Studies in Economic Nationalism

6

ECONOMIC NATIONALISM AS AN OBSTACLE TO FREE WORLD UNITY (1952)*

I

It is one of the jobs of historians, when they look back upon past events, decades or centuries after they have taken place, to ascertain when the destinies of countries and nations have taken fundamental turns, for better or for worse, in the course of their history, what the causes of these turns were — and their consequences, whether they could have been avoided or reversed, in brief, whether nations through their leaders and their public opinion have acted wisely or otherwise in the face of external forces and events.

Contemporaries lack, of course, the perspective from which alone the tides of history can be properly appraised and fairly judged. An interpreter of the contemporary scene, be he a journalist, a commentator, a political analyst, or an economic counselor, cannot do the work, which will only be performed, years after he is gone, by dispassionate and detached historians. When living, however, in the midst of great changes and violent commotions, when facing an uncertain future against the background of a troubled past, how can we avoid the temptation to take stock in our present situation, to try to appraise the exact position we have reached along the road we are travelling and to make a guess, however hazardous, as to the course that is ahead of us.

Deliberately, I am yielding to this temptation. I am doing so because my reading of contemporary events leads me do the conclusion that our nation and the entire free world are on the threshold of one of the great turnings of history. This I believe not so much because of the clouds of war which are hanging over us, clouds which are not getting any lighter because many of us turn our eyes away from them in the hope that they will disappear, and not so much because of the great danger of communist influences which, even without war, can undermine our society, our civilization, and our freedom.

The reason why I think that our destinies are about to take a major turn is that I am convinced that the unity of the Western World is threatened from within, as much as its security is threatened from without, and because I believe that the next months will show whether that all-important unity will be growing stronger or weaker in the years that lie ahead.

The imperalism of the Soviet Union, the pernicious infiltration of communism, these are the enemies whose power we must destroy. In order to do so, we, the nations of the free world, have to be strong, purposeful, and united.

The Western world through the North Atlantic Treaty Organization and other arrangements has achieved by now a considerable degree of military and political cohesion. The edifice of Western unity lacks, however, solid economic foundations. It is still divided by major economic barriers and by national policies which do little to promote unity and a great deal to prevent it. If the all-important cohension of the Western world is to endure and it solid economic foundations are to be built underneath the military and political arrangements, one major obstacle must be got out of the way. Its name is economic nationalism.

In the world as it exists today there is only one power which can conduct successfully a struggle against economic nationalism: the United States. We have the means if we have the will to do to the world of our time what England did to the world of a century ago: break down trade barriers, establish a stable international monetary system, promote a steady flow of foreign investments.

To be able to exercise this leadership, we in America have to give up one of our most traditional attitudes in the field of foreign economic relations. This attitude, although it has long since become obsolete in view of our own growth and of our position in the world economy, has still a great many adherents throughout the land. It is an attitude which goes back to the beginnings of the Republic and to Alexander Hamilton’s famous Report on Manufactures. It looks upon a protectionist tariff policy as a foundation of American prosperity.

This protectionist outlook may — I say “may” — have been beneficial to America’s growth in the 19th century. If it was, this was less due to the tariff itself than to the fact that, under Great Britain’s leadership, a large part of the world has moved away from protection and that from the middle of the 19th century onwards free trade was the prevalent “climate” of the world economy. A protectionist nation, in a freetrade world, may conceivably have derived some benefits from its tariff. It would not have derived them in a protectionist world or one in which our own tariff measures would have been countered by foreign restrictions against our trade.

It was realized even before the First World War broke loose that this attitude and this policy was becoming obsolete. When the United States emerged from World War I as one of the world’s most powerful economies, protectionism should have become confined to history books. Instead, it came back more virulent than ever.

In 1934, under the influence of the then Secretary of State, the great Cordell Hull, the United States entered upon a course of trade liberalization by adopting the Reciprocal Trade Agreements program. But the world was being increasingly torn by conflict and by the impact of totaliterianism and was moving inexorably towards another world war. The time was not ripe for an effective exercise of our leadership and the Second World War was upon us before we could make any impact upon the tidal wave of economic nationalism which was sweeping the world.

The history of our endeavors and frustrations of recent years is too long to be recounted here; it is, however, familiar and calls for only one comment. Instead of launching an all-out attack on economic nationalism, our Administration compromised with it. Instead of playing the role of St. George to the deadly dragon of economic nationalism, we temporized and compromised in quest of a modus vivendi. A little later we found that the role of Santa Claus was more comfortable than that of St. George: we fed the dragon dollars hoping he would turn into an amiable beast. Need I say that the dragon did nothing of the kind, much as he enjoyed our dollars!

