THERE is no longer that air of unreality in the discussions of British economic questions which characterized the first two postwar years. Sir Stafford Cripps in his recent surveys gave a blunt warning of possible economic catastrophe. The adoption of the Marshall Plan has for the moment obviated the terrible necessity of cutting imports and thus causing general dislocation and large-scale unemployment, a contingency which would have threatened all efforts at Western European reconstruction. But the consecutive drafts upon American goodwill clearly cannot be repeated indefinitely. Such a failure as the Anglo-American loan agreement must not be permitted to recur. A searching analysis of the British crisis is vitally important.

One of its most serious aspects is the effect on American public opinion of the criticism which attributes Europe's malaise to planning and inflation. Should an attempt be made to treat the problem by monetary panaceas -- devaluation and the like -- devastating social and political consequences could not be avoided; only by creating mass unemployment could Europe's international payments be balanced on a basis of free-market economics. This would involve hardship, if not starvation, and would have unforeseeable social and political consequences.

In this paper it will be argued that: 1, some of the current criticism of the British Government ignores the most important factors determining the position of the country, and obscures great achievements; 2, the relative failure to grapple with the British economic problem is due partly to the British Government's refusal to accept the wider implications for Britain of the consequences of the war (an attitude of which the critics of the Government were even more guilty) and partly to the unwillingness of the Government to implement fully its own principles; 3, in particular, the implications of full employment were imperfectly realized, in that certain controls were prematurely relaxed and, in consequence, production and investment did not expand at the required rate; 4, the real crisis of European and even more of British reconstruction has not yet arrived, and that it can be solved only by the closest economic coöperation in Western Europe, which must be harmonized with the special ties binding most of those countries to complementary areas overseas.

II. THE CAUSES OF THE BALANCE OF PAYMENTS CRISIS

It had always been recognized that the wartime loss of foreign assets and the weakening of Britain's capacity to obtain income from services such as shipping would force her to increase exports considerably. It was estimated that, in order to be able to obtain adequate imports for an increased population at full employment, Britain would roughly have to double her exports of manufactures. This calculation included some provision for the servicing of the accumulated war debt and postwar credits, but did not take into account any other commitments burdening the balance of payments.

In the acrimony of the political debate which has been raging in Britain, the fact has been lost sight of that the British foreign accounts payments could have been balanced but for the burden of international military and political commitments. According to the statement on the balance of payments, the deficit on current account in 1946 amounted to about $1.5 billion. But military expenditure, the cost of supplies to Germany, and other relief represented a direct burden of somewhat over $2 billion. If government expenditure abroad had been reduced in the same proportion by Britain as it was by the United States, we should have had a small surplus in our balance of payments. In 1947, the British position deteriorated considerably and the total deficit increased to $2.7 billion. The foreign expenditure of the Government declined to $1.4 billion. This, however, is not the whole story. The military expenditure was not merely a direct burden on the foreign income, but also absorbed manpower which otherwise could have contributed to exports. Had demobilization been carried out at the same rate as in the United States, we should have been able to expand civilian output by some $2.4 in 1946 and $1.2 billion in 1947. It can hardly be doubted that we could have increased exports by some $1.6 billion in the period, thus completely closing the gap. There was an exceptional burden on the balance of payments of not less than $4.4 billion during the two years, or more than either the whole of the United States loan or the total deficit on other items.

Although foreign demand for British exports has been very strong since the end of the war, the foreign trade deficit would have been even larger except for the most stringent efforts to limit imports. These remained at only three-quarters of the prewar level, and are certainly insufficient for the restoration of the normal working of the economic system. Had it not been for the rise in import prices since 1938 the adverse balance of trade in 1947 would have been $590,000,000 or less, instead of $1.8 billion.

The second disregarded cause of last year's sterling crisis, which will continue to plague Britain, seems to originate in the imperfections of exchange control. The inherent difficulties of exchange control are aggravated by the number of British firms engaged in foreign trade or operating overseas, and the complexity of business which makes it almost impossible to separate current and capital items. It seems as if a large capital investment has been permitted in the sterling area. There is an increasing danger that an illegal export of capital is taking place. The level of taxation is so high, the prospects in Europe are so uncertain, that even large losses and high costs and risks do not deter people from trying to transfer their capital.

