It is tempting to view the evolution of U.S. foreign economic policy from 1776 to 1976 as one from isolationism to participation to leadership of the world economic system, a process now starting to show signs of reversal. In terms of the theory of private and public goods, this country for some 170 years looked after its private national interest, then spent a quarter of a century playing a leadership role, pursuing at the same time what it conceived as the public international interest, before exhausting itself and perhaps turning back exclusively to its own affairs.1 Or, in Albert Hirschman's brilliant model of relations within social groupings, the country has moved from "exit" to "loyalty" to "voice"-first a participatory voice and then the voice of command-and may be again heading for the exit.2

But such themes would be too simple. The country is not a unified actor with a single set of purposes, but an amalgam of shifting interests which engage customarily in ambiguous compromises. Economic foreign policy may be global or may make distinctions among regions (North America, Europe, Latin America, Asia, Australasia and most recently Africa); among functions (trade, money, capital and aid transfers, migration, not to mention foreign growth and integration). At any one time there are complex trade-offs among various national and international interests rather than any one dominating the others. There is likely to be a high positive correlation among policies regarding different aspects of the country's economic relations with the rest of the world; nonetheless, there is no escape from detailed description and analysis.

Our interest attaches principally to the recent past. I propose first to sketch the period to World War I rapidly. Thereafter follow sections dealing separately with the 1920s, the Depression, the years following World War II through the 1960s, and then from about 1968 to the present. A brief section concludes with reflections on the prospects now facing both the United States and the world.


The American Revolution represented not so much a withdrawal from European and especially British life as an insistence on relating to Europe on different terms from those decreed by British decision. The Navigation Acts which determined where and how colonial shipping could be used, taxation from Whitehall, impressment of colonials as sailors in the British Navy-all were economic as well as political issues in which colonial interests were threatened by imperious decisions at a distance. The isolationism of Washington's Farewell Address (1796) and the Monroe Doctrine (1823) came later, with a revulsion against the Napoleonic Wars over more than 20 years-wars that incidentally enabled the struggling nation first to win its military independence and second to conduct its economic affairs independently.

But the nation had little in the way of a unified national interest. The Constitution of 1789 prohibited export taxation, deliberately foreclosing the possibility that central government could hurt the interests of an exporting state through taxing its output sold abroad. The idea originated not from the free trade of Adam Smith's Wealth of Nations of 1776 but in earlier Physiocratic doctrine, which Smith also embraced. "Laissez-faire, laissez-passer" was a French agricultural doctrine to free food for exports, as opposed to the doctrine of supply which would keep it at home for domestic consumption. The latter echoes today in embargoes on steel scrap, peeler logs, soybeans, wheat and the like.

In the absence of export taxes, federal revenues came largely from duties on imports. The Continental Congress levied a tariff of five percent "for revenue only" across the board. Debate followed almost immediately. Madison and Jefferson, from Virginia, wanted low tariffs to expand export trade through buying imports freely. Massachusetts and Pennsylvania sought protection for manufacturing. The tariff of 1789 was a moderate compromise, with five percent duties in general except for rates ranging up to 15 percent on a limited list of manufactures. Alexander Hamilton's well-known "Report on Manufactures" of 1792 did not affect the course of events.3

More significant was the Embargo of December 1807, precipitated by British impressment of American seamen. That Embargo, the Non-Intercourse Act of 1809, and war with England in 1812 produced substantial change in the course of economic development. War is the ultimate protective tariff. Embargo and war stimulated the cotton and woolen textile mills of New England and the iron foundries of Pennsylvania. With the restoration of peace, the tariff question became acute. It was a matter not of procreating infant industries, but of preventing infanticide. Agriculture was preoccupied with supplying Europe with grain, cotton and tobacco after the Congress of Vienna, and did not immediately resist; it began to do so after the fall of European agricultural prices, and the passage of the Corn Laws in Britain in 1819. Tariffs were raised further in 1824, but after the "tariff of abominations" of 1828 reaction set in. Early in the 1830s some duties were lowered, and in 1833 the Compromise Tariff produced a more general reduction. That this was followed by the depression of 1837-a result of the expansion of the bank credit by the Second Bank of the United States-led to the Whig, later Republican, view that tariff reductions spell depression.

In this period-and indeed until the last 40 years-the tariff was a domestic issue only. Higher duties in 1842 and reductions in 1846 and 1857 were unrelated to the free-trade movement under way in Europe. Led by Britain, which rationalized tariffs in the 1820s and 1830s before dismantling the Corn Laws and the Navigation Acts in the 1840s and freeing the export of machinery, the Continent moved to tariff reduction on a reciprocal basis during the boom of the 1850s, but especially after the Anglo-French (Cobden-Chevalier) Treaty of 1860. British leadership in the movement was important, as was the ideological character of certain free-trade forces under the influence of the economic doctrines of Smith, Ricardo and Mill.

Canada was sharply affected by the repeal of the Corn Laws and the Navigation Acts, and some Montrealers contemplated annexation to the United States. A less far-reaching remedy was found in reciprocal trade in natural products in a treaty of 1854. The special economic status of Canada, between the United States and Britain and having particular relations with each, remained an issue for the rest of the period.

While the United States was largely absorbed in its own affairs, many of those affairs, or those of constituent parts of the country, involved foreign economic questions. The Louisiana Purchase of 1803-financed by a loan issued in Amsterdam-riveted the attention of the Middle West briefly on Europe, from which it turned again on a heightened basis to exploration, Indians, land settlement. New York merchants and financiers, New England shipbuilders and traders, Southern planters, canal-builders and railroaders all had eyes on European markets. In transportation, the United States pioneered in fitting steam engines to ships: in the liner, or scheduled vessel that sailed each Saturday whether it had a full cargo or not, and in clipper ships. Cotton-growing in the South exploded in the 1820s and 1830s, and moved rapidly inward from the sea islands and the coastal belt to the Gulf states and across the Mississippi. New York bankers established branches in Liverpool (later moved to London) to finance the movement of staples eastward and of a wide variety of goods westward. The First Bank of the United States sold shares abroad, and the Second Bank borrowed in London on bullion.

With the rise of shipping came an upsurge of immigration, initially from Britain and Scandinavia, and after the disastrous crop failure of 1846, in a flood from Ireland and Germany. (An American myth holds that the Germans who flowed to these shores after 1848 were moved by conscience in revolt against monarchical repression and military conscription. The Carl Schurzes among the migrants, however, numbered several hundred out of hundreds of thousands.) Industrialization in Britain, Germany and Scandinavia after mid-century slowed down the flow of overcrowded peasants from these sources.

In the 1880s, however, there developed an entirely new economic interaction between the United States and Europe. Up to that time the farms of the New World had furnished largely exotic foods and materials not produced on a large scale in Europe-cotton, tobacco and sugar. But after the Civil War, the opening up of the Northwest Territories, with 40 acres and a mule for war veterans, made possible dramatic increases in grain production, while newly constructed railroads and ironclad, steam-powered, screw-propeller ships became available to move the grain to Europe. Along with similarly stimulated supplies from Canada, Australia, Argentina and the Ukraine, the new flow led to a drastic fall in the price of wheat in Europe, and uprooted a vast army of peasants and landless workers in Southern and Southeastern Europe-who poured into the steerage holds of ships bound for Ellis Island and New York.

Limitation of immigration of "undesirables," including the ill, convicts, and Oriental "slave labor," had been undertaken in the United States in 1862 and 1875. In 1885 an attempt was made to stem the flow from Europe through a ban on contract labor. There was, however, no stopping the flood of workers who came individually and without work, looking for a new chance. The strong tradition of the United States as a place of asylum for the oppressed of Europe prevented the passage of any effective legislation to limit immigration, such as by a requirement of ability to read and write English.

