IN the economic sphere, the world is about to enter a new phase. It is already evident in the United States that the period of the postwar transition with its special characteristics is drawing to a close. In Great Britain an over-all balance of trade has been achieved, although a large deficit against the dollar area remains; inflationary pressure has almost ceased and British industry is no longer gravely impeded by material shortages. On the Continent also there are signs that the inflationary pressure has eased. No doubt vast work remains to be done and many years must elapse before the ravages of war are repaired. But the period of extreme shortages and high pressure may be deemed to be over. It is not only in the United States that signs of depression are likely to appear.

This, therefore, is the time to take stock of such arrangements and plans as we have for international economic coöperation. Machinery was created some five years ago, and modes of procedure agreed upon, with some hope that they would enable the nations to tackle their economic problems in a spirit of closer coöperation than in the thirties. Nonetheless, as the time draws near for these plans to be put to the test, there is a suspicion that the agencies and procedures may not be adequate to the occasion. Governments feel that they may have to increase import restrictions and take other unneighborly measures, if faced with a severe depression. In the economic field, no less than in politics, the momentum of internationalism appears to have decreased. The political reasons are too well known to need repetition here. But in the economic sphere, the failure of one or more Powers to be fully coöperative ought not to prevent collaboration by the others. It may be that the plans themselves were not entirely adequate.

Partly owing to waning faith in economic internationalism, and also owing to the unexpectedly formidable difficulties of the transition period, there has recently been a tendency to turn in another direction and recommend regional coöperation, an example of which would be a European Union. Provided that ambitious plans for federal political institutions are strictly eschewed, it should be possible to make good progress in European collaboration. A beginning has been made under the stimulus of E.R.P., and it should be possible to proceed further in such matters as mutual currency convertibility and the relaxation of import restrictions between the European countries. It would be a happy thing indeed if the European nations could so far overcome prejudices and genuine difficulties as to aim at a free trade area.

When one considers this regional proposal, however, one sees at once that regional groupings of this kind must not, like nations, be mutually exclusive in area. Britain would be part of a European grouping, but part also of the British Commonwealth and Empire, and there would thus be an overlap. Nations cannot overlap one another -- even nations with federal constitutions; there must, therefore, be something organically different in the conception of such a regional grouping from the conception of a federation. It must be emphasized that in order to get free markets of continental scope for their manufactures, European nations should aim at a free trade area, and not, as has sometimes been suggested, at a customs union. A customs union would be inconsistent with the position of Britain as an integral part of each of the two groupings. Britain would be unwilling to treat the produce of her Commonwealth and Empire much less favorably than that of the European continent. If she reduced her duties on Commonwealth and Empire produce to a very low level or to zero, she would be obliged, in accordance with her obligations, to reduce her tariffs on goods from outside countries also, so as to avoid increasing preference margins. Britain would, in fact, have to be a relatively free trade country.

In a customs union, member countries have to have identical duties against the outside world. The continental nations would never agree to reduce their protection against the outside world to this extent. Consequently, the idea of a customs union has to be abandoned, and that of a free trade area, with each nation adopting a separate and independent policy in its external tariffs, substituted for it. No solution could be found by bringing the Commonwealth and Empire within the European customs union, even if such a plan were acceptable to the United States, because the European nations would refuse to accept Commonwealth and Empire produce duty free, and the British Dominions would refuse to accept European manufactures duty free. This may serve to illustrate the point that the institutional arrangements of a regional grouping must and can be adapted to meet the problems of a possible overlap.

Such proposals as those for a European Union and for closer Pan American coöperation suggest the division of the world into large blocs. This is a dangerous tendency, and it is fortunate that the special relations of Britain to her Commonwealth and Empire completely upset the tidy and symmetrical idea of the formation of mutually exclusive regional groupings. But once it is recognized that groupings need not be mutually exclusive, large new vistas open up. What a "grouping" means, in essence, is close economic coöperation -- and the benefits of close Anglo-American economic coöperation, not only to the partners, but also to the world as a whole, are obvious. In the writer's opinion, no other instance of international economic collaboration offers such possibilities of general usefulness as this; and once we accept the idea that international groupings of smaller ambit than the whole world need not be mutually exclusive, it follows that Anglo-American coöperation need not be inconsistent with the European Union. The two procedures are not alternatives. We should proceed with the utmost energy along both paths. The significance of the British Commonwealth and Empire, in this respect, is that it exists as a going concern, and has developed procedures which reduce unneighborly action. The main objective in a European Union would be to remove obstacles to trade within the area.