We might conclude, therefore, that the acute crisis of the British balance of payments was mainly caused by the internal and external burdens of our political commitments, aggravated by some export of capital and the grave worsening of the terms of trade. Britain was in no position to shoulder these burdens unaided. The export targets set to overcome the crisis were unreasonably high. Devaluation under present circumstances would hardly help, as Britain did not encounter difficulties in selling what she could produce and spare from the home market. Nor would devaluation limit imports, the extent of which is already kept by the Government far below the level of demand. On the other hand, devaluation would probably reduce the dollar proceeds of our exports while leaving the cost of imports unchanged. Thus instead of improving the deficit in our balance of payments it might well be aggravated. It is to a sharper handling of the exchange restrictions and export controls -- which had been lifted after the war -- that the country must look for an improvement of its position.

III. FULL EMPLOYMENT, INFLATION AND INVESTMENT

The crisis in the international economic relations of Britain and the acrimonious debates which followed have obscured the solid achievement of the British Government. The exaggerated hopes entertained during the latter part of the war have also contributed to the prevalent disappointment. It is, therefore, only too necessary to insist that much more has been achieved than could reasonably be expected after so long and exhausting a struggle. The demobilization and reabsorption into civilian work of 5,000,000 members of the armed forces have been accomplished without serious incidents. The physical output of the country is above prewar, though the worsened terms of trade and the loss of foreign income have depressed national income. This is an accomplishment which was not reached for five years after the shorter and much less devastating first German war. The dismal trend of coal output, the most important single item on the economic front, has been decisively reversed. Britain has gone some way to establishing the foundations of a balanced social and economic system, partly by transferring ownership of the most important public utilities to the state, thus making it possible to carry out the necessary nationalization of these services, for which private capital could not have been raised under present conditions. Control over the flow of investment has been effected, and new institutions have been created to finance out of public funds new private ventures, especially of small and middle size, which found difficulty in obtaining backing before the war. The nationalization of public utilities, which substitutes low interest government bonds for high yield equity capital, freed venture capital for new industries which will and ought to remain in private hands. In a troubled world, beset by internal dissensions and increasing political extremism, labor strife has almost completely been avoided. Domestic political disagreement has not deteriorated into irreconcilable conflict. The maintenance of political stability is perhaps the greatest achievement of the economic policy which was pursued.

Yet those features of this policy which were responsible for this relative domestic tranquillity became the butts of the most vehement criticism. It has been suggested that the root economic problem is the prevalent inflation, the excess of incomes over supplies, aggravated by the subsidies which kept the price of necessities relatively stable despite rising wages and prices abroad. It has also been asserted that the Government has over-expanded investment. At each stage of reconstruction, the austerity imposed by the Government was sharply attacked. The inflation, the critics maintain, has resulted in a maldistribution of resources, and only the restoration of a free-price system can bring relief.

These arguments are fallacious economically; and the adoption of the measures proposed would certainly have catastrophic political consequences. First of all, the pressure of demand on supplies does not primarily result from current incomes. It is the consequence of the huge accumulation of wartime savings by consumers -- some $12 billion -- and of financial reserves by firms -- some $18 billion -- as a result of the reduction of working capital, the accumulation of unused obsolescence allowances and undistributed profits, war-damage payments, and the partial refund of the excess profits tax. Short of completely blocking these reserves, with the attendant hardship out of all proportion to the advantages, an excess of demand over potential supply could not be avoided. A budget surplus of even $1 billion could not deal with the problem. This does not mean that the attainment of a budget surplus was not desirable. But a reduction of the subsidies which are needed to stabilize the cost of living is not the way to achieve this budgetary surplus. Nor could the restoration of the free market mechanism be expected to restore equilibrium. The Government was pledged to maintain full employment. Indeed, no government could survive today in England which did not adhere to that policy. At full employment, however, the bargaining position of the unions is extremely strong. A wholesale attack on the standard of life of the lowest income classes by decreasing or abolishing subsidies would be fiercely resisted. All that could be achieved would be a spiral of prices and wages. The excellence of the price mechanism based on an uncontrolled money demand depends for its functioning on sufficient unemployment to keep the general level of wages stable or only imperceptibly rising. Increases in certain important industries lead to immediate demands from workers in others. Only where there is a reserve of unemployment can collective bargaining limit wage rises to those industries whose products are most urgently needed and which must therefore attract additional labor. Thus a large-scale redeployment of labor is also inconceivable without unemployment, once control over employment and planned wage policy are rejected. It is, to say the least, regrettable that the so-called disinflationists ignore this problem completely. A planned wage policy would, of course, substantially decrease the scope of the controls needed. Budgetary policy, as we have seen, cannot under present circumstances be expected to restore equilibrium. Indeed, care must be taken in day-to-day policy not to overshoot the mark because the spending of reserves might easily be postponed. Most official calculations of the inflationary gap have made the double mistake of reckoning only with current incomes, leaving aside potential dis-saving, and at the same time they also disregarded a possible increase in productivity which would offset that inflationary pressure. The dangers of such a simplified approach to our problem are great.

