The Endless Fantasy of American Power
Neither Trump Nor Biden Aims to Demilitarize Foreign Policy
IN April 1950 I discussed in these pages "The Marshall Plan Halfway." At that time the United States looked forward to completion of the European recovery program by mid-1952, as provided by the Economic Coöperation Act of April 1948. But in June 1950 came Korea. Since then we have been in a process of transition to the Mutual Security Program. Instead of the Marshall Plan, we now have a three-pronged program combining economic aid, now called "defense support," administered since last January by the Mutual Security Agency as successor to E.C.A.; military aid under the Department of Defense; and Point Four (Technical Coöperation Administration) under the State Department. Averell Harriman as Director for Mutual Security has had the rôle of over-all coördinator of these activities.
In these circumstances we cannot attach the same significance as previously to the date mid-1952. Instead of providing the definitive cure for international imbalance, at least so far as Western Europe and its dollar gap are concerned, the Marshall Plan has become one more transitional experience in the increasingly complicated world situation that has been unfolding ever since the war. We can now only speculate whether, but for Korea and the rearmament program, the goal of independence from "extraordinary outside assistance" might have been reached by mid-1952. Actually, as contemplated in our budget for the fiscal year beginning July 1, 1952, assistance to Europe will be much greater than in any year of the Marshall Plan, and foreign aid as a whole (except as modified by Congress) will be 7.9 billion dollars, as against total Marshall Plan expenditures since April 1948 of 12 billion dollars. It is, however, important for many reasons to try to appraise at this time this whole experience. How much progress has Europe really made? Has the setback in Western Europe's external balance that has occurred this past year, and which the 0. E. E. C. report of last November called "ominous," been wholly due to temporary forces brought on by the Korean war and the rearmament program, or are there other forces suggesting deeper-seated maladjustments? Since the end of the Second World War, there have been sharply divided schools of thought as to the nature of Europe's economic difficulties.
The passing of E. C. A. last January 1 was the occasion for much appraising of the Marshall Plan results. One of the most interesting statements was E. C. A.'s final press release. The positive achievements cited form a most impressive record, without parallel in history. After World War I it took seven years to regain the prewar level of production in Western Europe. At the end of 1951 industrial production was 41 percent above prewar, 64 percent above 1947, and well beyond the target originally set for 1952. Agricultural production was 9 percent above prewar and 24 percent above 1947. Gross national product--the total sum of Western Europe's production of goods and services--had risen 25 percent in real terms in less than four years and was 15 percent above prewar. The transportation system has been rehabilitated. Electrical output has doubled over prewar. Steel production has doubled since 1947 (and is one-fifth above prewar), giving a total production last year of 60,000,000 tons as compared with 35,000,000 produced by Russia and her satellites. Refined petroleum products have quadrupled over prewar.
In agricultural products the gains are less striking but substantial. Cereal production and bread grains have about regained their prewar level, and the output of potatoes, sugar, meat, milk and oils is well above the targets set, and in every case except meat (where the prewar level was regained last year) substantially above prewar. The great disappointment has been in coal production, which is still somewhat behind the prewar output and about 20 percent short of the goal set for 1951; of the one billion dollars for economic aid to Europe in our budget for the past fiscal year, about two-thirds represented payments for imports of American coal.
I have always regarded the Marshall Plan as primarily an investment program, whose purpose was not merely to restore war damage but to increase production and productivity to the point where Europe might hope to balance its international accounts without further external aid. A parallel objective was to increase real income, which had fallen below the limits of tolerance, and thus to raise consumption and to provide internal savings which could take over the burden of investment as external aid was tapered off. On these fundamental aims the Marshall Plan must now be regarded as an interrupted experiment, or at least one made vastly more complex by the need of rearming. It is always difficult to make comparisons of the level of consumption at different periods in a changing world, and this is especially true in a comparison of prewar and postwar levels, since wars often produce significant changes in the pattern of consumption, and allowances have to be made for such things as continuance of rent controls and food subsidies. The O. E. E. C. conclusion in its last annual report, June 1951, was that in 1950 per capita consumption in Western Europe as a whole was still somewhat below prewar, though this was mainly due to the low consumption levels still existing in Austria, Germany, Greece, Italy and Turkey; in most other countries it was somewhat above prewar. How to improve--and above all to prevent a renewed decline of--Western Europe's real income will surely have to be a major consideration in the planning of the defense program if the progress that has been achieved by the Marshall Plan in warding off Communism from within is to be preserved.
