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THE certainty that the Marshall Plan will not in itself overcome the "dollar problem" of the world as a whole by 1952 has produced a number of proposals for supplementary action. They include plans for funding Britain's excess sterling balances, suggestions for various domestic measures which deficit countries should take, and proposals seeking to induce the United States to export capital on the required scale. As Professor Williams has pointed out, internal measures by themselves will not be enough to correct the disequilibrium.[i] Moreover, there is little chance of large-scale private American investment taking place in Europe or other deficit countries, and any plan to export capital and technical skill to underdeveloped countries is at best a long-term undertaking. It is the purpose of this article to suggest that there is another and more realistic method of invoking American capital exports on a large scale. In this view, the key to the problem is to be found in investment in the Commonwealth countries, and involves a joint approach by these countries to the United States Government to obtain large-scale dollar loans which will be used to finance the capital imports necessary for their development as dollar earners.
Overseas sterling countries are responsible in a large degree for the magnitude of the dollar problem.[ii] Whereas before the war a United Kingdom deficit with the United States was covered by a surplus with other sterling countries which themselves had a surplus with the United States, in 1948 and the first part of 1949 overseas sterling countries were responsible for two-thirds of the total sterling area deficit on current account with the United States. The United Kingdom has made some progress in meeting its dollar deficit, while in the rest of the sterling area the deficit has increased since 1938. Before the war the gold production of the sterling area was $550,000,000, or more than the total dollar deficit of $525,000,000, so that by offsetting this production against the deficit a dollar balance was achieved. This is not the case now. Not only has the dollar deficit of the sterling area other than the United Kingdom increased greatly; gold production has also declined, the comparable figure for 1948 being less than $500,000,000, i.e. less than half the total deficit.
A more detailed study of what has happened in Australia will make the situation even clearer. In 1936-1937, Australia had a dollar deficit of $36,000,000. Ten years later the figure had risen to $54,000,000 and in 1947-1948 it reached a peak of $164,000,000. The next year the deficit was more than halved, falling to $72,000,000; the 1949-1950 figure is not yet available but will probably not be below this level. All studies show that for the moment the problem is intractable, despite severe restrictions on imports from the dollar area. The total Australian deficit for the four postwar years ending 1949-1950 will be not less than $350,000,000, and it may be as high as $400,000,000, or one-fifth of the last-line reserve that the United Kingdom regards as necessary for maintaining sterling as a viable currency.
Since 1947 the United States has given or loaned between $4 billion and $5 billion a year to the countries of Western Europe; but the Council of the O.E.E.C. has reported that the countries receiving aid expect to have a current dollar deficit of $2 billion in 1951-1952. It is clear, therefore, that the United States must continue to export capital after 1952, and that this means investment abroad by the United States along lines which are more or less traditional for a creditor country. The questions then arise, first, to which countries this investment should be directed, and second, to what extent private foreign investment can be expected to provide an outlet for American funds.
On the first point the answer can be only that if United States investment is to be made along commercial lines, it will need to be reoriented away from Western Europe and toward countries possessing resources which, if developed, will make the economies of those countries somewhat complementary to that of the United States. The seriousness of the dollar crisis should not prevent us from realizing that in the long term it is likely to disappear, as increasing production and diminishing resources cause the United States to import more and more foodstuffs and raw materials. The non-European world is obviously in a better position to supply these than is Europe. This is not to say, of course, that Western Europe will not require continued assistance in some form or another after 1952, or even that, given the end of the chronic disequilibrium in the balance of international payments, Western Europe's trade with the United States will not continue to expand. It merely means that Europe does not provide the best opportunities for American investment on a commercial basis.
Having said this much in answer to our first question, we have also partly answered our second. Private United States foreign investment has been directed traditionally toward manufacturing industries and public utilities. Although there has been a marked increase in petroleum investments since the end of the war, it is certain that direct private investment outlets will be insufficient in these and other fields permanently to close the dollar gap. If the principal hope of restoring long-term equilibrium lies in the development of primary resources, then private investment must be relegated to a relatively minor rôle. This does not mean that continued efforts should not be made to expand private investment. Any American capital exports will provide a welcome palliative to the world's ills, and steps already taken by the United States Government to encourage such investment should be welcomed.