Moreover, immigration from Europe met a critical need in the American growth process. In Europe, economic growth to a considerable extent was achieved through what is called the [Sir Arthur] Lewis model of "growth with unlimited supplies of labor," hardly distinguishable from the Marxian "reserve army of the unemployed." Unlimited supplies of labor off the farm held down wages, raised profits, led to reinvestment of profits and sustained growth. In the United States, early growth came from unlimited supplies of land which furnished a good livelihood to independent farmers. When manufacturing began to flourish-mainly because of the spillover of demand from affluent agriculture and only partly as a response to protectionist tariff policies-the massive infusion of labor sustained the process.

A high land-labor ratio from the beginning meant high wages, and high wages in turn predisposed American manufacturers to labor-saving invention. Eli Whitney responded with the cotton gin, which made possible the expansion of the cotton crop and of British and New England cotton-textile industries. He further perfected interchangeable parts. The Colt revolver, the McCormick reaper, the Singer sewing machine, and the typewriter were among the labor-saving devices which poured forth from Yankee ingenuity. They quickly led to manufactured exports and subsequently to subsidiary factories abroad. The roots of the multinational corporation in manufacturing, usually thought of as a product of the jet aircraft and transatlantic telephone 100 years later, stretch back virtually to the middle of the nineteenth century. The Colt revolver and the McCormick reaper scored successes at the Crystal Palace Exhibition of 1851 and the Paris Exposition of 1855.

Finance had gone abroad as a handmaiden of trade long before manufacturing. Industry and the states of the Republic had borrowed in foreign financial centers since the 1820s, and had chalked up a substantial record of default and failure. The role of the federal government in these matters was small until the 1840s, when the first borrowing of consequence since the Revolution was undertaken to finance war with Mexico. Peabody, Seligman, Morgan, Drexel, and other less illustrious names gradually shifted their overseas operations from trade to investment banking more generally.

In monetary affairs, the United States sought to adhere to bimetallism, and then to the gold standard, although its finances seemed chaotic in the view from European centers, as speculative excess led to boom and bust, mania and panic, especially in 1836, 1857, 1872, 1893 and 1907, which sent shock waves reverberating back to Liverpool, London, Paris, Amsterdam and Hamburg. It was necessary to suspend specie payments and to issue greenbacks during the Civil War, resulting in depreciation of the Union dollar-though to nothing like the extent of Confederate money or the Continental currencies. After the war, the question was merely one of when to resume specie payments, and how. Resumption was achieved in 1879. An important change had been made in 1873, when the flood of silver from Nevada after 1869 depressed its price. A continuous preoccupation since the Coinage Act of 1792 had been to get the ratio of silver to gold right, so as to thwart Gresham's Law that overvalued money drives undervalued out of circulation. Up to the 1830s, when the United States ratio was 15 of silver to 1 of gold to the general European ratio of 15.5 to 1, the country gained silver and lost gold. In 1834 and 1837 the ratio was changed to 16 to 1. By 1872, however, 16 to 1 was too high a value for silver, and bimetallism was then abandoned in favor of gold, to the distress of Populists for the rest of the century.

Tariff policy at this time was dominated by fiscal considerations. When the Treasury was pinched, as in 1862 during the Civil War, tariffs were raised; when revenue was ample, as in 1872, lowered. But by 1890, as a result of depression, the McKinley tariff raised rates, especially on wool and sugar, only to have the act of 1894 under President Cleveland partly reverse the result, largely on the basis of the charge that it had been produced by "trusts." The 1890s were a period of trust-busting and opposition to monopoly. Action against trusts, however, stopped at the water's edge. No action was taken against the collaboration of large American firms with one another or with foreign firms in foreign markets, except insofar as they conspired to restrain competition in the U.S. market.

By the turn of the century, the United States was beginning to move away from an isolationist parochialism to a role in world society. As early as 1853-54, Commodore Perry had opened up Japan to American and European shipping and trade. When the Berlin Conference of 1885 among the European powers accelerated the pace of imperialistic acquisition, the United States became restive. In 1898 the explosion of the Maine in Havana harbor provided an excuse for a war against Spain in which Cuba, among others, obtained its independence, but Puerto Rico and the Philippines became United States protectorates. In the chaos which followed liberation, American investors (trusts?) acquired major properties in Cuba, especially the Isle of Pines, in an episode which recalls the carpetbagging in the South during the Reconstruction after the Civil War.4 Fearful of being left behind by European powers, the United States sought an open door in China. The beginnings of foreign aid may be found in U.S. use of its share of the indemnity required of China after the Boxer uprising of 1900 for charitable work in China.

The sharp depression of 1907 raised questions about the efficacy of the national banking system established in 1863. No longer completely self-sufficient, the country established the Aldrich Commission which reviewed banking legislation in other countries to study how to improve banking organization. Senator Aldrich also gave his name to the Payne-Aldrich Tariff of 1909 which raised tariffs to their highest point in the history of the country before World War I. Democratic victory in 1912 with the election of President Wilson brought the passage of both the Federal Reserve Act and the sharply reduced Underwood Tariff of 1913. The Payne-Aldrich Act was said to favor trusts, and to have produced depression in 1910.

Up to 1914, dominant economic issues were argued in terms of domestic interests in a world taken as given, which U.S. action did little to affect, rather than in terms of economic theory or foreign relations. The British-dominated international economic system served American interests well. The country could afford to be loyal to that system, despite the claims of Southwestern farmers and Western miners that it depressed prices. Gold in California in 1848, silver in Nevada in 1869, the expansion of wheat acreage in the 1870s, and the bubbles followed by bursts throughout the century from 1815 to 1914 affected the system in ways we chose to ignore. That was the business of someone else-perhaps in London. America did what it did. Feedback to other nations was ignored.


World War I changed the entire position of the United States in the world economy. According to economic analysis a country progresses through a series of stages: young debtor, mature debtor, young creditor and mature creditor. The United States went from the first to the fourth in three years, from 1914 to 1917. Assembly-line methods devised by Henry Ford just prior to the war were expanded to produce equipment and munitions for the Allied powers of Europe and for the United States itself. Based on the Federal Reserve System, the financial apparatus of the country grew in parallel. J. P. Morgan & Co. financed British and French private borrowing in the United States, and served as fiscal agent in supporting the pound and franc in foreign-exchange markets. In the end, the U.S. government itself undertook to finance Allied borrowing in dollars, especially those for consumption and reconstruction in 1918 and 1919.

Revisionist historians maintain that the entry of the United States into World War I was a continuation of the imperialist policies of the turn of the century, and of the expansion of American trusts into overseas markets needed to sustain the rate of profit at home. These policies are thought to have been motivated by the Eastern establishment's desire, conscious or unconscious, to take over world economic domination from the City of London and other European economic power centers. The U.S. government is said early to have sought the expansion of overseas banking in order to push the use of the dollar in world trade and finance.5 The theory suffers a logical flaw. Aggressive economic designs would have been more readily achieved by staying aloof from the battle, remaining "too proud to fight." The simpler and naïve purpose of "saving the world for democracy"-a non-economic motive-better fits the facts and the logic.

Saving the world was one thing; keeping it saved was something else. President Wilson had plans for remaining involved in European and world affairs. They were not widely shared. The United States refused to ratify the Treaty of Versailles, to accept reparations, or to join the League of Nations with its Economic and Financial Department to worry about world economic questions. It did, however, join the International Labour Organisation, established at Geneva in response to a proposal of the British trade unionist, Albert Thomas, and did cooperate with the League on a wide number of issues. General commitment to participate in the world political and economic system was withheld.

The war interrupted a wave of immigration which had reached, on a gross basis, one million persons in 1913. In 1917 an Immigration Act was passed after long debate, and over the veto of President Wilson, providing that immigration be based on quotas conforming to national origins of the existing population. This restricted immigration from Southern and Southeastern Europe in favor of the Northern and Western sections. In 1921 and 1924, overall quotas were reduced. The action is generally ascribed to trade-union desire to limit the workforce and preserve wage gains achieved during the war. More fundamentally, the motivation was sociopolitical rather than economic, reflecting widespread concern that it would be difficult socially to absorb the vast numbers of would-be immigrants backed up in the countries of supply.

