Foreign Affairs: 100 Years
A New Americanism
Why a Nation Needs a National Story
WE ARE now close to the halfway mark of the Marshall Plan, and well beyond it in terms of the scheduled appropriations.[i] Last year, though the yearly program of aid was submitted to Congress in February, the process of first "legislating" and then "appropriating" for it was not completed until October. This year, the process has begun in an atmosphere of "disappointment," to cite Mr. Hoffman's phrase widely echoed in our press, over Western Europe's failure to make a stronger response to E.C.A.'s request, presented to the O.E.E.C. Council last October 31, for a program of "integration" to solve the dollar deficit and make Western Europe independent of "extraordinary outside assistance" by July 1, 1952.
Adequate perspective is more necessary than ever. We may be in danger of swinging from undue optimism to undue pessimism, and in the latter mood, of insisting on unduly simplified solutions. It should be remembered that it was the European Organization, in its first Interim Report, that first officially called attention to the fact that the recovery in 1948 merely brought us to the hard core of the problem of the dollar deficit. The report predicted that, unless "drastic changes in policy" were made, Western Europe's dollar deficit would still be some $3 billion in 1952. The first effects of the report were excellent. The rather shallow optimism that had prevailed, in Western Europe as well as here, disappeared. The report called for a plan of action. On February 17, 1949, the O.E.E.C. Council adopted a set of principles which were made the basis of a plan of action, announced on March 8 by the newly created Consultative Group of Ministers. This seemed a brave start, but as the year wore on, there was a growing impression of a lack of sense of direction. One reason for the change was undoubtedly the prolonged negotiation over the revision of the European Payments Agreement. Another was the British reserve crisis and the general setback to exports. A third reason was the growing feeling that the Consultative Group of Ministers was not providing the vigorous leadership hoped for; and along with this there developed doubts about the adequacy of the plan of action. It was against this background that Mr. Hoffman made his request that the Council should present a record of progress and a program of integration. He asked also for the appointment of a strong political leader, or "coördinator," who could resolve differences and expedite the program.
The response made to Mr. Hoffman's request is the O.E.E.C.'s Second Report, adopted by the Council on January 31, after meetings in Paris of the Consultative Group of Ministers with Mr. Hoffman, Mr. Harriman and their chief aids. The new report is in many ways encouraging. Even including Western Germany, industrial production in 1949 was some 15 percent above the level of 1938. After the First World War, the prewar level of industrial production was not regained until 1925. The most encouraging development in 1949 was that the peak of inflation was passed. This had been the first objective of the March plan of action. Basically, the conquest of inflation has been made possible by the expansion of production and the removal of scarcities, in which the recovery program has played a major rôle, and by the adoption of restrictive fiscal and monetary policies which the rise in production has made possible. There is still, however, no firm assurance that the battle against inflation has been permanently won. Britain's experience in 1949, and her announced program of further budgetary cuts, provides one illustration; and the relation of wage policy to political changes in France provides another. The wave of devaluations in the wake of sterling devaluation is requiring renewed vigilance in every country lest the external effects be dissipated by renewed inflation.
One other major point in the March plan of action was the coördination of investment. The first Interim Report had called attention to the fact that the national four-year plans (presented in response to Mr. Hoffman's request of July 1948 for a "master plan") emphasized self-help rather than mutual help, and revealed much wasteful duplication of investment. From the survey presented in the new report, it must quite frankly be concluded that last year, as regards coördination of investment, was a year of exploration rather than achievement. Even apart from the question of how much centralization of authority is needed, the subject presents numerous complexities. One is the basic question of method, as between reliance on planning and on free market forces; and how to integrate investment as between countries where it is planned and controlled and countries where it is not. There are also the uncertainties in forecasting aggregate demand and in locating production in the right places, having in mind that little analytical work has yet been done on problems of location. There is the cartel problem and the danger that private interests will undo what governments have planned. There is the very troublesome question of what relative weight to put on current comparative costs and on future development. There are the questions of the desirable speed and scope of change, of how fast and how far to go, questions which for old and settled communities like those of Western Europe present far greater hazards than for less developed areas.
