IV Organization for European Economic Cooperation

IV Organization for European Economic Cooperation Background. In April 1948, nineteen countries of western Europe established an Organization for European Economic Cooperation in order to launch a coordinated attack upon their economic problems. Western Europe was on the verge of breakdown as a result of the socialist and interventionist practices of almost all European governments. Inflations and credit expansions were running wild. Allround price and wage controls strangled economic activity. Large and important sectors of industry were nationalized and turned over to government officials. The remaining private industries were levied with confiscatory taxation. All these and many more socialist shackles on the activity and initiative of the individual resulted in decreased productivity and lower real incomes and standards of living. The stock of capital equipment was no longer maintained, and productive techniques remained stagnant or even deteriorated.

These conditions naturally impeded every attempt at reconstruction and reparation of the damages caused by war. In these dark hours of the system of central planning and government control in Europe a light suddenly began to shine. On June 5, 1947, the Secretary of State of the United States, General Marshall, made a historic speech at Harvard University in which he invited European nations to join in detailing their common needs which then were to be considered by the Congress of the United States. Immediately European governments responded and set up a "Committee of European Economic Cooperation" which developed into the "Organization for European Economic Cooperation" when Congress approved the Foreign Assistance Act providing for billion dollar aid for Europe in April 1948. OEEC henceforth served as the 175 176 STEPS TOWARD UNION receiving and distributing instrument for American aid. On the supplying side of Marshall's vast "European Recovery Program" the American "Economic Cooperation Administration" (ECA) was set up to approve and finance the purchase of goods for Europe.

Convention for European Economic Cooperation. While the American Foreign Assistance Act laid down the basic policy of assistance and aid as far as the United States was concerned, the European governments laid down their principles of cooperation in the "Convention for European Economic Cooperation." In it they declared "that their economic systems are interrelated and that the prosperity of each of them depends on the prosperity of all. ... Only by close and lasting cooperation between the Contracting Parties can the prosperity of Europe be restored and maintained, and the ravages of war made good." 1 Article I of the Convention defines as an immediate task "the elaboration and execution of joint recovery programs ... to achieve as soon as possible and maintain a satisfactory level of economic activity without extraordinary outside assistance." Then follow specific objectives which the contracting governments pledged to pursue.

The governments will "both individually and collectively, promote with vigour the development of production, through efficient use of the resources at their command, whether in their metropolitan or overseas territories, and by the progressive modernization of equipment and techniques/' The governments will "within the framework of the Organization . . . draw up general programs for the production and exchange of commodities and services. In so doing they will take into consideration their several estimates or programs and general world economic conditions/' The governments will "develop, in mutual cooperation, the maximum possible interchange of goods and services. To this end they will continue the efforts already initiated to achieve as soon as possible a multilateral system of payments among themselves, and will cooperate in relaxing restrictions on trade and payments between one another with the object of abolishing as soon as possible those restrictions which at present hamper such trade and payments."

The governments will "continue the study of Customs Unions or analogous arrangements such as free trade areas, the formation of which might constitute one of the methods of achieving these objectives. Those Contracting Parties which have already agreed in principle to the creation of 1 Convention for European Economic Cooperation, with Related Documents, Paris, April 16, 1948, U. S. Department of State, Publication 3145, Preamble.

EUROPEAN ECONOMIC COOPERATION 177 Customs Unions will further the establishment of such Unions as rapidly as conditions permit." The governments will "cooperate with one another and with other likeminded countries in reducing tariff and other barriers to the expansion of trade, with a view to achieving a sound and balanced multilateral trade system such as will accord with the principles of the Havana Charter." A government will, "having due regard to the need for a high and stable level of trade and employment and for avoiding or countering the dangers of inflation, take such steps as lie within its power to achieve or maintain the stability of its currency and of its internal financial position, sound rates of exchange and, generally, confidence in its monetary system." The governments will "make the fullest and most effective use of their available manpower. They will endeavor to provide full employment for their own people and they may have recourse to manpower available in the territory of any other Contracting Party. In the latter case they will, in mutual agreement, take the necessary measures to facilitate the movement of workers and to ensure their establishment in conditions satisfactory from the economic and social point of view." 2 Organization. The following national governments are members of OEEC: Austria, Belgium, Denmark, France, Western Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Sweden, Switzerland, Turkey, the United Kingdom, and the Anglo-American Zone of the Free Territory of Trieste. Also the United States and Canada associated themselves informally with OEEC and, although they are not full members, they are usually represented at its meetings.