The most serious economic issues arising from the war dealt with reparations and war debts. Having been strengthened economically rather than hurt by war, the country refused to accept reparations, but insisted on being repaid by its Allies for war and postwar loans. It further maintained that war debts and reparations were unrelated, contrary to French and British positions, the latter expressed in the Balfour Note of August 1922. Not until the Hoover moratorium of June 1931 was the connection acknowledged; and even after reparations had been buried at Lausanne in July 1932, Hoover in 1932 and Roosevelt in 1933 continued to try to collect war debts.

The United States played a role in reparations, however, through private individuals. When the Versailles arrangements broke down after the German inflation and after the occupation of the Ruhr by Belgian and French troops, Charles G. Dawes served in 1923-24 as chairman of a commission to write a new plan. The conventional wisdom has held that Dawes was simply American window-dressing for a staff plan drawn up by British civil servants, but this is now known to be oversimplification. One British aim in the Dawes Plan was that the revised Reichsbank should hold foreign exchange, that is, pounds sterling, among its reserves. On U.S. insistence the Dawes Plan specified that Reichsbank reserves be held in gold-an echo of a controversy between France and the United States forty-plus years later but with the U.S. role reversed.6

By 1930, when Owen D. Young served in a similar capacity on a revised reparation scheme, U.S. involvement in European financial questions was complete. While much of the attention of government was focused on domestic problems-the Florida land boom, the rise of the automobile industry, and the decline in agriculture-Eastern finance was being drawn into world affairs. The Dawes Plan provided for issuance of a loan for Germany. The New York tranche (or slice) was oversubscribed 11 times and gave a sharp stimulus to foreign lending generally. The Agent-General for Reparations, established under the Plan, was S. Parker Gilbert, formerly of J. P. Morgan & Co.

During the 1920s, moreover, Benjamin Strong, the President of the Federal Reserve Bank of New York, was often called upon to arbitrate the central-bank quarrels of Europe, largely between Montagu Norman of the Bank of England and Emile Moreau of the Bank of France. Strong had a leading role in urging the return of the pound to par in April 1925. Then, within two years, he faced a dilemma, whether to lower interest rates in New York to assist the British with outflows of capital, or to raise them to slow down the boom in business and in security prices. He chose the former, and from March 1928 the stock market soared.

Economists call it a "dilemma position" when monetary policy is pulled in one direction by external and in another by internal requirements. For a long time, Strong's choice of aid to Britain's maintenance of the gold standard over curbing the speculative excesses of the stock market was regarded as a bad one. More recently, "monetarist" economic historians such as the Nobel-laureate Milton Friedman have shifted the debate, arguing that, while Strong was wrong in favoring foreign over domestic considerations, he should have ignored the stock market and focused on a steady expansion of the money supply.7 I am no more moved by this revisionism than by the political brand. Money supply was growing, and in fact declined very little up to March 1931. To the economic revisionists, it was not growing fast enough, a subtle argument but unconvincing.8

In Wilson's Fourteen Points, only the third had dealt with economic questions, and called for "removal, so far as possible, of all economic barriers and the establishment of an equality of trade conditions among all nations consenting to the peace and associating with its maintenance." It evoked little response, either at home or abroad. The United States in Harding's Administration took action in the Fordney-McCumber Tariff of 1922 to nurture its new crop of wartime infant industries. Tariffs were similarly raised all over the world.

The League of Nations undertook to reverse the trend in a series of conventions, many of them technical, for lifting trade from the chaos into which it had fallen during the war and the period of postwar monetary disturbance. In 1927 a World Economic Conference, with the United States as observer, met in Geneva and adopted a series of resolutions for lowering tariffs and opening up trade channels. No action was taken under it. Instead, Herbert Hoover, campaigning for the presidency in 1928, promised to do something for agriculture to alleviate its plight under the pressure of falling prices, which had begun in 1925. That something was to be what Josef Schumpeter called "the Republican household remedy": increased tariffs. In due course, this commitment ended up as the Hawley-Smoot Tariff of June 1930.

On tariff matters, disaggregated economic interests and recommended policies diverged for ideological reasons, or what is perhaps better explained as cultural lag. The North and Middle West, interested in manufacturing, favored Republican high tariffs; the South, with a traditional stake in the export of cotton, was Democratic and opposed to protection. (Middle Western agriculture was ambivalent: interested in exports of grain and lard, but worried about farm imports from Canada and Australia.) But the economic base underlying these positions was changing. In the Middle West, manufacturing had risen through mass production to an export position, which would benefit from freer trade; in the South, especially North and South Carolina and Georgia, the cotton-textile industry, moving in from New England in the 1920s and 1930s, gave many states a greater interest in cotton textiles than in cotton production. Not until after World War II did the South begin to qualify its doctrinaire espousal of free trade; and a Senator such as Robert Taft from Cincinnati, a city exporting machine tools to the world, never altered his inherited protectionist views in the economic interests of his constituents. Detroit in the 1920s was rising to a position like Manchester in Britain during the first half of the nineteenth century. It was slow in drawing policy consequences.


To Herbert Hoover, the Depression which started in 1929 was the fault of Europe, and there was little that the United States could or should do internationally to remedy it. The Hawley-Smoot Tariff of 1930 was a domestic measure, undertaken to relieve agriculture. If the movement to raise tariffs spread beyond farm products to manufactures, and if tariff rates were raised to unconscionable levels, as 34 protesting nations abroad contended, Hoover nevertheless regarded it as a private U.S. matter. He did not answer widespread criticism that creditor nations should not raise tariffs on the ground that this prevents debtors from paying interest and amortization-an oversimplified and dubious doctrine, as it happens. (Tariffs under stable conditions raise income which spills over into further imports, to change for the most part the structure rather than the total quantity of imports.) Mostly, however, he failed to see the Hawley-Smoot Tariff as the major action in setting off a retaliatory tariff war of the beggar-thy-neighbor sort. World trade shrank in a declining spiral, as the quantities and prices of traded commodities continuously fell.

The impact of the Depression in the United States ricocheted abroad in other ways. The United States stopped buying as much abroad and also stopped lending, thus cutting down on available foreign exchange in two ways. In British lending of the nineteenth century, foreign and domestic investment alternated: when the periphery lost receipts from exports, it was able to borrow. This was not a matter of policy, but of the action of market forces. In the United States lending policy was minimal. The Department of State had asked Wall Street to notify it of impending bond issues so that it could indicate if there were foreign-policy objections to particular loans. And the Johnson Act of 1930 stipulated that borrowers in countries in default on war debts could not have access to American capital markets, but this manifestation of congressional irritation on war debts should not have had any effect on major borrowers in Germany, the Dominions and Latin America that owed no war debts. Nevertheless, there was nothing that President Hoover could do to stimulate lending. It picked up in the second quarter of 1930 and then mysteriously collapsed.

In 1931, Hoover acceded belatedly to the suggestion for a moratorium on war debts and reparations; failed to take vigorous action to stop the financial runs on Austria, Germany and Britain, partly because of the necessity of agreeing with France; and ignored the strongly deflationary impact of the appreciation of the dollar-flowing from the depreciation of the pound sterling-on U.S. farm prices, banks in agricultural areas, and ultimately on banks more generally. Mr. Hoover had an enviable record in international affairs as mining engineer and as administrator of food relief for Belgium immediately after the war. His vision of interrelations among world economies under stress, however, was a limited one, and contrasted sharply with the broader view espoused by such Eastern establishment spirits as Dwight Morrow, a Morgan partner.9

Foreign economic policy suffered in 1932-33, when Hoover was unable to govern and Roosevelt refused-after the election but before his inauguration-to make decisions before he bore responsibility. With the Inauguration and the Bank Holiday, the "Hundred Days" involved a hectic series of decisions, largely on domestic programs-the Agricultural Adjustment Act, National Recovery Act, Thomas Amendment, and the like. Within the Roosevelt Administration an intense struggle took place between the Middle Western views of advisers like Moley and Tugwell, and the Eastern-Southern retinue of Norman Davis, James Warburg and Cordell Hull. The former dominated, and problems like the clash between agricultural imports and measures to raise domestic prices, or the World Economic Conference (scheduled for 1932 and postponed to 1933), were put to one side.