Finally, it has been suggested that the present crisis is due to overinvestment. But on closer investigation it can be shown that investment is seriously deficient if Britain is to survive as an industrial exporting nation. The accumulation of fixed capital in 1946 was barely two-thirds of the depression year 1938. In 1947 it might just have reached that level. Yet it is well known that capital accumulation during the inter-war period was seriously deficient and that, in order to improve our competitive position, we must succeed in lessening the discrepancy in capital equipment per head of the workers between the United States and Britain. The United States since the war has invested more than $60 billion as against the British investment of only some $12.5 billion (in Britain), more than double per head of the working population.

IV. THE TRUE CAUSES OF THE CRISIS

Where, then, lie the true causes of the crisis? It is clear, first of all, that there is a serious discrepancy between the military and social commitments of the Government and British capacity to produce. Britain has suffered a serious decline in productive effort since the end of the war. Secondly, too large a proportion of this smaller national effort has been used for consumption. Despite the fall of total national output, consumption increased in 1946 by some 10 percent and is now, in terms of quantities and at 1938 prices, practically equal to production of that year.

The consequent insufficiency of capital investment could have been offset by a resolute attempt to rationalize production, i.e. to standardize the products and concentrate output on the best plants. The existence of vast modern armament factories might have facilitated such rationalization. Mr. Churchill's last government unfortunately had gone some way in dismantling controls, and that policy was not reversed. Consumers goods industries were deconcentrated, with a considerable loss in productivity, and the effort at industrial reorganization exhausted itself in the appointment of working parties to review the state of different industries. Their recommendations, such as they were, were not followed up promptly. In its anxiety to avoid the reappearance of distressed areas blighted with local unemployment, the Government commendably pushed the settlement of new industry, but insufficient attention was paid to the need of increasing productivity. The building program was not utilized to develop the mass production of housing programs, and durable consumers goods which could be sold abroad. The partial decontrol of prices and the complete decontrol of employment attracted labor toward the uncontrolled sector, i.e. luxuries. As necessities were rationed and their prices controlled, the relative profitability no longer expressed the relative urgency of demand for them; and as no rational wage policy was evolved, manpower was also misdirected. The price mechanism was disrupted and nothing was put in its place. The partial decontrol very much aggravated the production crisis. Altogether in contrast with the optimistic calculations of a substantial rise in productivity, there was, if anything, a decline. Yet an enormous advance could have been made, showing the way to other European countries.

Here, then, we find the true explanation of the internal causes of the relative failure of the Government. It committed the country to admirable experiments in social progress. It took powers essential for the establishment of a more balanced economic system. It preserved social peace and thus aided economic reconstruction. The main reason of the present grave difficulties is that it did not realize that the magnitude of the effort required a single-minded concentration on the tasks in hand in increasing the productive power of the nation. The legislative program was admirable, but it was not followed by an equally well thought out program of reform on the administrative side. As a result, maximum potential production power declined and no reserves were available to cover the unforeseen burdens of our foreign commitments and the increase in the price of imports. The coördination of internal and external policies was imperfect, and even in internal policy the coördinated planning of the economic activities of the Government was not implemented until developments had reached a very late stage.

V. TOWARD A SOLUTION

The severity of the sudden crisis last summer, totally unexpected by the expert advisers of the Government, and the threatening exhaustion of the country's international reserves, produced a series of remedial measures. The machinery of government has been much improved by the appointment of Sir Stafford Cripps as economic coördinator -- and subsequently also as Chancellor of the Exchequer -- and by the reorganization of the central planning agencies of the Cabinet. The planning and coördination of current measures have already improved, though this improvement is less noticeable so far as long-run policies are concerned.