The Organization, which has its seat in Paris, is composed of a Council consisting of all the members, a seven-member Executive Committee, and a SecretaryGeneral with several directorates. The Council is the policy-making body of the Organization and is responsible for all major decisions which are binding for all members having voted in the affirmative. The Council consists of cabinet ministers of the member governments or their deputies. It meets at least once a month at the executive level and every two months at the ministerial level. The Council also designates the Members of the Executive Committee and its officers and appoints the SecretaryGeneral and the directors. The Executive Committee is charged with carrying out the policies of the Council and directing the work of the numerous com2 Ibid., Part I, Articles 2-9.

178 STEPS TOWARD UNION mittees. It consists of seven member governments elected by the Council; it reviews and makes recommendations on matters before they are considered by the Council. The SecretaryGeneral prepares the meetings of the Council and of the Executive Committee. He insures the execution of their decisions, presents to the Council for approval the Organization's budget, and stays in contact with other international organizations. There are also a variety of committees which meet on a regular basis throughout the year. The "vertical" technical committees deal with questions relating to specific commodities as, for example, food and agriculture, coal, nonferrous metals, or certain sectors of the economy as inland transport and shipping. The "horizontal" committees are concerned with broad questions such as balance of payments, trade, government planning, and manpower. In order to eliminate the payments difficulties among OEEC countries the European Payments Union was developed by OEEC and is operating under its authority. The Union was created by a special agreement signed by all OEEC countries in September 1950.

The Managing Board of EPU is responsible to the OEEC Council, the policy-making body of the Organization. It is also responsible for the execution of the September 1950 agreement and has the power to make decisions concerning the operation of the Payments Union. Aid and Counterpart Funds. In each country where assistance is provided by the government of the United States, a special local currency account is created in which the local currency equivalent to the dollar grant received is deposited. During the first four years of American recovery aid, 95 per cent of the counterpart funds were available for use by the depositing governments; since 1952, this part has been reduced to 90 per cent. Under the Economic Cooperation Act of 1948, counterpart funds were employed for (a) promotion of reconstruction, expansion, and modernization of industrial capacity, (b) stabilization of internal financial and monetary conditions, and (c) development and expansion of the productive capacity of basic industries. The Mutual Security Act of 1951 extended the use of counterpart funds deposited for current dollar grant aid by the U. S. government to include "military production, construction, equipment, and materiel." The Mutual Security Act of 1952 provided that counterpart funds were to be used primarily for military assistance and defense support. This Act also provided that "the counterpart derived from EUROPEAN ECONOMIC COOPERATION 179 100 million of dollars aid be used to stimulate free enterprise and the expansion of the economies of the participating countries with equitable sharing of the benefits of increased production and productivity between consumers, workers and owners." The employment of funds is subject to supervision and control by the American administration providing the dollar aid.3 The cumulative status of counterpart funds accounts from April 3, 1948 through September 30, 1953 was reported as follows: 4 Balance for Use By Recipient Governments Country (millions of dollars) Total of all countries 10,579.7 5 Austria 698.2 Belgium-Luxembourg 28.0 Denmark 222.5 France 2,677.3 Western Germany 1,256.9 Greece 661.5 Iceland 25.1 Ireland 17.3 Italy 1,153.2 Netherlands 833.2 Norway 347.1 Portugal 19.4 Trieste 34.3 Turkey 192.0 United Kingdom 2,216.6 Yugoslavia 153.7 The cumulative amounts and the purposes for which withdrawal of counterpart funds by the recipient governments were approved by the American administration were reported as follows: 6 3 The Economic Cooperation Administration, A Report on Recovery Progress and United States Aid, February 1949, p. 157; Foreign Operations Administration, Statistics and Reports Division, Local Currency Counterpart Funds, data as of September 30, 1953, p. 1.

