The British Crisis

FROM the beginning, European recovery has presented a mixed picture. Last year the main ground for encouragement was the marked expansion of production, and the main worry -- so far as internal conditions were concerned -- was inflation. This year production has expanded further, and the peak of the postwar inflation has been passed. In France the change came with dramatic suddenness early in the year, and since then the evidence of further progress has been continuous. In Western Germany there had been fear that the marked change produced by the currency reform of June 1948 would be only temporary, and that inflation would break out again. But this danger has not materialized, and one of the outstanding developments of 1949 has been the recovery of German production, which before the currency reform had been less than 50 percent of prewar and is now rapidly approaching the prewar level.

There is thus continuing evidence of substantial progress. Yet probably at no time since the recovery program began has there been more disposition to question the outcome, or to insist that drastic changes in policies are essential for success. In an article in this review last spring, I referred to the two schools of thought which existed, one emphasizing the internal aspects of the problem, the other the external.^[i] This debate still goes on.

According to the one view, now that production has been expanded and inflation corrected, we are much closer to achieving the internal conditions which will inevitably result in the disappearance of the external deficit. This view holds that if we have as yet made no great headway with regard to the deficit, it is because the processes of internal change have not gone far enough, and in particular because in England, despite Sir Stafford Cripps' severe budgetary changes of last year, disinflation is being frustrated by nationalization, increased social welfare expenditures, excessive taxation, the continuance of direct controls and the unwillingness or inability of the Labor Government to apply the necessary pressures on labor and business to bring down export costs.

The other view accepts practically all of this reasoning but insists that the problem is more difficult than such an analysis implies. Western Europe has suffered a great structural change in its international position. The east-west wall, the partition of Germany, the chaotic conditions in the Far East have combined to increase very greatly its dependence on the dollar area. At the same time, the loss of income from overseas investment and from services has greatly impaired Western Europe's ability to meet its long-standing trade deficit with North America. Thus the prewar pattern of trade, both within Europe and between it and the outside world, has been destroyed. The most serious aspect of the problem is that it is not merely the result of changes in this war but the culmination of a process of change which goes back to before the First World War. The restoration of production and the correction of inflation, though essential first steps, are not enough to correct this structural maladjustment. The ultimate solution must lie somewhere between increased productivity on the one hand or decreased real income on the other; but many puzzling questions arise -- both long-run and short-run in character -- as to how best to seek a tolerable and sustainable equilibrium. It was on these grounds that I suggested that recovery might take the form of an approach to a plateau, which might be fairly quickly reached but difficult to get beyond; and it was on similar grounds that the O.E.E.C. Interim Report last December concluded that by 1952 the dollar deficit of Western Europe might still be some $3 billion unless "drastic changes in policy" are made.

II

Certainly the disturbing developments this year have been with the external aspects of the problem.^[ii] Of these, much the most serious for the outcome of the recovery program is the new British reserve crisis. Sir Stafford Cripps' announcement on July 6 revealed that Britain's reserve had dropped by $260,000,-000 in the second quarter, and was almost $400,000,000 under the $2 billion which she has regarded, since the convertibility crisis of 1947, as marking the danger point for her. The causes for the drop included a direct increase in Britain's own dollar gap, a loss of dollar earnings by the other members of the sterling area, and acceleration of the slow drain of gold to Belgium and Switzerland. The report by Cripps was followed by a meeting in London with Secretary Snyder and Finance Minister Abbott of Canada, and later by a meeting of Commonwealth finance ministers. The announcement that Britain would cut dollar imports by 25 percent was followed by similar statements by other sterling area countries. But these are regarded as stop-gap measures. The whole problem is to be surveyed at a conference scheduled to open in Washington about the time these lines appear in print.

After the first war, Britain's policy was dominated by the fear of loss of reserves. The gold standard which she restored in 1924, following the period of currency disorder and inflation which engulfed Europe, broke down in 1931; and ever since it has been referred to as a "strait jacket" to which she would never return. The devaluation of 1931, which she did her utmost to avoid, turned out most beneficially. Quite contrary to orthodox theory, it was followed by a fall of prices elsewhere rather than by a rise in British prices. This favorable turn in the terms of trade improved Britain's trade position and undoubtedly played a large rôle in the rise in productivity as well as output which she experienced in the thirties.

