How to Get a Breakthrough in Ukraine
The Case Against Incrementalism
THE aim of the Democratic administration which assumes office on March 4 will be to liquidate the war—to liquidate it finally, so that world confidence may be restored, world trade freed of its shackles, and the minds and energies of statesmen everywhere turned to new and constructive purposes. Three Republican administrations have failed to do this. Their refusal to face economic problems realistically and their parochial attitude in international political questions have made the present task extremely difficult. Indeed, it is no exaggeration to say that the policies of the Harding, Coolidge and Hoover administrations, inspired by the selfish and uncoöperative attitude which the Republican Party adopted because of their implacable hatred of Woodrow Wilson, must be held in large measure responsible for the continuation of the war psychology, the frustration of all attempts at thoroughgoing economic rehabilitation through international action, and the sense of insecurity now prevailing in every quarter of the world. To restore men's confidence in the ability of governments to govern is the first task of our times. It must be the first task of the Roosevelt administration.
Before I proceed to enumerate some of the specific matters which will have to be dealt with in any attempt to liquidate the war, let me speak of the general spirit which Mr. Roosevelt's public statements authorize us to believe will guide him while he is President. As he remarked in closing his article in FOREIGN AFFAIRS in July 1928, "It is the spirit, sir, which matters." I think that in office Mr. Roosevelt will be equitable and resolute, in his dealings alike with his fellow citizens and with foreign governments. He will learn as he goes along, not seek to impose preconceived solutions. He revealed something of his philosophy in a modest little talk at Poughkeepsie on election eve. "A man comes to wisdom in many years of public life," he remarked. "He knows well that when the light of favor shines upon him, it comes not, of necessity, that he himself is important. Favor comes because for a brief moment in the great space of human change and progress some general human purpose finds in him a satisfactory embodiment. To be the means through which the ideals and hopes of the American people may find a greater realization calls for the best in any man; I seek to be only the humble emblem of this restoration."
It must not be forgotten that Mr. Roosevelt was a member of Woodrow Wilson's official family and came under the spell of that courageous and idealistic leader. Early in his term of office President Wilson gave an example of his courage, his common sense and, as it proved, his foresight. A dispute arose with Great Britain over the interpretation of a treaty regarding the tolls to be charged on vessels passing through the Panama Canal. When after careful study the President came to believe that the American interpretation was wrong, he did not hesitate to reverse the policy of the previous administration, although he himself had indorsed it in 1912. In the face of hostile public sentiment, and undeterred by lack of support in Congress, he adopted and successfully maintained the position that this country could not afford to have its integrity questioned. His action gave Europe a belief in his courage and fairness which was to stand him and the United States in good stead in later years of stress.
It is in this sort of spirit, I believe, that President-elect Roosevelt will proceed to the decisions necessary to a final liquidation of the war—decisions no less momentous than those which faced our war President. Let me mention the chief problems involved and try to forecast how I think the next administration is apt to view them.
The American tariff problem is very generally misunderstood today because it has completely changed since the World War. Before 1914 we were a debtor country, paying interest and amortization to foreign creditors on the moneys they had lent us to exploit our natural resources, build our railways, and expand our industries. Every year we supplied our foreign creditors with a large volume of dollars, which they used to buy goods here. We had, consequently, a so-called "favorable balance of trade," that is to say, we exported more than we imported. Countries similarly placed were Russia, Brazil, India, Haiti and Guatemala—debtor countries like ourselves, giving up part of their production to their creditors. Countries with a so-called "unfavorable balance of trade" were Great Britain, France, the Netherlands, Switzerland and Germany—creditor countries which, like individual capitalists, could afford to consume more than they produced with their own labor.