The foreign commitments of the Government are being further reduced and it is hoped that their cost will not exceed $800,000,000 this year. The manpower estimates provide for a substantial addition of workers to the productive effort. The further reduction of the length of conscript service to one year will automatically speed the process.

Equally important are the steps taken to achieve a balanced increase in foreign trade. After some false starts, the control over the volume and direction of exports was reimposed. Export targets were revised and a number of important agreements negotiated with foreign countries providing for a balanced increase of international exchange on a reciprocal basis. Indeed, we must now fear that the Government, frightened by the events of last summer, will, though paying lip service to multilateralism, try to achieve a more strictly bilateral balance with our foreign suppliers than is either necessary or desirable. Unfortunately, there are no signs that the Government realizes that in the long run Britain can maintain her standard of life as an industrial exporter only on the basis of the unification and rationalization of European industry: otherwise she will not be able to compete on equal terms with the industries of the United States. Indeed, if Britain is to avoid a suicidal competition for markets we shall have to envisage a deliberately planned development of overseas countries (e.g. China, Africa) so as to absorb the growing productive capacity of the world without bouts of unemployment.

On the home front considerable progress has been achieved. For many months previously the pleas for control over employment had been rejected as conflicting with liberty. Yet it is clear that the alternative method of restoring equilibrium -- mass unemployment -- would harm the interest of the workers much more than the restoration of control over employment. Conscription of labor cannot be envisaged in a free society. Control over employment there must be. The only question is whether that control is exercised by the power of the purse and monetary policy, or by deliberate decision of a responsible government. At long last the choice has been made, and the results of the first six months' operation of the new system by which employers can hire workers only through the labor exchanges have brilliantly vindicated the system. The charge that slavery is about to be reëstablished in Britain has been exposed to the ridicule of facts.

Concomitantly, the first timid steps have been taken to achieve the redeployment of manpower. Collective bargaining has not been restricted legally, but trade unions have been persuaded not to press for wage increases not justified by an increase in productivity. It is yet to be seen whether persuasion will be sufficient, but the principle that wage policy is an essential ingredient of economic planning has implicitly been accepted. At the same time steps were taken to extend the control over prices. In this respect, too, the measures taken have been tentative. As yet no attempt has been made to use price control to enforce rationalization, but once the system is established there is reasonable hope that its efficiency will increase and that the pricing mechanism will be used as an important weapon in conscious economic planning.

The clamor for severe budgetary and investment deflation has fortunately been resisted, though some measures have been taken to reduce monetary pressure. Gross investment of $7.6 billion in 1947 is to be reduced by $400,000,000 in 1948. This means that net investment will be smaller than even in 1938, if account is taken of the much increased burden of replacement and maintenance. Yet the Government's plans envisage an increase in investment in agriculture. This is a doubtful experiment in self-sufficiency, as the reorganization of our agricultural production has not been attempted. Subsidies to agriculture have been further raised and it is questionable whether the farmers, whose profits are already very high, will respond by increasing production. Housing plans have rightly not been cut, as houses are necessary to ensure the mobility of labor. It is the extension of transport facilities, and to some extent of factories, which takes the brunt of the axe. A tighter control over investment projects was obviously necessary in order to speed the completion of those already under construction, but the decision to compress the total volume seems unwise. But some rationalization of investment will be enforced. Unfortunately control over the purchase of equipment has not been reintroduced and it is doubtful whether persuasion will result in the right choice between different schemes. This method was tried and failed during the war. Nor can one be satisfied with the measures designed to achieve an increase in productivity. A beginning has been made in concentrating production and working double shifts prior to an organized drive for reëquipment; but these efforts -- e.g. in cotton -- have been on far too small a scale and far too timid. No effort has been made to evolve wide schemes for concentration and standardization. During the war successful experiments were made at increasing efficiency by establishing temporary holding companies dealing with entire industries and reorganizing their production. This method showed that the interest of smaller and relatively inefficient firms can be safeguarded even though they lose their identity during the period of reorganization. Private ownership is maintained, yet maximum output is achieved in the shortest time. Such schemes might well be taken as a pattern in dealing with small industries whose combined output is so important, especially in exports.

