Chapter V. Principles of Foreign Aid

THIS brings us to the basic facts and principles that must be kept in mind in connection with the whole problem of foreign aid:

1.As the United States produces only 12 per cent of the world’s food supply, it is clear that America cannot feed the whole world.

Before the war, the United States produced less than 9 per cent of the world’s food supply as measured in calories. Today, as a result of increase in our own production and the falling off of Europe’s, we produce nearly 12 per cent of the total.¹ Even this is hopelessly inadequate to fill the gap left by the decline in European production. America has 140,000,000 mouths to feed; but Europe has 350,000,000. It should be obvious that the real solution is not to distribute scarcity, but to restore production. As we have already seen, this is prevented everywhere in Europe today—by Russian looting, by the policies of the Allied occupation authorities in Germany, by socialism and communism, by “agrarian reforms” which seize land, break up farms and displace populations, by export and import barriers, by exchange controls, and by price-fixing which makes it unprofitable or impossible to grow, transport and sell food. Because of the small American food supply in relation to world demand, the effort to atone even moderately for the food shortages in Europe must cause soaring food prices here.

2.The need for outside help to restore Europe’s capital structure has been greatly exaggerated. Its unused resources for creating its own capital are very great.

As L. Albert Hahn has pointed out in an article called “Capital is Made at Home” (Social Research, May, 1944), foreign capital did not flow into Germany in substantial amounts immediately after the First World War, when capital was urgently needed to replace depleted stocks and restore the wornout industrial and transportation systems. Nevertheless, in 1924, after the great inflation, Germany’s industrial and transportation systems were in good shape; for meanwhile, except during the dizzy last months of inflation, the German entrepreneur had had more capital at his disposal than he actually needed. “Capital was made at home, through the restrictions that inflation had imposed on consumption.”

In 1924, it is true, Germany began to absorb higher amounts of foreign capital, but by mid-July, 1931, the import of capital was suddenly stopped and she was forced to rely on her own resources. “In one week she gave up her search for foreign credits and turned to capital autarky. Nevertheless, as the world has meanwhile come to know to its sorrow, her industrial output was stupendous.”

As Dr. Hahn has insisted: “It should never be forgotten that despite the widely held opinion, no country is predestined to have an active or passive trade balance. A small deflationary pressure on the price level, or a small inflationary rise in the price level, will, under certain conditions, suffice to reverse the trend of the trade balance. . . . The Germany that was then professing not to have sufficient foreign exchange for her creditors had all the foreign exchange she needed for her war preparations. Incredible as it seems today, it is clear that a substantial part of Germany’s war preparations was financed by her foreign creditors, very much against their will.”

3.This brings us to a third principle, which is that help from outside to any country goes eventually to relieve the LEAST urgent needs which the government of that country then decides to meet.

This follows from the ability to divert resources, and from the fact that any country meets first what it considers its most urgent needs—or rather what those in power in that country consider its most urgent needs. Those who tell us, for example, that if we do not send food to the Yugoslavian government we are starving its people, forget that Yugoslavia conscripts an enormous standing army from men who would otherwise work on farms to produce food. To the extent that Yugoslavia’s food problem is solved by outside gifts, it releases the manpower and financial resources to maintain this military establishment.

When we keep this elementary principle in mind, we recognize how unimportant and even how futile it is to require that our loans to foreign governments be used only for certain specific purposes. We could, for example, insist that our funds should be used only to buy foodstuffs. But to the extent that we relieve the borrowing country of the need of supplying its own foodstuffs, we merely release resources in that country to supply some less urgent need. Hence it is pointless to insist that the proceeds of our loans should go only for some specified purpose. To the extent that we relieve a foreign government of the need of providing for this purpose, it can use the released resources to increase social security payments, to raise salaries of civil servants, to expand its military establishment, to finance anti-capitalist propaganda, or for any other purpose that it thinks desirable.

This principle is recognized quickly enough when dealing with individuals. If you make a loan to a family that keeps a car for pleasure, nothing is gained by the assurance that the particular dollars you have loaned have gone only to buy food, and that the automobile was bought and run with the family’s own earnings. Even if you could verify by the numbers on the bills that your particular dollars were spent only for food, you would know that your loan was being used in effect to keep the car—because the family would otherwise have to give up the car and use its own earnings for the food.

Yet this elementary principle is constantly overlooked in international relations. People feel somehow assured by the statement that our loans or gifts have been earmarked only for special purposes. Unless we undertake to control all the expenditures of the borrowing country, however, our particular contribution becomes in practice an unidentifiable part of the general pool out of which that country’s expenditures are made, like the last bucketful of water after it has been poured into an already partly-filled tub.

