Sterling-dollar Diplomacy: The Origins and the Prospects of Our International Economic Order 0231049447, 9780231049443

Table of contents :
CONTENTS
FOREWORD TO THE NEW EDITION
STERLING-DOLLAR DIPLOMACY: A TWENTY-FIVE YEAR PERSPECTIVE
FOREWORD TO THE FIRST EDITION
PREFACE TO THE FIRST EDITION
PART I. THE OBJECTIVE OF MULTILATERALISM
I. THE AMERICAN CHALLENGE
II. THE BRITISH RESPONSE
III. THE ATLANTIC CHARTER
IV. ARTICLE SEVEN
PART II. PLANNING FOR MULTILATERALISM
V. PLANNING FOR FINANCIAL COLLABORATION
VI. PLANNING FOR COMMERCIAL COLLABORATION
VII. THE COMPROMISE ON FINANCIAL COLLABORATION
VIII. THE COMPROMISE ON COMMERCIAL COLLABORATION
PART III. THE TRANSITION TO MULTILATERALISM
IX. THE RISE AND FALL OF WAR-TIME COLLABORATION
X. NEGOTIATING THE LOAN
XI. THE LOAN AGREEMENT AS AN INSTRUMENT OF MULTILATERALISM
XII. PASSING THE LOAN
PART IV. MULTILATERALISM IN PRACTICE
XIII. SAVANNAH: TWO CONCEPTIONS OF FINANCIAL COLLABORATION
XIV. LONDON: TWO CONCEPTIONS OF COMMERCIAL COLLABORATION
XV. THE END OF BRETTON WOODS
XVI. THE END OF THE LOAN
XVII. THE END OF THE I.T.O.
XVIII. CONCLUSION
APPENDIX
BIBLIOGRAPHY
INDEX

Citation preview

STERLING-DOLLAR DIPLOMACY

by Richard N. Gardner IN PURSUIT OF WORLD ORDER BLUEPRINT FOR PEACE THE GLOBAL PARTNERSHIP (with Max F. Millikan) STERLING-DOLLAR DIPLOMACY

=♦

STERLING-DOLLAR DIPLOMACY The Origins and the Prospects o f Our International Economic Order

NEW, E X P A N D E D

EDITION

BY

RICHARD N. GARDNER

McGRAW-HILL BOOK COMPANY NEW YORK

TORONTO

SYDNEY

LONDON

♦

S te rling -D ollar D iplo m a cy

First edition published in Great Britain by Oxford University Press, 1956. New, expanded edition copyright © 1969 by Richard N. Gardner. All Rights Reserved. Printed in the United States of America. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of McGraw-Hill, Inc. Library of Congress Catalog Card Number: 67-26351 NEW, EXPANDED EDITION

22832

To MY PARENTS whose love and sacrifice made this book possible

CONTENTS FOREWORD TO THE NEW EDITION, by Robert Triffin INTRODUCTION: A TWENTY-FIVE YEAR PERSPECTIVE FOREWORD TO THE FIRST EDITION, by R. F. Harrod PREFACE TO THE FIRST EDITION

xiii xvii xcvii ciii

PART I

T H E O B JE C T IV E O F M U L T IL A T E R A L IS M I.

II.

T H E A M E R IC A N C H A L L E N G E A n Unpromising Legacy The Post-war Planners M ultilateralism and Mr. Hull Conclusion

1 1 4 12 23

T H E B R IT IS H R E S P O N S E The Forces for Collaboration The Critics o f Multilateralism The Conditioned Response Conclusion

24 24 30 35 39

III. T H E A T L A N T IC C H A R T E R The Setting o f the Atlantic Conference The First Definition o f Multilateralism The A tlantic Charter in Anglo-American Opinion Conclusion

40 40 42 47 52

IV. A R T IC L E SE V E N The Question o f4Consideration* The Second Definition of Multilateralism The Anglo-American Reaction A Problem o f Interpretation Conclusion

54 54 56 62 64 68

PART II

P L A N N IN G FO R M U L T IL A T E R A L IS M V.

P L A N N IN G F O R F IN A N C IA L C O L L A B O R A T IO N Keynes, White, and History The Two Plans as Instruments o f Multilateralism The transitional issue The liquidity issue The adjustment issue The Two Plans in Anglo-American Opinion Conclusion

71 71 80 80 86 88 95 99

viii

VI.

Contents P L A N N IN G FO R C O M M E R C IA L C O L L A B O R A T IO N The Conception o f I.T.O. The *Seminar*on Commercial Collaboration The employment issue The issue o f quantitative restrictions The tariff-preference issue Conclusion

101 101 103 104 106 107 109

VII. T H E C O M PR O M ISE ON F IN A N C IA L CO LLA B O RA ­ T IO N Drafting the Financial Compromise The liquidity issue The adjustment issue The transitional issue The British Debate Second thoughts on multilateralism The financial compromise : British version The American Debate The attack on Bretton Woods The financial compromise: American version Congress *takes a chance * Conclusion

110 111 112 114 117 121 122 124 129 129 133 140 143

V III. T H E C O M PR O M ISE ON C O M M E R C IA L B O R A TIO N Negotiating the Commercial Compromise The employment issue The issue o f quantitative restrictions The tariff-preference issue The Anglo-American Reaction The commercial compromise: British version The commercial compromise: American version Conclusion

145 145 146 148 150 153 154 158 160

COLLA ­

PART i n

T H E T R A N S IT IO N TO M U L T IL A T E R A L IS M IX. T H E R ISE A N D FA LL O F W A R -T IM E C O LLA B O RA ­ T IO N The System o f War-time Economic Collaboration Planning fo r the Transition Period The End o f Lend-Lease Conclusion

165 165 178 184 187

Contents

ix

X. N E G O T IA T IN G T H E LOA N The British Approach The American Reception Negotiating the Loan Conclusion

188 188 192 199 206

XI. T H E L O A N A G R E E M E N T AS AN IN S T R U M E N T OF M U L T IL A T E R A L ISM The Lend-Lease Settlement The Anglo-American Financial Agreement The line o f credit—its purpose, amount, and terms The multilateral obligations Provision fo r consultation and escape Conclusion

208 208 210 210 213 221 223

X II. PA SSIN G T H E LOA N The British Debate The attack on the Agreement The defence o f the Agreement The American Debate The Agreement in danger The campaign fo r multilateralism The new factor in American policy Conclusion

224 225 226 232 236 236 242 248 253

PART IV

M U L T IL A T E R A L IS M IN PR A C T IC E X III. SA V A N N A H : TWO C O N C EPT IO N S C IA L C O L L A B O R A T IO N The Issues at Savannah Two Conceptions o f Financial Collaboration Conclusion

OF

F IN A N ­ 257 257 261 267

XIV. L O N D O N : TWO C O N C E PT IO N S O F C O M M E R C IA L C O L L A B O R A T IO N The Employment Issue The Issue o f Quantitative Restrictions Conclusion

269 271 280 284

XV. T H E EN D O F B R E T T O N W OODS The Last Illusions Bretton Woods in Crisis The Emergence o f a New Approach Conclusion

287 287 293 299 304

X

Contents

XVI. T H E E N D O F T H E LOAN 306 The Approach o f the Crisis 306 The Agreement and the Crisis 312 Convertibility 313 The sterling area arrangements 325 Non-discrimination 331 The Agreement and Public Opinion: The Consequences o f a False Start 337 The British reaction 337 The American reaction 342 Conclusion 346 X VII. T H E EN D O F T H E I.T.O. Tariffs and Preferences: The Day o f Reckoning The prelude to Geneva The day o f reckoning The Completion o f the Charter Exceptions fo r discrimination Exceptions fo r economic development The End o f the I.T.O. The British debate The American debate Conclusion

348 348 349 354 361 361 364 369 369 371 378

X V III. C O N C LU SIO N

381

A PPEN D IX . Financial Agreement between the Governments o f the United States and the United Kingdom

387

B IB L IO G R A PH Y

393

IN D E X

413

For there are, in the present time, two opinions; not, as in former ages, the true and the false, but the outside and the inside; the opinion of the public voiced by the politicians and the newspapers, and the opinion of the politicians, the journalists, and the civil servants, upstairs and backstairs and behind-stairs, expressed in limited circles. Those who live in limited circles and share the inside opinion pay both too much and too little attention to the outside opinion; too much, because, ready in words and promises to concede to it everything, they regard open opposition as absurdly futile; too little, because they believe that these words and promises are so certainly designed to change in due season, that it is pedantic, tiresome, and inappropriate to analyse their literal meaning and exact consequences. They know all this nearly as well as the critic, who wastes, in their view, his time and his emotions in exciting himself too much over what, on his own showing, cannot possibly happen. Nevertheless, what is said before the world, is still of deeper consequence than the subterranean breathings and well-informed whisperings, knowledge of which allows inside opinion to feel superior to outside opinion, even at the moment of bowing to it. J O H N M A Y N A R D KE Y NE S

FO R EW O R D TO TH E NEW E D IT IO N new edition of s t e r l in g - d o l l a r d ip l o m a c y could not come at a better time. The world is once more actively engaged in a desperate search for internationally agreed solutions to the peren­ nial problems and recurrent crises flowing from the attempt to fit the facts of interdependence to the outworn legal trappings of national monetary sovereignty, rather than vice-versa. Recent threats to the international monetary system have underlined the urgency of cooperative solutions as the only alternative to a new clash of mutually defeating national policies that would resurrect, in the late 1960s and early 1970s, the disastrous experience of the early 1930s. The negotiation of the new facility for Special Drawing Rights in the International Monetary Fund was a milestone in world monetary history, since it paved the way for the collective crea­ tion and management of a new international reserve instrument. But this important step forward in international monetary coop­ eration must still be complemented by other arrangements regulat­ ing the future role of the traditional reserve instruments that make up the present pool of world reserves, i.e., gold and the reserve currencies (dollars and sterling). Sterling-dollar diplomacy thus remains the order of the day, but will have—tomorrow as yesterday—to be inserted into a broader multilateral framework to solve satisfactorily—or, rather, to ward off in the future—recurrent sterling and dollar crises as well as to provide a stable and generally acceptable framework for the international coexistence of national monetary sovereignties in the world at large. The basic problems of such coexistence are more political than economic. They raise once more the very problems so lucidly and constructively explored in this book by Richard Gardner—the translation of the experts’ solutions into operational agreements acceptable to, and supported by, national governments, parlia­ ments, and public opinion. His fascinating account of wartime and postwar economic diplomacy should be required reading for T h is

XIV

Foreword to the New Edition

everyone concerned with international monetary reform. So should his new essay distilling the lessons of the last twenty-five years of international economic cooperation, which greatly enhances the value of this excellent book. It is a rare joy to come across a book as appealing to the layman as it is to the specialist. This is such a book. Historians, economists, political scientists, and lawyers will learn more from it than from many an esoteric volume on the same subject. And the layman will begin to understand the intricacies of international economic nego­ tiations as well as the international economic institutions of the postwar era. The curtain rises with the blaring trumpets of the Atlantic Char­ ter in August, 1941, and falls on the quiet burial of the proposed Charter for an International Trade Organization in the fall of 1950. The story centers on three major episodes of Anglo-Amer­ ican negotiation: the creation of the twin Bretton Woods institu­ tions— the International Monetary Fund and the International Bank for Reconstruction and Development, the Anglo-American Finan­ cial Agreement, and the Charter for an International Trade Or­ ganization. The main, and rare, originality of the book is well described in the author’s original preface: [It] is not a book of economic theory.. . . Still less is it a statistical analysis---- It is rather a book about the making of international economic policy and the shaping of institutions to implement that policy. It places special emphasis on the interaction between official policy and public opinion.. . . Thus it is a hybrid work on the borderline of history, international relations, political science, and even international law. Perhaps it can best be described as “a study in international economic diplomacy.” A single and highly illuminating technique is used in all three cases—Bretton Woods, the Anglo-American loan, and the ITO —to depict and explain the rise and fall of Anglo-American col­ laboration. A high-level conference between Roosevelt and Church­ ill concludes with a joint declaration expressing in broad and high-sounding terms the agreement of both countries with some idealistic formulation of postwar aims. The second act of the play shifts from the statesmen to the technicians, who attempt to couch their statesmen’s declaration in more concrete terms that may serve as a basis for actual negotiation of a draft agreement. In the third

Foreword to the New Edition

xv

act the negotiators are called in, and conflicting viewpoints and interests are reconciled into some hybrid compromise, preserved by escape clauses or “transitional” arrangements, or hidden be­ hind platitudinous statements of intention susceptible of divergent interpretations on both sides of the Atlantic. The fourth act fol­ lows the wearisome process of parliamentary or congressional ratification in each of the two countries. The experts are disappointed at the compromises, the interests threatened by the escape clauses rise against ratification, and public opinion must be wooed by extreme and conflicting com­ mentaries by government administrators about the agreement’s significance and expected consequences. Ratification is finally won, but the initial enthusiasm has been dissipated and replaced by mutual weariness and suspicion. And in the fifth act both governments find themselves plagued by their previous pronouncements and trapped into rigid formulas unfit to solve the problems of a fast-changing world. Doom comes: spectacularly for the Anglo-American Agreement with the dazzling collapse of sterling convertibility in August, 1947; obscurely for the International Monetary Fund condemned to impotence for the postwar decade; ingloriously for the ITO Charter quietly with­ drawn by the administration from a hopeless congressional debate. Mr. Gardner brilliantly summarizes the lesson of this triple failure under three headings: economism, universalism, and legal­ ism. Excessive stress on economic tools and objectives led to the initial neglect of noneconomic factors vital to the ultimate success or failure of international cooperation. Concentration on universal rules and institutions failed to exploit the greater potentialities, and indispensable role, of closer collaboration among like-minded countries, particularly between Britain and the United States as the two key countries in the world economy. Finally, our hanker­ ing for the false security of precise legal agreements and com­ mitments resulted in unwanted rigidity and detracted from dayto-day efforts to reach a genuine agreement on devising and implementing the flexible policies needed to meet ever-changing problems in a highly fluid economic and political environment. The book is sprinkled with numerous illuminating observations well worth pondering by future planners and negotiators. I cannot

XVI

Foreword to the New Edition

resist quoting one of these, whose wisdom is too rarely appreciated by blueprinters in government as well as in academic life. National policy is rarely influenced as much by impressive blue­ prints for future action as by daily expedients contrived to cope with current problem s.. . . Looking back from our present vantage point we can see that the measures adopted to bridge the transition from war to peace did more to influence the quest for multilateralism than all the planning in advance of perm anent institutions for postwar collaboration.

Observations such as these are given their full meaning by the way the story is told. They do not emerge from abstract reasoning but flow naturally from the narrative itself. The style succeeds in recapturing the high drama of the events described. The clash of leading personalities—such as Lord Keynes and Harry Dexter White—is vividly illustrated by aptly chosen anecdotes. Excerpts from congressional hearings or newspaper editorials plunge the reader back into the atmosphere of the times, essential for a sympathetic understanding of illusions and errors of judgment easy to criticize from hindsight, but which will be as difficult to avoid tomorrow as they were yesterday. ROBERT TRIFFIN

INTRODUCTION

ST E R L IN G -D O L L A R D IPL O M A C Y : A T W E N T Y -FIV E Y EA R P E R S P E C T IV E In Washington Lord Halifax Once whispered to Lord Keynes: “It’s true they have the money bags But we have all the brains."

mischievous little verse, found on a yellowing piece of paper salvaged from the Anglo-American financial negotiations of twenty-five years ago, stirs memories of a great adventure in eco­ nomic diplomacy. It recalls the extraordinary effort of a small group of men to create a new international economic order—an economic order designed to provide the foundations for world prosperity and world peace. A great gulf of years now separates us from this scrap of paper and from the American and British negotiators, half of whom, at least, it presumably delighted. As these lines are written, it is roughly a quarter of a century since the charters of the Interna­ tional Monetary Fund and World Bank were completed at Bretton Woods, New Hampshire. Nearly the same time has passed since the signing of the Anglo-American Loan Agreement and since the first discussions leading to the General Agreement on Tariffs and Trade. In this quarter of a century the international setting has radically changed. Occupied or enemy countries at the time of Bretton Woods, such as France, Germany, Italy, and Japan, have become major participants in economic diplomacy. So have the less-developed countries, which were only marginally involved in the shaping of the postwar economic order, and the communist countries who deliberately excluded themselves from participation. Today the “moneybags,” the “brains,” and the political leverage are all better distributed than they were twenty-five years ago. Sterling-dollar diplomacy, in the sense of a virtual Anglo-American monopoly in the shaping of world economic policy, is a thing of the past. The very title of this book—appropriate as it is for this T h is

xviii

Introduction

study of the origins of our global trade and financial institutions —is no longer sufficient to describe the workings of those institu­ tions today. Yet sterling-dollar diplomacy—as a shorthand designation for the struggle to build a viable world economic order—is as vital a matter as ever. Keynes and White, Clayton and Dalton, and most of the other protagonists are gone. But the old subjects are still with us—the role of the dollar, of sterling and of gold, the ade­ quacy of international liquidity, fixed versus flexible exchange rates, protectionism versus free trade, universalism versus regionalism, nondiscrimination versus preferential arrangements. And behind these old subjects lie the same fundamental issues—how to rec­ oncile liberal international trade policies with domestic stability and growth, and how to devise international arrangements bene­ fiting not just the world community as a whole but each of its parts. Ordinary people still read over their breakfast tables of attempts to resolve these issues in the old capitals of economic diplomacy such as Washington, London, and Geneva—and in new ones such as Bonn, Stockholm, Rio, and New Delhi. Like their parents in that earlier time, they struggle to comprehend the spe­ cialized arguments and the international economic “crisis” which they read about in the headlines but which they do not always feel in their everyday lives. The first edition of this book was written about halfway between the negotiations which shaped our postwar economic institutions and their twenty-fifth anniversary. How does it all look today? How far did the United States and the United Kingdom succeed in planning for their own and the general economic welfare? Where did they fail, and what still remains to be done? The reader may prefer to examine the historical account before considering the tentative answers offered in this introductory essay. On the other hand, he may wish to read this as a “code” with which to decipher the “real meaning” of the history as it unfolds in the book. My answers to the questions posed above are somewhat differ­ ent now than when this book was written. A few years after the first edition was published I joined the administration of President John F. Kennedy and served for four years in the Department of State. This experience had an inevitable effect. Once the critic has had a turn as actor, he does not write criticism in quite the

Introduction

xix

same old way. After experiencing the difficulties of persuading the Congress to appropriate funds for U.N. peacekeeping opera­ tions, one is rather more understanding of the problems that others faced in obtaining congressional approval for the Bretton Woods agreements and the British loan. One becomes more acutely aware of the difficulties of diplomatic negotiation between democratic countries—particularly of the severe constraints im­ posed by our own and other countries' constitutional systems. One sees more clearly that the choices available to the policy maker are often limited by past commitments and by contemporary pub­ lic attitudes, and that sometimes the choices are all bad. One realizes that policy must sometimes be made piece by piece—the pieces not always fitting very neatly together—and that the inter­ play between officialdom, on the one hand, and parliaments and the public on the other, often results in promises on which delivery cannot be made. A thoughtful veteran of the Anglo-American negotiations of­ fered some useful reflections along these lines when the first edition of this book appeared: To me, then as now, the m ajor significance of Bretton Woods was the death blow it represented in victory over the economic isolationism of the prew ar period and the serious threat that with military victory this country would again revert to economic nationalism. Thus, the question of how effective the Bank and Fund may have been in the light of postwar events (m any of them not foreseeable except by hindsight) is not nearly so im portant as having established the prin­ ciple of U.S. cooperation in the solution of the international economic problems of the future. Let me admit that Bretton W oods’ sails had to be trimmed to the point where public and Congressional acceptance might be possible— b ut only then after a life and death fight. Let me admit that the package was wrapped in the glittering generalities of a hard political fight designed to get public acceptance and force Congressional ap­ proval. My answer is that both courses in my opinion were essential to establishing the major principle and are entirely in harm ony with w hat we all know to be the realities of mobilizing political action in this country. Having established the principle and having obtained public ac­ ceptance thereof, the ground was paved for the British Loan, Marshall Aid, etc. To my way of thinking, the basic differences between the British and U.S. approaches were not matters of economic theory or even disagreements over the major economic factors involved. The

XX

Introduction

real question was how to equate economic principle with the realities of both British and U.S. political life (to say nothing of the other interested countries). Thus my standard for evaluation (unlike perhaps that of the economic-historical standard) is whether what was accomplished was of lasting significance in terms of the limitations imposed by the then existing circumstances. By these standards I view the whole period encompassed by your book much more sympathetically than perhaps you may— and I concede your obvious sym pathy.1

I confess that I find these words more convincing today than when I first read them. This is not to say that the conduct of the American and British governments as told in this history, par­ ticularly in regard to the handling of domestic parliamentary and public opinion, should now be regarded as blameless. On the con­ trary, some of the critical judgments in the first edition still seem justified, and will be noted later. But I am not quite so confident today as when this book was first written that so many things could have been done better. There is, of course, an even more important reason for a new evaluation of the economic diplomacy of the wartime and postwar years. We now have the advantage of a longer historical perspec­ tive. The first edition of this volume appeared in 1956; most of the research and writing was done in 1953-1954. In those years, the results of the wartime and early postwar efforts at international economic cooperation looked very different than they do today. The International Monetary Fund was then largely inactive, by­ passed by belated efforts of postwar reconstruction. Sterling and the other major European currencies were still inconvertible; the provisions of the International Monetary Fund permitting exchange restrictions for a “transitional” period looked as if they might apply indefinitely. The Charter for an International Trade Organization had been withdrawn from the Congress; the General Agreement on Tariffs and Trade seemed too weak to organize an effective attack on trade barriers. The recipients of Marshall aid were pre­ occupied with removing quantitative restrictions among themselves; the United States was undermining its commitment to liberal trade with “escape clause,” “peril point,” and “buy American” prac­ tices; the outlook for substantial reductions in trade barriers on a global basis seemed highly uncertain. Anglo-American coopera1 Letter of Ansel F. Luxford to the author, August 23, 1956.

Introduction

xxi

tion for multilateral trade was bedeviled by a supposedly chronic “dollar shortage” and by divergent approaches to domestic plan­ ning and full employment. Today, as we look back across a quarter of a century of history, the picture looks very different. But we must not compensate for overly pessimistic judgments in the early 1950s by excessively optimistic conclusions now. The struggle to achieve the objectives of the wartime and postwar planning still goes on. The achieve­ ments of recent years, great as they are, are far from being secure. The recurrent monetary crises, the backsliding into trade and capital controls, the disappointing progress in efforts to raise living standards in the less-developed world—these and other danger signals have raised new questions about the adequacy of our postwar economic arrangements. In short, the balance sheet of economic cooperation contains its full measure of debits as well as credits. Let us look at both sides of the ledger, evaluating the progress of global cooperation in general and of Anglo-American cooperation in particular. As we undertake this difficult task of reappraisal it may be use­ ful to remind ourselves at the outset that we are not dealing here with “pure” economics, but more with what used to be called “political economy.” The point seems obvious enough, and would not need to be emphasized but for the fact that it has been so frequently overlooked. In the hearings before the Senate Foreign Relations Committee on the Bretton Woods agreements in 1945, Secretary of the Treasury Henry Morgenthau insisted that the Fund and Bank “are to be financial institutions run by financial people, financial experts, and the needs in a financial way of a country are to be taken care of wholly independent of the po­ litical connection.” When Senator Fulbright questioned whether economics could be so easily divorced from politics, the chairman of the committee, Sen. Robert F. Wagner of New York, inter­ jected: “I have just checked with Senator Tobey, and neither one of us heard any politics at all at Bretton Woods.” 23Keynes was perhaps equally unrealistic when he urged that the Fund should be run wholly by international civil servants with only the most occasional supervision by government representatives.8 2 Infra, p. 11. 3 Infra, pp. 257-260.

XXII

Introduction

Today we understand rather better the extent to which “politics” and “economics” are bound up with each other. Money means command over resources and command over resources means power. Through the accumulation of gold and other reserves na­ tions often seek to assure their financial and political independence and put themselves in a position to influence the policies of others. International economic negotiations can involve the same tension between adversary national interests as negotiations on disarma­ ment, U.N. peacekeeping, the Middle East, or Vietnam. Nations are unlikely to surrender power to community institutions unless they are confident that the power will be used consistently with their interests. Thus economic integration cannot run too far ahead of political integration. After World War II the Soviet Union re­ fused to join the Bretton Woods institutions; other communist countries joined but soon left. Even within the West grave strains on these institutions developed when General De Gaulle sought by economic means to reduce the influence of the United States in world affairs—to limit the U.S. capacity to undertake military operations in Vietnam and elsewhere, to invest large sums in Euro­ pean industry, and to carry on aid programs in the Third World. The most obvious way to do this was to cash in dollars for gold, to encourage speculation against the dollar, and to adopt a nega­ tive attitude in negotiations to create new liquidity. When a sense of political solidarity is lacking, as it has been lacking between the North Atlantic nations on Vietnam and other questions, eco­ nomic negotiations are bound to be affected. Nations do not like to lend financial assistance in support of policies they do not approve. When the finance ministers of the Group of 10 met in Stockholm in the spring of 1968, demonstrators carried signs reading: “Supporting the dollar means supporting genocide.” The dollar crisis of early 1968 was a dramatic example of politics influencing economics, and of the reverse effect as well. For the threat to the dollar and the international monetary system—though not the principal factor—was probably a contributing element in the decision of the Johnson administration not to send 200,000 more troops to Vietnam, to halt the bombing, and to seek a nego­ tiated settlement. Clearly today’s maker of international economic policy needs

Introduction

xxiii

more than economic theories and statistics. His models are easily wrecked by crises in Asia and the Middle East, by student revolu­ tionaries and black militants, by proud and often unpredictable political leaders who decline to behave according to the economist’s definition of “rationality.” Although factors such as these cannot always be foreseen in advance, we are at least coming to under­ stand that no blueprint of economists or bankers can work if it fails to take account of political factors. It is a healthy sign of the times that the coordination of U.S. international economic policy is now a major responsibility of the National Security Council. Just as military questions have become too important to be left to generals, it is no less true that economics has become too important to be left to “pure” economists—i.e., economists without a broad understanding of the political and social context in which they have to work. This does not mean, of course, that economic questions must be subordinated entirely to politics. Economic ends do have a value in themselves and cooperation is often easier in the economic than in the political field because nations can more easily perceive their common interests. It is possible for all nations to gain from major efforts in trade liberalization such as the Kennedy Round, or from new institutions to enlarge liquidity (the amount of liquid assets available to nations for the settling of their international accounts). The economic weapon is often a dangerous one to employ for political purposes, particularly against a reserve currency such as the dollar. The depositors do not want their banker to go broke, nor do they wish to force the United States into deflationary or restrictionist measures that would quickly affect the other main trad­ ing nations. The denial of financial support to a country in diffi­ culty may force that country to make adjustments; but they may not be the adjustments which those denying the support intend. Despite the difficulties encountered during recent monetary and trade nego­ tiations, most governments have usually paid due regard to the old saying, “a rising tide lifts all the boats,” and to its modern counterpart, “an ebbing tide means many shipwrecks.” As PierrePaul Schweitzer, managing director of the International Monetary Fund has put it, the reconciliation of diverse interests is made pos­ sible in monetary negotiations “by a common recognition of the

xxiv

Introduction

stake which every country has in the smooth functioning of the international monetary system.” 4 The same is true for negotiations on trade and development problems. THE

FRUITS

OF

CO O PE R A T IO N

With these considerations in mind, let us begin with a look at the credit side of the ledger. For the world economy as a whole, the twenty-five years since Bretton Woods have been years of unprecedented prosperity and growth. In very round figures, world production has soared from $300 billion a year to more than $2,000 billion a year and world trade from $30 billion a year to more than $200 billion a year. Even allowing for price increases, these figures represent at least a threefold increase in real terms. It is an impressive record, though one must make some obvious qualifications, notably the failure of the less-developed countries to share proportionately in this fantastic over-all growth. While it would be an oversimplification to give all the credit for the excellent performance to the international economic in­ stitutions established during and after World War II, it is clear that the postwar planners must have done something right. The institu­ tions they created—the International Monetary Fund, the Inter­ national Bank, the General Agreement on Tariffs and Trade—have demonstrated an extraordinary ability to adapt themselves to the changing needs of the world economy. This is particularly re­ markable when one considers the handicaps under which each of them was founded—handicaps described in some detail in this book. IMF: The Triumph of Keynes and White The International Monetary Fund was launched with very modest financial resources relative to its responsibilities—some $9 billion in gold and foreign exchange (reduced below $8 billion when the Soviet bloc refused to join). Keynes considered these amounts inadequate, and was particularly troubled by the failure to make Fund resources unconditionally available.6 But the Fund’s potentialities as a supplier of liquidity were steadily enlarged with 4 Arthur K. Salomon lecture, IMF Press Release, December 5, 1967, p. 10. 5 Infra. pp. 86-88, 112- 114, 257-268.