4 Foreign Operations Administration, Ibid., p. 3. 5 The total of all foreign grants and credits by the United States Government in the postwar period from July 1, 1945, through September 30, 1953, amounted to $43,076,000,000. See Appendix of "Congressional Record" for January 27, 1954, p. A604. 6 Foreign Operations Administration, Ibid., p. 6.

180 STEPS TOWARD UNION Cumulative Withdrawals April 3, 1948-September 30, 1953 Purpose (millions of dollars) Military 1,270.0 Retirement of debts of national governments 2,510.8 Promotion of national production through government grants and spending.... 4,244.8 Subsidies to agriculture 906.4 Subsidies to mining 494.8 Subsidies to manufacturing 742.5 Subsidies to transportation 1,787.5 Subsidies to public housing and buildings 884.2 Other subsidies 313.7 Total of all approvals of government withdrawals and spending 9,304.0 An Annual OEEC Program. According to Article I of the Convention, the Organization is to elaborate and execute a joint recovery program. The first annual program which was handed to the American ECA representative in Europe in October 1948 was most illustrative as it laid down the principles of future European cooperation. Representatives of nineteen countries had cooperated in its preparation and had agreed unanimously upon its terms. The program covers the following points: 1. Allocation and use of $4,875 million of United States aid.

2. Introduction of a system of intraEuropean payments linked to United States aid.7 3. Rules of commercial policy to guide the future financial, economic and commercial relations of the member countries.8 As the basis for the division of American aid the program recommended the dollar deficit of each country's central bank with the central banks of the nonmember countries, account being taken also of its creditor position vis-a-vis the central banks of the member countries. The primary objective of this approach towards division of American aid was to cover dollar deficits and encourage "the development of a free system of payments through the extended use of Western Europe's own currencies."9 7 On this point, see detailed presentation, p. 196 et seq. 8 Organization for European Economic Cooperation, Report to the Economic Cooperation Administration on the First Annual Programme, July 1, 1948-June 30, 1949, Foreword, p. 7.

*Ibid., p. 9.

EUROPEAN ECONOMIC COOPERATION 181 In order to reduce future dollar requirements, OEEC suggested that the chief imports from the United States should be those capital goods that would most likely result in future dollar earnings or savings. It also recommended government restriction of certain dollar imports and the shifting of other imports from the dollar area to European or other non-dollar sources. Recommendations were based on an attempt to forecast in detail for a year the supply and demand for each commodity. OEEC finally appealed to the member governments to develop domestic production, improve labor productivity, coordinate the investment plans of their citizens, and embark upon other measures of government aid. A Quota Removal Program. Quotas which limit absolutely the amount of goods that may be imported accounted for most of the postwar increases in government restrictions of foreign trade. It is obvious that there cannot be effective economic cooperation and integration where the economic relations are rigidly limited by complete sets of government quotas. OEEC therefore decided to center its attack on the removal of import quotas in intraEuropean trade.

Early in 1949, OEEC embarked upon a quota removal program. In its Interim Report it invited the member governments to consider abolition of import quotas and their substitution by a system of "global quotas" or "open general licenses."10 Global quotas which only limit the total amount of imports of a certain product do not specify from what country within the OEEC area imports are to come. Open general licenses allow free imports of certain products from certain countries. Both forms of trade liberation, of course, are subject to the limitations imposed by government exchange control. The Interim Report also emphasized the following conditions for these steps towards intraEuropean trade liberalization: the suppression of inflation, the correction of excessive disequilibrium, the balancing of the area's dollar accounts, the restriction of trade with the dollar area, and other preliminary steps.

Until 1951 the member states really abolished a considerable part of their quotas on intraEuropean trade. Most OEEC governments reached a 60 per cent liberalization by the end of 1950, and the 75 per cent mark was reached in the summer of 1951. When it became apparent that the liberation list of every OEEC government differed from that of all other governments, and not a single good appeared on the liberalization list of every OEEC country, it was proposed that all governments remove quotas on a "common list" of goods. About 70 commodities comprised this list which most io OEEC, Interim Report, p. 92.

