An effective multilateral trade and payments system covering a wide area has long been one of the objectives of American foreign economic policy. We evidenced this desire at Bretton Woods, and later through the major participation we assumed in the International Bank for Reconstruction and Development and the International Monetary Fund. In connection with the British loan we emphasized the importance we attached to a return to sterling-dollar convertibility. Under the terms of the Reciprocal Trade Agreements Acts we have negotiated agreements affording foreign exporters easier access to the American market. But beyond all this, during the postwar period from July 1, 1945, through September 30, 1952, we extended net foreign aid in an amount of $36,000,000,000, a considerable portion of which was made available on the theory and in the hope that it would bridge a transition period from wartime destruction and disorganization to the establishment of a new equilibrium in the international balance of payments.

In making this vast expenditure of funds we wished to accomplish collateral purposes of great urgency along the way. And it should be noted in passing that in these we have been notably successful. Surely the $3,443,000,000 allotted to UNRRA, post-UNRRA and interim aid was highly effective in fending off the starvation that threatened many areas and peoples in the immediate postwar period; and the $12,634,000,000 spent on European recovery through the Economic Coöperation Administration and its successor, the Mutual Security Agency, has enormously facilitated the restoration of the war-torn economies of Western Europe. By these enlightened measures chaos was averted in much of the free world, and the advance of Communism in Western Europe was brought to a halt.

Yet in spite of these accomplishments, the problem presented by the disequilibrium in the international balance of payments remains unsolved--a circumstance which profoundly influenced the deliberations of the recent Commonwealth Economic Conference in London. At the conclusion of this meeting, on December 11, 1952, a communiqué was issued setting forth one of its major objectives in terms which echo our own desires:

The conference therefore agreed to seek the coöperation of other countries in a plan to create the conditions for expanding world production and trade. The aim is to secure international agreement on the adoption of policies, by creditor and debtor countries, which will restore balance in the world economy on the lines of "Trade not Aid" and will, by progressive stages and within reasonable time, create an effective multilateral trade and payments system covering the widest possible area.

These and related questions evidently are to be discussed with us soon by our British friends. It therefore seems imperative that we determine without delay what our future course of action should be.

Why, we must ask ourselves, are we, in spite of all our efforts, still living in a world characterized by inconvertible currencies and bilateral trading arrangements? Why do we see on so many sides an ever-growing network of restrictions upon the free movement of goods (to say nothing of persons) across national frontiers? Why is it that the International Bank for Reconstruction and Development functions in low gear while the International Monetary Fund has become almost a moribund institution? Perhaps in part at least the reason is that in our postwar economic foreign policy we have been guided by a nostalgic desire to return to the patterns of the prewar world and by an unwillingness to accept the unpalatable thought that these patterns are to a great extent unsuited to the world as it exists today.

The most striking single fact with which we have to contend is what Marshal Stalin, in his much-discussed pamphlet, "Economic Problems of Socialism in the U.S.S.R.," described as "the disintegration of the single all-embracing world market" which, he explained, "has had the effect of further deepening the general crisis of the world capitalist system." It may seem strange to turn to Marshal Stalin as an authority, or to look to him for guidance. Yet we should draw from his fulmination lessons in the economic domain as far-reaching as those that we drew in the military domain from the Communist aggression in Korea.

It is impossible to say whether Stalin by intimating that the Soviet Union need only await patiently the inevitable economic collapse of the non-Soviet world was attempting to beguile us into a false sense of military security. Nor need we accept his thesis that because of "the struggle of the capitalist countries for markets and their desire to crush their competitors . . ." the law which decrees "the inevitability of wars between capitalist countries remains in force." This thesis, which we categorically reject, is of course highly agreeable to the masters of the U.S.S.R.

But we should not dismiss lightly Marshal Stalin's penetrating analysis of the difficulties we face. From the "disintegration of the single all-embracing world market," he concluded "that the sphere of exploitation of the world's resources by the major capitalist countries (U.S.A., Britain, France) will not expand, but contract; that their opportunities for sale in the world market will deteriorate, and that their industries will be operating more and more below capacity. That, in fact, is what is meant by the deepening of the general crisis of the world capitalist system in connection with the disintegration of the world market."