Introduction

xxv

time. Two over-all quota increases, coupled with special increases for certain countries, brought its resources to $21 billion by the middle of the 1960s. Another $6 billion in convertible currencies was made available on a contingent basis with the conclusion in 1962 of the General Arrangements to Borrow among key financial powers—the famous Group of Ten plus Switzerland. Even with respect to regular Fund resources, the conditional aspect that so troubled the British at Bretton Woods and Savannah was gradually ameliorated. Drawings in the “gold tranche” (the part of each member’s quota equivalent to its gold contribution) were made unconditional—at first de facto and eventually de jure. Quite apart from the “gold tranche,” the Fund developed the technique of “stand-by” arrangements—promises that countries could make drawings without further review up to a certain amount—provided they carried out satisfactory economic programs agreed to in con­ sultation with the Fund. And “compensatory finance” facilities were developed to make drawings virtually automatic for lessdeveloped countries in payments difficulty owing to an unforeseen decline in commodity earnings beyond their control. The big breakthrough, of course, was the negotiation of the new facility for Special Drawing Rights (SDRs) in 1968. Where Fund quotas and the General Arrangements to Borrow provided mainly conditional liquidity, the SDR facility would create a new reserve asset—“owned reserves” that a country could use in set­ tlements just as gold or foreign currencies. At long last the Fund could provide what Keynes had wanted—a quantum of interna­ tional currency automatically available to all countries that could be increased in accordance with the needs of world trade. With the SDR facility in operation, the growth of international reserves would no longer depend on unpredictable or unilaterally-deter­ mined elements such as net additions to the world’s gold stock and the U.S. balance-of-payments deficit. It would be the result of collective decisions of governments with a view to world economic requirements. In this respect, therefore, one might say Keynes eventually won his argument with Harry White—twenty-five years late. The SDRs are essentially the type of liquidity for which Keynes fought in vain in the wartime negotiations. Despite “reconstitution” pro­ visions placing a modest limit on the extent of average use, the

XXVI

Introduction

SDRs are unconditionally available and do not need to be repaid. Moreover, each participant is obliged to provide convertible cur­ rency in exchange for SDRs in an amount equal to twice its own allocation of SDRs. This is a significant break with the more conservative conception of White under which the Fund was founded, whereby a country’s quota represents its maximum liabil­ ity and measures its maximum drawing rights. It is true, of course, that the creation of the SDR facility was also the occasion for amending the Fund’s Articles to make draw­ ings of the Fund’s regular resources beyond the “gold tranche” available only if the Fund is satisfied that a member’s use of its resources will be consistent with the policies of the Fund—includ­ ing the requirement of prompt repayment. These amendments codified the restrictive interpretations on the use of Fund re­ sources originally pressed by the United States—and now pressed, ironically, by the Europeans. In another sense, then, Keynes and White both “won.” Twenty-five years after Bretton Woods the Fund became an instrument for two different kinds of facilities: the unconditional liquidity sought by Keynes (SDRs) and the conditional drawing rights (regular Fund resources) sought by White. The Fund’s power to mobilize liquidity has not only grown with increases in its own resources and more liberal rules govern­ ing their use, it has also grown through the Fund’s indirect support of short-term credits extended to one another by central banks. These credits are normally repaid with the help of drawings on the Fund; indeed, the availability of medium-term Fund credit which can be offered to a government upon the working out of an acceptable stabilization program is one reason emergency central bank credits are available in the first place. This productive col­ laboration between the Fund and the banking community is a far cry from the atmosphere at Bretton Woods, where the delegates brusquely called on central bankers to dissolve the Bank for International Settlements and where Henry Morgenthau proudly heralded the achievement of his lifetime ambition—to “drive . . . the usurious moneylenders from the temple of international finance.” 6 One wonders what Morgenthau must have thought in the final years of his life when the “usurious moneylenders” mobil0 Infra, p. 76.

Introduction

xxvii

ized $3 billion of central-bank credits to rescue sterling within a space of ten hours one November day in 1964. Fortunately for the world, the central bankers did not follow the advice they were given at Bretton Woods. Instead, they preserved and strengthened the Bank for International Settlements, and provided more than $12 billion to support sterling, the dollar, and other beleaguered currencies through “Basle credits” and currency swaps. This impressive revival of central-bank cooperation has introduced a new element of flexibility to the international monetary system, by­ passing some of the political difficulties inherent in the approval of credits by national parliaments. In July and November, 1968, for example, the “Basle Club” helped rescue the franc from the international consequences of France’s domestic upheavals, providing $3.3 billion in credits, of which $1.4 billion was put up by the Federal Reserve system. In view of the troubled state of political relations between France and the United States, one can well imagine what might have happened had the administration sought the same $1.4 billion from the U.S. Congress. This extraordinary growth of central-bank cooperation, rein­ forced by the Fund’s lending powers, has mainly benefited the advanced countries. But the Fund has also played an indirect role in mobilizing liquidity for the less-developed countries. Its financial assistance to these countries has tended to certify the credit worthi­ ness of the borrower and has thus made it easier to obtain credit from governments or private sources. To an important degree the Fund has become an international arbiter of those sound domestic policies that qualify a country for external aid. Its “Good House­ keeping Seal of Approval” has often been decisive in persuading rich countries to come to the aid of the poor. The Fund’s ability to mobilize liquidity in all these ways has been an element in the progress toward the currency convertibility and the freedom-from-exchange controls charted as an objective at Bretton Woods. This is one of the obvious places where things look much better now than when this history was written. The first effort at sterling convertibility under the rigid deadline of the Anglo-American Financial Agreement collapsed in July, 1947. The struggle back up the multilateral slope was long and difficult, but external convertibility was formally restored in December,

xxviii

Introduction

1958, not only for sterling, but for the other major European currencies. Twenty-five years after Bretton Woods, all the major industrial countries of the non-communist world had made their currencies convertible; with few exceptions, they were refraining from exchange restrictions on current transactions in accordance with the Fund Agreement. Although the financial crises of the late 1960s have caused some notable relapses, multilateralism as conceived at Bretton Woods is being applied on the major part of world trade. What of exchange stability, that other central objective of Bretton Woods? The currencies of the major trading countries, with occasional exceptions such as the Canadian dollar, have been maintained at fixed exchange rates in accordance with the Fund Agreement and have changed only occasionally in the face of “fundamental disequilibrium.” The devaluation of sterling and other major European currencies in September, 1949, was a major factor in ending the “dollar shortage.” The upward revalu­ ation of the German mark and the Dutch guilder in 1961 and the second devaluation of sterling in 1967 were also steps in the direction of balance-of-payments equilibrium. The old contro­ versy between Keynes and White over the freedom that countries should have to vary their exchange rates7 no longer troubles Anglo-American relations, though, as we shall note later, the issue is more alive than ever. Despite all the misgivings ventilated in the Congress, Parliament, and the press a quarter of a century ago, the United States got the exchange stability it sought at Bretton Woods, and Britain got the scope it wanted for exchange adjustments. Whether the “adjustable-peg” system has really been the best possible one for Britain and the United States, not to mention the rest of the world, is another quesion—to which we shall return when we come to our long list of “debits” and major unfinished business. But the Fund was to be more than just a mobilizer of liquidity or a policeman of exchange practices. It was, according to the very first purpose laid down in its Articles of Agreement, “to promote international monetary cooperation through a perma­ nent institution which provides the machinery for consultation and collaboration on international monetary problems.” Keynes 7 Infra, pp. 88-100, 114-117, 121-144.

Introduction

xxix

hoped the Fund might be the embryonic economic government of the world. He feared that the decisions taken when the Fund was inaugurated at Savannah meant the destruction of this ambitious aim.8 Certainly the Fund is an international, not a supranational, organization. In accordance with the Savannah decisions, its directors serve full time rather than part time at the headquarters of the Fund and act as representatives of the governments that choose them. Yet over the years they have also developed the “world, objective outlook” for which Keynes had argued.9 The board of the Fund, like the Board of the Bank, has developed a large measure of solidarity and “team spirit.” The directors can bring this common approach to bear on their respective treasuries and foreign offices, thus assisting accom­ modations in national policies. Perhaps more important is the fact that senior government officials both in treasuries and central banks are to an increasing extent alumni of the Fund board or Fund staff. Even where this is not true, they are in frequent contact at the annual meetings and periodic consultations. They all know one another better because of the Fund and have a degree of shared experience and outlook that would have been hard to achieve without the Fund. And beyond all this there is the continuing contribution of the manag­ ing director and the Fund staff as spokesmen for the general interest. At the height of the economic “cold war” between France and the United States the world was fortunate that a French managing director, Pierre-Paul Schweitzer, and his American deputy, Frank A. Southard, Jr., could work together effectively on behalf of a compromise plan for new liquidity. The delegates at Bretton Woods gave little thought to the Fund’s potential impact on the less-developed countries. If that impact has proved less than one might have hoped, it has never­ theless been significant. For the developing countries—and par­ ticularly the new nations—the service of their financial officials as members of the Fund board or Fund staff has been particularly valuable. Some of their younger officials have been trained at the IMF Institute. The annual consultations on exchange restrictions and the discussions with governments on requests for Fund as8 Infra, Chapter XIII. 9 Infra, p. 266.

XXX

Introduction

sistance have provided opportunities for wide-ranging reviews of less-developed countries’ domestic and international policies. Through its technical missions, the Fund has helped establish and run central banking systems. Thanks to all of these relation­ ships, the doctrinal gap between the Fund and the less-developed countries on inflation and multiple-exchange rates has begun to narrow. The Fund has become more pragmatic in regard to the spe­ cial problems of less-developed countries; many less-developed countries have come to see the importance of sound financial policy for economic development. Moreover, the Fund has become a vigorous and often successful spokesman for the interests of the poor countries—as in the decision to include them as full partici­ pants in the SDR facility. Were Keynes and White alive today, they would probably regard this as one of the Fund’s great ac­ complishments, even though it scarcely figured in their thinking at the time of Bretton Woods. IBRD: The Banker Develops a Heart The second of the Bretton Woods twins began life in condi­ tions even more inauspicious than the first. Early postwar planning centered on the International Monetary Fund; the International Bank for Reconstruction and Development was considered of secondary importance. When, on the eve of Bretton Woods, the negotiators finally focused on the Bank, they were in a conservative mood—the British did not expect to be beneficiaries, the Ameri­ cans were afraid of the Congress. The Bank’s lending capacity was limited almost entirely to what it could raise by bonds issued on the private capital market. There was simply no conception of the vast needs of the less-developed countries and of the role the Bank should play in meeting them. Indeed, the Bank was con­ ceived mainly as an institution for reconstruction. Incredible as it seems today, the word “development” did not even appear in Harry White’s first draft.10 The Bank, like the other Bretton Woods twin, took some years to overcome its initial handicaps. In its early years it depended wholly on the American capital market. Its loans were deployed for reconstruction almost as much as for development, and as a lo Infra, p. 74.

Introduction

xxxi

reconstruction agency it was inevitably overshadowed by the Marshall Plan. In the 1950s, when it began to focus at last on the less-developed countries, its dependence on the private capital market forced it into a rather conservative banker’s role. It financed only specific projects that promised profits sufficient to repay the initial investment; covered only foreign exchange (not local currency) costs; and concentrated on traditional “public utility” investments in power and transportation. Equally im­ portant, it lent only on commercial terms—with interest rates of 5 or 6 per cent and repayment schedules of ten to twenty years. Even in these early years, of course, the Bank’s contribution was by no means unimportant. After the disastrous experience of defaults in international bond issues during the interwar period, it is doubtful that the capital market of the United States could have once again been tapped on such a large scale, particularly for the less-developed countries, without the International Bank as intermediary. World Bank bonds, representing a diversified package of investments undertaken by an experienced and prudent management and backed by guarantees of borrowing govern­ ments as well as the U.S. capital subscription, were soon regarded in Wall Street as a first-class investment. Moreover, the Bank helpfully diversified its borrowing operations as Europe recovered and the United'States slipped into balance-of-payments trouble. By the middle and late 1960s European capital markets were providing substantially more of the Bank’s new money than the capital market of the United States. Moreover, the Bank’s role in stimulating the flow of private capital was enlarged with the creation of two Bank affiliates. The first—the International Finance Corporation—put government money to work with private enterprises in less-developed countries without the Bank’s requirement of host-country guarantee. The second—the International Centre for Settlement of Investment Disputes—offered hopeful possibilities for the resolution of dif­ ferences between foreign investors and governments. In all these ways Morgenthau’s “usurious moneylenders”—far from being “driven from the temple of international finance”—were brought into new and productive forms of collaboration with national governments. These achievements in mobilizing and stimulating the flow of

XXX11

Introduction

private capital for development can be credited in large part to two experienced figures from the U.S. financial community— Eugene Black and George Woods. But the Bank’s evolution under their presidencies was not limited to the area of “bankable” investment. The really big breakthrough was the creation of the International Development Association as the Bank’s “soft-loan” affiliate. It was with the creation of IDA in 1960 that the member governments, responding to U.S. leadership, finally recognized the inadequacy of the original Bretton Woods conception which made the Bank almost entirely dependent on private capital. Unfor­ tunately, IDA was constantly undernourished. During the 1960s it received no more than $300 million a year in developed-country contributions. But at least to some extent the Bank’s normal credits on commercial terms could now be supplemented by interest-free IDA loans repayable over fifty years with ten-year grace periods. With this new source of funds, Woods moved boldly to modify some of the Bank’s conservative policies. By the middle and late 1960s the Bank and IDA were making program as well as project loans, were financing local as well as foreign exchange costs, and were moving into two fields where traditional banker’s criteria of profitability do not apply—agri­ culture and education. To carry out projects in these fields, the Bank called upon the Food and Agriculture Organization and UNESCO, thus moderating its previously aloof and somewhat con­ descending attitude toward other United Nations agencies. (How far that previous attitude had taken hold may be seen from the fact that when the author of this book appeared as a witness on behalf of the foreign-aid bill in 1961, no less a figure than Sen. William Fulbright expressed incredulity on being informed that the Bank had any relation to the United Nations! ) The Bank’s historic contribution—like that of the Fund—can­ not be measured by its own financial operations. It served as something of an inspiration and a model for the growth of regional development banks in Latin America, Africa, and Asia, even though it feared this kind of “competition” when the InterAmerican Bank was first proposed. Its consortia and consultative groups have brought donor countries together and coordinated their aid in support of internationally-approved development plans. This “multilateral-bilateralism,” or multilateral coordination of bi-

Introduction

xxxiii

lateral aid programs, is now an important element in international financial cooperation—a vital supplement to the discussions of bilateral aid policy among donor countries in the Development Assistance Committee of the Organization for Economic Coop­ eration and Development. When all of this is taken into account, it is clear that multi­ lateral cooperation in development lending has come a long way. At the present time the United States is doing a majority of its development lending through the multilateral arrangements men­ tioned above. The Bank and IDA are lending $1 billion a year, and their new president, Robert S. McNamara, has promised to double this amount. The regional development banks are lending close to $.5 billion a year. All in all, about one-sixth of total de­ velopment assistance is being disbursed by multilateral agencies, and about one-half is being transferred pursuant to arrangements worked out by consortia and consultative groups. The Bank’s ability to mobilize increasing amounts of capital, together with its prestige and experience, has given it a growing influence on the aid policies of the rich and the development policies of the poor. Its presidency is becoming one of the world’s most influential platforms for improving the aid efforts of the developed countries. Its role in training, advice, and technical assistance en­ ables it to shape profoundly the development effort of the poor countries. The Economic Development Institute, the visiting Bank Missions, the Bank’s assistance in project preparation and execu­ tion—all of these help encourage those sound internal policies without which no amount of external assistance can possibly bear fruit. No doubt, as we will emphasize later, aid is still insuffi­ ciently large and insufficiently multilateral, and no doubt the performance of developing countries, in many respects, continues to be disappointing. But the Bank’s achievements since Bretton Woods represent a quite unprecedented and spectacular advance in international collaboration for development over anything that came before. G ATT: Vive le Provisoire! Seldom has the truth of the old cliché—c'est le provisoire qui dure—been more amply demonstrated than in the history of the

xxxiv

Introduction

third institution bom of the wartime negotiations: the General Agreement on Tariffs and Trade. GATT was, as this history re­ minds us, a historical accident. Drawn up as a trade agreement pending the creation of the International Trade Organization, GATT had to live on as an organization when the ITO was with­ drawn from a recalcitrant Congress.11 Its legal basis was inse­ cure. It had no adequate secretariat or budget. For nearly a decade visitors to GATT headquarters were greeted with a sign reading “Interim Commission for the International Trade Organization”! That GATT was obliged to live for years in a state of legal obscurity and institutional undernourishment was due mainly, of course, to the facts of political life in the United States. It was bad enough that the Congress was unwilling to approve the ITO; to add insult to injury, it disclaimed approval or disapproval of GATT in successive renewals of the trade-agreements legislation. The Eisenhower administration’s attempt to give GATT a firm legal and institutional underpinning—the Organization for Trade Cooperation negotiated in 1955—suffered the same fate as the ITO Charter. U.S. contributions for the support of the GATT secretariat had to be smuggled through the Congress each year under a category in the State Department budget entitled “inter­ national conferences and contingencies.” Some members of the Congress deeply resented the restraints that GATT seemed to place on American freedom of action in the trade field, particularly since U.S. participation in GATT had never received congressional approval. Even in the first years of the Kennedy administration an American Under Secretary of State for Economic Affairs felt obliged to tell the executive secretary of the Contracting Parties: “You know, GATT is a dirty word in Congress.” Not until 1968 did an administration dare to ask the Congress for permanent authorization for contributions to the GATT Secretariat—an ac­ knowledgment of legitimacy enjoyed by every other major inter­ national agency. U.S. coolness to GATT was a major limitation on its effectiveness, since in the absence of American leadership not much could be done by others to strengthen GATT as an in­ strument of liberal trade. In light of these handicaps, GATT’s accomplishments have been rather extraordinary. Everybody concedes, to be sure, that GATT 11 Infra, pp. 348-380.

Introduction

xxxv

has not been fully effective in dealing with such problems as regional trading groups, border taxes, and agriculture—more of these and other problems later. Yet one cannot fail to be impressed in reviewing how, under the skillful leadership of Eric Wyndham White, GATT’s chief executive for its first twenty-one years, the institution survived its initial difficulties and became a vital instru­ ment for trade expansion for countries accounting for more than 80 per cent of world trade. Despite the absence of the formal organizational structure that would have been provided by ITO or OTC, the contracting parties established a permanent council to operate between their meetings, a network of specialized com­ mittees, and a small permanent secretariat. Quietly but perceptibly GATT developed authority in a fourfold role—as a forum for trade negotiations, as a body of principles governing trade policy, as a center for the settlement of trade disputes, and as a vehicle for the development of trade policy. As a forum for trade negotiations GATT promoted an un­ precedented amount of tariff disarmament in six major bargaining rounds— Geneva, 1947; Annecy, 1949; Torquay, 1951; Geneva, 1956; Geneva, 1960-1961 (the “Dillon Round”); Geneva, 19641967 (the “Kennedy Round”). In the Kennedy Round, which dwarfed all the others in importance, tariffs were reduced an average of 35 per cent on items accounting for $40 billion of world trade. When the last installments of the Kennedy Round are carried out, the average height of tariffs in industrial countries will be down to about 8 or 9 per cent. The United States will have reduced its average tariff to this level from the 60 per cent that prevailed before the Trade Agreements Program began in 1934. These achievements, to be sure, were the result of commitments undertaken by national governments, but they would not have been possible without GATT. In each of the difficult bargaining rounds GATT—or more precisely its chief executive—was an indispensable element laying the groundwork for the negotiations and guiding them to a suc­ cessful conclusion. This function was reinforced in the Dillon and Kennedy rounds, when Wyndham White became chairman of the Negotiating Group. Indeed, when differences between the United States and the European Economic Community seemed irreconcil­ able, it was his last-minute intervention that saved the Kennedy

XXXVI

Introduction

Round from collapse and provided the basis for the final settle­ ment. Both from the standpoint of results achieved and of GATT’s role in producing them, the wartime dreams for the bargaining down of trade restrictions have enjoyed a considerable measure of realization. A similar judgment seems justified when we look at GATT’s role as a set of principles regulating international trade policy. Consider, for example, the bitter differences on quantitative re­ strictions (QRs) that threatened the success of the London Con­ ference.12 The compromises reached there worked out much better than the skeptics believed possible. To some American critics the exception permitting QRs to protect the balance of payments and the clause safeguarding a country’s domestic employment policy constituted an “economic Munich.” 13 Yet QRs have been largely eliminated among developed countries on trade in industrial goods. To some British critics, the limitations on the use of QRs threat­ ened to frustrate full-employment policies and postwar recovery.14 Yet in not a single instance did they actually do so. As to that other explosive issue in the GATT negotiations—Imperial Pref­ erence—it has gradually faded from sight. Successive rounds of tariff reductions have reduced the preference margins, and pref­ erences expressed in monetary terms have had their real impact further eroded by inflation. Nondiscrimination is now the rule for the large majority of transactions among developed countries. Of course difficult questions remain—how to reconcile the mostfavored-nation principle with regional arrangements and with the trade interests of the less-developed countries. As will be sug­ gested later, there may be a need to revise the GATT rules here as on other matters. But, generally speaking, GATT as a set of trading rules has served the common interest of the international trading community. To be wholly viable, any code of principles requires effective procedures for interpretation and the adjustment of differences. GATT’s ability to develop such procedures over the years is one reason for its continuing vitality. GATT panels of experts, drawn from member countries with no direct interest in the subject mat12 Infra, pp. 280-284. 13 Infra, pp. 375-377. 14 Infra, pp. 369-371.

Introduction

xxxvii

ter, have managed to resolve a number of dangerous trade dis­ putes that could have unraveled painstaking accomplishments in trade liberalization. In 1963-1964 a GATT panel helped to bring a truce in the famous “chicken war” between the United States and the Common Market resulting from the latter’s system of variable levies. GATT’s conciliation function has also been aided by the personal role of its chief executive. In the months that fol­ lowed the Kennedy Round, Wyndham White helped persuade the Common Market countries to ease U.S. balance-of-payments diffi­ culties by speeding up their implementation of the Kennedy Round timetable. Although the offer was conditional, and was later overtaken by events before it was implemented, it did help to avoid, at least temporarily, the imposition of import sur­ charges by the United States. As an instrument for the development of trade policy, par­ ticularly with respect to the problems of the less-developed coun­ tries, GATT has played a role scarcely anticipated by its founders. As originally conceived, GATT recognized no special need to assist the exports of the less-developed countries. The Haberler report of 1958, the Ministerial Declaration of 1961, the Action Program of 1963, the Trade and Development Chapter added to the GATT articles in 1965—these were major steps toward remedying this deficiency. The critic might say that GATT moved too slowly in this direction, and only under pressure from the developing countries and new institutions such as the UN Conference on Trade and Development (UNCTAD). But in the end it did move. It stimulated the rich countries to accept special responsi­ bilities to eliminate, or at least reduce, restrictions on the exports of the poor, and it established the principle that tariff concessions by rich to poor need not be subject to full reciprocity. GATT also undertook a number of technical assistance activities to help the developing countries—training programs for their trade officials, an international trade center to promote their exports, and con­ sultations with individual countries on the trade aspects of their development plans. There are no scientific means of measuring how much GATT has done in all these ways to contain protectionist pressures in member countries. Because of GATT’s system of “controlled reprisal,” national leaders can now point with certainty to the

xxxviii

Introduction

adverse consequences which the adoption of trade restrictions will have for their own country’s export trade. The very fact of a country’s commitments under GATT can be cited as an excuse for not giving way to domestic pressure groups. Wyndham White used to tell the story of the foreign trade minister of a GATT member who complained to him in front of other officials that GATT was preventing his country from adopting certain pro­ tectionist measures. He seemed shaken when told that none of the measures were actually a violation of GATT. After the meeting he told GATT’s chief executive: “Why on earth did you have to say that? I don’t really want to do those things anyway!” GATT has been no guarantee against protectionism, but it has provided some additional leverage to government leaders who “really don’t want to do” things that would impede pursuit of the general wel­ fare. This last point is perhaps the central one on the credit side of this historical balance sheet, and it is a point that applies to all three of the institutions of international economic cooperation whose origins are traced in this book. The Fund, the Bank, and the GATT have articulated the common interest of nations and conciliated their adversary interests. They have encouraged govern­ ments to take a more international approach and have strength­ ened the hands of outward-looking leaders in dealing with domestic political opposition. They have taken responsibility for compro­ mises in situations where national leaders could not have taken responsibility alone. Thanks to them, nations have followed better economic policies than they otherwise might have done. In short, these institutions, if not the agencies of world government, have certainly been instruments of a better world economic order. Economism, Universalisai, and Legalism Revisited In the first edition of Sterling-Dollar Diplomacy we empha­ sized three “errors” which underlay wartime and postwar economic diplomacy—Economism, Universalism, and Legalism.15 If this assessment of the credits fairly attributable to the Bretton Woods institutions and GATT is correct, these “errors” may not have been so serious as we originally thought. 15 Infra, Chapter XV11I.

Introduction

xxxix

We said in the first edition that the postwar planners were guilty of Economism in building a set of postwar economic insti­ tutions before the political setting could be more clearly foreseen. But they had to start somewhere. If the British and American governments had not used the period of their wartime collabora­ tion to establish the Bretton Woods institutions and chart the main outlines of what became the GATT, these institutions might never have been created. From a twenty-five-year perspective we can be grateful that the economic foundations of a decent world order were laid while the fighting was still going on, even if those foun­ dations might have been better shaped to postwar political realities. It would have been difficult, perhaps impossible, to have held a successful Bretton Woods conference after the war. Not only would the wartime spirit of idealism and solidarity have been dissipated, but it would have been necessary to contemplate closing the ex­ change markets until the conference reached a successful con­ clusion. We said that the postwar planners were guilty of Universalism in sometimes considering universal institutions a substitute for co­ operation on a bilateral or regional basis. It is certainly true that they failed to supplement these institutions soon enough with measures to deal with the special problems of sterling and of European reconstruction, as critics such as John H. Williams had urged.16 To say that they were guilty of Universalism, however, does not mean they made a mistake in founding universal insti­ tutions in the financial and trade field. Quite the contrary. Pre­ cisely because of their universal character, the Bretton Woods institutions and GATT have been indispensable vehicles not only for linking the United States and Western Europe, but for linking the developed nations to the nations of the less-developed world. And precisely because of their universal character the institutions have been able to make modest beginnings in building bridges to the countries of Eastern Europe. None of these possibilities could have been realized had the British and American governments sidetracked the International Monetary Fund in favor of a bilateral financial agreement as was envisaged in the original “key currency” proposal.17 16 Infra, pp. 132-133. 17 Ibid.

xl

Introduction

We said the postwar planners were guilty of Legalism in exalting agreement in form over agreement in substance. Certainly some agreements were negotiated in excessive detail, without any real meeting of minds and without adequate procedures for adjustment in the light of changing circumstances. The notorious example was the Anglo-American Financial Agreement, with its inflexible timetable for sterling convertibility and its camouflaging of diver­ gent intentions with respect to the funding and writing off of the wartime sterling balances. A second example was the ITO Charter, so weighted down with rules and exceptions that it collapsed of its own weight even before it could take effect. Yet the Bretton Woods institutions and GATT are also legal instruments; as this history reveals in abundant detail, they certainly were the subject of very different interpretations on the two sides of the Atlantic. But most of the differences that seemed so im­ portant a quarter of a century ago have disappeared, removed by changes in American or British policy or simply overtaken by events. Perhaps these institutions have succeeded where the AngloAmerican Financial Agreement failed because they have provided a framework for continuing consultation and adjustment of policy. Perhaps the inconsistent and self-serving statements negotiators make to please domestic opinion may be a price worth paying if there is sufficient common interest to enable the institutions to work in practice. Whether they do, in fact, work depends not only on this measure of common interest but on the leadership of the international staff, the evolution of national policies, and the procedures by which present ambiguities can be clarified in changing circumstances. “There is,” Keynes warned at Savannah, “scarcely any enduringly successful experience yet of an international body which has fulfilled the hopes of its progenitors. Either an institution has become diverted to be the instrument of a limited group, or it has been a puppet of sawdust through which the breath of life does not blow.” One cannot escape the conclusion that Keynes, per­ fectionist though he was, would have been the first to acknowledge the service to the general interest as well as the continuing vitality of the institutions in whose conception he played such a leading part.