The two budgets since the dollar crisis maintain the subsidies needed for stabilization of the prices of necessities. This, in the face of determined hostile pressure, is their greatest merit. A rupture of price stability at this point would certainly have resulted in labor troubles and the refusal of the trade unions to cooperate in a coherent plan to restore the balance of the economy. Some attempt was made in the autumn to restrict consumption by increasing indirect taxation. But the increase was not significant and hit luxuries less than more necessary commodities. The recent budget has continued this program; purchase taxes were, however, reduced, even on certain luxuries, in contrast to taxes on indulgence (i.e. alcoholic drink and tobacco) which were substantially increased, with a result that total indirect taxation has been increased by $200,000,000. Unfortunately, the system of taxation was not coördinated more closely with general economic policy. No attempt was made to tax luxury services, nor was the work of physical controls made easier by introducing discriminative taxes on employment in unessential industries.

While the incidence of income tax on the marginal earnings of the lower income categories and of married women was reduced, far too few people have been totally exempted from direct taxation. Thus it is improbable that the administration of direct taxation will improve. Thousands of civil servants and private clerks are toiling to obtain a few score millions of tax revenue. The payment of tax by weekly wage earners is the most effective deterrent to increased effort. The new capital levy, ingenuously disguised as a surtax on unearned income, represents in fact no contribution to the solution of the so-called inflationary problem. Most of it will be paid out of capital, and the rest at the expense of saving; consumption will hardly be affected. It must be considered a gesture directed at the workers to secure their coöperation in agreeing to a freezing of wages. On the other hand, it completes a series of tax measures which have seriously weakened the incentive of the private owner to take new risks. It is from the decrease in state expenditure -- amounting to some $800,000,000 in 1948 and 1949 -- rather than from an increase in taxation that there is hope for an increase in the budget surplus and economic balance.

Whether these measures will suffice to restore the balance of our internal and external situation in the long run is questionable. There is, first of all, no sign that our foreign commitments have been adequately revised or that the disastrous experience in Germany has led to a consideration of policies. Secondly, the rationalization of production must be intensified. Even though Britain has obtained American help in sufficient amount to make possible an increase in investment above the level contemplated before the cuts last winter, there is immediate need of a thorough reorganization of industry. This is the gravest aspect of the British problem, and the failure to deal with it is deeply disappointing. The control of employment and the control over raw materials will have to be reënforced by a reorganization of the tax system. The financial weapon needs to be coördinated with direct fiscal controls over the distribution of scarce supplies.

If coöperation with the trade unions to establish wage scales which promote recruitment into undermanned industries and promote efficiency is unsuccessful, labor direction will be necessary. A cumulative increase in the wage level resulting from sectional bargains is not merely a threat to the currency but also retards production. At the same time, the Government ought to beware of policies which will result in unemployment; nothing could be more disastrous for a rational reorganization of British industry than a justified suspicion by the rank and file that increase in production must lead to a loss of jobs.

As we have seen, all calculations of closing the inflationary gap are vitiated by the fact that the largest portion of potential demand originates in accumulated wartime reserves. All efforts should be made to persuade people to refrain from using these reserves, and to increase their current saving. But it must be realized that we are dealing here with an extraordinarily unstable demand which might at any moment be withdrawn. Nor must it be forgotten that productivity will increase far more rapidly than before the war if a sensible industrial policy is pursued. This should also make the task of controls easier. The fears that an uncontrolled inflation threatens England are unfounded. Nonetheless, the problem of inflation exists; so does a balance-of-payments problem. But both should be tackled, not by measures which would inflict unnecessary hardship and jeopardize social peace, but by a reconsideration of our international position and measures to increase our productive capacity.

VI. THE LONGER-TERM OUTLOOK

The solution of the longer-term economic problem is not possible in isolation from the current political background. It depends on reintegrating Britain in a prosperous world economic system which, in turn, depends on resolving the unbalance in political and economic relations brought about by the Second World War. The formidable difficulties in the way of achieving this are both international and domestic, both intellectual and material.

The origin of the intellectual problem can be discerned in the discrepancy between the part played by Britain during the war and the problems posed by the aftermath. The contribution of Britain to victory was unique. She alone remained in the field after the disaster of 1940, and this secured the claims to leadership which enabled her to play the rôle of an equal partner of her much stronger wartime allies. When victory was at last achieved, it was psychologically difficult, if not impossible, for Britain to readjust herself to the new balance, or rather unbalance of power.