AMERICAN AID VS. EUROPEAN POLICY

4.Food relief and financial help from the United States will be futile unless the country aided discontinues policies which unbalance its trade and discourage or prevent production.

Here again everyone recognizes a similar principle in his private affairs. A banker cannot lend the funds which others have entrusted to him to a manufacturer who is so incompetent that he is bound to fail, or who indulges in practices which make it impossible for him to repay the loan. A manufacturer who is following practices which make it impossible for him to maintain his solvency, a manufacturer whose costs exceed his receipts, is simply dissipating resources. To say that his costs are greater than his income is merely another way of saying that the value of the raw materials and labor services he is using up is greater than the value of the finished goods he is producing.

An indulgent father who is lavishing money on a son who merely squanders it in idleness and vice is not doing that son a service. Outside help, whether of loans or gifts, is in general only good to the extent that it promotes self-help.

These principles apply to nations as to individuals. Loans or gifts that merely subsidize or prolong policies that paralyze production are worse than thrown away. Yet we have the strange spectacle today of Europeans who tell us in effect: “It is your duty to come to our aid; it is your duty to pour your money into our countries; but you must have nothing whatever to say about its use. That would be interfering in our internal affairs; that would be undermining our independence.”

Such a position is on its face self-contradictory. A nation that asks for help not based on purely commercial considerations admits that it is dependent. It is asking us to interfere in its affairs, but to interfere solely on its own terms and not on ours. It may be asking us, in effect, to give it funds to maintain, subsidize and prolong the very policies which have brought it to or kept it in its present state.

I should like to present here an instructive quotation:

“The United States is disinclined to entangle herself further (after recent experiences) in the affairs of Europe, and, anyhow, has for the time being no more capital to spare for export on a large scale. There is no guarantee that Europe will put financial assistance to proper use, or that she will not squander it and be in just as bad case two or three years hence as she is now. . . . In short, America would have postponed her own capital development and raised her own cost of living in order that Europe might continue for another year or two the practices, the policy, and the men of the past nine months. . . .

“If I had influence at the United States Treasury, I would not lend a penny to a single one of the present Governments of Europe. They are not to be trusted with resources which they would devote to the furtherance of policies in repugnance to which, in spite of the President’s failure to assert either the might or the ideals of the people of the United States, the Republican and the Democratic parties are probably united.”

These are not the words of some American “isolationist” in 1947. They are the words of the most influential British economist of the last generation. They were written in 1919 by John Maynard Keynes in “The Economic Consequences of the Peace” (pp. 283-5). They apply with startling accuracy to conditions today.

It is true that in 1919 Mr. Keynes did favor an American loan to Europe—of the very modest amount, by present standards, of $1,000,000,000 in the first instance—but only on the assumption that Europe would agree to these very drastic conditions:

“This sum . . . should be lent and should be borrowed with the unequivocal intention of its being repaid in full. With this object in view, the security for the loan should be the best obtainable, and the arrangements for its ultimate repayment as complete as possible. In particular, it should rank, both for payment of interest and discharge of capital, in front of all Reparation claims, all inter-Ally War Debt, all internal war loans, and all other Government indebtedness of any other kind. Those borrowing countries who will be entitled to Reparation payments should be required to pledge all such receipts to repayment of the new loan. And all the borrowing countries should be required to place their customs duties on a gold basis and to pledge such receipts to its service.

“Expenditure out of the loan should be subject to general, but not detailed, supervision by the lending countries.”

THE MINIMUM REFORMS NEEDED

IF WE grant, then, that any financial aid we extended to Europe would be futile unless accompanied by drastic economic reforms in the recipient countries, what are the minimum reforms that would be needed to bring recovery? They would include the following:

I.A balanced budget. Unless a government’s revenues equal or exceed its expenditures it cannot prevent inflation; it cannot stabilize its currency. The greater part of the network of controls that are strangling European production and European liberty today began as an effort to prevent the consequences of a currency inflation. Nearly all governments, of course, will argue that they are too poor to balance their budgets; that their revenues are insufficient. The answer will be found in pointing to their expenditures, which are in most cases enormously greater than before the war. This is the result of larger military establishments, bigger social security schemes, food subsidies, bigger subsidies to meet bigger deficits in nationalized industries, grandiose government building schemes, industrialization programs, and what-not. If they are “too poor” to balance their budget, they may appropriately be asked, are they rich enough to afford these?

II.The elimination of exchange controls. There will be no long-term economic stability and no real freedom of international trade until nations go back to the gold standard. But the first step toward the resumption of free and normal international trade is the removal of all prohibitions on the rate at which the existing paper currency is bought and sold, either in terms of gold or of other currencies.