The conclusion we have reached, therefore, is that American capital exports should be directed more to non-European countries, and that they should largely take the form of loans of a commercial type, negotiated either in the United States capital market or directly between governments.
Because the dollar problem is also the sterling problem in reverse, it follows that in the search for a solution to international economic disequilibrium, the most fruitful avenue for American investment might be in sterling countries outside the United Kingdom. It so happens that the most vigorous members of the sterling area are the traditional British Dominions--Australia, New Zealand and South Africa--and the Indian group with its vast problems of industrial and agricultural modernization. Although she is not a member of the sterling area, Canada should also be linked with these countries because of her common traditions and common problems. All of these countries are members of the British Commonwealth, though with differing degrees of attachment, and all have political systems similar to that of the United States. As an outlet for investment, moreover, they do not present any of the awkward strategic problems of Western Europe, and there is a likelihood that they would be attracted by a common interest in a new plan of American aid.
Such a plan would entail a common approach by the Commonwealth countries to the United States, though each would be responsible for its own loan arrangement. It is not possible in this article to indicate in detail the scope of American investment along these lines, but Australia may be taken as representative of one section of the group, namely the older British Dominions which have already undergone a considerable degree of industrial development, while India may be regarded as representative of the less developed countries in the group. Australia has a rapid population growth, many important and profitable projects of economic development (which can be undertaken only with the help of large-scale capital imports), a vital interest in strengthening sterling, and a capacity for becoming an independent dollar earner in the near future if her development is fostered now.
The suggested Commonwealth loans obviously might be linked with the assistance which the United States proposes to render undeveloped countries such as India in accordance with President Truman's Point Four, but we shall return to this later. For the moment it is enough if we indicate the wide scope which exists for American investment in the British Commonwealth, and the need for coördinated attack on the problem of organizing a flow of American capital into these countries. It should be noted that the problem is quite different from that of European recovery, and that a different and much more flexible organization is required to meet it. The proposals I have outlined are intended to ensure a minimum burden of administration; since the loans would be organized on a commercial basis, there would not be the need for the vast amount of programming, screening, legislating and appropriating that has to take place before the E.C.A. allocations can be made.
Australia, for example, might need to borrow from $200,000,000 to $400,000,000 annually. This would involve an annual interest charge of $50,000,000 to $100,000,000 in a fairly short space of time. How could this be met?
In the immediate future it should be possible to increase Australian dollar earnings by exporting commodities such as meat, for which a market may exist in America that has not been exploited because of supply difficulties. The export of 150,000,000 pounds of beef to the United States, which would represent only about one-eighth of 1948-1949 production, would in itself provide about $50,000,000. The proceeds of the proposed loans would be used to step up general productivity in Australia, moreover, and the increase in output resulting from this may be expected to augment Australian dollar earnings. Australia has a good record in fulfilling her debt obligations, and her external debt has been reduced by £100,000,000 (Australian) in the last ten years. India's debt record is also good, and during World War II she paid off her British debt of £350,000,000 while building up sterling balances of £600,000,000. Apart from newly negotiated Bank loans, India has no long-term foreign debt.
But the principal reason for assuming that Commonwealth countries could meet the obligations of a dollar loan lies in the long-term development which might be expected to take place in the American economy. Present-day forecasts of the willingness of the United States to import are unnecessarily gloomy. The present rate of productivity in the United States is more than 2 percent per annum. If this is maintained, the American national income will double in little more than 30 years, and long before this stage is reached America will be growing short of the raw materials necessary to feed her growing production. The present dependence of the United States on certain raw materials will thus be greatly increased, and her volume of imports should grow even more rapidly than her general rate of economic development. American exports of food and raw materials will also decline relatively to total output, so that her export surplus should eventually be converted to the import surplus required of a creditor country if international equilibrium is to become a reality. The British Commonwealth should therefore have little difficulty in finding the dollars necessary to meet interest charges on the debt, and it would be unreasonable to use possible difficulties in this regard as an excuse for inaction.