"Outwardly," according to Marshal Stalin, "everything would seem to be 'going well': the U.S.A. has put Western Europe, Japan and other capitalist countries on rations; Germany (Western), Britain, France, Italy and Japan have fallen into the clutches of the U.S.A. and are meekly obeying its commands. But it would be mistaken to think that things can continue to 'go well' for 'all eternity,' that these countries will tolerate the domination and oppression of the United States endlessly, that they will not endeavor to tear loose from American bondage and take the path of independent development." And somewhat later: "Would it not be truer to say that capitalist Britain, and, after her, capitalist France, will be compelled in the end to break from the embrace of the U.S.A. and enter into conflict with it in order to secure an independent position, and, of course, high profits? . . . What guarantee is there, then, that Germany and Japan will not rise to their feet again, will not attempt to break out of American bondage and live their own independent lives? I think there is no such guarantee."

Much of Stalin's argument had been anticipated in a number of short pamphlets issued in preparation for the Moscow Economic Conference. In these, emphasis was placed upon the breakdown of East-West trade, for which, needless to say, the United States is held solely responsible. The point was underscored that a healthy economic existence for Germany in particular and for much of Western Europe as well was dependent upon the reopening of trade with the East. In like manner, for Japan it was dependent upon the reopening of trade with the Chinese mainland. And this line of thought, harboring an uncomfortable element of truth, was slavishly followed in several of the speeches delivered at the recent meeting of the Communist Party in Moscow with a view to fomenting discord between us and the other nations of the non-Soviet world.

Few would agree in every particular with Stalin's gloomy prognosis. In the wake of wartime destruction and dislocation, the non-Soviet world has shown amazing resiliency. Instead of growing dissension there has been an increasing sense of solidarity among the free nations. We have had our differences, but these have been accompanied by no rancor, by no bitterness. A common peril has focused our energies upon an overriding objective.

Nevertheless, Marshal Stalin sounded a warning that we can ill afford to ignore. Apparently, he was supremely confident—and who is to say that we did not give him some warrant for this confidence?—that we will have neither the intelligence nor the imagination to develop a comprehensive program in the economic domain boldly calculated to ward off "the inevitable collapse." Because events have cast the United States in the unwanted rôle of leadership, it falls to us to demonstrate by our conduct in the years ahead that this confidence of his was misplaced. The grim fact that Western civilization is threatened as never before fastens upon us the responsibility of making the greatest possible contribution to its defense. We shall discharge this responsibility the more readily if we recognize that it will avail us little to have made the non-Soviet world militarily secure if we fail to make it economically secure as well.

The disintegration of the single all-embracing world market is something that we can do little about so long as the Iron Curtain remains. There is, however, another matter of vast importance with which, in conjunction with other nations of the non-Soviet world, we can deal, and we should prepare to do so without delay. This is the profound disequilibrium in the trading world, resulting from the changing economic geography of the twentieth century, and in particular from the impact of two world wars. It already arose to plague us in the inter-war period, but was obscured for a time by the armaments race of the late thirties and then by the outbreak and the immediate aftermath of the Second World War. There is every likelihood that before long it will reëmerge as the most troublesome single factor in the economy of the non-Soviet world--a disequilibrium now aggravated by the unnatural barriers separating the West from its Eastern markets and sources of supply.

This imbalance finds its most obvious expression in what has come to be called the "dollar gap." In the postwar period the United States has been willing to fill this gap from governmental or quasi-governmental sources. But this is a policy that in the nature of things is bound to encounter increasing domestic resistance. As this resistance develops, other countries, notably the United Kingdom and the other members of the Commonwealth, feel impelled to impose restrictions progressively on purchases within the United States, thus moving ever further away from the hoped-for restoration of a wide area of convertible currencies and multilateral trade.

