THERE have been few points in the world's history when those who had participated in events or seen them at first hand could say without dramatic license or exaggeration: "This is the end of an era." Anyone with even a schoolboy's slippery grasp of history has known since 1945 that the great era of Western European expansion and leadership had come to a full stop. From the fifteenth century to World War I, the outpouring of people, capital, ideas and industrial products from the European center to the world's circumference, the drawing into her markets of food and raw materials, and the recurrent shifts in strategic power associated with her expansion had made up the major theme of history. The interwar period saw renewed expansion in some quarters and held some prospects, dim as they seem in retrospect, of substantial European recovery and stability. But World War II put an unquestioned end to the chapter.

This is not to say that Western Europe has ceased to be a powerful and essential factor in the world's affairs nor even that she has become merely a focus of instability. European resources, capacities and civilization can still make her a vital force for good or evil, but she is not likely in the foreseeable future to be a dominant force. The meaning of present events can be understood only if it is realized that Europe must adjust herself to a radically changed position and that we North Americans must adapt our thinking to a changed relationship between Europe and America.

We are now wrestling with problems of reconstruction and readjustment which cannot be avoided after a desperate world conflict of all but six years. We find them deepened and confused beyond measure by great historical shifts which the war converted from gradual subsidence to a jarring earthquake. Beyond these, there is the sharp division between east and west which has made difficult problems desperate. Thus there is great dispute as to what is temporary and what is permanent in our aims, where there can be reëstablishment and where there must be readjustment. It is not easy to determine the facts relevant to the complex problems nor to define the issues. It is going to be difficult for democratic opinion to give an informed verdict even apart from national prejudices and irritations.

In all this the United Kingdom necessarily has the central place because to a high degree throughout much of her history she has been the chief gateway between Europe and America and between the European and the colonial worlds. Continental Europe has important problems of its own but the economic problems of creating a new and viable Europe appear in their most intense form in the United Kingdom. What we may call the sterling-dollar crisis, not to prejudge it by a biassed label, is not simply a monetary crisis. The monetary crisis is the superficial evidence of the inadequacy of effort and policy in the face of historical changes which affect the whole world.

In Canada the crisis gives rise to grave foreboding. It forecasts loss of markets, the failure of reconstruction plans as Canadians conceive them, and the still graver threat of disunity within the North Atlantic area. Canada is a North American country, European in origin but shaped by the conditions of North American life. Her whole history has been embraced within the period of European expansion. The circulation of her economic lifeblood was started by emerging European deficiencies in grain and wood and by the investment of British capital. The era of British investment in Canada ended with World War I but if the British and European markets have fallen in relative importance in the inter-war years, they have continued to grow absolutely. Without the cereal markets of the United Kingdom and Europe, for which there are no alternatives apparent, the Canadian economy will face painful contraction and readjustment.

Canadians generally have a clear realization of the direct importance to them of external trade. Though they may not be able to quote accurate statistics, their attitudes reveal comprehension of the fact that of all the goods and services made available to them by production and by imports, about one-fifth is destined for sale abroad. They know that this was true before the war. They realize that it is still true. They apprehend clearly enough that if the one-fifth is not sold abroad, the other four-fifths will not be available at home. They realize, too, that of the one-fifth sent abroad nearly one-half has been consigned to the United Kingdom and Western Europe. It would be odd indeed if the New Brunswick lumberman, the Nova Scotia apple grower, the Ontario base-metal miner, the prairie farmer or the British Columbia logger did not understand something of the importance which the British and European markets have had for him. Whatever may be the interventions of government, they realize that the ultimate markets for their surpluses lie abroad and that for some of them the United States is not a market.

Comprehension of these facts was a powerful influence in leading the Canadian people to give ready support to all measures which promised to be helpful in the recovery and stabilization of Europe. In relief, the International Monetary Fund, the International Bank and in loans, Canadian contributions have been rather more than proportionate to the whole of the United States aid, given or projected. Not only was the government of the day willing but it had strong parliamentary and popular support.

But even on the economic side, it was not alone European markets which Canadians had in mind in approving measures of assistance to the United Kingdom and Western Europe. They were conscious of the need to be able to sell wherever their products were wanted. Canadian wheat, to take an important example, must flow to many markets, for it is some 40 percent of the world's exports. It must flow in varying quantities according to the size of the Canadian crop and according to the size of the crops of importing countries. "Multilateral trade" has become a jargon phrase, but it has a real meaning to a country whose livelihood is earned to a decisive degree by the sale of large and specialized exports. World markets to the widest extent possible seem to Canadians the most desirable and indeed only tolerable aim.