One of the principal advantages of the scheme I have outlined lies in the fact that it would strengthen sterling. Instead of leaving the United Kingdom to undertake all the risks of dollar borrowing, the rest of the sterling area would undertake responsibilities which would result in a considerable easing of Britain's burden. Viability of sterling as an international currency would be restored to the extent that overseas sterling countries could build up a dollar surplus or reduce their dollar deficit.
The extent to which some countries have drawn on their accumulated sterling balance has been one of the United Kingdom's major difficulties during the past three years. These drawings have involved the United Kingdom in a large volume of unrequited exports; in 1947, for example, Britain's deficit on current account was $2.5 billion, while the reduction in sterling balances and capital exports, which involved either unrequited exports or a drain of gold and dollar balances, amounted to some $1.5 billion. In 1947, 1948 and the first half of 1949, some 1.13 billion pounds have been drawn from sterling sources in these ways. This has aggravated Britain's problems while indirectly shifting the task of repaying the debts, through E.C.A., to the United States. To the extent that the proposed loans open up an alternative source of supply to the Commonwealth countries desiring to undertake programs of development so that they no longer need to draw on sterling balances, both Britain and the United States will be better off.
Apart from helping solve the dollar shortage, such a scheme provides a pattern for American investment closer to the traditional pattern than are recent forms of American foreign financial assistance. Such an approach would enable the United States to embark on its next venture in external financial assistance on terms much more favorable to America than those of Marshall Aid, or any form of foreign aid extended by the United States since the end of the war. Of $23.3 billion provided by the United States in the postwar period, some $13.3 billion have been in the form of grants and the rest has comprised credits of various kinds. At no time will interest payments on this vast sum exceed $200,000,000 a year. Compare with this the possible return of $30,000,000 to $40,000,000 a year from loans of, say, $1 billion per annum to Commonwealth countries; each year's loans would be less than 4 percent of total postwar American aid, but would return up to 20 percent of the interest receivable from that aid. (This assumes, moreover, that America's present debtors can meet their obligations, and in existing circumstances such an assumption must be regarded with some skepticism.)
The approach would offer other advantages to the United States besides the purely financial one. America would cement her economic leadership in the western world and would find an outlet for her rapidly growing productive capacity. Direct benefit to the United States economy would follow the improved status of sterling and the indirect strengthening of Western Europe. The United States would also be asserting effective leadership in South and Southeast Asia, and by promoting economic development there would help stem the tide of Communism in the East. As we have noted, such a plan would properly be linked with the Point Four program. The idea of a common approach by British Commonwealth countries to the United States to negotiate development loans on a government-to-government basis is also in harmony with the "Colombo Plan" for British Commonwealth assistance to Southeast Asia, put forward by the Australian Minister for External Affairs at the British Commonwealth Conference in January 1950.
Perhaps some sort of joint secretariat might be established which could act as a clearing house through which both American and British Commonwealth aid to Southeast Asia could pass. In extending such aid, as also indeed in the broader scheme outlined above, the United States and the British Commonwealth would be acting as equal partners. Not until the Commonwealth countries are provided with dollar loans along some such lines as I have suggested, however, can they throw their full weight into the task of raising living standards in this "have-not" area of the globe, so important strategically to the United States and the countries of the British Commonwealth. No doubt the United States would continue to supply grants direct to eastern countries; but the proposal sketched here, I think, offers more scope for the development of long-term investment of the more or less traditional kind than any form of foreign aid devised by the United States since the war. It would call to the assistance of the United States a suitable partner in developing international investment and in implementing a policy designed to raise living standards in Southeast Asia. And finally, it would impart strength to sterling perhaps more effectively than would direct aid to the United Kingdom, for it would provide for a more rapid development of the resources of the sterling area and would share responsibility with the vigorous members of that group.
[i] John H. Williams, "The British Crisis: A Problem in Economic Statesmanship," Foreign Affairs, October 1949.
[ii] Cf. United Nations Economic Bulletin for Europe, Second Quarter 1949.