The dollar was allowed to depreciate, and when the World Economic Conference finally met in June 1933, President Roosevelt torpedoed it by refusing to accept an agreement worked out by the experts in which Britain would stabilize the pound, Germany would renounce foreign-exchange control adopted in the summer of 1931, France would give up import quotas undertaken because of the ineffectuality of tariffs in keeping out foreign grain, and the United States would stabilize the dollar. The conference broke up in early July after concluding only a small agreement sought by Senator Pitman of Nevada for the silver interests. Its consequence was to divide the world economy further. The Gold Bloc of Continental Europe-France, Belgium, the Netherlands and Switzerland-drew together, as did the sterling area of most of the British Commonwealth and a few countries closely allied to Britain in trade. At the center of the sterling area was the preferential trade system of the Commonwealth worked out at Ottawa in August 1932.

Under Roosevelt, however, the inward-looking phase of American policy did not last long. At the end of 1933 he and Secretary of the Treasury Morgenthau had lost interest in daily changes in the gold price and were exploring a stabilization agreement with the British. Failing this, in February 1934 they fixed the dollar in terms of gold anyhow, at $35 an ounce.

In the same month Roosevelt gave Cordell Hull-the Secretary of State with a fanatical preoccupation with free trade-the green light to introduce a bill to lower tariffs on a bilateral basis. (Under the unconditional most-favored-nation clause the country had adopted in the 1920s, reductions negotiated with one country would be extended to others.) This was signed into law in June 1934. Within the half-decade to 1939, 20 agreements were concluded, the first with Cuba in August 1934, the most important with Britain in November 1938 and two with Canada, in November 1934 and November 1938.

An awakening interest in foreign policies, both political and economic, also led the United States to normalize relationships with the Soviet Union, from which recognition had been withheld since the Revolution of 1917 on the ground that successor governments are required to assume the debts of their predecessors, which the Soviet government had been unwilling to do. Trade relations with the Soviet Union, which had been minimal to this time, expanded somewhat with the establishment of Soviet official buying agencies in the United States, but the development was not substantial.

To the South, Roosevelt initiated a Good Neighbor Policy, without, at that time, much in the way of specific content. It was, however, a significant change both from the Monroe Doctrine, which had been directed mainly against European intervention, and from the imperialism of the turn of the century-the imperious use of the Marines to collect debt service from Nicaragua and Haiti, and unquestioning support for such companies as United Fruit and Mexican Eagle in their operations in the area.

Of multilateral and more general import was the Tripartite Monetary Agreement entered into on September 26, 1936. The occasion was the collapse of the Gold Bloc, and especially of the French franc. The agreement provided a convenient cover under which the franc rate would be adjusted as part of an international exercise to provide exchange-rate stability. The engagement was limited: each country undertook to hold currency of the others without conversion to gold only for 24 hours. Symbolically, however, it marked an initiative by the United States in stabilizing the world economy. A separate similar exercise was undertaken in the spring of 1937, when the country refrained from changing the price of gold under pressure of the "Gold Scare" in which foreign private citizens and even a few central banks sold gold for dollars against the prospect of a reduction in the gold price. At some inconvenience, but no real cost, the U.S. Treasury held to the $35-an-ounce price, buying all gold that was offered to it and sterilizing it by raising reserve requirements and open-market operations.

Exactly what forces produced the change in American economic policy in 1933 and 1934 from isolation to involvement is not self-evident. Elements contributing to the shift included recovery from the depths of the Depression that had focused attention on domestic concerns, perhaps a shift of the President's interests from the Populist position adopted during the campaign and especially during the first exciting days in office to his more comfortable views as an Eastern establishment figure; growing preoccupation with the threat to world peace posed by dictators in Europe and the Far East, with a natural extension of interest from foreign policy to foreign economic policy; and, as already noted, familiarity and boredom with the esoteric games of changing the gold price to alter the exchange rate to raise U.S. commodity and share prices-especially after July 1933, when the technique ceased working. The circumstances and the personality of the President played a large part. More fundamental reasons would argue that the inward-turning of 1928 to 1933 was a deviation from trend, to which 1934 marked a return.

A European effort to regularize the international economy through agreement was initiated in 1937, leading to the preparation of a report under the direction of Paul Van Zealand, former Prime Minister of Belgium. Appearing in 1938, the report was ignored under the stress of recession in the United States, which had struck in September 1937, and of rapidly expanding rearmament in a Europe threatened with war.

Foreign economic policy records two episodes associated with the rising threat of war. In 1935 Italy launched an unprovoked attack on Ethiopia, and the League of Nations somewhat diffidently called for sanctions on the delivery of oil to Italy. Though not a member of the League, the United States nonetheless supported the campaign and urged American oil companies to stop selling oil to Italy. The large companies complied with the request; unfortunately a rapid increase in Italian oil prices induced the entry of a host of single-ship operators who escaped control and delivered to Italy at Eritrean ports more gasoline than it had previously imported.

And, in 1938, the United States took another economic-warfare action of its own in cutting off the export of scrap iron and steel to Japan, foreshadowing a cutoff of oil in the summer of 1941, which helped precipitate the decision of Japanese military leaders to make war on this country.

As war began in Europe in 1939, President Roosevelt honored more in the breach than in the observance the Neutrality Act of 1939, passed by the Congress in an effort to keep this country uninvolved; got around the Johnson Act of 1930 by interpreting it to apply only to private lending in the United States, and not to government advances to foreign borrowers; and finally, after the tide of battle had turned against Britain in 1940, and well before the United States had entered the war, enacted Lend-Lease in February 1941 as a way to transfer resources to its Allies without piling up the kind of recount of war debts that had occurred after World War I. A special feature of Lend-Lease was the Hyde Park Agreement of December 1941 with Canada, under which supplies and components needed by Canada for incorporation in matériel produced for Britain would be lend-leased to Britain, but delivered to Canada. This had the effect of keeping Canada off the books as a recipient of U.S. assistance. Before U.S. entry into the war, the United States and Canada established a Joint Economic Committee of the two countries to expedite cooperation in mobilization and in planning postwar reconstruction. When the United States did enter, joint boards were established with Britain in a number of economic areas, parallel to the military arrangements, and especially in procurement, shipping and food.

As one condition of qualifying to receive assistance, the Lend-Lease agreement required that the recipient promise to cooperate with the United States in the design and construction of a liberal postwar world economic system. In the summer of 1941, President Roosevelt and Prime Minister Churchill met aboard a warship off Newfoundland. In addition to strategic planning of military operations, they drafted an Atlantic Charter that laid down broad principles for the establishment of a liberal economic system after the war.


In the Department of State, Leo Pasvolsky was assigned the task of preparing postwar plans for U.S. policy for the world economy. No government agency waited for such plans to emerge. The Treasury moved ahead with monetary reconstruction. In 1943 the Agriculture Department organized a Hot Springs meeting on food. From the Department of State came a design for world trade. The United Nations was to be assigned a watching brief over world economic policies generally, but with operating responsibilities assigned to specialized agencies.