In the maze of statistical material available it is difficult to determine precisely the net amount apt to be due the United States annually from the rest of the non-Soviet world on strictly merchandise, service and investment accounts. However, on the assumption that world trade and existing restrictions continue at about the present level, an estimate of $3,000,000,000 more or less should prove not wide of the mark.

In the immediate future, the financing of government operations abroad, largely military in nature, will go a long way toward easing the situation. Offshore purchases, stockpiling, the expenditure for the construction of bases and for the maintenance of our military establishment in foreign lands--all these will furnish the stream of international payments with a not inconsiderable amount of dollars. And this stream would be materially augmented had we the imagination to envisage the enormous stimulus to our whole program for the defense of Western Europe that would ensue from a generous recognition of the great financial burden now carried by the French in Indo-China.

But a half world whose accounts as a whole are thus precariously balanced is far removed from the vision of a wide area of expanding trade, increasing prosperity, convertibility and multilateralism which we must realize if the non-Soviet world is to be made secure against the danger of that economic disintegration which Marshal Stalin so pleasurably anticipated. Military expenditures in contemplation for the fiscal year 1953-54 should afford us at the very least a breathing spell within which to develop a program for the ultimate realization of this vision. The problem we face is how, once our military expenditures abroad decrease, the international accounts are to be balanced in such a manner as to hold forth the promise of a rising standard of living throughout the non-Soviet world. Having regard to the growing importance of exports in maintaining full employment at home, and to the necessitous nature of much of the demand for American goods abroad, we must ask ourselves: How can the dollar gap be closed on the basis of a high level of international trade?

Clearly, we alone cannot furnish the answer to this question. The task ahead demands a high degree of coördination of economic policies within the non-Soviet world. It calls for a coöperative endeavor in which each nation will make its maximum contribution to a common purpose. After the groundwork has been sufficiently prepared, it may well prove desirable to call an economic conference of representatives of the nations most vitally concerned in order to lay the foundations for such an endeavor. Precipitate ad hoc decisions to meet recurrent crises lead inevitably to disappointment. The time for such improvisations has passed.

The communiqué issued at the close of the Commonwealth Economic Conference offers striking evidence of a return to economic sanity. Three principles that we can readily accept were agreed upon as governing the approach to the whole range of subjects under discussion:

(a) Internal economic policies designed to curb inflation and rises in the cost of living should be steadily followed.

(b) Sound economic development should be encouraged with the object of increasing productive strength and competitive power, providing employment, and raising the standards of life.

(c) A multilateral trade and payment system should be extended over the widest possible area.

The Commonwealth nations are apparently willing to play their part, hoping that we may prove willing to play our part too.

We should do well to consider, therefore, the broad lines of the contribution we are called upon to make toward the establishment of a secure and viable economy on this side of the Iron Curtain. Stated quite simply, this would seem to require an express determination to see that dollars are made available to the stream of international payments from time to time in such amounts, in excess of military expenditures abroad, as may be necessary to balance the international accounts at a high level of trade.

Assuming this to be our express determination, how are we to implement it? It has been urged in many quarters that we should reduce our tariffs and simplify our customs procedures. Needless to say, in view of our position as a great creditor nation, it is highly desirable that we do both. Furthermore, it would be helpful if we could secure the repeal of the Buy America Act, and the reconsideration of legislation which requires that at least half of the shipments from the United States financed by the Mutual Security administration be carried in ships flying the American flag. The farther we proceed along these lines, the smaller will be the dollar gap that has to be closed by other means.

However, any realistic appraisal of domestic political possibilities would suggest that other means cannot safely be neglected. Unless trade in the non-Soviet world is to languish—unless we are to advance the realization of the Stalinist prophecy—we must be prepared to assure the flow of investment and risk capital from the United States in volume adequate to fill any remaining gap. Traditionally, this is the rôle that a great creditor nation is called upon to play. In the nineteenth century the international accounts were balanced by the free flow of private investment and risk capital from the creditor nations and, in particular, from Great Britain to the rest of the world. We are often reproached because, as our British friends say, we "do not behave like a creditor nation." Until we do, they assert, the development and expansion of the whole non-Soviet world will be hopelessly handicapped.

