Crisis of Command
America’s Broken Civil-Military Relationship Imperils National Security
THE completion of the first hundred days of life on the New Frontier provides an occasion for an appraisal of the program of the new Administration in the area of economic foreign policy. These hundred days were an exceptionally difficult period for formulating long-term policy. The cold war had entered a state of acute tension, and earlier hopes that there were opportunities for fruitful negotiation, mutual accommodation, mutual understanding with Russia now seem utopian. The American economy was undergoing a recession separated from a preceding recession by a disappointingly brief period of moderate prosperity. Aside from the recession, the long-term aggregate and per capita economic growth rate was low, in fact one of the lowest ones in the world, and yet the American economy was not free from the threat of at least creeping inflation and of persistent unemployment; something structurally wrong clearly was operative, but there was no agreement in diagnosis. Europe, though flourishing economically as never before, was involved in a dispute between the Six and the Seven which threatened to split it into two trade areas manœuvring against each other and united only in making access to the European market for overseas products more difficult than before. The United States, on the other hand, was committed to bestowing blessings on any preferential tariff arrangements provided they could present claims, even of doubtful legitimacy, to the labels of "customs union," "common market" or "free trade area"--labels which in the best of circumstances designate mixtures of trade liberalization and of aggravated protectionism in uncertain and unascertainable proportions.
Our federally mismanaged agriculture was in its chronic state of growing surpluses, growing reliance on Treasury subsidies, growing dissatisfaction with its results on the part of the farmers themselves, growing resentment by agricultural-exporting countries against our massive export-dumping in the world market; only the patient consumers and taxpayers remained silent and without benefit of effective and dedicated spokesmen. An old, respected and politically influential industry, the textile industry, was in real or simulated distress, and was campaigning vigorously and with considerable evidence of eventual success for quantitative restrictions on imports of foreign textiles as the most available remedy for its difficulties; a host of other American import-competing industries were waiting impatiently for the adoption of quantitative import restrictions on textiles and the establishment thereby of an important precedent for similar action on their behalf.
In much of the free world, and especially in the underdeveloped countries, the trend of action, and even more so the trend of opinion, seemed to be moving strongly in favor of government enterprise as against the free market. Even in countries where domestic private enterprise was strongly entrenched, there was hostility to foreign, largely American, private enterprise extending--or even maintaining--its activities in their territories, and this hostility was manifested by nationalists both of the right and the left. Added to all this was a new constraint in the formulation of American policy: the necessity of taking account of the impact of any proposed measure on the American balance of payments. Where this new limitation on choice of alternatives in policy-making pinched most was in the brake it applied to resort to government spending, the most readily available of palliatives for many domestic economic ills and, in recent decades, the most lavishly used tool of American foreign policy.
This is a formidable combination of adverse circumstances and of problems for a new President to have to face. Fortunately for the country, and for the world, President Kennedy possesses in abundance the qualities needed for coping successfully with such a situation. He has drive, energy, stamina, intellectual agility, the capacity to use advice with discrimination, the courage to make difficult decisions and to make them promptly, political finesse, style in speech and bearing. Since taking office, he has demonstrated most of these qualities in the area of formulation of economic foreign policy, which is the only concern here. On the whole, his record to date in this area, taking all relevant circumstances into consideration, seems excellent to me. I shall argue, nevertheless, that he has made some mistakes of consequence. I attribute this not to defects of judgment or insight, but to flaws in the pattern of organization of the top-level decision-making process which he has adopted.
In the first place, these past hundred days have been a crisis-ridden period, and a President newly taking office has also a mass of detailed decisions to make which may be routine in character and individually of minor importance but nevertheless must receive immediate attention. The range of his activities since he took office makes evident that in addition to handling the critical problems and the detail which could not be deferred the President has also given considerable attention to matters which are non-essential, or could have been deferred without cost, or could have been delegated to the established agencies for handling. Since not even his time and energy are infinite, this may have resulted in some major issues getting less of his attention than they otherwise would. It is possible also that by diffusing the impact of his personality and of the power and prestige of his office over so extraordinarily wide a range of activity and of issues he has weakened his power of persuasion over Congress and the people on the particular issues of major importance.
