THE devaluation of the pound last September, followed immediately by that of so many other currencies, is a sharp reminder of the changing pattern of economic relations in the postwar world. In itself it is like a single figure in red at the end of a company's balance sheet. Such a menacing cipher reflects only the net result of many factors, good and bad, in past experience, and indicates the compelling necessity of new adjustments. It mirrors neither the past nor the future pattern in all the complexity of individual transactions. It does, however, present an immediate challenge to think of both. This is an appropriate moment, then, to attempt a broad survey of the main forces determining the shape of things to come.

The present devaluation was, of course, not so much an act of policy as a recognition of facts and a surrender to necessity. Great Britain, and others in a comparable position, had been unable to sell enough to the dollar countries at current prices and exchange rates to balance their international accounts, even with Marshall Aid; and their reserves of gold and foreign exchange, especially those held in London for the whole of the sterling area, had therefore become dangerously depleted. Recognition of this, and increasing expectations of devaluation, had depreciated the pound, wherever transactions in it escaped the exchange control, even below its purchasing parity. The devaluation by 30.5 percent reflected both these influences. If the value of currency in purchasing power and in public estimation does not equal its exchange rate, the rate must obviously be allowed to adjust itself, before all reserves are exhausted. And that is what happened.

A new exchange rate is, however, more than a barometer. It changes the terms of trade with all countries whose rates have not been similarly altered; and must substantially modify, as it is intended to do, the whole pattern of foreign commerce. Before looking at deeper forces operating below the surface of current transactions, we should note the first effects of a devaluation of 30.5 percent on, for example, British trade with countries like the United States whose currencies have not been devalued. If, and where, dollar and sterling prices remain unchanged, British goods as delivered are of course 30.5 percent cheaper in terms of dollars; and, at that rate, 43.9 percent more of British goods and services would have to be sold to earn the same number of dollars as before. That means that very nearly half as much again of British effort would be required to earn a given number of dollars -- to get back to scratch, so to speak, without making any further progress in the earning of more dollars.

Also, to attain a reduction in price fully equivalent to the percentage by which the exchange rate has been lowered, costs including wage costs must not rise; although devaluation is bound to increase the cost of any imported raw materials used and to raise in some measure the cost of living and therefore strengthen the demand for higher wages. Of course in practice dollar and sterling prices will not remain the same in all cases after devaluation. Some dollar goods will fall in price; some sterling prices of articles exported to dollar countries will rise. On the other hand, even when the British manufacturer offers the same sterling price, later costs of salesmanship and so on will reduce the initial advantage. Moreover, it must be expected that when productive capacity is converted, or goods switched from the market at home, there will be some frictional loss. The net result of these qualifications is that the American customer will not, in general, get as great a reduction as 30.5 percent, and his inducement to buy more will be correspondingly less; and the increase in the volume of British goods required to earn as many dollars as before will not be as great as 43.9 percent. All this means only that, for both good and ill, the devaluation will not be fully effective. No one can estimate precisely the actual consequences; but the starting point of any attempt to do so must obviously be an analysis of the full effects of devaluation, in the absence of special factors which may reduce or offset it.

The effect on the trading relations of other countries which have devalued with the dollar countries will, in principle, be the same. Between each other (where the rate of devaluation has been the same, as in most cases it has been), the terms of trade will of course be unaffected.

What, then, is likely to be the result? I should guess that British exports to Canada (which has lowered her rate by only 9 percent) will increase very greatly, so much indeed as to earn substantially more Canadian dollars in spite of the extra volume required to earn as many. The devaluation will also add an ordinary economic incentive to reënforce governmental limitations of dollar imports, and give a stronger impulse to the search for substitutes elsewhere. All devaluing countries should similarly be able to increase their exports substantially to hard-currency countries. Britain should, for example, be able to sell much more to Venezuela and Iran. The prospects of a sufficient increase in the sales to the United States itself are perhaps more doubtful. A small proportion of the vast domestic market in America would make all the difference to the non-dollar countries. But it will take a great effort to pass far beyond the point at which even the same dollars as before are earned with the increased volume now required. Much depends on the United States tariffs; and it must not be forgotten that, from the point of view of the American manufacturer who finds the increased competition of foreign goods inconvenient, these goods are coming in with the double advantage of lower wage-rates and what he will regard as "exchange dumping." It is true, as is argued below, that the free entry of foreign goods, even on this basis, is to the advantage of the American economy as a whole; and the Administration in Washington doubtless recognizes this. But the political difficulty of giving full effect to pure economic doctrine in these circumstances must be recognized.