The external strains of the twenties, the ensuing great depression, and the release from both through the devaluation made a deep mark on British economic thinking. With the development of Keynesian "closed economy" economics, primary emphasis was increasingly placed on internal full-employment policy, which was to be kept free from external interference by the use of exchange-rate adjustments. But the gains proved short-lived. The sterling devaluation was part of a chain reaction that included devaluation of the dollar in 1933-34 and did not end until there had been further devaluations of the French and Belgian francs (the process in the case of those two countries had begun a decade earlier). Indeed, there is no evidence that the vicious circle would have ended but for the war and the direct controls, both external and internal, that came with it. Meanwhile Britain and many other countries had in the later thirties turned increasingly toward bilateral trade and exchange controls as the effective methods of relieving external strains. Despite all her efforts, Britain was by 1938 compelled to liquidate a small portion of her overseas assets to bring her international account into balance.

It is against this background that British postwar experience must be reviewed. With the profound change in her external balance wrought by the war (hastening and completing a process long under way), British policy has again been dominated by the fear of loss of reserves, but under conditions even more desperate than before. At the same time there has persisted the desire for complete autonomy at home, in the interest now not merely of full employment, but of the realization of the social welfare state. British policy since the war has been a mixture of these two opposing aims. The British and we in America were alike slow to appreciate the external problem. One of my complaints during the Monetary Fund negotiations was that for two years, when we had the advantage of close wartime cooperation, they diverted attention from the rehabilitation of the British position^[iii] as the basic prerequisite for achieving world equilibrium and restoring the network of multilateral trade and payments. The abrupt termination of lend-lease after the war revealed the full gravity of the problem and precipitated the Anglo-American loan negotiation. The credit of $3.75 billion granted in July 1946 was intended to cover a five-year period during which Britain's external deficit could be overcome and a surplus created for interest and amortization payments; but within little more than a year virtually all of it had been used up. The loan melted away with astonishing rapidity after the pound, in accordance with the agreement, was made convertible in July 1947. This failure, together with rising inflation on the Continent and the growing threat of Communism, led to the Marshall Plan. And now again, in little more than a year after the Plan's adoption, we are confronted with a British crisis.

This, in broad outline, is how the average American taxpayer may now view the matter, not unfairly. But the picture when properly filled in is less black. Britain has in fact made great progress with her external deficit. Before this new crisis arose, she had reduced her imports to about 80 percent of prewar and expanded her exports to 50 percent more than prewar. At the end of last year, she was able to declare that she had achieved over-all viability in her international accounts, except that her surpluses elsewhere could not be used to cover her dollar deficit. Even when thus qualified, this is an astonishing performance. To appraise it objectively, we must take account of the inherent difficulty of manipulating the balance of payments of a country whose exports are so dependent on its needs for outside materials and food. This is the condition that confronts Western Europe generally, and the condition that in the twenties made the German reparations "transfer problem," as we then called it, so intractable. That Britain -- in such circumstances, and in a world still in great disorder -- should have been able to fill up the gap in her external balance caused by the loss of overseas assets and income which she had acquired over generations is an achievement greatly to her credit. This remains true whatever may remain to be said by way of qualification. Certainly it could not have been accomplished without the most severe austerity, quite unlike anything one finds in most parts of Western Europe.

III

Much was being said, however, even before this new crisis arose, by way of qualification and even disparagement, both here and on the Continent; and the crisis is bringing some fundamental issues to a head. When I visited Europe last fall, Britain was clearly the spearhead of the recovery, but her methods were regarded on the Continent (except in the Scandinavian countries) with suspicion and distaste. There were complaints that British austerity was depriving some of the Continental countries of their formerly rich English market for less essential goods. Underneath much of the criticism lay the ideological conflict between, on the one hand, direct controls and planning as practised by Britain and the Scandinavian countries, and, on the other, the policy followed by some of the Continental countries looking toward freer internal markets and reliance on general monetary and fiscal controls. In many quarters, too, as in the United States, there was hostility to Socialism and the welfare state. This year, with inflation passing, the Continent is presenting a more convincing picture of recovery. In some cases, there even is substantial improvement in foreign trade. As a result, as I found on my trip this summer, it is felt that earlier suspicions about British methods and British progress are being confirmed; and the animosity that was engendered over the payments agreement has done much to sharpen the criticism. There has been much the same kind of reaction in America, and much complaint that American dollars are going to underwrite British Socialistic experiments rather than to close the dollar gap.