The present crisis indicates that these objects are likely to be even more difficult and doubtful of attainment than had been hoped. A more serious aspect, however, is that it has become the occasion for sharp division and unseemly bickering between the United States and the United Kingdom which threaten to disrupt the essential unity of the North Atlantic and to hinder the effective working of the Atlantic Pact. If to the division between east and west there is to be added division between the United Kingdom and the United States, then indeed Canadians would look forward to a gloomy future.

A mere improvised patching up of the present crisis will not be good enough. There must be another great effort to set the directions right. There has been a very great deal of resources, effort and good will put into postwar reconstruction. Not all the resources were fully used or put in the right places. Not all the effort was wisely directed. The goodwill was diluted here and there by ill-tempered controversy. Nevertheless the over-all program has been impressive. Though blemished by improvisation and by concessions to national prejudices, the whole project has been systematic in its structure and wise in its objectives. Lend-Lease and Mutual Aid had as their second major aim the elimination of unmanageable postwar debts. The whole conception of UNRRA was a vast improvement over the postwar thinking or performance in 1918-19. The International Monetary Fund and the International Bank were designed to meet not the needs of a transition period but the long-run needs for short-term and long-term capital. The dollar loans were promptly planned and available at an early stage. The General Tariff Agreement and the unratified International Trade Organization were a valiant if complicated attempt to facilitate world recovery by a reduction in the tariffs of the United States and other countries in contrast with the increase which had taken place in 1921 and 1922. Marshall Aid has been as noble, generous and helpful a policy as was ever conceived.

The results of the year 1948 were encouraging. Industrial production in Europe rose well above the prewar level except in Austria, Italy, Greece and Western Germany; and in the latter there was great improvement in the last half of the year. Agricultural production in most countries still lagged behind the prewar figures. Except in Austria, France and Greece prices rose by slight percentages if at all. Trade increased, but intra-European trade lagged far below the prewar level. Substantial progress, though not enough, was made toward balancing international accounts. The United Kingdom Government announced that in the last half of the year her over-all accounts showed a small surplus though her dollar accounts still showed a deficit. The United Kingdom Economic Survey for 1949 was on the whole a hopeful document.

The world was ill prepared therefore for the crisis which broke this summer. In its acute form it is a sterling-dollar crisis of which the concrete evidence is the sudden decline of U.K. gold and foreign exchange reserves, but its ramifications run through the whole North Atlantic community.

What has happened is not difficult to discern. The whole postwar program, including E.R.P., erred on the side of optimism. It left thin margins for unforeseen contingencies. Poor crops in Europe, a cruel winter and the rise in United States' prices had all but nullified the United States and Canadian loans. Now another such contingency has rudely upset E.R.P. The United States postwar boom came to a gradual end and substantial price declines have taken place, in part causing and in part caused by curtailment and deferment of buying. The United Kingdom has been hit in two ways. The dollar earnings of the sterling area in southeast Asia have declined sharply as purchases of rubber and tin fell off. United Kingdom exports to the United States have been unable to meet the sharper competition of United States products and have declined drastically. Talk of devaluation of the pound has brought still further deferment of purchases. Planned imports have continued and reserves have fallen.

It is hard to imagine that such a contingency could have been unforeseen. No recession in history had been so well advertised in advance. A pattern of prices had been built up in the United States shaped by the competing, and in aggregate, excessive demands of net exports, investment and consumption and by the prospect of still higher prices. Ultimately a price pattern conducive to lower exports, somewhat less gross investment and more consumption was desirable and to be expected. The changeover has, however, made readjustment necessary abroad as well as at home.

There is perhaps a gain in perspective in looking back at the crisis of 1920. Against a different background, a similar but much more violent change took place. Commodity speculation and inventory accumulation were then checked by drastic credit restriction and by rapidly rising imports from Europe. The drop in prices was peculiarly precipitate and great, about one-third in 12 months as against something over 10 percent in the past 12 months. Unemployment was exceptionally heavy though not prolonged by the standards of the next decade. The shock to European balances of payments was cushioned to some degree by the fall in European exchanges, though European exchanges in general were not stabilized until ten years after the war.