These responsibilities are indicated by the substantives used in the titles of the major world organizations. First in functional order was the United Nations Relief and Rehabilitation Agency (UNRRA). Relief was the provision of foodstuffs to hungry allies after the war. Rehabilitation consisted of restocking. The Bretton Woods bank was the International Bank for Reconstruction and Development (IBRD), beginning with the reconstruction of war damage, and going on to the development of countries which had not begun industrialization. The International Monetary Fund (IMF) would deal with exchange rates, balances of payments and the financial side. An International Trade Organization (ITO) was to lower restrictions and set rules for commerce. The world order would be pieced out with lesser specialized agencies in health, meteorology, aviation and the like. While these institutions were being brought into being, the United States enlarged by $3 billion the lending capacity of the Export-Import Bank, established in 1934 primarily to assist exports and employment. Of this, $1 billion was initially set aside for a loan to the Soviet Union, pending settlement of Lend-Lease and other wartime financial arrangements. The loan failed to materialize for reasons that have never been made clear but that undoubtedly reflected the influence in that first Truman year of such men as James Byrnes and Leo Crowley.

As the country least hurt by war, the United States took a major role in contributing to UNRRA, stocking it in large part with surplus army provisions. A first tranche of $2.75 billion was to be followed by a second equal amount in August 1945. A number of countries raised objections. Canada chose to give its aid directly to Britain. Britain refused to join unless the feeding of Austria and Italy were shifted from military aid (in which its share was 50 percent) to UNRRA (in which it was 8 percent). The U.S.S.R. insisted that while it was a donor, to the extent of 2 percent, and hence not entitled to receive aid, the Ukraine and Byelorussia should be recipients. With one vote in 17, the United States reluctantly agreed to take over the Canadian 6 percent, thereby increasing the U.S. total from 72 to 78 percent, and to add recipients, thus diluting the aid provided for others. It resolved thenceforward to render aid bilaterally, rather than through multilateral organizations that lacked objective principles of aid-giving and were subject to logrolling.

The need for relief, rehabilitation and reconstruction had been seriously underestimated in the postwar period, on several scores beyond the dilution mentioned. In August 1945, on the surrender of the Japanese, Lend-Lease was stopped precipitously-a decision made by President Truman and Secretary of State Byrnes en route to the Potsdam negotiations without consulting their economic advisers. The decision was based on commitments made to the Congress in the Lend-Lease legislation process, commitments which they both, as former Senators, felt bound to honor. In his Memoirs Truman recognized this as a serious mistake and put most of the blame on Byrnes. In addition to this blow, price control was removed in June 1946, so that a given amount of dollars went less far. Military destruction had been overestimated, but a serious underestimation of greater significance was made of the under-maintenance of capital, using up of stocks, and wearing out of consumers' inventories of clothing and household goods. Post-UNRRA direct assistance by the United States was undertaken in the strenuous conditions of 1946, along with the use of IMF and IBRD loans for emergency consumption rather than the reconstruction and balance-of-payments purposes for which they had been established.

The British position had been alleviated temporarily by an Anglo-American Financial Agreement which provided for a $3.75 billion loan to enable Britain to resume convertibility of the pound. During the early debates on postwar policy, John H. Williams of the Federal Reserve Bank of New York and Harvard University had opposed the IMF as a universal device for restoring world monetary health, and argued an opposing "key-currency" principle in which certain major monies, around which pivoted large currency areas, would be restored to health separately and in sequence. As often happens when alternative courses are debated, both the IMF and the British key-currency loans were adopted. The initial amount of the loan was cut from $5 billion, perhaps a political necessity since the measure ultimately passed the Senate by only one vote. (The vote ratifying the agreement in Parliament was also close, as the Opposition contended that the conditions of the United States in granting the loan were too onerous.) As it worked out, the British were unwilling or unable to negotiate the write-down or funding of accumulated sterling balances or to institute effective controls on the export of capital. In consequence, the convertibility of sterling instituted in July 1947 lasted only six weeks before the bulk of the loan was gone.

Relief for the defeated countries of Germany and Japan was a low priority for the Allied governments but not altogether ignored. U.S. policy toward Germany was complicated by joint occupation with Britain, France, and especially the Soviet Union; in Japan, where the United States was the sole occupation power, decision-making was easier. U.S. policies called for avoiding the connections between reparations, war debts and foreign lending which had held after World War I. At Potsdam the United States insisted that the four zones of occupation be treated as a single economic unit, and that the first charge on current German production from all zones be commercial exports necessary to pay for imports, rather than reparations. The point was to prevent some occupation powers from taking out reparations from current production while others were obliged to feed the population in their zones. Reparations, it was agreed, should be paid through removal of capital equipment from Germany that was in excess of the peacetime requirements of the German people.

Strong forces in the United States pushed for restrictive and repressive policies in Germany. Under a Joint Chiefs of Staff directive (JCS 1067), drawing its inspiration from the so-called Morgenthau Plan, the U.S. commander was instructed to take no steps to revive the German economy beyond those necessary to prevent such disease and unrest as might endanger the occupation forces. In July 1945, however, French, Belgian and Dutch need for coal made it necessary to try to restore German coal production for export. By fall, Poland was asking for spare parts for German machinery in Silesian coal mines. It proved impossible to reach sustainable agreements with the Soviet Union on what they could remove from Germany as war booty, restitution and reparations, and in particular the Soviet Union did acquire foodstuffs from the eastern zone of occupation while Britain and the United States were feeding their zones in the west. Gradually the zonal arrangements broke down, and so did arrangements for reparation removals. The economic importance of Germany in the revival of Europe became clear. By September 1946, the Secretary of State made a speech at Stuttgart outlining a more positive policy of German economic recovery in a European setting.

Governing and feeding Germany were further complicated in the fall of 1946 by a British government approach to the United States, stating that the country was unable to continue to pay the import bill for its populous zone of occupation including the Ruhr. A Bizonal Agreement in December 1946 provided that the two zones would be treated as a unit and that the United States would advance the bulk of the sums needed for imports. Later the French joined, with the smaller, self-sufficient zone.

Continued British economic weakness led in February 1947 to that country preparing to give up its support of Greek resistance to domestic and foreign infiltrating communist forces, and to another substitution of American for British responsibility, in the Truman Doctrine, for military aid to Greece and Turkey. Much of the assistance, especially in roads in Turkey, served a double economic and military purpose and could be said to be the beginnings of U.S. aid to economic development. Its main purpose was military.

A harsh winter in Europe in early 1947, which burst pipes, blocked transport, flooded fields and rotted seed, threatened economic breakdown throughout Western Europe. Funds made available from the United States under the British loan, UNRRA relief and post-UNRRA aid were nearing exhaustion. Political stalemate with the Soviet Union over German questions, plus economic disintegration which overwhelmed the stopgap measures applied to separate countries, produced in Washington a strong desire for a new, cooperative, enlarged effort to achieve recovery in Europe. On June 6, 1947, Secretary of State George C. Marshall gave a speech outlining a European recovery program. He proposed that Europe should prepare a program of recovery which would involve the cooperation of all the countries participating, including Germany, and that with it as a basis the United States would undertake a new coordinated program of aid.

The invitation was extended to all the countries of Europe, including the Eastern bloc and the Soviet Union. Foreign Minister Molotov met with Foreign Ministers Bevin and Bidault in Paris but refused to participate unless the United States handed over a fixed sum first and let the countries of Europe use it in their own way. Following this refusal, Czechoslovakia and Poland, which had previously accepted the invitation to participate, reversed their decisions. When the three western zones of occupation of Germany went ahead with monetary reform in their own zones and in their districts of Berlin, in June 1948 as the Marshall Plan got under way, Soviet military forces blockaded land access to Berlin, effectively dividing the country. Western links to Berlin and the Berlin economy were maintained only by airlift.