Britain's internal policies since the war have undergone many changes, and at times have called forth praise and at other times severe criticism from the British themselves. For a country in Britain's position, the decision to retain direct controls (certainly externally, and to a large extent internally) was unavoidable; and the debate on this score has been mainly over whether the internal decontrol, which has already been considerable, might not have gone faster than it has. I agreed with much of the criticism by British economists in 1947 about the repressed inflation and the "empty economy" which was resulting from undue reliance on direct controls as against those of a monetary and fiscal nature. But the discussion seemed to provide a more convincing proof of the need of more effective monetary and fiscal measures than it did of the possibility of dispensing with the direct controls. There is much truth in the view that it was when Cripps moved over from the Board of Trade to the Treasury, following the convertibility crisis, that Britain really began to make headway with her external problem, and that the reason for this was largely his budgetary attack on the inflation. The change which he wrought in his 1948 budget from a deficit to a substantial surplus has had few parallels in postwar history.

Yet it is probably the budget, more than any other aspect of British internal policy, that is now being criticized, both within Britain and from outside; for it is here that the conflict between the social welfare state and the balance of payments comes most sharply into focus. There is little evidence as yet that nationalization in itself has been holding back production and productivity (though the steel industry might present a clearer case). But there is general complaint that the budget is too high, on both sides. One can question how much this is a matter of social philosophy and how much the effect of war, which in Britain was unusually destructive and severe. Doubtless it is made up of both. But the question arises of how much social welfare a country so beset from without can afford. The answer cannot be given merely by progressively more severe doses of austerity. This is negative, and if carried too far is self-defeating.^[iv] Despite some attempts to cut them back, British social expenditures -- for housing, education, social security, health -- have shown a strong upward trend. For a time it was possible to dissipate and disguise the effect of these by reducing military and overseas expenditures (partly at the expense of the United States). But if one counts in public investment, local and national, there is today a serious question how much budgetary surplus still remains. Meanwhile taxes, always essentially restrictive, have been raised so high, on both individual and business incomes, as to dry up saving and destroy incentives among workers, producers and investors. This is a process by which any gains in productivity, whether resulting from Marshall Plan aid or otherwise, are put in constant danger of being swallowed up in expenditures that do not contribute to productive effort. How far this process has gone, I must leave to English economists better acquainted with the intricacies of the British budget and national income accounts to determine. It provides an interesting commentary on the wave of discussion that sprang up, both here and in Britain, some years ago of why a large budget was better than a small one, and how a budget could never be too large, since a government has no propensity to save. In postwar Britain, the excess saving thesis (part of the "closed economy" analysis) must have increasingly a far-off sound.

Without doubt, another major British difficulty has been over-full employment. We suffered from it in America, too, before the present recession. In our kind of system, efficiency requires freedom of direction of resources, which in turn requires some slack. In a planned and controlled society this is regarded as waste. But the moot question is whether fuller employment, beyond some point, does not mean lower productivity and real income. Though full employment has become the declared objective of public policy in Britain, and also here and in some other countries, the economists have yet to produce a workable concept. Up to now, however, it is doubtful how much the over-full employment in Britain has been the result of conscious policy. Like the United States and much of the rest of the world, Britain has been in a boom; and the effects of it have been intensified there by the fact that, added to all the war-created shortages at home, there has been the overriding pressure to equate the foreign balance. Even the Marshall Plan, in so far as it has led to over-ambitious investment programs to raise productivity in the future, may be lowering it in the present. This has been the nature of Britain's dilemma.

IV

The new crisis, as I have said, should bring these issues to a head. Whatever else the conference in Washington may produce, no program for stopping Britain's loss of reserves and correcting her dollar deficit will carry conviction unless the right foundation in British internal policy is laid. But to suppose that this alone could solve the external problem would be, I think, a profound oversimplification. We are brought back to the two schools of thought I mentioned earlier, and the relative importance of internal and external factors. The hard core of the problem is the conjuncture of a great structural change in the international position of Europe -- particularly of Britain -- and of a growing predominance in the world of a relatively self-contained, but highly unstable, United States.