In considering Anglo-American coöperation, I suggest that, to focus our thoughts and plans, we take as the leading idea the prevention of world-wide slump. Nothing has happened since 1939 to make it seem any less likely that boom and slump will continue to follow one another as of old. The great postwar boom suggests that, sooner or later, we may be faced with a tendency toward an unprecedented slump. How near such a development may be is not germane to the argument, for it is clear that effective remedies need careful and lengthy preparation. Furthermore, there is one school of thought which holds that the world of free enterprise may have to face a period of "stagnation," that is, of chronic depression. Its arguments are strong, and those who take the other view can hardly hold that they are quite certainly incorrect. Thus we are beset with grave dangers. If a slump were allowed to assume major dimensions, this would be a great disaster. The Russians await precisely this dénouement, and smile sardonically meanwhile. Are we really sure that we have done all the thinking and planning that are needed to secure ourselves against it?

The case for close Anglo-American coöperation is precisely that this is the sole available method for averting the disaster in question. An American policy which prevented the development of a large recession in the United States would be an important contribution to world stability. By itself it would not be enough, but the dollar-sterling area as a whole bulks so large in the non-totalitarian world that stability in this wide region would probably suffice to reduce fluctuation in the whole world to manageable dimensions. Neither Power could create a stable world alone; by a joint effort they should succeed in doing so. It may be objected that action taken by agencies of still wider scope would be still more effective. The answer is that at present these agencies lack sufficient powers, and that there is not sufficient confidence in them to make nations, great or small, willing to give them the extra powers which they would need.

This lack of confidence may be in part mere old-fashioned prejudices; nonetheless, if it exists, we must take it into our reckoning. But it may also have reason behind it. Effective anti-slump action must be timely, bold and large in scope. Such action, if ill-considered, might have appalling results. To get well-considered action, it is necessary to have a common point of view, a common basis of economic doctrine, as well as mutual trust and understanding. These conditions do not appear to be fulfilled in the larger circle of nations, but as between Britain and the United States, they are possible. (I assume that the British Dominions would be closely associated in this activity.)

No doubt there would be political objection, on both sides of the water, to close Anglo-American collaboration leading to vigorous action in the international sphere. When the war was still on, Americans were especially anxious, for political reasons, to make it plain that there would be nothing exclusive in the Anglo-American discussions under Article VII of the Mutual Aid Agreement, and that all nations would be brought in on an equal footing as quickly as possible. There might well be loud outcry against arrangements for joint international action by the United States and Britain, in which other nations were not full and equal partners. This is the unhappy offspring of age-old prejudices; we are dogged by history. Nevertheless, if the danger which we face is sufficiently grave, surely a way can be found. Two important points could be emphasized. One is that the plans would be framed so as to reduce to a minimum specific commitments requiring legislative support. The other is that, although the planning, management and decisions would be Anglo-American, the consequential benefits would be open for all to enjoy. It would be an Anglo-American service for the world at large.

This coöperation should take two forms. There would be needed a continuous and detailed concerting of policy at a high and intimate level, and there would also be needed some kind of international agency. When the slump gains ground, the United States Government will develop policies in the internal and foreign fields. So too will the British. It is important that these two Powers should know, not merely in terms of statements dressed for public consumption, but in terms of most secret motives, what those policies are. An initial difficulty that might be encountered on the American side is that, in a certain sense, the Government may have no concerted policy of its own. The great Departments in the United States Government have been likened to independent sovereign powers -- an arrangement that has a connection with the Constitution itself, and serves to make more difficult encroachment by the central power upon the liberties of the individual.

It would undoubtedly be dangerous to undermine this valuable safeguard. Generations of political writers have given praise to the flexibility and efficiency of the British Constitution, by contrast with the more rigid American structure, but I believe this opinion is now undergoing a change. Lovers of liberty see weakness in the elasticities and informalities of the British system, and a bulwark of defense in the written Constitution of the United States. Nonetheless, Americans may feel the need for a greater coördination of policy, at least for the specific purpose of concerting measures to combat trade depression. The weaknesses in the American anti-depression policies of the thirties are now generally well understood. The British administrative system already has more internal cohesion, with its strong Cabinet, its Treasury which occupies a strategic position among the Ministries, a useful Cabinet Secretariat, and good interdepartmental committee work.