Secondly, newspaper accounts give the impression that the President does not rely heavily upon Cabinet sessions and on continuing interdepartmental committees for the development of policy positions, but depends mainly for advice and information on his White House staff and outside experts, on individual heads of agencies and on ad hoc committees of selected membership. It is wise procedure for the President to use the brains, the knowledge and the experience of high-I.Q. men drawn for a term of years or ad hoc from the ivy-mantled towers of Academia, from the learned professions and from business and labor. There is even a stage--a late stage--in the decision-communicating process where the professional speech-writer, if kept under close supervision, can do more good than harm. Judicious selection of outside advisers can bring into the decision-making process ideas, skills, imagination, insights and enthusiasms which the routine processes of the bureaucratic machine cannot be relied upon to generate in adequate quantities. There is, nevertheless, in the personnel of the established agencies, and in their filing cabinets, a store of knowledge, information, historical perspective, which it is dangerous to neglect when important decisions are being hammered out.
I would regard it as a sound precept that wherever time permits no important decision on an issue which has many ramifications and a historical background should be decided without utilization of a staff-paper, prepared for and discussed and revised by a standing inter-agency committee in which are represented all the agencies which can contribute information with respect to the history of the issue, the interests involved, possible side-effects and interrelations with other issues.
Despite the limited range of opportunity I have had over the years to observe at close hand the process of policy-formulation in Washington, I have seen a number of instances where a key factor has received consideration only because some civil servant, not always a high-ranking one, was given the opportunity, at some stage of the process, to call attention to it. I know of at least two major decisions reached without comprehensive enough consultation of the regular departmental organizations which would have led to major disasters for our country if extraneous factors had not come to our rescue.
One of these decisions was the instruction paper given to General Eisenhower in September 1944 (J.C.S. 1067), which would have required the American occupation agencies in Germany to press for the near-pauperization of Germany for the indefinite future. This paper was the product of a combination of fanatics from the Treasury Department and of generals. The State Department, which should have had the major role, was inadequately prepared, was incredibly blind to its routine responsibilities and allowed itself without a struggle to be, to all intents and purposes, merely a silent observer of the decision-making process. It was historically sophisticated British civil servants, and an eventual realization that a hostile Russia, with an insatiable appetite for reparations and an unlimited capacity to absorb them into its commodity-starved economy, would be the only beneficiary, which brought us in the nick of time partially to our senses.
The other of these decisions was N.R.A., which was essentially the product of a White House circle, and from which the Supreme Court rescued us. I would add as a third instance (but where it is conceivable that the evil effects of a mistaken top-level decision are still with us) the sinking of the World Economic Conference by White House edict in 1933. Here again the delinquency was on the part of the State Department, which did not struggle vigorously enough for its appropriate place in the decision-making process.
I come now to my appraisal of concrete details in the President's program, with particular attention to the content of his impressive series of Messages to Congress relating to American economic foreign policy. In these messages are a number of proposals for new multi-national agencies or for changes in old ones. It is perhaps not without significance that, unless I have overlooked something, there is no reference in these Messages, explicit or implicit, to the United Nations organization as such. This may be fortuitous. On the other hand, it may indicate a recognition that the enlarged membership of the U.N. involves a great relative increase of "debtor" or "underdeveloped" or "poor" countries to "affluent" or "advanced" countries, and of countries of varied degrees of "neutralism" to countries more or less tightly committed to the Western Alliance. In any case, I feel that our organized collaboration on economic matters with other countries is more likely to have an outcome consistent with our national objectives if it is carried on not through organizations of unlimited membership operating on the principle of one-country one-vote, but through "clubs" of countries with substantially like-minded views and aims, or through organizations of comprehensive membership, like the International Bank and the Monetary Fund, where there is weighted voting power corresponding at least roughly to the distribution of financial obligations and responsibilities. The new organizations proposed or already established, it seems to me, in the main have these latter characteristics in greater degree--or lack them in less degree--than the General Assembly of the U.N. and its sub-agencies.