I have dwelt on the coördination of investment not only to reveal the difficulties, but also to indicate that the "integration" approach to the solution of Western Europe's dollar deficit should not be regarded as new. From the beginning, it has been present under various names and forms. What has happened since October is an increased emphasis on integration, and on liberalization of trade and payment as the way to achieve it, though the new report calls also for further study and action in the related field of coördination of investment.
One of the outstanding features of 1949 was the striking tendency for intra-European trade balances to level off.[ii] France, for example, which had previously had a deficit with almost every other country, has since July 1 not had to use any of her drawing rights against the United Kingdom or Belgium. Belgium, whose intra-European surpluses had been about twice her dollar deficit, now has a much reduced surplus, if not an actual deficit. The United Kingdom, which previously had been a net exporter to the Continent, has become during the past year a moderate net importer. It may be premature to try to appraise the significance of this movement, which seems to have been due in part to the realignment of currencies, and even more to the passing of inflation and the removal of scarcities through increased production. But it seems to provide the most promising indication thus far of the development of a trade pattern that has a foundation in the logic of the changes in international relationships wrought by the war. By destroying the pattern of trade between Europe and the outside world -- particularly the earnings from overseas investment and services, along with a general impairment of trade with Eastern Europe and the Far East -- the war not only greatly intensified the dollar shortage problem, but by that very fact swept away the basis on which the prewar pattern of intra-European surpluses and deficits had long rested. There was thus created a strong presumption that the trade of the Western European countries among themselves should move toward a position of even balance, except as that position might be modified by such movements of capital and credit as they might be able to sustain among themselves.
It is now greatly to be hoped that this movement toward equilibrium of trade and payments can be strengthened and consolidated. To achieve this result is undoubtedly one of the main purposes of the new measures for which Mr. Hoffman has been contending. The movement to liberalize trade had its beginnings last year as an outgrowth of the negotiations for the revision of the Payments Agreement. Proposals were made, and some actual steps taken; and the Council adopted a resolution calling on the participating countries to report by October how far they were prepared to put their intra-European trade on the basis of open general licenses. This movement was greatly strengthened by Mr. Hoffman's statement to the Council on October 31. In the new report, all the participants have undertaken to place a minimum of 50 percent of their privately traded intra-European imports on this basis. This, however, should be but a beginning. It is a fair presumption that in the present enlarged and better balanced state of intra-European trade, a liberalization of trade by 50 percent would not produce any serious disturbance of trade or employment, and would not seriously increase the competition which domestic producers would have to face. The movement will miss its main objective if it does not go far enough to produce competition severe enough to promote productivity, serve as a guide to new investment and coördination of investment, and direct the further expansion of production and trade into the right channels for overcoming Western Europe's external deficit. But how fast the pace of trade liberalization will be from now on is uncertain,[iii] and much may depend on the payments arrangements still to be worked out.
To achieve complete freedom of intra-European trade would require free transferability of currencies. Following Mr. Hoffman's statement of October 31, E.C.A. presented a proposal which it hoped would provide the outline of a plan that could be incorporated in the new O.E.E.C. report, which would then soon be followed up by the actual creation of a European Payments Union. At first there seemed to be general assent, at least as to the basic objective. But as the discussions continued, important questions were raised, particularly by Great Britain. There was also a last-minute revelation that our own Government was not of one mind. The result was that in the January 31 meeting, no plan for a Payments Union was adopted, and the whole matter was put aside for further study by the experts.
The basic purpose of the proposed Union is to set up a pool, consisting in part of gold or dollars and in part of credit facilities provided by the Union. Payments among the members would be effected through the Union, the payments taking the form partly of credits and partly of gold or dollars -- the latter on an ascending scale for debtors and a descending scale for creditors, so as to bring pressure on both to work toward an even balance in their aggregate intra-European trade. A Board of Management would be created, with powers designed to facilitate this process. To set the Union going, E.C.A. would provide a fund of "free dollars," to be withheld from the "basic aid" allocated among the participating countries.