Now, however, as 1952 draws to a close, we are moving towards a very important turn of the road. The year that lies ahead of us will, I feel, be a year of great opportunity. It may prove in the annals of the future to have been a year of great achievement. It may prove to have been a year of another great frustration. In the former case, 1953 will have been the year of an all-out frontal attack against the forces of economic nationalism, a year in which great strides will have been taken in the direction of currency convertibility and international monetary reconstruction, a year in which we will have called a halt to the protectionist tendencies which are again on the rampage, a year in which we will have told the world, friends and foes alike, that we are aware of our place in the world economy, of our leadership, of our opportunities, and of our responsibilities.

Failing this, 1953 may be the year in which hope for a sound world economy will have been decisively dimmed, in which new international economic crises will destroy what is left of the endeavors of the past few years, in which our friends will be disillusioned over our leadership and our foes cheered by our failures; a year in which it will become apparent that the free world is moving away from unity rather than towards it, because of the growing, not declining, influence of economic nationalism.

The situation strikes me as being serious in the extreme. Whether we shall move towards success or towards disaster depends largely on us in this country.

In Western Europe a new wind of good economic sense is blowing with increasing strength. Governments in power today in Western Europe are led by moderate people, wholehearted believers in the virtues of individual freedom, of private enterprise, and of the market economy. They are people endowed with great common sense and who have given proof in recen tyears of both daring and wisdom. They are trying very hard to put their houses in order even if that means a temporary decline in living standards.

I had long conferences with many of these statesmen as recently as May and June of this year. They are willing to be our partners in a common pursuit of a sound world economy. They are awaiting our cooperation and our leadership. They want trade rather than aid, they want to earn their prosperity rather than to get it as a gift.

The world doesn’t stand still. Opportunities come and go. A new Administration is going to come into office next January. The stage is set for great positive accomplishments in the international economic field. Will the American nation as a whole overcome the protectionist tradition in favor of a dynamic new outlook in international trade? It is harder, I know, to change habits of thought and long-standing patterns of emotion than it is to accomplish anything else in the world.

There are, I am sure, many people who would heroically fight for their country, who would sacrifice their health and their wealth alike for national survival but who will cling emotionally to the last shreds of a worn-out policy, such as protectionism, not wanting to admit that the future of their country depends upon its being overcome and reversed. To these I say: think well, think fast, for time is running out on us!

II

“Economic nationalism” is then the arch enemy of free world unity, but what exactly is economic nationalism? So far in this address, I have used the term without definition, assuming that we have, all of us, an intuitive understanding of its meaning. The moment has come where a precise definition is of essence. To be successfully fought, an evil must be well understood. Part of our troubles since the war has consisted precisely in allowing the contours of our problems to get blurred; consequently our policies lost both sense of purpose and dynamism.

In order to perceive clearly the nature of economic nationalism, let us reflect for a moment upon the contrast which exists between the physical structure of our planet and its political organization.

In physical terms the planet is a single unit which cannot be subdivided into equivalent or selfcontained parts. Politically, however, it is divided into a multitude of separate states, all bent on independence, often seeking at least partial economic self-sufficiency, and, throughout the course of history, moving in an ever-changing pattern of alliances and conflicts.

Neither the earth’s surface nor its interior can be divided into fully or partially independent sections. The distribution of fertile soil, of climates favorable to human well-being, of land and sea, mountains, rivers and lakes, does not favor the kind of politiacl division which prevails on our planet. The interior of the earth, in so far as it is open to human exploitation, is not as homogeneous as, for example, an apple nor divisible into equivalent and selfcontained portions as is an orange. There is no way in which the political division of the planet can be reconciled with its physical structure by apportioning in some way or other the surface and the resources of the globe among individual states. The alternative is to reduce the imoprtance of political divisions in terms of economic relationships.

Here we get into the heart of the problem. Given the multiplicity of nations and states, on one hand, and the fundamental natural unit of the planet, on the other, governments can, through their policies, foster unity or increase division. In some areas, such as trade, government can best promote unity by standing aside and allowing individuals to work things out among themselves. This was the doctrine and the practice of free trade. In other areas, such as international monetary relations, positive measures on the part of public bodies, governments and central banks, are necessary to create an international system out of the multiplicity of national currencies. How this can be done was illustrated by the long and highly successful experience of the gold standard.

