THERE has been this year a growing sense of crisis in world affairs. In April the Moscow Conference ended in stalemate. In May, with the Truman Doctrine and the grants to Greece and Turkey, we took a stand against further Russian penetration in Europe, and presumably in Asia. On June 5, Secretary Marshall's Cambridge speech, a month after Dean Acheson's Mississippi speech, revealed our Government's recognition of the increasing gravity of the European situation and the need for prompt coördinated action. The Secretary's speech was seized upon on both sides of the Atlantic and overnight became the Marshall Plan.

Since then events have moved swiftly. Sixteen European nations, on the invitation of England and France, have accepted Secretary Marshall's suggestion that Europe must study its own needs and present a program of self-help which would provide a basis for planning further American aid. Russia has further revealed her hand by rejecting the invitation and forcing her satellites to do likewise, though some of them clearly wanted to accept, and she has threatened the rest of Europe with dire though vague consequences for their acceptance.

The European Committee is to report in September. Congress will not reconvene until January. But in the meantime, as I write, three committees (one a nonpartisan, nongovernmental group under the chairmanship of Secretary Harriman) are analyzing the American aspects of the problem, our available resources, the impact of further foreign aid upon our economy, and what our policies and actions should be.

With this time-schedule, American aid under the Marshall Plan cannot begin until next year, but since June it has become increasingly clear that the situation in some countries cannot wait. England and France have been rapidly running out of dollars. Our loan to Britain of July 15, 1946 ($3.75 billion) and the Canadian loan ($1.25 billion) had been designed to cover a five-year breathing spell in which Britain's trade position might be restored. According to the tentative time-schedule submitted by the British, it had been expected that the loans would be used up at a diminishing rate during the first three years, leaving two years more in which to develop a surplus in Britain's balance of payments before interest and loan repayments would begin. But by August 1 all but $1 billion of the American loan and half a billion of the Canadian loan had been used up, and the drawings on our loan in June and July alone had amounted to the astonishing total of $1 billion. It was this situation which, after a week of continuous Cabinet meetings, forced the British Government to bring in a drastic plan of self-help -- involving the reimposition of wartime controls over labor and management and very substantial further reductions of imports and of government overseas expenditure -- and to request a conference with our government concerning the convertibility and nondiscrimination clauses of the Anglo-American Financial Agreement.

The position of the French international balance has been even more critical. Though since May 1946 France has received foreign loans and credits of $3.2 billion (of which nearly two-thirds was furnished by our Government) only $600 million remained unused at the end of July, and the prospective deficit by the end of the year, after allowing for exhaustion of the loans, mobilization of French-held foreign investments, and the restitution of gold by Germany, was estimated at $600 million.[i] Such a deficit would more than exhaust the French gold reserve, which now has shrunk from $3.2 billion in August 1939 to $540 million, in contrast with the British gold reserve which at $2.4 billion is somewhat higher than before the war.

Meanwhile in Germany, where Allied policy has never really got out from under the Morgenthau concept of the "pastoral state," production is running at 35 to 40 percent of the prewar level. There is recognition that this situation also cannot wait for the Marshall Plan. In July a new and much more liberal directive was given to General Clay supplanting J.C.S. Order 1067, which with amendments had been in effect in the American zone since April 1945; and a British-American conference in Washington was scheduled for mid-August on the vital question of expansion of coal output in the Ruhr, which has been only half of prewar.[ii]


While the Marshall Plan is being worked out -- and the steps are being taken that cannot wait -- we must try to clarify our understanding of the problem and our part in it. American reactions have been varied and have, I think, shown some confusion and misunderstanding. It is certainly true that our aid already has been large, some $10 billion in loans and credits and $5 billion in outright gifts. Our postwar exports (in part financed by these means) have equalled, and this year even exceeded, those of the war period, when our exports were financed mainly by Lend-Lease. During the first half of this year the outflow was at an annual rate of about $20 billion (nearly 10 percent of our gross national product), and the monthly surplus over imports was about $1 billion. Nothing like this has happened before in time of peace, though after the last war -- for about a year and a half, when it ended in a serious slump -- the outflow was relatively about as large.

One widely prevalent assumption seems to be that aid under the Marshall Plan will be put on top of these figures and will raise the level of exports and the export surplus to some higher magnitude. Can we stand the strain? Are we willing to? Will it involve a return to wartime controls? Would not undue strain on us react unfavorably upon Europe and make a bad situation worse? These are some of the questions that have been debated.

There has been some reference to the possibility of a "new isolationism," growing out of a feeling that the very magnitude of the undertaking proves its futility; it is useless to go on trying to hold up with American dollars a situation which grows largely out of Europe's continuing failures to straighten out its own political and economic affairs; further help from us will only mean further delay in Europe's coming to grips with its own problems; and for this we are not willing to burden further the American taxpayer or to resume wartime controls. It will be hard to say how much of this kind of sentiment there is until Congress reconvenes, in a session in which tax reduction will undoubtedly be one of the chief political issues. But it is clear that a convincing program of European self-help will be an essential condition of further American aid.