The World War made us a creditor country. It increased our buying power and reduced the buying power of our former creditors—and present debtors. In this changed situation the logic would call for a reversal of the balance of trade. This could come about in one of two ways. It could come about in a good way—through a larger return to the United States in goods and services; or in a bad way—through a decrease in exports. The way chosen would depend primarily on our tariff policy. In 1919 and 1920 many careful observers recognized the dangers of raising our tariff. Even the Republican platform of 1920 admitted that there was such a thing as "the problem of the international balances," and stated that, in view of uncertainty regarding this point, the Party could not say what it would do in 1921. Twenty years before, William McKinley, in his last speech, had foreseen the necessity of a shift of policy, saying: "A system which provides a mutual exchange of commodities is manifestly essential to the continued and healthy growth of our export trade. We must not repose in fancied security that we can forever sell everything and buy little or nothing."
But all evidences of a new spirit in the Republican Party disappeared when the landslide of 1920 brought Warren G. Harding to the Presidency. I have never heard it alleged that Mr. Harding was an economist. He had an "affection for the tariff as a political issue," and he settled this question, like others, in terms of his affections. The result was the Fordney-McCumber Bill of 1922.
Warnings that this high tariff would choke our export trade proved premature. From 1922 to 1929 our exports of manufactured goods grew steadily, though exports of raw materials and foodstuffs barely held their own or, in some cases, decreased. Our European customers were obtaining dollars here with which to buy our goods, and did it without selling us as many goods in return. How was this accomplished? It was accomplished by a thoroughly unsound financial development. When President Harding put in a personal appointee as Governor of the Federal Reserve Board in the place of W. P. G. Harding, he broke the Board's independence and sense of responsibility. The new political influences in the Board worked steadily for a cheap money policy which made bank credit multiply and enabled the United States to absorb an enormous volume of foreign securities. We would not let foreigners earn the dollars to pay us their debts; but we cheerfully lent them dollars to pay us the interest.
In 1928 Mr. Hoover undertook to reply to criticism on this score, saying that it was not necessary that exports be paid for by imports, because of the "invisibles" of foreign trade.[i] He listed the 770 millions paid out in 1927 by our tourists and the 240 millions sent abroad by immigrants, and mentioned "a hundred other items." Among these hundred other items, however, was the one all-important item—the net cash figure for our foreign investments. In the previous year, 1927, it had amounted to $1,648,000,000. On it our export prosperity rested. Mr. Hoover's argument is typical of the "new era" economics of 1928 and 1929, which implied that debts can be created without consideration of how they are going to be paid. Foreign trade and foreign loans collapsed together. If this was "the American system" we are well through with it.
Mr. Hoover has not admitted the existence of any general problem in the tariff. In his speech of acceptance on August 11, 1932, he said: "If our opponents will descend from vague generalizations to any particular schedule, if it be higher than necessary to protect our people or insufficient for their protection, it can be remedied by this bipartisan Tariff Commission." The only tariff problem in his eyes concerns the particular schedules which the Tariff Commission shall fix after ascertaining costs of production at home and abroad, and recommending equalizing rates.
Now this principle of equalizing costs, carried out logically, would remove all incentive to foreign trade, the whole basis of which lies in the comparative superiority of different countries in different lines. In the United States, where land and capital are relatively abundant and labor relatively scarce, we concentrate on mass production. In Europe, handwork and specialty production are more economical. Wages have been comparatively high in America because men have been scarce and resources abundant. Our immigration restrictions and not our tariffs have safeguarded our wages. Nor do our high wages mean that our cost of production is high, since the labor cost per unit of output is low.
The past three administrations have been interested only in adjusting individual schedules. But the true tariff problem is a general one—the problem of how to enable foreigners to earn enough dollars here to pay their debts and take our exports, without the necessity of foreign loans. According to present schedules, foreign countries must pay us something like $1,200,000,000 a year on what they have already borrowed from the American people. We must permit them to pay us without having to borrow more money from us. They can pay partly in goods, partly in services, partly in gold. We must adjust our tariff policy so that our foreign lending will be safe, while at the same time our domestic undertakings are adequately protected against undue competition. Many schedules must be reduced moderately, and some sharply. I am not proposing free trade, or even a tariff for revenue only, but rather the "competitive tariff for revenue" called for in the Democratic platform. This will still leave us a protective tariff, but not a prohibitive tariff. If foreign goods are admitted on a competitive basis, our farmers will regain their foreign markets and our manufacturers will regain their farm markets. Incidentally, a moderate tariff which admits foreign goods brings in revenue to the government, whereas prohibitive tariffs do not.