Meantime the devaluing countries will have equal difficulty in enforcing the policy required for them to take full advantage of the export opportunity offered by devaluation. Internal prices both of imported foods and of raw materials required for the manufacture of both goods consumed at home and sold abroad must rise. If the effect on the standard of living were allowed to lead to wage inflation all the initial advantages might be lost. The elimination of internal inflation by measures of economy, both public and private, is essential. One of the most serious consequences of the devaluation is that it introduces a new and serious form of inflation. Professor John H. Williams was able to point out, in his article in the October issue of this review, that the "peak of the postwar inflation has been passed." [i] But the large increase in the volume of exports required to earn the same dollars at the new exchange rates, still more to increase those earnings, must result in the withdrawal of goods from the home markets (whether they have hitherto been made at home or imported from other "deficit" countries). No similarly automatic reduction of the public's spending power results, and the new inflation can be checked only by deliberate new measures of enforced economy. The British Government has introduced a program of economies, including capital and current expenditure, both public and private, amounting to something over £250,000,000. That is a very substantial total, but in the nature of the case the economies will come into operation more slowly than the inflation they are required to counter; and it is generally believed that much more will be required. The same problem confronts all the devaluing countries and will in every case be difficult.

Of course to the extent to which production per man can be increased by greater effort or improved technique, inflation will be reduced without corresponding reduction of purchasing power; and, as we shall see, any satisfactory solution must include measures to secure this. In the case of Great Britain there might be one other alleviation. Early in this year Britain's current foreign trade was in "over-all" balance. But a part of the exports which contributed to this consisted of "unrequited" exports paid for out of the so-called "sterling balances." These were balances acquired by other countries, especially India and Egypt, by the provision of goods and services during the war. They amount to over 3 billion pounds, and though the drawings on them have been controlled, the amounts released annually have recently been at the rate of some hundreds of million pounds. These obligations were of course incurred by Britain in large measure for the purpose of waging a war in which the creditors were also interested. There is, therefore, some moral claim for a suitable combination of funding, scaling down and control of the rate of release. Moreover, it would be against the interest of the owners of the balances that the British economy and sterling should be further weakened. Nevertheless, when full allowance is made for these considerations, the owners still have a moral as well as a legal claim to draw substantially on the balances, and an urgent need to do so for immediate necessities. The releases agreed to by the British Government have been those considered necessary on grounds of justice and political expediency. The Government has announced that, in the present crisis, it will now be compelled to exercise a tighter control of these balances.

It is possible that America might play a useful part in any settlement. At the time of the American loan to Britain, the United States Government urged strongly that these balances (which were and are still weighing heavily on the British economy) should be strictly controlled. I have always thought it regrettable that America was not asked at that time to convene a conference to consider the general question of outstanding war obligations (other than those of the enemy countries) -- a conference over which she would have presided with the immense prestige of her own lend-lease. No comparable arrangement could indeed have been expected in the case of the sterling balances, many of which represented purchases not directly required for the war. But a reasonably satisfactory settlement might well have been achieved. Perhaps, in a somewhat different form, America could still help in a solution. Indeed, she is in some measure contributing to it by some of the loans now being made to India by the International Bank (whose resources are mainly American) and by the aid now projected under President Truman's "fourth point" to underdeveloped countries.

This description of Britain's economy under the impact of devaluation may be a suitable introduction for a wider survey, because many of the factors discussed apply also in the case of other "deficit" countries, and because Britain and her sterling form the basis of so much of the trade which is actually taking place between these countries and which is supplying so many necessities to each. It is time now, however, to extend our vision over a wider range of countries and economic developments.