Considerable ambiguity attached to U.S. views as to what was meant by a European recovery plan. In the eyes of many, it meant the extension to Europe as a whole of French techniques of planification begun with the Monnet Plan of 1946. To William L. Clayton, Under Secretary of State for Economic Affairs, and Lewis W. Douglas, Ambassador to the Court of St. James, it implied return to liberal principles of free markets. The preamble to the European Recovery Act of April 1948, and Paul G. Hoffman's speech of October 31, 1949, emphasized the reproduction in Europe of a vast continental market like that of the United States. The United States applauded when in May 1950 French Foreign Minister Robert Schuman proposed a measure of functional integration in the European Coal and Steel Community. It supported a European Payments Union. At the same time, it maintained pressure for the elimination of quota restrictions, which largely discriminated against U.S. exports in the interest of economizing on dollars, and worked more broadly for the adoption of generalized rules for trading in the draft Charter of the International Trade Organization (ITO) signed at Havana in 1948.

As indicated earlier, the ITO was to be a cornerstone of a worldwide system of liberal trading, setting down procedures for lowering tariffs on a multilateral basis, providing for freedom of investment, limiting restrictive business practices, and establishing machinery for handling necessary exceptions and adjustments. Countries emerging from the difficulties of war, and those embarking on programs of development, insisted on so many exceptions to the general rules, against quantitative restrictions and in favor of low, nondiscriminatory tariffs, that the Congress of the United States judged the document worthless. The United States would be held to the general rule; other countries would claim avoidance under saving clauses.

The Department of State ultimately did not submit the treaty to the Senate for ratification. Instead, it concluded an executive agreement, not requiring congressional assent, the so-called General Agreement on Tariffs and Trade (GATT) that embodied the principal clauses of the ITO, and provided for a small staff to supervise operation of the agreement in Geneva. Under its aegis, a series of multilateral reductions of tariffs was negotiated in the postwar period, from the Geneva Round in 1949 to the Dillon, Kennedy and current Tokyo Rounds. The Kennedy Round negotiated after 1962 was particularly salient.

Help to developing countries was initially limited to the "development" aspect of the IBRD and Greek-Turkish aid. In his Inaugural speech of January 1949, however, President Truman included a Point IV aimed at this group of countries. This program initially consisted of technical assistance, especially in agriculture, education, and the planning of public works. As the 1950s wore on, it became increasingly evident that much more was needed, especially capital assistance. A euphoric mood developed that poor countries could all follow the development path of Britain, the rest of Western Europe, North America, and most recently Japan, and succeed in raising their standards of living. Needed were resolve on the part of local government and foreign aid in the form of goods, modern technology and effective management. Under the Republican regime of President Eisenhower, and later under Nixon, emphasis shifted from official aid to the role of American corporate investment in countries initially called "underdeveloped," then "less developed," and finally "developing." Both political parties put faith in the beneficent role of American food aid, under Public Law 480, designed to help developing countries and the American farmer, the latter by disposing of surplus stocks. Other groups were not slow in taking advantage of the opportunities afforded by foreign aid, shipping lines insisting on transporting it in American bottoms, suppliers that it be spent on or tied to American goods only. Even the Congress benefited through a provision that five percent of the local-currency counterpart derived from the sale of aid goods be set aside for American use, largely the building of embassies and the entertainment of junketing Congressmen.

Assistance was furnished through multilateral agencies and bilaterally. Under the former, there were U.N. programs: those of the IBRD and its subsidiaries-the International Development Association (IDA) for non-bankable projects, and the International Finance Corporation (IFC) to invest in private enterprise in developing countries. In time special regional banks were established, largely with American capital, in Latin America, Asia and Africa. In due course, aid to development was extended by other industrial countries after their recovery from the war. Development became an international concern of the Organization for Economic Cooperation and Development (OECD), which emerged under the Marshall Plan from the original Organization for European Economic Cooperation (OEEC)-enlarged to include the United States, Canada, Australia and Japan. Its Development Assistance Committee (DAC) gathered statistics, compared national efforts, and urged increased aid.

Foreign aid was assisted in the early stages by the cold war. South Korea, Taiwan and Israel were especially favored by U.S. aid because of their strategic importance. Cuba got no aid from the United States, a great deal from the Soviet Union. At the last minute Secretary of State John Foster Dulles backed away from building the Aswan Dam in Egypt and let the Soviet Union take on the project. Bilateral aid was divided into military and economic, and the latter was often not that much different from the military aid in its implications for political alignment and support.

Discouragement with foreign aid set in during the 1960s. Economic development was stubbornly slow. Aid achieved little growth, less gratitude, few political objectives. The Hickenlooper Amendment, which required withholding aid when American property was nationalized without prompt, adequate and effective compensation, proved ineffective. Internationalists deduced from these circumstances that foreign aid should be multilateral, not bilateral. Those not so internationally minded thought there were better things to do with the money at home. Détente with the Soviet Union lessened the urgency of helping the developing countries. Aid still could be used in particular political impasses to grease a solution, help for both Egypt and Israel, or support for Rhodesia. But the moral commitment eroded.

Last in this catalog of areas of foreign economic policy was the monetary field. The IMF went into hibernation after the start of the Marshall Plan, except for a series of small operations, largely the furnishing of advice to developing countries, since the major financial needs of developed countries were covered by the Marshall Plan and by the substantial volume of dollars earned by Japan as a staging area for U.S. troops in Asia.

As recovery progressed, however, the countries of Europe and Japan began to accumulate foreign-exchange reserves, a process which continued after Marshall aid ceased. Some insignificant amounts of dollars were converted into gold in the 1950s. The greatest part was held in deposits in U.S. banks and in U.S. Treasury bills. The country became banker for the world, spending abroad, investing, lending, furnishing assistance in amounts which exceeded the dollars earned through exports of goods and services. Accumulation of dollars by foreign countries began to be regarded as a deficit in the balance of payments of the United States, and was a matter of concern to President Eisenhower in the closing days of his term of office, and to Presidents Kennedy and Johnson from 1960 to 1968. Gradually the country's economic preoccupations shifted from the rest of the world to the international position of the United States.


Immediately after the war, the French economist François Perroux wrote of the United States as a dominant economy; i.e., its every action affected the rest of the world, but it was not in turn called upon to react to events outside.10 A recent English observer, seeking to make an elusive distinction between "hegemony" and "leadership," characterized the role of the United States in international economic affairs in the 1950s and up to the middle of the 1960s as "hegemonic."11 The decline in dominance was visible about 1960.

One view holds with hindsight that the shift from preeminent concern in foreign economic policy for the public international good began with the permanent exception sought by the United States in 1955 to the rule against quantitative restrictions in GATT for its agricultural products.12 U.S. support for freer trade in agricultural products is highly selective: it favors freer trade in export products such as grain, oil seeds and meal, citrus fruit, poultry and tobacco; and opposes it in dairy products, meat, rice, sugar, cotton and wool, which are on its import list.13 Farm groups have long had power in legislatures well beyond their economic significance, as a result of Engel's law and cultural or perhaps political lag. Engel's law-that food consumption as a proportion of expenditure declines as income rises-means that farm groups are in continuous decline in the proportion of national income produced, of persons employed, and in votes. Political lag-until the Supreme Court one-man, one-vote decision in 1962 required state legislatures to be reapportioned on a regular basis-meant that the states retained control of the decennial reapportionment process and that farmers dominated it. This fact and the seniority system kept them in effective control of key legislation far out of proportion to their numbers or economic importance. Where farm groups led the way in insisting on domestic special interests over the interest of the economic system on a world basis, other groups-trade unions, industries, shipping, large corporations and the like-did not tarry in asserting their own interests. The executive branch often fought a rearguard action, yielding slowly in watering down the successive trade legislation, for example, with escape clauses, peril point provisions, the application of export quotas abroad, anti-dumping provisions, and exceptions to freer imports in the interest of national defense.