Many of the questions raised are to me reminiscent of old Bretton Woods discussions. Is the new Union to be merely the lender of last resort, or is it intended to supplant existing means of international payment? One of the chief objectives is to include within the area of liberalized trade and payment not only the Western European countries and their overseas territories but also Britain and the sterling area. From the standpoint of "integration," this seems to me a much more desirable objective than a mere intra-European trading area. But it does raise serious questions as to how the new multilateral payments system is to be related to the sterling system. The British have contended that, if this can be done at all, it can be only through assigning to the Union the more limited function of lender of last resort; and they have said that any more extended use of the Union would involve the freezing of all sterling area accounts and also transferable sterling. The British contention is that if both the sterling system and the Union were in operation simultaneously, both would tend to work lopsidedly. For sterling holders would pay their deficits in sterling as at present, while Britain would be required to pay her deficits in clearing units and to lose gold or dollars to the Union.
Another question that has been raised, and one that should be of special interest to us, is whether it is possible to operate any kind of gold or dollar settlement system in Europe so long as there is a dollar shortage. To put the question differently, could the Union be any stronger than the dollars we put into it? [iv] A temporary answer could be found through the provision of dollars by E.C.A. for the next two years. But the proposed Union is intended to be a permanent mechanism, and the implication cannot be avoided that it is based on the assumption of Western Europe's achieving viability in dollars by 1952. A related question is whether, should this not prove to be the case, the United States is prepared to provide more dollars after 1952, or, as an alternative, to accept discrimination. A further question is how the new Union and its Board of Management would be related to the International Monetary Fund.
I do not regard these questions as insoluble, but they do indicate that time must be allowed for more thoroughgoing analysis than the payments problem has thus far received. Of necessity, some new arrangement must be made to supplant the present Payments Agreement which expires on July 1. One criterion should be to build on what we have; and this, I believe, should involve a thorough survey of what can be done to rehabilitate sterling, which is already serving as the basis of the most extensive multilateral trading system that now exists. This would require, as one prime essential, a solution of the problem of the wartime sterling balances, which was put on the agenda for further work growing out of the Washington conference last September of the United States and Canada.[v] Indeed, a solution of this problem is also mentioned as essential in the proposed European Payments Union.
As to the Payments Union, I would lean toward the lender-of-last-resort function. With E.C.A. aid, the gold or dollar settlement feature could, I think, be made workable, and would serve a desirable purpose, for the next two years; but the longer future is conjectural. This may be a good reason for continuing to regard European payments arrangements as temporary and experimental, and for leaning toward more limited, rather than ambitious, and quite possibly hazardous, conceptions. What does seem particularly desirable is some intra-European credit arrangement which would permit the countries to think in terms of their aggregate European trade position (including their sterling area position), rather than in terms of bilateral trade balancing; and which would give time for corrective action without threatening immediate and substantial loss of reserves. One of the most critical difficulties in Europe today is that the war and the initial postwar confusion have stripped reserves to the danger point, so that the countries cannot ride out even minor international trade disturbances. This is one reason why I have favored increasingly over the past year a change in the technique of E.C.A. aid, with less emphasis on programming and more on provision of reserves. Such a change would accord with the fact that now that the groundwork in production and internal financial stability has been laid, we need a more flexible approach to the problems of trade adjustment that remain unsolved.
In problems of this character, there is a kind of cause-and-effect dilemma. More liberal trade and payments arrangements would undoubtedly improve Western Europe's ability to overcome her external deficit. But we must bear in mind that it was the dollar shortage that produced the trade and payments restrictions even before the war, and has intensified them since the war. It is the threat of a continuing deficit after 1952 that now makes the Western European countries cautious about throwing off their trade restrictions, and entering into payments arrangements which quite possibly after 1952 they would not be able to maintain. It is this kind of dilemma, also, that raises questions about intra-European coöperation, or integration, and the forms that it might take.
It is therefore essential to have as clear a view as we can of the possible future pattern of trade. The recent emphasis on integration in terms of analogy with the United States and its "one big market" has suggested to some minds that Western Europe is being advised to solve its external problem by developing trade within itself. Seen in this way, the analogy would be quite misleading. Western Europe can perhaps to some extent reduce its overseas dependence, and O.E.E.C. plans, as outlined in the new report, do call particularly for an expansion of agricultural production, which is only now reaching the prewar level for the area as a whole. But we must bear in mind that the level of real income is still some 10 percent below prewar; and whether it can be raised to a reasonable standard by a process of Western Europe's turning inward upon itself seems to me highly dubious. Basically, we have the problem of a small land area, with unbalanced resources, which in the past has had to look increasingly to the outside world, both for supplies and for markets, and in the process has developed a population density about four times that of the United States. American integration -- through westward expansion into virgin territory within a single country -- has involved not only the development of a great internal free market, but a lessening dependence on the outside world. In the fundamental respect therefore of relative dependence on internal and external markets, it would surely be misleading for Western Europe to use the American economy as its model, though more could be said for it if Western and Eastern Europe were combined.