This is not a new problem, though it has been greatly intensified by the war. It provides, I think, the main explanation of the decay of the multilateral trade and payments system during the interwar period. The difficulties it presents are both short-run and long-run. The long-run aspects I discussed in the article already cited, emphasizing particularly the secular tendency toward a widening gap in productivity as between this country and Europe.^[v] But the present crisis is more immediately related to the short-run aspects. American booms and depressions have an intensified effect abroad. This explains the persistent attempts made by some countries in the course of the I.T.O. discussions to get a guarantee of American stability as the price of their adherence to a multilateral system; and is a large part of the explanation of the numerous "escape clauses" to which we were obliged to consent before any agreement on the I.T.O. Charter could be reached. Our present depression is not large, by comparison with depressions of the past, and for us it will probably prove salutary. Yet -- whatever the other considerations -- it is certainly the main immediate cause of the present British crisis. It has depressed not only Britain's direct exports to us, but even more importantly the exports to us of primary products from the other sterling area countries the dollar earnings of which go to build up Britain's reserve. This in turn reacts on British exports to those countries; and it will be surprising if it does not also affect Continental exports round the whole circle.

The point to emphasize is that this is not a matter for mutual reproach, but a serious dilemma. As I have said, by past standards our depression has not been large, and it seems an unreasonable counsel of perfection to ask us to do a great deal better; but it does threaten to have large effects elsewhere. Perhaps the main hope lies in the prospect that it may have passed its worst phase, so far as inventory liquidation and the fall in the prices of primary products are concerned. If so, however, the problem will be postponed rather than solved. In a world of such unequal parts, the maintenance of a mutually advantageous balance is at best precarious, and one cannot dismiss, as merely wilful, attempts to avoid the effects of our instability through proposals for price stabilization of primary products (we have that problem at home), or even the making of bilateral trade bargains involving known quantities and prices. If multilateral trade is to be restored in such a world, it will have to be by some far more sophisticated, and much more gradual, process than we have been willing to contemplate.

Britain stands in a peculiar, indeed a unique, relation to this problem. Leaving the United States aside, she is still the greatest trading nation; it is her balance-of-payments position that has been most profoundly changed; and it is her trade relations and policies that have the greatest influence on the whole pattern and technique of trade and payment. Nothing better illustrates the complexities of the problem than the striking fact that Britain in recent years has been not only a leader in the development of bilateral trade, but also the chief organizer of multilateral trade and payment arrangements. Besides developing the sterling area, with a common reserve and the pooling of dollar earnings, she has also been steadily developing the system of sterling transferable accounts in Europe and other parts of the world. The fact that sterling was being widely used as a clearing currency was a major reason for the convertibility crisis of 1947; and even today, though sterling is not convertible into dollars, its use as a clearing currency is a major reason for Britain's precarious reserve position. This fact is the reason why this is a crisis for the sterling area rather than for Britain alone. It is the reason also why Belgium, which was one of the chief sources of pressure on sterling in 1947, has ever since been a chief source of drain on British gold reserves. Though Britain's own trade with Belgium is roughly in balance, Belgium's trade with the sterling area, and particularly the fact that her Congo trade and earnings are paid via sterling,^[vi] have been causing a gold drain on Britain of more than $100,000,000 a year -- a fact which, of course, had much to do with Britain's attitude toward the revision of the intra-European payments plan.

V

One of the largest questions raised by the British crisis is whether a general reorientation of the recovery program is not now needed. The Marshall Plan has served admirably to restore Western European production to above its prewar level, and it has thereby been a potent force in overcoming inflation and warding off Communism. But we face now the even more difficult task of restoring equilibrium in trade. As the present crisis indicates, this is not merely a Western European problem but a world problem, with the question of an adjustment between the sterling area and the dollar area one of the most basic issues.

In Europe there is a growing disposition to ask whether the recovery program has not lost a sense of direction. The "master plan" approach, the "integration of Europe," and even the lesser objective of mutual help through the coördination of investment, have very markedly lost ground. The creation of the Consultative Group of Ministers and the eight-point program which resulted from it last March have not given the impetus intended. There is a feeling that, so far as the trade problem is concerned, we this year have been largely marking time; and perhaps nothing could prove it better than the inordinate amount of effort devoted to so minor a segment of the problem as the intra-European payments plan. There also is a disposition to question the effectiveness of the technique of the Marshall Plan for this second phase. It is a plan to provide goods, under American supervision and control, the allotments to be based on the dollar deficits. Many feel that for the task of trade adjustment this technique provides the wrong incentives, creating in the United States an interest in disposal of surpluses at the taxpayers' expense, and in Europe too much emphasis on investment programs (often insufficiently thought through) and too little emphasis on current production and costs. The effect, it is asserted, is to delay rather than hasten the closing of the dollar gap.