The primary unraveling of the American dominance, hegemony or leadership in the world economic system, however, came in the monetary field, and had its roots in technical and political difficulties. The technical difficulties were those of understanding. The Bretton Woods system had strongly opposed flexible exchange rates on the basis of the 1930s experience of competitive depreciation. It permitted or encouraged control of international capital movements in the defense of a fixed exchange rate. At the end of the 1950s, members of the economics profession-prominent among them Yale Professor Robert Triffin-began to fear that the world money supply would prove inadequate. Gold production furnished only about $1.5 billion of additional reserves annually to the world, and much of this-ultimately all of it-went into private hands for industrial use and hoarding. Liquidity was furnished to the world by the U.S. balance-of-payments deficit, measured by the increase in dollar reserves by countries abroad. When the United States succeeded in correcting this deficit there would be insufficient liquidity to finance world production and trade. Observers like Jacques Rueff of France and Roy Harrod of Britain wanted to raise the price of gold; Robert Triffin recommended issuance of a new international money. Meanwhile, the United States sought unsuccessfully to correct its balance-of-payments "deficit" by halting capital exports through taxes on security issues, controls over bank lending, and restrictions on taking capital abroad by firms investing overseas-all to no or little avail. And countries like the United States and Germany conducted their monetary policies independently, without recognition that their money markets had been joined through the joining of each with the Eurocurrency market which had grown up outside the United States.

In retrospect it is clear that there were a number of errors of economic analysis in these views. First, it proved impossible to halt capital movements in most societies. Money is fungible and flows through many channels. To cut off one or two channels at a time will only increase the pressure on others and maintain the flow which, so long as there are enough conduits open, is impervious to the closing off of any one. Other temporizing devices worked out by the ingenious Under Secretary of the Treasury, Robert V. Roosa, such as issuing special bonds which guaranteed the buyer against exchange risk, or negotiating special offsets by Germany against American expenditure for the maintenance of its forces in Europe, were of little help, based as they were on the reasoning that the deficit in the U.S. balance-of-payments was a passing disturbance. Second, most of the deficit was a function of the fact that the United States was acting as banker to the world. Liquidity needs determined the deficit, rather than the deficit accidentally filling liquidity needs. This became less true in the final years of the Vietnam War after about 1968, and especially in 1970 and 1971, when the merchandise trade balance in the United States balance of payments turned adverse on an annual basis for the first time since 1894. The meaning of surplus and deficit in the balance of payments is different for a bank and for a bank customer. The United States was acting as a bank. The rest of the world represented customers. Third, when money markets are joined, as European markets were with those of the United States and Canada, monetary policies cannot be independently determined. In 1966 and 1969-70, U.S. attempts to tighten interest rates pulled a flood of money from Europe. The system ultimately collapsed in 1971 when the United States tried to achieve cheap money while Germany was seeking to raise interest rates. Dollars poured abroad and drowned the Bretton Woods system.

The Bretton Woods misconception about the possibilities of control of capital movements had another consequence. The IMF had been designed to fund cyclical-not persistent-balance-of-payments deficits on current accounts, not to handle capital flows. The amounts available were too small, even before postwar inflation, and provision of assistance was stretched out over time. The IMF was no help in a crisis on this score, and also because its decision-making procedures were time-consuming. A few steps were taken to modify IMF procedures to correct these disabilities. With convertibility in 1958, however, it proved necessary to provide a special fund for countries under speculative attack, called the General Arrangements to Borrow (GAB), organized by leading financial countries (the Group of Ten). A run on the pound sterling in March 1961 occurred while this machinery was being completed, and was met by an informal emergency loan to Britain on the part of a number of countries. This so-called Basel Agreement, led by the United States, was regularized in arrangements to swap claims on foreign central banks for foreign claims on domestic central banks, which were activated in subsequent foreign-exchange crises in Canada in 1962, Italy in 1963, and Britain again in 1964 and 1967. As the largest supporter of the agreement, the United States found it of little help when the crisis affected the dollar.

In 1965, under President Johnson and Secretary of the Treasury Henry H. Fowler, the United States decided that it would be useful to adopt Triffin's suggestion of a new international reserve asset, but to do so in addition to gold and dollars, not as a substitute for them. The reason was that gold was going into hoarding and was not available for adding to world liquidity. The world had accumulated $25 billion or so of dollars and was wary of taking more. To increase world liquidity at some appropriate rate, therefore, it was believed necessary to add a third asset. Subconsciously, perhaps, the American authorities were more interested in restoring the U.S. ratio of reserve assets to foreign liabilities than they were in global liquidity. They failed to recognize that Special Drawing Rights for the United States meant SDRs for all.

An asymmetric or hierarchical system in which the United States acted as banker for the world; the ultimate provider, along with military security, of a market for distress goods; a source of goods in short supply, and of capital requirements; a monitor of the system of international money including the pattern of exchange rates; and a lender of last resort in crisis-such a system may be possible to contemplate in economic terms. By the 1970s it was no longer in the cards politically. Attacks on the system came from many sources: from within the United States where some industries, and most labor unions, joined farmers in asserting the primacy of their parochial interests over the international interest of the system; from radicals who insisted that U.S. professed action in the international interest was in fact a selfish imperialist one; from a stronger Europe, led by France and followed somewhat reluctantly by Germany, Britain and Italy, claiming an enlarged share of decision-making; and from the developing countries. It was largely the domestic interests in the United States that led Secretary of the Treasury John Connally in August 1971 to insist on devaluation of the dollar, to break the pressure on import-competing industries, and which led President Nixon in August 1973 to embargo the foreign sales of soybeans, thus administering a second shock to Japanese economic interests and sensibilities. The French voice in international economic matters was larger than their economic specific gravity for a number of reasons: because they mobilized the European Economic Community (EEC) in support on occasion; because they were willing to exit-converting dollars to gold ostentatiously in 1965, withdrawing from NATO, refusing to vote in EEC until they got their way over agricultural prices.

The developing countries had organized themselves as the Nonaligned Nations at Bandung in 1955 and as the Group of 77 in the United Nations Conference on Trade and Development (UNCTAD) in 1964, and began gradually offering an alternative view of how the international economic system should be managed. In the United Nations, making effective use of a large majority because of the numbers of newly independent states, the developing countries gradually fashioned a position which differed from the free-market one professed by the United States in a long list of economic functions, from trade to commodity prices, assistance for balances of payments, foreign aid, the multinational prices, assistance for balances of payments, foreign aid, the multinational corporation, and the issuance of international liquidity. They denounced the conception of a liberal system as neocolonialist, continuing economic subjection after political independence had been granted, and opposed it with a list of demands packaged as the New International Economic Order. The success of the Organization of Petroleum Exporting Countries (OPEC) in converting a political embargo into a drastic price rise in oil in December 1973 in the wake of the Yom Kippur War raised expectations of the developing countries in their demand for a share of SDRs, and their demand for generalized preferences for manufactured exports of developing countries in industrialized nations. Secretary of State Henry Kissinger initially reacted to this importunism by ignoring it. Gradually, however, he began to take a hand, seeking a way to find an accommodation with the developing countries. At the Seventh Special Session of the General Assembly in September 1975, he went along with a proposal for a Committee of Twenty, to meet at Paris, with four committees, to prepare detailed plans. And during 1976 a genuine bargaining process seems to have been under way, in Paris, at the Jamaica meeting on monetary matters, at the UNCTAD Conference in Nairobi in May-as well as in the related area of the Law of the Sea Conference, where a deadlock between developed and developing countries persists on the issue of how to exploit and distribute the proceeds of the mineral resources of the ocean seabeds.


Public goods are those the consumption of which by any one person or consuming unit does not diminish the amount available for the consumption of others. Short of some level of congestion, roads and parks furnish an example. Other types of public goods are law and order, clean streets, economic stability.

Public goods are difficult to get produced on a voluntary basis because it is in no one person's interest to undertake the expenditure of time, effort or money to do so. And, if they are going to be produced, the individual can enjoy them without payment, as a free rider. Hence, public goods are notoriously underproduced. They must be furnished by government, and even then sectional or group interests may politick against their production on the ground that their costs exceed their benefits.