182 STEPS TOWARD UNION member governments agreed upon and for which trade was tentatively freed from quota restrictions.11 OEEC AND TRADE LIBERALIZATION: AN APPRAISAL Bearing in mind that import quotas are merely one of many tools of government planning and restriction upon foreign trade, we may deliberate on the extent and meaning of the liberalization of trade quotas as brought about by OEEC. At first glance, the liberalization of intraEuropean trade at the rate of 75 per cent of all commodities is undoubtedly impressive. We gain the impression that European nations are really heading towards unification and integration of their economies. Upon second glance, however, the OEEC liberalization program appears in a different light. A distinction becomes apparent that is of greatest importance for the understanding of government quotas of foreign trade—the distinction between restrictive and non-restrictive quotas. A true liberalization of trade quotas naturally means the removal of those quotas which led to a restriction of trade. Abolition of non-restrictive quotas, of course, is meaningless. For example, a country whose system of government quotas consists of 99 per cent non-restrictive quotas, may abolish 99 per cent of its total system, and, yet, its quota restrictions would remain unimpaired. Switzerland, for example, may abolish her quotas on imports of watches, clocks, and similar products of precision instruments which, of course, does not lead to any expansion of trade, because she is exporting these goods and need not fear any foreign competition whatever. However, if she would remove import quotas on American automobiles, more automobiles could be imported and consequently more Swiss goods could be exported.

Removal of such restrictive quotas would lead to expansion of foreign trade. But let us assume for the sake of further illustration that the quotas removed within the OEEC area were really restrictive and that their removal lead to an expansion of trade. We yet must bear in mind that the liberalization applies only to imports from OEEC countries. Quota restrictions upon trade with nonmember countries either have remained unimpaired or have even increased. If we see the effect of the OEEC liberalization program in the light of a nation's total foreign trade, we arrive at more illustrative results. According to a conservative estimation by William Diebold, compliance with the OEEC liberalization program by the spring of 1950 11 See also William Diebold, Trade and Payments in Western Europe, Harper & Brothers, New York, 1952, p. 158 et seq.

EUROPEAN ECONOMIC COOPERATION 183 meant "the removal of quotas of 40 per cent of the total imports of Belgium, Ireland and Switzerland. For Denmark, Sweden, the Netherlands and Portugal the figure was 27 or 28 per cent; Norway, 23 per cent; Germany, Italy and Greece, 14-16 per cent; and France and Britain, only 10 per cent/'12 Diebold then proceeds to compare the liberalization of trade within the OEEC area with the gross national product of each member country. According to him, "liberalized imports amounted to 12 per cent of Belgium's gross national product, and 11 per cent of Switzerland's, but in France and Germany they were only 1 per cent and in Britain, Ireland and Italy, 2 per cent. The other countries fell in between, ranging from 3 per cent in Greece to 9 per cent in the Netherlands."13 If we now bear in mind that the quotas removed were mainly non-restrictive and that quota restriction is merely one of many government restrictions, we perceive the full extent of the "liberalization" as achieved by the OEEC countries.

The Reforms Needed. Europe at the end of the war was economically very poor. The destruction of capital equipment and the depletion of resources expended in the war against the Axis had deprived the countries of the capacity to produce at the rate that would have allowed the pre-war standard of living. It was clear enough to all observers that the European nations had to curtail their consumption and, in order to improve living conditions, had to get things straightened out. The elements in the problem of reconstruction were the following: 1. Almost all European governments had unbalanced budgets. They were borrowing and spending far more than the tax revenues collected. All of them conducted policies of inflation and credit expansion which were wrecking the currencies. All of them had currencies that were increasing steadily in volume, fluctuating violently, and depreciating rapidly. The utmost need for Europe was that of balancing government budgets and stabilizing currencies.

2. When the government of the United States, the only strong creditor country, offered to make grants and extend credit to the European governments, the proceeds were to be taken partly in gold, to build up the reserves of the central banks. The measures of currency stabilization in connection with adequate gold reserves would have allowed free convertibility and redeemability of currencies—the only measures that could bring about reconstruction and recovery. 12 William Diebold, Ibid., p. 182. 13 Ibid.

