The Global Zeitenwende
How to Avoid a New Cold War in a Multipolar Era
LEND-LEASE is an emergency system of supplying war materials to countries whose defense against their Axis enemies is deemed necessary to the defense of the United States. Before the United States entered the war it could be described as a modern form of the subsidies that powerful countries have often in history given to their allies or potential allies. Britain from the outbreak of war gave the same sort of assistance, and on a comparable scale, to many other of the United Nations. Since Pearl Harbor, reciprocal or "reverse" lend-lease has developed on a considerable scale to meet the needs of United States troops on foreign territory. Thus the lend-lease system has become a means of pooling the resources of the United Nations in a common war effort. It is an essential mechanism for the conduct of the war. If the powers granted by Congress to the President to conduct lend-lease transactions should lapse, an elaborate system of inter-Allied financial agreements would have to be created in their place. Such a change-over would cause confusion and probably would seriously handicap war operations.
In its essence, lend-lease is an emergency program of economic warfare. It may have to be continued for a brief period after the end of hostilities in order to cope with the confused and urgent necessities of relief and rehabilitation. But this is a very different thing from reorganizing postwar international trade on a permanent lend-lease basis. There has been a good deal of loose talk implying that this might be done, as though lend-lease were a great economic discovery with long-range applicability. It has been suggested vaguely, for example, that exports for reconstruction and international economic development might be made on a lend-lease basis, instead of in the normal way against payment which must ultimately be made by imports. Such suggestions are perhaps responsible for the apprehension with which the whole lend-lease procedure is viewed in some quarters. They tend to create an impression that foreign consumers may in future be supplied, without payment, from the spasmodic surpluses of misdirected American production -- surpluses which might result in particular from programs of public expenditure designed to create employment in the United States. From an economic point of view, this would be an elaborately ineffective way to avoid recognition of the fundamental truth that exports must be paid for by imports. From the political point of view, it is absurd to believe either that the United States can or will subsidize foreign consumers indefinitely, or that foreign countries will be content to exist on a poor-relation W.P.A. or international food-stamp level.
In this article we shall first trace the steps by which lend-lease developed from a unilateral subsidy in kind into an extensive system of mutual aid. In the next section statistics will be used to show the extent to which normal trade is at the moment overshadowed by this new system of pooling war materials. The gradual emergence of principles for the settlement of lend-lease obligations will then be discussed. Finally, attention will be drawn to the opportunity which that settlement will offer for the restoration of multilateral trade and the expansion of prosperity.
The Lend-Lease Act was passed March 11, 1941, almost nine months before the United States became an active belligerent. Its primary purpose was to relieve the strain upon the British balance of payments. Great Britain had been at war for a year and a half, and for nine months had been virtually alone in the struggle against the European end of the Axis. London had made a tremendous effort to mobilize exchange assets, but current exports, gold shipments and security sales were inadequate to finance the ever-increasing imports of war materials, including food. Within the Empire there was effective pooling of resources, including exchange assets. Purchases outside the Empire, however, had nearly exhausted the available means of payments. Large fixed investments remained in British ownership, it is true, though ownership had in some cases been transferred to American citizens and the United States Government was about to take a mortgage on others. But it was not easy to mobilize these and there were insufficient liquid assets to continue and expand purchases to meet the rising scale of needs. The Lend-Lease Act was intended to solve this problem by making goods available for war purposes, not only to the British countries, but to "any country whose defense the President deems vital to the defense of the United States."[i]
The generalizing of lend-lease procedures began immediately upon the entry of the United States into active hostilities. The full story of reciprocal aid cannot yet be told; but immediate British aid to meet such urgent American needs as that for antiaircraft guns has been publicly acknowledged. As detachments of American troops moved into widely dispersed theaters of war, and as the United States Navy extended its operations, increasing quantities of local supplies were obtained on reciprocal lend-lease. Full information on this broadening of mutual aid has not yet been supplied, since it might serve to indicate the size of the American forces in different areas. In the same way, the quantity of materials secured by the United States from Allied sources also remains a military secret. Some of these materials, like some of those furnished by the United States, have been purchased with foreign exchange; but much has been supplied without payment. The accounting must wait for the end of the war. In any case, the situation changes so rapidly that progress reports would not be very conclusive. Probably on balance the United States is a heavy creditor; but the regular reports on United States exports should not be allowed to obscure the fact that there are balancing entries, which in some cases may turn out to be very substantial.