Division, on the other hand, is fostered willfully or unwittingly whenever governments interfere in trade transactions between residents of their country and people living elsewhere in the world; whenever they restrict migrations and travel; whenever they limit the freedom of people to buy and sell foreign goods or to invest capital in foreign lands.

From Adam Smith till 1930, economists have been well-nigh unanimous in recognizing the virtues of unfettered, unhampered trade relations between people living in the various countries of the globe. Whenever departures from free trade were advocated, this was done for reasons of a political or social character, such as military strength or the diversification of industries, or the maintenance of high-cost farming, for example. These military, political, or social aspirations had then to be paid for by the loss of some of the benefits of international trade and of the international division of labor.

Such — apart from the “protection” of special vested interests by means of tariffs —were the major motivations of the relatively mild form of economic nationalism which was experienced in some countries (including the United States) during the ninetheeth century. The fact that individual freedom was greatly respected in those days and the powers of the state were limited, and the fact that a large part of the world, under leadership emanating from England, was on a free trade basis, tended greatly to mitigate tendencies toward economic nationalism.

More recently the situation changed very dramatically. The rise of collectivism in the 20th century and the widespread (and only too well founded) sense of political insecurity have played into the hands of economic nationalism. Economic planning became the intellectual fashion of the twenties, and the reality of the thirties and the forties; currently it shows, for the first time since the Great Depression, signs of receding.

Centralized economic planning is a typical feature of the totalitarian state; but it can be advocated also in the name of wellbeing or in the name of security. The economists of the Keynesian school have been at pains to demonstrate that national planning fosters prosperity — even though it breaks up the world economy. Both reasoning and experience shows them to be wrong; their influence, however, although it has passed its zenith, it still considerable. The popular appeal of the full employment slogan is still very great in certain countries as is the appeal of the economic development slogan in some areas of the globe. It is one of the tragedies of our age that these slogans should have become the weapons of economic nationalism; actually those who use these weapons are incapable, in the end, of delivering the promised goods, but by the time this is discovered much harm has been done.

Actually, governmental planning for full employment can only result, in an economy insulated from the rest of the world, in regimented poverty. Prosperity is a child of freedom and of enterprise. Economic development, too, is jeopardized by governmental regulations and restrictions; it calls for the best possibe utilization of ressources and is stimulated by the availability of foreign capital and imported skills.

In a growing world economy there are jobs enough for all. In a world economy free from restrictions economic development of any one area can be carried out with the help and the resources and skills of other, more advanced, areas. There is actually no conflict between full employment and economic development, on the one side, and the freedom of international economic intercourse, on the other. It is a tragedy that millions of people all over the world have been misled into believing the opposite.

It is up to those who believe in the virtues of private enterprise and individual endeavor as against the paternalism of an all-powerful state to fight against the fallacies that are being spread in the world by the adherents of economic nationalism and its siamese twin, collectivism. Actually, this is a task for Americans, in the performance of which we can count, at this point, upon the able partnership of our friends from Western Europe. They are the people who have awakened — or are in the process of awakening — from the daydream turned nightmare of the “Welfare State” and who are today in the front ranks of the defenders of sound, time-proven, principles of “old-fashioned” economic liberalism.

A fake promise of welfare is one of the propaganda weapons of economic nationalism today; the other is the promise of national security. That promise, too, is unfulfillable. Two world wars have abundantly demonstrated the hopelessness for any country to be strong in and through economic isolation from the rest of the world. National strength requires the use of resources, many of which are outside of the country’s territory. Only a group of countries working freely together can achieve strength. This is the basic concept of NATO and it is in urgent need of an economic implementation.

It is when one examines a common endeavor such as that of NATO countries that one is most forcibly struck by the folly of economic nationalism. Here we are, a group of friendly nations, seeking by common effort protection against outside aggression. We are working towards a common foreign policy. We are working towards a joint military force. And yet we continue having economic policies which create division amongst us. Unless we decide to abolish the use of exchange controls, import quotas, high tariffs and discriminatory trade practices, all of them tools of economic nationalism, we, the countries of the Western World, will most certainly fail to achieve the unity upon which our common survival depends.

Nor does the practice of economic nationalism allow the governments of the underdeveloped areas of the world to join with the United States and Western Europe in a common endeavor for a richer and more abundant life. Economic nationalism of the underdeveloped countries of Asia, of Latin America, of other areas, discourages today most effectively a large and sustained influx of capital and know-how from abroad without which no major economic advance can rapidly be made.

