Foreign Affairs: 100 Years
The Future of History
Can Liberal Democracy Survive the Decline of the Middle Class?
WHEN a business decides to close down a line of activity it transfers to other departments such assets as are usable and liquidates the remainder at the best price obtainable. But when the United States reduces its military establishment it cannot merely sell off its excess property for the highest possible price. Maintenance of employment at home and the requirements of a constructive foreign policy are far more important than the cash which may be realized. The prospect of immediate financial gain must be balanced against the more distant but very important effects which the sale will have on both domestic business and world trade.
Though it is impossible to say how large the surpluses will be at the end of the present war they are likely to be big enough to exert a damaging effect on postwar production if they are merely dumped on the world markets. When and how should they be sold? How, particularly, should they be sold abroad? And, more difficult still, what methods of payment should be arranged, in a world economy suffering from a shortage of dollars? Unquestionably there will be dire need for some of them in the foreign nations devastated by the war; and countries eager to expand their economies will undoubtedly want some also. At the same time, foreign businessmen fear the sudden sale of surplus goods for the same reasons that our own do. And some foreign governments will have surplus property of their own to get rid of.
It is logical to look to our experience after the last war for help in answering such questions, but the search is not very rewarding. Surplus property in 1919 was infinitesimal compared with the amount expected to be in existence when this war ends. Its value was perhaps only 2 or 3 percent as much; and it was less widely scattered. Furthermore, neither our methods of disposing of our surplus last time nor many of the economic policies of that period can now be regarded as models.
An Act of July 9, 1918, authorized the President, through the head of any executive department, to sell any surplus war supplies on such terms as that department head deemed expedient. On February 11, 1919, the Secretary of War, by direction of the President, created the United States Liquidation Commission to dispose of all surplus army property and to settle war claims held by and against the United States. As a general rule, it was decided not to bring property abroad back to this country. There was great pressure for the speedy disposal of such property on the spot in order not to delay the return of the troops. And in the case of the Army's automotive equipment, for example, it was sold abroad in order to minimize the effect of the sale on the market for new vehicles in the United States. Nevertheless, property worth about $672,000,000 was brought back.
More than half of our surplus military property abroad was in France. Movable property, valued at its cost in the United States plus the cost of its transportation to France, was appraised at $697,298,000, which a 25 percent deduction to cover deterioration, etc., reduced to $522,974,000. Immovable property, such as barracks and railroad yards, was estimated to have an "Armistice value" of $39,256,000. From the total was deducted $135,281,000 covering certain categories of goods, e.g. equipment used for maintenance of troops or donated to the Red Cross, and animals sold at auction, leaving an appraised value of $426,949,000. After a further reduction these goods were transferred to the French Government in consideration of a ten-year 5 percent dollar note.
A further sale amounting to $7,341,000 was made to the French Government on credit. From the remaining American supplies in France and other parts of Europe, sales amounting to $195,386,000 were made on credit to the Governments of Belgium, Czechoslovakia, Estonia, Latvia, Lithuania, Poland, Rumania, Russia and Serbia. Some of these sales were made through relief societies in Poland, Czechoslovakia and other countries. No credit sales were made to the British Government. Surplus goods were also transferred without payment to the American Relief Administration and goods valued at $10,000,000 to the American Red Cross. Further sales amounting to $227,537,000 were made for cash to individuals and non-government organizations in various countries. The aggregate contractual value of all sales of surplus property was therefore $822,923,000. This has been reported to be about 60 percent of cost.
Various claims against the United States for railroad and port dues, transportation of United States troops in Allied ships, etc., were set at $120,000,000; and there were claims by the United States for war material supplied to its Allies. The net balance on all these transactions, including the sale of surplus property, is estimated to have been $757,000,000 due to the United States. This sum is arrived at as follows:
|Sales of Surplus Property||Millions of Dollars|
|On credit to foreign governments|
|Block sale to France||$400,000|
|Other sales to France and other countries||195,386||$595,386|
|For cash to individuals and non-government organizations||227,537|
|Against the U. S. Government||$120,000|
|By the U. S. Government||55,000||$65,000|
|Net balance in favor of the U. S.||$757,923|
Of this sum $595,386,000 was received in foreign government obligations running from three to ten years and carrying 5 percent interest.