The most important element in our economic foreign policy is our commercial policy, just as the most important way in which our international economic relations contribute to our own welfare and to that of the free world is through our ordinary trade as carried on by our merchants. I write here, as always in these matters, from the point of view of an old-fashioned free trader, although one who recognizes that to the qualifications which the pioneers of free trade were willing to make others need to be added in the light of new insights and changed circumstances.
Since 1934, the successive American Administrations, Republican as well as Democratic, have followed as their objective the policy of gradual and selective reduction of the level of American import barriers, through multilateral negotiation of reciprocal concessions. They have sought also the elimination of direct or quantitative restrictions of import controls such as absolute import quotas and rationed foreign-exchange licenses. They have supported also, though with some watering down and some deviations from the narrow path of righteousness, conformity to the principle of non-discrimination as between foreign countries, or the "most-favored-nation principle."
With respect to all of this, the experts differ as to the extent and the vigor with which we have served our stated principles, and no informed person would think of claiming that in our conduct we lived up fully to our pledges and good resolutions. This is true also, however, of other countries, and in the main, I think, only a few small countries are in a position to scold us.
The President has not presented a special message to Congress on the trade-policy issue, and it does not seem likely that such a message will be scheduled until 1962, when the Trade Agreement Act of 1958 will be up for its periodic renewal. Meanwhile, GATT is engaged--with rumors that it is unsuccessfully engaged--in the attempt to negotiate a general round of tariff reductions, to be completed in 1961. The previous Administration offered to negotiate a 20 percent cross-the-board reduction of existing duties, and this offer, I gather, is in theory at least still on the agenda of GATT. It is obvious, however, that there is keen awareness on the part of the President of the fact that in Congress at least, and perhaps also in the country at large, the tide is running in a protectionist direction, supported no doubt by the current recession and our balance-of-payments difficulties.
In his references to trade, the President has declared himself an opponent of protectionist solutions of our problems. He has so far put all his emphasis, however, on the promotion of American exports, and in a reference to GATT negotiations currently under way he has stated that "we seek the fullest possible measure of tariff reduction by foreign countries to the benefit of our exports," without indicating what we are prepared to offer in return. The "peril-point" provision of the Trade Agreement Act of 1958 provides that the Tariff Commission shall determine points below which particular import duties cannot fall without danger of injury, and that the President must not carry any reductions beyond this point without reporting his reasons for doing so to Congress. This will no doubt operate as a powerful mental hazard against meaningful duty reductions on our part and would seem to be a complete barrier to effective negotiation of cross-the-board reductions. The President has already proposed that the exemption of duty on foreign commodities brought in by American tourists be reduced from its present maximum of $500 (of commodity-value, not of duty) to its traditional level of $100, as a minor remedy for our balance-of-payments problem. It is as yet by no means clear that President Kennedy will be as stout a defender of a liberal American commercial policy as were his predecessors since Roosevelt. In any case, the most that can be realistically expected this year as far as American trade barriers are concerned is that some minor reductions may result from the GATT negotiations, and that on the whole our barriers to imports will emerge from this year of recession and of balance-of-payments deficit without substantial change in a protectionist direction. Tied loans and "buy American" practices will be resorted to more extensively than ever before, but, I hope, on a temporary basis.