The first argument against our post-war tariff policy, then, is that it makes our customers unable to obtain the dollars which they need to pay their debts and buy our agricultural products and the manufactured goods in which we excel. The second is that it produces retaliatory measures abroad. A war of strangulation is in process between almost every country and every other country. As Newton D. Baker said in his admirable campaign address in Brooklyn, this war has existed since the Hawley-Smoot tariff bill was passed in the Congress of the United States. Take as a case in point the present state of our relations with Canada, our closest neighbor and best customer. The resentment and loss caused in Canada by our recent tariff policy was the last straw needed to turn the British Empire into a protectionist unit. That was a momentous event, and one which will have most unfortunate results for the United States. We have only ourselves to blame.
The tariff war is partly retaliatory; partly it is based on false theories; partly (in countries struggling to maintain their currencies with inadequate gold reserves) it is almost a matter of necessity. Quotas and restrictions on foreign exchange dealings are added to tariffs; currencies fall as a result of the stoppage of trade; and then exchange depreciation is made a pretext for new tariffs, with further exchange depreciation as a result. It is a fallacy to believe that the depreciation of a foreign country's currency justifies raising tariffs against that country. A country whose currency is depreciating and fluctuating is seriously handicapped in its whole economic life, including its export trade. Our experience since the war is proof of this fact, which was emphatically confirmed by the Chairman of the United States Tariff Commission, Robert L. O'Brien, a Republican and a protectionist, in his testimony last May before the House Ways and Means Committee.
The creditor countries must break the present vicious circle. The United States should lead the way. The international conference to reduce tariffs which Governor Roosevelt has announced his intention of calling may prove a turning point in world history.
A second tariff reform should be discussed either at this conference or at the projected World Economic Conference. Almost as much as they need reduction in tariffs, the nations need tariff stability, so that their manufacturers may plan, their farmers plant, and their miners produce, without fear that suddenly their export trade will be shot down from ambush by an executive order of some foreign government. Reform of this abuse by the establishment of decent standards of government regulation of international trade is an essential part of the general program for restoring world stability.
Closely allied to the tariff problem is the problem of the war debts. I think the new administration should make the greatest possible effort to put the war debts once for all on such a basis that they are no longer a political question in the world. How this can best be achieved must be a matter for negotiation with each of the foreign governments owing debts to the United States. It is to be hoped that without default or postponement of present instalments the individual debtor governments will in the spring request conferences with the United States Government, in order to deal with the whole problem in a systematic way. Mr. Roosevelt has announced that he favors a conference with our debtors to bring about a definite understanding with them, and has indicated that payment can only be expected if we permit imports by lower tariffs.
It may be urged that if we make definitive debt settlements in the near future we might later discover that we had accepted smaller payments than necessary. According to that reasoning we should leave the question open. But Mr. Roosevelt went to the heart of the problem in his speech of February 2, 1932, when he called for an early accord regarding future payments. Uncertainty is one of the factors delaying the return of normal economic conditions. While the debt question hangs fire, for example, England cannot set a new par for sterling and return to the gold standard. Like many other related matters, this is of much importance to American trade, and so to the budget of the United States Government.
At Lausanne, the Allied Governments made a sincere effort to forget war hatreds and took a long step towards disposing of the reparations question once for all. They were able to do this because their peoples had come to realize that the black reparations cloud hanging over Europe carried less promise of fruitful rain than the threat of catastrophic new storms. In the same way, and for similar reasons, the American people must be ready—as practical business men, for reasons of cold common sense—to do what is necessary in order to dispose finally of the war debts as a political question.
