it; nor would any other alternative carry much conviction in the light of the analysis of the whole problem as I have reviewed it.

As between cutting imports from us and expanding exports to us, it seems correct to say that, if E.C.A. aid is cut off in 1952, the former is more certain than the latter. It cannot of course be merely assumed that our export program will end, since it is the result of economic and political (and military) compulsions which may in some degree be continuing after 1952. It cannot be overlooked that the whole program is based on the conception of a tolerable living standard, which it is in our interest as well as Europe's to maintain. But it has up to now been our national intention, firmly and repeatedly expressed, to cut the program off on schedule; and I am merely indicating that if we do, there will be more certainty of our exports to Europe declining drastically than of Europe's exports to us rising in anything like the same volume. One is struck in reading the national plans, and even the O.E.E.C. report, by how little real confidence there seems to be in the expansibility of Europe's exports to this country. Though the national plans call for an expansion of exports of $5 billion between 1947 and 1952, which would mean doubling them, they expect to get only one billion of this increase in our market; and though the O.E.E.C. report writes down the other export targets, and quite rightly says that the large potential market is here, it does not hazard any figure beyond saying that "if enough vigor is applied, the estimates might be exceeded." Even the very decided improvement in Britain's trade position in the last 18 months (which has led to Sir Stafford Cripps' recent statement that Britain is already almost viable, except that she cannot use her non-dollar surplus to cover her dollar deficit) has not included any substantial increase of exports to us. Our total imports in 1948 were about 50 percent higher than in 1938 and appreciably higher than in the good year 1937. But imports from Western Europe have not recovered even to the low 1938 level, and the share of Western Europe in our imports has fallen from 23 percent in 1937 to about 13 percent in 1948.

This pronounced dragging of Europe's exports to us may be due to various causes. No doubt in part it indicates the need for greater initiative, more attention to trade organization and distribution, greater emphasis on market research. It suggests, too, the desirability of examining our tariff, with specific reference to the Marshall Plan. Much has been said in recent years about how our tariff has been liberalized since the middle thirties, by the reciprocal trade agreements, the rise of prices which has reduced the burden of the specific duties, and the further steps we have taken in connection with the I.T.O. negotiations. But I suspect that our tariff still accords effective protection in just the range of goods in which Western Europe might otherwise compete; and beyond the actual protection, there is the potential, which comes to view in discussions, for example, of the effects of Swiss competition on our watch industry, or of British competition on New England woolens. The British now speak hopefully of our market for their small cars, but two answers that I have had from persons in our automobile industry are: first, that the market is only temporary and reflects the scarcity of American new cars, and, second, that if, however, there is a market, we will go after it.

A much larger question is whether the dollar is not now undervalued in relation to European currencies. This would help to explain why Western Europe's exports have done so much better in the sterling area, and even in South America, than here. Undoubtedly the references in the O.E.E.C. report to the need for "radical changes" in policy if Western European exports are to expand substantially mean precisely this; and this clearly is the meaning of the recent announcement by O.E.E.C., since its report was published, that analysis of the problem of "stabilization of currencies" will be one of the major matters on its agenda this year. So long as a condition of sellers' markets existed after the war, the European countries were more concerned with avoiding increased cost of imports -- so much needed for recovery and reconstruction -- than with stimulating exports, which in the world at large were mainly limited by short supply rather than by cost. But with the present indications of change toward buyers' markets the case for currency depreciation has become much stronger, though, if the experience after the first war is any guide, there is a presumption that internal inflation must first be brought under control. I agree with the conclusion, which one can readily read between the lines of the O.E.E.C. report, that there should now be a thorough examination covering the whole field of currency relations. This is a task for the International Monetary Fund as well as for the O.E.E.C. It should include the whole question of discrimination, through direct balance-of-payments control as well as exchange-rate adjustments. This is too technical a subject for discussion here. One important aspect is whether it should be directed against the United States or in favor of Western Europe, which are not necessarily the same things. One effect of the growing scarcity of dollars throughout the world is the incentive it provides for other nations to make reciprocal trade arrangements which bypass us. There have recently been reports, for example, of discrimination in Latin-American countries against our cars and certain other goods and in favor of British, and against American oil-refining equipment in favor of European, even though this may involve serious delay. Such arrangements we can of course deplore, in the name of multilateral trade, but so long as such a pronounced bias of world trade in our favor persists, we ought not to stand in the way of measures which may help to correct it.