There is ample reason for accepting this fundamental thesis. While expenditures made abroad in connection with our defense effort may temporarily distort the picture, it seems safe to say that in the long run the international accounts are unlikely to be brought into balance on the basis of expanding trade unless investment and risk capital flows more freely from the United States to foreign lands than in the recent past. But there is little analogy between the position of Great Britain in the nineteenth century and our own position midway through the twentieth. In the first place, the hundred years from the end of the Napoleonic Wars to the outbreak of the First World War was a period of tranquillity. Secondly, during this period there were open to the creditor countries exceedingly attractive fields of profitable foreign investment—the United States, Canada and South America, to name but a few. Thirdly, this was a time when it was considered both good business and good morals to respect international obligations. And there were often ways of exerting pressure effectively on those who wilfully sought to evade their commitments. In these conditions, private capital moved across national boundaries freely in response to differences in interest rates and prospects of reward.

But how changed the situation is now! Instead of that tranquil world, we live in a world in turmoil. To us as the greatest creditor nation there are few fields of foreign investment as tempting as those which lay open to Great Britain in the nineteenth century. The vast oil reserves of the Middle East have attracted considerable direct investment on the part of our leading oil companies, and Canada today offers prospects of reward which have stimulated a capital flow across our northern frontier. But, in general, American private capital evidences a strong disposition to stay at home, finding the United States the most secure place for profitable employment. And, last but not least, partly as a result of the rise of an intensely nationalistic spirit in the more backward countries, neither considerations of good business nor of good morals have anything like the weight they had in an earlier period—as illustrated by the growing disposition to assert the sovereign right of nationalization, with the question of compensation left completely in the air. That this tendency which is so damaging to the cause of international investment has deep-rooted support was clearly demonstrated when on December 11 of last year the General Assembly's Economic and Financial Committee approved by a vote of 31-1 (the United States casting the only negative vote, with 19 countries abstaining) the resolution introduced by Uruguay affirming the practically unrestricted right of any country to nationalize private property. And the ability to enforce compliance with commitments willingly entered into has been undermined by the fear of playing into the hands of the Soviet propagandists who on the slightest pretext raise the bogey of capitalist imperialism.

In this atmosphere it is hardly to be expected that private capital will move from the United States to places where it is most needed year after year in requisite volume. The flow should tend to increase if a concerted effort to improve "the climate for foreign investment in friendly foreign countries" begins to produce results.[i] Meanwhile it might be stimulated through broadening and extending the nature of governmental guarantees of private investment, and through tax incentives provided in a variety of ways. "Accelerated depreciation" is a suggestive example. We have become accustomed to offering this inducement to American corporations who are asked in the national interest to embark upon construction programs which they would not undertake for purely corporate reasons. In a similar manner, "accelerated depreciation" might be offered as an inducement to corporations to make capital investments abroad deemed to be in the national interest.

Yet when everything else has been done that is politically feasible there is a strong possibility that government itself will for a time have to play a part in making an adequate supply of risk capital available. With so many variables in the equation, it would be rash to hazard a guess as to the amounts that may come into play. It can be safely asserted, however, that they will be trifling in comparison with the total sum of our annual military expenditures. And if through governmental action in this domain we succeed in concert with other nations in furthering our objectives of expanding trade and increasing prosperity, convertible exchanges and multilateralism throughout the non-Soviet world, the investment will have paid handsome dividends.

Once the validity of this line of reasoning is accepted, in what manner may government best discharge the obligation involved? Either the powers of the Export-Import Bank should be materially broadened or, and possibly preferably, the formation of an international development corporation should be given more serious consideration than it has had to date. Its primary purpose would be to provide funds for desirable development projects in the non-Soviet world which neither any existing agency nor private capital is prepared to finance.