One possible danger in inviting 16 European countries to study their needs is that each may see its own needs more clearly than the problem as a whole, with the result that the program, if it is to satisfy all, may be larger than is warranted. There may be a similar danger in our own procedure of appointing committees to study our resources to see how much we can help. We take pride in doing things in a large way. Some of our official statements immediately following Secretary Marshall's speech seemed to carry an emphasis on bigness; and probably such an emphasis would not be unwelcome to many in Europe. There have been suggestions that the nation that could devise and carry out the Lend-Lease program ought not to balk at a large program of postwar aid; and in the House of Commons in July Mr. Morrison was reported to have suggested resumption of Lend-Lease to help solve Britain's problem.

With this emphasis on size in the interest of Europe has gone an emphasis (by some Europeans and by some at home) on the need of a large-scale program in our own interest. With our gigantic powers of production, the argument runs, we cannot, without such a program, make good our promises to sustain high employment at home. Mr. Bevin has been reported to this effect, and the Russians from the start have pictured the Marshall Plan as a capitalistic dodge to keep our own economy off the rocks. This line of suggestion fits well into the Marxian thesis that capitalism has an inherent tendency toward over-production and under-consumption. The fact that our large exports have been an important factor in our postwar boom -- and were after the last war -- appears to give the argument special point at present. The question whether this country, or any highly industrialized capitalistic economy, can sustain itself at high employment without special stimuli (large military expenditures, public works, an export surplus) was certainly one of the most debated between the two wars; but few economists believe that we can attain a condition of stable equilibrium in the world (and much that happened in the inter-war period bears on this) by using the outside world for leverage to sustain American employment. To pose the present European problem in these terms is to challenge us to turn our back on it and find the answer to our own problem of employment some other way, as in the end we must.

But for the present, at any rate, this emphasis on our need to export to support employment is mistaken. For a free economy we are exporting too much rather than too little; and with the large home demands still unsatisfied, American foreign aid financed by the taxpayer diverts to foreigners goods and services, and the money to buy them, which would otherwise be used at home. Taking home and foreign demands together, our present danger is one of over-utilization rather than under-utilization of American resources. Mr. Hoover has been quite right in saying we must not overstrain our own resources if we really want to help. Our exports have been one important cause of the rise of our price-level -- a rise since June 1946 unprecedented in any equal peacetime period. The price rise has greatly increased the cost of European imports and has thus been an important factor in the dollar shortage. The British have said it has reduced the value of our loan to them by about $1 billion. Above all, we must avoid this kind of vicious circle. But should we do so by resuming rationing and price controls or by limiting our aid? And might we not again, as in the war, meet the strain in part by increasing output further, if we organized expressly for the task? It is around questions like these that much of the debate has revolved.

But there has been also a quite different approach. As against the view that European recovery will require a further large-scale program of American financial aid, it has been suggested that the dollar shortage -- which is a way of putting the need for further American aid -- has been much exaggerated. Official figures show that the outside world's holdings of gold and dollar balances are still about $18 billion, which is higher than before the war; and to these have been added estimates of some $10 billion of American loans and grants authorized but still unutilized. Such figures, though not inaccurate, give a wrong impression. Of our own contributions still unused, nearly two-thirds represent our share of the capital of the International Bank (only a small fraction of which has been called up) and our quota in the Monetary Fund. How much use can be made of these institutions in this situation is an important but a problematical question, and I will discuss it later. Of the remainder, a number of the items authorized do not bear on the situation in western Europe. In very large part also, the gold and dollar balances do not bear directly on the problem. Some large part, particularly in a time of world-wide inflation like the present, must be held immobilized as monetary reserves. Much of the rest is financing abnormally large exports to parts of the world outside of Europe, a fact that points to the need of retaining our export controls -- as Congress so wisely did toward the end of the last session -- and relieving the strain on our own economy by external rationing. The gold and dollar balances of the liberated countries of western Europe have shrunk from $5.4 billion just before the war to $2.5 billion in March 1947. The acute situation in France I have already described. England's gold reserves constitute her last line of defense; if sterling is to play its rôle as a world currency -- and this has been an objective in our postwar planning quite as much as in Britain's -- their draining away will need to be watched with very anxious care.