Devaluation is a dramatic reminder of what has been the principal failure of the Allied belligerents in Europe in their efforts to restore their economies after the war. They have not, as the drain on the reserves has shown, succeeded in balancing their accounts with the dollar world, even with Marshall Aid. Still less have they achieved such progress as to make it likely that they will do so when that aid comes to an end. Failure in this respect must not, however, be allowed to obscure their remarkable achievement in other respects. A recent U.N. bulletin gives an index of industrial production which shows, both for the United Kingdom and for belligerent Europe as a whole, excluding Russia and Germany, an increase of about 20 percent in the first half of 1949 as compared with 1938. This represents a more rapid recovery than after the first war in spite of the greater devastation and the present division between west and east. Mr. Hoffman had reason to congratulate the countries of O.E.E.C., in his address to that body on October 31, on the "truly amazing progress in restoring industrial and agricultural production." This economic progress has, moreover, been accompanied by a steady political improvement in Western Europe since February 1948.

It is much, but it is not enough. More production, more inter-European trade, and more economical manufacture of the goods that have to be exported in return for dollar imports are all required. Some of this will depend upon more effective incentives to increased enterprise and effort. Much will depend on international arrangements. Mr. Hoffman, in the same address, said that the two major tasks were to balance Europe's dollar accounts, and, second, to "move ahead on a far-reaching program to build in Western Europe a more dynamic, expanding program -- nothing less than an integration of the Western European economy." He asked for a concerted program early in 1950. It is notorious that O.E.E.C.'s work in this respect has been disappointing, especially to American observers. It is also obvious that this is a very critical stage in the Marshall policy. Funds are now being devoted to capital installations, and so far as these are related to existing national economies and not to a plan designed to achieve greater integration, they will prove additional obstacles to progress in the future. Renewed efforts are now being made to promote more inter-European trade and to enable the countries of Western Europe to supply more of each other's necessities. It is to be hoped that greater success will now be achieved than in the past, but if the American people are not to feel seriously disappointed with the new program (even to the point of endangering the future instalments of Marshall Aid) it is important that they should realize the immense difficulties of a comprehensive and complete economic union. The advantages of a single market like that provided by some 150,000,000 in the United States are of course immense, as American experience has demonstrated. But federation there was facilitated by homogeneity in race, tradition and language, and the economic adjustments resulting from free competition were made easier by the fact that workers displaced in one area could migrate to another. No similar opportunities are available in Europe, and a displaced migrant has to find his way through a network of security regulations enforced to exclude the politically doubtful as well as for other reasons. Moreover, a customs or currency union is scarcely possible in any complete form without a form of political union to which the resistances of national sovereignties and national loyalties are still very strong. These obstacles are probably too great, in spite of the powerful impetus given by the present situation, for union to be complete within any near future. Some intermediate system is all that can be hoped for. An increase in the goods allowed to pass freely without "quota" restrictions; reduction without abolition of tariffs and other impediments; a general plan for locating major industrial and power plants, with little regard for frontiers, and its assistance by the conditional allocation of Marshall funds; the extension of the sterling area (with reënforcement of reserves), with free inter-convertibility of currencies and their conditional convertibility into dollars; an embryonic common government (short of federation) in the shape of a strengthened O.E.E.C., for the purpose of securing reasonable similarity of domestic policies and of economy in dollar expenditure -- these may together form the outline of a practicable system. It would prepare the way for a more complete union not immediately possible. No short-cut by free convertibility or unrestricted multilateralism or complete customs or currency union is likely to be possible. Progress along one line will depend on simultaneous progress along the others. If as much as is suggested above is achieved, it would be unfair and unwise to regard it as disappointing.

Apart from any arrangements between them, the Marshall countries all have in varying degree the same task as that described for Britain -- the elimination of inflation and the increase of economical production. What has happened broadly is that, in consequence of world shortages and the weakness of national currencies caused by the general trade disequilibrium, each country has controlled external trade and currency movements. Bilateral trade agreements, inflationary conditions and currency restrictions have combined to form a market or markets sheltered from the full impact of world competition in which trade has developed on the basis of relatively high costs and prices. This mattered little while everything was less important than increased production. It mattered comparatively little so long as there was a sellers' market throughout the world. But a minor and short-lived American recession last spring and the arrival of the inevitable buyers' market quickly revealed the underlying weakness and the reserves fell rapidly. Hence the devaluation crisis, and the need for the renewed efforts to encourage more exports to dollar markets under conditions of keen competition. So long as easy profits and sheltered markets are available, under inflationary conditions, either at home or in other soft currency countries, there will be no sufficient compelling force to secure the transfer of enterprise and the redevelopment of labor to the export drive. Hence the necessity for disinflation, as the prior condition of an increased effort to export, to avert the danger of losing the new opportunity offered by devaluation and the threat of even lower exchange rates.