VIII

In the background of the whole European trade problem, however, and much the most discouraging aspect of it, is the prewar trend. I have spoken of Western Europe's wartime loss of foreign assets and earnings as the core of her present difficulty. The war, however, merely hastened and completed the great change in regional relations which had been going on since well before the first war. The great expansion of world trade in the nineteenth century was based upon the exchange of Europe's manufactures for food and raw materials from the widening world outside; but since the 1870's, the world outside Europe has become increasingly industrialized. Between 1870 and 1913 world production of manufactures increased fourfold, and between 1913 and 1939 it doubled, but world trade in manufactures has been a decreasing fraction; in the 1870's, one-third entered into international trade, in 1913 one-fifth, in 1938 one-tenth. Meanwhile, the United States, with its great land area, its diversified resources, its rapid technological progress, has developed a rounded economy, on a high level of productivity and real income, to a degree never previously witnessed. It now produces more than 40 percent of the world's manufactures, but still relies predominantly on home supplies of food and raw materials. Over the last hundred years, its foreign trade has declined from about 10 percent to less than 5 percent of its national income, compared with percentages of 10 to 30 or higher for the Western European countries. Between the 1870's and the last war, imports of manufactures dropped from about 38 percent of our imports to less than one-quarter, while manufactures grew from one-seventh to about one-half of our total exports. In the process, the United States has looked increasingly to the non-European world for imports, largely in direct exchange for exports, and the share of Europe in our trade has undergone a continuing decline. The effect of the war has been to accentuate this shift, with the result that since the war the United States has been getting not only the bulk of its food and raw material imports from outside Europe but also a substantially larger part than previously of its manufactured imports, while the proportion of manufactures to total imports has diminished further.

This is the much discussed "chronic dollar shortage." One kind of solution of it might be found in American self-sufficiency, which might suggest that, once Europe was restored with our aid, trade would thereafter develop between Europe and the other parts of the world, leaving us comparatively in a backwater, but one which we could endure more readily than others. But, for the short run, this seems most unlikely since it is just the ground I have been covering in the above analysis. And, in the longer run, it seems even more improbable since the tendency for three-quarters of a century has been just the opposite. We have increasingly become a better market for the products of the younger countries and in the process have tended to push European manufactures out of their markets as well as our own. What the historical development suggests is that it is Western Europe that is in danger of being left in the backwater.

Exchange-rate adjustments, coupled with direct foreign trade controls, and combined into a policy of discrimination aimed at us, may, together with the E.C.A. program, supply a short-run answer for the problem of Western European viability. But what the longer run answer is to be does not readily suggest itself. Basically, the cure is productivity, and to this the E.C.A. program must be directed, but it seems optimistic indeed to suppose that that kind of solution can be found in four years. Moreover, it must be borne in mind that the problem is one in comparative productivity. Our own economy cannot be expected to stand still, and there is much in the history of international trade to suggest that a productivity advantage, once achieved, is cumulative, and thrives even on the measures that, under static conditions, might be expected to offset it. Thus, in the nineteenth century, England's foreign investment increased her own productivity fully as much as that of the countries where her investments were made. Foreign investment is a dynamic process which operates on both ends. This has to be borne in mind when we speak, though still rather vaguely despite Mr. Truman's fourth point, about foreign investment and the export of know-how, as being the logical accompaniment or follow-up policy for the Marshall Plan. Its most likely direction would be to the less developed parts of the world, rather than to Western Europe, in search -- on the nineteenth century analogy -- of raw materials. We speak hopefully now, as a possible solution of the chronic dollar shortage, of our growing need for petroleum, copper and other materials, though postwar growth of such imports has been, at least in part, the result of wartime shortages. Though for some products, such as rubber and silk, the war has probably reduced our dependence on imports, it does seem probable that in the longer run we shall become more dependent on other countries for raw materials, and that our trade will take on increasingly the character of European nineteenth century trade, an exchange of manufactures for raw materials and even foods. But it is not clear that a flow of capital from us, fostering this process, would greatly benefit Europe, except as, in an expanding world, there might be some room for all to benefit. One holdback that European countries seem to have on direct American investment there is that, unless accompanied by substantial increases in productivity, it would further burden their external balance. The experiences of the interwar period with its problems of blocked currencies growing out of private investment have not been forgotten.

IX

In concluding this paper, I am only more impressed with the gravity of the problem. The O.E.E.C. report has prepared the ground for a more intensive discussion of issues and plans of action. It will involve the work of many minds and the weighing of many interests. The announcements by O.E.E.C., since its report, show the direction of thinking in Europe. Besides currency readjustment and coördination of the investment programs -- certainly two major facets of the problem -- they have emphasized further exploration of the development of Western Europe's overseas territories, an important, but not I think a major short-run, factor, and perhaps somewhat on a par with our own thinking, still vague, about foreign investment as a follow-up on E.C.A. One suggestion, I think by us, which seems to me of major significance, is that O.E.E.C. should take the initial responsibility for the use of the counterpart funds in local currency, which the Western European countries must deposit in amounts equal to our E.C.A. grants, with a view to achieving a better coördinated policy, as regards their relation both to inflation and to investment. Heretofore, these funds have been handled by our local E.C.A. delegations directly with the individual governments. The most significant developments have been the appointment of a steering committee, or super-board, for O.E.E.C., to be composed of representatives of cabinet rank, and the announcement that O.E.E.C. has formally decided to stay in existence after 1952. This, too, I believe, has been, at least in part, the result of E.C.A. suggestion. Another development has been to "extend the understanding of the European public" by authorizing Secretary-General Marjolin to give more frequent information to the press.