There may nevertheless be a tendency to exaggerate the magnitude of the problem. We seem to swing between extremes. Undoubtedly, as Secretary Marshall has said, European reconstruction is going to take longer and prove harder than had been assumed -- though why we should have expected an early recovery is hard to say, since after the last war it took until 1925 for European production to get back to the prewar level, and the Second World War was much bigger than the first. But it is far from true that in the past two years European recovery has made no headway. In much of Europe there is nothing radically wrong that the solution of certain key problems and key situations would not cure. Production in the Scandinavian countries is close to or above the prewar level, though there are some balance of payments difficulties (notably in Sweden) which arise mainly from the disturbed conditions elsewhere. Belgium has made a brilliant recovery based in part upon a drastic anti-inflationary monetary program. Britain, though certainly one of the main sore spots, has pushed its production to 10 to 20 percent beyond the 1938 level. Holland, which also quickly instituted a monetary reform, has now raised its production to nearly 90 percent of prewar, and her main troubles stem (as do so many others) from the big hole in Germany, and also from the conditions in Indonesia. In France the recovery has been to about 90 percent of prewar production, and in Italy to 68 percent; in both cases the main trouble appears to be monetary inflation, and until that is cured the acute balance of payments difficulties are likely to remain. About the rest of Europe one cannot say much; we do not know much about what goes on behind the iron curtain. But our government has stated that neither Poland nor Hungary is in need of further relief, and there have been reports of marked industrial progress in Poland and Czechoslovakia. In southeastern Europe the bad economic and political conditions go back far beyond the last war, and quite apart from any attitude we may have toward the Russian satellites they can hardly be regarded as an important part of the immediate problem (or at any rate a part we can do much about). For Greece and Turkey we have already a program of assistance under way.


This brief survey will have served its purpose if it brings out the need for breaking the problem down into its parts. What are the specific situations and conditions the correction of which would set a European recovery in motion? In its general nature the present problem is not new, and perhaps what we need most of all is historical perspective. What did we do, or fail to do, after the First World War from which, looking back, we might get some guidance? We should consider not only the immediate postwar period but the whole experience between the wars. What we do now will affect international relations and the structure of world organization for a long time to come.

The first war produced profound maladjustments in the internal economies of the European countries and in their balances of payment. The United States was converted from a borrowing to a lending country. Germany's international position, by the loss of foreign assets, trade and shipping, was affected in the same kind of way as Britain's after this war. Most of the European countries had international deficits due to shortages of food, raw materials and other goods, internal inflation and the loss of foreign assets; there was the same kind of "dollar shortage" as at present, though on a smaller scale. England did not have a deficit but did suffer a loss of foreign markets and investments that marked the first undermining of her international creditor position, now dramatically completed by the second war.[iii]

We had no plans for the transition from war to peace, beyond loans for relief, sales on credit of surplus war stocks, and governmental and bank credits to finance exports; after 1920 our Government withdrew from the financing of external aid and left the field to private lending. We refused to join the League of Nations or to sign the Versailles Peace Treaty. International developments in the twenties were dominated by the controversies over German reparation payments owed to our Allies and the war debts owed by them to us, and by the closely related large-scale outflow of American private capital. I shall not try to tell in detail the story of the reparation payments, the "final" London Settlement of 1921, which broke down within a year and was followed by the French invasion of the Ruhr, hyperinflation in Germany and other parts of Europe, and the complete destruction of the German currency; the Dawes Plan of 1924 and the Young Plan of 1929; the final breakdown in the great depression; or the parallel story of our refusal to recognize the interdependence of the war debts and reparations or accept a feasible settlement, and the final abandonment of the question in the great depression, though we have not yet cancelled our claims.

Granting the impossibility of compressing a decade into a few pages, we can find three outstanding lessons in the twenties. (1) Though food was supplied by relief organizations in the immediate postwar period, no international plan was developed to provide other goods, particularly raw materials, essential for European reconstruction. The problem was not faced as an international issue until the Brussels Conference of October 1922, when the Ter Meulen Plan for raw material credits was presented but failed to materialize. Countries were left to obtain raw materials and other needed goods out of their own financial resources and with their international positions already acutely in deficit. Our exports, initially very large, underwent a severe decline. Wartime controls in Europe, internal and external, broke down, prices rose violently, the foreign exchanges collapsed, tax receipts declined while expenditures increased, the deficits being covered by government demands upon the central banks until government credit collapsed, and monetary inflation undermined not only the power to produce but the social and political fabric of the Continent. (2) The reparation payments and the war debts, superimposed upon the already unbalanced international position, not only greatly intensified the external maladjustments and the internal inflation but for years kept international policy persistently pointed in the wrong direction. (3) The outflow of American capital served as the great counterweight; but I think it must be concluded, as we look back today, that though our capital exports alleviated, and on the surface in the last half of the decade even seemed to have cured, Europe's difficulties, in the end they intensified the malad-justments and contributed greatly to the severity of the world depression of the thirties. But this is a complex subject, and what to conclude for present policy is not an easy task.

As I have indicated, reconstruction in Europe came too late. It did not get under way until inflation had run its course. Though the first of the League loans, which did so much for the smaller countries of central and southeastern Europe, went into effect in Austria in October 1922, German reconstruction was not attempted until 1924 (the Dawes Plan), England resumed the gold standard in 1925, the French budget was balanced and the franc stabilized in 1926-28, and the Polish stabilization came in 1927. These were all parts of the attempt to restore the gold standard, which had broken down in the war, and with the controls removed had given way after the war to international currency chaos and internal inflation. Whether this attempt to reconstruct the world as it had been was foredoomed to failure because a world organization of the gold-standard, multilateral-trade type was no longer workable, or whether the new collapse was due to the specific errors committed -- the long delay, the overvaluation involved in restoring the prewar pound (Keynes's "economic consequences of Mr. Churchill"), the undervaluation of the franc, the inclusion of reparation payments in the Dawes Plan, American protectionism and the Smoot-Hawley tariff--has been the world's most debated economic question ever since. It provides the key to much of the discussion of Bretton Woods and the International Trade Organization and its Charter.