Such projects vary greatly in character, and the forms of appropriate financing will be correspondingly varied. There will be instances such as the improvement of harbor facilities or the building of roads where the return on the investment can in all likelihood be secured only through the taxing authority and will depend in the last analysis upon the growing prosperity of the area that the projects are designed to promote. There will be other instances, such as power plants, where the return on the investment may be determined primarily by the degree of its success as a commercial enterprise.

On this account the international development corporation should have broad powers permitting it to make loans to governments and governmental agencies, or to corporate entities with or without governmental guarantees, and to make equity investments as well. Having regard to the sensibilities of the British and of the French and the relationships that exist between them and some of the undeveloped areas, no barriers should be placed in the way of dealing through them as intermediaries where the wisdom of such a course is clearly indicated. Prospective commitments must be viewed in the light of the over-all objective of American foreign economic policy, and the most appropriate form of financing must be determined by negotiation with the agencies—governmental, corporate or both—directly concerned. As the capital of the international development corporation may be furnished entirely (and in any event will be furnished principally) by our Government, its policies would of necessity be set by us.

Could such an organization function most effectively as a national or as an international entity? Should it be affiliated with or independent of the Bank for Reconstruction and Development? These are open questions that require thoughtful exploration. Variations of this general concept have recently been publicly advocated and discussed. They have encountered a generally unfavorable reaction from the business community. The idea should not on that account be prematurely abandoned. Sober second thought may lead to a more favorable response. For while the charge will be made that such an organization would involve "putting government into business with a vengeance" it would merely put government into business in fields which business itself was not prepared to enter. In certain instances, by furnishing equity capital it might provide a sound basis for senior financing through the medium of the Bank for Reconstruction and Development. Like our own R.F.C., it could, through the purchase of securities, nurse projects until such time as the investment market is prepared to take these commitments off its hands. In the meantime its funds would be employed, consistent with our determination to establish a viable economy in the non-Soviet world, in ventures that under favorable circumstances might not only result in getting our money back, but might even offer the possibility of a profit. For us this would be a novel prospect that should make the undertaking somewhat more palatable politically.

One should not minimize the difficulties confronting such an organization in the search for the useful employment of funds. The objective is to assist in the establishment of a viable economy in the non-Soviet world. It may be that on this account, while not losing sight of the further development of European productivity, emphasis should be placed in the first instance upon making available to the potential customers of European industry "untied" dollars, i.e. dollars which need not be spent in the United States, but may be spent by the recipient in the most favorable market. This means that attention should be focused on the backward and undeveloped areas where the demand for capital for desirable projects would at the outset be limited, and owing to the governmental, sociological and economic structure can only gradually be increased.[ii]

When the Bank and the Fund were formed, hope ran high that we were moving toward a peaceful world in which venture capital would once again freely seek employment across national boundaries. In such a world they could readily have performed their allotted functions. This hope faded in the light of the aggressive and intransigent attitude of the Soviet Union. As a result, the anticipated flow of venture capital failed to materialize and the Bank and the Fund were hopelessly handicapped. The international development corporation would furnish the missing link in the institutional chain. Its activities, supplementing whatever flow of capital may be stimulated by government guarantees and tax incentives, should fill the gap in the balance of international payments resulting from the present hesitancy of venture capital to seek employment abroad. Its task would become urgent as soon as a material decrease in our defense expenditures overseas could be clearly foreseen.

For the sake of emphasis it seems worth underscoring the warning to be drawn from Marshal Stalin's tract: It will avail us little to have made the non-Soviet world militarily secure if we fail to make it economically secure as well. To accomplish this purpose:

(1) There must be a large measure of coördination of economic policies within the non-Soviet world. Once the groundwork has been laid, this might be sought through an economic conference of the nations principally concerned.

(2) The contribution of other nations to this common endeavor should be primarily along the lines laid down in the three principles adopted at the Commonwealth Economic Conference.