184 STEPS TOWARD UNION 3. Finally, if the European nations wanted to benefit from the advantages of an international division of labor and desired access to international capital markets and, especially, to that of the United States, tariffs had to be lowered and quotas, exchange controls, and other trade barriers had to be removed. If men are free to transfer balances, capital, and goods from one country to another without encountering government-created difficulties, an integrated world economy can develop and bring in its train strength and prosperity. The Opportunity of a Creditor. An industrial corporation that is compelled to undergo a reorganization does so because all other remedies or treatments for bankruptcy have failed. Like the simpler remedies of refinancing, reorganization is designed to prevent the disintegration of the business and, as a going concern, make it more valuable than it would be in liquidation. A common objective of reorganization, which is usually forced upon the corporation by its creditors or prospective creditors, is to raise new funds for working capital and other rehabilitation. In this process the creditors have the opportunity to impose adequate requirements for internal reform upon the corporation. Bankers as creditors have an obligation towards their own depositors to do just this.

In the case of intergovernmental loans the creditor government has a similar opportunity and obligation. The United States government, from the close of World War II through September 30, 1953, had more than 43 billion dollars' worth of opportunity to bring reason and order to the world. The United States government also had a 43-billion-dollar obligation towards its own citizens and taxpayers to do just this. When the question of aid and loans arose, the United States government was in a position to impose adequate requirements for internal reform upon the country which was receiving the grant or credit. To fail to do this would mean prolonging the misery of the debtor and the chaos of the world. If we see the foreign aid spending of the United States government from this point of view, we must conclude that the United States government not only missed this rare opportunity but also failed entirely to discharge its 43-billion-dollar obligation towards its own citizens. Never in history has such an amount been spent and been poured into 43 countries with such a disregard for prudent principles of economy. But could we expect the American government to lead the other countries to sound financial and economic reforms while similar policies of ample spending and currency depreciation were conducted at home? Obviously, we could not, for EUROPEAN ECONOMIC COOPERATION 185 the American leaders were inspired with the same kind of New-Deal ideas abroad as recent administrations have desired to enforce at home. Instances are even related where American officials interfered with foreign governments which endeavored to abolish controls and return to sounder principles of government. American Fair-Deal officials repeatedly exerted pressure on the Belgian and German governments to inflate their national currencies at a greater degree and create more credit through simple expansion. Fortunately for these nations, their governments usually resisted this Fair-Deal pressure.

A Windfall for Socialism. The true meaning of the foreign aid spending of the United States government can be recognized only if we analyze the purposes for which the billions of dollars of American aid were used by the recipient governments. Let us look, for example, at the uses of the Marshall aid by European governments which are required to deposit the local currency proceeds from such aid in counterpart accounts before they are authorized by American authorities for government spending. As of September 30, 1953 the Austrian government was allowed to spend the following amounts for the following purposes:14 Retirement of government debt $12.5 millions Agricultural programs of government spending for research for government-owned forestry, etc 75.0 Subsidies to government-owned or government-controlled mines 28.9 Subsidies to government-regulated manufacturing industries considered essential 153.8 Subsidies to government-owned railroads run at a deficit 52.3 Subsidies to government-owned or government-regulated electric, gas, and power facilities 111.5 The uses of the French counterpart funds during the five years' period by the French government are similiarly revealing. The expenditure statement reads as follows:15 Military production $493.6 millions Retirement of government debt 171.4 Agricultural programs of government spending and subsidies to farmers 253.0 Subsidies to government-owned mines run at substantial deficits 308.6 14 Foreign Operations Administration, Local Currency Counterpart Funds, p. 8.

« Ibid., p. 11.

186 STEPS TOWARD UNION Subsidies to other government-regulated industries considered essential by central planners 230.8 Subsidies to government-owned railroads run at deficits 125.1 Subsidies to government-owned or government-regulated electric, gas and power facilities 563.9 Public housing and other housing under government rent control 350.3 The German government enjoyed a similar windfall for its spending programs. Through September 30, 1953 American recovery aid provided for under the Marshall plan was employed as follows:16 Agricultural programs of government spending and subsidies to German farmers $106.3 millions Subsidies to government-owned or government-controlled coal mines 107.1 Subsidies to industries considered basic and essential ... 268.2 Subsidies to government-owned railroads run at substantial deficits 17.1 Subsidies to the government-owned system of telephone, telegraph, and other communication facilities run at deficits 10.6 Subsidies to government-owned or government-regulated electric, gas, and power facilities 200.1 Subsidies to public and social housing under government rent control 130.8 In Italy spending of the counterpart funds by the Italian government was authorized by American officials for the following purposes: 17 Military production $ 54.4 millions Agricultural programs of government spending and subsidies to farmers 233.6 Subsidies to the government-owned railroad system run at substantial deficits 220.4 Loans to industries considered essential and regulated by government 193.5 Subsidies to housing under government rent control ... 161.2 Similar statements on Marshall aid spending by other recipient governments would reveal similar purposes of government spending and handouts. We readily admit that the purposes of spending as indicated in the expenditure statements were most urgent and bene16 Ibid.