In the last few years our imports have been running at about an even level, whereas our exports have substantially increased and have provided annually an export surplus of several billion dollars, which helped greatly to keep the recession from being worse than it has been. Of our annual imports of $15 billion, about half are raw or semi-processed materials which could be produced in this country, if at all, only at unbearably high costs, and which we therefore for our own reasons choose to admit free of duty or at very low rates of duty. If we were to concede that all of the remaining imports are significantly competitive with domestic production, this would mean that the American economy has to meet the competition in its own market of imports from abroad amounting to only some 1½ percent of our Gross National Product. If we were to seek in a protectionist direction for a solution of our unemployment problem, our sluggish growth rate, our recession or our balance-of-payments deficit, the total area of manœuvre as far as import barriers are concerned would be limited to this 1½ percent of Gross National Product. Among many other objections to following this route, it must not be forgotten that we export more goods than we import, and that raising our import barriers will inevitably be followed by imitative, defensive or retaliatory raising of foreign barriers against our exports.
Our farm policy is integrally related, in terms both of conflict and of harmony, with all phases of our economic foreign policy as a whole. For strategic reasons it commonly masquerades in internationalist costume, but if we penetrate its superficial disguise, it will be found to be essentially and narrowly domestic, isolationist and even internationally aggressive.
In the farm program of the Kennedy Administration, the internationalist disguise is made more elaborate. We are urged to embark on a Food for Peace Campaign, and we are asked to stop talking of agricultural "surplus," but to speak of "abundance," an abundance to be shared with the poor and the hungry, at home and abroad. Our agricultural superiority over the Soviet Union is to be transformed into a diplomatic weapon "to shape the future of the world." The "surplus," or as I prefer to call it, the "excess," is to be transformed, as far as production is concerned--as distinguished from stocks--from an incidental, unintended and transitional by-product of schemes to raise farmers' incomes to a permanent feature of our economy. The irresistible demands for subsidies of the farmers and of their Congressional spokesmen are to be tied up in one tightly-wrapped package with the humanitarian objective of relieving hunger abroad, the strategic objective of outmatching Soviet aid to poor countries, the foreign policy objective of aiding underdeveloped countries to attain higher rates of economic growth, and, to bring it quite up to date, the need for correcting our balance-of-payments deficit. The taxpayer, who bears the cost of the subsidies to agriculture, is assuaged by being assured that it is cheaper to give our abundance away than to store it.
The complexities of the plan and its departures from free-market processes are almost without limit. One significant phase of the plan is that for each commodity affected a committee of producers is to participate with the Secretary of Agriculture in deciding price-support levels, output restrictions and so forth, subject to a veto within 60 days by either House of Congress. Precedent is cited for this delegation of legislative authority in the trade-agreements acts and in other past legislation, but the delegation in these cases was at least confined within the several branches of the Federal Government. The closest precedent, it seems to me, is in the production-codes provisions of the N.R.A. Act, which, it will be remembered, were treated rather roughly by the Supreme Court.
A linkage of the farm program with "our progress toward a liberalization program" is to be made by way of a redoubling of our efforts to gain access for more of our agricultural products to the markets of foreign countries by means of trade promotion and by pressure on other countries to liberalize their agricultural programs. Whether the emphasis is to be on "What we can't give away we'll give the hard sell" or on "What we can't sell we'll give away" is not indicated. Nor is there any sign in the Administration's pronouncements that anyone involved in drafting the program has made any attempt to determine, or had any interest in, whether under free market conditions, here and abroad, this country would produce more agricultural produce or less, and whether it would export more or export less, than under the Administration's program. It is particularly disconcerting from the point of view of friendly international relations and the preservation of orderly and defensible competitive procedures that we have not yet given the customary public promise to those of our friends and allies for whom agricultural exports are a mainstay of their national economics that we would endeavor to minimize the damage to them of our disposal activities abroad. Given the nature of the international aspects of the Farm Program, I hope the State Department had no positive part in it.
It is a sad footnote to this program, which fosters excess output and then grasps at every conceivable way of disposing of it short of burying or burning it, that the Air Force and the Navy are resorting to such practices as petty barter of government-owned farm products for oil and for the services of a private company in laying a missile range cable in the Caribbean, and that under the Food for Peace program it is planned to pay workers on development projects in part in American surplus food instead of in money. It may be that, several millennia after the introduction of the use of money as a medium of exchange, we have found this to have been a mistake. But it does seem hurtful to the dignity of his uniform that the military officer should be engaged in bartering peanuts for fuel oil and paradoxical that in our economic development activities abroad we should help laborers who have probably in many cases but recently emerged from a near-barter economy to return to it.