When we turn to the investment aspect of the recovery program, the results achieved in the past four years are most impressive. As the O. E. E. C. report just mentioned indicates, as our aid has tapered off from year to year, in accordance with the Plan, the increase in investment financed out of domestic saving has been more rapid than the decline of external aid. "There have been few periods in history when so high a proportion of resources has been freely devoted to investment in such unpromising conditions and with such impressive results. It may be estimated that in 1950 real per capita gross investment (i.e. measured at constant prices) was more than 10 percent greater than in 1938. In terms of net investment the increase was much greater and probably amounted to about 40 percent."
In the light of this record it comes with something of a shock to find that in 1951 Western Europe's external trade deficit was about 4.5 billion dollars,[i] a deficit that was exceeded within the Marshall Plan period only by that of the first year, 1948, when the deficit was 5.4 billion dollars. This is what the O. E. E. C. report called "ominous." Since the chief aim of the Plan was to remove the external deficit, must we conclude that we have come full circle, and are now back more or less at the point from which we started? Has nothing much, after all, been accomplished about the hoped-for freedom from "extraordinary outside assistance?" And how could this happen in the face of such an impressive record of economic upbuilding as we have described?
The first, and the main, explanation is that this has been the effect of the Korean war and of the rearmament program that has come in its train. But a fact that may be even more significant in its implications for the longer run is the extraordinary violence of this effect. It appears to reveal once more the precarious nature of Western Europe's international position, and sets us wondering, as often before in my own case, as to whether-- even apart from such major disturbances as Korea and rearmament--we are on the way toward a really durable and dependable solution.
To get light on such a question we must look back at the behavior of Western European trade since the war, and especially since the Marshall Plan began. Sir Oliver Franks' exploratory committee,[ii] created in 1947 in response to Secretary Marshall's request for a program of self-help, mutual help and external aid, presented a four-point analysis: expansion of output along with general economic rehabilitation, internal financial stability (overcoming inflation), economic coöperation among the participating countries (through O. E. E. C.), and, finally, as the end result, the wiping out of the external deficit. Skipping for the time being from the first point to the last, and looking first at the volume of trade, the results are encouraging. Western Europe's foreign trade has not only recovered strongly from the year of collapse, 1947, but both overseas and within Europe it had by 1950 exceeded in volume that of 1938. Despite the setback in the external deficit in 1951, the growth in volume of trade has apparently continued; overseas exports in 1951 increased by 2.2 billion dollars over 1950, and intra-European exports by 1.5 billion dollars (at constant 1949 prices).[iii] The general conclusion seems to be that though export trade for Western Europe as a whole has not fully kept pace with production, and has not yet attained the target set forth in the national four-year plans presented in 1948 (which was a one-third increase by 1952 over 1938), the production program and other measures taken under the Marshall Plan have had an effect on trade that provides strong support for the exploratory committee's analysis and expectations. It should be recalled, too, that these results have been accomplished with only about half as much external aid as the committee estimated would be needed.
When we come, however, to the balance of trade and payments, as distinguished from the volume of trade, the facts are much harder to appraise. They show erratic fluctuations even before Korea, and it is to this fact and its implications that I wish later to return. When we come to Korea itself and the defense program we find not only that they were mainly responsible for the "ominous" widening of the gap in 1951 but also for the astonishingly good showing made in 1950. These violent changes are traceable both in Western Europe's balance of payments and in our own. Western Europe's trade deficit fell from 3.5 billion dollars in 1949 to 2 billion dollars in 1950; and when account is taken of invisible earnings, which far exceeded the exploratory committee's expectations, the current account balance of payments of the O. E. E. C. countries fell from 2.4 billion dollars in 1949 to $846,000,000 in 1950. The annual figures really conceal the full measure of the improvement, since there was an actual surplus on current account of $87,000,000 in the second half of 1950. It is not to be wondered at that the O. E. E. C. report of June 1951 contains at times a note almost of exultation--the problem was solved! But one finds here and there also notes of warning and references to signs of impending change. By November 1951 we get a very different document, whose main theme is the "ominous" widening of the deficit.[iv]
We find the counterpart of these changes in our own balance of payments. In 1947, the critical year before the Marshall Plan began, we had the huge excess of exports of 9.9 billion dollars, and, including invisibles, a total export surplus of goods and services of 11.5 billion dollars. In that year Western Europe's gold and dollar deficit was 8.5 billion dollars. In the first two years of the Marshall Plan our surplus was reduced by roughly half. Then came the abrupt decline in 1950 to a surplus of 1.4 billion dollars on trade account, and 2.2 billion dollars including services. Again, the yearly figures conceal the magnitude of the change, for in the third quarter of 1950 our current account surplus virtually vanished, and on trade alone we had a deficit for the first time in 13 years. Here again, we can appreciate why the Europeans hoped the problem had been solved. But by the fourth quarter of 1950 the gap was widening. For the year 1951 as a whole we had an export surplus of goods and services of 5 billion dollars and in the fourth quarter the surplus advanced to an annual rate of 7.5 billion dollars, the highest rate since the British devaluation in September 1949.