(3) Our own contribution in the first instance should take the form of an express determination to make dollars available to the stream of international payments from time to time in such amounts as may be necessary to balance the international accounts at a high level of trade.

(4) This determination should then be implemented by appropriate measures, among which should be included, to the extent politically practicable, a reduction in tariff barriers, a simplification of customs procedures, the repeal of the Buy America Act, and the reconsideration of legislation restricting cargoes to American bottoms.

(5) Last of all, steps should be adopted to stimulate the flow of private risk capital, and provision should be made through some such instrumentality as an international development corporation to facilitate to whatever extent necessary an added flow of risk capital to be furnished from governmental sources.

This program covers a complex of measures which taken in their entirety will strike some thoughtful persons as far too drastic in nature. There are those who believe that at the root of the world disequilibrium lies the disposition of certain nations to live beyond their means. If we were only to make access to dollars more difficult, they say, and thus force these recalcitrants to tighten their belts, all would be well. Admittedly, there are excesses that should be curbed. But to make the dollar shortage an instrument of policy would inevitably produce a world of shrinking international trade and growing restrictions, harmful to us and involving for some of our closest associates an intolerable lowering of the standard of living with social consequences too dangerous to be contemplated with equanimity.

In an address delivered at Fordham University, October 29, 1952, the dilemma facing the non-Soviet world was brilliantly summarized by Charles Malik, the Minister of Lebanon in the United States, in the following words:

The economic difficulties of the Western community must be honestly faced. Economic aid by this country is only a temporary expedient; it cannot be the permanent solution. The more than 200,000,000 industrialized people of Western Europe can only live and prosper if trade barriers among them are removed, if the United States and Canada lower their tariffs against the products of their skills, and if they apply their techniques to great schemes of development wherever they can. Which is more important--that only one part of the Western community should prosper even if that should endanger the whole, or that the whole should more or less uniformily prosper and therefore stand firm against the adversary, even if that should mean a relative curbing of desire on the part of some? Here again is a test of how much the West constitutes a real organic community in face of the common present danger, and therefore of whether it can develop the conscious human will to invalidate the forebodings of the Marxists.

To invalidate these forebodings drastic remedies are required. The establishment of a sterling dollar exchange stabilization fund or the much-discussed increase in the price of gold would provide no long-range solution. Inconvertibility is but a symptom of the underlying disease. To attack the symptom, leaving the disease untouched, will surely prove disappointing. And as far as tampering with the price of gold is concerned, this is a nostrum the use of which should be viewed with a high degree of skepticism and should be considered, if at all, only as the tag end of an over-all program designed to establish a new equilibrium.

Half measures will serve no useful purpose. Enlightened self-interest demands of us a more comprehensive approach to the economic problem than we have hitherto been prepared to follow. Our determination to see that there are dollars available to balance the international accounts at a high level of trade would have a tonic effect throughout the non-Soviet world. With the specter of a chronic dollar shortage removed, confidence would revive. Instrumentalities such as the Bank and the Fund, with possibly some minor modifications of policy or statute in the latter, would take on new life. Trade restrictions would begin to give way before the coming of a new era of multilateralism. The convertibility of currencies would become an attainable aim of policy.

Such are the results likely to flow from a full recognition and acceptance of our responsibility as a great creditor nation. To deal with a situation so infinitely complicated, any program must of necessity remain highly flexible in matters of detail. Yet there seems ample justification for believing that the adoption of policies consistent in general with the line of conduct here advocated may offer the best chance of meeting successfully the challenge implicit in the economic analysis of Marshal Stalin.

[i] The language quoted is from the interesting report, "Program for Increasing Private Investment in Foreign Countries," prepared for the Government by August Maffry.

[ii] A stimulating study on the subject of our Foreign Development Program has been prepared under the auspices of the Mutual Security Agency.

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  • FRANK ALTSCHUL, Chairman, General American Investors Company; member of the Yale Council; Vice-President and Secretary, Council on Foreign Relations; author of "Let No Wave Engulf Us"
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