Introduction

xli

Anglo-American Economics: The Common Interests Emerge This volume is not just a history of international economic institutions; it is also a study of Anglo-American relations. In drawing up our twenty-five-year balance sheet we have some credit entries here as well. A quarter of a century ago inter­ national economic issues seriously divided the two countries. They continued to divide the two countries when the present volume was written. They are not a major source of division today. To understand why this is so we need to look at some of the thorough­ going changes that have taken place in the psychology and politics as well as the economics of Anglo-American relations. On the psychological side, Anglo-American relations are now largely free from the abrasive attitudes of pride and prejudice that characterized the wartime and early postwar years. A con­ gressman would be unlikely to oppose helping Britain today on the ground that it would “promote too damned much Socialism at home and too much damned Imperialism abroad” 18 (although he might cite these reasons against the request of his own government for a tax increase!). It is equally hard to imagine a Member of Parliament saying that the American people are “extremely ig­ norant . . . in the adolescent state . . . and . . . do not understand the international trade problem.” 10 And if someone did make such remarks today, he would not find the ready reception that existed in certain segments of public opinion at the end of World War II. “Twisting the lion’s tail” in the United States is now an anachron­ ism; anti-Americanism in England is “non-U” and out of fashion. To be sure, large numbers of Englishmen during the 1960s were alienated by Vietnam and Lyndon Johnson, and some denounced as “imperialist” and “racist” the foreign policy of “American capitalism.” But this was not anti-Americanism so much as a rather generalized revolt against “establishment” policies—it was aimed not only at targets in the United States but in Britain and other countries as well. Indeed, there is, particularly among the young, a striking degree of intellectual and cultural assimilation. One sees this in the American admiration for British “style,” 18 Infra, p. 237. 19 Infra, p. 226.

xlii

Introduction

in the popularity of mini-skirts, British tailoring, and Beatle rec­ ords, and more deeply in the quest for values with which Britain is identified—elegance, charm, wit, self-confidence, and an icono­ clastic individualism. One sees it also in the British fascination with American products and American TV, and in the hunger for “American” innovations in education and business. A dramatic symbol of the cultural convergence was John F. Kennedy, who could probably have outpolled any rival political figure in Britain as well as in the United States. The psychological climate now is free, too, from the attitudes of intellectual and moral superiority that characterized AngloAmerican relations in an earlier time. As Lord Lindsay of Birker put it during the debate on the Loan Agreement: One of the difficulties about the relations between these two great countries which we both inherited from our spiritual ancestors, the P u ritan s. . . is the habit of looking down with ineffable superiority on other people. When we do that to each other it is really more than we can bear and when the Americans do it to us it riles us very much indeed.20

Very little such reciprocal condescension has aggravated AngloAmerican relations in recent years. Perhaps this has something to do with the fact that both countries have been struggling with chronic balance-of-payments deficits, domestic racial problems, and intractable challenges to their overseas policies (Rhodesia and Vietnam). On both sides of the Atlantic the tendency is no longer to say “if only you would do things our way.” It is more likely to be “of course, we are in no position to talk!” The change in the political setting has been no less profound. In the wartime years many American leaders regarded the British Empire as a major obstacle to the achievement of U.S. postwar goals. On the British side, there was widespread resentment of the rise of American power and of what looked like a misguided and indiscriminate “anti-colonialism.” A quarter of a century later the British Empire has been dismantled in what has been accu­ rately, if rather irreverently, described as “the greatest strip­ tease act in history.” Drawn into the vacuum created by the withdrawal of British power, the United States has assumed vast economic, political, and military responsibilities in every continent 20 Infra, pp. 229-230.

Introduction

xliii

of the world. Somewhere in the late 1940s or early 1950s the British began to doubt the glories of imperialism and the Ameri­ cans the glories of anti-imperialism. By the mid-1960s there was, if anything, a reversal of roles. The United States was being at­ tacked in both countries for trying to be “policeman of the world,” and was vainly seeking to dissuade Britain from abandoning its military outposts in the Middle East and Asia. Obviously, then, the psychological and political setting of Anglo-American relations is totally different now than in the early years of sterling-dollar diplomacy. What is less obvious—but hardly less important—is that the old divisions on economic questions have also disappeared. At the time of the negotiations on the Bretton Woods agreements, the British Loan, and GATT, critics on both sides of the Atlantic argued that British and Amer­ ican economic policies were too divergent to permit close collab­ oration in a multilateral financial and trading system. Even as sober an observer as Prof. John Williams wondered “whether we are prepared, on either side, to adopt [the Fund and Bank plans] in our present divided state of thinking.” 21 But events have fully vindicated the protagonists of sterling-dollar diplomacy, who argued that the two countries could work together effectively in postwar financial and trade arrangements. On the British side, it was argued by some that the United States could not be relied upon to discharge its obligations as a creditor nation—that it would run massive and perpetual balance-of-payments surpluses, would follow protectionist and mercantilist poli­ cies, and would have a great depression dragging Britain and the rest of the world down with it into the abyss. The emotional polemics to this effect written in the 1940s and 1950s by critics such as Thomas Balogh look rather silly today. Even The Econ­ omist of this same period tended, though in a more balanced and sophisticated way, to perpetuate the myth of “dollar shortage” as the basis for reservations about Anglo-American efforts to pro­ mote a multilateral trade and payments system. As late as 1957 its former editor, Sir Geoffrey Crowther, proudly reminded a Harvard audience that for years he had preached the doctrine of a perm anent and organic shortage of d o lla rs.. . . The more time passes the m ore convinced do I become that I am rig h t.. . . It is difficult to 21 Infra, p. 100.

xliv

Introduction

believe that there can ever have been another case of a country where the demand of the rest of the world for its products was so urgent and its demand for the products of the rest of the world so indifferent.22

In reality, of course, the United States was developing a vora­ cious appetite for foreign products and was running increasingly in the red because of military spending, foreign aid, and private capital exports. It ran balance-of-payments deficits throughout virtually all of the 1950s and 1960s, pumping well over $30 bil­ lion of monetary reserves into the international economy. It progressively reduced the American tariff structure, even during periods of substantial payments deficit, and for much of this period permitted other countries to nullify their tariff cuts by quantitative restrictions and other measures to protect their balance of pay­ ments. It not only avoided a postwar depression but embarked in the 1960s on an unprecedented era of economic growth. Far from proving resistant to Keynesian ideas, the makers of American pol­ icy, after some delay, became pioneers of the “New Economics.” The U.S. administration and the U.S. Congress, thought in the 1940s to be implacably hostile to deficit spending, were threatening international stability in the late 1960s for the very opposite rea­ son—by perpetuating budget deficits and delaying adoption of a tax increase. By the end of this decade, indeed, the United States was causing quite a different problem from that which had preoccupied much of British opinion in the 1940s. Then the United States was the country that would not import enough to let the rest of the world pay its debts. Now the United States was the country that did not export enough to finance its military spending, foreign aid, and private investment in the rest of the world. Then the United States was supposedly threatening to unhinge the world economy by a bias toward massive deflation. Now the United States was threatening international stability by a dangerous tendency toward inflation. Like Britain, the United States now put a high priority on full employment, the welfare state, and rapid rates of growth. Now both countries struggled with inflation and payments deficits —and railed against the “bad creditor” countries of Continental Europe for continuing to follow pre-Keynesian policies. 82 Balance and Imbalance of Payments (Boston, 1957), pp. 34, 48.

Introduction

xlv

A quarter of a century of history had also eroded another old issue in Anglo-American economic relations—Britain’s Common­ wealth trading and financial arrangements. In the early postwar years there was still an important segment of British opinion which believed that the British Empire—particularly in its economic aspects—could be a permanent foundation of British power. As late as 1956 Lord Beaverbrook could tell the author: You may have the idea that my opposition to the Loan was con­ tentious or obscurantist. It was, as I see it, the attitude of one who sought to reconcile his belief in the Empire, with his hope that a strong Empire was the best ally the United States could have. Was I wrong? 23

The answer, quite obviously, was yes, since empire was not a viable political or economic concept for Britain after World War II. The economic evidence for this could be seen clearly in the trade statistics during the 1950s and 1960s. For both Britain and its Commonwealth partners, trade with Europe and North America was becoming much more important than trade with one another. At the same time, the sterling area was steadily losing its attraction for the overseas holders of sterling—and even for the British gov­ ernment itself. History more than vindicated Keynes’s scathing attack on those British critics who wanted to build up a separate economic bloc which excludes Canada and consists of countries to which we already owe more than we can pay, on the basis of their agreeing to lend us money they have not got and buy only from us and one another goods we are unable to supply.24

How little vitality was left in the old notion of imperial preference could be seen in the fact that by the mid-1960s the leaders of both the Labor and Conservative parties favored British member­ ship in the Common Market—a move that involved substantial discrimination against Commonwealth goods. And the principal alternative offered by British opponents of Common Market entry was a Free Trade Area embracing both the Commonwealth and the United States! History has been no kinder to some of the American critics of Bretton Woods, the British loan, and GATT than it has been to 23 Letter dated August 21, 1956, commenting on the first edition of this volume. 24 Infra, p. 234.

xlvi

Introduction

their British counterparts. There were those who argued, for ex­ ample, that the great effort in sterling-dollar diplomacy would never achieve the objective of multilateral trade. They were wrong. Though a decade behind schedule, the British government did make sterling convertible and did eliminate quantitative restrictions discriminating against American goods. The Imperial Preference system was reduced to a point where it was no longer a major obstacle to American trade. What has been true of Britain has with few exceptions also been true of the industrialized world as a whole. If the members of the Common Market have not always been so forthcoming as the United States would have liked, they and most of the other industrialized trading partners of the United States did cooperate in GATT-sponsored tariff negotiations and did largely cease to employ quantitative restrictions against American goods. Just as Britain got the depression-free postwar world it wanted, so the United States got its postwar world of trade ex­ pansion. Nowhere has the assimilation of British and American economic policy been more striking than in the international monetary field. In contrast to the bitter debates on the liquidity issue in the war­ time financial negotiations, the United States and Britain were united in the 1960s by their shared financial vulnerability as chronic deficit countries and reserve currency centers whose liquid obligations far exceeded their available reserves. They became the two greatest proponents of new measures to enlarge liquidity through the International Monetary Fund. After its defeats on the liquidity issue in the wartime talks and at Savannah, the British government thought for a time that the Fund would be of little value for sterling; as things turned out, Britain used the Fund’s resources in every year but one between 1957 and 1968. The U.S. government, for its part, conceived the Fund as something only others would use; yet Fund assistance to the United States during the 1960s totaled nearly $2 billion. The United States not only exercised its Fund drawing rights to this extent; the Fund also mopped up dollars by accepting them to the limit in repurchases of currencies by other countries. In the light of what we know today, the old congressional de­ bates on the Bretton Woods agreements read like some dark echo of the Middle Ages. Senator Taft, the leading Republican spokes-

Introduction

xlvii

man, thought the United States was putting “all the valuable money in the Fund . . . I do not thimc anybody has ever proposed to give away American money as the Fund proposes to give it away, to people who themselves will control its disposition.” 25 Senator Millikin went so far as to argue that U.S. membership in the Fund would violate the constitutional powers of Congress.26 The Amer­ ican Bankers Association spoke for most of the private financial community when it opposed the Fund; its allies included senior officers of the Federal Reserve Bank of New York. Twenty-three years later, when the facility for Special Drawing Rights was presented to the Congress, the climate was rather dif­ ferent. In the hearings before the House Banking and Currency Committee, for example, not one congressman spoke against the SDRs and not a single opposition witness turned up to testify. Nobody raised a constitutional objection to the powers given the executive branch to vote periodic increases in SDRs—potential claims on as well as potential assets of the United States—even though these were far greater powers than those delegated under the Fund Agreement (where the U.S. quota could not be changed with­ out congressional approval). Indeed, the principal criticism voiced by members of the Congress was that the plan might turn out to be too conservative to meet U.S. liquidity needs, particularly in the light of the voting powers given to the members of the Common Market. On just one page out of 227 in the hearings before the House Committee could one find any echo of 1945. Like the Bourbons who had learned nothing and forgotten nothing, the Daughters of the American Revolution submitted what might have been a carbon copy of their testimony on the Bretton Woods agree­ ments, warning that approval of the SDR facility would move the United States “one step closer toward the establishment of a social­ istic world order.” 27 THE

D E B I T E N T R I E S ---- A N D S O M E UNFINISHED BUSINESS

It is clear from this review that the balance sheet of sterlingdollar diplomacy contains impressive credits. But to have a bal25 Infra, p. 130. 26 Infra, p. 131-132. 27 Hearings on H.R. 16911 (May 1 and 2, 1968), p. 226.

xlviii

Introduction

anced perspective we must also note the entries on the debit side of the ledger. With the help of hindsight we can see that mistakes were made—occasionally in the original institutional design, more frequently in the way the institutions were used (or not used) in practice. Partly because of these mistakes, partly for other rea­ sons, the international economic system founded at Bretton Woods is now in difficulty; the gains of the last quarter century in trade and welfare are gravely threatened; and today’s architects of in­ ternational economic order confront challenges even more for­ midable than those that faced their predecessors twenty-five years ago. The Liquidity Tangle The most consequential list of debits must be recorded in the field of monetary cooperation. We are still struggling with the two long-term problems that faced the British and American nego­ tiators at Bretton Woods—the liquidity issue and the adjustment issue. Despite all the progress of the intervening quarter century, the closing years of the 1960s have been years of monetary crisis. The dollar and the pound have been in trouble—trouble so great that it has undermined the capacity of the United States and Britain to meet their domestic and international responsibilities and has led to dangerous backsliding from multilateral trading goals. It remains true today, as it was in the 1940s, that the inter­ national monetary problem is basic to everything else. If that cannot be set right, all the other aims of policy will be gravely threatened. The world has not yet fully resolved the first of the Bretton Woods dilemmas—how to create sufficient liquidity so that im­ balances in payments can be corrected without harmful restrictions on international transactions or domestic growth. That greater progress has not been achieved can be ascribed in some measure to the failure of the Continental European countries, notably France and Germany, to display the “Bretton Woods spirit”—to favor a liberal international approach to liquidity creation when they developed surpluses in the late 1950s and 1960s. But a meas­ ure of responsibility must also rest on American and British policy —on the refusal of the United States to grant sufficient powers of

Introduction

xlix

liquidity creation to the International Monetary Fund in the nego­ tiations before Bretton Woods—and to the failure of the United Kingdom to seek a timely international solution to the problem of sterling. For most of the quarter century we are considering, the two countries resisted thoroughgoing multilateral solutions and sought instead to preserve their national freedom of action and the special prerogatives of the dollar and sterling. These policies seemed at the time to serve their respective national interests, yet as a consequence of postponing the multilateralization of their reserve functions the two currencies became gravely exposed, the world monetary system dangerously vulnerable, and the freedom of action of the United States and Britain increasingly restricted. Although the analogy is not exact, the behavior of the two re­ serve centers suggests that of the business firm with a serious cash shortage that has to stop production every few years and negotiate new loans from its creditors. The question that the firm’s management ought to face is whether the most acceptable long­ term solution to its problem is not to convert the creditors* interest from debt to equity—to bring the creditors into the business. The question Britain and the United States are now facing and should have faced some time ago is whether it is not better to be a minority shareholder in a liquidity-creating organization in which everyone else is a minority shareholder than to be increasingly de­ pendent on the willingness of foreign bankers and governments to hold one’s IOUs. It is fascinating to speculate whether things might have turned out better if the two countries had worked earlier and more resolutely for a multilateral approach. Had they done so, it is conceivable that they might have secured the nec­ essary cooperation from Continental Europe, particularly if they had shown greater willingness to attenuate the “Anglo-Saxon” character of the Fund and given Europe a role in staff and in decision-making more appropriate to its economic strength. U.S. policy on the liquidity problem during the war and post­ war years reflected an unduly short-term and parochial view of the national interest. The United States flatly rejected Keynes’s Clearing Union, which would have given the world $32 billion of unconditional liquidity capable of further expansion to meet grow­ ing world needs. In drafting the articles of the International Mone­ tary Fund and in shaping its early policies the United States

1

Introduction

insisted on its own more restrictive conception—a modest amount of Fund resources, smaller quotas for European countries (includ­ ing France!) than these countries wanted, drawing rights limited to contributions, drawings conditional rather than unconditional, no drawings to facilitate an outflow of capital, drawings only in the currency the borrower needed to make payments. Most of these restrictions eventually worked against U.S. interests and considerable efforts had to be undertaken to reverse some of them. Obviously, twenty-five years ago, the United States conceived of the Fund as a device for helping others; it seemed never to occur to U.S. officials, or to the skeptical Congress with which they had to deal, that the United States might one day welcome assistance from the Fund. Only much later did the United States come to realize that today’s surplus country may be in deficit to­ morrow—and that a liberal multilateral solution to the liquidity problem can therefore serve the interests of all. By that time De Gaulle was in power and had learned how to make political capital out of the dollar’s vulnerability; and the Continental Europeans generally were showing the same shortsighted conception of sur­ plus-country interests evidenced in American policy a generation earlier. (After years of French opposition to enlarging liquidity through the International Monetary Fund, the franc had to be rescued in 1968 by Fund drawings and by Basle credits secured, as noted earlier, by the ultimate resort to Fund resources. Some­ day, perhaps, nations will learn the lesson that a surplus today can be a deficit tomorrow, and that the national interest in liquidity creation cannot be measured by a straight-line extrapolation of the balance-of-payments position of the moment. ) If the United States had accepted the Clearing Union and used it to cope with the financial problems of the postwar period rather than the Marshall Plan and other postwar aid programs, it would have accumulated some $30 billion in unconditional liquidity— enough to finance virtually all the U.S. deficits in the 1950s and 1960s. Today’s Secretary of the Treasury might well be tempted to summon the ghost of Henry Morgenthau and ask: “Why didn’t you accept the Keynes plan!” But of course this way of putting the problem is somewhat misleading. The Clearing Union, designed as a long-term instrument of monetary cooperation, would not have been the right vehicle for U.S. reconstruction aid to Europe.

Introduction

li

It was, moreover, biased in an inflationary direction. It represented too radical a break with tradition to be accepted in the political climate of the time. One needed to build confidence and gain ex­ perience with a more modest instrument. Still, the United States would have done well to accept some elements of the Keynes plan. If it had done so, and avoided burdening the Fund with so many inhibiting restrictions, the Fund might have done more to help the United States in the 1950s and 1960s. This failure of American policy would have been less serious had the postwar world been favored with an adequate and rapidly growing stock of monetary gold. None of the negotiators at Bret­ ton Woods took account of the fact that the world’s prewar stock of gold was being cut in half in real terms by the wartime and postwar inflation. They did not foresee how much the maintenance of the preexisting gold price in this inflationary situation would limit new gold production and how great a proportion of new pro­ duction would be drained into hoards and industrial uses. Nor could they imagine the increase in liquidity requirements that would result from the fantastic growth in trade and the removal of restrictions on current transactions and capital flows. To para­ phrase a popular American comedy of the early 1960s, they did not even begin to ask themselves the question: “Will success spoil Bretton Woods?” The ratio of gold to world imports dropped ominously in the years after Bretton Woods. It had been 100 per cent in 1938, but it was only 60 per cent by the end of the forties, 40 per cent by the end of the fifties, and 20 per cent by the end of the sixties. Since it could not be borne by the Fund, the responsibility for filling this gap in reserve growth was assumed by the United States. Countries seeking additional reserves steadily built up their dollar balances. The United States, which entered the postwar era with more than $20 billion in gold against $6 billion in foreign liquid dollar holdings, saw its gold stock shrink to $10 billion and its liabilities rise to more than $30 billion during the ensuing twenty-five years. The world’s liquidity problem was temporarily postponed—but at the cost of a drastic deterioration in the liquidity position of the United States. Two veterans of the Bretton Woods period were quick to warn of the dangers inherent in these developments. Roy Harrod,

lü

Introduction

Keynes’s biographer and confidant during the wartime negotiations, wrote a report for the Fund as early as 1954 warning of an im­ pending liquidity crisis and urging an increase in the price of gold. (The author vividly remembers a session at Christ Church, Ox­ ford, when Harrod looked over an early draft of this book and exclaimed: “Everybody still thinks you Americans have too much gold. But the day will come when you won’t have enough!” ) On the other side of the Atlantic, Edward Bernstein, a principal author of the Fund agreement, was equally farsighted. He urged in vain in the late 1950s that new measures were needed to enhance the Fund’s capacity to supply liquidity. And Robert Triffin, someone not involved in the Bretton Woods negotiations but a chief archi­ tect of the European Payments Union, captured widespread atten­ tion with his proposal to transform the Fund into a world central bank—in effect, an updated and more ambitious Keynes plan (but with greater safeguards against inflation than Keynes had provided). Although these and other scholars proposed very dif­ ferent kinds of solutions, they were united in their conviction that gold would be insufficient to provide the necessary growth in liquidity and that the continued use of the dollar to fill the liquidity gap risked a world monetary crisis. The failure of the U.S. government to accept elements of the Keynes plan during World War II was perhaps forgivable given the state of congressional opinion, the conception of the United States as a perpetual surplus country, and the radical break with tradition that the Clearing Union represented. Less forgivable was the failure of the U.S. government to seek a broad international solution to the liquidity problem in the 1950s and early 1960s. The Eisenhower administration showed no interest whatsoever in mone­ tary reform. In 1960 the author was sufficiently stimulated by Harrod’s diagnosis and by the Triffin and Bernstein proposals— not to mention the lessons he thought he learned in writing this volume—to outline a “strategy for the dollar” in an article for Foreign Affairs.28 The thrust of the essay was that negotiations to enlarge the world’s liquidity should be envisaged and that, pending their conclusion, the United States might have to run modest deficits of $1 to $1.5 billion a year to supplement the inadequate growth 28 “Strategy for the Dollar,” Foreign Affairs, Vol. 38, No. 3, pp. 433-445 (April, 1960).

Introduction

lüi

in the world’s stock of gold. Writing in the same number of the periodical Robert B. Anderson, President Eisenhower’s Secretary of the Treasury, ignored the liquidity problem entirely and called for the total elimination of the U.S. deficit—a call destined to be issued each year without success by Secretaries of the Treasury for most of the 1960s. At about this time I put the problem as fol­ lows in testimony before a Senate Committee: The m ajor trading countries of the free world may be likened to players in a great poker game. Ten years ago the United States had won just about all the chips, leaving the rest of the players on the verge of bankruptcy. In the last few years the United States has been losing some chips and, remembering its form er position, is feeling less secure. But the other players have not yet won enough chips to feel secure either. As a result the game continues to be marked by a certain degree of fear and tension and most of the players are hurting themselves and one another by frequent infractions of the rules. The present U.S. policy seems to be aimed at recovering the chips that were lost in recent years, or at least preventing the loss of any more. But this would only intensify or at least perpetuate the unsatis­ factory features of the game. The only true solution lies in increasing the num ber of chips in the game, or at least finding ways in which the existing chips can be loaned where necessary by one player to another. Once this is done the game can proceed smoothly and harm oniously and the players can play it as it was meant to be played— according to the rules.29

This approach to the problem was certainly not original—it was inspired by the distinguished mentors cited above, as well as others. But it was still very definitely a minority view and not many peo­ ple seemed to be listening. One newspaper account, after noting that “Mr. Gardner, alone among the witnesses, urged that the world work toward a whole new system of international payments and reserves” added that “the committee questioning centered on the problem of import competition with domestic goods, and with the alleged loss of jobs through investment abroad.” 30 The advent of the Kennedy administration changed the U.S. approach to the liquidity problem—but only slowly. When several 20 U. S. Senate, Committee on Interstate and Foreign Commerce, Foreign Com­ merce Study (April 25 and 26, 1960), p. 81. 30 “Investment Abroad Receives Backing/' The New York Times, April 27, 1960, p. 52.

liv

Introduction

of us sought to include some proposals for international monetary reform in a report to President-elect John F. Kennedy, they were diluted and relegated to the end on the theory that they distracted from the central question of balancing U.S. accounts.81 President Kennedy’s Council of Economic Advisers under Walter Heller subsequently pressed the view that there would be an over-all liquidity shortage if the United States closed its payments deficit, and that the effort to stop the flow of gold and dollars from the United States had to be accompanied by multilateral arrangements to enlarge liquidity. But the Treasury Department, led by Douglas Dillon and Robert Roosa, felt that closing the deficit had first prior­ ity. The European countries, in their view, were not yet ready to accept any plan for new liquidity that would meet the needs of the United States—and would not be until the U.S. deficit was brought under control. Thus the emphasis in the early years of the New Frontier was on unilateral U.S. action to increase exports and reduce capital outflows, on bilateral devices such as “Roosa bonds,” and on providing the Fund with additional resources in convertible currencies through the General Arrangements to Bor­ row.32 It was not until the summer of 1963 that the United States decided to support even a study of the liquidity problem, and it was not until 1965 that it called for negotiations to create new liquidity. Since the U.S. payments position was still weak when these lat­ ter decisions were taken, one of the original justifications for delay in initiating monetary reform—that closing the deficit had to have priority—might seem less than fully convincing. Roosa has since argued that the General Arrangements to Borrow repre­ sented “the outer limit of negotiable agreement on a multilateral basis at that time” and that the potentialities of the GAB and other means of expanding liquidity had to be exhausted before the Europeans could be persuaded to contemplate a more funda­ mental reform of the system.33 But perhaps this was owing to the fact that the negotiations were never moved from the financial to the political level and that the United States was still insisting on 31 Report to the Hon. John F. Kennedy by the Task Force on Balance of Payments, December 27, 1960. 32 Robert V. Roosa, The Dollar and World Liquidity (New York, 1967), especially pp. 3-39. 33 Id., at p. 32.

Introduction

lv

the sanctity of the dollar’s reserve role. Suppose the United States had used its full diplomatic leverage, involving President Kennedy himself, and had offered to share the dollar’s reserve function? Eminent authorities may be found on both sides of this ques­ tion, and a future historian will have to judge whether the Kennedy administration could have moved faster. A question that seems less closely balanced is the role during this period of the Interna­ tional Monetary Fund. During the 1950s and early 1960s the Fund largely ignored the liquidity problem, apparently on the theory that liquidity would be perfectly adequate if only its members would do a better job of balance-of-payments adjustment. The Fund, which should have articulated the general interest in monetary reform, was strangely silent. Only after Pierre-Paul Schweitzer replaced Per Jacobsson in 1963 did the world’s principal instru­ ment for financial collaboration throw its full weight behind the efforts that led eventually to the SDR facility. In view of the fact that the negotiations for SDRs were com­ pleted successfully in 1968, one may well ask whether the slow­ ness of the United States to act on its manifest interest in a liberal international solution to the liquidity problem really made much of a difference. The gap in world liquidity was filled by increases in dollar balances; the deteriorating liquidity position of the United States was shored up by a variety of ad hoc arrangements; the Fund’s supply of the currencies of European and other surplus countries was supplemented by the General Arrangements to Bor­ row. But the time purchased in these ways was costly. The payments problem caused, or at least reinforced, policies of tight money and fiscal restraint in periods such as 1959-1961 when the U.S. economy needed expansionist measures, costing perhaps tens of billions in lost growth. There was increasing resort to devices such as tied aid, the Interest Equalization Tax, and “voluntary” (later mandatory) controls on capital export. Some harmful reductions were made on balance-of-payments grounds in foreign aid and in overseas cultural and diplomatic activities. The liquidity position of the United States became more vul­ nerable, its bargaining position weaker. The time-purchasing ex­ pedients put more power in the hands of the central bankers, with their natural preoccupation with price stability rather than economic growth. The main venue for discussions on monetary reform be-

lvi

Introduction

came the Group of Ten—the forum that devised the General Ar­ rangements to Borrow—a conservative forum weighted more in favor of surplus country interests than the International Monetary Fund. The United States might have achieved a more satisfactory agreement on monetary reform had it taken the initiative before reaching the position of international supplicant. Moreover, the agreement came dangerously late—with a liquid­ ity crisis already upon us. In 1965 and 1966, thanks to increased hoarding and diminished production, the total gold supply stopped growing; in 1967 and 1968 a gold rush drained several billions out of gold stocks into private hoards. Both the dollar and sterling were at bay. It was by no means clear that the SDRs had come in time to save the international monetary system. In 1968, the gold pool had to be abandoned, and the price of gold in free mar­ kets rose and remained well above the official price. With the beginning of 1969 there was talk that the official gold price itself would have to be raised, or that the United States would have to suspend gold sales and let the dollar float. The first alternative would increase reserves in a most arbitrary way, giving windfall profits to the gold-producing countries (South Africa and the Soviet Union) and countries holding reserves mainly in gold (e.g., France); it would make nations less willing to hold dollars and sterling as reserves in the future; and it would undermine the whole endeavor to adjust reserves gradually to meet world needs through intergovernmental cooperation in the new SDR facil­ ity. The second alternative would be deeply unsettling to the inter­ national monetary system—probably leading to the formation of two currency blocs (a “dollar bloc” and a “gold bloc” ) following divergent monetary policies and divided increasingly by financial and trade controls. Both of these alternatives would represent a major detour from the movement toward the conscious and co­ operative management of money on a global basis that was charted at Bretton Woods. The only hope of avoiding them was through the speedy and liberal use of the SDR facility. A first-year alloca­ tion of $5 billion in SDRs seemed the minimum amount needed to meet the world’s reserve needs. If the United States can be criticized for pursuing too narrow a conception of its national interest in international financial ques-

Introduction

lvii

tions, what should be said of British policy? The United Kingdom made a historic contribution by presenting the Keynes plan in 1943. But once the Clearing Union was rejected, the British gov­ ernment seemed to lose interest in international solutions to the liquidity problem. True, the United Kingdom pressed for the gen­ eral quota increase in the Fund in 1958, but it was not until the early 1960s that the British government advanced a proposal for fundamental reform—and that, the abortive Maudling plan of 1962, was inadequately thought through and was presented with­ out the necessary diplomatic preparation (for example, there was no meaningful consultation with the United States). For nearly two decades after Bretton Woods British leaders, like their Amer­ ican counterparts, preferred to run a reserve currency without interference rather than seek international solutions to the liquidity problem. Given the greater vulnerability of sterling, the failures of the British government in this regard were more serious than those of the United States. World War II left Britain with a heavy burden of indebtedness and a dangerously vulnerable liquidity position. Before the war Britain had reserves of about $4 billion to back sterling liabilities of about $3 billion. Since the end of the war Britain has had to operate with reserves of $2 to $3 billion against sterling liabilities of about $12 billion. The overhang of the sterling balances has vastly complicated Britain’s domestic and international economic policy. Every weakening in Britain’s current balance of payments has tended to trigger a speculative flight from sterling. In some cases, as in 1947, the holders of sterling balances themselves moved out of sterling. In other cases, the mere presence of the balances encouraged speculation against sterling through “leads and lags” in Britain’s payments for and receipts from cur­ rent transactions. Its role in running a reserve currency has deterred Britain from devaluing sterling when this would have provided maximum bene­ fit to the British economy. To persuade foreign governments to continue to hold sterling, the British government has had to pay a high price in economic and military aid and in the free flow of private capital to sterling-area countries. In the mid-1960s the Bank of England had to insure sterling holders against possible devaluation losses through “forward cover” in the exchange mar-

lviii

Introduction

ket; this alone cost the United Kingdom hundreds of millions of dollars in precious reserves when it devalued sterling in 1967. The price of running a reserve currency has been high—too high in the light of Britain’s reduced position in the world. A “man from Mars” visiting the earth during the postwar era might have understood the United States, with the world’s most productive economy, trying to run an international currency; the attempt of Britain to do so, shorn of its empire and greatly diminished in relative economic status, would have struck him as a dangerous anachronism. Could this have been avoided? Admittedly, it is not very clear just how a country such as Britain gets rid of a reserve currency role. Still, there were some opportunities to share that role with others—or at least to make the role more manageable. In the discussions that preceded Bretton Woods the American negotiators raised the problem of the huge sterling balances accu­ mulated during the war. They suggested that a large part be written off and another part taken over by the IMF. The British govern­ ment rejected these overtures.34 To be sure, American thinking on the subject may have been nebulous and unrealistic. A write-off of a substantial portion of the balances from India, Pakistan, and Egypt would have been possible only had the United States been prepared to offer a substantial block of aid to these countries directly or through the International Bank. A funding of a portion of the balances through the IMF would have implied much more ambitious resources for the Fund than the American government was prepared to accept. A genuine international solution to the problem of sterling would not have been easy in the period before Bretton Woods. But British interests might have been better served in the long run if the British negotiators had tried. Similar opportunities were missed during and after the AngloAmerican loan negotiations of 1945. The Loan Agreement spe­ cifically envisaged that the wartime balances would be segregated and brought under British control. It further envisaged that they would be partly written off, partly funded, and partly made avail­ able for current use; the American negotiators expected that the bulk of the sterling balances would be written off or funded.35 Even at this late date American diplomatic and financial aid in achieving 34 Infra, p. 119. 35 Infra, pp. 204-206, 218-221.