Moreover, our kind of integration, if applied in Europe, would involve a time schedule and a scope that reach far beyond the E.C.A. program. Many of the questions raised by it are obviously political as well as economic. Indeed, this would be true even of the proposed Payments Union and the trade liberalization program if they were pushed to their logical limits; and this point has been stressed particularly in connection with the proposed Board of Management and its powers. As I earlier pointed out, this is also one of the main limiting factors on European coördination of investment. For really thoroughgoing integration on the American model, even if it were otherwise desirable or feasible, the main question raised would be whether political union would not have to precede economic integration.
It is recognized, however, that the analogy with the American kind of integration is imperfect, and, so far as I know, there is no reference to it in the new report. What undoubtedly was mainly intended was that a better integration of European production and trade would stimulate efficiency and might reduce the gap between American and European productivity. The question of comparative productivity as between countries is a complex one. It involves not only comparison of physical output per man hour, but comparative wages and other costs. Economists in some European countries do not concede that the comparison has been unfavorable since 1938; and for the postwar years at least, it is not clear that this country, with its rapidly rising wage costs and its emphasis on quantitative expansion more than on qualitative improvement of plant and equipment, has been outstripping, or possibly even keeping pace with, some of the European countries. It is not clear, either, whether the main difficulty, at least for some of the larger European countries, is the question of size of industries, having regard to their overseas as well as their domestic markets.
But taking a longer view, I have felt that one of the main causes of world imbalance has been, and is likely to continue to be, our tendency to outstrip other countries in productivity. Often in the past, our progress has come irregularly, and has been associated with depressions, though not depressions long or deep enough to have cumulative destructive effects like the Great Depression of 1929-33. After the 1920-21 depression, American productivity increased 10 percent a year for two successive years. One question for ourselves is whether our economy is still capable of that kind of progress. But a point to emphasize is that, under dynamic conditions, the growth of comparative productivities has to be regarded as a race; and the American economy cannot be expected to stand still while Europe is endeavoring to catch up. Certainly the burden of proof lies on those who question this conclusion; and, among other things, what they have to explain away is the succession of devaluations of currencies that has occurred since the First World War.
Essential as it is to raise European productivity, it seems to me unlikely that the dollar deficit can be eliminated primarily by direct exports to this country. It is important to bear in mind the relative magnitudes of trade, and the historical trends. Even in 1938, the dollar area took only one-seventh of Western Europe's exports, while supplying one-fourth of her imports; and before that there had been a long history of a worsening imbalance in the direct trade between the two areas. Between 1938 and 1947, Western Europe's imports from the dollar area doubled, while exports dropped about 40 percent. The crux of Western Europe's dollar problem is found in these facts, which accounted for a gap of about $6 billion on trade account, and including invisible items, of about $6.9 billion, in 1947, when the Marshall Plan was first conceived. Including capital transactions and the trade of the O.E.E.C. dependent overseas territories, the total gold and dollar deficit was $8.5 billion.
For the year ending July 1, 1950, the gold and dollar deficit of the O.E.E.C. countries with the United States and Canada is estimated in the Report at $4.4 billion; and the principal changes, compared with 1947, are a contraction of about $2.5 billion in imports from this area and an expansion of only $204,000,000 in Western Europe's exports to the area.[vi] The national programs for 1950-52 show for the whole period 1947 to July 1, 1952 an estimated decrease of imports from the United States and Canada of $3.6 billion, and a rise in exports of $665,000,000. When these changes have been achieved, Western Europe's imports from this area will be $3.2 billion, and her exports to it $1.5 billion.