Peculiar farm programs have become a deeply rooted phase of American politics, and I am realistic enough to concede that it is probably true that, unless he accepts substantially all that the farm bloc in Congress asks for, no American president would nowadays be permitted to lead his country on other important issues. The President, however, also has an important educational function, and it surely is wrong for him to support a program involving resort to barter, payment in kind, export premiums, import prohibitions, support-prices and so forth, as if these were normal long-run aspects of a healthy economy, a healthy agricultural community, a healthy system of international economic relations or healthy politics.
Aid to poor and underdeveloped countries on a substantial scale has been accepted by our government and, I believe, by the American people as our responsibility. It is an activity, however, without established or traditional procedures and without accepted theory or principle to inform us how to carry it out. So far, at least, there is no consensus on why foreign aid should be given, to what countries, in what amounts, on what conditions, through what agencies, with what objectives. There is even no agreement on how to distinguish "aid" from transactions which rest on a mutual exchange of considerations. When we give food as aid, with the kind of food and the timing of the aid determined by our domestic agricultural embarrassments, should it be the American valuation of the aid in money, or the minimum amount of freely-disbursable money which the recipient country would gladly accept as a substitute, which is regarded as the proper measure of the amount of aid? Most of these and many other questions relating to foreign aid are questions which can be answered only in terms of value-choices in the light of the prevailing circumstances. Past experience can afford light as to errors to avoid, but little or no positive guidance.
The President, in his Foreign Aid Message, speaks in somewhat similar terms about the foreign aid program he found in operation when he took office. "Existing foreign aid programs and concepts are largely unsatisfactory and unsuited for our needs and for the needs of the underdeveloped world as it enters the Sixties." The President thinks he has found better guides to programs and better concepts, but I am not convinced of this.
The President is even more sharply critical of the pattern of organization and administration of our present program. Our existing procedures are "bureaucratically fragmented, awkward and slow." The administration of the program "is diffused over a haphazard and irrational structure. . . ." He makes detailed recommendations for reorganization, both in Washington and in the field, and all of these strike me as well-formulated, practicable and conducive both to high-quality decision-making and high-quality applications. I welcome particularly the proposals for a larger role for the State Department in the planning and coördination of the various aid programs, but without assignment to it of responsibilities for operation, for which it is not suited.
The President makes a number of concrete proposals with respect to the administration of aid which have both logic and experience to support them. He states a strong preference, "special situations" excepted, for loans (as opposed to grants), including loans at low or no interest rates and with long terms to maturity. The only special situation he spells out is where countries are under strong pressure, internal and external, against maintenance of their independence. I would suggest that another appropriate exception would be for grants for low-cost pilot or training activities of a kind whose value sophisticated, advanced countries are more likely to appreciate than countries still at a relatively primitive stage of cultural and economic development.
The President's Message strongly emphasizes the need for long-term authorizations by Congress if the most productive form of aid--support of development programs based on long-range plans--is to be financed. The outstanding success in the past history of foreign aid was the Marshall Plan. I am sure that many factors contributed to that success, but surely one of them was that financing was made available in such manner as to facilitate planning ahead with assurance that the funds needed would be on hand. Persuasive also, at least to Americans, is the President's plea for a larger participation in foreign aid activities of other industrialized countries and for coöperation of such countries with the United States in the planning and administration of aid programs. I accept the Peace Corps Plan, but largely out of admiration for the President's enthusiasm for good causes, and as a contribution to American moral uplift at a time when I am told our youth are in great need of it. It carries no promise that seems real to me of a significant contribution to the relief of poverty or backwardness in Africa or Asia, but it will do no harm and is a luxury our more or less affluent society can readily afford.