Introduction

lix

such a settlement might have been possible. But once again the British government preferred to go it alone on sterling. There was no writing off of the balances and very little funding. The sterling holders cashed their liquid claims in huge amounts and forced the British government to abandon convertibility after five weeks in August, 1947—causing bitter recriminations against the United States and deep disenchantment with the multilateral goals.80 Later the Loan Agreement’s elaborate provisions on waiver of interest, based on the assumption that the balances would be brought under control, had to be entirely renegotiated. Britain missed its third and perhaps most attractive opportunity to multilateralize sterling’s reserve role in its standoffish attitude toward European integration in the 1950s. The British govern­ ment pressed successfully to wind up the European Payments Union and went off on its own to restore the convertibility of sterling. Moreover, it took a tough bargaining position in discus­ sions of a possible European free trade area to unite the uinner six” and “outer seven”—so tough that the project finally col­ lapsed. Had it put forward then the more affirmative approach adopted in the 1960s in its attempt to join the European Economic Community, a European free trade area including Britain and the EEC might well have materialized. This and a strengthened EPU might have led to the substitution for sterling of a common European currency so that alongside the dollar there would have been a second reserve currency backed not by the faltering British economy but by the combined re­ sources of a resurgent Europe. There might have been a marriage, in short, of the Continent’s financial strength and London’s finan­ cial institutions and services. (As Jean Monnet once put it: “With their liabilities and our assets, we would make quite a Bank!” ) This remains the best solution to the sterling problem, but thanks to past errors of British policy it is not clear when it will once again become available. Why did Britain repeatedly miss the opportunity to multi­ lateralize or ease its reserve currency role? Several answers suggest themselves—excessive pride and self-confidence in the country’s ability to run a world-wide financial system on vastly diminished resources; the wish to have assured export markets in sterling36 Infra, Chapter XVI.

lx

Introduction

area countries; the desire to avoid financial and trade measures that might prejudice Britain’s political relationships with the Commonwealth. These attitudes persisted for much of the postwar period—and with generally negative results. For most of the quarter of a century since Bretton Woods, Britain’s attempt to run a reserve currency by itself brought it into recurrent crisis and made it ever more dependent on periodic injections of short­ term assistance. It was only after the devaluation of sterling in November 1967, when the pressure of sterling holders to diversify their reserves threatened to destroy the whole system, that Britain sought a multilateral solution. One might say it was finally forced to do so—and on terms less attractive than it might have had earlier. By refusing to recognize clearly where it was, Britain fell further than it need have done. The Basle Agreement of 1968 was possibly, at long last, the beginning of a multilateral solution to the sterling problem. A group of central banks made $2 billion in medium-term credit available to cover withdrawals of one category of sterling balances —those held by sterling-area governments and central banks. These official sterling-area holders were given a guarantee by Britain of the dollar value of most of their remaining balances and undertook in return to maintain an agreed proportion of their reserves in sterling. Sterling held by governments and central banks outside the sterling area was not affected. Was this a step toward perpetuating or terminating the sterling area? One could not be sure; at least it bought a few years for Britain to decide. But one thing did seem clear: whether Britain opted for the continuation or termination of sterling’s reserve role, there would probably be multilateral management of either solution. The SDR facility negotiated toward the end of the 1960s was aimed at only a part of the liquidity problem—how to create a sufficient volume of reserve assets. It was not aimed at the problem of how to maintain confidence in all the different forms of reserves. The SDR agreement did call upon countries to maintain a reasonable relation between their holdings of SDRs and other reserve components (e.g., not to cash all their SDRs in for gold), and it authorized the Fund to direct SDRs to the different partici­ pants in order to promote this objective. But it still left unresolved

Introduction

lxi

the problem of destabilizing shifts between the other reserve assets (dollars, sterling, and gold). The decision taken in the spring of 1968 by the countries par­ ticipating in the gold pool to stop selling gold to the private market halted the disastrous shrinkage of the monetary gold stock and held official gold reserves at a minimum of $40 billion. Yet the simultaneous decision to limit gold purchases by central banks did not deter those speculating on an increase in the official gold price—gold sold well above this price in private markets— and some governments were still buying South African gold. The world urgently needed some means of preventing speculative runs from dollars and sterling—indeed from all currencies—into gold. The consolidation of monetary reserves is therefore one of the next big steps to be taken in the field of monetary reform. The members of the IMF, as suggested by the Italian government and various monetary experts, should turn in all their reserves of key currencies and gold to the IMF so that those reserves and SDRs can be combined into a consolidated reserve account. Nations would then draw proportionately on all their reserves in making international settlements. In this way the United States and Britain as well as other countries would be protected against speculative runs; but they would be limited in their power to pump dollars and sterling into world reserves through balance-of-payments deficits. They would face a fact they had been reluctant to face in the past—that others would agree to hold their currencies only if not required to do so in unlimited amounts. In return for losing their freedom to cash dollars and sterling in for gold, the European countries and other key currency holders would be freed from the “taxation-without-representation” aspect of the present system: Henceforth they would have a reasonable voice in deciding the total amount of new reserves to be created. This consolidation of reserves will be no easy matter to negotiate; the effort could well break down on such questions as relative shares in decision making and the amount of new reserves to be created. The United States may conclude that it should avoid any attempt at reserve consolidation for the time being, hold on to the power of the “printing press” a bit longer, and even opt

lxii

Introduction

for a “dollar-area” approach. This would be unfortunate. In the long run countries with strong balance-of-payments positions are more likely to contribute to reserve creation through joint cre­ ation of SDRs than through having more dollars forced upon them by unilateral U.S. action. If the United States is prepared to face up to this fact, there is at least some chance that the 1970s will witness the end of the quasi-independent role as reserve centers of Britain and the United States and the beginning of the truly multi­ lateral solution to the international liquidity problem envisaged but not achieved in the wartime planning. The Dilemma of Adjustment If the liquidity issue is not yet wholly resolved, an even larger debit entry must be made on the adjustment issue—the second central problem in the wartime negotiations. In their original form, the American and British currency plans faced the adjustment issue squarely—and provided for far-reaching international control over the economic policies of deficit and surplus countries.f7 Under the first (unpublished) draft of the White Plan, members were obliged “not to adopt any monetary banking measure promot­ ing either serious inflation or serious deflation without the con­ sent of a majority of member votes of the Fund.” The published version omitted this far-reaching (and politically unrealistic) provision, but authorized the Fund to make recom­ mendations for changes in the economic policy of countries going too far toward deficit or surplus. Moreover, recommendations could be reinforced by sanctions—the denial of the use of Fund re­ sources beyond a certain point for a deficit country, the rationing of the “scarce currency” in the case of a country in surplus. Under the Keynes plan, the Clearing Union could require a deficit country that drew more than one-half of its overdraft facilities to deposit collateral, depreciate its currency, control outward capital move­ ments, or surrender liquid reserves in reduction of its debit balance. It could recommend to that country internal economic measures needed to restore equilibrium. It could require a surplus country whose credit balance exceeded half its quota to carry out such measures as the stimulation of domestic demand, the appreciation 37 Infra, pp. 90-93.

Introduction

lxiii

of its currency, the reduction of import barriers, and the making of international development loans. With the notable exception of the “scarce-currency” clause, most of these references to international supervision of the economic policy of deficit and surplus countries were eliminated during negotiation of the Fund Articles. In part this was owing to differences between the United States and Britain on the rela­ tive emphasis to be accorded to deficit and surplus country re­ sponsibilities; it was also because of the fact that explicit qualifica­ tions of economic sovereignty would alienate congressional and parliamentary opinion. Thus the Bretton Woods compromise left a good deal of ambiguity about the responsibilities for adjust­ ment of surplus and deficit countries. It ruled out adjustment through freely fluctuating exchange rates or by controls on payments for current transactions—since exchange stability and multilateral trade were two primary Bretton Woods objectives. But it said very little about how adjustment was to be achieved. The architects at Bretton Woods apparently hoped that, with the aid of Fund resources, deficit and surplus countries could be relied on to restore a balance within a relatively short time by reasonable domestic policies and by occasional changes in exchange rates to correct a “fundamental disequilibrium.” Un­ fortunately, however, this system just hasn’t worked out. The inadequacies of the Bretton Woods adjustment mechanism were camouflaged in the early postwar years when the United States was in surplus and the rest of the world was in deficit. Nobody paid much attention to the problem of how the Fund would “police” surplus and deficit nations to assure their good behavior. In effect, the United States “policed” the economic policies of deficit countries unilaterally, using the leverage of postwar aid to encourage the adoption of internal and external policies it regarded as appropriate. It also, in a sense, “policed” itself—adopting liberal aid and trade policies appropriate to a surplus nation because it quickly recognized that if it failed to do so the rest of the world would go broke. This was not a question of American altruism, but rather of enlightened self-interest. The United States was the economic giant among nations; there was no one with whom to share responsibility; it alone had the power to save the wartime multilateral dream and assure the

lxiv

Introduction

survival of freedom in the West. The political costs of failure were unacceptable to it and, consequently, it was willing to pay the price in the Marshall Plan, other measures of postwar aid, and unrequited tariff cuts. Nobody had to invoke the principal IMF sanction envisaged for “policing” the creditor—the “scarce-currency” clause considered so important by Keynes. It was un­ available, in any case, since the Fund was inactive during the period of U.S. reconstruction aid and dollars in the Fund were not technically “scarce.” But for the reasons mentioned above it wasn’t needed. When “dollar shortage” gave way to “dollar glut” and a U.S.centered system was replaced by a more balanced distribution of economic power, the shortcomings in the Bretton Woods design became apparent. The countries of Continental Europe did not “police” themselves in the direction of creditor-country responsibil­ ity following the earlier American model. It was not that they were more “wicked” than the United States; but because none of them was big enough to be decisive, they did not assume the same responsibility the United States had done for “saving the system.” The French used growing gold reserves to support an independent economic and political role, with little heed to cooperation through the Fund. (France unwillingly had to disgorge half of its $6 billion gold stock after the May, 1968, disorders, but student rioters such as Cohn-Bendit can hardly be considered part of the permanent adjustment mechanism.) The Germans were equally reluctant to accept the Fund’s concept of creditor-country responsibility. At the end of 1968, when Germany was running a huge pay­ ments surplus, it steadfastly rejected international pressures to re­ value; the German press announced proudly that Germany was “No. 1 in Europe” and the German government declared that the major responsibility for adjustment lay elsewhere. The “keycurrency” clause was now a dead letter; nobody, least of all the United States, wanted to use exchange controls on current trans­ actions as a sanction against surplus countries. It was becoming uncomfortably clear that a system of fixed exchange rates in which gold and key currencies (supplemented by the possibility of international credits) were the main components was rather asymetrical in its pressures for adjustment. ITie deficit countries were under pressure to adjust when they ran out of reserves and

Introduction

lxv

had to go to the Fund or to the central bankers for aid; but there was no similar pressure on the creditors to reduce their surpluses. The deficiencies of the system were also evident on the deficit side, particularly where the United States and Britain were con­ cerned. To begin with, there were some difficulties in applying conventional balance-of-payments accounting concepts to the United States in its role as central banker to the world. For one thing, the statistics were often inadequate—the “errors and omis­ sions” item in the U.S. accounts occasionally reached $1 billion in a single three-month period. Then there was the statistical anomaly that, under the traditional “liquidity” definition in U.S. payments accounting, purchases by Americans of foreign securi­ ties of less than one year’s duration counted as a debit item, while purchases by foreigners of U.S. securities of less than one year’s duration counted not as a credit item but rather as part of the deficit. (In 1968 the United States managed to achieve a payments surplus for bookkeeping purposes by getting foreigners to invest in thirteen-month rather than less-than-one-year securities! ) But most basic of all there was very little agreement as to the relevance of the concept of payments equilibrium for a country such as the United States, at least in the pre-SDR period when it had to supply a large part of world liquidity needs. When dollars are the principal instrument available to increase world reserves, are U.S. deficits benign or malignant? Most people would say they were benign, at least up to the latter part of the 1950s. But what about the decade of the sixties? Given the continuing desire of the Europeans to run surpluses and the slow growth of the stock of monetary gold, how would it have been possible for the United States—at least in the first half of the decade when its record of price stability compared favorably with that of Western Europe— to have achieved equilibrium without taking measures destructive of its own and the general welfare and inconsistent with the IMF and GATT rules? Was there also some measure of truth in the view that a modest U.S. payments deficit was an appropriate reflection of the “financial intermediation” performed by the United States as cen­ tral banker to the world and the world’s most highly developed capital market? Or were those Europeans right who claimed this was but a sophisticated rationale by which the United States was

lxvi

Introduction

trying to spend beyond its means at Europe’s expense—refusing to accept the discipline it urged upon Europe when the situation was reversed? Perhaps all we can say here on this enormously difficult conceptual problem is that, while payments deficits were in the general interest in the 1940s and 1950s given the responsi­ bilities of the United States as central banker and capital supplier to the world, the deficits were too large in the 1960s to be tolerable to the European surplus countries and too dangerous in terms of the exposed U.S. liquidity position. For much of the postwar period, when the United States main­ tained relative price stability, its adjustment problem was largely a function of its newly assumed global role. The planners at Bretton Woods did not foresee the cold war, the vast needs of the lessdeveloped countries, or the growth of the multinational (typically United States) corporation. They did not foresee that the U.S. postwar balance of payments would have built into it huge and continuing debit items for foreign military spending, foreign aid, and private capital outflow substantially exceeding the large U.S. export surplus. Should this problem have been recognized by 1948? Preoccupied with the history of loan defaults after World War I—and influenced perhaps by its unhappy recent experience with the British loan—the U.S. administration decided, over congressional objections, to give half of Marshall Aid on a grant basis. This was one of those occasions where the Congress may have been right. If the Marshall Plan and other postwar aid to Europe had been put entirely on a loan basis, with repayment provisions related to the degree of European recovery, the United States might have been the beneficiary of more than $10 billion in additional principal and interest repayments during the 1950s and 1960s—over one-third its total deficit. The American adjust­ ment problem would have been reduced to more manageable pro­ portions. The United States would have been in a stronger bar­ gaining position for negotiations on monetary reform, and it would not have had to ask favors from France and other beneficiaries of its postwar largesse. Admittedly, the suggestion that the United States should have provided for full repayment (conditional upon recovery) from the beneficiaries of postwar aid may be dismissed as “20-20 hind­ sight.” The policy error that really brought the U.S. adjustment

Introduction

lxvii

problem to critical proportions, and that should have been recog­ nized at the time, occurred with the escalation of the Vietnam War. In the summer of 1965 the Johnson administration made its fateful decision to send American forces to Vietnam. Federal spending on Vietnam mounted steadily toward the level of $30 billion a year, but the administration was slow to face the economic consequences. Partly because it genuinely underestimated the cost of the war, partly because it was reluctant for domestic political reasons to admit them (e.g., Great Society programs might have been endangered), the administration did not request a tax increase until the summer of 1967. Then the Congress delayed action for another full year. The domestic economy became dangerously overheated; the U.S. trade surplus, which had been close to $7 billion in 1964, fell precipitously and almost evaporated in 1968. The payments deficit, which seemed on the way to being closed in the early 1960s, became dangerously large, and mandatory controls were placed for the first time on capital outflows. In March, 1968, came the gold rush. For the first time in history Americans traveling abroad found that banks would not accept their traveler’s checks. The dollar was at bay, and a world financial crisis threatened. Although not the deciding factor, these events must have played some part in President Johnson’s decision not to escalate further in Vietnam. The worst was avoided in 1968, but the failure of the United States to grapple more effectively with its adjustment problem has left a difficult legacy. The Nixon administration has to face the future with less elbow room than any of its predecessors—with U.S. gold reserves close to the peril point, with dollar balances close to the limit of tolerance, and without the traditionally large U.S. export surplus. The adjustment problem of the 1970s, even with a generous infusion of SDRs, threatens to be at least as painful for the United States as that of the 1960s. If the United States has been deficient in coping with its adjust­ ment problem, it is hard to find words severe enough for the United Kingdom. For much of the quarter century since Bretton Woods, Britain has been, in its own and foreign eyes, the “sick man” of the industrialized world. Its payments difficulties, under­ standable enough in the forties, persisted in the fifties, and reached catastrophic proportions in the sixties. Compared to the American

lxviii

Introduction

adjustment problem, the British one has been both different and more serious. A deficit of several billion may be troublesome for a $900 billion economy like the United States (1969 figures) —it is much more troublesome for an economy of $100 billion. It may be dangerous for a country in the exposed U.S. liquidity position—it is much more dangerous for a country with Britain’s even more precarious relation between reserves and liabilities. It may reflect adversely on a country with a normally large trade surplus overbalanced by foreign spending—it reflects much more adversely on a country with a deteriorating trade balance tending toward large deficits. For more than two decades after World War II Britain tried at one and the same time to run a world currency, to enjoy the benefits of a welfare state, and to play a great power role. These were difficult tasks to undertake simultaneously even for the United States; they were impossible for Britain, without an ex­ ceptionally productive performance by the domestic economy. Unfortunately, the British people began the postwar period with­ out a very clear understanding of this fact. The dominant emphasis of British leadership was on full employment, not on productivity. The British public was told that “one of the biggest contributions” Britain could make to world trade would be to have a “shortage of labor.” 38 Full employment was held to be “the main condition for the maintenance of satisfactory levels of living.” 39 Com­ paratively little was said about employment being productive as well as full—and even less about how the necessary productivity could be achieved. Keynes sometimes talked as if exchange rate changes by themselves could provide a satisfactory method of adjustment; the external value of sterling would thus “conform to whatever de facto internal value results from domestic policies, which themselves shall be immune from criticism___ ”40 Not only in the wartime period, but for years thereafter, the focus of politi­ cal discussion in Britain was on the responsibilities which the United States would have to undertake to restore equilibrium to Britain’s balance of payments. It would have been better for all concerned if an equal emphasis had been given to educating the 38 Infra, p. 273. 39 Infra, p. 274. 40 Infra, p. 127.

Introduction

lxix

British public on Britain’s own responsibilities for adjustment. Britain’s postwar planners would have been astonished to learn that Britain’s gravest economic crisis would come in the 1960s in the midst not of “dollar shortage” but of “dollar glut.” Britain faced a difficult task after World War II—to adjust from its former status as the center of an imperial network of markets and sources of supply to being a small island nation able to earn its way in a highly competitive world market. It never really made this adjustment. During the postwar period its share in world exports of manufactured goods fell from 24 per cent to 12 per cent. At the same time, its over-all record of economic growth was the least impressive of any major industrial country. Through­ out the 1950s, for example, Germany’s economy grew three times faster, Italy’s two times faster, France’s one and one-half times faster. The slow rate of economic growth was owing in part to the “stop-go” economic policies that British governments felt obliged to follow to protect the reserves. But the more basic reason lay in certain fundamental weaknesses in British industry and trade-unions which held productivity back—in the restrictive practices, the resistance to innovation, the lack of enterprise, the adversary mentality between worker and employer, the emphasis on security rather than growth. Both government and business put insufficient emphasis on pro­ duction for export; the competitiveness of British goods suffered in terms of price, quality, delivery dates, servicing, and promotion. Underlying all this were certain basic features of British society— the tendency to educate too small a proportion of the population for the task of running a modern industrial state, to exalt talented amateurs over professionals, to despise competition, and look down on business as an unworthy calling. The domestic failures were particularly alarming against the background of increasing external burdens. In the Anglo-American loan negotiations it was assumed that Britain’s overseas govern­ ment expenditure (mainly aid and military spending) after the postwar transition period would be $250 million a year.41 In fact, the sum grew to three times that figure in the 1950s and seven times that figure in the 1960s. The postwar planners simply did not foresee, in the case of Britain as in the case of the United 41 Infra, p. 200.

Ixx

Introduction

States, that military and foreign-aid expenditures would become such major items in the balance of payments. In 1968 the British government was finally obliged to abandon its postwar effort to play a global military role. The decision was unsettling to stability in Southeast Asia and the Persian Gulf; it came at a particularly bad time, with the United States already overextended and reluctant to fill the gap; but it did at least represent a long-overdue decision on Britain’s economic priorities. Even this drastic surgery will not be enough, absent fundamental reforms in the home economy, to close Britain’s deficit and produce a sufficient surplus to rebuild Britain’s reserves and pay off its heavy burden of foreign indebtedness. As they face the 1970s, therefore, the United States, Britain, and their trading partners are still struggling with the difficult adjustment issue they confronted at Bretton Woods a quarter of a century ago. The United States and Britain, indeed, are seeking to improve their payments positions by a total of about $5 billion a year. Which are the countries prepared to see their payments positions reduced by this amount (or even by this amount minus allocations of SDRs)? And, quite apart from the specific American and British problems, just what methods of adjustment are coun­ tries agreed to use? Are they to place primary reliance on trade and capital controls, on fluctuating exchange rates, or on the harmonization of domestic and foreign economic policies? Until greater progress is made in resolving these questions, we are likely to stumble from crisis to crisis. The first of these three alternatives—trade and exchange con­ trols—is clearly the least consistent with the Bretton Woods design. Yet there has been increasing reliance on controls over private investment, on tied lending, on quantitative restrictions, and on import surcharges. Even with new liquidity from the SDRs, the Bretton Woods goal of multilateral trade will be frustrated unless some more satisfactory means of adjustment can be found. The second method of adjustment—exchange-rate flexibility— is now receiving increasing attention. Exchange-rate changes have taken place under the “adjustable peg” system of Bretton Woods, but there is widespread agreement that they have not always taken place at the right time or in the most efficient way. For reasons of prestige national leaders tend to postpone rate changes too

Introduction

lxxi

long—and then get forced into them under massive speculative pressures. Most experts still believe that permitting exchange rates to fluctuate without any limit poses too great a risk for traders and investors and too great a danger of inflation and speculative capital flow. But these and other dangers can be reduced to ac­ ceptable limits in some intermediate system. The best approach is probably to permit exchange rates to fluctuate up to 2 per cent on either side of parity rather than the 1 per cent agreed to at Bretton Woods, and to permit the parity itself to move 1 or 2 per cent a year in response to market forces. Although some have argued that greater exchange flex­ ibility will unsettle the confidence of international traders and investors, this modest combination of “wider band” and “crawling peg” should commend itself to the financial community as a desirable substitute for the present system. After all, a substantial risk of a very small rate change may be preferable to the small (but far from negligible) possibility of a very substantial rate change that exists at present, particularly if the new system makes exchange and trade restrictions less likely and eases the adjustment problem of a troubled world economy. Of course, exchange rate changes can be no substitute in the long run (as the British experience has shown) for changes that may be otherwise required in a nation’s domestic and international economic policy. It is this third kind of adjustment that remains the one most consistent with the Bretton Woods blueprint. Experience demon­ strates, however, how hard it is to achieve. The senior treasury and economic officials of the industrialized Western countries adopted an admirable report on the Balance of Payments Adjust­ ment Process in Working Party Three of the OECD in the mid1960s, yet periodic consultations on specific adjustment problems have brought only partial results. Deficit and surplus countries have been reluctant to sacrifice domestic economic objectives to the objective of external balance; even when prepared to do so, they have not always had the policy instruments available to get sufficiently quick results. “Incomes policy” in Britain to stabilize wages and prices has been hard to implement in the face of trade-union opposition. Fis­ cal policy in the United States has encountered congressional hazards— as when the Johnson administration’s tax increase was

lxxii

Introduction

held up for a year by the opposition of the House Ways and Means Committee. A great contribution could be made to the adjustment problem if the Congress were to give the Executive Branch the power to vary income tax rates by limited amounts; yet the Congress has shown little willingness to surrender such powers. Somewhat greater progress might be hoped for in the harmonization of policies on military spending, foreign aid, and capital flows. But even here the difficulties have been great. They will continue to be great so long as countries seek to pursue inde­ pendent foreign policies and decline to risk the establishment of compromise arrangements against their will by international agencies. There are no easy answers to the adjustment problem. Cer­ tainly greater efforts are needed to give the Fund the kind of influence on the national economic policies of deficit and surplus countries that was envisaged in the original White and Keynes plans. As noted earlier, the pressure is now on the deficit country when it runs out of reserves; there is little effective pressure on the creditor. At the very least there should be more regular and systematic consultations among senior officials so that international adjustment is given greater weight in national policy making. Countries moving toward extreme surplus or deficit positions in the Fund ought to be obliged to consult with the Fund staff. At a certain point the Fund should be allowed to make specific pro­ posals for adjustment. A deficit country would have to accept these proposals to get additional assistance. A surplus country would not be permitted to drain reserves out of the system indefinitely; beyond a certain point it would have to accept proposals for policy changes or allow its exchange rate to appreciate. This recipe for adjustment, obviously, is easy to describe and very difficult to achieve. But the effort has to be made. Even with generous increases in liquidity in the form of SDRs, the wartime goal of multilateral trade now faces its greatest challenge. It will stand or fall on the success or failure with which the world resolves the balance-of-payments adjustment problem. Failure would mean further resort to trade and exchange controls and quite possibly the breaking up of the Fund membership into cur­ rency blocs separated by fluctuating exchange rates and discrimin­ atory financial and trade controls. A quarter of a century ago