The program as now organized imposes a crushing burden of administration. The screening of the yearly programs of the 19 recipient countries, first in Europe and then in Washington; the delays and uncertainties involved in our practice of first "legislating" and then "appropriating," the time which officials must devote to expounding and defending the programs -- all this means, almost inevitably, that more fundamental analysis and policy-making regarding the ultimate goal get smothered by the sheer day-to-day burden of "processing the dollars." The preparation of the 1949-50 program began last October; the appropriation for it is, as I write, two months late; and not until the appropriation is made can the individual country allotments (and the drawing rights in the payments plan) be finally determined. In these circumstances, some critics feel that the programing and the screening can be little more than an elaborate pretense.

Interest is therefore shifting to the problems of the individual countries and to key situations. On the technical side, the thinking is more in terms of reserves, exchange rates and trade policies than the programming of goods. And, as I have said, there is a shift in interest toward the trade problem in the world as a whole rather than the specific E.C.A. program. Britain and the sterling area, and their relation to the dollar area, lie in the very center of the wider problem.

VI

The Washington conference can hardly be more than the beginning of an attack upon this wider problem. The dilemma posed by Britain and the sterling area is that of a world within a world -- or, as it has come to be called, the problem of the two worlds. It is also called, by those who are hopeful that adjustment between the two areas will eventually be reached, the problem of the halfway house. At the onset of the present crisis, both hopes and fears were expressed that the sterling area would collapse. Some Americans and Europeans have regarded the sterling area with suspicion, as Britain's attempt to develop, with E.C.A. aid, a trading empire, behind a wall of discriminatory trade practices, wherein she and her group can live free from the pressures of American efficiency and low costs. We might not necessarily object (the argument continues) to this attempt by the British to create a higher-cost but more planned and secure world of their own, however distasteful it would be on ideological grounds, if we did not have to feed dollars into it continuously at our taxpayers' expense.

But this view is oversimplified and does much less than justice to the postwar achievement of Britain and the sterling area. Measured by the amount by which they have reduced their dollar deficit, their performance has been better than that of Western Europe as a whole. Measured by advances in productivity, or by the rise in export prices since before the war, their performance is also better. As to the suspicion that the ultimate objective is a world apart, our policy of course should always be to see that such an objective does not materialize, at least at our expense. But in my view there is little basis for the fear; and instead of indulging in it we would do better to study the circumstances that have governed Britain's policy and seek through cooperation with her and the other sterling countries to create the conditions which would help to make the two worlds one. The sterling area arrangement, if the gap between it and the dollar area can be bridged and a stable balance reached, offers the best prospect today of achieving a viable pattern of world trade to replace that shattered by the war.

Though Cripps has resolutely rejected it, devaluation of sterling is the most obvious and the most discussed manner of attacking the problem directly. The wave of talk about it last spring undoubtedly contributed to the loss of British reserves. Much could be accomplished without devaluation, and what it would itself accomplish is much more uncertain than a simple analysis in terms of purchasing power parities and comparative costs would suggest. One major argument against devaluation is the internal inflationary effect. In 1931 this danger was slight because Britain, like the world generally, was in a state of depression, with unemployed resources. This fact, combined with the circumstance that she was a large and then unrestricted import market, caused external prices to fall rather than British prices to rise as a result of the devaluation. But now both circumstances are reversed. Britain still suffers from over-full employment and low real income, and her imports are already so restricted that the possibility that she can again push the economic burden of sterling devaluation onto other countries seems remote. This means not only that the corrective effect of the devaluation on the external balance would have to come, this time, almost purely from the export side, but that much sterner measures would have to be taken to prevent the devaluation from being dissipated by an internal wage-price spiral.