Coincident with a change in the spirit ruling our economic foreign policy must go a change in the spirit of our foreign policy in political matters. The great problem of government is how to reestablish a sense of security in the world. If we are sincere in preaching disarmament, we must help to give nations cause to feel that their lands and possessions are safe. Disarmament follows security. It cannot be achieved under any other circumstances.
In this connection let us turn to the Democratic platform adopted at Chicago in June, one of the plainest and most terse enunciations of party principle in the history of American politics. Among the elements of the "firm foreign policy" which it demands is the maintenance of the Pact of Paris, " to be made effective by provisions for consultation and conference in case of threatened violation of treaties." This phrase gives recognition to the fact that on the long and weary road to disarmament political solutions must precede technical solutions. The degree to which a nation will agree to disarm will depend upon the degree to which it feels that it will be secure without the armaments which it is asked to give up. Partial naval disarmament became possible only when political agreements had showed the peoples involved that they would be safer under the proposed new conditions than they were with each nation acting for itself and the devil threatening to take the hindmost. Disarmament of land forces will become possible only when mutual assurances have been given and received that no great nation will, without warning or negotiation, frustrate the plans which other nations have made for acting cooperatively to restrain possible aggressors from breaking the peace. It is one thing to reserve freedom of judgment and eventual freedom of action; it is quite another thing to refuse to behave as a responsible sovereign member of the world society, willing and anxious to discuss frankly whether or not a certain proposed international action coincides with our interests and will help to preserve peace.
One of the principal preoccupations of our government in recent months has been the situation in the Far East. The United States has a double interest in the dispute over Manchuria. Its first interest is in maintaining the sanctity of treaties, which is merely part of the general question of maintaining international peace. Its second interest is to uphold the traditional policy of the "open door." On this second point the policy of our government is subject to negotiation in the light of changes in the general world situation, and, in particular, of changes in the situation in the Far East. The principle enunciated by Secretary Stimson last summer looks either to a return to the status quo ante through the spontaneous action of the two Powers directly party to the Manchurian dispute, or else to the settlement of outstanding questions by direct negotiation between those Powers under the auspices of the League of Nations. If the second course can be successfully pursued, so that the dispute is dissolved by direct negotiation without further bloodshed, the real aim of the American people will have been achieved, the power of the Kellogg Pact will have been vindicated, and the world will have cause to be well satisfied.
Nations like individuals are subject to moods. And in both cases ugly moods provoke dislike and, eventually, retaliation. Prosperity is not in itself hateful. But arrogance, the conscious pride of wealth, a refusal to recognize the responsibilities that go with power, are universally disliked in individuals and are in the end rebuked. We have discovered lately that nations are not exempt from this law. Because of our happy geographical position and vast natural resources we long felt immune from the rules which older nations found it useful to observe in international intercourse. We did not recognize that wealth and power are apt to engender envy, and that the possessor of them must show an unusual degree of fairness and consideration in all his dealings.
There is something else to be said on this point, however. In the post-war decade the world got the impression that American springs of wealth were exhaustless. In the same way that the American people have got to understand that the nations of the world are " all in one boat," the peoples of other lands will have to realize that pictures of fabulous and everlasting prosperity in the United States were unreal and misleading. Our budget was nearly 3 billion dollars out of balance last year, and will be perhaps 2 billions out this year. The duty of taking account of another nation's resources and capacities does not fall on the United States alone.
Throughout this brief article I have stressed the spirit which will prevail during the Roosevelt administration rather than make an attempt to forecast the details of Mr. Roosevelt's probable policies. That is because a "new deal" in the spirit of our foreign policy is all-important. Abroad as well as at home there is gratification over the prospect. The belief that under Mr. Roosevelt our foreign policy will be generous and humane is well founded. We shall not shirk our responsibilities. Coercion, material or moral, will not be used to enforce our will in settling any straightforward and honest difference of opinion. But while we shall extend justice we shall also demand it. We shall try to make what is right, what is fair, the standard of our conduct; and we shall insist that others hold to the same standard in all their dealings touching the safety and well-being of the American people.
[i] Speech in Boston, October 15, 1928.