« ibid.

EUROPEAN ECONOMIC COOPERATION 187 ficial. A railroad system that is government-owned and run at substantial deficits year after year undoubtedly is in urgent need of modernization and reconstruction. Public utility facilities that are government-owned or government-run, which break down at sunset or supply only part of the public, are in need of reconstruction. A government-owned telephone system whose "across the street" telephone service requires more effort and patience on the part of the public than a "cross-continent" call with the American Telephone and Telegraph Company undoubtedly is in a bad condition and needs to be reconstructed. Housing conditions in a country whose government practises strict rent control for twenty or more years must be deplorable and call for improvements. But a lasting improvement of this unfortunate state of affairs cannot come from some reconstruction subsidies, similar to those drawn by the industries from their own governments for many decades. It only can come by eliminating the root of the evil: the nationalization or regulation of these industries by their own governments.18 It is obvious that the American government is not concerned with the cause of the evil but merely with its inevitable effects. It poured more than 43 billion dollars' worth of aid into old channels of government spending which, in the past, had swallowed vast amounts and which will gulp similar amounts in the future. The American government merely relieved temporarily the recipient governments from an activity to which they themselves were committed.

In this connection, one decidedly detrimental effect of American aid to European governments must be mentioned. The billions of American dollars at the disposal of the recipient governments have strengthened enormously the position and authority of government. The system of government interference and handouts gained new 18 An excellent example of the operation and "expansion" of nationalized industries is the German postal, telephone and telegraph service, which for many decades was considered to be an efficiently run government enterprise. The following data must be considered in the light of the monopolistic position of these government industries and the enormous growth of many private industries. Service Letters handled (in millions) Parcel Post (in millions) Telephone calls (in millions) Telegrams (in millions) Personnel emp. (in thousands) Surplus or deficit as presented by government accountants (in millions of Marks) Source: Deutsche Zeitung und Wirtschaftszeitung, April 21, 1954, p. 4.

1911 5994 271 2074 50 310 1936 6437 296 2562 21 382 +72 1951 4443 178 2156 26 294 +102 1952 4815 191 2323 26 303 —51 1953 5511 203 2499 27 334 —146 188 STEPS TOWARD UNION support and enjoyed new popularity with each dollar distributed among the constituency. And while railroads, public utilities, and other government enterprises are rebuilt and modernized with American money, people find their belief in their system of government confirmed, in nationalization of industries, in central control, and in government handouts. With every new train passing by people infer: socialism works; our system of government regulation works. Government orators confirm their belief: it works! it works! But it is obvious that this inference, sooner or later, must lead to further economic breakdowns, to new poverty and chaos. The Dollar Mystery. "The number one financial problem of the world is the shortage of the United States dollar." The United States government is therefore urged by foreign governments in concert with most contemporary writers on foreign affairs to make dollars available for countries that suffer from this malady. The explanations commonly offered for the dollar scarcity are "the emergence of the United States as an overwhelmingly dominant economic power and the hostility between the West and the Soviet Bloc." The United States, it is said, has 50 per cent of the world's purchasing power and 75 per cent of total investment capacity. These conditions cause maladjustment and call for planning on the international plane.