One of the basic questions, I believe, in attempts to coördinate European plans for investment and trade relates to the kind of production and trade that Europe should be trying to develop. Heretofore she has to a large extent specialized in the lighter manufactures and in fine quality products, and to the extent possible these should be continued. There could be much lost motion involved in throwing out of work crafts and skills acquired over generations, and this is often forgotten when we speak of ambitious plans of integrating Europe on the American pattern, industrially and agriculturally. But this war, like others previously, has given a fresh impetus to industrial development in other parts of the world, and typically it is the imports of lighter manufactures which are restricted by such countries in favor of imports of capital (and consumer durable) goods which they need for development (and greater satisfaction) but have no nearby prospect of producing for themselves. It is interesting that the Economic Commission for Europe in March 1948 emphasized capital goods exports, and in a subsequent report on East-West trade emphasized the need of the Eastern European countries for capital goods from the west.

Particularly important are the questions for ourselves. As I indicated earlier, about oil and shipping, there are questions involved in the Marshall Plan that go beyond merely charging the taxpayer. One of our chief dangers is the development of a vested interest (and quite possibly a serious economic dependence) in our exports. They have been so large and have gone on now for a decade. Large foreign sales of agricultural products, and of many industrial products, are obvious alternatives to reducing prices at home, and it is no secret that the jockeying for allotments in the annual E.C.A. programs is by no means confined to the European recipient countries -- or even to private business interests here. Such questions have an obvious political tinge. With the filling up of domestic deferred demands we can expect this kind of interest to increase, particularly if we should come to feel -- what yet seems to me unwarranted -- that we are sliding into depression. On the import side, it remains to be seen how much our traditional attitude toward commercial policy has changed, or rather whether it has changed enough. How, for example, will the American public react to the conclusion that, following our E.C.A. contributions of, say, some $15 billion, which come after earlier substantial postwar grants and loans, an essential part of the solution of Europe's imbalance will be exchange-rate and other adjustments intended to discriminate against us, even though the "discrimination" merely means putting us back in relation to others to where we were before, and is for the general good?

These are some of the questions which we should face, not in 1952, but now. Some others, such as the effects of the military expenditures that will be involved in the North Atlantic Pact, I feel quite incompetent to discuss, except to say the obvious -- that they much increase the complexity of the problem. Sticking strictly to the E.C.A. program, there is one aspect that permits me to end on a more cheerful note. I have said little about conditions in particular countries; the effect of the Marshall Plan has been to make us think in terms of Western Europe as a whole. But earlier, I had in many of my papers attached special importance to the plight of Britain, as the key to the problem of restoring postwar international trade equilibrium. Up to a year and a half ago, Britain's position looked by all odds the blackest, excepting only Germany. Now the British are able to announce that they are approaching viability, though not in dollars. Their four-year plan carries conviction that it will succeed, though quite probably, as some of the Continental countries insist, in part at their expense -- in the same sense that our progress has been at Europe's expense. A correction of the French inflation would be another long step forward.

Having watched Britain's performance, I would like to believe other miracles are possible, including even Western Europe's achievement of viability. This will require hard work all round and an impelling sense of pressure. Until the full results of such a policy are seen, I think we would do well to stick firmly to our schedule. British advice, and I think O.E.E.C. advice, is to put zero aid opposite the date July 1, 1952, but with full realization of the "radical changes" in policy which this implies.

[i] John H. Williams, "The Task of Economic Recovery." Foreign Affairs, July 1948.

[ii] Sixteen countries plus three occupied territories, the Bizone and the French zone in Germany, and Trieste.

[iii] "Major Economic Changes in 1948." New York: Columbia University Press, 1949. This statement relates to the first nine months of 1948. An E.C.A. report received since the above was written ("Recovery Guides," February 1949) indicates new peaks in both production and trade in the last quarter of 1948, combined output in the O.E.E.C. countries (including Western Germany) being "13 percent above the last quarter of 1947, and 5 percent above the 1938 level."

[iv] There is not room for discussion of general versus direct controls, or "open" versus "repressed" inflation; see my earlier paper, op. cit., p. 624-626.

[v] Thirty-seven percent over the level planned in the 1948-49 program.

[vi] The breakdown of the decline in 1947 compared with 1938 is: sterling area (outside Europe) $900,000,000, Eastern Europe $2.1 billion, other countries (China, Japan, parts of the Middle East, Spain) $700,000,000.

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  • JOHN H. WILLIAMS, Nathaniel Ropes Professor of Political Economy at Harvard University; Economic Adviser, Federal Reserve Bank of New York; recently in Paris as an adviser to Secretary-General Marjolin regarding the long-term program of O.E.E.C.; author of "Postwar Monetary Plans"
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