I give, merely for example, a plan for securing the kind of coöperation which I have in mind. Congress, when passing the Bretton Woods Act, set up a National Advisory Council on Monetary and Financial Problems, to watch the policy of the international agencies in relation to American policy. This body is composed of the Secretary of the Treasury, as chairman, the Secretaries of State and Commerce, the Chairman of the Board of Governors of the Federal Reserve System and the Chairman of the Board of Directors of the Export-Import Bank. It has established a working Staff Committee and Secretariat composed of officials of the agencies represented on it and of the Securities and Exchange Commission, and it may be relied on to have full information on current United States problems and policies. The British should set up a similar body, and these two bodies should have frequent, say monthly, joint meetings. There should be mutual consultation and revelation of plans, with the same kind of intimacy that existed at the Combined Chiefs of Staff meetings. The problem of combatting depression is not unlike that of combatting an "enemy:" there are frequent surprises and changes in the situation, and quick adaptation is needed. Such a body should be attended by Dominion representatives also, sharing the same intimacy.

It ought to be possible to set up this machinery without meeting too serious legislative problems. The purpose of the joint effort would be to find solutions for economic difficulties, within the field of what is "politically possible" in each democracy. But the combined group would be charged with the duty of pushing the discussion to a point at which all were satisfied that plans were adequate to the situation and that the two nations, by their joint and several policies, could effectively prevent depression from gathering force within their own borders.

This by itself would not be enough to meet the threat of worldwide economic depression. Some Anglo-American agency would be required. Surveying the scope of existing agencies, one finds two notable gaps. There is no international Central Bank with powers of "credit creation," and, despite abortive discussions, there is no master plan for dealing with the commodity problem. An Anglo-American Central Bank need not poach upon the ground of the International Monetary Fund; indeed, it might make it easier for the Fund to carry out its tasks effectively. The Fund has duties somewhat different from those of a Central Bank; its primary concern is with the equilibrium or disequilibrium in the balances of payments of various countries, with the maintenance of exchange parities or their orderly adjustment, and with the rules whereby the convertibility of currencies is assured or, when need be, modified. Above all, it should preserve the balance between creditor and debtor countries by constraining the creditor countries to play their part in any needful adjustment, through the operation of the scarce currency clause. Owing to the difficulties of the transition period, the Fund has not begun to function as it normally will; it has had to adapt itself to difficult times. If more orderly international relations are achieved, it will have most important tasks to perform.

The essential features of a Central Bank proper are: 1, that it carries assets and liabilities many times as great as the subscribed capital; and 2, that it can vary the size of its total assets from time to time in the pursuit of its own policy of stabilizing business conditions. The International Monetary Fund has neither of these features. Whether there was a genuine "credit creating" power in the clearing union as originally drafted by the late Lord Keynes may be disputed. Be that as it may, it would have been easy to graft upon his institution, as and when experience showed the need, a credit-creating power. But the constitution of the International Monetary Fund, which is in some ways the converse of that of a Central Bank, seems to preclude the possibility of credit creation, without a change so radical as to involve rebuilding it afresh. It cannot expand its aggregate assets at will, to suit the phrase of the trade cycle. Its constricted shape is probably due to the American fear that any money which the United States might have on deposit there would be in the nature of a "handout" to needy countries, rather than an excellent and valued asset. This point of view may still obtain. Yet, so long as it does, it is impossible to create a genuine international Central Bank or realize all the benefits that might flow therefrom.

It would seem the wiser course, therefore, to maintain the International Monetary Fund as it is (though, we may hope, with enlarged resources), in order that it may play a more active and important part when conditions are normal, and to set up alongside of it a central banking agency, the primary purpose of which would be to expand and contract credit as occasion required. Yet, once again, we must note that this would be impossible if the Americans continued to regard a deposit in the Central Bank as a "handout." This is one of the most important reasons why it seems needful to have a joint Anglo-American institution. Might not Americans regard their holdings in an institution jointly controlled by the two Powers as valuable assets? All turns on this.