If it should turn out that United States prices find a bottom at or slightly below the present level, we shall have come through the first postwar recession with unprecedentedly little inconvenience and damage. There are signs that this may be so, but the danger is that repercussions in Europe may react on North America and precipitate fresh contraction. Certainly in Canada, which as yet has felt very little recession, the further contraction of sterling and European purchases already in progress is likely to have serious effects.

The greater worry is not the immediate effect but the doubt as to whether the whole grand project of helping the United Kingdom and Western Europe to reëstablish themselves is not going wrong. It was expected that progress might be slow and intermittent. The possibility that there would be setbacks was not overlooked. But whether the road was long or short, it was assumed that the direction would be right. The right direction as far as Canadians are concerned is the direction of convertible currencies and against the bilateral balancing of trade between pairs of countries. It is the direction of the expansion of trade and not the curtailment of imports. Convertibility of currencies was obviously given too early a place on the program. The short-lived convertible pound of the summer of 1947 is sufficient evidence of that. What is particularly worrying to Canadians is that a good deal of evidence seems to indicate that the restoration of international equilibrium and the reëstablishment of multilateral trade are not the direction in which United Kingdom and European plans appear to be moving.


There is nothing to be gained from minimizing the task which the United Kingdom faced at the end of the war. She had achieved a war mobilization probably more complete than that of any other belligerent. She had therefore the greatest problem of redirecting manpower. The most extensive withdrawal of labor had been from her export industries. She had sacrificed $4.5 billion of overseas assets and the earnings which had come from them. She had assumed additional external liabilities of more than $11 billion, mainly in sterling and more than half of it to India, Burma, and the Middle East. The United States and Canadian loans added another $5 billion of external debt. The merchant fleet, a vital earner of foreign exchange, had been reduced by a third. It was then estimated that the volume of exports must be increased to nearly 175 percent of prewar volume if the United Kingdom was once more to achieve a balance as against the rest of the world by 1952. By the end of 1948 exports were 143 percent of the 1938 volume, but the target of 150 percent for January to June 1949 has not been achieved.

The achievements of four years are very real but the uncomfortable fact is that they are not enough. A projection of present trends will not bring about an equilibrium which will be welcome to North America. It will not bring the goal of a wide area of multilateral trade and convertibility of currencies closer. It will not provide a firm underpinning for the Atlantic Pact. There is grave danger that the present situation may seriously endanger Anglo-American solidarity, which is as vital for the peace as it was for the war.

Consideration of the present crisis must take account of two sets of facts. In the first place, the provision of postwar assistance -- particularly to the United Kingdom -- has been too restricted. The margins for contingencies have been too thin. The installments have been too limited in time. The quotas of the International Monetary Fund are, in the light of present day prices, ridiculously small. The Canadian quota, for example, would not buy one and a half month's imports. The Canadian loan to the United Kingdom was probably as much as could be managed and in fact the drawings on it were at too great a rate for the Canadian economy to support. The United States loan at three times the Canadian figure was (even if no rise in prices had taken place) completely inadequate to finance the United Kingdom deficit over the probable period of reconstruction except under the most improbably favorable circumstances. The Marshall Plan was recognition of this deficiency as well as of the inroads made by poor crops and a severe winter.

Moreover, because of the stalwart efforts of the United Kingdom to help herself to a new equilibrium through austerity, and the precarious position of other European governments, the allocations to the United Kingdom did not recognize fully her key position in Europe and in a large sector of the world.

There is a dilemma in the planning of aid, whether by loans or gifts. The apparent need is greatest in the earlier years and it seems reasonable to expect that as production rises the external aid can be tapered off. It is just in the early years, however, when wartime scarcities still persist, that it is impossible to get the necessary goods for the money. Only by firm and direct controls, which neither Canada nor the United States was prepared to maintain, would it have been possible to give to Europe the goods and services contemplated in the financial aid extended. We have now evidently entered a period in which goods are likely to be more abundant and in which financial aid given can be fully realized in goods. It would be folly to give generous money grants when they could not be converted into goods except at rapidly rising prices and refuse them, if still needed, when circumstances were such that the real purpose could be accomplished. The rehabilitation of the United Kingdom and Western Europe is not the first capital project, in which North Americans have engaged, to take longer and cost more than the original estimates allowed.