The more we consider the magnitude of the task of adjustment, on the new terms of trade now set by devaluation, the more plainly we see that no satisfactory solution can be found solely in terms of enforced economies and austerity. Disinflation and "income freezing" are only an indispensable stage in preparing the way for a new creative effort to produce more and more economically. The provision of adequate incentives for this purpose of course raises the main issues between the two major political parties in Great Britain, and indeed between the policies and political philosophy of the present British Government and those of Western European countries as well as the United States. But it is perhaps true to say that there is a growing recognition in Britain as elsewhere that policy must be directed more to increasing the ordinary economic motives of conditional profit and loss, of varying wage rates; otherwise the necessary redeployment of labor on a sufficient scale to the essential industries and the increase in man-year production in those industries will be impossible. Such penal enforcement as is possible in a free society cannot be sufficient unless it is reinforced to a greater extent than at present by the pervasive and intimate compulsions of personal gain and loss. Social progress, as the great Cambridge economist Marshall remarked long ago, depends on harnessing to it not only the highest but also the strongest forces of human nature. Patriotic appeals and personal economic inducements are of course both in operation, and will continue to be; but the proportions need to be changed in favor of the latter. Too often, under inflationary conditions, economic incentives have tended to keep enterprise and labor in less essential work rather than to secure the transfer and redeployment required. They must be the ally instead of the enemy of public policy. The provision of the appropriate incentives of course depends partly upon government policy, partly upon the trade unions and managements rearranging wage rates, after the first disinflationary wage freezing, so as to give a greater reward for increased effort and transfer to the most important work. The problems raised are too complex and controversial for adequate discussion in this article. But the recognition of the need for new disinflationary measures suggests a movement in the right direction.


The extent of the "dollar gap" can be conveniently seen by contrasting the United States balance of payments in the last completed year for which accounts are available, 1948, with the position a decade earlier. In the years 1936-8 the United States exported $4.1 billion of goods and services, and imported $3.6 billion (including investment income in both cases), leaving only a half billion for adjustments through capital operations and gold movements. In 1948 the corresponding totals are $16.8 billion and $10.3 billion, leaving a surplus of no less than $6.5. This had to be abridged by the United States Government aid -- $4.6 billion (mainly "Marshall") -- by some advances by the International Bank and Fund -- and for the rest from the reserves of non-dollar countries. This situation was aggravated -- to an extent which cannot be exactly measured by available statistics -- by the minor recession last spring which precipitated, though it cannot be said to have caused, the actual crisis.

Last winter O.E.E.C.'s "Interim Report" suggested that as events were then developing, and without "drastic changes of policy," there was the likelihood of a deficit of $2 to $3 billion when Marshall Aid came to an end in 1952. Subsequent developments do not suggest that such an estimate would be too pessimistic.

What will happen if nothing effective is done to improve the position in the meantime? Since the logic of the balance of payments is inexorable, and the plus and minus items (including capital movements) of every country are necessarily in balance at every moment, the question is, what will be the resulting level and pattern of international trade? Policy can only influence the proportions of the constituent items, and so far as deficit countries cannot export goods and import capital on a sufficient scale, they will necessarily lose imports from the surplus countries. A lowering of the whole level of dollar trade of course involves loss to both seller and buyer, perhaps sufficient to cause or aggravate a depression for the first and to cause disastrous impoverishment to the second.

The penalty of failing to increase dollar earnings enough to prevent a great further reduction of imports from the dollar countries would indeed be very great. It would reduce not only food standards but also the rate of mechanization on which increased productive efficiency depends. Above all, it would probably result in such a loss of raw materials as would prevent factories running to full capacity, and so start a downward spiral. This would also cause large-scale unemployment. And it is important to realize that this would be a form of unemployment which the remedial measures associated with Lord Keynes could not relieve but would only aggravate. Those measures were designed to increase an inadequate home demand. They could do nothing to reduce the unemployment resulting from an inadequacy of imported raw materials. Indeed, they would add to the evil by causing new inflation and increasing the costs of exportable goods.