The subsequent history of these obligations is tangled with that of other obligations of the debtor governments. Interest was paid on the French debt for surplus property until 1926, when the short-term obligations of many governments were funded into 25-year debts carrying a minimum interest of 4.5 percent. From 1926 to 1931 interest and principal were generally paid; but payments have been made by few since the 1931 moratorium.
With so much fighting yet to be done, the impossibility of making more than an extremely rough estimate of possible surpluses after this war is obvious. Major questions of postwar policy yet to be decided, such as the size of our postwar army and the quantity of strategic reserves we should keep, will also affect the final total. And some lend-lease goods may become surplus. When lend-lease ends, there will be supplies in course of production for lend-lease countries or on the way to them. The Lend-Lease Act permits these to be delivered in accordance with any international agreement made prior to the termination of the law; but if no such agreement has been made, they may become surplus. Whether materials already supplied on lend-lease and in stock in recipient countries or partly worn out will be returned for disposal on behalf of the United States also depends on major policy decisions which have not yet been made.
But even though accurate estimates of the amount of government property likely to remain after this war are impossible, there have been guesses that there will be surplus material which originally cost between 60 and 100 billion dollars. Much of it will consist of combat equipment. Potential surplus civilian goods may amount to about 18 billion dollars; of this perhaps half may be abroad, though here again there is little real basis for an estimate.[i] Civilian materials will include food, drink, clothing, medical supplies, almost all kinds of housekeeping goods -- cooking, shoe repairing, sewing and laundry equipment -- machine tools, and communications and transportation equipment such as aircraft, railroad locomotives, freight cars, trucks and port installations. There will be significant surpluses of some raw materials. Much of the accelerated mineral production of the war years will not have been lost and will return to the markets as scrap, possibly in quantities sufficient to depress prices for a number of years. (A sharp fall in mineral prices would be serious domestically and internationally.) There will be surplus steel, aluminum, synthetic rubber and aircraft plants. We shall also have many installations abroad, although there will be fewer than might be supposed because many barracks and other facilities abroad have been supplied to our Army on reverse lend-lease.
Clearly the surpluses will be large enough to affect markedly the economies of some of the countries in which they are sold. If we were forced to choose between selling large quantities of surplus goods in the United States in a time of serious unemployment, or destroying them, it would in general be more economical to destroy them, although we may not have to make this choice. The selling of surplus goods is a deliberate process of reducing inventories, and if it is done when many people are out of work the sales aggravate the unemployment. It is natural and desirable to wish to make use of things already produced; and selling government surpluses at the "best" price might be expected to channel them where they are most useful, and also reduce the national debt. Thus the Baruch-Hancock report on "War and Post-War Adjustment Policy" points out that "the fact that surplus sales will lower the debt dramatizes an important point which some business groups are inclined to forget. The net result of an effective disposal program will aid all business; which is an important consideration to be balanced against the possible short term effect of individual sales." [ii] But the losses which might result in the shape of unemployed men and unused plant can, in a society organized like ours, exceed the benefits of a course aimed at the greatest possible reduction of the national debt.
The maintenance of employment is a task of the first magnitude. It cannot, of course, be achieved merely through careful control of the sale of surplus property; but the policies for such disposal must be coördinated with the larger task. It may seem that the United States, which had a prewar annual production of around 90 billion dollars and a wartime annual production of 190 billion dollars, ought to be able to absorb civilian goods originally costing 10 to 20 billion dollars. And it is true that some commodities produced for the Army -- trucks, for example -- are so much less satisfactory for peacetime purposes than goods manufactured expressly for commercial use that they will not compete sharply with new products. But other surplus goods will; and there may be enough of some kinds to supply the market for a considerable time. Government stocks of transport aircraft, in particular, may be two or three times the annual need. Stocks of aluminum, copper and other raw materials are likely to present similar problems. And there is an added danger that surpluses may come on the market and cut new production just when industry is going through reconversion and some unemployment is inevitable.