The twenties were the big decade of American private international investment. It was our first experience and we did it badly. The optimism engendered by our long period of prosperity from 1922 to 1929, the high interest rates obtainable, the easy task of salesmanship distorted our vision and put the emphasis on the apparent profits rather than on productivity. The eventual losses have been an almost insurmountable deterrent to further private foreign investment ever since. The conclusion, however, that our capital exports were mistaken is easier to reach now than it was then. The restoration of the gold standard and balanced budgets and the large rebound in European production and trade that accompanied them in the last half of the twenties -- and it was in that period that our capital exports were really large -- were conditions calculated to invite investment, which in turn further stimulated production and trade. Between 1925 and 1929 the world production of primary products rose by 11 percent, industrial production by about 23 percent and the volume of world trade by about 20 percent.

It is the occurrence of the great depression that makes the record look so bad -- and the human propensity to rationalize history after the event. The question really raised is what caused the great depression, how much was it due to domestic developments within the United States (where it began and was most severe), and how much to international maladjustments that had been staved off but in the end were intensified by an extravagant wave of American foreign investment. This is a question that will probably never be settled, though I lean to the view that the causes were more domestic than foreign. It was apparent, however, even in the twenties that our capital exports to Germany were unduly large and in considerable part misdirected. It has been estimated that between 1924 and 1930 Germany borrowed from abroad, mainly from this country, about 30 billion marks. With these loans she was able to make her reparation payments under the Dawes Plan and to rationalize her industries and increase her capacity to pay. There was a body of respectable economic opinion which held that this was a logical way of solving the reparations problem so far as the German end of it was concerned, though it still left unsettled the questions whether other countries were really willing to receive the payments, whether Germany could make net remittances after the capital inflow had diminished, and perhaps above all (and this is a question which has entered into the present postwar discussion of German reparations) whether the rest of the world wanted to see Germany's economic power developed by this process. Between 1924 and 1930, by the aid of these loans, Germany not only built up her industries and paid reparations but increased her gold reserves, built up foreign balances and investments of almost 10 billion marks and, in addition, enjoyed a large surplus of imports despite the fact that she was paying reparations both in money and in kind. She also indulged in many extravagant expenditures at home. As the American capital inflow continued, it became increasingly short-term (roughly half of the whole was short-term), and, when finally the storm broke over Europe in 1931, it was the flight of short-term capital, first from Austria, then from Germany, and finally from London that precipitated the new collapse of the gold standard, drew three-quarters of a billion dollars of gold from our market in the five weeks following England's going off gold in September,[iv] and led to a wave of hoarding of gold, internally and externally, round the world which did not end until our bank holiday of February 1933. This was followed by our own experiment of going off gold and devaluing the dollar -- a chapter which did not end until the Gold Reserve Act of January 30, 1934.

The great dividing line of the inter-war period is the year 1931. Thereafter, the world increasingly turned its back on the gold standard and multilateral trade. The thirties were a period of greatly restricted international trade and investment. Neither really recovered from the blow of the depression. But the flight of short-term capital to this country continued, accompanied by an absorption of the world's gold on a scale much exceeding even the flight of short-term capital and gold of the early twenties. The first Roosevelt Administration was intensely nationalistic, at least in its early years, and must take its very large share of the blame for the failure of the World Monetary Conference of 1933, which was the last attempt, before the present, to stabilize world conditions of currency and trade by organized international coöperation on multilateral trade and currency lines.

The broad fact about the thirties was the turning away from multilateral trade and the search for internal stability and security even at the expense of international trade. We watched it go through its various phases, the leaning toward autarchy, the depreciation of currencies that ended only in a vicious circle, the spread of restrictive trade and currency devices -- bilateral clearing agreements, quotas and other direct import controls, exchange controls. One of the large issues in economic thinking is whether the events and the policies of the thirties, including our own, were inevitable against the earlier background, and whether -- looking not merely at the depression and what may have caused it but at the whole sweep of change in world organization and relationships which many, especially in Europe, trace back even beyond the First World War -- the meaning is that the nineteenth century kind of world has disappeared, and we have been making the mistake repeatedly of vainly trying to set it up again. It is clear that in the beginning the whole movement was involuntary and defensive; it grew perforce out of the contraction of trade in the depression, the panic flights of short-term capital, and, as the Hitler menace grew and war approached, out of political insecurity. But deeper-seated forces have also been suggested, such as a growing lack of balance in the world between agriculture and industry and the cumulative advantage of the United States in world trade, based on our comparative self-sufficiency, rapid technological progress, and the strong foreign demand for our consumer durable goods and capital goods.[v] It is perhaps these broader considerations that have given currency to the phrase "chronic dollar shortage."