This does not mean immediate “devaluation.” “Devaluation” is, in fact, meaningless except in relation to a gold standard—or at least to something definite into which the currency is freely convertible. Otherwise we should have to ask, “Devaluation” in terms of what? “Devaluation” in relation to what? As long as a currency is not convertible, it is useless for the government authorities to put any arbitrary “official” value on it (in terms of American dollars, say). They can only make this partially (and dangerously) effective by making it a crime for anybody to buy or sell the currency below that value.

A borrowing government may therefore at least temporarily retain its existing “official” currency rate if it thinks that rate has still any purpose or significance. For its real depreciation has already taken place; it is merely a question of the government’s being willing to acknowledge the existence of that depreciation. Only if the currency rate is left free—until a self-stabilizing gold standard can be re-established—can there be a resumption of a healthy, normal, two-way foreign trade.

III.There must be an end of price control, either for home-produced or imported goods, and an end of other regulations that prevent or unbalance trade and production.

IV.Excessive foreign trade barriers must be lowered or removed.

V.As American loans or gifts would in effect be used to support the recipient country’s military establishment (either directly or by releasing the resources devoted to it), an excessive military establishment could not be permitted.

The American government has in fact imposed some conditions with many of the loans and gifts it has made. In most cases these conditions have been wholly inadequate. In others they have been worse than nothing. Instead of asking for fewer governmental controls, our government has asked for more.

In reply to its request, it got “assurances” from Greece, for example, that: “Existing regulations on the import and export of foreign exchange will be enforced and strengthened by all possible means. . . . A vigorous program will be undertaken to hold down prices and to establish an equitable relationship between prices and wages. . . . Rent control and rationing of commodities will be continued. . . . The Greek Government would also wish the [American] mission to assist in . . . regulation of wages and prices.”¹

The American officials who insisted on these conditions did not know that exchange control, price control and wage control are not the way to check inflation; they are merely the way to check production.

THE DILEMMA OF CONDITIONS

MANY Americans recognize that financial aid to Europe will be futile unless European governments change their present economic policies. But most people assume that this difficulty can be met if our government attaches conditions to its aid similar to those just outlined. This view, however, faces grave dilemmas both at the borrowing and at the lending end.

The borrowing governments believe in the economic policies they are following. They think these policies essential to revival, or at worst “unavoidable.” For at least three main reasons they resent any conditions imposed on them.

1.They will insist that these conditions are impossible of fulfillment, or that they will actually prevent revival, or even that they will bring “economic chaos.” Anything that goes wrong will be blamed not on their other policies but merely on whatever they have done to conform with the conditions of the loan.

2.Any conditions whatever, from the mere fact that they are conditions, will be considered humiliating. The borrowing government will regard them as an infringement of its sovereignty and independence. It will be accused of subservience and vassalage by the Communists and by its domestic opposition. America will be accused of using the loan to seek political domination.

3.The borrowing nation is certain to suspect that any conditions imposed by the lender are primarily for the lender’s benefit and not for its own. Thus, though the main purpose of the American government is the economic revival of Europe, and though the conditions it imposes are solely designed to make sure that its loans or gifts will bring this revival, the very fact that the American government insists on those conditions will be enough to make them unpopular in the borrowing countries. European governments will think of themselves as making these reforms, not for the recovery of their own country, but as a favor to us. Even if they do recover, they are almost certain to conclude that they recovered in spite of the reforms and not because of them. And if conditions in the borrowing country actually become worse—

But we can get a sufficient foretaste of the future from the past, and we need merely quote what the supposedly conservative and responsible London Economist had to say in its issue of August 23, 1947 about the conditions of the American loan:

“American opinion should be warned that over here, in Great Britain, one has the feeling of being driven into a corner by a complex of American actions and insistencies which, in combination, are quite intolerable. Not many people in this country believe the Communist thesis that it is the deliberate and conscious aim of American policy to ruin Britain and everything that Britain stands for in the world. But the evidence can certainly be read that way. And if every time that aid is extended conditions are attached which make it impossible for Britain ever to escape the necessity of going back for still more aid, obtained with still more self-abasement and on still more crippling terms, then the result will certainly be what the Communists predict, whether or not it is what the Americans intend. The crippling of the British export trades that was one of the conditions of Lend-lease increased the dimensions of the aid that was required in 1945. And the famous Articles Seven to Ten of the Loan Agreement, with their obligations of convertibility and non-discrimination, have brought the British back to Washington earlier and in worse plight than was necessary. . . .

