Mr. Chamberlin long has observed, analyzed, and reported economic and political developments at home and abroad. This report is based on his European tour last summer and autumn. The giant atlas, sustaining the pillars that keep heaven and earth apart, is a figure in Greek mythology. But there is nothing mythological about the unique role of Uncle Atlas which the United States has assumed ever since it committed itself to participation in World War II by passing the Lend-Lease Act early in 1941.
Never in history has there been such a tremendous economic blood transfusion, such an outpouring of subsidies from one country to the rest of the world. Lend-lease aid to countries with which the United States was associated in the course of the war, very little of which was reimbursed by so-called reverse lend-lease, amounted to well over fifty billion dollars. It could be argued that it was more economical to sustain allied forces than to spend this money on our own military effort. Still, in view of later developments, it seems a little ironical that about eleven billion dollars of lend-lease aid to the Soviet Union (not a penny of which has been repaid) was followed by vastly larger military and foreign aid expenditures for the avowed purpose of containing and checking Soviet designs of expansion and aggression.
From a war emergency, foreign aid has become a permanent habit. Grants and loans of dubious security to nations in all parts of the world since the end of hostilities add up to about 60 billion dollars, and every year the Administration can be relied on to ask Congress for additional appropriations of about four billion dollars. The request is usually granted, with minor cuts.
These handouts have been used for a wide variety of purposes in a large number of countries. They paid the greatest share of food and rehabilitation expenditures under UNRRA. Some twelve billion dollars were spent on the Marshall Plan for European economic reconstruction. Still larger sums have been contributed for the martial plans that followed the Marshall Plan, for the military buildup of supposedly friendly nations in Europe and Asia.
The American taxpayer has also been footing the bill for a good deal of economic aid, some of it going to allied countries and some to neutrals like India and Yugoslavia and even to a country like Poland which, through no desire of the Polish people, to be sure, is in the Soviet bloc.
And both at home and abroad there are always eager sponsors of bigger and better handouts for welfare purposes all over the globe. Some American Senators have sponsored support without a definite limit for India‘s plans of economic development. And a well-known British woman writer on economic subjects recently advanced the proposition that the fate of the free world would hang in the balance until India was tided over the growing difficulties of its new five-year plan by an annual subsidy of one billion dollars in foreign currency. The United States was the obvious largest potential source of this proposed handout.
Insufficient Funds
Now, however, there are signs that America cannot play the part of Uncle Atlas much longer, and this for a reason that has often checked governments in extravagant courses in the past. The means to continue these lavish foreign subsidies are running out. Dollars have been used with such reckless profusion to prop up foreign currencies and foreign economies that the dollar itself is today in danger of becoming a weak currency.
It has long been a popular theory, especially among British economists, that Europe faces a so-called dollar gap. Europe can never, so this argument runs, sell enough in goods and services to the United States to pay for what it urgently requires in raw materials and equipment from American sources. This line of reasoning easily led to the conclusion that it is up to America, in one form or another, to subsidize Europe indefinitely.
But during the last decade this theory of the inevitable dollar gap has been knocked into a cocked hat. Indeed it has been proved true, but in reverse. Ever since 1950, with the sole exception of 1957, when there was an abnormal European demand for American oil because of the
Dwindling Gold Reserve
In its international accounts the United States was in the red by $3.4 billion in 1958, by about $4 billion in 1959. The United States gold reserve, which was $22.9 billion in 1957, has now fallen below $20 billion. This, to be sure, is a tidy figure, about half the known gold reserves in the world. But an unfavorable balance of payments of $4 billion is not negligible either. Nor is the fact that European countries hold short-term dollar liabilities in the neighborhood of $15 billion. Were all these liabilities presented at once, the United States would face the disagreeable alternatives of going off gold, in respect to foreign liabilities, thereby producing a tremendous international financial shock, or of seeing the gold reserve diminish to a very small figure.
To be sure, this is not likely to happen. Such a massive run on the dollar would not be in the best interest of the European holders of the dollar liabilities. It is the long-range trend toward an unfavorable balance of payments that is the serious aspect of the situation.
A Weakened Economy
Long accustomed to take for granted the idea that the dollar is the king of currencies, Americans do not realize, as Europeans do, what a weak, shaky currency can mean. When a country with a limited gold reserve finds itself spending a good deal more abroad than it receives from abroad, its financial authorities find themselves tempted to resort to all sorts of disagreeable courses: to slap on quotas for the purpose of reducing the inflow of foreign goods; to limit the amount of money a citizen may take out of the country; to forbid foreigners to bring in or take out the currency of the country, and so on.
All such measures are entirely contrary to the spirit of a free economy and, in the long run, do more harm than good. But they are the usual consequences of a persistently unfavorable international balance of payments. When a currency is persistently weak it is apt, in the end, to be reduced in international exchange value. So, in 1949, the British pound, which had long been selling at a discount on foreign markets, was officially reduced in relation to the American dollar from $4.00 to $2.80; and most European currencies experienced the same or similar reductions in value.
Since that time, European currencies, as a general rule, have remained stable in international exchange value; but the French franc was devalued more than once before France finally set a stable currency course by introducing anti-inflationary measures in the latter part of 1958.
Prospects of Devaluation
When a currency is cheapened in exchange value, the immediate effect is temporarily to right the balance of international payments. Exports are promoted and imports are discouraged because exports are cheaper, in terms of foreign exchange, and foreign goods become correspondingly more expensive. Just for this reason, because it makes foreign imports more expensive, devaluation means a certain amount of impoverishment for the people of a country that resorts to this practice.