By the end of the first year of lend-lease operations the President could report that: "All the resources of the United Nations are now part of a common pool, out of which arms and men pour as considerations of military strategy dictate. Into this pool flow lend-lease munitions, together with the entire military, air and naval strength of the United Nations." While this statement may have been based on aspiration as well as on fact, successive quarterly reports to Congress have indicated progress toward the pooling of economic resources.
For example, the fifth report, issued in June 1942, said: "American troops on Australian and British soil are being fed and housed and equipped in part out of Australian and British supplies and weapons. Our Allies have sent us special machine tools and equipment for our munitions factories. British antiaircraft guns help us to defend our vital bases, and British-developed detection devices assist us to spot enemy aircraft. We are sharing the blueprints and battle experience of the United Nations." And the sixth report, in September 1942, stated: "Under reciprocal lend-lease General MacArthur's men are receiving munitions, uniforms, food and shelter from the Australians. Similarly, United States forces are receiving aid from New Zealand. The Fighting French in Equatorial Africa and New Caledonia are furnishing us with materials, facilities and service. In Great Britain we are receiving a formidable amount of munitions and supplies. Guns and camps, aircraft and military stores have been turned over to our troops. In July alone, a quarter of a million British workmen were engaged on construction for the American Army."
The pooling of resources began to be regularized in the important agreement signed by the United States and Great Britain on February 23, 1942. Similar agreements have been signed by the United States with China on June 2, with the U.S.S.R. on June 11, with Belgium on June 16, with Poland on July 1, with the Netherlands on July 8, with Greece on July 10, with Czechoslovakia on July 11, with Norway on July 11 and with Jugoslavia on July 24; while an exchange of notes with Australia, the Fighting French, New Zealand and the United Kingdom on September 3, 1942, set forth in somewhat more detail the principles governing the provision of reciprocal aid. A financial agreement with China dated March 21, 1942, and joint agreements with Canada and certain Latin-American countries, complete the network of agreements so far negotiated.
It will be observed that the commitments are bilateral between the United States and its several allies. In fact, the pooling is multilateral, but the obligations are bilateral. The same may be said of the administrative agencies. Washington is the effective center of the United Nations organization; but that organization exists in the form of bilateral agreements with the United States. This is clearly a difficult situation for the United States, whose world-wide obligations are not shared by its allies (though the United Kingdom has parallel obligations). It is also a precarious situation for the other countries, since a shift in American policy could wreck the whole system.
The extent to which barter under lend-lease has replaced ordinary trade is difficult to measure, even for the United States. While lend-lease aid does not necessarily constitute a debt in monetary terms, account is kept of the monetary value of the American goods and services supplied. Their nominal value is already impressive. The amounts authorized from appropriations to the President or by transfers from other appropriations total nearly 60 billion dollars. About 12.5 percent of this amount (7.5 billion dollars) had been or was being supplied at the end of November 1942. Most of this came from appropriations to the President. About four-fifths of the amount actually transferred represented military supplies, foodstuffs, raw materials and industrial goods; one-fifth covered services such as shipping and supply services, shipping repairs and shipyard facilities.
In the first year of lend-lease, the exports on this account were about 20 per cent of the total exports of the United States, and the proportion has grown rapidly. For the next six months it was well over 60 percent; and it still is rising fast. Monthly shipments were at the rate of approximately 8 billion dollars a year in August 1942; in October 1942 the rate was almost 11 billion dollars a year.[ii] Meantime, the trade carried on through normal channels was shrinking in volume if not in value. It does not seem an exaggeration, therefore, to state that a new, improvised system of bilateral or unilateral barter transactions, designed to meet strategic rather than economic needs, has been superimposed upon and has now partly displaced the multilateral trade formerly conducted by private enterprise.