We have thus a mixed result. Western Europe is much stronger than five years ago. Production and trade have expanded strikingly. But the external deficit, though almost overcome in 1950, has again opened up alarmingly. Though we may discount the deterioration as due to Korea and rearmament, we must discount the great improvement that preceded it as also due to these developments.
As I said earlier, it is the violence of these changes in the past two years that should give us chief concern. They represent a repetition, in an exaggerated form, of earlier experience. Since the war there have been recurrent drains on Western Europe's gold and dollar reserves. They have fallen into a biennial pattern, with a reserve crisis in every second year--1947, 1949, 1951. They have forced drastic remedial measures--in 1947, abrupt termination of Britain's attempt at convertibility and non-discrimination; in 1948, interim aid for France, the Marshall Plan, Cripps' austerity budget; in 1949, currency devaluations and severe direct import cuts. The renewed drain of British reserves since June 1951, reducing reserves by more than half and bringing them again almost to the pre-devaluation minimum, and the equally acute drain of French reserves, have again been followed by drastic import cuts and other measures.
These disturbances are sometimes called short run. They are short run only in the sense that they recur frequently. Their persistent recurrence suggests that they are symptomatic of deeper-seated difficulties. Since the end of World War I, the world has been troubled by maldistribution of gold reserves and a persistent bias toward gold absorption by this country. In the inter-war period gold drains forced recurrent waves of currency devaluations and in the end led to direct exchange and trade controls and a marked deterioration of multilateral trade. This was all in the background before World War II greatly intensified the problem. With reserves now much smaller than before the war in relation to price levels and the volume of trade, there is a fundamental lack of confidence in the ability of countries to maintain stable currencies. Even minor swings in the trade position are magnified by fear and speculation--flights of capital, black markets, delays and accelerations of payments and of receipts by exporters and importers. When knowledge of thinness of reserves is coupled with knowledge that currency devaluations can be and have frequently been forced, the stage is set for recurrent crises such as we have seen; and the evidence seems to be that not even direct controls can stifle them, though necessity forces further resort to such controls on each new occasion. The problem of Western Europe is not merely to solve the dollar gap, difficult and uncertain as that question is, but in addition to build up reserves to an adequate level, and to do this in the face of the strong bias toward gold absorption by this country which has persisted ever since 1914. It was hardly to be expected that the Marshall Plan by itself could achieve such a result, even apart from Korea and rearmament.
The Western European countries are heavily dependent upon foreign trade. Basically, their trade is an exchange of their manufactured goods for raw materials and food. Thus exports are closely tied to imports, and, though foreign trade may expand with home production, there is little leeway in which to bring about favorable changes in the balance of trade. This was a major problem with the German reparation payments in the twenties, and it is the kind of problem that is often overlooked when people talk about the expansibility of production as a cure for trade imbalance. Throughout the Marshall Plan period the availability of supplies, particularly of raw materials, was a constant worry. In each of the biennial swings in the trade balance that I have mentioned, one can readily trace the fluctuations in the stocks of raw materials on hand. The good showing made by Britain in 1946 under the Anglo-American loan was largely an expression of the running down of stocks which resulted from curbing imports and stimulating exports, and this process has been repeated ever since, accentuating the swings in the trade balance.