They also explain, it is asserted, why other countries' currencies are often "overvalued" when compared with the United States dollar. American productivity rises faster than elsewhere, thus creating greater competitive power and industrial supremacy, which finally results in the elimination of foreign countries from the most productive lines of production. Thus the difference between rich and poor nations grows and the dollar shortage brings about "a continued deterioration of (at least the relative) standard of life of countries other than the United States."19 To remedy such unfortunate world conditions international loans are said to be unsuitable because the poor nations can scarcely be expected to repay loans. "Stability in the world economy, therefore, could be expected to depend on the capacity of the United States to maintain activity by domestic measures or on arrangements of a non-commercial nature which would use United States productive power threatened with unemployment for the reconstruction or development of foreign coun19 T. Balogh, The Dollar Crisis, Oxford, 1949, p. 9; see also OEEC, Comments by the Economic Committee on the Report on International Financial Stability, Paris, 1952; OEEC, Financial Stability and the Fight Against Inflation, Paris, 1951, pp. 13, 16, 32.

EUROPEAN ECONOMIC COOPERATION 189 tries." 2Q In other words, the United States government is urged to conduct policies of full employment and turn over a larger share of American production to the poor nations of the world. Through sharing American wealth the dollar shortage in the world is said to disappear. In the first place, such an assertion contradicts reality. From July 1, 1945 through September 30, 1953, America indeed has shared its wealth by granting more than 43 billion dollars' worth of foreign aid. And yet the dollar shortage has not been overcome. If 43 billion dollars of foreign aid constitute no sharing of wealth for the reconstruction and development of foreign countries, what amount would earn this designation? Should the United States government double its aid? Or treble it? Great Britain alone has received $6.8 billion via grants and credits for reconstruction. And yet the pound sterling is still inconvertible and subject to British exchange control because of the alleged dollar shortage. If $6.8 billion were insufficient to stabilize the pound, what amount, if any, could achieve the stabilization?

Secondly, the foregoing explanation lays the blame for the dollar shortage solely upon the United States. In reality, there is only one convincing explanation for the dollar shortage: the monetary and fiscal policies of governments. A government that enforces an exchange rate between domestic money and foreign money at which the sellers of the latter are shortchanged, will experience foreign exchange shortages. This is the essence of one of the oldest economic laws known to economists: Gresham's Law. But we need not be economists in order to understand this economic phenomenon. It is just common sense. The contention that it is American productive power that throws the world into a state of imbalance and forces foreign governments frequently to devalue their "overvalued" currencies is meant to be a popular excuse for policies of inflation and depreciation. It is true, increasing productivity tends to increase the purchasing power of the domestic currency. But this tendency has a limit because international transactions are based on gold parities. The movement of gold from one country to another tends to equalize the purchasing power of currencies. Inflow of gold in one country tends to raise its prices for commodities; outflow tends to lower prices. In the United States the inflow of gold has raised commodity prices considerably. Since the United States government has also inflated its 20 T. Balogh, Ibid., p. 7.

190 STEPS TOWARD UNION currency, the purchasing power of the dollar has even declined below its legal gold parity—that is to say, the United States dollar is traded at 37-40 dollars per ounce of gold on the free money markets of the world. This dollar-gold relationship on the money markets reveals that any government refraining from inflating its own currency would experience an immediate inflow of American gold and a surplus of United States dollars. Such a government could also embark upon a very lucrative undertaking. For one ounce of gold it could buy $37-$40 on the free currency market and then purchase one ounce of gold for only $35 from the United States Treasury. That means, as long as the United States dollar would sell at a gold discount, it could earn the spread on each transaction. The United States government indeed would suffer from a heavy drain on its gold and foreign exchange.

However, conditions are such that most governments are inflating and depreciating their currencies at a faster rate than the United States government. Consequently the phenomenon of "dollar shortage'* is inevitable, unavoidable, and brought about by the very governments complaining about it. The fact that American citizens export more goods than they import stems from one reason only: the granting of credits and outright gifts by American citizens and the United States government to foreign citizens and governments. How could foreigners import more from the United States than they export without a settlement of the balance? Who would sell to a foreigner without receiving payment or being willing to extend credit for the time being? If American citizens or the United States government were not willing to extend credit and make outright gifts, foreigners could not buy more than they sell. If the United States government would discontinue its vast foreign aid spending, foreigners would have to restrict their buying to equal their selling. It is obvious that it is not additional purchases which call for more American aid, but American aid allows and calls for additional purchases. If you do not have the means and are unable to obtain a consumer's loan for the purchase of a new car, you must abstain from buying. If you should obtain a loan, you can purchase the car. This principle of exchange naturally is valid not only in your transactions with fellow citizens but also with foreigners.