The President urges that the underdeveloped countries should receive aid in larger volume than at present, and, as I have pointed out, he wants other countries to give in increased amounts. He does not expressly recommend that the United States this year or in the future should increase its budgeted expenditures for aid, and for the coming fiscal year his only budgetary recommendation for increase of economic aid is in the form of a request for a transfer of 5 percent ($200,000,000) of the $4 billion authorized for the present fiscal year from the military-support to the economic-aid category.
Responsibility for our current balance-of-payments deficit is often attributed to our foreign-aid expenditures. It is not possible to assign a deficit (or a surplus) in the international balance of payments of a country to a specific debit (or credit) on the other side of the balance sheet, since there is complex causal relationship between the various items. The President claims that since over-all only 20 percent of the current program of foreign aid is not directly spent on American goods and services, it is only that 20 percent which puts a burden on our balance of payments. The problem is more complicated than this, once indirect relationships are taken into account. For example, the 80 percent of our foreign aid which in the first instance is spent on domestic goods and services contributes indirectly to the deficit, among other ways, by the import ingredients in our foreign aid exports and by the reduction in our commercial exports which results from the utilization of our productive resources in servicing foreign aid. It is also possible, on the other hand, that aid granted, say, in the form of a tied loan may result in exports financed by the recipient country amounting to several fold the amount of the aid. What can be said with justified confidence is that the responsibility for our balance-of-payments deficit attributable to our foreign aid is much smaller than the amount of such aid. How much smaller, no one can know.
The President rightly stresses the importance of self-help on the part of the underdeveloped countries, of sound planning, of sustained effort. Many persons, including myself, believe that in many underdeveloped countries a major barrier to escape from poverty is excess population. The Message does not frankly tackle this issue, and refers to population growth as a "problem" only in the sense, which may not go beyond arithmetical truism, that the larger the rate of growth of population in an underdeveloped country the larger will be the rate of growth in aggregate real income which will be needed to maintain a given or attain a higher level of per capita real income, and the larger also (in the aggregate only? or also per capita?) will be the effort required on the part of the recipient country and those who give it aid if it is to attain "real economic progress." We are also told that by the year 2000 "Latin American population will be 592,000,000, compared with 312,000,000 for the United States," presumably to indicate the dimensions of the problem of increase in "effort" which will be required to attain any given gain in per capita real income. Nothing is said about the possibility that population control should share with increased "effort" the burden of attaining economic goals. It is at least a forward step in American state documents, however, that the words "population" and "problem" are allowed to appear in fairly close proximity.
On the question of what countries should be given aid, and in what proportions, guidance is offered in terms of the concept of "self-sustained growth," which is heavily plugged, and appears at least ten times in the Message. This term sounds somewhat familiar to me, and I suppose there is some place where it has been precisely defined, but in the context of the Message I cannot achieve more than a vague guess as to what its meaning may be. Apparently "self-sustained growth" is a "stage" in a country's development when it can "stand on its own feet" and no longer need aid; and a country is apparently worthy, or most worthy, of receiving aid when it is moving by its own resources and effort towards the "self-sustaining" stage, provided it has not actually reached that stage. Is there a way, however, of determining with even the roughest of approximation whether a poor but developing country in receipt of aid is "self-sustaining," or alternatively owes its progress to the aid? And are there not countries which are stagnant or even deteriorating which have little prospect of marshalling will and capacity for movement in the direction of "self-sustained growth" without external aid?