Introduction

lxxiii

there were those who argued for “two international systems, a dollar bloc and a sterling bloc . . . conditions, interests and men­ tality within the two groups differ fundamentally, and for this reason any attempt to lump them together is foredoomed to failure.” 42 Substitute “gold bloc” (meaning Continental Europe) for “sterling bloc” in the above quotation and the same thing is being said today. We may come to this two-bloc alternative, but it is surely second best to making the Bretton Woods system work. A twobloc system would disrupt the efficient flow of trade and invest­ ment across the Atlantic. It would pose a difficult choice for Britain, which now belongs ideologically with the dollar bloc but politically in Europe. It would pose grave choices also for coun­ tries such as Italy and Japan which have trading links with both sides of the Atlantic. Its long-term political consequences could be devastating. Development Assistance: Still a Long Road Ahead We have dwelt at some length on the debit items under inter­ national financial cooperation. We can be somewhat shorter, if not much more reassuring, on the subject of development assistance. We noted earlier the unprecedented measures that have been undertaken to assist the less-developed countries. Nevertheless, despite all the progress of the past twenty-five years, living stand­ ards in the poor countries of the world are rising by an average of little more than 1 per cent a year. The income per capita of the average American is now close to $4,000 a year; at present rates of growth, income per capita in Asia, Africa, and Latin America will hardly reach $200 a year in this century. The first United Nations Development Decade has been widely described as a “Decade of Frustration.” If successive development decades are to avoid the same fate, the world will have to find ways to get more resources from the rich, better development policies from the poor, and better forms of multilateral cooperation. Certainly the volume of aid to less-developed countries is still wholly inadequate when measured against the fundamental purpose of assistance—the achievement of living standards in the less42 Infra, p. 96.

lxxiv

Introduction

developed countries compatible with minimum human dignity. The emphasis in the 1940s was on the reconstruction of Europe; in the 1950s it was on military assistance to contain communism; only in the 1960s did economic development of the poor countries emerge as top priority for the United States and other industrial­ ized countries. By this time the problems of the developing countries had become much more serious and public support for aid in the rich countries had begun to falter. In the late 1960s aid reached a plateau of about $10 billion—a generous estimate including medium and long-term government lending and food shipments as well as grants (but excluding private investment). Even this figure was increasingly offset by the return flow of payments on past loans; it was well below the 1 per cent target for aid as a proportion of gross national product which had been accepted as a target by the developed countries. The United States, which had been supplying about half of all assist­ ance, was moving away from the 1 per cent target; at the end of the decade the U.S. aid bill was cut to its lowest level since the pro­ gram was started some twenty years before. One wondered whether an adequate attack on world poverty could ever be based primarily on bilateral programs requiring annual appropriations. The evidence strongly suggests that the answer to this question is no. A partial solution to the problem may be in national and international measures to stimulate the flow of private capital to the less-developed countries—in bolder tax incentives and more effective guaranties against nonbusiness risks. These measures can be supplemented by special efforts to encourage joint ventures between foreign and local enterprise. Another hopeful way forward is the plan advanced in the early 1960s by David Horowitz, governor of the Central Bank of Israel, by which the World Bank would greatly enlarge its borrowings on the private capital market, greatly expand its lending on easy credit terms, and cover the interest differential with a special subsidy from the developed countries. A relatively small interest subsidy could thus have a multiplier effect in producing the kinds of “soft” loans the poor countries need—particularly if new ways can be found to let the Bank place its bonds with the big institutional investors in the rich countries such as insurance companies and pension funds. A contribution can also be made by multilateral

Introduction

lxxv

efforts to forgive or reschedule the accumulating burden of re­ payments on past bilateral lending. Perhaps most fundamental of all, there could be a linking of liquidity creation and develop­ ment lending. This may not be politically feasible until the SDR facility is well under way; but eventually it will be desirable to transfer a substantial share of SDRs to the International Develop­ ment Association for relending to developing countries. If there is an urgent need to do something about the volume of aid made available by the rich, there is also an urgent need to improve the self-help efforts of the poor. The international community has been painfully slow in understanding the develop­ ment process. When the United States first began to turn its attention to this subject, the tendency was to regard the problems of the developing countries as but an extension of the problems encountered in the reconstruction of Europe. A certain amount of technical assistance or capital investment was supposed to do the job. But the Marshall Plan analogy did not work. Disappointed by the failures of development assistance, policy makers and scholars turned to a succession of different priorities—the private sector, tax and land reform, human resources, the trade gap, agriculture, population control. All of these things are important, but by the end of the 1960s, despite a few dramatic success stories, the world had not yet found the answer. What is clear is that development means more than redistributing world income— it means internalizing the wealth-creating process within the devel­ oping countries. It is also clear that this requires a thoroughgoing political, economic, social, and cultural transformation within these countries. Of all the failures of the less-developed countries in the quarter of a century since Bretton Woods, two of the most devastating have been the neglect of agriculture and family planning. With the development of “miracle” strains in rice and wheat, with the growing use of chemical fertilizer, and with improvements in irrigation and farm machinery, the first of these omissions seems on the way to being remedied. The outlook for remedying the second is less hopeful. For the first fifteen years of the United Nations, the population problem was almost entirely ignored. Not until the mid-1960s did major aid-giving countries such as the United States begin to make assistance available for family plan-

lxxvi

Introduction

ning, and only then did major developing countries get significant programs under way. Yet even now the ratio of talk to action remains distressingly high. There is no slackening in the rate of population growth in the less-developed areas as a whole, or in critical countries such as India and Indonesia. In major countries of Latin America population is doubling every twenty to twentyfive years. As a result of past neglect, the rate of population growth in many developing countries is now so great, and its consequences are now so grave, that this is probably the last generation that can cope with the problem on the basis of individual choice. It may be the last one with a chance to stave off disaster by any method at all. Vastly greater efforts are needed to speed a break­ through in contraceptive technology so that family planning can be effective among backward rural populations—and vastly greater efforts are needed to apply new technology effectively in country-wide programs. The decisions of the World Bank and the United Nations in the late 1960s to use international resources in support of national family-planning programs were steps in the right direction. But international and national population ef­ forts will have to be carried forward on a really massive scale if even minimum development objectives are to be achieved. There are some problems in this world for which there are no solutions, and the problems of mobilizing more aid for de­ velopment and assuring more effective development policies may well be among them. If there is an answer to these two aid dilemmas, it probably lies in substantial part in the growth of more effective forms of multilateral cooperation. Just as the planners at Bretton Woods and their successors did not fully face up to the fact that the Bretton Woods objectives of multilateral trade and fixed exchange rates would require the harmonization of hitherto-independent national economic policies, so, too, they failed to recognize that the successful development of the less-developed countries would require a substantial degree of multilateral control over the aid policies of the rich and the development programs of the poor. How to devise this control in a manner that is politically acceptable is the big aid question for the future. The most hopeful approach, in all likelihood, will be through strengthened multilateral institutions to encourage and

Introduction

lxxvii

supervise a series of interrelated commitments—commitments to more aid by the rich linked to commitments to more effective development efforts by the poor. The shape of such a strengthened multilateral development program has begun to appear in the last few years. An interna­ tional commission of “wise men” under Lester Pearson has under­ taken a wide-ranging study as a launching platform for larger and more effective development efforts. United Nations bodies have begun concrete efforts in development planning—with a World Development Plan and specific targets for individual countries and different sectors. Religious and civic groups are organizing themselves into a world-wide network to put pressure on policy makers. There is no doubt that new forms of international co­ operation are emerging to strengthen those forces in the rich and the poor countries who seek a more satisfactory record of develop­ ment. The question is whether they will come soon enough—and be substantial enough—to keep pace with rising demands and expectations. Trade Policy: Back Again to the “Drawing Board” There is a long list of debits and unfinished business, too, in the area of trade policy. Despite all of GATT’s achievements, its most basic negotiating techniques and its most fundamental rules are now the subject of widespread criticism. The nations of the world are going back to the “drawing board” to reexamine the fundamentals of trade policy in the most intensive way since the GATT was negotiated a generation ago. Perhaps the major debit item to be recorded here is the failure of the United States to throw its full support behind effective international machinery in the field of trade. The unwillingness of the Congress to approve the ITO or even the more modest OTC turned out to be extremely shortsighted in terms of both American and general interests. When, in the 1960s, the United States and others needed a strong international trade agency to sponsor across-the-board tariff cuts, to cope with regional trading groups, to arrest agricultural protectionism, to eliminate barriers to the exports of the less-developed countries, and to deal with new questions like the multinational corporation, many U.S. officials

lxxviii

Introduction

had reason to regret that GATT had been left so long in an under­ nourished condition. The absence of an ITO or an OTC provided a major excuse for the creation of UNCTAD, a highly political body whose secre­ tariat, trade board, and committees were heavily weighted in favor of the less-developed countries. Instead of having the trade prob­ lems of these countries dealt with in a strong trade agency of gen­ eral jurisdiction, responsibility was now split between UNCTAD, GATT, and other bodies; jurisdictional conflicts and duplication of effort were undermining the efficiency of the system. Impa­ tient with the shortcomings of GATT, the United States was taking more and more trade problems to the industrialized countries’ forum, the OECD, thus accentuating further the weaknesses of GATT. When one recalls the wartime American dream of a global order in the field of commercial policy, it is more than a little ironic that, in contrast to U.S. participation in OECD, the United States as of this writing is still not represented in GATT at the ambassadorial level and the Congress still has not enacted any permanent authorization for contributions to the GATT secretariat. Quite apart from the institutional question, the list of unfinished business in trade policy is very long. GATT has registered its greatest successes in dismantling tariffs on industrial products. Yet even here its achievements are by no means secure. Britain and France have slipped into new restrictions to cope with payments crises. The United States, confronted with a surge of competitive imports, is succumbing to renewed pressures for protection in steel, textiles, and perhaps other industries. And—even assuming that further backsliding can be avoided—the road ahead is still long. Britain is not yet in the Common Market; the external tariffs in both the Common Market and the United States are still signifi­ cant impediments to the flow of manufactured goods on a basis of comparative advantage. Tariff protection in developed countries is still a major barrier to the light manufactures and processed products of the less developed. It is tempting to speculate whether a better record on manu­ factured goods might have been achieved by more timely American leadership. The trade negotiations launched under GATT auspices in the 1940s and 1950s were conducted on an item-by-item basis; their potential for trade expansion was limited by the “peril-point”

Introduction

lxxix

policy of the United States—the policy that no tariff cuts could be made that might cause injury to an American industry. If the United States had been able to accept the British proposal of 1943 that tariffs be reduced across the board by an agreed per­ centage,43 the industrialized countries might now be enjoying a regime of free trade or something close to it; regional groupings such as the Common Market would either not exist among the developed countries or else would pose no problem. When in the 1960s, the United States finally abandoned its “peril-point” policy and embraced an across-the-board approach to tariff bar­ gaining, it confronted a Common Market in the process of con­ solidation. The clause in President Kennedy’s Trade Expansion Act au­ thorizing the elimination of tariffs on products in which the Com­ mon Market and the United States were the principal suppliers was frustrated by De Gaulle’s veto of British entry. Even the authority for a 50 per cent cut across the board could not be fully used because of the long list of “exceptions” held out from the negotiations by the United States, the Common Market countries, and others. The Kennedy Round was a big advance over previous negotiations, but it did not break entirely with the traditional method of item-by-item bargaining. Although the jecord might have been better, it is nevertheless true that the tariffs maintained on manufactured goods by the United States and its main industrial trading partners will be down to an average of about 8 or 9 per cent after implementation of the Kennedy Round. We are thus, in a sense, within striking distance of free trade. To negotiate the rest of the way to zero we need a new approach to tariff negotiations—a free-trade treaty calling for annual percentage reductions by the developed coun­ tries in every industrial item across the board (e.g., reductions by 10 per cent a year for ten years), or at least the staged elimination of tariffs and other barriers in certain key industrial sectors. Neither alternative, of course, will be politically possible until the Kennedy Round is digested and better solutions are found to outstanding problems in the monetary field. If a quarter century of trade cooperation has registered some success, however limited, in the industrial field, it has been a serious 43 Infra, pp. 108-109.

lxxx

Introduction

disappointment in the field of agriculture. Both the American and British governments found it necessary for domestic political rea­ sons to exempt agriculture from their wartime plans for the reduc­ tion of trade barriers.44 The GATT started life with a double standard, forbidding quantitative restrictions for the protection of industry but permitting them to protect price-support programs in agriculture. However, the GATT rules did at least provide that restrictions on agricultural imports could be used only when domes­ tic production of the same product was also restricted. Unfortunately, the United States set the worst possible example in the early postwar period by deviating from this standard itself; it was obliged to seek a waiver for such deviations in the early 1950s. A decade later the Common Market, following in U.S. footsteps, embarked on a policy of large-scale protection of highcost domestic agriculture—a policy not only costly to Europe but extremely harmful to the interests of the United States, other de­ veloped agricultural producers, and many less-developed countries. By the end of the 1960s the agricultural policy of the Common Market had put it and the United States on a collision course. If there is to be real movement toward freer trade in agriculture, there will have to be some hard bargaining in GATT or elsewhere on the traditionally “domestic” question of the level of government price supports. Moreover, without some assurance for their agri­ cultural exports it will be politically difficult for the United States and other countries to undertake major new initiatives to dismantle industrial protection. Nontariff barriers constitute another problem not faced up to sufficiently either in the negotiation of GATT or in GATT-sponsored tariff bargaining. These NTBs have naturally loomed larger in importance as tariffs themselves have come down. The GATT rules place no real restraint on “Buy-American”-type policies— government procurement favoring domestic over foreign suppliers. They do not deal effectively with the problem of government sub­ sidies to domestic production. Nor do they come to grips with other nontariff barriers such as health and safety measures used with protectionist intent, or with burdensome customs formalities and valuation procedures. Perhaps most serious of all, they do not 44 Infra, pp. 107, 149-150.

Introduction

lxxxi

take account of the trade-distorting possibilities of differential tax systems. One of the major challenges to GATT was posed in the late 1960s by the U.S. demand for renegotiation of the GATT provi­ sion permitting border taxes to countries employing indirect taxes but denying these devices to countries using direct (income) taxes on business profits. In 1947, when it was running a huge trade surplus, the United States had not taken the distinction very seri­ ously. Two decades later, as the U.S. trade surplus diminished and the Common Market countries moved toward a common “tax-onvalue-added” system of indirect taxation, the United States made amendment of the GATT provisions on internal taxation and border taxes a major issue of commercial policy. The negotiation of new agreements on this and other nontariff barriers should now be a major GATT preoccupation—perhaps the major preoccupa­ tion until the time is ripe for a really big step forward in tariff reduction. As nations go back to the drawing board to reconsider tradepolicy questions, they will need to give particular attention to the use of trade measures for balance-of-payments adjustment. Quan­ titative restrictions—the most pernicious of all trade measures—are paradoxically the only trade device permitted under the GATT rules to countries in payments difficulty. This was understandable when GATT was negotiated, since QRs were the standard method of import regulation in most countries at the end of World War II. By the 1960s, however, most of the developed members of GATT had dismantled their machinery for administering QRs and did not want to restore it; Britain, France, and other countries faced with adjustment problems resorted to trade restrictions rely­ ing on the price mechanism—import surcharges or export rebates. In actual practice, GATT was exercising little or no control over trade measures adopted for balance-of-payments reasons. Although there are risks in expanding the range of trade devices that coun­ tries can legitimately employ for adjustment purposes, there is something to be said for altering the GATT rules to permit the exceptional use by deficit countries of import surcharges and ex­ port subsidies—provided such measures are subject to safeguards and international supervision. There is an even stronger case for

lxxxii

Introduction

revising GATT to recognize the special obligation of surplus countries to reduce tariffs and border taxes and to diminish rebates and other export incentives. A major issue in the negotiation of GATT was how to reconcile the principle of nondiscrimination with the promotion of regional or other special trade relationships. The GATT articles permitted exceptions to the most-favored-nation principle only for custom unions and free-trade areas, but GATT soon had to accommodate itself to regional arrangements in Europe and Latin America that did not comply fully with its carefully drawn requirements. From one point of view, GATT’s flexibility in this regard has been gratify­ ing, but from another point of view it is disturbing to find no real international consensus, either on the level of policy or on the level of trade theory, on the kinds of special associations which fairly balance the interests of participating countries and the in­ terests of those outside. GATT’s dilemma, moreover, is not soluble in purely economic terms. The United States supported European integration for po­ litical reasons, despite its adverse consequences for American trade. It is finding it harder to support the Common Market as the goal of political unification fades. It would find it still more difficult to support the Common Market, or some wider European group­ ing, if either became a vehicle for organizing Europe against the United States. This problem now poses difficult choices for the United States and Britain. If Britain should be successful in joining the Common Market, a whole network of special arrangements will have to be negotiated of an essentially discriminatory character to protect the interest of Britain’s trading partners in EFTA and the Common­ wealth. If Britain is permanently barred from membership, and if the Common Market countries take a negative approach to fur­ ther reductions of trade barriers on a multilateral basis, pressures may develop for a special arrangement stopping short of complete free trade between the United Kingdom, Canada, the old Com­ monwealth, and the United States—perhaps also embracing Japan and other countries in Europe that remain outside the Common Market. Still another possibility is a special trade agreement be­ tween Britain and its EFTA partners and the members of the

Introduction

lxxxiii

Common Market as a substitute for the immediate merging of the two groups. All of these possibilities involve discriminatory fea­ tures inconsistent with the GATT rules—and departures from historic policies followed by Britain and the United States. Another challenge to the most-favored-nation principle is now posed in relation to the less-developed countries. By the late 1960s the United States had abandoned its opposition to preferential tariff treatment by the developed countries in favor of the less de­ veloped; it was also taking a more permissive approach toward preferential tariff arrangements among the less-developed countries themselves. But neither of these new forms of discrimination had yet received official sanction in the GATT rules. The former ques­ tion, involving so-called “North-South” preferences, threatens to raise the “Imperial Preference” issue in a new form, given the quite understandable American position that preferences should be granted by all developed countries to all the less-developed countries alike, and should result in the phasing out of “reverse preferences” granted by certain less-developed countries to the United Kingdom and the Common Market countries under post­ imperial trade arrangements. Nearly everyone is now agreed that special trade treatment is justified for the less-developed countries, at least on a temporary basis. But the basic issue is still there: Is the end of policy to be a global trading community or a series of special North-South arrangements amounting to economic “spheres of influence”? Quite apart from the issue of discrimination, the whole rela­ tionship between trade liberalization and development is more than ever a subject of controversy. Just as the postwar planners paid inadequate attention to the problems of the developing coun­ tries in framing the articles of the World Bank, so they also underestimated them in the original negotiation of GATT. This failure was beginning to be made up in the 1960s, both in GATT and in UNCTAD, but there was a long way still to go. One part of the problem is to eliminate as far as possible the trade barriers applied by the developed countries against the exports of the less developed. This will require the liberalization and eventual elimina­ tion of such devices as the Long-Term Cotton Textile Agreement. It will mean ending the protection of high-cost agriculture in the

lxxxiv

Introduction

Common Market and the United States (their protection of sugar alone costs the developing countries half a billion dollars a year in lost exports). Another part of the problem is how to bring about a more ra­ tional trade policy on the part of the developing countries them­ selves. In the negotiation of GATT and in subsequent years, the less-developed countries, fascinated by the concepts of “import substitution” and “infant industry protection,” managed to free themselves from any effective international supervision of their protectionist policies. As a result, many of these countries are seriously hindering their development plans by indiscriminate pro­ tection—protection which increases domestic production costs and undermines their capacity to export competitively and earn needed foreign exchange. Having freed the less-developed countries from so many of their GATT obligations in the fifties and sixties, the international community needs to develop some new sanctions (or incentives) to move them toward more rational trade policies in the seventies and eighties. There is, finally, a set of problems not covered by GATT at all—problems associated with the so-called “multinational cor­ poration.” The architects of the ITO and GATT conceived of trade and investment in separate compartments, with investment in very much the subsidiary role. But one of the most striking developments in the world economy during the last quarter cen­ tury is the way in which international trade has become subordinate in importance to the development of international production. (A good deal of international trade, in fact, is between different parts of multinational companies.) At the end of World War II, U.S. exports and the sales by U.S. firms overseas both totaled about $15 billion; at the end of the decade of the 1960s, U.S. exports had risen to more than $30 billion, while the sales by U.S. firms overseas exceeded $150 billion. In the light of this profound structural transformation it has become clear that the achievement of the benefits of international specialization will require some ground rules not merely about goods that happen to cross borders but also about productive facilities substantially owned or controlled by foreigners. A quarter of a century after the wartime planning on postwar trade cooperation, the biggest single issue in economic relations between Europe

Introduction

lxxxv

and the United States was not any of the traditional “trade issues” dealt with in GATT but rather American private investment in Europe and the so-called “technological gap.” In his best-selling book, The American Challenge, Jean-Jacques Servan-Schreiber warned his fellow Europeans that the third economic power in the world after the United States and the Soviet Union would soon be, not European-owned industry, but American-owned enter­ prises in Europe. How these enterprises operate—and how they are treated by the host governments—is thus a matter of central concern. The ITO charter, as this history recalls,45 included provisions concerning the rights and responsibilities of foreign investors and the regulation of international restrictive business practices. At that time the differences between the United States, Europe, and the less-developed countries on these questions were so great that the final outcome pleased almost nobody and alienated nearly every­ body. When the ITO project collapsed, partly because of these provisions, the world was left with a GATT focused narrowly on traditional trade questions. Given the radical transformation in the structure of international trade, we now need to consider ways of dealing with the problems that arise when, for example, the United States seeks to enforce on foreign subsidiaries of American corporations U.S. balance-of-payments controls, U.S. concepts of competition, or U.S. regulations on trade with communist coun­ tries. There is also the question of discrimination against such firms by host governments. At the very least, GATT ought to be a forum for discussion of such problems. Better still, GATT could be amended to include some general principles in this area. Looking further ahead, we might envisage the registration and supervision of multinational corporations by an international agency. Whether government attitudes have converged sufficiently since the ITO experience to make any of these suggestions workable is one of the big ques­ tions for the future. Of course we can make the problem of the multinational corporation more manageable if these corporations become multinational in fact as well as name—with foreign par­ ticipation in ownership and management of the parent company as well as in ownership and management of the foreign subsidiary. 45 Infra, pp. 365-366.

lxxxvi

Introduction

Some Institutional Imperatives Beyond these various items of unfinished business in finance, trade, and aid, experience also suggests the need for some general institutional reforms. To begin with, there is a need to restore the International Monetary Fund to the position of primacy originally envisioned for it in dealing with the adjustment and liquidity prob­ lems. The development of the Group of Ten brought the responsible decision makers together in a useful way, and possibly was justi­ fied by the negotiating necessities of the early 1960s. With the completion of the SDR negotiation, however, it is time for the Group of Ten to be “brought back into the Fund.” More pre­ cisely, it would be well to create a “Group of 21”—the twenty countries with representatives on the Fund’s executive board plus Switzerland—which could meet at the ministerial level every three months or so, alternately at Washington and at the Fund’s head­ quarters in Paris (and perhaps, occasionally, at other places). The “Group of 21” would fill a serious policy-making gap that has plagued the Fund throughout its existence. The executive board meets frequently but at too low a level, whereas the effective policy makers meet at the Fund only for a few days a year at the annual meetings. With a “Group of 21,” the Fund would have a means of influencing national policies it has hitherto lacked, and the Fund staff would provide a continuity in decision making unavailable in an institution lacking a secretariat such as the Group of Ten. From the point of view of the United States and Britain, more­ over, the presence of the major less-developed countries in a “Group of 21” would make that a better balanced forum than the more surplus-country oriented Group of Ten. And from the viewpoint of the general interest, it is only right that the less-de­ veloped countries and others excluded from the Group of Ten should participate in decision making on liquidity and adjustment issues in which they have an important stake. There is no reason, for example, why countries such as India or Brazil should be ex­ cluded from participation in a forum that may decisively influence the amounts of SDRs to be created or the adjustment policies of countries which are significant markets for their products and major suppliers of foreign aid.

Introduction

lxxxvii

A second major institutional need is for the more effective co­ ordination of effort in the financial, trade, and aid fields. The three areas are intimately related, yet decisions have often been taken in one area without adequate attention to the other two. GATT and IMF, for example, need to work jointly, not separately, in dealing with adjustment problems. GATT, the Bretton Woods institutions, and the rest of the U.N. family need an integrated approach in aid to developing countries. The international community is now burdened with a proliferat­ ing conference schedule and a bewildering variety of secretariats each dealing with single pieces of a large problem. Everybody talks of coordination, but everybody is trying to coordinate every­ body else. No central intergovernmental group or secretariat fixes priorities or works out a division of labor for the system as a whole. If the problem at Bretton Woods was to create new institutions where virtually none existed before, the problem now is to get several dozen global and regional agencies to work together ef­ fectively. Although the political obstacles are formidable, we should aim eventually at a fundamental reform of the U.N. system, with a cen­ tral committee of governments and a central Director-General for Economic Affairs giving over-all direction to the headquarters in­ stitutions, the semi-autonomous bodies like UNCTAD, and the specialized agencies. To what extent the Bank and Fund should be permitted to retain an autonomous position in such a reorgan­ ization in view of their unique position as financial agencies is a question that will require careful consideration. A third institutional issue is raised by the growing polarization between rich and poor and the growing tendency toward bloc negotiation and voting. The problem was dramatized at the 1964 UNCTAD conference, the first major conference in which the di­ vision was North-South rather than East-West. It was then that the poor countries really began to use their automatic majority in an attempt to enforce economic demands on the rich. When, on behalf of the United States, the author of this volume urged a conciliation formula to discourage the voting of disagreed reso­ lutions, a spokesman for the poor countries replied: “Those in possession must be relieved of their possessions. There are only two ways to do this—by force or by votes. We do not have the

lxxxviii

Introduction

force, but we do have the votes. And you are trying to take away our votes!” This approach to the problem threatens to be counterproductive. While voting in international forums has occasionally been a con­ structive influence on national policies, the indiscriminate use of the voting machine by the poor countries is more likely to harden the heart of the rich than produce new concessions. Public opinion in the developed countries is becoming increasingly resentful of the one-nation, one-vote system, with its vast disparity between voting power and real power. The Bretton Woods founders were wise in establishing the Bank and Fund on a weighted voting basis, with votes roughly propor­ tional to contributions. Unfortunately, resolutions passed on a one-nation, one-vote basis in the General Assembly and in other U.N. organs of general competence can be addressed to the Bank and Fund, and this threatens to be a serious source of friction between the U.N. and the Bretton Woods twins. Hopefully the poor countries will recognize their long-term interest in seeking solutions through negotiation rather than legislation. In return, the developed countries will have to be more forthcoming on trade and aid matters than they have hitherto been. Sweet reasonable­ ness is not likely to break out in an atmosphere of frustration. There is one final question to be considered in this overview of institutional effectiveness. The postwar institutions for monetary, aid, and trade cooperation were launched without the participa­ tion of the Soviet Union—and without most of the other countries of Eastern Europe. This was the result of decisions by the Soviet Union itself, although it must be admitted that the planning of these institutions did not make very many concessions to the spe­ cial problems of communist participation. For much of the inter­ vening twenty-five-year period, the participation of the communist countries was ruled out by political considerations. But since the early 1960s an emerging detente between the United States and the Soviet Union and between Eastern and Western Europe has been reviving the universalist dreams which animated the war­ time planning. Moreover, economic changes are taking place within the countries of Eastern Europe—changes away from or­ thodox principles of centralized planning and toward increased

Introduction

lxxxix

autonomy for productive enterprises with greater reliance on mar­ ket forces. On both sides of what used to be called the Iron Curtain there has been a growing interest, not only in traditional- forms of trade, but in industrial cooperation and coproduction agreements—the most dramatic example being the agreement of FIAT to build an automobile factory in the Soviet Union capable of producing half a million automobiles a year. There has also been increasing interest in multilateralizing the external payments of Eastern European countries, in providing credits to some of these countries, and in involving them in joint programs of assistance to the less-developed world. The Soviet invasion of Czechoslovakia interrupted these hope­ ful developments. Is this interruption to be permanent—or tem­ porary? In the light of the Czech experience, it may be that universalism can no longer be advanced by piecemeal negotiations with individual Eastern European countries. Perhaps the principal focus will have to be on the Soviet Union itself. Full Soviet mem­ bership in the Bank, the Fund, and the GATT is not practical in the immediate future, but the Soviet Union could be invited to join Bank consortia (such as the one for India) and meet with GATT and Fund members on special trade and monetary prob­ lems. Surely it would be in the general interest if, without com­ promising their effectiveness, the institutions for international eco­ nomic collaboration could find ways of realizing the universal participation envisaged during the wartime planning. Two Countries in Search of a Role To complete this inventory of entries on the debit side of the ledger, what should be said of Anglo-American relations after twenty-five years of sterling-dollar diplomacy? These relations are certainly now conducted, as we suggested earlier, in an enormously improved psychological atmosphere; moreover, there are no longer any major economic issues dividing the two countries. But har­ monious Anglo-American collaboration in pursuit of a liberal world economy cannot be taken for granted. Moreover, the very concept of a “special relationship” between Britain and the United

xc

Introduction

States is one of declining vitality in both the economic and the political sphere. The problem is not so much that certain differences have emerged over the years in British and American attitudes on ques­ tions such as Suez and Vietnam. A deeper element of fundamental strain is the dramatic increase in the power of the United States and the dramatic decline of Britain. The wartime dreams of postwar collaboration had assumed an intimate relationship, if not between equals, then at least between two powers that were unique in the West in their ability to play a global role. American support for Britain was motivated in part by the idea that Britain could make a major world contribution in the pursuit of common economic and political objectives. By the late 1960s this assumption had been badly shaken. The United States now looms larger than ever on the British horizon, but Britain is smaller than ever on the American. The concept of two major powers working in harmony toward global objectives has been undermined by a succession of events. Despite repeated American efforts, Britain has begun to abandon its last military positions outside the European area. De­ spite billions of dollars of American aid, sterling was devalued a second time, putting further pressure on the American dollar. American patience is beginning to wear thin. Probably the United States will continue to help Britain; but where the reasons used to be the additional strength that Britain could bring in support of American objectives, the reasons are now the additional burdens which a further weakening of the British position would place on the United States. This condition of acute dependence of Britain on America—this widening power gap between the two countries— is not a healthy one for the Anglo-American relationship. It is hardly the outcome the postwar planners dreamed of twenty-five years before. Indeed, the attitude of official Washington toward Britain in the late 1960s has become colored with a certain amount of disap­ pointment—if not actual irritation. As one American official put it: “Look, we love you—for Shakespeare and the Queen and all that. But when it comes to handling world problems, the British are out to lunch.” The British journalist who reported this com­ ment added:

Introduction

xci

There is no mistaking the change in the nature of the Alliance. In so far as it implied a military-political carryover of the V-signs-on-theWhite-House-lawn intimacy of W orld W ar II, the special relationship has been m oribund since Suez and dead since Mr. Wilson dissociated British from U.S. bombing in Hanoi. N or can it be revived. Like Remem brance Day parades, the old wartime links, forged out of mutual need, and conjoining what once were near-equals, are out of date and out of touch with the realities of an economically stagnant ex-empire steadily abandoning its world role in favor of links with Europe, and the requirements of the world’s only real super power, overflowing with new commitments to Asia and South America.46

The central problem of sterling-dollar diplomacy after twentyfive years is no longer the old divergence on domestic and inter­ national economic policy described in this book; it is, rather, the acute difficulty both the United States and Britain are having adjusting to radically altered positions of power. On the one side, the question is just what Britain should become once it is recog­ nized that World War II and its aftermath have destroyed the foundations of British power. As Dean Acheson put it with more truth than tact: G reat Britain has lost an empire and has not yet found a role. The attem pt to play a separate power role— that is, a role apart from Europe, a role based on a “special relationship” with the United States, a role based on being the head of a “commonwealth” which has no political structure, or unity, or strength, and enjoys a fragile and precarious economic relationship by means of the sterling area and preferences in the British market— this role is about played out.47

After the second devaluation of sterling there was a tendency, hopefully transitory, to ask whether Britain could any longer play any significant role in the world. As The Economist put it: Britain now seems bemused, lethargic, patently unsure of itself and what used to be its interests. This may be the inevitable consequence of prolonged economic failure. It is probable that the failure is more one of mental energy than of economic resources.. . . We are getting uncom fortably close to ending up as an Iceland with 55 million people.48 46 Eldon Griffiths, “Collapse of U. S. Respect for Britain,” The Times (Lon­ don), April 13, 1967. 47 Quoted in George W. Ball, The Discipline of Power (Boston, 1968), p. 69. 48 The Economist, December 16, 1967. »

XC11

Introduction

These were harsh words but probably not unjustified. Even a sympathetic visitor to England in the late 1960s could not help but be struck by the “eat, drink, and be merry” philosophy preva­ lent in “swinging London”—and by the cynical response to the all-too-familiar official appeals for greater sacrifice and hard work. Perhaps beneath appearances there is still the famous capacity of the British people to rally in adversity. But is the necessary spirit, determination, and self-confidence really still there? Assuming that the British people do not want to wind up as another Iceland, their best possibility seems to lie in Europe— in membership in the Common Market. If this option is permanently foreclosed by General De Gaulle and his successors, perhaps a viable alternative can be found in a North Atlantic Free Trade area fashioned in partnership with Canada and the United States. It is far from clear, however, given domestic political developments, that the United States will be prepared to make a commitment to free trade in the early 1970s. It is even more unlikely that the United States will go this far without the quid pro quo of European participation. Yet if participation in both a Common Market and a North Atlantic Free Trade area is denied to Britain, what other alternative is there to an “Iceland” solution? Britain was not the only nation suffering from an identity crisis at the end of the 1960s. “Britain had lost an empire but not yet found a role,” but the American problem is even more serious. To paraphrase Acheson, the United States had “inherited an em­ pire but not yet found a role.” Mired in Vietnam, beset with vast responsibilities around the world with no major ally to share them with, preoccupied at home by racial strife and the increasing alienation of youth from the economic and political system, the United States is in its deepest crisis since the Civil War. The de­ parture of the Johnson Administration signaled the end of a post­ war era in which the United States had steadily enlarged its global responsibilities. The mood was a far cry from the idealism and self-confidence of the Kennedy inaugural: “Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and success of liberty.” If one could only make all the problems go away, like the Lord Chancellor in Iolanthe, with a

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xciii

simple stroke of the pen: “Every fairy shall die who don’t marry a mortal.” But it is doubtful whether America’s future—or the world’s—can be assured simply by saying “we shall not pay any price, not bear any burden, not support any friend, not oppose any foe, to assure the survival and success of liberty.” Without clearly calculating the cost, the United States has built hundreds of military bases around the world and assumed treaty commitments to aid 43 countries against aggression. A full reex­ amination of these and other overseas commitments is certainly in order. But there is a danger that a frustrated and embittered American people will jettison with excessive haste in the 1970s too many of the responsibilities they assumed in the forties, fifties, and sixties. There is a further danger that liberal U.S. policies in trade, aid, and finance may be victims of the growing pressure for disengagement. This is surely no time, either in the economic or the political field, for the United States to retreat to a corner to lick its wounds and ponder the ingratitude of a world that questioned its good intentions. Sterling-Dollar Diplomacy: Has It a Future? From a twenty-five-year perspective, the wonder is not that the postwar planners made mistakes or that they were perplexed by the dilemmas of Economism, Universalism, and Legalism, but that they created a set of arrangements that should remain so essen­ tially relevant to our problems today. The founders of the Bretton Woods institutions and GATT obviously could not erect struc­ tures to endure unchanged for all time. They could not have foreseen cold war and tentative detente, the new threats to the international monetary system, the magnitude of the needs of the less-developed countries, the current dilemmas of Britain and the United States. But they gave us a framework to deal with these problems—a framework whose vitality and capacity for growth provides both a measure of their historic contribution and an op­ portunity for our generation if we have the imagination to make use of it. How will we use this great institutional heritage? In economics, as in other human affairs, one rarely stands still. Either the world will continue to move forward toward the objectives charted in

XC1V

Introduction

the sterling-dollar diplomacy of twenty-five years ago, or it will move backward toward the destructive economic policies which this diplomacy sought to avoid. Thus the big question is whether the historian who looks at this history twenty-five years from now —which will be close to the year 2000—will see the twenty-five years since Bretton Woods as part of a historic march toward free trade and economic integration, or as but a brief interlude between eras of trade restriction and economic nationalism. As we write these words the outlook is uncertain. Economic nationalism is again on the march. The United States, Britain, and the other trading nations are increasingly preoccupied with domes­ tic problems. In the 1930s, when the problems were depression and mass unemployment, this preoccupation proved fatal to eco­ nomic cooperation. In the 1970s, when the preoccupation is racial strife, social unrest, and the alienation of youth, what will be the outcome? How will liberal economic and political principles sur­ vive these new challenges? Can domestic objectives be achieved if the international ones are neglected? Can the United States and Britain afford not to continue their quarter-century movement to more liberal policies in trade, finance, and aid? If they abandon this historic movement, who will be left to lead—and what will remain of the great dream of a liberal world economy conceived during the last war? And—perhaps the most ominous question of all—even if they do try to lead, will anyone follow? Is some variety of statism, rather than a system based on individual initia­ tive and market forces, the wave of the future? If so, is the grand wartime design for a liberal international economy ultimately destined for the dustbin of history? We do not know the answer to these questions. We can only hope that future historians will judge that today’s generation has demonstrated the same commitment to economic internationalism and the same qualities of courage and imagination as the pro­ tagonists of sterling-dollar diplomacy whose story is told in this book. We can wish, too, that these same future historians will take a generous view of our negotiators’ prose—and their poetry as well. Perhaps, twenty-five years from now, someone will dis­ cover the following composition penned by an uncrowned poet laureate at the recent SDR negotiations and will smile at his verses

Introduction

xcv

indulgently as we did at the ditty from the sterling-dollar To opt, or not to opt: That is the question: W hether *tis subtler to fill one’s coffer With sins and errors of outrageous debtors, O r to hold gold, against a sea of troubles, A nd by opting out to end them? Or try perhaps The SDR; and, by that asset, say we end The haemorrhage that drains our gold pool’s stock, O ur flesh indeed. T is a consummation Devoutly to be wish’d. To try the SDR; To hold; perchance to draw: aye, there’s the rub; F or from that asset new what dreams may come When we have shuffled it among the Ten, To quench their thirst. . . . Liquidity makes cowards of us all; And the creative Rio Resolution Is sicklied o’er with the pale cast of doubts, A nd currencies of great myth and moment, So battered by the currents, turn awry And lose their role of action. Join you now The fair new scheme! In its Articles of faith Are all our [sins] [dreams] recorded.

FOREWORD TO T H E FI RS T E D I T IO N T his is a stimulating book on an important subject. The idea for it

was conceived when Richard Gardner, then an American Rhodes Scholar at Oxford, came to me in search of an appropriate subject for doctoral research in his chosen field of international economics. Together we cast about for a topic which would fit Mr. Gardner’s interests and skills. He was a lawyer primarily, already a member of the New York Bar, who had acquired a good grounding in economics. He was also an American in England, greatly interested in problems of Anglo-American relations. After some time we hit upon the idea that he should make a systematic examination of the interaction be­ tween public opinion in the two countries, on the one hand, and the course of their economic relations, on the other. This seemed a new field to explore. In the event, Mr. Gardner’s work led him to an exhaustive study of the joint planning and drafting of certain vital institutions—the Bretton Woods organizations, the Anglo-American Loan Agreement, the International Trade Organization, and the General Agreement on Tariffs and Trade—and the fate of these insti­ tutions in the early post-war period. Thus this book comprises an authoritative review of an important piece of history, as well as a significant analysis of the interrelation between policy and opinion in international economic affairs. The story so well told here seemed to me badly to need telling. I had in mind my own experience. I had taken an active part in the discussions of the drafts of the late Lord Keynes's Clearing Union and other documents relating to post-war plans, and subsequently I had watched the course of events from the periphery, but with inside knowledge. There had been a considerable momentum of enthusiasm for these plans at the centre. The British were struck by the adaptability of the Americans, and their readiness to look at many problems from points of view not their own and to modify their plans accordingly. It really seemed to me, and I think to many others concerned, that, despite serious differences, sufficient common ground of philosophy and policy and purpose had been achieved to make a great new era of economic co-operation possible after the war. One watched hopefully for big developments of worldwide significance.

xcviii

Foreword

Yet when I had slipped out of official employment as soon as the war was over, all seemed quite changed. These great purposes appeared to be lost to view. What had happened? Was it that the new Labour Government took no interest in these vital questions? Yet its more important members had been in Mr. Churchill’s coalition. Surely they had not overnight lost faith or their appreciation of the vital importance, even from a narrow British point of view, of economic co-operation with the Americans. Pro­ bably matters were still being pushed forward behind the scenes in ways of which, as an outsider, one knew nothing. But even more striking was the state of public opinion. I found even in well-informed circles the most dense ignorance about the purport of the plans, and, so it seemed, complete indifference about them. During the war much had naturally been secret, but now the plans, touching as they did Britain’s most vital interests and her capacity for solvency, should be in the forefront of men's minds. But when I talked of these matters, I found superciliousness and incredulity. It was as though I was a traveller from distant lands telling tales that were frankly not believed. Keynes was exceedingly worried about this ; he referred to the attitude of mind of the British public as one of ‘invincible ignorance’ ; the expression seemed entirely just. Evidently the British authorities, preoccupied as they had naturally been with fighting the war, had not done a good job of education. And what of the American side? We in Britain had some mis­ givings about the abrupt way in which Lend-Lease was terminated and about American attitudes at the Inaugural Meeting of the Fund and Bank. Had there been since Roosevelt’s death a subtle shift in the balance of power as between different personalities which meant that the Americans had lost their adaptability and co­ operative spirit? I could not know about these things. And then, what of American public opinion? Was there over there that same great gulf between inside opinion and outside opinion that was manifested in Britain? This study contributes much to our understanding of these things. It confirms my view that on the English side too little effort was made to educate the public about what was afoot. This may have been due to the distractions of war; our civilian population was receiving VI and V2 projectiles almost until the end. It may have been due to the reticence that is natural to the English, and to an unnecessary enlargement of the scope of what should be regarded as

Foreword

XC1X

secret. Whatever the reason, however, there can be little doubt, in the light of Mr. Gardner’s study, that this failure of education had a most serious effect. The study also reveals certain points about the American attitude which I did not fully appreciate before. On that side there was plenty of publication, propaganda, education. The fault was that the hopes raised were too high. Not enough effort was made to explain the points of view and the problems of the British, and, indeed, of the other nations whose co-operation would be required. There was also the point of view that the United States should take a tactical advan­ tage of the position created by Lend-Lease to wrench the British away from the policies to which they were otherwise addicted—in fine, to defeat British Imperialism. That is an approach quite different from that of collaboration. Instead of finding some common ground in which both partners believed—and there was really much com­ mon ground present—one tried to coerce one’s partner into doing something that he really did not want to do. This book shows us how much we have suffered from this mistake. All these things Mr. Gardner writes about with scholarship, good judgement, and a commendable objectivity. His position as an American writing an Oxford dissertation on such controversial matters was not an easy one. Yet he has managed to avoid special pleading on behalf of his own country or of his British hosts. More­ over, he has brought to his task that rare gift—a fine command of English prose style. This book casts fresh light on recent events. As one who has been close to certain of them, I have been quite startled at some of Mr. Gardner’s revelations. Yet it would be a pity if these revelations alone were the main matter that drew attention to the book. Its principal value, it seems to me, is as a study in the diplomatic relations between two democracies. By analysing some major difficulties in these relations it provides important lessons for the future. It is for this reason that Mr. Gardner’s work should be read and pondered by everyone vitally concerned with the conduct of public affairs. Mr. Gardner’s story has an unhappy ending, but he carries it only to 1947. Since then matters have in some respects taken on a more cheerful aspect. Mr. Gardner finds that by 1947 the aim of multi­ lateralism, which at the outset was common ground between the two countries, had been completely frustrated. In 1947 one might wonder whether the obstacles to its achievement were mainly

c

Foreword

transitional difficulties connected with the immediate aftermath of war, or whether the whole shape of things in the world today was inconsistent with the aim. The subsequent course of events should incline us to the former and more cheerful point of view. We have recently been making considerable progress towards the objective of multilateralism. But of course new troubles may blow up. And therein lies the importance of this work. New troubles will call for new adjustments and new agreements. When nations have, as they will inevitably continue to have, somewhat different vital interests and different points of view, there is always difficulty in reaching agreements, and the intentions of the agreements may be somewhat differently interpreted by the parties to them. If it were not for this little bit of latitude, it would be even more difficult to reach agreements than it has so often proved to be. What is vitally important is that democratic leaders should regard it as their bounden duty to explain to their peoples what, to the best of their knowledge, the points of view and intentions and vital interests of the other partners are. Each nation must learn that the other nations naturally have different interests and points of view. The explanation of the other point of view should be done fairly and without malice, but must not understate the difference—otherwise the agreement will lead to frustration and mutual loss of confidence between the partners. We have not only to think of co-operation between what we regard as members of the free world. We still cherish the hope, if we are optimistic, and it is right to be optimistic, that in due course and at long last there may be agreements on certain topics bringing the now divided world closer together. Then these problems will become very acute indeed. It will be absolutely incumbent upon responsible leaders to explain not only what they have in mind in appending their signatures to agreements, but also what, to the best of their understanding, the other parties to the agreements have in mind. If there can have been such grave and utter misunderstanding of the other point of view as between the two partners, the United States and Britain, locked in a close alliance during the war, what mis­ understandings may there be in relation to agreements between the free democracies and the Communist powers! It is not only a ques­ tion of the actual content of the commitments expressed by certain language in a given agreement, but of all the motives and intentions which govern the willingness of each party to sign such an agreement.

Foreword

ci

It is incumbent upon the leaders in each country to obtain a thorough understanding of what these are, and to explain them to their peoples in unvarnished terms. Much about the nature and scope of this problem may be learned by a careful study of Mr. Gardner's book. This is a matter of no little moment; indeed it is a matter of paramount and over-riding concern for us all. R. F. HARROD Christ Church , O xford January 1956

PREFACE TO T H E FI RS T E D I T IO N T his , like most books, was inspired by a personal experience of the author. I was an American student in England some six years after the end of the Second World War. It was not a smooth period in Anglo-American relations. There was a good deal of uneasiness in Britain about American economic policies. There were even misgiv­ ings about the great effort of Anglo-American collaboration which had created the Bretton Woods organizations, the Anglo-American Financial Agreement, the Charter of the International Trade Organi­ zation, and the General Agreement on Tariffs and Trade. Hitherto I had rather taken for granted the soundness of this effort. But the intensity of the criticism impelled me to undertake a systematic study of the historical record. That study has now, some five years later, resulted in the present volume. This introductory explanation may serve to warn the reader of what this book is and what it is not. It is not a book of economic theory in which one can find an original discussion of the principles of international trade. Still less is it a statistical analysis of the post­ war pattern of international trade and payments. It is rather a book about the making of international economic policy and the shaping of institutions to implement that policy. It places special emphasis on the interaction between official policy and public opinion—particu­ larly, on the difficult problem of explaining complex economic poli­ cies to a democratic electorate. Thus it is a hybrid work on the border­ line of history, international relations, political science, and even international law. Perhaps it can best be described as ‘a study in international economic diplomacy’. For some time I have wanted to undertake such a study. Here is a field which has been somewhat neglected, partly, I suspect, because of our rather accidental classification of academic disciplines. Economists have only rarely attempted the writing of history; when doing so they have usually confined themselves to the history of ‘pure’ economic phenomena and avoided consideration of the politi­ cal forces at work. Professional historians, for similar reasons of specialization, have been reluctant to analyse economic policies and events. Specialists in international relations and international law have also tended to neglect these subjects in their analysis

c iv

Preface

of international institutions. Thus few studies have been undertaken in a fascinating and important field. The present work represents one attempt to change this state of affairs. It is concerned with a sequence of historical events beginning with the drafting of the Atlantic Charter and ending finally with the decision of the United States Government to abandon the Inter­ national Trade Organization. In the history of Anglo-American economic collaboration the period bounded by these two events forms something of an era. It was an era during which the United Nations embarked under Anglo-American leadership on the most ambitious programme of intergovernmental co-operation ever under­ taken in the economic field. The aim of this programme was the reconstruction of ‘multilateralism’—a system of international trade conducted along reasonably free and non-discriminatory lines. The present work is a history of the multilateral goal and of the early life of the institutions which were to make it a reality—the International Monetary Fund and the International Bank for Re­ construction and Development; the Anglo-American Financial Agreement; the International Trade Organization; and the General Agreement on Tariffs and Trade. It seeks to answer three main ques­ tions: What exactly was the multilateral objective? What institu­ tional devices were chosen to achieve it? Were the institutions well designed to promote the end in view? Yet it would be misleading to present this work as a comprehensive account of the international economic institutions created after the Second World War. It is primarily a history of Anglo-American collaboration. Writing it has reinforced my belief in the critical im­ portance of this collaboration for the prosperity and security of the free world. While Anglo-American collaboration by itself is hardly a sufficient condition for the achievement of these objectives, it cer­ tainly is a necessary one. Britain and the United States, the world’s two largest trading nations and the centres of the world’s two major currency areas, must strike a harmony in their economic policies if a workable international order is to be achieved. I chose to write this history mainly as a history of Anglo-American collaboration, not because I thought it would tell the complete story, but simply because I thought it would tell a coherent and important part of the story without which nothing else could be adequately understood. I am bound to say in all honesty that on important aspects of this history others are better qualified than myself. I was not a participant

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in the Anglo-American negotiations and never knew Keynes, White, Vinson, or Morgenthau except as names in a newspaper headline. Yet there were several compelling reasons which emboldened me to the present effort. Although participants in the actual events still survived, most of them were prevented either by law or moral scruple from telling the full story themselves. If many were more familiar than I with certain aspects of the story, there were few, if any, who were well acquainted with all of it. Moreover, those who had been personally involved might find it difficult to tell the story without giving expression to individual or national prejudices. Finally— perhaps the most compelling point of all—nobody had in fact de­ cided to make the attempt. Serious difficulties were involved in writing this history of policy and opinion. With respect to policy, there was the problem of writing about controversial matters so closely after the event. Much official documentation had been published—the international agreements themselves, copious preparatory materials, and official statements of national positions. But much was also still unpublished. Except for newspaper accounts and one or two isolated memoirs, the public had not been given details of the planning within the two govern­ ments or of the negotiations between them which produced the final results. This gap I was able to fill in part through the kindness of several persons who took an interest in my study. Professor Jacob Viner of Princeton, to whose writings I was already much in debt, granted me permission to use the collected papers of Harry Dexter White which Mrs. White had given to the Firestone Library after her husband’s death. Professor Ross Pritchard of Tufts College was no less generous in making available some of the official papers of Will Clayton, about whom he was writing a study. These two major sources yielded official memoranda prepared within both Governments, records of meetings within the American Government, communications be­ tween the leading negotiators, and other equally valuable documents. With these as a beginning, with the help of certain other unpublished materials, and with the help of intensive interviews with actual parti­ cipants in the events, I set about fitting together the pieces of the historical picture. With respect to opinion as well as policy, the writing of this history presented problems. Here the difficulty was not a lack of materials, but a plethora. The events in which I was interested had stimulated

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Preface

a vast amount of discussion in daily newspapers, popular and scho­ larly periodicals, books, and other published materials. I struck a particularly valuable mine of information in the newspaper clipping files of the Royal Institute of International Affairs, placed at my disposal by Miss Lois Simpson of that organization. This enabled me to make a systematic study of comment in leading newspapers published on both sides of the Atlantic. But that was only the begin­ ning of the problem. From the mass of material it was necessary to distill the most significant expressions of opinion and to trace their development in time. Unfortunately, we have not yet devised wholly effective methods for such analysis. Consequently I had to write my history of opinion in a selective and almost impressionistic fashion, paraphrasing and quoting from those sources which seemed to me most important. In writing this book I have been acutely conscious of the disability of all historians—that of maintaining a proper proportion between the facts as we know them to be today and the facts as they must have seemed to the actors at the time. ‘History’, as one historian has noted, ‘is lived forward but is written in retrospect. We know the end before we consider the beginning and we can never wholly recapture what it was to know the beginning only.’ I have sought to recapture the spirit of the years of which I have written and to judge the parti­ cipants only in the light of what they actually knew or could have known at the time. I must make one final point. This book discusses issues which have aroused considerable controversy. Some of them are still with us today. I have not been completely ‘objective’ in discussing them, if that word should be interpreted to mean the lack of a point of view on the desirability of multilateralism and on the means by which it can be achieved. I have aspired to ‘objectivity’ only in the sense of presenting national viewpoints as fully and fairly as possible and avoiding partisan pleading on behalf of my own country or of the country in which the study began. In short, the point of view of this work is designed to be neither ‘pro-American’ nor ‘pro-British’, but rather ‘mid-Atlantic’. Most books are based on an exchange of ideas, advice, and en­ couragement. In this one the exchange has been very much in my favour. I owe a particularly large debt to the following persons on both sides of the Atlantic: Professor John H. Williams, who first stimulated my interest in

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international economic relations when I was an undergraduate at Harvard. Dean Eugene Rostow, Professor Myres McDougal, and Professor Harold D. Lasswell of the Yale Law School, who encouraged me to combine the study of international law with the study of inter­ national economics, and to pursue that combination at Oxford. The Rhodes Scholarship Trust, whose benefaction enabled me to carry out this plan. Roy Harrod, my Oxford superviser, whose Life o f John Maynard Keynes inspired this book and whose wise and generous counsel guided it to completion. Sir Donald MacDougall, who served as superviser during two terms of Mr. Harrod’s absence, despite heavy commitments in Government service. E. T. Williams, Warden of Rhodes House, and Professor Arthur Goodhart, Master of University College, who sustained me with helpful advice and encouragement throughout my Oxford career. Dean Erwin Griswold and Associate Dean David Cavers of the Harvard Law School, who granted me a Teaching Fellowship in International Legal Studies during the academic year 1953-54, thus enabling me to complete my Oxford dissertation. Mrs. S. G. Gurney, of Bayworth Corner, Boars Hill, Oxford, who gave me hospitality and moral support in the final stage of that effort. Professor James Meade and Professor Agnes Headlam-Morley, my Oxford Examiners, who provided helpful suggestions for revising the Doctor of Philosophy dissertation into its present form. Edward Bernstein of the International Monetary Fund and Richard Ford of G.A.T.T., who gave me much material on the history of those institutions. Certain authorities who took special pains to read and advise on my preliminary drafts—Sir Frank Lee, Charles Kindleberger, Judd Polk, Bill Diebold, Emilio Collado, Harry Hawkins, John Leddy, George Bronz, and Winthrop Brown. Mrs. Elizabeth Valkenier of the Council on Foreign Relations, who helped me in a final check of citations. Mrs. Peter Steer, in Drayton St. Leonard, Oxford, and Mrs. Marcelle Jordan, in New York, who typed the manuscripts of the dissertation and book. Coudert Brothers, and especially Alexis Coudert, whose kindness and generosity helped me through the final revision.

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Last, but not least, the countless persons on both sides of the Atlantic in universities, journalism, and public life, who generously contributed ideas to the author. A complete listing of their names would be impractical and would, in some cases, violate express wishes for anonymity. RICHARD N. GARDNER New York C ity , N .Y . February 1956

PART I

THE OBJECTIVE OF MULTILATERALISM

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CHAPTER I

THE AMERICAN CHALLENGE ‘L e t there be no mistake about it. The policy put forward by the American Administration is revolutionary. It is a genuinely new conception of world order. It is an inspiring attempt to restate democracy in terms of the twentieth century situation, and to extend its meaning in the economic and social sphere.’ With these words The Economist in the midst of the Second World War described the ‘challenge’ in foreign economic policy presented by the words and actions of public figures on the other side of the Atlantic.1What inspired this enthusiastic British account of American post-war planning? Was it an accurate appraisal of the forces emerging to shape the foreign economic policy of the United States?

A N U N P R O M IS IN G L E G A C Y

Certainly there was very little in the history of tte pre-war period to justify such an optimistic account of the role the United States was prepared to play in post-war economic affairs. The dominant tradition in this aspect of American policy had been a compound of economic isolation and economic nationalism. Before the mid-1930's the United States paid little attention to international economic problems; on the occasions when it was forced to do so it played a lone hand without much regard for the interests of other countries. The major features of this tradition are well known—the adoption of higher and higher protective tariffs; the insistence on repayment of the First World War debts; and the subordination of international to domestic recovery measures which disrupted the London Economic Conference of 1933. Four factors may be cited as of particular importance in explaining this unpromising historical legacy. The first, plainly enough, was the tradition of American political isolation. In recent years it has been pointed out that the term ‘isolation’ is not entirely accurate as a de­ scription of American attitudes toward the rest of the world in the 1 ‘The American Challenge*, cxliii (1942), p. 67.