The second apparent fact to be taken into account is that the direction of developments in the United Kingdom has not been what was desired. There has been great governmental pressure in the United Kingdom to increase exports to dollar countries, and since 1947 the progress has been notable. But as compared with prewar figures, the increase in the volume of exports going to the sterling area has been greater than in that going to dollar countries. If the direction of public exhortation and organization has been behind dollar exports, it would appear that the pull of the price system has been toward the sterling area. It is one of the great misfortunes of the postwar period that the United Kingdom was politically weak in the quarters of the world where the largest sterling balances were held. There was no such cutting down of these debts as was contemplated. Despite some points of stringency hailed with enthusiasm by London, sterling has been relatively plentiful and sterling countries have been stronger bidders for United Kingdom exports than have dollar countries, particularly when competition had reasserted itself. If one is concerned that the dollar countries are draining the United Kingdom of dollars, one must also be concerned that others are draining her of goods.

This condition is apt to be represented as the result of the unwillingness of dollar countries to import. That is another problem which may be serious enough in the future but it is not the immediate problem. What Canadians fear is that as the United Kingdom follows the path of diverting imports from dollar to sterling sources she will make sterling still more plentiful in the sterling countries and enable them to bid still more strongly for U.K. exports. Dollars will thus become scarcer and scarcer, and the sterling countries will become a protective bloc supporting a plateau of prices by the stringent application of import controls -- all in the name of saving dollars. This is not the declared intention of the United Kingdom Government, but it seems to be the path along which it is reluctantly moving. It would appear to be essential that effective steps should be taken to get the price system working in the direction of the avowed aims of the British Government. Whether this is done by credit policies agreed among the sterling-area countries, by direct cost cuts, or by a change in the sterling-dollar rate is for the United Kingdom to decide.

Whatever technical views one may hold, the legitimate concern of those outside the United Kingdom is that such readjustments should be made as would, through the incentives distributed by the price system, reinforce the efforts of the government to increase dollar exports and leave less concentration of austerity in the United Kingdom.

The United States and Canada could offer positive assistance in achieving this. In dealing with the sterling balances held by India, Egypt and the Middle East, the United Kingdom has played a politically weak hand and the results have been economically costly. Canada and the United States hold trump cards -- hard currency. It may be that for a grant of hard currency to be spent on North American goods, India and the others would write off two or three times the equivalent in pounds from the liabilities of the United Kingdom, and defer sterling drawings for a period of years. In compensation, the United States and Canada would temporarily extend their markets for food and capital goods and strengthen important troubled areas.

There is an additional consideration which is advanced with less assurance, and without any desire to raise ideological questions. It has been an old and persistent tradition in Canadian history that when Canada engaged jointly with the United Kingdom in negotiations with a third party, there were likely to be economic concessions to gain political ends in which Canada had less direct interest than the United Kingdom. The tradition may be historically inaccurate, but it relates to periods when Britain had ample economic margin and great political and strategic interests. She still has the latter but her economic margin is now dangerously thin. The practice of bulk buying on long-term contracts seems likely to be costly. In an emergency, bulk buying has a great advantage to the buyer in assuring supplies and to some degree in stabilizing prices. The emphasis in the primary producing country is always on stability. In periods when supplies are inadequate this means that the buyer assumes a large part of the risk. There was a theory current some years ago that a country with a large import market could exercise great bargaining power and exact favorable terms of trade. This is probably true when supplies are redundant and when the buying country has limited political interests. The present situation would appear to be that the United Kingdom, whose political and strategic interests are gravely disproportionate to her present economic resources, is likely to find that in these and other negotiations she makes economic concessions she can ill afford.


If and when the immediate crisis is overcome, other problems loom ahead. In the long run, the United States recession, in its present dimensions, is a minor consideration. The United Kingdom and the sterling area can still make progress in increasing their dollar exports if there is a realistic cost adjustment with dollar countries. A vital question, however, will still be unanswered. It is not whether a balance can be achieved. A balance is unavoidable. The question is whether ultimately dollar countries will accept the imports, whether they will make the continuing investments necessary to balance international trade at a high level, or whether they will consciously or otherwise choose to balance accounts at the low level of imports they are willing to accept. Let us be clear, however, as some British commentators are not clear, that this is a question which events have not as yet posed. The present unbalance of accounts between dollar and European countries is not the result of unwillingness to accept imports. It is the deliberately planned result of efforts to provide the United Kingdom and Western Europe with more goods and services for reconstruction purposes than they could themselves produce. The question will be posed, however, as the amount of aid diminishes.