A related factor has been the pronounced swings in the terms of trade. How important these can be was indicated by the official British statement that the adverse change in the terms of trade in 1951 cost Britain more than the increase in her defense expenditures. The kinds of goods that Europe buys are subject to much wider price swings than the kinds of goods she sells. The first effect of the Korean war was a sharp rise in raw material prices, in many cases by severalfold. This rise affected first our own trade position and later that of Western Europe. It largely accounts for the big upswing in Europe's position in 1950 and the marked downturn in 1951. We had a pronounced expansion of imports in 1950. Through government stockpiling and business inventory accumulation in this country at high prices Europe enjoyed for a time a double benefit. Our purchases of raw materials, particularly from the sterling-area countries, whose dollar earnings, through the sterling-area dollar pool, go to swell Britain's reserves, had much to do with the rise in Britain's reserves from 1.4 billion dollars, just prior to sterling devaluation in September 1949, to 3.8 billion dollars by June 1951. At the same time Europe's own exports to both the dollar and the non-dollar world flourished, imports were held down, stocks of goods were drawn down, and before the string had run out the results were highly impressive.
But in 1951 came the inevitable reversal. Western Europe found itself forced to replenish stocks at import prices much above those before Korea. The rise of import prices not only caused a sharply adverse change in the terms of trade but brought on a new outburst of inflationary pressure, after inflation had been held well in check for a considerable period, despite even the currency devaluations of September 1949. From June 1950 to the end of 1951 the wholesale price level rose 28 percent in Britain and 47 percent in France. In the case of Britain, at least, which is farther along with rearmament than the Continental countries, the competition of the defense program with the export industries for home and foreign resources began to make itself sharply felt, to the point where the Churchill Government conceded that the defense program would have to be spread over a longer period of time.
The reference earlier to the sterling area indicates the importance for Western Europe of triangular trade. One of the things that became apparent, even in our own official thinking (E. C. A.), as the Marshall Plan progressed, was that Europe's exports to us were too small to provide the main cure for the dollar deficit. Granted that the drive for exports to the United States should be strongly pushed, the main problem was to shift the source of Europe's supply away from us to third countries, and to expand Europe's exports primarily to such countries. Such a pattern of trade, to be self-sustaining, would mean a surplus of exports to the non-dollar world, a surplus of exports by the latter to this country, and a European surplus of imports from us, to be financed in this manner. In such a pattern of trade the effect of swings in the terms of trade is complex. If our imports from the raw-material-producing countries rise in volume and in price, Western European exports to such countries are likely to rise in volume and in price, and this change, coupled with some increase in Western European direct exports to us, can have highly favorable effects.
But against this is the fact that Western Europe in its own buying of raw materials is adversely affected. What will come out of such changes depends upon the circumstances of the particular case. As I have said, Western Europe benefited in 1950, and suffered heavily in 1951, from the changes in the terms of trade. A further factor is that when the terms of trade move against the raw-material-producing countries, as they did after the price rise passed its peak, Europe is apt to lose in volume of exports to such countries, but to find her terms of trade improving through the fall of raw material import prices. Since the third quarter of 1951, Britain's terms of trade have been gradually improving, and this change has been reflected this year in the reduction of the drain on Britain's reserves. But this may not be the end of the road either, for as the position of the raw material countries worsens they come under pressure to cut their imports not only from us but from Europe. Thus since the meeting of the Commonwealth Finance Ministers in London last January we have seen the emergence of a new sterling area policy, in which the sterling-area countries reserve the right to cut imports even against Britain herself. Considering that the essence of the sterling area has been the freedom of trade and capital movements within the area, and the maintenance in consequence of the largest area of fully multilateral trade which still remains, such a policy may have significant implications for the future.
The rise and the fall of raw material prices and the consequent violent swings in the terms of trade and in the volume of trade are strikingly illustrated by the behavior of wool, rubber and tin since Korea. Chiefly because of the phenomenal rise in the prices of these three commodities, export receipts from the United States and Western European countries by the countries producing them (primarily the sterling area) totaled 1.5 billion dollars more during the 12 months from mid-1950 to mid-1951 than during the six months preceding Korea, at an annual rate; and then, in the third quarter of 1951, fell by an amount equivalent to 1.1 billion dollars a year.[v] Such erratic swings (and one could amplify by taking more commodities) act as a two-edged sword for some European countries, particularly the United Kingdom; Britain has continuously been whipsawed by fluctuations in the terms of trade, which when favorable for her are unfavorable for the outer sterling area, and vice versa. The complexity of her task as banker for the sterling area under such conditions will, I think, raise serious questions for the future unless, through the development of more effective policies for the area as a whole, some correction of these violent fluctuations can be achieved. In recent years confidence in the future of the sterling area has waxed and waned with each recurrent swing, and the time seems to have passed when the area can be expected to survive on such an informal and almost organizationless basis as in the past.