We might try to avoid these difficulties by suspending sales as soon as serious unemployment appears and resuming them when full employment has returned. To sell only during a period of shortage of commodities would give the government good prices, would bring immediate benefits to consumers and would exert a downward pressure on prices. Resuming sales when full employment reappears might prevent a rise in the price level like that which occurred in 1919-1920. On the other hand, the presence of large unsold stocks of goods in government warehouses would undermine the confidence of business in its future markets, and might discourage reconversion. An exact balance cannot be struck as to the advisability of putting surpluses "on ice;" but we can perhaps conclude that though the immediate sale of certain goods, such as machine tools, may be needed to facilitate reconversion, the sale of equipment should not exceed the maximum quantity that the market is able to absorb without interference with current production.
One alternative to selling at home during periods of unemployment or to putting on ice is to sell abroad. Such sales may in some cases also affect the domestic economy by cutting into the market for new American goods. But disposal of surplus food and clothing, so terribly needed in countries freed from Axis rule, should interfere little with American production. This country's contribution to UNRRA can be made partly out of those surpluses, and in so far as the governments of liberated countries possess funds, their needs for relief should be met on the basis prescribed by the UNRRA agreements.
The sale abroad of commercial and industrial equipment involves more complex problems. Our refusal to sell would not necessarily maintain the foreign demand for new American machinery, since surplus or new goods from other exporting countries may also be on the market; and some countries may be able to buy nothing at all except surplus goods at reduced prices. There will be no lack of desire for American products; and the need for industrial equipment will be enormous -- greater, perhaps, than the total of American surpluses and postwar output combined. The main difficulty will be the inability of foreign countries to pay for what they want -- a problem to which we shall return below.
It is sometimes said that we should sell no industrial equipment such as machine tools or textile machinery to foreign countries, since they will thereby be enabled to make and possibly also to export goods formerly bought from the United States. But the growth of industrialization in other lands could be prevented only by prohibiting export of both new and surplus machinery and by somehow inducing all other industrial nations to refuse to export machines -- an absurd idea. We cannot overlook the simple humanitarian obligation to help the people in war-torn lands overcome their destitution; but in any event the amount of damage that our sales of excess equipment could do to our export trade is often greatly exaggerated. We ought, in fact, to have little difficulty in disposing of large industrial surpluses abroad without harming our exports. Many American manufacturers of equipment will find that improvements which they are making in their products will open future export markets to them. These improvements will accelerate the obsolescence of much existing equipment; yet in undeveloped countries experience with earlier and simpler models is often a necessary step toward the purchase of more modern equipment.
Sales of surplus goods abroad should, indeed, benefit the future export trade of the United States. The sooner the people in the devastated areas can begin to produce, the sooner they will cease to be candidates for relief and become potential customers for imported goods in general. Sales of peculiarly American equipment -- for example, trucks, agricultural implements and construction and road building machinery -- in countries which have had none before would create a market for repair and maintenance materials and for additional equipment. And an increase in production abroad tends to create purchasing power and expanded opportunities for American goods and services.
The temptation to make the purchase of supplementary new equipment from the United States a condition of our sale of surplus property abroad should be resisted. This country will have a greater surplus to sell than any other, and attempts to use it as a lever to obtain new business would disturb world markets seriously and create much bad feeling.