These figures, taken in relation to Western Europe's balance of payments as a whole, show clearly that the main solution is being sought through a contraction of imports from the dollar area accompanied by an expansion of exports to other parts of the world. For the whole period from 1947 to July 1, 1952, imports are expected to expand by $700,000,000 (despite the contraction of $3.6 billion from the dollar area) and exports are expected to expand by $5.5 billion, of which only $665,000,000 represents an expansion to the United States and Canada. Exports to this area will be less than 10 percent of total Western European exports. Yet the increase in these exports compared with 1947 will be 80 percent. The contraction of imports from this area will be 54 percent. We shall be supplying Western Europe with nearly as large an amount of imports as in 1938, but they will represent only one-sixth of its total imports.
These figures seem to me to give a more realistic view of the possible future pattern of trade than is implied in the emphasis on the dollar export drive, important as that is. They have important implications for trade policy. The chief one is that multilateral trade, not only within Europe, but even more in overseas trade, is the right objective. Europe must be able to use her trade surpluses elsewhere to cover her trade deficit with the dollar area. This implies, equally, that the ultimate goal must be convertibility of currencies, not only within Western Europe, but throughout the world. Experience has already shown that the dollar deficit is proving more intractable than the over-all external deficit. Britain has been viable over-all for the past year but has not been able to use her surpluses elsewhere to meet her deficit with us. France is now approaching a similar condition. For the aggregate of the O.E.E.C. countries, this tendency is revealed in the summary of the national programs, which indicate an expected gold and dollar deficit in 1951-52 of $2.3 billion, though the over-all deficit is expected to be $1.5 billion, indicating that the O.E.E.C. countries expect to have a substantial surplus with the non-dollar world. The problem is thus becoming increasingly one of how to put the parts together to achieve a stable world equilibrium.
It is quite clear that this objective will not be reached by 1952. The new O.E.E.C. report is less pessimistic than the earlier one. It accepts the dollar deficit of $2.3 billion in 1951-52, indicated by the national programs, and concludes that the deficit will be further reduced in 1952-53. It indicates that the Western European countries are as firmly resolved as the United States that the program should end on schedule on July 1, 1952, though pointing out that there will still be special problems in a few countries, such as Western Germany, Austria and Greece. This does not mean, however, that the problem of the dollar deficit will not remain. The termination of the E.C.A. program on schedule should differentiate between the countries that have structural international trade problems still unsolved, and those that do not, or whose difficulties stem from those of others. But the main effect, I think, will be to broaden the area of consideration of the problem of imbalance, focusing attention on the fact that it is a world problem, and not merely a Western European problem. Indeed, there is growing awareness both here and in Europe of the need for a broader attack, which should not wait for the E.C.A. program to end.
The broader problem is to work out a sustainable pattern of world trade. This is a problem quite as much for us as for Western Europe, the sterling area, and other parts of the world. Its largest aspect, indeed, is the growing preponderance in the world of the American economy, its comparative self-containment, its long-run tendency to outstrip others in productivity, and its short-run instability, which, as was indicated last year, produces effects abroad quite out of proportion to the internal effects. About the future of American policy there are many uncertainties. Though the American tariff has been greatly liberalized since the mid-thirties, and the United States has taken the lead in the I.T.O. and G.A.T.T. negotiations, many of the American duties are still prohibitive over the range of goods in which Western Europe might compete, and there is still a real question as to how much the American people have ceased to be protection-minded where it counts. The I.T.O. Charter has not yet been accepted by Congress, and there have been recent indications that formidable opposition is being organized against it. Between the desire of industrial and labor groups to keep out imports and the desire of farmers and industrialists to retain their war-swollen foreign markets as vents for surplus, even at the expense of the taxpayers -- and the urge, common to all countries, to use the foreign balance as a stabilizer of home production and employment at high levels -- there will undoubtedly be severe political tensions in the United States, the outcome of which it would be hazardous to predict.