The vast revolution of world power might have been foreseen. The British position, although difficult, might in the longer run have been retrieved by a skillful combination of economic and political policy. Britain could perhaps have used her leading position in Western Europe immediately after the liberation to build up a strong common organization which eventually would have provided the required balancing third. Close coöperation with Europe, suitably harmonized with the existing special ties with the Commonwealth, might have provided a basis on which Western Europe could have been reintegrated eventually into the world economy. The serious physical damage to the densely populated areas, the loss of foreign investment and the long interruption of trade led not merely to an increase in industrial plant overseas but also to a shift of consumers' preference for non-European goods. The continued rapid progress in manufacturing efficiency overseas, and capital investment at a vastly superior rate than can be achieved in Europe, might well make this trend permanent. The creation by conscious and coördinated planning of a huge common area comprising Western Europe and its related overseas territories, based on much the same social goals and faced with much the same problems, must be attempted if the world political and economic equilibrium is to be restored.

During the war, the differences of opinion of the coalition Government were too great to make it capable of devising a new policy for Britain. The unexpected accession of the Labor Government in 1945 might have provided an opportunity to reconsider the position and longer-term aims. Two decisive factors militated against this. First, the United States was a determined adherent of Manchester Liberalism in the most dogmatic sense. It regarded non-discrimination, convertibility of currencies, the abolition of quantitative regulations, not merely as a means of increasing real income -- though it can be shown that under modern conditions this is more than unlikely -- but as a political or rather moral aim in itself. The pressure exerted by the United States during the war at the conferences convoked to consider the postwar reorganization was considerable.

Such a program, moreover, presupposed meticulous preparation and intimate political relations between Britain and Western Europe. The inability and unwillingness of Mr. Churchill to face the consequences of the war on the economic side and thus to face an analysis of the military strength of the country, together with the United States' opposition to what were then called "exclusive blocs," prevented Britain from recognizing that she could retain her position as a Great Power only by joining the smaller countries of Europe and building up a large economic unit dedicated to progressive social policy and the replacement of the bankrupt prewar system which had given rise to Fascism.

Most of the British political and economic experts were only too glad to use the American opposition to such a policy as an added argument. They feared that the effort required to provide effective leadership in Europe would necessitate the continuation of controls. They hoped that, after a slight transition period, Britain could settle down to a position not dissimilar to what it was before the war. They saw no reason for experiments.

The impact of Soviet hostility was directed in the immediate postwar period mainly against Britain. Thus a vicious spiral began which still holds the Continent and the world in its grip. Soviet hostility more and more drove the British into a position of dependence upon America, for there was no time or opportunity to oppose the U.S.S.R. merely by European coöperation. Soviet Russia, on the other hand, whose clumsy diplomacy caused the combination against herself, felt justified in her violent tactics by the fact that such a combination had come about.

On the economic front the loan negotiations with the United States determined British policy. Britain was committed to an abrupt restoration of free-market economics in international relations under conditions which made failure almost certain. No attempt was made to assess the over-all burden of the internal and external commitments. The crisis of last year, which took the country and the administration unawares, has now resulted in the reconsideration of American policy. It has become clear that the effort to restore the prewar economic system could not succeed in the face of the obstinate fact that the world was irretrievably changed. The Marshall Plan recognized that the balance could be restored economically and politically only by creating a strong Western European economy able to stand on its own feet. Far from being opposed to an attempt to bring about closer economic relations with Europe, the United States took the initiative in promoting it. It is unfortunate that this change has come about mainly as a result of the increasing tension with the Soviet Union, for it brought support of policies which seriously militate against the reconstruction of Western Europe. The inequality in distribution of income, the lack of social security, the incapacity of the ruling classes to devote a sufficient quota of the national output to economic progress, render assistance without reform liable to failure.

The belated effort to bring about an orderly reconstruction and establish a strong unified Western European economic system faces many difficulties. Between the Scandinavian countries, Holland and Britain on the one hand, and the Latin and Mediterranean countries on the other, no common economic, as contrasted with political or military, platform is apparent. In the former, there is a régime of controlled economy with inflation kept firmly in check. In the latter, inflation is raging after free-market economies have been restored, with resulting serious social inequality and increasing social tension. In the former, no threat exists of violent revolution or quasi-Fascist authoritarianism. In the latter, democracy is assailed from both sides and is maintaining itself precariously.