2

The American Challenge

early decades of the twentieth century; the sustained active interest in South American and Far Eastern affairs would seem to confirm this objection. But it is certainly true that, as regards the affairs of the Old World, the posture of the United States was that of fairly con­ sistent withdrawal. Since it was Europe, and Britain in particular, which was the hub of the world’s economy, the significance of that posture for America’s participation in international economic affairs was clear enough. Having rejected membership in the League of Nations, it was difficult for the United States to associate itself closely with the League’s official economic activities. At the same time, the international activities of private finance were regarded with deep suspicion. Thus American participation in international economic affairs was inhibited even on the unofficial level. A second factor in the American tradition of economic withdrawal was the country’s natural economic position. The United States was a large continental land-mass, potentially self-sufficient in nearly all branches of production. It had little need either to import large quantities of goods from abroad or to look beyond its borders for profitable investment outlets. These factors, of course, did not preclude the possibility of deriving substantial benefits from inter­ national trade and investment carried on along the lines of compara­ tive advantage. But they did make it much easier to forego such benefits if other factors impelled the country to do so. In the years before the Second World War foreign trade accounted for only one-twentieth part of American national income. And while the United States had once been a substantial importer of foreign capital, it never adjusted to being a capital exporter on a comparable scale. A third obstacle to United States participation in international economic co-operation—especially with Britain and other European governments—was the devotion of a considerable body of American opinion to the philosophy of laissez-faire. This may seem a rather paradoxical statement. The most truly ‘international’ economic system, surely, was one in which intervention by national govern­ ments was absent and comparative efficiencies, working through the price mechanism, determined the allocation of world resources. The answer to this objection, of course, was that the liberal system could no longer be automatically achieved. After the havoc wrought by two world wars and the Great Depression the reconstruction of a liberal world economy was bound to require widespread government

An Unpromising Legacy

3

intervention. Such an effort, especially if it involved active participa­ tion by the United States, would arouse determined opposition from the same American groups who opposed the extension of government activity in the domestic sphere. The last and perhaps the most intractable factor inhibiting a hope­ ful American approach toward international economic affairs was the constitutional and political structure of the United States. Any country with a widely dispersed and heterogeneous population would find it difficult to form an integrated and consistent foreign economic policy. In the United States this natural difficulty was further aggra­ vated by a political system which tended to subordinate national to local interests and, as a corollary of this, international considerations to considerations of a domestic character. The bargaining among sectional groups, so essential a part of the American legislative pro­ cess, often produced unfortunate results when it came to matters affecting the relations of the United States with the rest of the world. American tariff policy provided a notable example of this prob­ lem. Individual congressmen who held liberal views on the tariff question were often forced to give way to the protectionist demands of influential constituents. Congressmen from areas where the fear of foreign competition was great would support one another’s re­ strictive proposals. In this way the natural protectionism of many American business men, especially those in industries making greater relative use of high-cost American labour, would be quickly trans­ formed into national policy. The same problem was present, to an even greater extent, in the field of agriculture. By the mid-1930’s the most important American agricultural and mining interests, faced with such difficulties as over­ production, high labour costs, and uneconomic sources of supply, had abandoned the cause of liberal trade. The system of Con­ gressional districting and of electing two Senators from each State regardless of population gave these interests a disproportionately large representation in the American Congress. The farm bloc was particularly well placed to press for greater protection against foreign foodstuffs and raw materials. The forces of industrial and agricultural protection enjoyed an additional advantage on the eve of the Second World War. Although the early days of the New Deal had witnessed a striking growth in Executive power, the Congress was, to some extent, coming into

4

The American Challenge

its own again. National defence, aid to the Allies, and finally war itself brought a vast expansion in government expenditures. These expenditures could only be authorized by the legislature. Con­ gress, with its critical power of the purse, was therefore in a strong position to influence American policy in the international economic field. The four factors outlined above presented very considerable ob­ stacles to the development by the United States of a positive foreign economic policy. What was the basis, then, of the American ‘chal­ lenge* in international economic affairs? T H E POST-W AR PL A N N E R S

The nature of the American ‘challenge’ in foreign economic policy can best be understood against the general background of American post-war planning. There were three main centres of this activity. The first was in the Department of State under the direction of Secretary of State Cordell Hull and Under-Secretary of State Sumner Welles. The second was in the Treasury Department under Secretary of the Treasury Henry Morgenthau, Jr., and his deputy in charge of international financial problems, Harry Dexter White. The third was in the Board of Economic Warfare under VicePresident Henry A. Wallace. The men who directed these various centres of post-war planning had numerous differences in outlook and policy. But they were all deeply influenced by three ‘lessons’ drawn from the unsuccessful efforts at peacemaking that followed the First World War. First, they remembered the fatal unpreparedness and confusion that be­ devilled the American delegation at Paris. Thus they advocated detailed planning on post-war problems even during the war itself. Second, they were acutely conscious of the harm that had been done by the failure of the United States to join the League of Nations. Therefore, they wanted to base future American foreign policy on participation in a world organization. Finally, they recognized that a major reason for the breakdown of the last peace settlement lay in the inadequate handling of economic problems. Consequently, they placed great emphasis on economics in drawing blue-prints for a better world. It is difficult to over-estimate the influence exerted by these ‘les­ sons’ from the past on the character of American post-war planning.

The Post-war Planners

5

To begin with, there was the idea that the post-war settlement should be planned in advance. A corps of specialists under Dr. Leo Pasvolsky, Hull’s special adviser in charge of post-war planning, began drawing blue-prints of the post-war world as early as the autumn of 1939. Under-Secretary Welles, in paying tribute to the importance of this activity, explained that the President ‘desired to be able later to reach in his basket and to find there whatever he needed in regard to post-war foreign policy and meanwhile wished to devote himself wholly to ways and means of winning the war’.1* This attempt to supplement the day-to-day making of policy with long-term planning by objective scholars was certainly an attractive idea. But such a division of functions might also be the cause of difficulty. If those charged with the conduct of the war did not share in the formulation of post-war objectives, they might adopt short­ term policies inconsistent with the long-term plans. If the post-war planners had no share in the daily problems arising from the war, their planning might degenerate into abstract model-building remote from political and economic realities. The problem of reconciling principle and practice had confounded American leaders before. John Maynard Keynes had noted of Wilson’s effort in 1919 that when it came to practice, his ideas were nebulous and incomplete. He had no plan, no scheme, no constructive ideas whatever for clothing with the flesh of life the commandments which he had thundered from the White House. He could have preached a sermon on any of them or have addressed a stately prayer to the Almighty for their fulfilment, but he could not frame their concrete application to the actual state of Europe.1 Hull, unfortunately, was something like Wilson in this respect. During the war he persistently refused to consider the specific politi­ cal and territorial issues which would have the greatest influence on the post-war settlement.8 He had a most exaggerated notion of the efficacy of formal statements of general principle. In the weeks be­ fore Pearl Harbour, for example, he strove earnestly to get the sig­ nature of the Japanese Government to a declaration of economic and political principles, including a commitment to non-discrimination in commercial policy.4*Such actions betrayed a certain insensitivity to the harsh environment of contemporary international relations. 1 Harley A. Notter, Post-War Foreign Policy Preparation 1939-1945 (Washington, 1949), p. 79. 1 Essays in Biography (London, 1951), pp. 21-22. * See Sumner Welles, Seven Decisions That Shaped History (New York, 1950), ch. 5. 4 For the text of the declaration see Louise W. and Hajo Holborn, War and Peace Aims o f the United Nations, vol. i, pp. 57-59.

6

The American Challenge

There was a danger that the commendable emphasis on long-term planning might deteriorate into futile gestures of a similar kind. The second assumption of the post-war planners was that the United States should participate in some kind of world organization. This idea was no less commendable than the first. But here again some pitfalls lurked. Some of the most influential American leaders seemed to think that such an organization would fundamentally alter the conduct of international relations and eliminate the need for intimate collaboration between countries with special economic and political ties. Hull had been deeply influenced by Wilson’s idea that there should be ‘no leagues or alliances or special covenants and understandings within the general and common family of the League of Nations’.1 He, too, adopted a ‘universal’ approach to world order.2 Like other leaders in post-war planning Hull rejected the notion that American interests might be uniquely linked with the political and economic position of the United Kingdom. He did not consider that successful reconstruction in the economic field would require closer collaboration with Britain than was possible with other nations of the world. Too much emphasis on Anglo-American col­ laboration, he believed, would interfere with the achievement of his ‘universal’ system. He urged his fellow Americans to avoid this danger by consulting ‘with other interested nations whenever we consult with Britain'.8 This ‘universal’ approach to world order was a most difficult pro­ gramme to apply in practice. Short of an effective system of world government—which Hull and his associates never advocated—the various nations would obviously need to form less than universal arrangements to further their political and economic interests. That influential Americans could have thought otherwise showed how far the United States had been sheltered from the harsh realities of inter­ national politics. The Foreign Minister of a European state would hardly have said of the post-war world, as Hull did, that ‘there will no longer be need for spheres of influence, for alliances, for balance of power, or any other of the special arrangements through which, in the unhappy past, the nations strove to safeguard their security or to promote their interests’.4 Nor is it likely that he would have 1 Address opening the Fourth Liberty Loan Drive, reported in The New York Times (28 Sept. 1918). 8 This was Hull’s own description of his policy. See the Memoirs o f Cordell Hull, vol. ii (New York, 1948), part eight. 8 Italics supplied. Id., p. 1739. 4 ‘Memorandum on the Bases of the Foreign Policy of the United States’, 1 Mar. 1944, Holborn, vol. ii, pp. 262-5.

The Post-war Planners

7

described the basic assumptions of post-war planning in the same words as Harry White: It was expected that the early post-war would witness a degree o f unity and good-will in international political relationships among the victorious allies never before reached in peace time. It was expected that the world would move rapidly . . . toward ‘One World*___ N o influential persons, as far as I remember, expressed the expectation or the fear that international relations would worsen during these years.1

Such naively optimistic assumptions about the post-war world naturally led to a neglect of less grandiose but more practical devices for the achievement of prosperity and peace. There may have been another reason, to be sure, for the under­ valuing of Anglo-American collaboration. Some of the most influen­ tial post-war planners were deeply suspicious of the United Kingdom. There was a good deal of bitterness about ‘the Cliveden Set’, ‘colo­ nialism’, and the problem of India. Roosevelt himself expressed scepticism about Britain’s capacity to take leadership in the building of a better world. Among some Administration leaders of left-wing persuasion there was a tendency to write Britain off as relatively un­ important and to place primary reliance in peace-making on SovietAmerican relations. As Harry White put it: . . . The m ajor task that confronts American diplomacy—and the only task that has any real value in the major problems that confront us—is to devise means whereby continued peace and friendly relations can be assured between the U nited States and Russia. Everything else in the field o f international diplomacy pales into insignificance beside this major task. I t m atters little what our political relationships with England become o r w hat happens in the Balkans or the F ar East if the problems between the U nited States and Russia can be solved. Contrariwise, if we cannot dis­ cover ways to assure sincere friendship and military alliance between those two countries, the international political maneuvering in the Balkans, in the F a r East and in Europe can only accentuate the fear o f war, and if any­ thing enhance the chances o f major conflict.*

Scarcely less striking than the ‘universal* approach of the post-war plann "s was their strong emphasis on the economic basis of a satisfactory world order. To a certain extent, such an emphasis was eminently desirable. One could hardly quarrel with the attempt to 1 Rough draft (dated 19 May 1948) of a statement to be used in the introduction of proposed amendments to the Articles of Agreement of the International Monetary Fund, in The Private Papers o f Harry Dexter White (hereafter cited as White Papers). * Italics supplied. Untitled typescript dated 30 Nov. 1945, White Papers.

8

The American Challenge

place the post-war settlement on a secure economic foundation. Still, it was necessary to maintain a proper proportion in the relative emphasis on economic and political planning. The Economist observed, not without concern, that the speeches of American leaders dwelt ‘at much greater length and in much greater detail, on the side of post­ war economic collaboration*.1 Some of these statements carried the emphasis on economic policy rather far. Pasvolsky warned that un­ willingness to abandon policies of economic warfare would constitute ‘the greatest danger that can confront us after the war *.2*Welles argued that ‘one of the surest safeguards against war is the opportunity of all peoples to buy and sell on equal terms and without let or hindrance of a political character’.8In forwarding an early draft of his Stabilization Fund and Bank, White declared: ‘Just as the failure to develop an effective League of Nations has made possible two devastating wars within one generation, so the absence of a high degree of economic collaboration among the leading nations will, during the coming decade, inevitably result in economic warfare that will be but the pre­ lude and instigator of military warfare on an even vaster scale.’4 The same theme was taken up by other American leaders. In the presence of this powerful leitmotif at least one observer became convinced that ‘economic freedom for all is the basic American foreign policy for the prevention of war’.5* What was the explanation for such exaggerated emphasis on economic policy? To put it frankly, the Administration’s programme for peace was much more clearly defined on the economic than on the political side. Moreover, the American people seemed more nearly ready to support measures of international co-operation in this particular area. The adoption of the Reciprocal Trade Agree­ ments Act, the post-war planners recalled, had proved relatively easy compared with the repeal of neutrality legislation and the mobilization of public support for active measures against German aggression. Still, the singular emphasis in the post-war planning was not just the result of political expediency. The principal planners shared a genuine belief in the critical importance of economic factors. ‘If 1 ‘The American Challenge*, p. 66. 2 Italics supplied. Holbom, vol. i, p. 74. 2 Id., pp. 29-30. 4 Introductory section of undated typescript, ‘Suggested Plan for a United Nations Stabilization Fund and a Bank for Reconstruction of the United and Associated Nations*, in White Papers. * Arthur Krock in The New York Times (27 May 1942).

The Post-war Planners

9

goods can’t cross borders, soldiers will’ was a slogan well suited to the rationalist and materialist elements in the American intellectual heritage. The most faithful exponent of this view was Hull himself. As a Congressman during the First World War he became convinced that unhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war. Though realizing that many other factors were involved, I reasoned that, if we could get a freer flow o f trade —freer in the sense o f fewer discriminations and obstructions—so th at one country would not be deadly jealous o f another and the living stand­ ards o f all countries might rise, thereby eliminating the economic dissatis­ faction that breeds war, we might have a reasonable chance o f lasting peace.1

Hull was not content to state the truism that economic factors play an important role in international relations. He accorded them pride of place in his philosophy of world affairs. He had written to Secretary of State Lansing that ‘the chief underlying cause’ of the conflict which began in 1914 could be found ‘in the strenuous trade conquests and bitter trade rivalry being conducted prior to the out­ break of the war’.2*When Hull became Secretary of State this ob­ session with economics became an official part of American foreign policy. He insisted that his reciprocal trade agreements would be a major factor in achieving peace. To those who later objected that these agreements had not averted the Second World War he replied: But it is a fact that war did not break out between the United States and any country with which we had been able to negotiate a trade agreement. It is also a fact that, with very few exceptions, the countries with which we signed trade agreements joined together in resisting the Axis. The political line-up followed the economic line-up.8

In reality, of course, the failure to conclude trade agreements with the Axis Powers was a symptom, not a cause, of the bad political relations that eventually led to war. Yet Hull’s most enthusiastic disciples were so impressed with the efficacy of these agreements as a method of averting hostilities that as late as the 1 Hull, Memoirs, vol. i, p. 81. * Letter from Hull to Lansing, 16 Feb. 1916, National Archives, State Decimal File 1910-29, 600.0031/2, quoted in William R. Allen, ‘The International Trade Philosophy of Cordell Hull, 1907-1933*, Am. Ec. Rev., xliii (1953), p. 107, n. 32. * Hull, Memoirs, vol. i, p. 365.

10

The American Challenge

winter of 1937-8 they were pressing for a trade agreement with Nazi Germany: In the contribution which it could make towards the cause o f peace a commercial agreement with Germany would merit, and might well receive, much approval by the American people. It is true that the argument has sometimes been advanced that such an agreement would tend to increase Germany’s aggressiveness, and aid her to carry out her arm ament pro­ gram, and ultimately to wage war. I f this is true, then the basic philo­ sophy o f the trade agreements program is wrong. Would it n ot be more reasonable to expect that an agreement between Germany and the United States would be a factor making for peace? It would facilitate Germany’s acquisition o f raw materials; it would assist its export industries; it would be a proof to the German people that the democratic nations are not opposed to Germany’s welfare; it would rob the Four-Year plan’s drive toward an increased autarchy o f some o f its raison d'être.l

This memorandum was forwarded approvingly to Francis Sayre, then Assistant Secretary of State for Economic Affairs, by Harry Hawkins, Hull’s principal adviser on the trade agreements programme. Haw­ kins specifically cited the argument that a German-American trade agreement would be ‘an important force making for world peace’. This argument, like others made on behalf of the trade agreement, seemed to him to be ‘well taken’.2 How this sort of thinking was carried over into post-war planning may be illustrated by the incident of the Russian loan. In March 1944 White brought forward a memorandum proposing a loan to the Soviet Union of $5 billion on easy credit terms. His proposal did not make the loan conditional on Soviet good behaviour or on the co­ operation of that Government in a satisfactory political settlement. The mere giving to the Russians of reconstruction assistance would, in his view, ‘provide a sound basis for continued collaboration be­ tween the two governments in the post-war period'.3By January 1945 the idea had gained momentum and the size of the loan had been increased to $10 billion. Morgenthau forwarded White’s proposal to President Roosevelt with a favourable recommendation for future action. ‘I am convinced', wrote Morgenthau, ‘that if we were to come forward now and present to the Russians a concrete plan to aid them in the reconstruction period it would contribute a great 1 Memorandum of Charles Darlington, 31 Dec. 1937, reprinted in U.S. Congress, House of Representatives, Committee on Un-American Activities, Soviet Espionage within the United States Government, 80th Cong., 2d Sess. (31 Dec. 1948), pp. 92-93. * Memorandum from Hawkins to Sayre, 8 Jan. 1938, id., p. 96. • Memorandum of White dated 7 Mar. 1944, White Papers.

The Post-war Planners

11

deal towards ironing out many of the difficulties we have been having with respect to their problems and policies.’1 There may have been, to be sure, some reasonable arguments for expanding economic intercourse with Soviet Russia or Nazi Ger­ many. But at the time of each of the episodes mentioned above, the country in question constituted the greatest potential threat to the security of the United States. Common sense should surely have rebelled against the simple notion that by assisting these countries economically they would necessarily become less belligerent and more co-operative. Although nations may occasionally be induced to co-operate by promises of future benefits, they are rarely induced to do so by the memory of benefits already received. That this fact was not more clearly recognized by some American leaders shows how much they exaggerated the efficacy of economic policies and how little they appreciated the political determinants of international relations. The most influential post-war planners seem to have per­ suaded themselves that the economic institutions established after the war could operate in a political vacuum, dispensing their re­ sources without regard to the political policies of the recipients. Morgenthau was steadfastly to maintain this view in presenting the Bretton Woods agreements to the American Congress: S enator F ulbright ___It occurred to me that before the war we did busi­ ness with such countries as Japan and Spain without any regard to poli­ tical considerations. It does not seem to me th at in the future we can isolate the economic from the political; and in stating several times that this must be done on an economic basis without regard to politics, that is not quite correct. M r. M orgenthau . The discussion a t Bretton W oods . . . the two American delegates that are sitting here at this committee table can either affirm or deny what happened—but the thought was— T he C hairman [Senator Wagner] : I have ju st checked with Senator Tobey, and neither one o f us heard any politics at all at B retton Woods.* M r. M orgenthau : The thought was that those countries could come to a world bank or a world fund and get their financial needs taken care o f w ithout having to sell their political souls . . . th at is my conception o f Bretton Woods. These are to be financial institutions run by financial people, financial experts, and the needs in a financial way o f a country are to be taken care o f wholly independent o f the political connection----- 8 1 Morgenthau letter dated 10 Jan. 1945, forwarding White’s memorandum of 1 Jan. 1945, id. * The Senators, with all due respect, cannot have been very attentive members of the American delegation. The most important decisions at Bretton Woods, such as that on the size of national quotas, were largely determined by political bargaining. 8 U.S. Congress, Senate, Committee on Banking and Currency, Bretton Woods

12

The American Challenge

The impracticability of this idea in a world where the nation-state remained the dominant political unit should have been apparent to any one experienced in the conduct of international affairs. We are now in a position to summarize the main characteristics of American policy toward the post-war world. It proceeded on the assumption that post-war planning should be carried on in advance; that the United States should base its foreign policy on membership in a world organization; and that the achievement of peace would require the adoption of appropriate policies in the economic field. These ideas were unexceptionable in themselves. Unfortunately, however, there was a tendency to press each of them too far. The resulting excesses we might describe as Legalism, Universalism, and Economism.1 Such errors might lead to difficulty when the time came to implement the ambitious plans for prosperity and peace. M U L T IL A T E R A L IS M A N D M R . H U L L

We must turn now from this general description of post-war plan­ ning to the specific nature of the ‘challenge’ put forward by the United States in the foreign economic field. The post-war planners were united in their determination to break completely with the legacy of economic nationalism and economic isolationism already described. They recognized that the United States, despite its com­ parative self-sufficiency, had a very great stake in the economic well­ being of the rest of the world, not only because it needed foreign markets for the produce of its factories and farms, but because it needed a healthy environment on which to base its efforts at world peace. They considered that the United States, as the world’s fore­ most economic power, should bear the primary responsibility for reconstructing a freely flowing system of international trade. Perhaps most important, they were prepared to devote a considerable amount of American wealth, influence, and energy toward the achievement Agreements Act, Hearings on H.R. 3314, 79th Cong., 1st sess. (June 1945), pp. 14-15. In defending this approach against the objections of Senators Fulbright and Taft, Morgenthau said ‘we have a right to assume as between nations there is going to be a new conception of dealings with one another*. Id., p. 15. This, of course, is precisely what no responsible maker of policy had a right to assume. These pages of the Hearings are worth a whole volume on the difference between the practical and the utopian approaches to the achievement of world order. 1 For further discussion of the influence of these tendencies in American foreign policy see, respectively, George Kennan, American Diplomacy 1900-1950 (London, 1952); Walter Lippman, U.S. War Aims (Boston, 1944); William Y. Elliott, United States Foreign Policy (New York, 1952).

Multilateralism and Mr. Hull

13

of that end. Such a conjunction of power and idealism in economic affairs was entirely unprecedented in American history. Perhaps the best short description of the Administration’s basic objective in international economic affairs would be ‘the reconstruc­ tion of a multilateral system of world trade’. For the purpose of this history we may define such a system as one in which barriers to trade and payments are reduced to moderate levels and made non-discriminatory in their application. This objective is obviously not the same as free trade. In monetary policy, for example, multilateralism does not require the complete elimination of all kinds of exchange control. It does, however, require the ‘convertibility’ of currencies. The residents of a country whose currency is convertible may not themselves have the right to convert their currency, but non-residents who hold that currency must have the right to do so. The same principle applies in commercial policy. Multilateralism does not mean the elimination, but only the reduction, of tariffs and other trade barriers. Any trade barriers remaining after this reduction, however, must be non-discriminatory in their application. Thus, while the residents of a country may not be able to purchase foreign goods on the same basis as they purchase goods from one another, any obstacles placed in the way of foreign purchases must apply in equal measure to all countries.1 The economic case for multilateralism is essentially the same as the familiar case for free trade. Multilateralism means fewer obstacles to the movement of goods and capital. Trade tends to flow in accor­ dance with relative price considerations instead of being channelled in one direction or another by the need to strike a bilateral balance. Purchases can be made in the cheapest foreign market and sales in the most lucrative. Such a system promotes the international division of labour and encourages each country to specialize in the production of those things in which it enjoys the greatest comparative advantage. Two important advantages may be claimed for this régime. First, the most is made at any given time of the world’s existing stock of productive resources. Second, that stock of resources will be likely to increase over time more rapidly than under any alternative system. The latter result will occur because capital will be induced to flow to those parts of the world economy where it can make the greatest net 1 This definition should probably be described as the minimum definition of multi­ lateralism. As we shall see, the State and Treasury Departments early in the war went further and sought the elimination of direct controls such as quantitative restrictions and exchange controls on current transactions. See infra, pp. 20 and 76.

14

The American Challenge

contribution to productivity. At the same time, productivity will be stimulated by competitive forces acting through the operation of the market mechanism. In this way multilateralism will tend to maxi­ mize the real income of the world as a whole. To this broad generalization some qualifications must of course be made. Although free trade can be shown to maximize real income for the world as a whole, it may not do so for each of its constituent parts. Multilateralism can be shown to benefit everybody only if some mechanism exists for distributing the gains both within and between nations. Moreover, the greater efficiency in the use of re­ sources made possible by multilateralism will be offset to the extent that the system causes the idleness of those resources. Multilateralism will maximize real income, therefore, only in conditions of economic expansion. Even beyond these qualifications, multilateralism involves another difficulty. Several nations maintaining non-discriminatory trade bar­ riers may decide to lower those barriers between themselves, without extending such benefits to the rest of the world. If they remove all the barriers between themselves and adopt common restrictions against other countries they will not have violated multilateral prin­ ciples. But they may wish to stop short of this point. Can it be deter­ mined a priori that such a ‘preferential system’ is bad? Although this question has been the subject of much theoretical controversy, most economists would now agree that the answer is in the negative. Whether such a system increases or diminishes world income, they would say, depends on whether its ‘trade-creating’ effects offset its ‘trade-diverting’ ones. This depends, in turn, on the existing alloca­ tion of resources in the participating countries and on the extent to which specialization is possible between them.1 As a practical matter, this test for promoting world income is unlikely to be passed by most preferential systems. For political reasons the reduction of trade barriers which takes place in such systems will probably do more to give the participating countries sheltered markets against the outside world than it does to stimulate vigorous competition between them. Thus, departures from non-discrimination, even if they are not evil in principle, will usually prove self-defeating when it comes to practice. The case for multilateralism also has its non-economic aspects. The economic benefits of multilateralism can be said to promote, in a general way, the cause of world peace. Human beings whose 1 See Jacob Viner, The Customs Union Issue (New York, 1950), pp. 41-55.

Multilateralism and M r. Hull

15

economic circumstances are improving will be less likely, everything else being equal, to challenge the internal or external order. It can be argued also that multilateralism, by insuring equal access to markets and raw materials, avoids the grievances felt by the victims of dis­ crimination. Finally, as a very rough rule of thumb, it is probably true that the cause of peace is assisted by the reduction of govern­ ment interference in international economic life. But non-economic arguments for multilateralism deserve, like economic ones, the most careful qualification. To the extent that multilateralism increases inequality in income between or within nations, or causes serious fluctuations in incomes and employment, it may actually be a factor making for war. We may also doubt that discriminatory systems have frequently been the bona fide causes of aggression. Probably they cause little harm to political relations when the discrimination is small, uniform, and based on historical or regional ties. In general, as we have already suggested, undue atten­ tion to this aspect of the multilateral case places too great an empha­ sis on the economic causes of political conflict. With this brief statement of the nature and purpose of a multi­ lateralism we may return to the role of that idea in American post­ war planning. At the outset, the independent character of the Ameri­ can Executive departments presents something of a problem. Although the post-war planners in the Department of State, the Department of the Treasury, the Board of Economic Warfare and other agencies all proclaimed multilateralism as their general goal, they did not place identical emphasis on the various means of promoting that objective. Cordell Hull, for example, was mainly interested in regulating the use of trade barriers. Harry White, while sharing this concern with commercial restrictions, put somewhat greater stress on the impor­ tance of economic expansion—as he put it, a high level of American business activity would ‘do far more for our foreign trade than a complete wiping out of our tariff rates, or 100 trade treaties’.1 VicePresident Wallace spoke out for a programme of international public works, including such ambitious projects as ‘an international Ten­ nessee Valley Authority’ and ‘a combined highway and airway from southern South America across the United States, Canada, and Alaska into Siberia and on to Europe, with feeder highways and airways from China, India, and the Middle East’.2 Thus there was 1 Untitled, undated typescript, apparently of a speech, in White Papers. 1 Holborn, vol. i, p. 134.

16

The American Challenge

no uniform ‘American* view on the appropriate relation between the various elements of foreign economic policy. Fortunately, however, our problem can be somewhat simplified. In the early war years with which we are now concerned, the primary responsibility for shaping American foreign economic policy rested with the Department of State. As we have already suggested, Hull’s main interest was in the reduction of trade barriers. To be sure, considerable thought was also given to monetary stabilization, inter­ national investment, commodity agreements, and other matters. Some officials, like Herbert Feis, the Department’s Economic Advi­ ser, felt too much emphasis was being placed on the framing of fair trade principles which might prove of doubtful use in their practical application. Nevertheless, the Hull approach was clearly ascendant. It was developed by devoted subordinates of the Secretary such as Francis Sayre, the son-in-law of Woodrow Wilson, who became Assistant Secretary for Economic Affairs; Henry Grady, who later succeeded Sayre; and Harry Hawkins, a foreign service officer who took charge of the Division of Commercial Policy and Agreements. These men carried the major share of responsibility for working out the details of the multilateral approach. Of the two main elements of multilateralism, it was non-discrimina­ tion to which the State Department gave pride of place. In this respect Hull and his associates were in the main stream of the American tradition. Non-discrimination was not simply a personal hobby of the Secretary of State; it was a doctrine approved generally within the American Administration and widely supported in the nation at large. Non-discrimination had been established as a basic element in American foreign policy at least as early as the Farewell Address of President Washington. ‘The founder of his country’ had advised his fellow-Americans, in their economic relations with the rest of the world, to ‘hold an equal and impartial hand, neither seeking nor granting exclusive favors or preferences’.1 This advice, it is true, had not been consistently followed, and the United States had clung to the conditional form of the most-favoured-nation clause, an ineffec­ tive practical basis for the policy of non-discrimination. But when, at the end of the First World War, a Republican Administration em­ braced the unconditional interpretation, the United States became the world’s most vigorous champion of non-discriminatory trade. 1 Farewell Address (17 Sept. 1796), reprinted in James D. Richardson, A Compila­ tion o f the Messages and Papers o f the Presidents (New York, 1897), p. 215.