Even if the concept, when properly understood, would have obvious utility in the analysis of the causes of and obstacles to economic growth and of the contribution foreign aid can make to growth, I am skeptical on principle that any single concept can serve as a ruling or dominant guide to the appropriate allotment of aid among different countries. The phenomenon of growth manifests itself in a great variety of ways and is the outcome of a large number of factors. Aid, moreover, is not and will not be granted with the sole consideration of supporting or promoting growth. It will be given to countries whose growth rate exceeds ours, and it will be given to countries which are not enjoying any per capita growth at all. It will be given as a reward for merit and effort and also in the hope of bringing merit and effort into existence. It will be given to friend and to foe, for strategic reasons and political reasons, in submission to blackmail and as bribe, and out of sheer humanity without any other genuine reason. The decisions will probably turn out to be sounder ones if they are based on consensus of preferences, on "judgment," on wide-ranging information, than if they are controlled by adherence to a formula, or an analytical model. Working rules, flexible through time and readily amenable to exceptions, reached by the coöperative effort of wise and dedicated men--that is the best that can be hoped for under prevailing circumstances in a problem like foreign aid.
The President's Message on the Balance of Payments impresses me as a sober, judicious and well-balanced appraisal of the problem and of the available and appropriate remedies. The problem is, of course, that we have had for a number of years running a balance of payments deficit, that in the past three years this deficit amounted in the aggregate to some $11 billion, and that in consequence there has been a substantial depletion of our gold reserves and increase of American short-term liabilities abroad. If we abstract from loss of confidence in the prospects of maintenance of the value of the dollar, there is no immediate danger of acute financial embarrassment. But no one has ground for assurance that the drain of gold will cease, or even diminish, in the absence of corrective measures, and our internationally liquid assets are no longer so abundant that we can afford to be complacent about further depletion of them.
It is regrettable that in a period of recession and of unemployment it is hard to find remedies for a balance-of-payments deficit that are not of themselves undesirable, long though the list of possible remedies is. We could, for example, reduce or eliminate the balance of payments deficit by reducing military expenditures abroad or foreign economic aid, or by raising import barriers, or by subsidizing exports, or by restricting American private capital exports abroad, or by preventing American tourists from going abroad. Some would say that we could restore equilibrium in the American balance of payments by depreciating the exchange value of the dollar, or by going off gold altogether and letting the dollar "find its level" on a free market, but this is a "remedy" which is less available to the United States than to any other country in the world, and even if available would, if used, remove perhaps the strongest restraint on inflation which operates in this country. As long as the United States shows concern for the stability of the internal purchasing power of the dollar, it has almost no power to manipulate downward the exchange value of the dollar in terms of other currencies, and must accept passively the pattern of exchange rates which other countries wish to maintain. In this respect small countries like Haiti have the maximum amount of freedom and the United States in particular, and Great Britain next, have the least degree of freedom.
There are also possible internal remedies, most of them belonging to the category of financial austerity. Such are, above all, credit tightening, heavier taxation, and reduction in federal expenditures. These are ideal remedies for a balance-of-payments deficit associated with an inflationary boom, but they are costly and intolerable in a period of recession and of above normal unemployment.
Under present circumstances, there are four general rules which seem applicable for dealing with our current deficit:
(1) Since most remedies are in themselves undesirable, do not concentrate heavily on any one of them, but use a combination of them so as not to press with disproportionate severity on any particular sector.
(2) Of domestic measures, choose those first which are least objectionable, in themselves or in their impact on other goals.
(3) Adopt measures only for a stated and short period of time, so that they end unless specifically renewed.
(4) Press for the adoption by other countries, and especially countries with large international reserves and current surpluses in their balances of payments, of measures which will operate to relieve the pressure on our balance of payments.
The measures which the President has adopted or has proposed to Congress seem to me to fit these specifications very closely. No one measure is a major one; in general the least objectionable ones, among those available, have been chosen; in some cases at least, the measures are to be effective only for a limited period of time unless renewed; pressure has been put on other countries to reduce their trade barriers and to increase their foreign aid expenditures. In addition, the firm stand the President has taken on the question of depreciating the value of the dollar has visibly reduced the prospect that our difficulties might be enhanced by a flight from the dollar.