Unfortunately no clear picture can be given of the reverse process. Imports into the United States have increased, though not in proportion to exports. How much of this represents shipments on reciprocal lend-lease is not stated, nor can the facts be gleaned at present from the export returns of other nations. In any case, the greater part of the reciprocal lend-lease transactions consists of services and supplies to United States forces in foreign countries. It must be remembered also that Britain is practising what is in effect lend-lease to other nations to an extent which may approach what she is herself receiving from the United States.[iii]
The fact that United States exports, mainly on lend-lease, have increased so much more than imports is an indication of the fact that lend-lease is a war expedient superimposed upon, but not woven into, the pattern of international economic relations. The paradoxical fact that the greatest creditor country in the world has an active balance of both agricultural and manufactured exports has been made more obvious. The United States is lending more by exporting more; but repayment facilities in the form of imports do not appear to be increasing. The hostile reception given by Congress to the President's request for emergency powers to abrogate restrictions on migration and imports for the period of the war shows that the resistance to payment for United States loans, services and even exports continues strong.
It is also clear that the barter of supplies and services on lend-lease is not cutting new trade channels for the future. New markets may possibly be created for certain American products by reason of their being supplied on lend-lease in new areas; but continuing trade calls for organized marketing services which are not being set up. At the same time, the prewar marketing organization languishes and shrivels, so that it may be difficult to restore trade along the old lines after the war. New agencies must be created, new connections made and customers re-won in former markets, while the processes of marketing must be established anew if the potential demands now being stimulated in new areas are to be met when lend-lease stops. Many complaints by private trading agencies bear witness to the serious consequences of the dislocation of normal trade channels.[iv]
In the case of some foreign countries, reverse lend-lease operations may give rise to serious balance-of-payment problems. New Zealand, for example, by supplying food and equipment to American troops on lend-lease, loses sterling exchange which might be earned by exporting these goods to Britain. Consumers in England become used to substitute products and in the meantime New Zealand's means of payment for imports are curtailed.
While the organized machinery for the promotion of international trade is thus weakened, there is no weakening of tariffs and the other barriers imposed by government regulation, or of the various instruments of indirect protection. There has been a great extension and consolidation of exchange control and quota systems. Exchange control has, in fact, become universal. At the same time, war production, as always, has brought about great shifts in the pattern of international specialization. In the war of 1914-1918, German chemists developed synthetic nitrates and so dealt a heavy blow at Chilean prosperity in the postwar period. The development of synthetic rubber in the present war may be an even heavier blow to the future prosperity of countries which export natural rubber. These are merely dramatic aspects of a widespread process. Relative production costs of many commodities have shifted. There has been a hastening of industrial development in countries like Australia, Brazil and India. Agriculture has been rationalized in Britain. The whole structure of agricultural specialization in Europe has been twisted to fit the Nazi scheme of attempted self-sufficiency. The mobilizing of strategic materials by purchasing agreements, development contracts and preclusive buying merely accentuates the disturbance of former specialization. The fact that some of the war contracts will project into the postwar period is a relatively minor aggravation of an inevitable dislocation.
Examples might be multiplied of the many ways in which lend-lease operations are displacing and dislocating former trade relations without laying the foundations for the development of trade in the future. It is true, of course, that lend-lease will probably not create postwar transfer problems as a result of unbalanced financial transactions, and this is a great gain. The restoration of multilateral trade after the war, however, must be based upon the enfeebled survivals of the prewar organization, modified in some measure perhaps by the allocation of markets now being practised by Britain and the United States.
The smoothness with which United Nations resources are being pooled in the war effort is no indication that such pooling can continue after the war. Indeed, the fact that lend-lease is a substitute for the laborious breaking down of trade barriers, an avoidance of troublesome political controversies by a temporary war expedient, is likely to consolidate the barriers and weaken the organization of world trade.
Minor quantities of lend-lease goods and services have been supplied against payment in foreign exchange. The bulk of the obligations, however, have been left for future settlement. Possible ways in which such a settlement might be approached are indicated in successive reports by the President to Congress.