The point to emphasize, as I said earlier, is that these disturbances in trade and payments, while intensified since Korea, are in no sense new. This is only the last in a series of such crises. It is a striking fact, for example, that when British reserves were drained so heavily in 1949 and sterling devaluation was forced on an unwilling Cabinet, Britain's own trade was not out of balance--she had had for some time an over-all balance except that she could not use her surpluses elsewhere to cover her dollar deficit--and Britain was not seriously experiencing inflation. It was mainly the drain resulting from trade deficits in the outer sterling area that caused the crisis. And it was mainly an abrupt decline in American imports from the raw-material sterling-area countries that produced these trade deficits.
This fact illustrates a further cause of world trade maladjustment. What was for us a very minor business recession was greatly magnified in its external effects. Our imports constitute a small fraction of our gross national product--in most years under 5 percent--but they are sensitive to changes in our level of output and employment. It is estimated in the last United Nations' special report that an American recession of the magnitude of 1937-38, when our employment fell by 4 percent and our merchandise imports by 36 percent, would, if it occurred today, reduce the dollar income of the outside world by 10 billion dollars.[vi] And yet, historically, a fall in employment of 4 percent would hardly be called a major depression. It is easy to understand by comparison what disastrous effects our Great Depression of the early thirties had on world trade, and why in the discussions of the I. T. O. Charter (which in the end this country turned down) other countries insisted on some kind of guarantee of stability in the United States and on escape clauses if American instability threatened to drain off their reserves.
How seriously this problem of the effects of these short-run fluctuations in our imports is regarded is shown by the United Nations' special report prepared by a group of international experts, including two American economists, in 1949.[vii] The report proposed that a country whose imports fell off because of a domestic recession should supply an equivalent amount of its currency, through the International Monetary Fund, to the countries whose exports had declined in consequence. I have elsewhere criticized this proposal as being an arithmetic rather than an economic solution of the problem, and one which no country could be expected to accept in such a generalized, mechanical form without examining the circumstances of the particular case.[viii]
The formula was obviously aimed at the United States, and at the meeting of the Economic and Social Council in Geneva in July-August 1950, our representative stated that the United States Government "was not prepared" to enter into any commitment "automatically to provide indefinite amounts of public funds over long periods." The subject, however, was not entirely dropped, and last year a second group of experts was appointed to consider the problem further. There is not space to discuss their suggestions, but the main one is that the International Monetary Fund should address itself to this problem. There has been growing criticism, even within the Fund itself, of its inactivity--until the recent Australian credit the Fund has been virtually inactive for two years--and we should welcome the recent signs of a new orientation of its policies. In my discussions of the Fund in these pages in 1943-44, I was skeptical of its usefulness under the conditions likely to obtain after the war.[ix] But the fact is that it does have unutilized gold and dollar resources of over 2 billion dollars which could, I think, help substantially to bolster the reserve position of countries in periods of strain. The United Nations' report also discusses the swings in the terms of trade resulting from price fluctuations of primary products and recommends a new examination of the possibilities of international commodity agreements as a means of reducing such fluctuations.[x]
The impact of the United States on the outside world is the basic international economic problem. The short-run disturbances I have discussed are symptomatic of deeper-seated maladjustments arising out of long-run cumulative changes in the relative positions of the trading countries. The great size of the United States, its large home market, its diversified resources, its comparative self-sufficiency, its high productivity and rapid technological progress have introduced a tendency away from, rather than toward, equilibrium in world trade. Until this tendency can be removed, dealing with the short-run disturbances, important though that is, can at best have only palliative effects. The basic question about the Marshall Plan is how much it has contributed toward a solution of this imbalance. The great virtue of the Marshall Plan conception was that it did look toward a fundamental solution through intra-European integration. The urge for integration has been present under some form or name ever since the Plan began in 1948. I have already discussed the strong emphasis on investment to improve European productivity. It was recognized, however, that national investment plans, supported by external aid, were only a beginning and that the objective should be intra-European coordination of investment.[xi] But though the O. E. E. C. did much exploratory work, it had no power of action, and the discussion bogged down on the question of whether political union must precede integration of investment, production and trade, or whether economic integration for special purposes would promote the merging of sovereignty.