To the extent that there is a net export of capital from surplus countries (in the form of loans, investments or gifts), whether to the deficit countries direct or to others to which they can export, the change in the level of exports and imports, otherwise inevitable and painful to all concerned, is of course reduced. It is therefore natural and altogether a good thing that active efforts are being made to stimulate the export of American capital through the Export-Import Bank and the International Bank and the projects contained in the President's "fourth point." These all dispose of money either provided by the American taxpayer or raised by public loans carrying a United States guarantee. In each case, however, the intention is, by providing funds in this way, to pave the way for genuine private investment; and a President's Committee is specially charged with the duty of finding ways to encourage the American businessman to invest his money abroad.

How far is it reasonable to hope that the gap will be bridged in this way when Marshall Aid comes to an end? Undoubtedly much can be done. The two Banks are already lending money on a not inconsiderable scale. By financing projects in underdeveloped countries which will either save or earn dollars, and by expanding basic utilities, such as transport and power installations, they are improving the conditions required for the kind of enterprise which may be attractive to private investors.

But what is the order of magnitude to be expected? Obviously this depends upon the opportunities for productive and reasonably safe investment and upon the extent to which private investment can be attracted. A recent study prepared for the National Association of Manufacturers has estimated that something like $2 billion of American capital a year might be available for foreign investment. If there were in fact annual investment on anything like this scale the gap might be closed without disastrous changes in the level of imports and exports.

But it would be misleading to count upon any such figure in the years immediately ahead. The limiting factor is not the amount of capital theoretically available for export but the discovery of sound and attractive projects. The International Bank has already found this in seeking outlets for the comparatively modest resources now at its disposal. Sound foreign investment requires a combination of economic opportunities for development and of political conditions which give an assurance that these opportunities will not be destroyed by administrative incompetence, confiscatory policies or armed strife. The regions of the world in which both conditions are satisfied are not very numerous at the present time. On purely economic criteria there may be opportunities for far-reaching development in China and Russia, for example, but obviously the political conditions in those countries makes them impossible for American capital investment. The same is true, in varying degrees, of many other countries in every continent. There is indeed one category, the "colonial" areas, especially in Africa, where the political condition may be satisfied. The International Bank is now negotiating loans to these areas on a modest scale, with the metropolitan countries; and what it is doing there may ultimately prove of great importance in paving the way for private investment on a much larger scale. One of the obstacles to the private foreign investment in such areas is that arrangements have to be made with the metropolitan country to ensure reasonable security for the investor, while the native is protected from exploitation. If successive groups of private investors have to negotiate separately one after the other this may well prove an insuperable obstacle to otherwise promising projects. But if the International Bank negotiates, in connection with its own modest loans, a suitable general framework of protective rules, this might then be available for later private enterprises. Nevertheless, the possibilities of rapid and remunerative colonial development are often greatly exaggerated. We must remember, too, that if the capital development does not result in extra dollar-saving and dollar-earning equal to the return on the loans or the investment, then the "dollar shortage," though relieved for the time being, will soon actually be increased.

Moreover, there are now very formidable difficulties in attracting American private capital to foreign investment. The investor remembers the disastrous fate of the loans of the 1924-8 period. He has opportunities for a higher yield on his capital in good domestic securities than foreign investment can usually promise him with any certainty. And it is usually difficult or impossible for him to be assured that his profits will not be reduced, to an unknown extent, by taxation, or be inconvertible into his own currency -- even if there is no actual confiscation of the capital plant itself. Perhaps the investor may be tempted to take some risk if some form of governmental guarantee relieves him of part of it. But private foreign investment on any very great scale is still remote and hypothetical. Perhaps the principal forms it will continue to take for some time are in the establishment abroad of subsidiaries of American industries, or the purchase of equities in foreign companies.

Devaluation may offer an opportunity for some narrowing of the "gap" by increasing exports to dollar countries. But at the best it is surely indisputable that no American loans and investments -- governmental, semi-governmental or private -- will even approach in magnitude the increase in the gap which must follow the termination of Marshall Aid.