The security and the prosperity of the free world alike demand that an end be put to policies of economic nationalism. We alone in America can provide effective and dynamic leadership towards that end. We are strong and young and prosperous. We are the leaders of the free world in the fight against tyranny and aggression. We alone can be its leaders in the fight for economic unity and against economic nationalism.

How can we do that? This is the big question before us and one which we must answer fast if we are not to miss our chance of making our leadership effective. The following, in conclusion, are some positive suggestions for an American foreign economic policy aimed at the unity of the free world.

III

Our fight against economic nationalism must begin at home. As was suggested earlier in this discussion, we ourselves still have the protectionist virus in our system. It frustrates our commercial policy by our insistence upon escape clauses which make it possible to reverse tariff concessions granted to foreign countries (should it be shown that these concessions hurt some established industrial and agricultural interests at home). It creates in the world a great deal of uncertainty as to the American market, since our tariff increases can destroy long, painstaking, and costly, efforts on the part of foreign producers to sell their products to the American public. Thereby it destroys all the effectiveness we might have when urging other countries to liberalize their own trade policies. The example we are giving is what matters!

Protectionism is not only an obsolete policy for a country that leads the world in productive efficiency and in managerial skill, it is also a very costly policy for the great mass of American consumers and taxpayers. Consumers often fail to realize it, but they are paying more for a great many of the things they buy because the competition of foreign goods in the American market is interfered with by the imposition of high import duties. We all favor competition — but many want to stop it where foreign goods are concerned. This makes, of course, no sense — and it is a very expensive form of nonsense.

In the second place, we have been maintaining, for a number of years now, an export surplus financed through gifts and grants to foreign countries made at me expense of the American taxpayer. There has been much justification for these grants at the immediate aftermath of the war —but one should not mistake an emergency action for a new way of life. The American taxpayer is getting tired of the load he is bearing: the “dollar shortage” is a familiar complaint in a great many American households and there is a growing feeling that Santa Claus ought to be a sporadic event in the life not only of children but of nations!

If we are, however, to balance our foreign payments without making gifts or grants, there are only two ways by which this can be achieved:

(1) We can allow our exports to fall to the level of our imports. This would follow automatically upon the cessation of foreign aid. This solution would cause widespread difficulties in our export industries, which are among our most efficient ones, and it would deprive the rest of the world of American-produced goods of which there is great need. This, then, is a bad solution, for it is prejudicial to our own prosperity and to that of the world.

(2) We can, on the other hand, expand our imports so that foreign countries could earn the dollars needed to pay for the goods they are buying from us. This solution can maintain the prosperity of our export industries while allowing foreign countries to expand their production and trade. Because it favors both our own prosperity and that of the rest of the world, I should regard this as a good solution.

To open more widely the American market to foreign goods is then the first and major requirement for our foreign economic policy. This calls for a number of measures on our part. While a new and low tariff is being worked out, we should “bind” our present rates (in our relations with friendly nations) and we should pass through Conugress, as soon as possible, the presently pigeonholed Customs Simplification Bill. We are keeping out goods from the American market not only because tariff rates are high but also because the administration of the tariff involves many elements of arbitrariness and of uncertainty, as well as an excessive amount of red tape. When we get a new and low tariff, we should use it as an instrument of trade negotiation in order to bring about a reduction of trade barriers by the other free countries of the world.

The second major objective of our foreign economic policy should be the re-establishment of convertible currencies throughout the largest possible part of the non-Sovient world. This process could best be started in Western Europe and the Sterling Area. The United States has had no really active foreign monetary policy since 1947. In that year an attempt to restore the convertibility of the pound sterling had failed through had preparation and premature action, and ever since then we have avoided pressing this basic objective of our foreign economic policy.

Exchange control, however, is one of the most devastating instruments of economic nationalism. It insulates, more effectively than any other device, a country’s economy from the rest of the world. It provides a wall behind which the country’s internal prices can develop out of touch with the course of world prices, thereby creating balance-of-payments difficulties. And by appearing to protect a country against the consequences of mistaken domestic policies, it encourages scomplacency towards infernal inflation and the growth of economic maladjustments. Furthermore, exchange control combined with the use of import quotas restricts international trade and payments and leads in the direction of bilateralism à la Doctor Schacht. Until exchange control has been eliminated, multilateral trade based on private trading and individual enterprise cannot be restored.

It has been my conviction for a number of years now that the Marshall Plan might have become an instrument of monetary reconstruction. This has not, however, been the case. Now, we must adopt a number of important measures if we are to benefit from the outlook in Western Europe which is currently very favorable to the removal of exchange control. What stands in the way of realization along that line is the lack of adequate reserves with which to buttress the position of central banks once convertibility of currencies has been restored.