It has been suggested that buyers in the United States should have first choice of efficient modern equipment from surpluses. The Baruch-Hancock report states: "American industry will want to purchase much of this modern efficient equipment to replace obsolete equipment so as to improve our national industrial efficiency upon which our high wages and living standards rest. Before selling this equipment abroad these possibilities should be fully explored." The report also recommends that the government "develop the possibilities of disposing of surpluses abroad, balancing this with the need of improving the efficiency of our own productive plants and with other domestic needs." The proposal is of course reasonable, provided net prices on domestic sales are no lower than on export or foreign sales, and provided that we are aware of all the consequences of such a policy. Domestic sales of up-to-date machinery out of surpluses might hurt the American markets for new machinery. Furthermore, the American manufacturer buying a machine out of surplus might obtain a competitive advantage over rivals who had previously invested in such machinery at the full market price.
Our examination of aspects of the sale of surplus goods abroad has so far been concerned mainly with the effect of various policies on our domestic welfare and on our own foreign trade. But of course the interests and policies of foreign countries are a large element in the problem; goods cannot be sold in other lands against the wishes of their governments. Their attitude toward the sale of our property will naturally be influenced markedly by whether they produce goods of the kind which we might export to them. The United Kingdom, for example, produces some of the industrial goods of which the United States will have surpluses. For instance, we shall possess most of the world supply of surplus transport aircraft after the war, and the British may wish to purchase some American planes in order to expand their commercial aviation quickly. But they do not want the world market to be filled for years to come entirely out of American surpluses. The present proposal is to make surplus American transport aircraft available to foreign and domestic buyers without discrimination, giving them the option to buy outright, to purchase on a terminable installment plan, or to lease. The alternative of leasing will enable British firms to begin commercial air transport as soon as planes are released from war work, without, however, closing the markets to later planes of British make.
We have established prices in this country for surplus general-purpose machine tools based on the original price and the length of time the tools have been in use; and we are considering returning surplus cutting tools to the original manufacturers for rehabilitation, storage and sale on behalf of the Government. The manufacturers would be required to sell these goods in quantities bearing a fixed relation to their sales of new tools. A somewhat similar procedure for dealing with surplus communications equipment is being studied. Should the British wish to adopt a policy of the same sort so as to maintain the market for their own new tools they will have to be sure that American surplus tools will not be sold in the United Kingdom at prices which would undercut their own. In other words, the sales of surplus American goods in countries producing similar equipment must be coordinated with the efforts of the governments of those countries to maintain full employment, just as, doubtless, we shall ask foreign governments to coördinate their sales of surpluses in the United States with our own domestic plans. If we ignore the intentions of the buyer when we sell our surpluses in this country, leaving him free to use them, resell them here or ship them abroad, we cannot make arrangements with other nations which have surpluses regarding exports from this country. It may be both possible and desirable, however, to make agreements with the governments of such countries regarding American surpluses already abroad.
Of course, many countries will need our surplus goods badly and will be little concerned with the effect of purchases on their own postwar production. Industrial plants and transportation facilities will have been terribly damaged throughout Europe and the Far East. The shortage of trucks will be almost worldwide for some time. Agricultural equipment and domestic equipment in urban areas and innumerable other types of goods will have to be replaced. In addition, many countries are determined to develop their resources and will be eager to obtain industrial equipment. Some of these manifold needs can be met out of American surplus goods.
The problem of our excess merchant shipping, which closely affects our postwar relations with our Allies, demands special mention. At the end of the war the United States Government will probably have 12 billion dollars invested in ships. Our Allies have pooled their shipping with ours during the war and have lost many of their ships through enemy action; yet in the pooling of common production resources most shipbuilding has been allotted to the United States. The total tonnage of world shipping is now a little more than what it was in 1939 (78,000,000 tons), but at the end of the war we shall own a much larger share of it -- 50,000,000 tons as compared with 11,000,000 in 1939.
If we decide to hold in reserve the ships which we cannot use, we might nevertheless offer some of them to foreign countries on much the same basis that we propose to offer transport aircraft. In this way we would help them recover a reasonable share of their shipping business. Since ships built in wartime will not be able to compete with those built later, this procedure might be advantageous all around, since it would put postwar mercantile fleets on a more equal competitive basis, and might also reduce somewhat the probability of postwar building by other countries and save war-built American ships from idleness.