One final circumstance to be mentioned is Secretary Hull's attempt to combat the tide by his trade treaties. The restrictive trade and currency practices of the thirties were frankly discriminatory. They represented an attempt to balance accounts between individual countries, a method which obviously gives much freer play than multilateral trade for protecting the internal economy against external strains, and is the logical counterpart of the movement toward internal economic planning. The Reciprocal Trade Agreements Act of 1934 was an attempt at compromise along lines now being carried forward in the discussions of the International Trade Organization and its Charter. As a step toward restoring multilateral trade, it sanctioned bilateral trade agreements based on the principle of nondiscrimination, which was a reassertion of the most-favored-nation principle that had previously characterized our tariff policy.

As we look back over the inter-war period, it seems clear that the generalization often made that the wave of nationalism following the war wrecked the peace needs elaboration. The chief mistake, which certainly was nationalistic, was our refusal to join the League of Nations, which Wilson hoped would overcome the imperfections of the peace treaty. Much of the bargaining among the European countries at the peace table was nationalistic and paved the way for our isolationism. But the failure to organize the transition from war to a normal state of peace was probably largely due to ignorance. The world had never had such a war and was slow to appreciate what conversion to peace involved. The attempts to collect reparations and war debts were understandable, and perhaps we had to go through those experiences to find out their economic consequences. The attempt at reconstruction, though much too late and involving many mistakes, was nevertheless, in its broad outline, the kind of attempt that most of us, at least in this country, would want to make again. The depression presents the most difficulty; I can only repeat that I think it was primarily of American domestic origin, though with many complicating international circumstances. It brought down the whole house of cards, and the possibility of its recurrence is probably today the chief holdback round the world against the kind of world economic organization we would like to recreate. The real period of nationalism, so far as trade and currency are concerned, was the thirties, and, looking to the longer future, it raises the hardest questions that our postwar planning has to face.


Looking at our present problems in the light of this background, we can see that in various ways the postwar record has been better. We have joined, and helped to create, the United Nations. We have given much time and thought to the creation of international institutions -- the Monetary Fund, the International Bank, the International Trade Organization and its Charter -- which look toward the restoration of multilateral trade and currency arrangements and the reduction of the restrictive trade and currency practices of the thirties. We have made the loan to Britain. We helped to organize UNRRA and made the largest contribution to it. The Export-Import Bank has loaned extensively to meet the needs of other countries for raw materials and other American goods. Our Government has provided some $10 billion in loans and $5 billion in gifts, and there is a considerable further amount authorized but unutilized; this year's budget already provides for some $4.5 billion of foreign expenditures. In addition, we have been engaged in international exploration of many questions -- food, the atomic bomb, and many others.

In a number of respects, the world has embarked upon postwar reconstruction under better conditions than last time. As a point of departure, the restrictive trade and currency devices of the thirties, which were much strengthened during the war, have been an advantage rather than an evil. We have not had the wildly fluctuating foreign exchange rates. Exchange controls, nonconvertibility of currencies, direct import controls have been retained for the transition period, though profoundly modified in the single case of Britain by the Anglo-American Financial Agreement. The lesson of the perverse and often destructive movements of capital in the inter-war period -- especially the short-term balances -- has been learned, and the Fund Agreement provides for the permanent retention of exchange control over capital transactions.

There will be no problem this time of Allied war debts owed to this country. Lend-Lease, it was always recognized, was a glamorous name for outright grants, and the accounts have been settled (except for Russia), though we might well have thrown in the amounts remaining after the war instead of converting them into loans. But in England's case there is an accumulation of some $14 billion of external debt; in magnitude it is fully comparable with the reparation payments or the inter-Allied debts last time, and may well give rise to problems not dissimilar. As to reparations, the attempt to collect them has not been given up but has taken a new form which may avoid the transfer difficulties but raise others not less serious. Before, the main danger was that to develop Germany's capacity to pay reparations out of current output would make her too strong; now the danger is that the collection of reparations out of Germany's physical capital will make her too weak for the economic good of the rest of Europe, her own population, and ourselves so long as we have to go on paying the bill by relief expenditures in Germany.

In some respects we have made the same mistakes as before. We have submerged the concrete in the abstract, the short-run in the long-run. We have thought too much in terms of broad (and even doctrinaire) principles and not enough about the kind of world to which they would apply. We have been preoccupied with organizational forms and procedures which could operate successfully only when more normal conditions have been achieved. We have, in other words, failed again to appreciate the difficulties of the transition period or provide an adequate program for dealing with them. We have not thought enough in terms of the key situations or conditions the correction of which would go far to produce a general recovery.