One very important conclusion results. It remains true, as I argued in the article I wrote for this review before devaluation,[ii] that for as many years ahead as we can reasonably foresee, there will be a dollar disequilibrium in the sense that America will wish to sell, and non-dollar countries wish (and need) to buy, much more than they can pay for with the dollars available to them either from earnings or the net import of capital.

Since the logic of the balance of payments is inexorable, it follows necessarily that everything that America does to reduce foreigners' earnings will reduce pro tanto the total value of American exports. We commonly hear it said that "if America wishes to sell, she must buy." This formula is inaccurate if it means that she must buy as much as she sells, since the export of capital may cover a part of the gap. If it means less than this it is not sufficiently precise to exercise a compelling influence on policy. But if there is to be a continuing "disequilibrium" in the sense just defined -- and no responsible person will, I think, dispute this -- a much more useful formula results. America's exports will be determined to a dollar by her foreign customers' dollar resources. Thus the extent to which United States Governmental action reduces foreigners' earnings, American exports will be reduced by exactly the same amount. If a tariff prevents foreigners from earning x dollars which they would otherwise have earned, the total value of American exports will be x dollars less than it would otherwise have been. If a subsidy is given to shipping or shipbuilding which reduces foreigners' earnings by y dollars, other American exports will suffer to the extent of exactly y dollars.[iii] If insistence on "nondiscrimination" prevents two deficit countries from making preferential arrangements with each other which are not extended to surplus countries, the effect must be that the advantage to some American exporters is offset by exactly equal disadvantage to others. "Nondiscrimination" is not beneficial to a surplus country, so long as there is a dollar disequilibrium. Insistence on it (as Professor John H. Williams pointed out) merely impedes the removal of the disequilibrium. And the removal of that disequilibrium is the prior condition of fruitful "nondiscrimination," genuinely multilateral trade and convertibility. In all the cases I have mentioned, governmental action to help one class of industries brings no advantage to the American economy as a whole -- and leaves a net loss where there is a subsidy paid by the taxpayer.

From what has been said it follows that the maintenance of the highest level of international trade depends upon the observance of appropriate principles of conduct by "surplus" (or creditor) and "deficit" (or debtor) countries respectively.

Nor is it difficult to see what these principles are. For "deficit" countries they are indicated in the description of Britain's problem. Such countries need to eliminate inflation, to produce enough at prices which can compete advantageously, and on a sufficient scale, at least in neutral hard currency markets. A policy designed to secure this is demonstrably in the interest of the country itself; but it involves immediate sacrifice for the sake of a greater advantage later and is therefore politically difficult. Such countries must also restrict to a minimum their export of capital and encourage capital imports. So long as there is a serious dollar disequilibrium, deficit countries may also help to reduce it by preferential arrangements inter se.

For surplus countries the appropriate policy is, in terms of purely economic doctrine, equally clear. They would encourage the maximum of sound foreign investment and of foreign imports (even when made by lower-paid labor and helped by devaluation); and they would acquiesce in preferential arrangements between deficit countries -- arrangements which cannot inflict any net damage to the general economy of the surplus countries so long as the disequilibrium remains. Once the deficit countries have made their goods competitive in general world markets, where the domestic tariffs of the principal surplus country give its exporters no advantage, it is reasonable to regard the responsibility of securing a satisfactory adjustment as resting on the surplus country itself. That was the idea underlying Lord Keynes' "bancor" scheme, proposed but not accepted in connection with the Bretton Woods negotiations. Its principles perhaps merit some reconsideration now. For a surplus country, as for one in deficit, the appropriate policy is demonstrably in the interest of its own economy as well as in the general world interest. But it involves loss to particular industries, which can reasonably claim that they are suffering from unfair competition, though this loss is offset by the gain to other, exporting, industries. The full application of the policy is again therefore politically difficult.

I may perhaps set down one general reflection. To achieve the highest level of foreign trade, a surplus country and a deficit country must each pursue a different policy. Each will be difficult in terms of internal politics. The difficulty does not result from a conflict of national interest; for the policy which would benefit the world as a whole would benefit the country itself. Nor does it result from a conflict of interest between classes -- between rich and poor, or management and labor. In the case of surplus countries the conflict is between industries which look to the home market and to foreign markets. In the case of deficit countries it is a conflict between immediate and later advantage.