Together with Switzerland and Canada, but much more importantly so, the United Sattes is the source from which additional reserves could be obtained by foreign countries. We must design a program which would create a monetary reserve fund of substantial magnitude and make it available to our friends in Western Europe first, elsewhere afterwards. It would be tedious, at this point, to go into a welter of technical detail. Let me indicate, however, my personal conviction that the solution of this problem calls for a major upward revision of the world price of gold, as a part of a comprehensive, many-faceted, program.

Let us now turn our attention to a third aspect of our foreign economic policy: the problem of foreign investments. Much has been said on this subject in recent years. The U.S. Government has been greatly concerned over methods of encouraging private foreign investments. Rivers of ink have flown concerning the “Point Four” program. And yet capital movements have not been revived to anything like the hoped-for extent. In spite of the very successful operations of the International Bank for Reconstruction and Development, of the activities of the Export-Import Bank, and of a certain amount of private investment, economic development of many areas of the world has been slower than it might very conceivably have been with a more abundant supply of capital.

Another frustration? Indeed, yes! And why? Essentially for two reasons: the prevalence of economic nationalism among the governments of underdeveloped countries and the prevalence of exchange controls. The combination of the two has resulted in an atmosphere which is most unfavorable to the expansion of private investments in the underdeveloped countries. The problem is ours, for we have a stake in an expanding world economy. It is our problem, too, for we don’t want the dissatisfied masses of the underdeveloped countries to be led astray by communist blandishments. But the problem is not ours alone. Indeed, it is first and foremost the problem of the underdeveloped countries themselves. They stand to gain very much by the speed-up of their growth and they stand to lose their very freedom it the lack of growth gives way to discontent and despair.

It is the governments of underdeveloped countries which have the greatest responsibility in the matter and the government of the United States should make this abundantly clear to them and to the rest of the world. It should be made abundantly clear, as the International Chamber of Commerce urged as recently as last May that governmental loans or grants could never be a substitute for private capital. Such governmental funds as could be made available from time to time to underdeveloped countries should go preferably in the direction of countries whose governments have taken positive measures to attract private capital.

So long as private investors are discouraged from going abroad by a hostile attitude of foreign governments, international capital movements cannot revive. Here is a wall which the United States could very effectively help to break down. It could do so by an adroit combination of the proverbial carrot with the proverbial stick, by rewarding fair treatment of private investments and by penalizing acts of arbitrary nationalism.

These three aspects of our foreign economic policy are very closely tied together. Unless we have monetary reconstruction in the world, we can achieve neither the liberalization of trade nor the revival of foreign invetsments. Nor can monetary reconstruction endure if our commercial policies result in a chronic “dollar gap” and balance-of-payments difficulties for foreign countries. The revival of foreign investments must not be regarded, as it sometimes is, as an alternative way of resolving the “dollar gap” problem. Capital exports are not a substitute for merchandise imports. If our foreign loans and investments are to be secure, we have to accept foreign goods and services more abundantly than heretofore.

It is greatly to be hoped that the new Administration of the United States which will be inaugurated in January will put high on its agenda the formulation of a comprehensive program for a foreign economic policy. This program must be a deliberate and bold attack against economic nationalism, both our own and that of other countries. It must be a program based on the realization that, unless we open our market more widely to foreign goods, we are incapacitated in our struggle against economic nationalism and the division it creates in the free world. In contrast with what has been the case for the past quarter century, our foreign economic policy must be acutely aware of the importance of a sound international monetary system for our own prosperity and for that of the other free nations of the world, and for the unity of us all.

A comprehensive tour of Western Europe conducted early last summer has persuaded me that there is a very good opportunity for restoring currency convertibility in Western Europe in the course of the next 12 months and for bringing to an end the widespread use of import quotas. If these goals are to be reached, we shall have to act fast and act forcefully. Time will be of the essence. Even if we win the Battle of Convertibility, there will be a hard struggle ahead of us in the war against economic nationalism — but the chances of eventual victory will then be bright.

Prosperity is a wonderful objective. Even more wonderful is the objective of human freedom. Both of these are within the reach of the Western World if — and only if —that world achieves internal cohesion and unity. After the many tribulations, disappointments and frustrations of the past, will future historians be able to record that by the end of 1952 we Americans — and the free nations of the world — have learned the lesson that we must all prosper together if we are not to go down separately in misery and distress? The answer is in our hands!

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