Another danger (as we saw in the inter-war period) is of setting off an external spiral in the form of a vicious circle of currency depreciations feeding on itself. There has been much interest in "floating" rates of exchange. Before the war, I favored a high degree of autonomy and flexibility in the exchange rates of the smaller countries; and one of the most persistent criticisms of the International Monetary Fund has been that its articles of agreement unduly limit such flexibility. But I have long insisted that the case for the key currencies -- the dollar and the pound -- is different. They should remain firm, or subject to change only as a rare resort. Indeed, there never has been a good case for devaluing the dollar, and our devaluation of 1933-34 (and also our rôle in the Monetary Conference of 1933) has, in my view, been a major cause of the international trade disorders and the breakdown of the multilateral system. The difficulty with devaluing sterling now is that, despite the great body of literature on the subject, no one knows how much to devalue, or whether the new rate could be held. Another major difficulty is the uncertainty as to the effect of sterling devaluation on the other sterling area countries, which would undoubtedly follow Britain's lead. In the period between the wars we had much experience with the effect of currency devaluations on exports of primary products subject to inelastic demand; the increase in quantity exported may be more than offset, we found, by the fall in price. Britain benefited by this fact in 1931, and was able to stage a recovery -- and temporarily an improvement of her international position -- on cheap imports. But in the present case, with the dollar earnings of the sterling area pooled, the effect of devaluation might be to increase, rather than to relieve, the drain on British reserves. This could be an additional reason, along with the desire for protection against the effects of an American depression, for the British to advocate commodity stabilization agreements.

One badly needed adjustment in the British position, whether devaluation is to be undertaken or not, is an effective disposition of the wartime sterling balances. The disturbing effect of these was recognized during the Anglo-American loan negotiations, but no satisfactory solution of the problem was then found. They were a contributing factor in the convertibility crisis of 1947, and they have continued ever since to distort Britain's trade and threaten the stability of the pound. They explain the "cheap sterling" rates which result from the willingness of some wartime creditors to dispose of their sterling balances through roundabout operations circumventing the British exchange controls. So long as these balances remain, they will be a persistent source of pressure on sterling, even if it is devalued; and they might well give rise to claims for repayment at the present rate, adding to the problem created by the fact that some $2.5 billion of sterling balances are already subject to a guaranteed rate.

But there is another, and even more important, aspect. Last year the repayment of sterling liabilities amounted to $844,000,000, a sum not much smaller than the net amount received by Britain from E.C.A. Such payments take the form of "unrequited exports" which divert British resources needed to reduce the dollar deficit. Together with British capital exports to the sterling area, they explain the paradox of Britain's having become viable over-all by the end of last year, at the same time that she still had a large dollar deficit. They mean, in effect, that E.C.A. aid is funneled through the British economy to outside recipients, and are an important part of the explanation why the expansion of British exports since the war has been so much toward the sterling area and so little, in comparison, toward the dollar area. If this abnormal basis of trading were removed, either British exports would be more nearly matched by imports from outside the dollar area, reducing her need to import from us, or resources would be released for expanding exports to the dollar area and exerting the necessary pressures to reduce costs and develop an effective trading organization for this purpose. In present circumstances, however, the pressures are in the opposite direction; and until these balances are disposed of in some way, and this cause for the distortion of the trade pattern removed, there can be no assurance that devaluation would be definitive, or that it would accomplish its purpose of correcting the dollar deficit.

VII

With these qualifications in mind, and laying a large emphasis on the correlative actions to which they point, I have been inclining to the view (as an increasing number of English economists seem to do) that sterling devaluation, at some stage, will be a necessary part of the process of adjusting the imbalance between the sterling and the dollar areas, and, rightly handled, could contribute importantly to all-round trade adjustment. It would probably lead the way to an all-round adjustment of exchange rates, and this might overcome, at least temporarily, the bias in world trade that expresses itself in the universal dollar shortage. The fact is that the dollar needs to be appreciated; and this seems the most practicable way of doing it. The best defense against another vicious circle of depreciations would be for the dollar this time to stand firm. And the best answer to the question of how to make a new sterling rate carry conviction of permanence would be for the United States to help support it. Indeed, it seems clear that if we advise devaluation we should take a definite obligation to coöperate in making it effective. This might well prove a reason why, in the end, both sides would wish to move slowly, and make sure that everything possible was being done on other lines; and that is, I think, the right approach. The need for American coöperation in making sterling devaluation a success leads to the thought, already referred to, that American aid in the form of reserves might now be more effective than the continuance of E.C.A. aid in its present form. This suggestion would undoubtedly encounter the objection that it is a return to the technique which fared so badly in 1947. But the underlying conditions regarding production and inflation are now much more favorable, and the results might be much better.