So far as conditions in western Europe are concerned, the decisions about Germany must supply the largest part of the answer to what is wrong. It was probably a mistake to take up the minor peace settlements before the major one, but it would probably have taken time anyway -- the experience with Russia as it has unfolded, and the mounting pressure upon Germany's neighbors which has been the consequence of the protracted economic stagnation in Germany -- to bring the issues to a head. I cannot attempt to describe the nature or the causes of the stalemate,[vi] the Russian insistence on reparations before unification, the French insistence on a settlement of Germany's western border and on international economic administration of the Ruhr before unification, the lack of balance between industry and agriculture created by the loss of territory to Poland and Russia, the failure to achieve any kind of integrated economy (though there is now joint administration of the American and British military zones) which has probably done more to impede recovery thus far than the plant removals on reparations account, the very low "level of industry" formula agreed upon in March 1946 in fulfillment of the Potsdam Agreement, and the part played in it by the Morgenthau conception of the "pastoral state." Still less can I undertake to outline a program of correction, but it is clear that the solution cannot wait for the Marshall Plan, and it is heartening that Anglo-American discussions (to be followed apparently by discussions with France) are under way on the problem of Ruhr coal. Coal and transport appear to be the key problems in western Europe; their solution would go far to hasten general recovery.

For the rest of Europe, we must await the plans of the Committee for European Economic Coöperation. But there is a strong presumption, I think, that if the German problem is wisely handled, they should not, in Europe's own interest, involve very large-scale American financial aid. France, as I have indicated, has an acute balance of payments problem, and further loans will probably be needed by Holland, Italy, Austria and others. One important question is how much the International Bank can help, and whether the risks will be of a kind that the Bank can undertake. Another is how much other European countries better situated (notably Switzerland) can help. But the main point, I think -- and this a lesson from the inter-war period -- is that the difficulties cannot be solved merely or mainly by American dollars.

A basic difficulty is the widespread inflation. It has taken this time a new form, which has gained the name "suppressed inflation" in contrast to the open inflation that ran through Europe in the twenties. It is most marked in Germany and England, the French and Italian inflations being something between this new kind and the old. It is a deficiency of goods and a superfluity of money -- as inflation always is -- but operating under direct controls over prices and quantities, with the result that excess purchasing power continuously seeks to find an outlet, which in turn requires further extensions of controls. With prices held down, stocks of goods are in a state of acute depletion, and labor and buying power are drawn off into employments using less vitally necessary stocks of goods or none at all. The labor unions exploit the shortage of labor in essential industries to extort more pay for less work, and at the same time the premium on leisure is maximized because money wages buy less. Farmers have no incentive to bring their goods to market, and, as Secretary Marshall said, the town-and-country basis of a healthy economy disappears. This is a harder kind of inflation to deal with than the old one, which did at any rate burn itself out; it is likely to be more prolonged and much more dangerous to democratic institutions. It could lead to a kind of creeping stagnation with no outcome except a revolutionary change in economic and political forms. It greatly intensifies the balance of payments deficits by reducing goods available for export and creating an acute need for imports. This is a problem with which the European countries themselves must deal. One good first step would be to extinguish or immobilize the money "overhang" in the way Belgium and Holland did, or by some plan like (though I hope simpler than) the Colm-Dodge-Goldsmith Plan drawn up by our experts for Germany.

One further comment should be made on the task of the European committee. A situation like the present creates great pressure toward the integration of Europe within the territorial limits which Russia's attitude imposes. There has been talk of the Marshall Plan versus the Molotov Plan. In view of the predominantly agricultural character of eastern Europe and the concentration of industries in the west it is difficult to believe that the economic relationships will not in the end prevail. As Mr. Stassen has urged, the door must be left open. I am skeptical of anything so formalized as a western European economic bloc or a customs union, though there is much that the western European countries can do to lessen trade barriers between them, better integrate their interchange of goods and services, improve transportation and the mobility of labor. If Europe could make itself self-sufficient in fuel alone, as it used to be, that would be a great step forward and would go far to improve the balance of payments difficulties.


As Germany is the key to recovery on the Continent, England presents the central problem so far as the restoration of multilateral trade and currency arrangements is concerned. I have referred already to the revolutionary change in Britain's international position wrought by the war. It seemed to me clear long before the war ended what this change would mean for the problem of postwar reconstruction, and I sought in my earlier articles[vii] to give it priority over Bretton Woods or any other postwar question. In my view, we lost two years between the time the Keynes and White Plans were announced in April 1943, and the time the Anglo-American loan negotiations were begun in the last half of 1945, that might better have been devoted to the exploration of the British problem. Before we got to it, both our own and the British experts working on the Monetary Fund had been led to minimize the importance of a separate handling of the British problem and much of the spirit of wartime coöperation had been lost. The solution arrived at was, in my opinion, inadequate for the problem. We should have made a gift rather than a loan -- perhaps at an earlier date we could have agreed, as I suggested, upon an extension of Lend-Lease for this special purpose. But the thinking in both countries had been led into other channels.

I will not attempt in the brief space remaining to analyze the British loan negotiations. Our chief fault was not in the loan itself -- though the repayment with interest on top of the liquidation of Britain's external war debt constitutes a problem of which I cannot see the outcome -- but in the conditions attached to the loan. I suspect they were due not only to the fear of Congressional disapproval of anything that did not look like a good commercial bargain, but to the feeling that we had been too lax in our treatment of convertibility of currencies and exchange controls at Bretton Woods, and saw an opportunity to use our power to promote our traditional doctrine of nondiscrimination at the expense of a borrower who had no choice but to accept our terms.