“The risks of convertibility have proved all too real. Non-discrimination, if it is applied in the months to come, will be the means of starving the British people. Yet even now at Geneva the British representatives are in process of committing this country, in the proposed Charter of the International Trade Organization, to sweeping general principles which, however excellent they may be in theory, are likely to prove in practice to be equally dangerous. . . .

“For the present, the Americans still retain the power to make the British Government jump through any hoop they choose. . . . Let them forget, for the moment, their own conviction that their present wealth and strength are the result of superior virtue and remember the Europeans’ conviction that they are merely due to better luck.”

So much for the dilemmas that the effort to impose even the mildest common-sense conditions is likely to meet from the borrowing end.

But we face today a scarcely less serious dilemma from the lending end. The only conditions that could really bring revival to a borrowing country are those that stabilize the real value of its currency (as opposed to the “official” value) and that restore free markets. But these are not the conditions in which most of our own government representatives abroad really believe. As illustrated by the policies they have approved for or imposed on Greece, Germany and Japan, they believe fundamentally in Schachtism—i.e., in price control, wage control, trade control, exchange control and in government production “targets.” Many of them are either convinced outright that nationalization is better than private enterprise or at worse consider it a matter of indifference or of purely academic importance which system a nation adopts.

There is no assurance, if our government officials impose conditions with their loans, that they will not impose precisely the conditions that hinder recovery and lead toward a totalitarian economy.

POLICIES MORE IMPORTANT THAN LOANS

5.As a contribution to revival, the economic policies followed by a country are much more important than any foreign loan.

This should be evident from a simple mathematical calculation. By far the greatest post-war loan so far made by the United States to any foreign country is that of $3,750,000,000 to Great Britain. Britain used up $2,450,000,000 of this loan in the first twelve months. The national income of Great Britain in 1946, as estimated in a Government White Paper,¹ was £7,974,000,000, or approximately (at $4 to the pound) $31,896,000,000. The dollar credit, then, was being used at a rate which, high as it is, is still less than 8 per cent of the British national income. A 10 per cent increase in Britain’s production, therefore, particularly if reflected in a changed relation of imports and exports, would do far more for Britain than the American dollar loan. Even without such an increased production a change in Britain’s currency control policies could restore the trade balance.

The situation of England in this respect is not different from that of other European countries. A removal of the present throttling controls would easily permit at least a 10 per cent over-all improvement in production. Yet an over-all amount equal to 10 per cent of Europe’s present national income is more than the United States could possibly contribute in loans or gifts.

If it were possible successfully to impose sound policies as a condition for our loans, the conditions would be more important than the loans themselves.

SETTING AN EXAMPLE

6.The United States government cannot consistently recommend sound policies to foreign governments as a condition for loans, when it is not following such policies itself. It can preach effectively only by example. And it can do more for world revival by making its own economy sound and strong and free than by trying to put temporary props under economies built on the treacherous foundations of totalitarian controls.

The United States today has what is still called a “free” economy. It deserves this title only by contrast with a regimented world. It would not have been called a free economy twenty years ago. It will not function with the resilience of a genuinely free economy. We must reduce our unparalleled Federal expenses, still running at a rate five times as great as immediately before the war. We must reduce taxes to a level under which a healthy private enterprise can permanently function. We must cease trying to maintain absurdly low interest rates by inflationary means. We must return to a real instead of a merely technical gold standard.

And one major responsibility of the American government is to lower its tariffs. We cannot restore the balance of trade unless we are willing to buy as well as sell. We must remove every unreasonable barrier to the entrance of foreign goods. Our loans can be repaid only if we are willing to accept repayment. The only ultimate way in which we can accept repayment is in goods and services.

This also conforms to the principle that the best kind of help is the kind that promotes self-help. The best help to an unemployed man is not a loan or a gift, but a job. This maintains his self-respect and independence; it enables him to contribute services of a value at least equal to what he receives; it adds to the national income. For like reasons, the best way to help Europe is not to make doubtful loans or gifts, but to buy her goods.

When all this is said, however, it should be added that in recent years the tariff issue, and particularly the American tariff issue, has been greatly exaggerated as compared with its real importance. The world has now adopted barriers which are enormously more serious obstacles to trade than even high tariff walls. These include bilateralism, exchange control, quotas, special licenses, and direct prohibitions of imports and exports. The American tariff is today a minor rather than a major reason for the unbalance in American trade. Our imports are today held down more by the practices of foreign governments than by our own. And it is far from certain that the American tariff is today as high compared with other tariffs as most Europeans like to believe.¹

All this does not mean that the United States should not reduce its tariffs further, whether other nations do so or not. The fact that there are today much more serious barriers to trade than tariffs does not mean that we should not do everything we reasonably can to reduce our own tariffs. At a time, indeed, when foreign nations have drastically reduced their own potential exports by their overvalued currencies, we have a unique opportunity to make sharp cuts in our import duties with a minimum of disturbance.