The Marshall Plan, though it did not of itself achieve coördination of investment in Western Europe, did much to promote what is now being called the functional approach to the problem, and the new turn of events since Korea has furthered this approach. The program for liberalization of trade, the European Payments Union, the Schuman Plan, the European Defense Community, and the proposals for integrating agriculture and coördinating transport are all promising steps in this direction. In the unsettled conditions of October 1949, when there were strong grounds for doubt about how the Marshall Plan would turn out, Paul Hoffman made his plea for a program of integration as the only way of raising European productivity toward our level and thus of solving the basic imbalance. The only immediate step that proved feasible was the liberalization of trade and payments. In the second half of the Marshall Plan, this program played the leading rôle. Liberalization of trade was carried up to 75 percent of goods privately traded and a "common list" of freely traded goods was developed. International payment was multilateralized among the 0. E. E. C. countries through the establishment of the European Payments Union on July 1, 1950.
The Payments Union has been hailed as the major achievement of the Marshall Plan toward intra-European coöperation. Certainly it has succeeded better than its critics anticipated, and the O. E. E. C. countries have this year decided to continue it beyond the tentative date of mid-1952 originally set. The Payments Union, however, cannot by itself be regarded as anything more than an initial step toward integration, and even the continued existence of the Union cannot yet be taken for granted. Though it has weathered many difficulties, notably the German deficit position in 1950-51, and has, in that case particularly, demonstrated effective powers of management, the Union is winding up its experimental two-year period with some fundamental questions on which further light will be needed.
One is whether the success of the Union will require feeding more dollars into it. The Union now has almost intact its dollar reserve of $350,000,000 granted by E. C. A. at the time of its creation (as of May 1, the reserve was only $25,000,000 below that original amount). But this statement conceals the fact that nearly a half billion dollars of Marshall aid has in indirect ways been utilized, and in addition economic aid was still being given to the individual countries. There is thus left open the question of how the Union will fare now that the Marshall Plan has ended. Our Government has turned a deaf ear to the repeated demands by many Europeans that it furnish from $200,000,000 to $250,000,000 to strengthen the Union's dollar reserves for the rearmament period, and from current reports this decision has been accepted and further dollar aid has not been made a condition of the continuance of the Union.
Another vexing question is what to do about intractable creditor positions, notably that of Belgium, whose credits in the Union now far exceed the original quota and have been threatening to exhaust the Union's reserves. This year Belgium's receipt of gold and dollars from the Union has been cut below the sum to which she was entitled, and the solution now being worked on as I write (if Belgium will accept it, her alternative being presumably withdrawal from the Union) is refunding of the excess credit. But such a solution would be only temporary and does not solve the problem of the intractable creditor position. Belgium has had a persistent export surplus to the other Western European countries ever since the war, which appears to rest in part at least upon the fact that, with the liberal trade policies she has been pursuing, she tends to buy on balance from the United States and to recoup her dollar deficit by means of her European surpluses. In considerable part, the goods imported from us become the basis of Belgium's exports to O. E. E. C. countries. This is a striking illustration of how dependent the success of the Payments Union is upon discrimination against the dollar area. A gap in the wall, as in Belgium's case, represents a drain of dollars not from Belgium alone but from the O. E. E. C. countries as a whole. Thus we are brought back to the question whether Western Europe (or any other part of the world subject to persistent dollar drain) has any other alternative than either to try to protect itself by direct discriminatory controls aimed at cutting imports from the dollar area, or to build up its productivity (and thus its exports) to the point where the dollar shortage problem ceases to exist. This is the fundamental problem not only for the O. E. E. C. countries and the Payments Union but also for the sterling area and the sterling dollar pool.
The most discouraging feature of postwar experience is that we have not yet been able to find a solution to the problem of trade deficits which does not involve cuts in imports through direct controls. Even the German case I referred to earlier, which has been much cited as an illustration of what can be accomplished by monetary and fiscal measures, did involve direct import cuts, and, as I have indicated, Britain and the sterling area countries have felt themselves forced to resort to these cuts not only against us but against each other. Moreover, in its recent reserve crisis Britain's import cuts were directed against the O. E. E. C. countries to overcome her trade deficits with them and her loss of gold and dollars to the Payments Union. France pursued a similar course, and both France and Britain cut back their trade liberalization program to 60 percent.