In the international economy, there is no government to produce public goods. Certain international agencies are endowed with powers to discharge certain functions. For the most part, however, international public goods are underproduced unless some countries take on a leadership role, cajoling, persuading, arm-twisting other countries to take their appropriate shares of the cost. There can be stalemate: at the 1927 World Economic Conference under the auspices of the League of Nations, all countries, including the United States which attended as an observer, agreed to lower tariffs, but no country took action. All waited for a lead which was not forthcoming. At the World Economic Conference of 1933, no country was willing to abandon its national plans for recovery for the possibly illusory hope of a joint recovery effort.

Without leadership, international public goods are underproduced. With leadership there is the opposite danger that some country starts out believing that it is acting in the public or general interest and slips knowingly or unwittingly into serving its own ends exclusively.

The international economic system flourished, more or less, from 1870 to 1913 when Britain served as world economic leader. The public goods that it provided were a market for surplus or distress goods, a countercyclical source of capital, management of the gold standard that maintained a coherent set of exchange rates and coordinated macroeconomic policies, and the lender of last resort in crises. After 1913 Britain was unable to discharge these functions, and the United States was unwilling to. The Great Depression is largely ascribable to this gap.

Beginning about 1936 and with assurance during and immediately following World War II, the United States undertook to provide the public goods needed for world economic stability. Instead of the gold standard as cover, it had the United Nations and its specialized agencies. From the early 1960s, however, and increasingly from 1965 as the Vietnam War deepened, this country became less willing to act as a leader and the world became less ready to accept it in that role. Some of the U.N. agencies can go on without strong national initiatives, notably the IBRD. Most cannot. France is prepared to assert a claim to leadership, with the help of its EEC partners. It receives limited support. One or two voices have been raised in favor of a duumvirate or a triumvirate of the United States and Germany, or the United States, Germany and Japan. Quite apart from grave doubt as to whether the interests of such a pair or trio of countries could be harmonized sufficiently, there are questions first whether either Germany or Japan would be willing-up to now they prefer "loyalty" to "voice"-and whether the rest of the world would accede in such an arrangement. On all three counts, the prospects appear slim.

The New International Economic Order, calling for developed countries to accede to developing countries' demands on the ground of historical equity, seems to this observer utopian. Equally so is the possibility of negotiating on a long-run basis a giant "package deal" covering aid, preferences in trade, rights and duties of multinational corporations, international commodity stabilization, the "link" for the issuance of SDRs and the like. When principles are rejected, ad hoc arrangements may take their place but are unlikely to have much staying power. The universal historical record of failure in commodity agreements originates in the fact that while buyers and sellers may be content at any one time, at a later date when the agreement comes up for renewal, the price in the open market has changed and one or the other is dissatisfied. Complex package deals appeal to the diplomats, and the historical record contains a number-like the Congress of Vienna-that have demonstrated survival value. Most have not, nor have such deals in the economic field.

What then is ahead? Since 1971, despite inability to agree on the international economic system, the world has managed to avoid the beggar-thy-neighbor policies of competitive tariffs and competitive exchange depreciation which gave us the 1930s. Instability has been avoided though stability has not been assured. The nationalistic response to the oil embargo of November 1973-Operation Independence and end-runs to Tehran to assure national supplies of Iranian oil-has subsided without doing particular damage. But the world is far from agreement on a system, accepting it as legitimate, and responding to the cajoling or arm-twisting of a leader-enforcer. Moreover, the United States is the only candidate for the role visible on the horizon, and whether this country would be willing or acceptable-absent the charisma of a Roosevelt or a Kennedy-is very much in question.

What might such a system consist of? To a conventional liberal economist, the answer is relatively straightforward. It should be a market system on the whole, but with market solutions modified when they become intolerable, i.e., when goods are very scarce or so abundant as to threaten livelihoods. This does not mean commodity agreements so much as some provision for stocking grain against a repetition of 1974, some industrial materials stockpiling, but primarily international action to maintain world income in depression. Tariffs or quotas would be acceptable only on a disappearing basis, to moderate but not to forestall adjustment. A multilateral agency would be established on the multinational corporation, not to handle compensation for nationalization problems, on which no meeting of minds is likely, but to cope with questions of antitrust, trading with the enemy (whether the policies of one country in this area may intrude into another through foreign subsidiaries of domestic corporations), double taxation, tax evasion, corruption and the like. The OECD is the obvious locus of such an agency today, but it should be open to other countries, as they perceive it in their interest. The OECD should also be the setting for coordination of macroeconomic policies, once discussed by Working Party No. 3, but lately fallen into desuetude. DAC in the OECD should continue to preside over aid, though the function needs a greater stimulus than the example-setting efforts of Sweden, Norway and Canada seem to provide.

The most sensitive area is that of money. At the moment, fixed exchange rates have been rejected in favor of flexible exchange rates, but sentiment seems to favor such management of flexibility as approaches fixity. A return to the dollar standard, a return to the gold standard, or the development of a full-blown SDR standard each seems unlikely. The Eurocurrency and the Eurobond markets are private organizations, escaping national and international restraint. Darwinian evolution seems inescapable in this field, and is perhaps superior to Bretton Woods planning. It is possible, and even probable, that ad hoc international management of the Eurodollar and Eurocapital markets through combined open-market operations, led perhaps by the Bank of International Settlements, will provide the stability needed. In any event, the evolution is toward the internationalization of monetary policy. Monetary autonomy, like national military security, is a will-o'-the-wisp in an interdependent world.

In all these matters, it is useful to think of normal management of the system, and crisis management. Those in trouble will think the system always in crisis. This view must be resisted. Yet the rules applicable to market forces, discrimination, exchange control, foreign aid and the like which hold in normal times may have to be set aside in a true crisis. This poses a dilemma. Readiness of the system to cope with crises reduces discipline in normal times and increases the frequency of trouble. The knife-edge must be negotiated.

The United States must be prepared to contribute to the public good of management of the international economic system in the long run, and to respond to crises, applying different rules and standards to each, striving not to let the one corrupt the other. That is difficult enough. This country must at the same time associate the other nations of the world in this task in ways that are not subject to entropy and decay. It is a tall order.


1 Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups, Cambridge: Harvard University Press, 1965.

2 See Albert O. Hirschman, Exit, Voice and Loyalty; Responses to Decline in Firms, Organizations and States, Cambridge: Harvard University Press, 1970.

3 Frank W. Taussig, Tariff History of the United States, 8th ed., New York: G. P. Putnam's Sons, 1931, p. 15.

4 See Carlos F. Diaz Alejandro, "Direct Foreign Investment in Latin America," in The International Corporation, ed. C. P. Kindleberger, Cambridge: MIT Press, 1970, p. 321.

9 See Joseph S. Davis, The World between the Wars, 1919-1939: an Economist's View, Baltimore: Johns Hopkins University Press, 1975, p. 421: "Personalities counted heavily and clashes of strong personalities were recurrent sources of intranational and international friction. There were never enough harmonizers (such as Morrow, Salter, D'Abernon, Stamp, Monnet and Stresemann) to help divergent minds meet."

10 François Perroux, "Esquisse d'une theorie de l'économie dominante," Economie Appliquée, No. 2-3, 1948.

11 Andrew Shonfield, "Introduction: Past Trends and New Factors," in International Economic Relations of the Western World, 1959-71, Vol. 1, Politics and Trade, ed. Andrew Shonfield, London: Oxford University Press, 1976, p. 33.

13 Ibid., p. 322.

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  • Charles P. Kindleberger is Professor of Economics Emeritus at the Massachusetts Institute of Technology. He is the author of International Economics; Economic Growth in France and Britain; The World in Depression, 1929-39 and other works.
  • More By Charles P. Kindleberger