It is natural to compare, somewhat nostalgically, America's surplus position with that of Britain a little more than half a century ago. Britain then followed the policy ideally appropriate to a surplus country -- free imports without tariff impediments and new foreign investment absorbing the whole of any surplus of earnings from exports and earlier foreign investments. There was then no "sterling gap" as there is now a "dollar gap." But it was immensely easier then for Britain to pursue the policy appropriate to a surplus country than it is now for America. Her trade with her foreign customers was essentially complementary rather than competitive. Moreover, political conditions in the world were then much more favorable for productive and reasonably safe foreign investment. In contrast, America (with comparatively small exceptions) produces and makes all she needs -- and in terms of manpower as economically as foreign countries, or even more economically; and the obstacles to sound foreign investment on an adequate scale are much greater.

None of this changes the character of the policy which would be most beneficial to America as a "surplus" country as well as to the rest of the world. But in any forecast of the failure we must recognize that the political difficulties of a full adoption of this policy are much greater.

An examination of the difficulties which arise from the dollar disequilibrium, and impede its removal, may easily lead to an unduly pessimistic view of the future. There has indeed been, as Professor Williams has pointed out, a great structural change in the whole international position of Western Europe in relation to other continents -- a change dating from the early years of this century but accelerated and aggravated by the two wars. Its relative position in the world is, and will be, different. The pattern of international trade is changing, and must change, rapidly and on a large scale; and the losses and hardships of readjustment are very great. But as older opportunities are lost others will appear. The recovery in production in all the belligerent countries has been rapid and remarkable. If the political dangers of Communistic aggression within and without can be mastered -- a problem outside the scope of this article -- the constant improvements in mechanization and the technique of production will soon offset the losses of war devastation and postwar dislocation. Foreign trade may not reach the highest level which would be possible if all countries pursued the policies ideally appropriate to their position; the return to multilateralism, to political conditions which give the maximum incentive to efficient production, to free convertibility of currencies, will be slow and painful. But the goal is agreed and progress is being made towards it.

It is not unlikely that the close of the period of Marshall Aid will bring a temporary decline in the standard of living to millions of families. But the skill and industry of the European countries that were belligerent remain; the methods of production at their disposal are continually improving; their recuperative powers, though restricted by political difficulties, have already been demonstrated. A period of shortages, austerities and restriction, a long-drawn-out struggle to regain standards of living in the face of frustrating circumstances, do not easily evoke an intensity of effort like the dramatic crises of a war. But as the necessity becomes more evident, as it is likely to do in the daily life of every family in the course of the next year, a response similar to what we witnessed in the war may be expected.

If I may conclude by referring again to my own country, Hitler entertained the same illusion as had obsessed William II a quarter of a century before -- that Britain was decadent. Our friends have sometimes made the same mistake. The British people (and not they alone) are slow to recognize ugly facts till they are hit in the face; but when they are they react with energy, courage and determination. In the next few years these qualities will be needed, and they are likely to be evoked as they were in 1940. Britain and the countries of Europe will not achieve the same relative position in the world as in the last century. But the steady and unceasing benefits of improving industrial technique give them an assurance that, if war is averted, our standards of living can be raised, if not relatively to those of other countries, at least absolutely. And individual human happiness after all depends more on absolute than relative standards.

[i] "The British Crisis: A Problem in Economic Statesmanship," Foreign Affairs, October 1949.

[ii] "European Recovery: A Look Ahead," Foreign Affairs, January 1949.

[iii] I am not arguing the general question of shipping subsidies, into which of course certain noneconomic considerations enter, such as the "security" reason for maintaining a mercantile fleet available in case of war; I am pointing out only the purely economic effects.

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  • SIR ARTHUR SALTER, Member of Parliament for Oxford University; Secretary of the Allied Maritime Council during the First World War; Director of the Economic and Financial Section of the League of Nations, 1922-30; Parliamentary Secretary to the Ministry of Shipping, 1939-41, and afterward Head of the British Shipping Mission in Washington
  • More By Arthur Salter