The basis of operation of the agency would be that the Federal Reserve Banks and the Bank of England would treat deposits in it as cash. It would thus stand in precisely the same relation to these two institutions as they bear to the member banks of their own countries. Any other national Central Bank would be free, if it wished, to hold deposits there. I postulate that the Bank would expand its assets during recessions and contract them during periods of revival. By itself it could not deal with the "stagnation" problem; that can be solved only by the direct action of national governments. But there would be close coördination between the policy of the agency and the employment policies of the United States and Great Britain.

The agency would operate in sterling and dollars. What means should it use to expand and contract credit? It could and should buy and sell gold, but gold holdings are now too concentrated for such operations to have ramifying effects. In modern times Central Banks operate mainly through the purchase and sale of government securities, but in the case of an international bank this would raise complicated problems. If the Central Bank wished to have widely dispersed holdings, its portfolio would contain paper of doubtful value, and this would bring us back to the American idea of a "handout." Moreover, the various nations would themselves intensely dislike an institution which set out to hold large quantities of their several securities and, from time to time, to sell large quantities of them in such markets as it could find. This was indeed a bone of contention in the original discussions about the International Monetary Fund and was an important reason why its powers were restricted. The phobia in this matter was mainly on the British side.

What is required is that the Bank should be able to buy and sell, over a wide area, assets which are not earmarked as specifically national in character. Gold is ideal for this purpose, but gold is not enough. Then why should the Central Bank not buy and sell standard commodities other than gold? These would provide amply sufficient media for expanding and contracting credit. At the same time, it is widely agreed that the commodity problem must be tackled internationally. I assume that the proposed Bank would establish a wide margin between buying and selling prices, within which private trade could flourish. It would aim at ironing out oscillations, while ensuring a steady downward (or upward) movement of prices in accordance with fundamental conditions of supply and demand. It would take no cognizance of restriction schemes. The individuals of all nations would be free to buy from it and sell to it.

It should be emphasized that such a plan would not constitute the sum total of Anglo-American coöperation to prevent depression. This activity would be ancillary to their domestic plans, which we assume to be closely concerted. For Americans the agency would have the advantage of taking the agricultural support price policy off the shoulders of taxpayers, save to the extent that they were unwilling to see domestic agricultural prices conform in the long run to the world trend. It would relieve the taxpayers of the heavy burden that must come to them, if the domestic support price policy has to be carried out through a severe world depression. What Americans and British would be asked to contribute would be: 1, a moderate capital for the agency; and 2, the excess of storage costs, if any, over the profits on turnover. The latter would be at all severe only if there were a long-continued downward trend in the prices of all or of the majority of the commodities dealt in.


There remains to consider the question whether this agency should compete in the field marked out for the International Bank for Reconstruction and Development. All depends on how the International Bank evolves. The correct timing of development projects should play some part in the conquest of the trade cycle. The Charter of the International Bank contains no reference to the duty to provide such timing, but there is no reason why it should not do so. If its resources could be enlarged and its policy geared to the objective of ironing out the trade cycle, the Anglo-American agency could leave this field entirely to the International Bank. That institution exists, and duplication is undesirable, always provided that American investors are prepared to contribute sufficient funds to it. It is to be hoped that the British will also soon be in a position to make their own financial contribution to the work of the International Bank. For Americans and British to tend to concentrate upon separate fields of investment may be undesirable; some intermingling of plans and responsibilities is needed, and this might be effectuated either through the International Bank or through the Anglo-American agency.

At present these two Great Powers pursue unrelated and divergent policies, and I have attempted to illustrate only certain possibilities of coöperation. Who can doubt that there would be an immense revival of hope and enterprise throughout the non-totalitarian world, if the two Powers were known to be working closely together? Soon the drama of the trade depression will begin to unfold. There will be new strains and stresses, new forms of restriction and new threats to the very existence of free enterprise. Surely it is evident that this will call for a pooling of all there is of economic intelligence, resourcefulness and planning capacity in these two Great Powers. But we should not wait for the troubles to come. Britain has still very difficult postwar problems before her, connected with her "sterling balances" and the question of convertibility. She should take the United States fully into her confidence in regard to these matters. Joint consultation about them might be a first step to more far-reaching economic coöperation.

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  • ROY HARROD, of Christ Church, Oxford; University Lecturer in Economics since 1946; Joint Editor of the Economic Journal; author of "Are These Hardships Necessary?" and other works
  • More By Roy Harrod