Perhaps the greatest single problem to be faced in selling surplus American property abroad will be how to obtain payment. Some supplies can be traded for foreign claims against us, and some might be traded for rights to naval and air bases, aircraft landing rights and property to house American government representatives abroad. Some countries which have not actively participated in the war will possess considerable dollar balances and for a time can buy for dollars. But some of the countries where our Armed Forces will leave property are so undeveloped (for example, in the Pacific) or so devastated by war (for example, Italy) that payment will be extremely difficult, if not impossible. Even payment in local currency may be out of the question at first unless the countries concerned resort to inflation; and later, if local currency can be made available, its conversion into dollars may be impossible, since that can be accomplished only when a country exports more than it imports. It will be useless for the United States to grant credits, to be paid in dollars, to a country which is too poor to have any prospect of achieving an export balance. We might consider reëxporting the surpluses in those countries for sale elsewhere. But some material will cost more to transport than it is worth; and the withdrawal of goods from a country in sad need of them, or their destruction there, would certainly not endear us to other nations.
We shall not be able to forecast export balances with any certainty, and it may be desirable to sell for dollars, with clear and liberal provisions that payment may be postponed if the purchaser cannot acquire exchange. After a period of postponement, we might accept local currency, and if that accumulates, consider using the procedure adopted in regard to the Boxer indemnity.
Under the Boxer protocol of September 7, 1901, 13 Powers exacted a promise from China to pay an indemnity equivalent to about $330,000,000 over a period of 39 years, at 4 percent interest. In 1908 the United States remitted $11,961,000 of its share, directing that it be used to support Tsing Hua College and those of its students who came to the United States for further study. In 1917, when China declared war against the Central Powers, her obligations to Germany and Austria were cancelled, and all sums due to the Allied Powers (except the amount owed to Russia and the portion of the United States share which had been remitted) were suspended for five years. In 1922 and 1923 the French Government agreed that the French share should be used to pay off the Far Eastern creditors of one of its banks which had failed, and for public education. In 1923 Japan agreed to apply its share to education, art, sanitation and other work, to the aid of Chinese citizens living in Japanese territory, and to scientific research in Japan relating to China. In 1924 the United States remitted the balance of its share amounting to $6,137,000 and stated that this sum was to be applied, at the discretion of the President, to educational and cultural activities selected by a Sino-American Board of Trustees. In 1925 the United Kingdom followed suit, but the British stipulated in 1930 that all funds for the British share in the indemnity should be used to create an endowment for educational purposes -- the funds to be invested in railway and other productive enterprises in China, all the materials for which were to be bought in the United Kingdom. The Belgian Government had made a somewhat similar arrangement in 1927.
If the local currencies which were paid for our surplus goods and which could not be converted into dollars were used for cultural and philanthropic purposes, on the Boxer precedent, we would not receive any money for our property but we would at least avoid disrupting international exchanges in fruitless efforts to obtain payment. And we would win wide good will.
Some devastated countries which cannot pay cash for our surpluses immediately can, however, achieve an export balance once they get their industry and transport going. Credit will be necessary if any considerable quantity of surpluses are to be sold in these countries, or in undeveloped countries. The ability of other countries in general to obtain dollars, apart from loans and sales of gold, will depend upon our willingness to import foreign goods and pay for foreign services. Our tariff is the principal obstacle to imports.
The disposal of our surplus property will be a complicating factor at a time when political and economic conditions already are difficult. But if we are clear about our national interests in two major fields -- employment at home and foreign policy -- the action we decide to take about our surpluses can be made to further our domestic and international policies. The most difficult problem will be to weigh short-term financial considerations against the long-term effects of our transactions on domestic business, on international political relationships and on world trade and monetary mechanisms.
[i] It must also be remembered that figures of wartime costs reflect abnormally high wages, large amounts of overtime and the use of much unskilled labor.
[ii] "War and Post-War Adjustment Policy," by Bernard M. Baruch and John M. Hancock. Washington: Government Printing Office, 1944, p. 64.