The approach to Western European viability that I have suggested -- putting the main emphasis on reduction of imports from the United States and expansion of Western European trade with other parts of the world, with a secondary, but still very important, emphasis on expansion of Western European exports to the United States -- seems to me the kind of solution indicated by the relative magnitudes of trade and by the historical trends. It does, however, present serious questions. It implies discrimination against American exports. Such discrimination, however, is already implicit in the new measures for liberalization of trade and payments. Moreover, this basic change in our trade policy was already involved in the 25 percent cut of imports from the dollar area by Britain and the sterling area last summer, which must have been reviewed and approved at the September conference. Nevertheless, the working out of the implications of this change, in a spirit of coöperation rather than conflict, and with a view to expanding world trade, will doubtless present many difficulties. The most important question should be whether this discrimination could be regarded as temporary or whether it would tend to crystallize into a permanent division into "two worlds," which would run counter to the professions, European as well as American, that the object of the recovery program is to restore a multilateral non-discriminatory trade world.
The historical answer to unbalanced trade and productivity has been international investment. One of the most significant announcements in the new O.E.E.C. report is that the organization now proposes to undertake a study of foreign investment. The interest in President Truman's Point Four indicates that American thinking is turning in the same direction. The problem now presented, however, is quite unprecedented, and the analogy with nineteenth century experience could be misleading. Basically, what the world now requires is a flow of American capital accompanied by a flow of European exports. Such a development is not only unprecedented historically, but presents new and complex theoretical problems. It is not a question of "tied loans" but of an organic relation between the flow of capital and of goods. The danger is a further strengthening of trade ties between the United States and the less developed parts of the world, leaving Western Europe in a backwater. From this point of view, it would seem advisable for Western Europe to coöperate as fully as possible with her own resources in international investment, as Britain has been doing in the sterling area.
As regards American investment, it seems unlikely that the main reliance could be put on private foreign investment, at least without substantial guarantees. A part of our puzzle has been that, while the rôle we should play in the world is that of a creditor country, the conditions are often more favorable for investment here, not only for Americans but also for others. The history of the inter-war period is full of perverse and unstable capital movements which disturbed rather than restored international equilibrium. The kind of development program now needed would require planning, whether or not we like that word, because it would not be at all certain otherwise how the parts might fit together. It would require that attention be directed to key spots where aid would relieve European difficulties -- for example, the problem of the sterling war balances in the Middle and the Far East. It should give attention also to military and political considerations. It raises questions of our relation to such conferences as that recently held in Colombo by the British Commonwealth to explore the problems of Southeast Asia. One agency that could do effective work is the Bank for International Reconstruction and Development. But there will also be a need for American governmental investment, and probably also for some American grants of aid. I do not expect an early solution of the problem of world imbalance. But that is all the more reason, if this conclusion is right, why we should begin now, rather than wait for 1952. The hopeful aspect of the Western European problem is that it may after 1952 be "manageable," to quote the language of the new report, without an organized program of "extraordinary outside assistance."
[i] Last year, I discussed the European Recovery Program, in the light of the O.E.E.C.'s first Interim Report, in "Europe After 1952: the Long-Term Recovery Problem," Foreign Affairs, April 1949.
[ii] Equally striking has been the recovery in the aggregate of intra-European trade to the 1938 level, from about 60 percent of that level in 1947, despite the retention heretofore of bilateral trade agreements.
[iii] E.C.A. has pressed for virtually complete liberalization by the end of 1950. The French have proposed an increase to 60 percent by July 1, provided the proposed Payments Union is by then in operation, and to 75 percent by the end of the year. It has been said that these figures are well within the scope of British intentions, but that a number of other countries regard them as excessive. It should be noted, too, that hard currency countries, such as Belgium, are still excluded from the trade-liberalization proposals by others, including Britain. One of the present uncertainties is how far the restraint on freeing intra-European trade stems from genuine balance-of-payment difficulties and how far from a desire to protect vested interests. It must be recognized that a too-rapid pace of change might produce a serious setback in production, trade and employment, and that this hazard is much greater in old and settled communities than it would be in less developed areas. Even this caution, however, must be tempered by the fact that the period of external aid is limited, and results not achieved now may be much more difficult, if not impossible, to achieve later on.
[iv] This has also been, as I originally contended, a question for the International Monetary Fund.
[v] See John H. Williams, "The British Crisis," Foreign Affairs, October 1949, p. 14-15.
[vi] The poor showing in exports to us was due in part to our recession last year; the figures are $833,000,000 in 1947, $1.218 billion in 1948, and $1.037 billion in 1949-50.