The rationalizations of the Financial Agreement and the predictions about the British and American balances of payment by both the American and the British negotiators, including Lord Keynes in his posthumous paper,[viii] were much too optimistic. In part the disappointing result has been due to the British fuel crisis last winter and to the rise in the American price level. But it was apparent last fall that the rise in British exports, which had been pronounced since the fall of 1945, was tapering off. In part, the difficulties are Britain's own, an outgrowth of the "suppressed inflation" I have described. There is a question, too, how much the failure to live up to the anticipated schedule of reduction of the British deficit may have been due to the internal program of nationalization and economic planning. But that this was a major cause seems dubious, except for such things as the large-scale building program and the stimulation of consumption by the food subsidies, both of which any other government would probably have felt forced to undertake. The fact is that the situation that has developed is such as to require a changed attitude not only by the government but by the whole country toward its way of life -- and this by a country that has not yet got out of the war, though it was on the winning side.

The main trouble is that the external pressures and obligations are too great, and it is not clear how they are to be brought within Britain's capacity to bear. The largest item, I think, is the overseas expenditure, which in 1946 accounted for three-fourths of the total international deficit of £400 million.[ix] Britain has reached the point where her foreign commitments, military and financial -- including her equal sharing with us of expenditures in Germany, the size of her armed forces abroad (and at home) and other expenses -- must be sharply cut. When that has been done, the maintenance of the home economy, with whatever export-import relation that may entail, is unavoidably her own problem, though it will surely require a further loan to cover the transition period.

It seems certain that Britain will require a freer hand in governing her international trade and currency relations. This is the point of her request for a new discussion of the convertibility and nondiscrimination clauses of the loan agreement. It is clear now that these clauses were premature. Convertibility of sterling is desirable as soon as it is feasible, if sterling is to play its rôle as a world currency; and nondiscrimination is the right ultimate objective if we are to succeed in restoring a multilateral system of world trade. But applied prematurely they defeat their purpose. So far as can now be estimated, the drawings on the British loan in recent months much exceed the requirements of Britain's own international deficit; and it seems evident that convertibility has become a means of funneling a considerable part of the world's demand for dollars through London.[x] Nondiscrimination under present circumstances may become a weapon throttling international trade: if countries cannot buy from us they may not be permitted to buy from each other even though they have the money or the goods to buy with. The British complain, too, that nondiscrimination works one-sidedly; we feel free to resort to "tied loans" but object to "tied trade," the matching of exports and imports between pairs of countries; we discriminate also in favor of our shipping -- an industry that on grounds of comparative cost might better be left to other countries.


It was not my purpose in this paper to present an American program. I have tried to draw some lessons from the developments after the two wars that might help us chart our course. We shall need to provide further financial aid, and as much as the conditions warrant. But the conclusion as I have drawn it is that American dollars should not be the main reliance. The condition of "world dollar shortage" is not at present a general condition but a special one in specific countries. It is a consequence of failure thus far to develop adequate production (and to restrict home buying power). Our function should be to assist and alleviate the process, but with assurance that our aid is to be coordinated with self-help in a way that will avoid its merely postponing the adjustments that only the European countries themselves can carry through. I doubt the need of internal rationing or the feasibility of a return to price control, though I believed in 1946 that a flexible price control, such as many favored, would have been better than the more rigid system the Administration insisted upon, and much better than the virtually complete absence of control which in the past 15 months has resulted in the great rise of prices that has increased the cost to Europe of our exports. It seems probable now that the price rise has mainly run its course. We can help keep prices down by rationing exports to the countries that need them less and whose demand for them has been strengthened by their abnormally large gold and dollar holdings (the counterpart of our own domestic wartime savings). Throughout the whole experience since 1918 runs the lesson that we must concentrate on the key situations and conditions, correction of which would promote a general recovery and the kind of world trade organization we are seeking to restore. If we do this intelligently, I think our exports and our export surplus will be less in future than they have been the past two years, and will be more effective.

As I said earlier, much of our effort has been directed toward long-run objectives, toward the devising of international trade and currency organizations which can function effectively only after more normal conditions have been restored by other means. This is true of the Monetary Fund and of ITO. Only the International Bank can be regarded as properly having transitional as well as long-run uses. In my FOREIGN AFFAIRS paper in October 1944 I urged that the Bank's purposes be broadened to include stabilization (or general reconstruction) loans in addition to the "specific projects" that the Bank's articles of agreement emphasized. This purpose was included by Congress in our Bretton Woods Agreements Act and accepted by the Bank; it was the basis of the loan of $250 million to France last May. The Bank should be used to the maximum possible in this situation, and also the Export-Import Bank, which now has about $1 billion of free funds. Though it would undoubtedly strain the logic of the Fund, and the present restriction of its loans to "seasonal and cyclical" purposes, we should explore thoroughly the possibilities of using it. Whatever may have been the intention when the Fund was set up, there is something incongruous in the spectacle of an institution which now has about $3.2 billion of gold and dollars merely standing by.