LOANS PROLONG CONTROLS

7.Inter-governmental loans increase and prolong governmental restrictions on the economy both in the borrowing and in the lending country.

They do this in the first place because they subsidize restrictions on the part of the borrowing country. But they do it also because, when the government makes itself responsible for bringing in more foreign exchange by borrowing, it also assumes responsibility for the way in which that foreign exchange is allocated. Hence import ceilings, import quotas and import licenses become an inherent part of the government borrowing program.

But the lending country is no less affected, though in a different way. When the American government makes loans to a foreign government, it transfers purchasing power from the hands of its own citizens to that of the foreign government. In addition, unless the loans are immediately offset by the same amount of additional taxes, it creates inflationary purchasing power bidding for the limited supply of its domestic goods. It then, in order to make sure of keeping in the country goods needed by its own consumers or raw materials needed by its own manufacturers, insists that it continue to have the wartime power to impose export quotas. Export controls by our Federal Government have been kept for precisely this reason.

Inter-governmental loans prolong government controls and delay the return to a free economy.

WHO SUBSIDIZES WHOM?

8.The bulk of our past and prospective government “loans” to foreign governments are little better than thinly disguised gifts.

It would hardly be realistic, certainly, to adopt any other assumption in view of the history of inter-governmental loans, and particularly of the loans we made in expectation of repayment in the First World War. Conditions then were in fact not nearly as chaotic as today. At that time some of the borrowing governments had been accustomed to respect their agreements. They had not yet built up the precedents and self-justifications for default and repudiation that they have now.

But if we adopt this realistic view, it must have important effects upon our present policy and upon our expectations concerning its consequences. It merely breeds ill-feeling on both sides if something that was originally treated as a loan is defaulted.

Moreover, if our present “loans” are really gifts, we are deceiving ourselves if we put them down as assets. The money handed out is a direct loss. It must soon or late be repaid in our tax bills. This means, for one thing, that the “loans” our government makes to foreign governments must be treated like any other government expenditure. If they are not to be inflationary, unbalancing the budget, they must be met out of immediate increased taxes. When we are discussing how much foreign aid we can “afford,” we must discuss how much additional taxation we can afford.

We cannot adopt the realistic view that these so-called loans are really disguised gifts, without raising the further question concerning who is subsidizing whom. The most frequently urged reason for loans or gifts from the United States to Europe is that “Europe” is “poor” and the “United States” is “rich.” But this simple statement conceals a very complicated set of facts. It means that the average income of families and individuals in the United States is higher than the average income of families and individuals in Europe. And that is all it does mean. There are many people in Europe richer than the average American. These wealthy Europeans will necessarily be beneficiaries, directly or indirectly, of loans and gifts from the United States. All Americans, poor as well as rich, will necessarily be the losers, directly or indirectly, from these loans or gifts—whether by higher taxes, higher food prices, goods shortages, or in other ways.

Probably the chief source of pressure for loans and gifts from “America” to “Europe” arises out of a confused egalitarian philosophy which assumes that it is a duty of the “richer” nations to share their wealth with the “poorer.” The consistent application of such a philosophy would, of course, also make it incumbent upon “Europe” to share its wealth with “India” and “China” and “Africa.” Consistency would, in fact, first of all require the equalization of incomes both within the United States and within Europe. But without going into the implications of economic egalitarianism, it is sufficient for present purposes to point out that under the program of gift-loans from “America” to “Europe” lower-income persons and groups in America are in effect subsidizing some persons and groups in Europe with incomes higher than themselves.

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¹ Before the war, the world produced between 1.8 and 2 million billion food calories, of which the United States produced about 160 thousand billion, or a little over 8½ per cent of the world’s food supply. Europe, excluding Russia, produced roughly 350 thousand billion calories—about 18 per cent of the world’s supply, or more than twice as much as the United States. In the pre-war period Europe imported from 15 to 20 per cent of its total food supply.

¹ Greek Government’s reply of June 15, 1947 to American Note.
New York Times, June 19, 1947.

¹ National Income and Expenditure of the United Kingdom, 1938 to 1946. April, 1947.

¹ A more thorough study of this subject is needed than any that has yet been made. The construction of comparative tariff indices would be subject to many pitfalls and dangers of interpretation. But tariff comparisons through a carefully considered set of indices would certainly be better than leaving the question to mere rhetoric or vague impression.