The March 1942 report referred to three significant lines of settlement with Britain as, first, "the military contribution to American security which flows from the continued British fight against the Axis;" second, "the increased flow of reciprocal aid;" and third, "an understanding with Britain (and prospectively with others of our allies) as to the shape of future commercial and financial policy." The following quarterly report went a step further. Its closing passage read:
The real costs of the war cannot be measured, nor compared, nor paid for in money. They must and are being met in blood and toil. But the financial costs of the war can and should be met in a way which will serve the needs of lasting peace and mutual economic well-being.
All the United Nations are seeking maximum conversion to war production in the light of their special resources. If each country devotes roughly the same fraction of its national production to the war, then the financial burden of war is distributed equally among the United Nations in accordance with their ability to pay. And although the nations richest in resources are able to make larger contributions, the claim of war against each is relatively the same. Such a distribution of the financial costs of war means that no nation will grow rich from the war effort of its allies. The money costs of the war will fall according to the rule of equality in sacrifice, as in effort.
This appears to mean that there must be all-round cancellation of obligations in respect to lend-lease goods actually consumed in the war effort, on the theory that each of the United Nations will have contributed, to the best of its ability, to the common effort and, having given of its best, will owe nothing to the others.
Of course, there may remain substantial unused stores of war implements: ships, munitions, machines, materials and food. The disposition of these must be negotiated at the close of the war. Many of the airplanes, tanks, munitions and other war supplies will be returnable, or if not returned may be paid for in some fashion -- by the performance of garrison duty, for instance, or by contracting a loan, or by cession of bases or territory, or merely by conformity with policies desired by the creditor. Some stocks of food and transport facilities will undoubtedly be turned over to restored governments or to international institutions to be used for relief and reconstruction purposes in liberated areas.
The most knotty problems will probably be presented by the capital equipment which has been supplied on lend-lease in certain areas. Instances of such equipment have been cited in various quarterly reports -- port facilities, unloading, storage and assembly plants, railroads, locomotives, trucks, pipe-lines and new industrial equipment. No estimate of the value of these supplies is available, but they are unlikely to reach such amounts for any country -- even the United States -- as to cause grave transfer problems, even if the full cost is charged at full interest rates. The really costly items supplied on lend-lease are such things as bombing planes rather than industrial equipment. Since the former are likely to be written off and the latter to be written down, the postwar trading world should not be afflicted with unilateral transfer problems comparable with those created by reparation and war debt payments after the last war.[v]
It should also be noted that the provision of capital equipment on lend-lease, to be settled for after the war, has aroused suspicions of imperialist designs in some quarters. Although the American economic mission to India proclaimed that its activities were limited to war production, it seems to have been regarded with suspicion in Indian even more than in British quarters.
The argument up to this point may now be summarized briefly. Lend-lease has developed into a system of mutual aid for the purposes of war. It approximates a pooling of the economic resources of the United Nations. It has grown to proportions that dwarf normal trading operations. Exports from the United States have inevitably shown the greatest growth. This barter exchange of strategic goods and services does not take place through organized trade channels. On the contrary, it has dislocated and enfeebled the private channels which conducted prewar trade. It seems likely that the principles of settlement for lend-lease obligations, now beginning to emerge, will avoid the exchange and transfer difficulties consequent upon unbalanced financial obligations. The restoration of expanding multilateral trade, however, will require a decisive effort in view of the great shifts in specialization and cost relations inevitable in war production.
Article VII of the master lend-lease agreement foreshadows "agreed action . . . directed to the expansion, by appropriate international and domestic measures, of production, employment, and the exchange and consumption of goods, . . . to the elimination of all forms of discriminatory treatment in international commerce, and to the reduction of tariffs and other trade barriers." In the circumstances, the implementation of this article will be a great and complex task.