The President has expressly rejected, as inacceptable means of dealing with the balance-of-payments problem, not only manipulation of the dollar price of gold, but also reduction in our military program and in our economic aid program, the adoption of exchange controls over trade or capital movements, and the adoption of protectionism. This is all admirable. He recommends that in seeking balance-of-payments equilibrium we should place maximum emphasis on expanding our exports. Here I would suggest two amendments: We should confine ourselves to legitimate means of expanding our exports, with consideration for the maintenance of a liberal pattern of trade relationships in the free world; and we should not hesitate to seek and use, if we can find them, measures for increasing the capacity of domestic industry to compete with imports, so long as these measures do not involve increasing artificial import barriers.
One way of reducing the more serious aspects of a short-run balance-of-payments deficit without actually ending the deficit is to obtain credits abroad or from international financial institutions. The President proposes that the world stock of internationally liquid assets be increased by making it include more than gold, dollar balances and sterling balances, and suggests that a study be made of the possibilities of using the International Monetary Fund for this purpose. I do not believe that there is at the present moment anywhere a serious illiquidity with respect to foreign payments which is clearly attributable either to such maldistribution of internationally liquid assets as now exists, or to a shortage of the world stock of internationally liquid assets. The American and the British problems are not current illiquidity but current deficits in their international balances, from which illiquidity will result if these deficits do not cease fairly soon. Many countries are illiquid, but given their monetary and fiscal policies most of them would be illiquid again very soon after a restoration of liquidity by, say, foreign aid.
It may very well be, however, that the world will before long need, with some urgency, an increase in its stock of internationally liquid assets, and the International Monetary Fund seems the most eligible instrument to use for that purpose. A number of proposals are in circulation in this respect. Of these a probably adequate one and one which would involve the least change in present procedures would be for the Monetary Fund to negotiate with a number of advanced countries for stand-by credits for a number of years in terms of these countries' currencies, with interest to be paid at agreed rates on credit actually drawn, and with the Fund making the currencies so acquired available to member countries on the usual or more liberal terms.
The President also proposes measures which would make the United States a more attractive place for investment of foreign capital without raising the general interest rate structure in the United States. These measures involve an approach to a dual system of interest rates, under which foreign capital would receive higher rates of interest than American capital. There are technical and practical objections to these proposals, and there is considerable skepticism, which I share, as to the need for them and their effectiveness if adopted. But this is an area which has not in the past been much explored and deserves further study. With respect to long-term investments, I think it unwise to attempt to influence their volume or direction from a primarily balance-of-payments point of view, and the general principle to follow should be, for the United States at least, that capital exports and imports should be neither discouraged nor specially encouraged solely for balance-of-payments reasons. The free flow of long-term international capital is too valuable an institution to be regulated or manipulated for objectives which are transitory and can be better served by other means.
It is conceivable that even if all the concrete proposals which the President has made in connection with the balance-of-payments problem are carried out, the deficit will persist. It is likewise conceivable, though not I think at all probable, that some of the proposals made would, if adopted, operate to intensify rather than to abate our deficit. I nevertheless believe that the President's program is adequate for the time being, and that we can safely wait for clearer indications than now exist that additional action is needed.
The President's economic foreign policy program has been dealt with in the preceding pages in mixed terms of praise and of blame. Except for the farm program, I attach more weight to the items of policy I have praised than to those I have criticized. Except once more for the farm program, even where a decision is or may be a mistake, there is for the most part no building into our laws and institutions of new elements which, once introduced, will be difficult to remove. I, for one, have a high degree of confidence that with some amendment of his mode of organization of the top-level decision-making process, the President will give the country first-class leadership in the economic foreign policy area--except once more for agricultural aspects. There remain many problems to be dealt with, one of which at least is a fundamental one, namely, what role is to be permitted--and on what terms of reward, security and dignity--to private enterprise, at home, abroad and internationally, in the programs of our government and in the agreements we reach with other countries. This is, however, not an appropriate year to deal with this issue, and there would be no conceivable criticism of the President that would be less warranted by the visible facts than that he had tackled too few issues in his first hundred days in office.