The lessons of this sharp contrast have not been learned in Britain, and far less in the United States. There is still some reluctance to recognize, especially in America, that the return to free-market economies can have social dangers far outweighing any economic improvement, and that in the postwar circumstances even the extent of economic improvement which can be obtained in this way is questionable. The first requisite of a rational solution is an increase in European productive capacity and the restoration of its lost balance. This implies also rationalization of European production by making use of modern techniques based on mass markets. The second and hardly less important condition of success is the creation, by deliberately coördinated planning, of a large-scale economic unit within which this productive capacity can be developed. The task is formidable, and whether the older prejudices will regain their hold in the United States depends, perhaps, on whether quick successes are registered in Europe. After all, the degree of economic idealism demanded from the United States has never been achieved by any leading nation. It is nothing less than the voluntary foregoing of economic advantages -- indeed, active help to potential competitors in their effort at revival.

Yet, here at last, if pursued with energy and insight, there opens a new opportunity for the solution of the problem of reintegrating Western Europe into the world economic system. It must be recognized that the standards of living and the political and economic systems of the 16 nations are far too varied to permit sudden economic unification. Reconstruction is impeded by the fear of war, which deters investment and leads to a capital flight. These obstacles need not be insuperable. The unification of even the five countries joined by the Brussels Pact necessitates considerable readjustment. Yet if it were undertaken as part of a program of general expansion of productive capacity, this readjustment could take the form of a discriminating increase of industries in which one of the members has a comparative advantage, rather than the abrupt decline of the same industries in others. The slow but progressive creation of a wide market in Western Europe could serve as the basis for rationalizing production in each of the constituent units. It would give some safeguards for undertaking a huge investment program. As a considerable part of the investment would have to be made by private firms, the relative security provided is an essential condition for success. This is the main argument for permitting Europe, at any rate in the transition period, to maintain and extend special arrangements with overseas food and raw material producers to secure her outlets for manufactures.

The foreign balance will in any case remain the gravest economic problem of Europe. After the Marshall aid comes to an end, Europe will still have to face the need for increased exports to pay for supplies which she will no longer receive from America. The United States, on the contrary, will suffer either from a cessation of her exports to Europe, or will encounter increased competition in third markets as a result of European efforts to obtain dollars. A further program in economic development in overseas territories, especially if American help were forthcoming, together with domestic measures in the United States to increase the standard of living, could overcome this hurdle. It is also to be hoped that, as the success of the plan becomes manifest, the Eastern European countries, including the U.S.S.R., will increasingly participate, at any rate through an intensified exchange of goods. The west, and especially Britain, cannot survive merely by limiting the industrial competition of her former enemies, Germany and Japan, or by securing undue special favors from overseas territories. Only a continued world-wide progress can achieve tolerable and rising standards of life.

The British reaction to these vital changes in the basic situation has not been adequate. Indeed, there is growing dissatisfaction in Britain with the Government for not taking an energetic lead. There seems some reluctance by the British Government to entrust decisions on the distribution of United States help to a large council consisting of the representatives of governments of so varied a character, and a desire for bilateral negotiations. Such a course might bring immediate advantages; yet, in the long run, Britain would lose the unique chance of obtaining an important, if not decisive, voice in a wider and therefore stronger system. Timidity at this point might well result in the failure of the attempt to reorganize the productive capacity of Europe. It is unfortunately only imperfectly realized in Britain that the difficulties of last year do not represent the full manifestation of the European crisis. Europe has not yet had to face an inter-European struggle for markets aggravated by American competition. She has not so far found difficulty in placing the goods she produced. The governments are far too oppressed by their immediate difficulties to envisage a far more deadly threat which lies in the future and which must be warded off, even at the cost of taking what might appear to be undue risks and foregoing immediate advantages.

Thus, the longer-term outlook for Britain and Western Europe hangs in the balance, even if there is no war. On both sides of the Atlantic, the new outlook has a precarious hold. On both sides the proponents of western recovery will encounter the hostility of vested interests which feel menaced. Political prejudice, incompatible with the success of the new departure, will have to be overcome, and attempts will have to be resisted to use United States help to bolster groups which are unable and unwilling to shoulder the responsibilities of promoting social progress. But even if, in the main, the opening success of the new policy has been due to the regrettable worsening of the international outlook, a new basis has been created on which the balance of the world can be restored and the present tension eventually overcome.

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  • THOMAS BALOGH, Fellow of Balliol College and Member of the Institute of Statistics, Oxford University; author of "Studies in Financial Organization"
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