On our trade and currency policy, a number of true but familiar things might be said. As a creditor country we must be willing not only to invest abroad but to import the goods our capital creates. But this is for the future; foreign production is now so low, relative to foreign needs, that our imports are limited by scarcity rather than unwillingness to import. More relevant to present problems is our attitude toward the ITO Charter and related currency questions. These are matters calling for tolerance and wise understanding of other countries' difficulties. We face the task of creating a workable system of trade and currency in a very mixed world, a system acceptable to both free and planned economies. It will have to be an evolutionary process. We must start from where we are and not try to impose some system ready made. To the extent that we put pressure on other nations to give up their present arrangements before we are prepared to offer better ones, we are likely to increase the cost to ourselves of reconstruction. For the transition period, and perhaps some time thereafter, our attitude toward bilateral agreements and discriminatory practices will have to take account of circumstances. The question to be asked should be whether they are likely to encourage a growth of trade or the opposite, rather than whether they violate the pure principles we seek to promote.

Above everything, the world is looking to us to maintain stability at home at a high level of output and employment. As I said earlier, it was the great depression of the thirties that caused other countries to turn their backs on multilateral trade and seek security in protective trade and currency devices. It is the fear of recurrence of depression here that constitutes today their main reservation against our trade and currency plans. But we are far from agreed among ourselves as to how domestic stability can be maintained, and the most relevant and hopeful aspect of the matter is that, looking beyond the present inflation and its correction, we seem to have a good prospect of sustained high production and employment for some time ahead. In any event, it does seem clear that the greatest contribution we can make toward preserving our kind of economic system, here and elsewhere in the world, will be through the maintenance of a stable and prosperous economy at home, coupled with a liberal and constructive trade and investment policy abroad.

[i]The Economist, August 3, 1947, p. 199.

[ii] On August 9 the United States proposed to France "an early conference" to discuss French views on the American and British plans to raise the level of industry in their zones, and on the output and control of the Ruhr coal mines.

[iii] An important thesis, held especially by those who think a multilateral trade world no longer feasible, is that the change in the position of Britain, around which nineteenth century world trade was organized, began well before the first war, and that the wars and the experiences in between have merely hastened it. There is, I think, much truth in this view, but I do not accept the conclusion that multilateral trade is no longer feasible. (See a forthcoming new edition of my "Postwar Monetary Plans and Other Essays." New York: Knopf, chapter 1.)

[iv]Cf. John H. Williams, "The Crisis of the Gold Standard," FOREIGN AFFAIRS, January 1932.

[v] See my paper, "International Trade with Planned Economies: The ITO Charter," in "Postwar Monetary Plans and Other Essays," op. cit. The imbalance between agriculture and industry has been especially emphasized by some foreign economists. They trace it back before the first war and emphasize its impairment of the complementary character of world trade characteristic of the nineteenth century expansive phase; the rate of growth of population in Europe was declining; European investment had resulted in more primary production abroad than Europe could absorb. The first war (like the second) greatly expanded non-European agricultural output, and when European agriculture was revived in the twenties (and protected) the terms of trade turned increasingly against the agricultural countries. See, for example, H. W. Arndt, "The Economic Lessons of the Nineteen-Thirties," 1944 (issued under the auspices of the Royal Institute of International Affairs), and Sir Hubert D. Henderson, "The International Economic Problem," Stamp Memorial Lecture, 1946. For an analysis of England's changing position, which suggests that she must turn increasingly inward, see Sir Henry Clay, "Britain's Declining Rôle in World Trade," FOREIGN AFFAIRS, April 1946.

[vi] For excellent accounts see Mr. Hoover's Report No. 3 to the President on his economic mission to Austria and Germany, The New York Times, March 18, 1947; and E. S. Mason, "Has Our Policy in Germany Failed?" FOREIGN AFFAIRS, July 1946.

[vii] FOREIGN AFFAIRS, July 1943, January 1944, October 1944.

[viii] "The Balance of Payments of the United States," Economic Journal, June 1946.

[ix] "National Income and Expenditure of the United Kingdom, 1938 to 1946," Cmd. 7099, April 1947.

[x] On August 13, a new drawing of $150 million on the loan was announced, and on August 20 a further drawing of $150 million, reducing the amount remaining to $700 million. On the latter date the American and British Governments, by the publication of an exchange of letters between the Chancellor of the Exchequer and the Secretary of the Treasury, announced the suspension of free convertibility of sterling into dollars. On August 21 Britain gave notice that it would draw $300 million more on August 25 and 29 to cover the import commitments already made and would temporarily freeze the remainder of the loan ($400 million).

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  • JOHN H. WILLIAMS, Nathaniel Ropes Professor of Political Economy at Harvard University; Economic Adviser, Federal Reserve Bank of New York; author of "Postwar Monetary Plans"
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