Fifteen years, even five years ago, nothing would have seemed more absurd than the suggestion that the United States dollar might be exposed to the risk of devaluation. But, if one now travels in Europe and talks with financial experts in
Unbalanced Trade
What has created a situation where the dollar, long regarded as the Rock of Gibraltar among international currencies, can be seriously suggested as a candidate for devaluation? (The suggestion, to be sure, is certainly premature and may be altogether exaggerated; yet the fact that one does hear it on occasions is not without significance.)
There would seem to be two principal reasons for this striking change. And the first of these is the prolonged attempt to play the role of an international Uncle Atlas, supporting the universe. Our over-all commercial trade balance, the surplus of what we sell over what we buy, is still quite favorable, even though it declined from $6 billion in 1957 to $3.3 billion in 1958 and seems likely to decline further in 1959. We also receive a substantial income from foreign investments, notably in Canada.
But these favorable items in our international balance of payments are offset by such expenditures, involving the outlay of dollars for foreign currencies, as $3.1 billion for United States troops stationed abroad, nonmilitary government expenditure of $1.6 billion, $1 billion net outflow of government capital exports and a $2.9 billion deficit in private capital movements.
It is this imbalance that has caused America‘s gold reserves to diminish and its dollar liabilities to increase, to the tune of $3.4 billion in 1958 and $4 billion in 1959. This is why Secretary of the Treasury Robert Anderson has been demanding that discrimination against American goods in European markets should cease as not only inequitable in itself but also completely unwarranted by present financial and economic conditions. This is why the Administration is proposing that the European countries, which have been gaining in gold reserves as the United States has been losing, should make more of a contribution to projects for the aid of the economically retarded areas of the world.
Time for Reappraisal
The lesson of this situation for the United States is clear. Until a more normal balance of international payments is established, overseas commitments that involve dollar outlays should be scrutinized with the utmost care. Military alliance arrangements should be reexamined, with a view to a fairer distribution of the financial burdens. Too often, in the past, the assumption has been made by foreign governments and accepted by the United States that Uncle Atlas should carry the whole load or a disproportionate share of the load of expenditure in a common cause.
The American financial plight that has been receiving increased attention in recent months is a powerful argument for sweeping cutbacks in foreign aid appropriations, apart from the fact that these appropriations have already been discredited, in many cases, by waste and carelessness.
The best time to stop a run on the dollar is before it occurs. And, if the United States is to be of real help to peoples struggling against communist aggression and intrigue, the first condition is that the dollar be maintained in a sound and solvent condition. The United States has now become, in many respects, the banker of the world; and a banker must justify confidence by the prudent handling of his affairs.
Inflationary Measures at Home
It is not only profligate and reckless spending abroad that has weakened the position of the dollar. A second cause is the failure to deal firmly with inflationary trends at home. There has been too much paying not for work performed, but for work not performed, to farmers for not planting crops, to workers for unnecessary and wasteful practices, generally known as featherbedding.
Since there are in the market place no willing customers for unrendered services and unproduced goods, the financing of such something-for-nothing schemes depends on compulsion. Pressure group demands have led to government spending in excess of tax collections; and the resultant deficits, monetized through the federal reserve banking system, are reflected in rising wages and rising prices. The government has expanded the money supply to subsidize farm, business, and labor practices that could not meet the tests of open competition.
It is interesting to note that almost every European country has been improving its balance of payments in relation to the United States in recent years. This is partly the result of a return to full normal productive efficiency on the part of European industrial nations and Japan. This is to be welcomed. It is infinitely better, from the standpoint of America’s own long-range economic interests, to have Western Europe an aggressive competitor (and for this reason, a larger potential market) than to carry Europe around our collective neck as an albatross, a prospect that seemed not unlikely in the years immediately after the war.
Competitive Weakness
But, while European competitive strength is to be welcomed, American competitive weakness is not. It was a sobering experience last summer to visit a new shipyard in
Allowing for the fact that, by and large, a mark will go farther in Germany than a quarter in the United States, one could understand the remark of the German engineer: “No one could afford to buy ships from an American shipyard, unless it were heavily subsidized in one way or another.”
There is no reason to sell America short as a major factor in industrial production and world trade. All the assets which have made it the land of the greatest prosperity for the most people (as proved by the world migration figures) are still here: an energetic, mechanically-minded population, a convenient layout of natural resources, superb engineering schools and research laboratories, a go-getting spirit that will overlook no tricks in trying to get and hold customers.
A Serious Warning
But even a champion in sport can suffer an upset if he becomes overconfident, neglects his training, lets his muscles get flabby. A negative balance of $7.4 billion for a period of two years will not bankrupt America; probably onlya minority of Americans know there is such a deficit. But it should be taken as a warning nevertheless, a warning to re-examine two of the weaknesses that have helped to bring it about.
First, there has been the impulse to play Uncle Atlas, to assume that all the world’s ills can be cured by writing bigger checks payable in United States dollars. This is not true. Countries that will not look to their own defenses, that will not put their own economic and financial houses in order, cannot be bailed out by American aid, however extensive.
Second, there has been a failure to take precautions against that modern form of clipping the currency known as inflation. As a consequence there is a danger that we may price ourselves out of foreign markets and falter in competition with people who have had the courage and wisdom to impose on themselves sterner financial discipline.
It is time to give up grandiose dreams of being an Uncle Atlas, supporting the universe on our shoulders, and to take some more searching economic physical fitness tests to see that we are qualified to hold our own in a strongly competitive world.