Clearly what is needed in Europe is integration in some more fundamental sense than merely a monetary clearing union or a program of trade liberalization. That is why many are now looking forward to the Schuman Plan and to the European Defense Community, in the hope of achieving an integration in terms of production, distribution and coördinated investment. The Schuman Plan Treaty was signed a year ago by France, Germany, Belgium, Luxembourg, Netherlands and Italy, and the process of ratification is virtually completed. Unless something goes radically wrong in Western Europe, it should not be long before the Plan comes fully into force. When that happens, there will be created one single market for European coal and steel, a market which in terms of population will be about as large as ours. All tariff barriers and quantitative controls between the six countries of the community, as well as all discriminatory and restrictive practices, will be eliminated with respect to coal and steel, and coal and steel cartels will be outlawed.
This is a bright vision. Jean Monnet, its principal author, has hailed it, and also the Pleven Plan for a European Army (European Defense Community) which, organizationally, is drawn up on similar lines, "as the first institutions . . . of a United States of Europe." The Schuman Plan has encountered many difficulties and doubtless there will be more. Despite the elaborate organizational machinery, there will be room for play of national interests. Already there has been comment on the jockeying for position among the member nations and of pressure on the Steel Committee of O. E. E. C. to sanction increases of output in advance of the institution of the Plan, so that the countries will be in more favorable position for consideration of quotas after the Plan has gone into effect. Of basic importance in the Plan is the coördination of investment, the goal which, as I have indicated, has all along been sought under the Marshall Plan but without concrete results. If the Plan cannot eliminate high cost production and develop a really competitive market, it will fail of its purpose, and Europe will probably be facing again the problems of inefficient distribution of steel and coal capacity and the cartel practices that follow in their train. Though a transition period is provided for, in which countries will be compensated for elimination of high cost production (as in the case of Belgian coal), it will undoubtedly be easier to coördinate investment without undue national pressures through expansion of output. This raises in some minds the possibility of excess capacity. Germany had such a problem between the two wars and found an outlet in armament. In view, however, of the fact that the standard of living in Europe is still very low and that the O. E. E. C. has announced a new program calling for a 25 percent increase in gross national product by 1956, it seems premature to worry unduly about excess steel capacity, and there is surely no such problem for coal, which has been so badly lagging. If a Western European economy at all comparable with ours in productive capacity and productivity is to be created, Western Europe will have to think in much larger terms than heretofore.
This year economic conditions in Europe seem somewhat better. The anti-inflationary measures taken by the Pinay Government have been well received by the French people. Perhaps the main effects have been psychological and political, but the budgetary situation has improved, price increases have been checked, and, as I write, a large internal loan designed to draw out gold from hoarding is in prospect; the external drain has been checked and France's position in the Payments Union has improved. In Britain the Conservative Government has introduced important budgetary changes, has partly removed the food subsidies, and has taken steps to promote labor efficiency and reduce the pressure for wage advances by putting income tax on an incentive basis. The drain of dollar reserves has been substantially reduced, but, as of the end of April, the much hoped for counterswing had not yet occurred. Both France and England have increased the bank rate. The Bank of England discount rate has twice been increased, to a level of 4 percent, after having remained unchanged (except for a two months period in 1939 at the outbreak of the war) at 2 percent from 1932 to last November. In Europe, particularly during the second half of the Marshall Plan, there has been a general renaissance of central bank control. The Bank of England's actions were among the last in a succession that has spread pretty much throughout Western Europe.[xii] A growing number of economists feel that this reversion to monetary orthodoxy, if backed up by adequate fiscal policies, may point the way toward a more effective control of inflation.
But one must suspend judgment on whether progress is being made toward overcoming the biennial pattern of recurring crises and recoveries. Since the end of the war, each upswing after the crisis has followed a fairly definite pattern. The measures taken to stem the crisis begin to have some effect. The forces of fear and speculation pressing on the currency overreach themselves. Confidence begins to grow that the worst has been seen for the time being, flights from the currency subside and are followed by some backflow. But none of this means necessarily that there is confidence that a durable solution has been found. Western Europe's foreign trade problem is only part of that existing in the world as a whole. As I have indicated, throughout the Marshall Plan period the availability of supplies was a constant worry. The great increase of industrial production here and in Western Europe, in Canada and in some other countries, is making imperative an accelerated development of primary products. Industrial production in the world as a whole since 1938 has increased by some 50 percent, while the output of raw materials has at most increased by 10 percent. Some experts have estimated that, apart from the United States, the world's food production is now lower than before the war, and even the gain in raw materials is questionable if we take out a few large items, such as petroleum and aluminum.