The problem will confront Canada only in a derived form. She can help, but not decisively, in reaching a tolerable solution. Canadian propensity to import is high and surpluses on international account are easily disposed of by paying off debt in the United States. Trouble for the Canadian economy will result from any tendency toward bilateral balancing of accounts. The United States has been the cheapest and most convenient import market and almost the whole of the external debt is payable there.

For the United States, however, the problem is real and difficult and on its answer hangs the fate of the world. It is often suggested that the United States has such ample and varied resources that she has little need to import. This in fact is irrelevant. Countries do not import because their resources are inferior to foreign resources, but because there is a comparative advantage in using only the more productive resources.

Once before the United States faced the problem and its answers led to disaster. As imports from Europe began to rise in 1920 and 1921, Congress sought relief in the Emergency Tariff of 1921 and the Fordney-McCumber Act of 1922. The decision was particularly harmful because the most notable development in the economic world of that day was the great rise in output per worker in the United States. International accounts were for a time balanced by a large outflow of American capital. For reasons which have not been adequately explained, rates of wages remained remarkably stable with the result that profit margins increased. These were capitalized by the stock market at low rates of interest in the stock market boom. The opportunities for profit in the market and the attempt to control speculation by raising interest rates turned the export of capital into an import and led the way to collapse.

In a practical way, it is false to say that the United States must export less or import more, or export more capital. She must do all these things. To describe them as alternatives is likely to be an evasion of the real answer.

There are two important considerations in the future course of United States policy. To say that the United States tariff consists of a free list and a prohibited list is a caricature, but a revealing caricature. That tariff is backed by a customs administration which gives a foreigner the impression that it considers the continued entry of dutiable articles as evidence of gross inefficiency. The trade agreements program has been vigorously and courageously pushed by the Administration; but 50 percent of a prohibitive rate is frequently still a prohibitive rate. Competition has assumed a definite place in United States ideology, but the idea still seems limited to domestic competition. There are plenty of United States industries whose products could be put on the free list with little injury to them and great gain to the United States and the world.

The second consideration is this: If history repeats itself, the present recession is likely to bring a significant increase in output per worker, and at a time when such improvements cannot possibly be matched by overseas competitors, except temporarily by exchange devaluation. This poses a dilemma. Internally, no doubt, the appropriate result would be a gradual decline of prices spreading the benefits through an increase in real wages. As far as the world situation is concerned, the most helpful result would be a continued increase in United States money wages which would gradually make products with a high labor content unable to compete abroad or at home with the products of Europe.

Canada cannot take decisive action but she can help. Customs duties against British goods are lower than those against other countries' products, but many of them are still protective. If released from the provisions of the General Agreement, Canada could profitably reduce substantially her duties against United Kingdom products.

The full and ultimate crisis is not yet upon us. The events of the summer are interim difficulties which, however, give evidence of wrong directions. But on the answers to the ultimate questions hangs the fate of the North Atlantic community which in two wars has sprung into being for the salvation of western civilization. The Atlantic Pact is so much paper unless behind it stand a community of interest and a group of healthy coöperating nations. There is no salvation for the United States in a return to isolation. Divorced from North America, the sterling area and Western Europe will be sources of weakness and not strength to the United Kingdom. The United Kingdom must call the pervasive influence of the price system to her aid in mobilizing and directing her exports. The United States, having preached competition to the world, must be prepared to live with it internationally.

You are reading a free article.

Subscribe to Foreign Affairs to get unlimited access.

  • Paywall-free reading of new articles and a century of archives
  • Unlock access to iOS/Android apps to save editions for offline reading
  • Six issues a year in print, online, and audio editions
Subscribe Now
  • W. A. MACKINTOSH, Professor of Economics, Queen's University, Canada, since 1927, and Vice-Principal since 1947; author of "Agricultural Coöperation in Western Canada," "Economic Problems of the Prairie Provinces," various government reports and other works
  • More By W. A. Mackintosh