American coöperation will also be required in other ways, with or without devaluation. Besides the commodity stabilization proposals already mentioned, there have been a number of other suggestions worth exploring. An immediately effective way to offset the effects of our depression on the primary products of the sterling area would be for us to stockpile them. Another suggestion, widely discussed in Europe, is an all-round increase in the price of gold. Doubling the price of gold would restore its prewar relationship to the price of other commodities and would stimulate gold production, which has fallen by 40 percent since 1940. It also would greatly increase the size of existing gold reserves. Such a change in the price of gold, it is argued in Europe, might relieve the general dollar shortage by as much as $1 billion a year. Britain and the sterling area would particularly benefit. But such a proposal would undoubtedly encounter strong American resistance. To raise the price of gold would not be to correct the imbalance so much as to ease the effects of it temporarily; and from our standpoint it would be all too reminiscent of the gold inflows of the inter-war period and their monetary and banking repercussions. Nevertheless, in times like these, even such a proposal deserves careful study.

But none of these measures -- including even devaluation -- gets at the real causes of imbalance. They lie deeper -- in the impact of our economy on the world, our relative self-containment, our short-run instability, and our long-run tendency to outstrip others in productivity. According to historical precedent, the solution may ultimately be found in American capital export -- and the export of technology and skill, in accordance with President Truman's "Point Four" -- not so much to Europe as to less-developed areas, which might then become better markets for European goods as well as ours. But this is more the task of a generation than of a four-year program. In the meantime, I think we shall have to accept some form of compromise between the multilaterally organized kind of world we formerly had, in which currencies were convertible, and the bilaterally organized and controlled system which has been threatening to supplant it. As the I.T.O. negotiations indicated, this is a kind of pioneering into the unknown, making large demands for concessions and tolerance on both sides.

One kind of contribution we could make would be a candid exploration of our tariff and of our customs administration; these, I think, are still effective over the range of goods in which Britain and Western Europe might compete in our own market. Another is a relaxation of our attitude toward discrimination. Our doctrine of nondiscrimination, like the most-favored-nation principle from which it grew, has become more a device for retaining our advantages in trade than for restoring balanced trade. The O.E.E.C. Council has recently adopted a proposal, introduced by the British, for placing as much intra-European trade as possible on the basis of open general licenses. This seems a more effective approach toward getting better balanced and freer trade in Western Europe than is offered by the intra-European payments plan. Ironically, however, it must first be cleared with the United States, since it violates the nondiscrimination clause of the Anglo-American loan agreement.

There is, finally, as we all of course recognize, the difficult problem of stabilizing our own American economy. All countries which are heavily dependent on foreign trade find external strains a chief handicap in maintaining stability at home. Though we are much less affected in this respect than most, we are never wholly exempt from the urge to keep out imports or to expand exports in order to preserve domestic equilibrium at a high rate of employment. If we really want to achieve a world balance by some other means than the expenditure of our taxpayers' money, we have a special responsibility to strive to preserve stability at home in ways that help rather than hinder the attainment of a functioning world economy.

^[i] John H. Williams, "Europe After 1952: The Long-Term Recovery Problem," Foreign Affairs, April 1949.

^[ii] For a discussion of the revision of the intra-European payments plan see a note by the author on p. 153.

^[iii] Keynes' clearing union, of some $30 billion or more, was a heroic conception, which he doubtless hoped would serve all purposes. Though I thought it technically superior to the Fund, as a monetary mechanism, there was never a reasonable expectation that we would underwrite it.

^[iv] This is just as true of internal austerity as Cripps has admitted that it is with respect to his new import cuts.

^[v] There is not room in the present article for further discussion. The E.C.E.'s "Economic Survey of Europe in 1948" (Geneva: 1949) has since made the same point. The problem, however, needs further statistical analysis. For a good beginning, see L. Rostás, "Comparative Productivity in British and American Industry" (National Institute of Economic and Social Research, Cambridge, England, 1949). Since the war, the gain in United States productivity has been slight; but it has always come irregularly, and the present depression will probably increase it substantially. After the depression of 1920-21, there was an advance of 10 percent a year in American productivity for two successive years.

^[vi] Belgium, unlike Britain, did not lose her foreign assets.