This brings us back to the discussion of the terms of trade. For perhaps three-quarters of a century the problem had been whether the industrial countries could absorb the food and raw materials which they had been instrumental in developing in other countries, on terms of trade tolerable to the latter. Now there appear to be signs that the imbalance is swinging the other way, not merely in the short-run sense of Korea and rearmament but for the longer run. The absorption of metals is an outstanding example, and it is due not only to the great growth of investment in capital goods industries but to the growth of the consumer durable goods industries. American consumption of such products as automobiles, refrigerators, washing machines and vacuum cleaners has doubled and trebled since before the war. Meanwhile, there are sharply divergent views as to the purposes of international investment or grants of aid. The less developed countries, with their recently-won sovereignty and their growing social welfare consciousness, often do not welcome the nineteenth-century kind of foreign investment, which they regard as "exploitation," a process of extraction at low cost of what the industrial countries wanted, while doing little or nothing toward creating a better rounded economy and a better scale of living.
Thus, the urge for industrialization in the underdeveloped countries collides with the world need for primary production. How to reconcile this conflict and achieve a better balance of production and trade in the world as a whole is the great problem for the future. One of its most important aspects is the question what part the European countries should play in it. If they do not participate, they run the danger of being forced into a backwater through the growth of direct trade between this country and the less developed countries. Probably what has held the sterling area together more than anything else has been the free flow of capital throughout the area. Even under the Marshall Plan, American aid was in effect merely siphoned through the British economy to the sterling area countries in the form of "unrequited exports." Now this strain on the British economy will be accentuated by the rearmament program, and there will be similar problems for France and Belgium with respect to their overseas territories. I can only conclude that the problem of how to reach a stable world economic balance will long be with us and will require thinking and planning in new areas of economic policy where we are as yet merely in the pioneering stage. The Point Four program and the Colombo Plan, though proceeding slowly, are at least indications that we are beginning to perceive the nature of the problem.
Immediately upon us are the problems of rearmament. The latest O. E. E. C. report contains a warning that there may be a new inflationary outburst in Europe next fall or winter, and one of the most debated questions here at home has been whether the sidewise movement which we have had since the spring of 1951 will be followed by renewed inflationary pressure as our defense program gets into full stride. Many, both in Europe and here, have warned that a program too big or too rapid would not only lead to renewed inflation but would open up a serious danger of deflation when the build-up is completed and the replacement phase of the program is reached. In Britain, as I have said, the need of stretching out the military program has already been officially conceded, and for some time past the time-schedule of our own program has also been undergoing a process of stretching out. On the Continent, except for the heavy burden on France in Indo-China, the defense program is still in its early stages. Meanwhile, there is complaint in Europe that our aid, both military and economic, has been seriously lagging. There have also been complaints this year, including formal protests to our State Department by Italy and Britain and actual tariff retaliation by Belgium, that our tariff practices belie our preachments about freer trade. There is nothing new in this. One of our chief problems is, and long has been, with ourselves. We cannot hope to achieve freer trade in a better balanced world if we do not live up to it ourselves.
[i] This figure is based on January-September 1951 at annual rates of trade. See Economic Commission for Europe, "Economic Survey of Europe in 1951," Geneva, 1952, p. 69.
[ii] Committee of European Economic Co-operation, "General Report." Washington, D. C.: Department of State, September 1947.
[iii] E. C. E. Survey, op. cit., p. 69; based on January-September 1951 at annual rates of trade.
[iv] O.E.E.C., "European Economic Co-operation." Paris: November 1951.
[v] E. C. E. "Economic Survey of Europe in 1951," p. 12.
[vi] United Nations, "Measures for International Economic Stability," New York, 1951.
[vii] United Nations, "National and International Measures for Full Employment," Lake Success, 1949.
[viii] John H. Williams, "International Trade Theory and Policy--Some Current Issues," American Economic Review, Supplement, May 1951, p. 429.
[ix]"Currency Stabilization: The Keynes and White Plans," Foreign Affairs, July 1943; "Currency Stabilization: American and British Attitudes," Foreign Affairs, January 1944; and "International Monetary Plans: After Bretton Woods," Foreign Affairs, October 1944.
[x] See United Nations, op. cit., 1951.
[xi] For a discussion of the difficulties involved in coördination of investment, see John H. Williams, "The Marshall Plan Halfway," Foreign Affairs, April 1950.
[xii] In this country also there are promising signs of a revival of general monetary control, particularly the Treasury-Federal Reserve accord of March 1951.