The various stages of postwar action, beginning with reoccupation, relief and rehabilitation and going on to long-run reconstruction and economic development, form a complex and interwoven whole. It is natural that attempts should sometimes be made to distinguish between these stages. For example, the problems of relief, upon which much interest is concentrated, are sometimes discussed as if they could be dealt with apart from reconstruction problems, about which there are marked divergences of opinion -- at least in the United States. In plain language, there is general agreement that it is the duty of the United States to take a leading part in the humanitarian tasks of relief; but there is strong resistance in some quarters to any relief procedures or institutions which would commit the United States to continuing participation in international political or economic action. Such resistance is particularly strong among those who realize that, at least during a prolonged transition period, international collaboration must involve a continuance of controls over the allocation of food and raw materials.
It is the writer's belief that relief and rehabilitation cannot be separated from reconstruction. Attempts to separate them proceed from political motives rather than from a realistic appreciation of actual conditions. In fact, the approach to reconstruction by way of the provision of food and other immediate relief promises to open the way to action in many fields: restoration of transport facilities, rearrangement of the pattern of international specialization, investment to raise productivity and living standards in hitherto depressed areas and, as a necessary condition of all these developments, a freeing of multilateral trade.
Not only is there an immediate connection between relief and reconstruction in each national area, but employment in the more developed areas will depend largely upon participation in the relief and reconstruction of less developed countries. Belgium offers a good example. To get food into Belgium, ports must be dredged and communications restored. The amount of relief needed will depend upon the measures taken to reorganize Belgian agriculture and industry so that effective production may be resumed. If Belgium is again to import staple foods and raw materials, outlets must be provided for the characteristic Belgian exports of semi-finished and finished manufactures.
Thus the implementation of Article VII demands both negative action to reduce the obstacles to freer trade and positive action to coördinate national economic policies and direct them toward reëmployment and reconstruction. It is generally agreed that, for a transitional period at least, inter-government controls of commodity allocations, investments and capital movements, must be continued. But even if these controls should be directed toward establishing conditions of equilibrium which will permit the progressive restoration of free enterprise, there will clearly be need for international organs of coördination in such fields as exchange stabilization, foreign investment, commodity and cartel agreements.
An attempt to sketch a possible pattern of international economic organization after the first period of immediate relief would go far beyond the space of this article.[vi] All that can be said here is that lend-lease is a useful expedient in the emergency of war but not a suitable base for permanent international economic collaboration; it is, therefore, unlikely to survive the immediate demands for relief at the close of the war. No self-respecting national community will wish to remain dependent upon such subsidized relief, nor is it likely that even a very rich country will be able to subsidize the rest of the world indefinitely.
The process of winding up lend-lease arrangements will afford an opportunity to secure agreement upon policies designed to reduce trade barriers and eliminate discriminatory trade practices. Those negotiations, the most important of which will obviously be conducted between the United States and the British Commonwealth, will also offer opportunities for the creation of machinery to stabilize the exchanges and reëstablish multilateral credit clearings, to direct capital toward the economic development of countries with low living standards, to moderate the cyclical fluctuations of commodity prices, and, by the coördination of national economic policies, to minimize recurrent strains on the balances of payments.
[i] This extension of its benefits has made the Lend-Lease Act a powerful diplomatic instrument in neutral as well as belligerent countries. Forty-two nations, including Argentina, Chile, Egypt, Iran, 'Iraq and Turkey, are on the list of lend-lease recipients.
[ii] These figures do not include supplies exported to United States forces abroad.
[iii] "Part of the military equipment exported to the United Kingdom has been sent by the British to U.S.S.R., Egypt, India and other areas of the Middle East. In addition, Great Britain has sent a major share of its own production of war supplies to these fronts." ("Seventh Report to Congress on Lend-Lease Operations: For the Period ended December 11, 1942," p. 11.)
[iv]Cf. New York Times, October 2, 1942, p. 33.
[v] There will, however, be a somewhat similar problem arising from the accumulated balances on trading account blocked in London and to a much greater extent in Berlin. This is the problem which lend-lease has averted wherever it has been utilized.
[vi]Cf. the author's "Agenda for a Postwar World" (New York: Norton, 1942); and "Problems of Economic Reorganization" (Commission to Study the Organization of Peace, 1942).