Multilateralism and Mr. Hull

17

This campaign was endorsed by both political parties and by suppor­ ters of high as well as low tariffs. Well before the Second World War, therefore, equality of treatment had become firmly entrenched as a fundamental tenet of American policy. What caused this strong American attachment to non-discrimina­ tion in trade? To begin with, the doctrine naturally recommended itself to a people who believed in the least possible interference with the free market mechanism. There was also, in the second decade of the twentieth century, a more practical factor. The First World War had hastened the transformation of the United States into a major exporter of mass-produced industrial products. These products were particularly vulnerable to the impact of tariff preferences and other forms of discrimination. The United States quickly recognized that its growing industrial efficiency might be progressively offset if Ameri­ can products were not guaranteed equal access to foreign markets.1 The American devotion to non-discrimination also had a political basis. The United States, just as Britain, had an interest in maintain­ ing the balance of power. Its secure hemispheric position would be jeopardized by the rise of a European nation bent on adventures in the New World. Such a possibility, it seemed to some Americans, might be enhanced by the accelerating trend toward colonization and the development of exclusive economic concessions. Moreover, un­ less something were done to curb the tendency towards economic exclusion, the United States, itself reluctant to play an Imperial role, might be deprived of profitable opportunities for foreign trade and investment. It was largely considerations of this kind which led to John Hay’s policy of the Open Door, and to Wilson’s insistence, in the third of his Fourteen Points, on ‘the removal so far as possible, of all economic barriers and the establishment of an equality of trade conditions among all nations consenting to the peace and associating themselves for its maintenance’. As Wilson explained it, this prin­ ciple left ‘every nation free to determine its own economic policy, except in one particular, that its policy must be the same for all other nations, and not be compounded of hostile discriminations between one nation and another’.2 The First World War did much to stimulate American concern 1 Sec letter of William S. Culbertson, Acting Chairman of the Tariff Commission, to Secretary of State Hughes, 14 Dec. 1922, reprinted in Culbertson, Reciprocity (New York, 1937), pp. 246-51. * Letter to Senator Hitchcock, quoted in Culbertson, International Economic Policies (New York, 1925), p. 295.

18

The American Challenge

with the political importance of non-discrimination. An influential body of literature developed which cited unequal opportunity as one of the major causes of the conflict. Closed trade areas controlled by Imperial powers were held to deny other countries their natural rights to vital raw materials, markets, and investment outlets. The excluded countries, so the argument ran, not only felt aggrieved as a result of such discrimination; they were driven to obtain by force what they would otherwise have obtained by peaceful exchange. To some extent these same arguments might have been applied to high tariffs. But the protectionist revival in the United States was now in full swing. Ameri­ can exponents of equal access usually made an important distinction : Protection of the home market for the benefit o f national industries is an expression o f nationalism. Its object is to diversify a nation’s economic life and to afford varied opportunities for the application o f the genius o f a people. It is in no sense aggressive.. . . Preference, on the other hand, is an expression o f modem imperialism. In contrast with the policy o f protection it is aggressive. In its extreme form . . . it seeks to extend to new areas . . . the control o f the economic system o f the country which happens to have the political power to impose the preferential conditions. . . . Excluded nations cannot be expected to accept the fiction o f empire in justification o f their exclusion from extensive areas o f the earth’s surface.1

The campaign against discrimination concentrated with particular intensity on preferential practices in the British Empire. This was hardly surprising in the light of American history. Every schoolboy had read of the special favours the American Colonies had been forced to grant to British commerce. Even after the Revolutionary War disputes had developed over British attempts to monopolize the trade of the West Indies. When the United States adopted the un­ conditional form of the most-favoured-nation clause the Congress enacted a special provision authorizing the President to levy addi­ tional duties or even absolute prohibitions against the goods of any country which discriminated against the United States in favour of other ‘foreign countries’. The term ‘foreign countries’ was defined to include ‘any empire, country, dominion, colony or protectorate, or any sub-division or sub-divisions thereof (other than the United States or its Possessions) within which separate tariff rates or separate regulations are enforced’. This provision was aimed squarely at the preferences granted to Britain by its Colonies and Dominions and especially at the familiar argument that these preferences were not 1 Culbertson, International Economic Policies (New York, 1925), pp. 185-6, 192.

Multilateralism and M r. Hull

19

discriminatory because they were in force between countries bound together by formal political ties.1 The climax of this campaign against Imperial Preference came with Hull’s appointment as Secretary of State. American producers, beset by the Great Depression, were looking anxiously to foreign markets. In the midst of their difficulties they were met with the Ottawa Agree­ ments, which not only increased the preferences granted to Britain by the Empire but inaugurated a comprehensive system of preferences in favour of the Empire by the United Kingdom. The Secretary of State, responding to the bitter complaints of American exporters, described these Agreements as ‘the greatest injury, in a commercial way, that has been inflicted on this country since I have been in public life’.2 The hostility to the Ottawa Agreements on economic grounds was reinforced by political developments. The Axis Powers were devising economic policies to match their programmes of political expansion. Trade discrimination soon came to be regarded as the handmaiden of armed aggression. Hull began to emphasize that the principles of democratic foreign economic policy stood ‘at the opposite pole from the predatory policies and the methods of totalitarian \ 8 It seemed particularly important to make sure that discriminatory policies were not practised by the democratic nations themselves. The Axis nations, after all, were justifying their aggression on the ground that they were ‘have-nots’ whom the older Imperial powers had cut off from essential raw materials. To some Americans this argument had a certain plausibility. The extension of Imperial Preference, they pointed out, had reduced the ability of countries outside the British Empire to earn foreign exchange for the purchase of Empire raw materials.4 After the outbreak of the Second World War State Department spokesmen began to insist that no peace settlement ‘would be valid or lasting unless it established fully and adequately the natural rights of all peoples to equal economic enjoyment. So long as any one government possesses a monopoly over natural 1 Section 317 of the Tariff Act of 1922. For an idea of the origin of this provision see U.S. Tariff Commission, Colonial Tariff Policies (Washington, 1922). * U.S. Congress, House, Committee on Ways and Means, Extension o f Reciprocal Trade Agreements Act, Hearings on H.J. Res. 407, 76th Cong., 1st sess. (1940), vol. i, p. 38. 8 The Christian Science Monitor (19 May 1941). For one of his most comprehensive statements of this philosophy, see Economic Barriers to Peace (New York, 1937). 4 Hence the statement of Welles that ‘Access to raw materials does not mean posses­ sion of a colony. I t . . . comes in the end to access to the great buying markets of the world.* Dept, o f State Bull.%vii (1942), p. 808.

20

The American Challenge

resources or raw materials which are needed by all peoples, there can be no basis for a world order based on justice and peace.’1 In this way, for the makers of American foreign policy, non-discrimination became a vital element in the moral armament of the democratic world. Thus non-discrimination was a central element in the American ‘challenge’. The second aspect of multilateralism—the reduction of trade barriers—also played an important part. Hull and his asso­ ciates, like most Americans, were opposed to extensive government intervention in national economic life. It was natural that they should look with suspicion on government controls of all kinds. They drew a distinction, however, between various types of trade barriers. On the one hand, there were barriers which supplanted the free market entirely, like quantitative restrictions and exchange control. These were difficult to apply in a non-discriminatory fashion and involved all the major and political economic objections attendant upon discrimination. For this reason the State Department favoured their elimination. On the other hand, there were trade barriers, like tariffs, which made use of the free market mechanism. These might be objectionable if raised too high; but they were not regarded as evil in principle. The State Department favoured their retention in some measure to protect domestic producers. In its emphasis on the elimination of direct controls, the State Department ran into considerable difficulty. The Roosevelt Ad­ ministration, in its very early days, flirted with comprehensive pro­ grammes of planned economy. New Deal advisers such as Raymond Moley, George Peek, and Rexford Tugwell supported domestic recovery measures which involved resort to quantitative restrictions and bilateralism in foreign trade. It was only after many months of bitter struggle that Hull’s liberal policy emerged triumphant. Only gradually did the New Deal abandon its early experiments and revert progressively to free market principles.2 There was, moreover, one important sector in which the reversion to orthodoxy did not occur. This was the field of agriculture. To alleviate the vast distress of the farm community the Administration enacted a system of production controls and price-support schemes for certain basic agricultural commodities. As a result of this legisla1 Welles, Dept, o f State Bull., v (1941), p. 75. 2 The struggles between Hull and the New Deal planners are poignantly described in Hull, Memoirs, vol. i.

Multilateralism and Mr. Hull

21

tion American agricultural commodities were supported at prices well above those prevailing in the world market. The maintenance of this artificial two-price system had inevitable repercussions on Ameri­ can foreign trade policy. Section 22 of the Agricultural Adjustment Act authorized the President to employ import quotas whenever a commodity was being imported in such quantities as to interfere with the operation of any agricultural adjustment programme. Other provisions authorized the use of subsidies to facilitate the export of high-cost American products. By the beginning of the Second World War the price support system had been extended so far as to interfere considerably with Hull’s programme for the elimination of direct controls. The State Department was somewhat more successful in its policy with respect to tariffs. Once again, however, Hull’s task was by no means easy. First he had to defeat the A1 Smith-John Raskob ele­ ment within the Democratic Party which had written its protectionist sympathies into the Party’s platform in 1928. Then he had to cope inside the Roosevelt Administration with the influence of the MoleyPeek faction. Finally he had to contend with a Congress which, while considerably more sympathetic than its predecessors to the idea of tariff reduction, had no enthusiasm for a drastic programme which might complicate the problem of domestic recovery. In the light of these obstacles Hull’s successful sponsorship of the Reciprocal Trade Agreements Act in 1934 was a genuine achieve­ ment. Congress, for the first time in American history, delegated effective authority to the Executive for tariff-making. The President, it is true, had previously been authorized to raise or lower tariff rates, but he had been required to use his authority only to ‘equalize the differences in the costs of production’ between American and foreign goods. This provision proved administratively unworkable and ne­ gated the basic purpose of tariff reduction, which was, after all, the promotion of economically beneficial exchange based on differences in comparative costs. The Reciprocal Trade Agreements Act was free from this irksome limitation. But it too had some defects as an instrument for more liberal trade. It was mainly designed to increase American exports, not to increase American imports. The primary purpose of the legisla­ tion, as stated in its preamble, was that of overcoming the industrial depression by ‘expanding foreign markets for the products of the United States’. The President was authorized to enter into reciprocal

22

The American Challenge

trade agreements and to proclaim modifications in the American tariff resulting from those agreements only in order to promote this objective, and only when he found as a fact that ‘existing duties or other import restrictions of the United States or any foreign country* were ‘unduly burdening and restricting theforeign trade o f the United States'.1 The President could not, consistently with these provisions, carry out unilateral, across-the-board reductions in American tariff rates. The Administration’s public statements on the tariff issue con­ formed to this emphasis on selective, reciprocal, and moderate reduction. Hull assured his fellow Americans that the Act did not ‘contemplate no tariffs, not even low tariffs, but a reasonable, moderate, decent level of tariffs, in lieu of existing rank and high rates and discriminations’.2 When the Administration came to the Congress for renewal of the Act it placed its main emphasis on the extent to which the legislation had increased American exports. It promised, at the same time, that the reduction of tariffs would never be carried to a point where it caused serious injury to American producers. In defence of the Department of State it may be said that no other approach could have succeeded in securing political support for a programme of tariff reduction. Unquestionably there is much in this argument. But the cautious emphasis of the Hull approach was not dictated by political considerations alone. The Secretary and his associates never faced the fact that an effective programme of trade liberalization would require major readjustments in the domestic economy. In view of its strong balance of payments position, the United States could not, short of large-scale loans, grants, or gold im­ ports, significantly expand its exports without an equivalent increase in American imports. From a theoretical point of view, to be sure, an increase in the importation of particular commodities might not injure domestic producers if there was an equivalent increase in the total American consumption of those same products. In practice, however, this was not always likely to occur; important readjust­ ments would certainly be required. The Administration’s failure to explain this fact to the American people was not consistent with its persistent emphasis on tariff reduction as an instrument for the reconstruction of multilateral trade. 1 Italics supplied. * Department of State, Press Releases (6 May 1933), p. 314.

Conclusion

23

C O N C L U SIO N

The general direction of American policy in the foreign economic field looked extremely encouraging to transatlantic observers at the outset of the Second World War. To a considerable extent, this appearance was not misleading. The post-war planners in the United States were determined to break with the unhappy legacy of economic isolationism and economic nationalism which had been inherited from the past. They were united in seeking the reconstruction of a multilateral trading system which could form the basis for prosperity and peace. Their planning toward this end reflected courage, genero­ sity, and a large amount of genuine idealism. At the same time, however, there were a number of grounds for concern. Administration leaders were making some bold promises to the rest of the world about the future shape of American policy. Yet the main elements in the unfavourable legacy had not entirely disappeared. It was by no means clear that the American spokesmen could deliver their promises in the face of such powerful tendencies toward isolationism, self-sufficiency, sectionalism, and laissez-faire. Moreover, in their dramatic reaction against the past, the post-war planners threatened to fall into new errors which we described for convenience as Legalism, Universalism, and Economism. These errors might cause grave difficulties if the revival of multilateralism became the object of Anglo-American economic collaboration.

CHAPTER II

THE BRITISH RESPONSE H ow would the United Kingdom respond to the American ‘chal­ lenge’ in international economic affairs? In the early years of the Second World War the answer was still uncertain. There were power­ ful forces behind the idea of restoring a multilateral régime in close collaboration with the United States. But there were also powerful forces opposed to such a programme who advocated the widespread use of discriminatory and bilateral practices. Although public opinion on such a complex subject cannot be fitted neatly into separate categories, we must try now to indicate, in a rough kind of way, the major forces encouraging and hindering British participation in a multilateral régime. T H E FO RCES FO R CO L L A B O R A TIO N

Perhaps the most striking fact to note at the outset is the compara­ tive silence in official British circles on the economic programme put forward by the United States. Whitehall spoke much less frequently and in much less detail than Washington about the post-war revival of multilateral trade. By itself, this was no evidence that the British Government was ill-disposed toward the views expressed by Ameri­ can leaders. In part, the silence could be explained by the reluctance of British Ministers to ‘think out loud’ with the freedom enjoyed by their counterparts in the United States. There were also other reasons. British energies, unlike American, were almost wholly occupied with the problems of the war. There was little manpower to spare for speculations about the post-war settlement. Moreover, as we shall shortly observe, multilateralism remained a controversial public issue. British opinion was sharply divided on the merits of an open, non-discriminatory trading régime. Winston Churchill, the Prime Minister, felt strongly that questions of this kind should not be allowed to distract attention from the all-important problem of win­ ning the war. It was mainly for these reasons that the public state­ ments of British leaders provided so few clues to official thinking on the subject of multilateral trade.

The Forces fo r Collaboration

25

Behind the non-committal façade of British policy, however, there were at least three important forces working for economic collabora­ tion with the United States. The first was Britain’s dependence on America for the achievement of her military, political, and economic objectives. Churchill was ever aware that Britain required American help, not only to win the war, but also to restore its strength in the post-war period. The same awareness had a profound influence on other members of the War Cabinet, particularly Anthony Eden, the Foreign Secretary, and Sir John Anderson, Lord President of the Council, who had general charge of home and economic policy. These British leaders fully recognized, as one unofficial source put it, that there was in America ‘a strong correlation between sympathy for Britain and advocacy of trade liberation. If Great Britain dis­ appoints Mr. Cordell Hull’s supporters, she will be alienating those to whom she must look for assistance in the war and for collaboration in the peace.*1 For this reason alone, if not for any other, they would go as far as possible to co-operate with the United States in its cam­ paign for the revival of multilateral trade. A second factor encouraging an affirmative response to the American challenge was Britain’s favourable disposition toward the idea of international collaboration. In no country of the world, per­ haps, had there been greater devotion to the League of Nations, or greater interest generally in international institutions. The principal British leaders were under the influence of the inter-war failures fully as much as their American counterparts. Some of them placed just as much emphasis on the need for a universal organization, particu­ larly on one which would remove the economic causes of political unrest. The Labour Party formed a particularly important centre for planning of this kind; it proposed the establishment after the war of an international authority to eliminate imperialistic economic prac­ tices and raise living standards all over the world.2Some of its leaders in the coalition Government—Clement Attlee, Lord Privy Seal, Ernest Bevin, Minister of Labour, and Hugh Dalton, President of the Board of Trade—worked to embody such ideas in official policy. It was these men who provided the main response to the ambitious statements of economic objective that were thundering on the other side of the Atlantic. Attlee no less than Hull was insisting that after the war ‘there must be equal access for all nations to markets and 1 Editor, 4An End to Economic Nationalism*, The Banker, lx (1941), pp. 174-81. * The Old World and The New Society (London, 1942).

26

The British Response

raw materials ’-1 Indeed, in their concern with the building of universal institutions and with the economic causes of war, some of the Labour Ministers threatened to lapse into the same errors already noted in American policy. Dalton, observing that Britain’s post-war planning was progressing much faster on the economic than on the political side, declared that this was ‘thoroughly healthy and I hope it will go on. In international discussions between the wars there was too much politics and too little economics___ One of the lessons we must learn is that in constructing post-war arrangements we must keep politics in a role in which primacy is given to economic endeavours and co-operation.’2 The third force working for economic collaboration with the United States was more directly related to the issue of multilateralism itself. This was the resurgence of the strong liberal economic tradition which had guided British policy during the greater part of the nine­ teenth century. In the seventy years between the repeal of the Corn Laws and the beginning of the First World War the United Kingdom had put no obstacles in the way of the free importation of goods from foreign countries. During this same time the Colonial Empire had been, with few exceptions, as open to foreign traders and investors as it had been to the traders and investors of the United Kingdom. The pound sterling, which financed the bulk of the world’s trade, was freely convertible into other currencies at a fixed gold parity. Since Britain was the dominant country in international trade, its liberal policies were widely applied throughout the world as a whole. Com­ merce between nations flourished and the benefits promised by the classical economists were enjoyed to an unprecedented degree. The interest of Britain in such a liberal system was obvious enough. It has been pointed out with sufficient frequency that the United Kingdom, a densely populated island with very limited re­ sources, could be self-sufficient only at a tremendous cost. In the nineteenth century—and only somewhat less notably at the outset of the Second World War—Britain was greatly dependent on overseas supplies of foodstuffs and raw materials and on foreign markets for the output of its industrial plant. It had, moreover, an indirect stake in the development of free and prosperous international commerce, being at once a leading financier, carrier, and insurer of the trade of other nations. Britain’s interest in liberal trade had a political as well as an 1 Holborn, vol. i, p. 672. * ‘First Place to Economics*, The Financial News (23 Mar. 1944).

The Forces fo r Collaboration

27 economic basis. As an island cut off from the rest of the world, the United Kingdom could not be a first-class political or military power. Its strong position depended on the uninterrupted flow of overseas supplies and on the maintenance of lines of communication with its overseas Empire. Moreover, Britain was a most successful practitioner of peaceful trade; it had an obvious interest in the maintenance of that particular form of international competition. If nations were denied access to markets or raw materials accessible to Britain, they might seek to obtain by force what they could not obtain by peaceful means. Britain’s dedication to a free and open system of international commerce might serve as a safeguard against the envy or enmity of other nations. In the words of that shrewd analyst of Britain’s interests, Sir Eyre Crowe: ‘Second only to the ideal of independence, nations have always cherished the right of free intercourse and trade in the world’s markets, and in proportion as England champions the principle of the largest measure of general freedom of commerce, she undoubtedly strengthens her hold on the interested friendship of other nations, at least to the extent of making them feel less apprehensive of naval supremacy in the hands of a free trade England than they would in the face of a predominant protectionist power.’1 These familiar arguments for liberal trade, which had reigned supreme until overwhelmed by the disasters of the inter-war period, were coming to the fore again in official planning for the post-war world. They had, to be sure, been formerly employed on behalf of free trade, which no longer found serious advocates in Government circles. But, as we indicated earlier, the economic and political argu­ ments on behalf of free trade could be applied, with certain qualifica­ tions, to the system known as multilateral trade. In the early years of the war-time Government the reconstruction of such a régime be­ came a major objective of British no less than of American planning. The British emphasis, of course, was rather more on the side of the lowering of trade barriers than on their non-discriminatory applica­ tion. This followed naturally from the fact that liberal trade policy in Britain had meant no, not simply low and non-discriminatory, barriers to trade, and from the development of special economic ties between the members of the British Commonwealth. It followed also from Britain’s urgent economic interests in the post-war period. 1 4Memorandum by Sir Eyre Crowe on the Present State of British Relations with France and Germany, January 1, 1907*, in G. P. Gooch and H. Temperley (eds.), British Documents on the Origins o f the War 1898-1914 (London, 1928), vol. iii, p. 402.

28

The British Response

British officials were preoccupied with the practical problem of achieving an increase in British exports at the end of the war sufficient to make up for the reduction in foreign exchange receipts caused by war-time losses of shipping and foreign investments. The magnitude of the necessary increase in exports was estimated in official circles at about 50 per cent. Such an increase would require not simply the absense of discrimination against British goods, but a very consider­ able lowering of barriers to world trade. In the words of the Chan­ cellor of the Exchequer, Sir Kingsley Wood: N o nation’s interest in the maximum growth and freedom o f commerce will be as great as ours. We shall want to secure as large a volume o f inter­ national commerce under conditions as free from restrictions as possible consistent with our commitments. Unless, in fact, we can effect a great move forward in our export trade, our relatively high standard o f living must inevitably fall. We must never forget that we can only achieve this by providing our customers with the goods and commodities they want a t prices they are willing to p a y .. . -1

We have already mentioned some of the principal Ministers re­ sponsible for the liberal emphasis in British planning. But the prob­ lems of the war left these Ministers comparatively little time for detailed consideration of the issues of post-war economic policy. Planning in this field was directed by senior civil servants such as Richard N. V. Hopkins and Sir Percivale Liesching of the Treasury and Board of Trade, respectively, who were sympathetic to the develop­ ment of a multilateral programme, and was carried out, in large part, by distinguished ‘temporaries’ who had come into the Govern­ ment at the beginning of the war. In the latter category a particularly important role was played by the academic economists. Although they could not, in a formal sense, make decisions on high policy, they came to exercise, during the war years, a very considerable influence. Many had distinguished reputations which enabled them to speak with great authority; and their temporary positions in the Government service gave them a freedom of action they might have otherwise lacked. Their memoranda were debated back and forth in interdepart­ mental committees, reviewed by the senior civil servants, and finally forwarded to the Ministers themselves. The British response to the American challenge was thus profoundly influenced by their ideas. The important role played by the academic economists greatly strengthened the forces working for the liberal revival in British 1 386 H.C. Deb. 818 (2 Feb. 1943).

The Forces fo r Collaboration

29

economic policy. In their thinking on international trade the majority of Britain’s leading economists remained loyal to the classical tradi­ tion. Two notable examples of the general tendency were Lionel Robbins and James Meade, who directed, in successive terms, the Economic Section of the War Cabinet Secretariat, and who made per­ haps the most significant individual contributions to post-war planning on commercial policy. Before joining the Government Robbins and Meade had both written powerful defences of liberal trade.1 Robbins had argued, no less emphatically than Cordell Hull, that to recom­ mend a policy of autarchy in the existing state of world affairs was ‘to recommend war as an instrument for making autarchy possible \ 2And Meade, in drafting a blueprint for the government of world trade, had little difficulty in concluding that ‘a free trade policy should be taken as the basis of the commercial policy of the International Organisation’.3 Thus on the side of commercial policy the academic economists in the Government were disposed to take a liberal line. The same was true, though less clearly at first, on the side of financial policy. Three academic economists of particular influence in the British Treasury were Hubert Henderson, Dennis Robertson, and John Maynard Keynes. Henderson was to remain profoundly sceptical of the practi­ cability of achieving multilateralism in the post-war world. He was to prove more of a critic than an architect of the multilateral pro­ gramme.4 Robertson, on the other hand, was rather more construc­ tive. He put a high value on the importance of reaching agreement with the United States on a programme of financial collaboration. The views of Keynes will be explored in detail at a later point.5 Here we may note simply that his ideas on external policy were going through a period of transition. At one time he had held liberal views on international trade. During the Great Depression, when he be­ came concerned with the problem of full employment, his position had begun to change. He despaired of gaining approval for policies of expansion on a world scale; he supported, as the only practical alternative, the use of autarkical measures to ensure domestic re­ covery. Now his views were changing again : The autum n o f 1941 was for Keynes a time o f deep reflection and heart searching. . . . He was advised on every side that it would be needful to 1 Robbins, Economic Planning and International Order (London, 1938); Meade, The Economic Basis of a Durable Peace (London, 1940). a Robbins, p. 321. a Meade, p. 76. 4 See infra for a discussion of his views and those of other critics. 4 See Chapter V.

30

The British Response

maintain something like the war-time system, suitably modified, o f tight controls, of blocked accounts and bilateral bargains. . . . Yet he revolted against all this. He, like the Americans, disliked reverting to the law o f the jungle. His instincts were for international cooperation. I f these instincts had been dorm ant in the years before the war, that was because such instincts seemed impracticable; the internationalists tended to be those who had not accepted Keynesian economics, and to hand international arrangements over to them would, in his judgment, be fatal. U ntil the world was converted to his views, one must aim at trying them out in Britain, even if this meant some insulation. But was the world changing n o w ? . . . Perhaps the time was almost ripe to attem pt to apply Keynesian thought on a world scale; that would be much better than doing so on a national scale only.1

Thus, at a critical time, a powerful force was added to the ranks of those who were sympathetic to the post-war reconstruction of multilateral trade. T H E C R IT IC S OF M U L T IL A T E R A L IS M

Within the British Government powerful forces were working for a favourable response to the American challenge. But opinion in Whitehall was by no means representative of the country as a whole. Outside the Government were powerful groups who opposed multi­ lateralism in principle or who put so many qualifications on its recon­ struction that their position amounted to the same thing. This oppo­ sition was not difficult to understand. The United Kingdom had tried the liberal alternative in both commercial and financial policy. After the First World War it had clung to free trade and the gold standard despite widespread defections by other countries. These traditional policies had been accompanied by mass unemployment and increasing pressure on the balance of payments. Henderson’s was a minority voice within the Government, but he spoke for many outside when he wrote: The history o f the inter-war period provides no support for the view th a t we should attem pt once again to reconstruct a war-shattered world on the basis o f a freely working economic system, international credits, the reduc­ tion o f trade barriers, and the outlawry o f quantitative regulation. To attem pt this would be not to learn from experience b ut to fly in its face. It would be to repeat the mistakes made last time in the name o f avoiding them. It would be to invite the same failure, and the same disillusionment; the same economic chaos and the same shock to social and political stability; the same discredit for the international idea.* 1 Roy F. Harrod, The Life o f John Maynard Keynes (London, 1951), pp. 525-6. * *International Economic History of the Inter-War Period*, a memorandum pre-

The Critics o f Multilateralism

31

To put the matter bluntly, the inter-war misfortunes had destroyed the former faith in the efficacy of freely working market forces. The decline of this faith had been reflected in the decline of the Liberal Party. The Labour Party, which supplanted the Liberals as the second force in British politics, tended to identify the free market with mass unemployment and social injustice. The Conservatives, at the same time, were becoming increasingly responsive to demands for protection and exclusion on behalf of vested interests in industry and agriculture, for whom free trade had meant the loss of markets, falling profits, and even financial ruin. On neither Left nor Right, therefore, was there much enthusiasm for economic liberalism. On both sides there was less interest in efficiency than in security, less interest in the size of national income than in the nature of its dis­ tribution. It was not difficult to see the implication of these develop­ ments for British foreign economic policy: We m u s t. . . reconcile ourselves once and for all to the view that the days o f laissez-faire and the unlimited division o f labour are over; that every country—including G reat Britain—plans and organises its production in the light o f social and military needs, and that the regulation o f this production by such *trade barriers’ as tariffs, quotas, and subsidies is a necessary and integral part o f this policy. This does not mean that the principle o f the division o f labour is in itself false, that world prosperity will not be enhanced by an abundant flow o f international trade, or that Britain has n o t above all other countries a supreme interest in a revival o f the free exchange o f goods and services. W hat it does mean is that this exchange can no longer be left to the working o f Adam Smith’s ’invisible hand*, but must be consciously and deliber­ ately organized by those who are responsible for commercial policy.1

Thus very formidable opposition to the American challenge took shape on both extremes of the political spectrum. On the one side, British industry, which in earlier days had been a powerful supporter of liberal trade, had become much less confident about its ability to compete with producers in the United States and other more recently industrialized countries. It regarded with profound suspicion any attempts to modify the system of protection and Preference which had been erected in the wake of the Great Depression. When, for example, the British Government in 1937 began negotiations on an Anglo-American trade agreement, 150 members of the Parliamentary pared 3 Dec. 1943 during Henderson's service in the British Treasury, reprinted in Henry Clay (ed.). The Inter-War Years and Other Papers, a Selection from the Writings o f Hubert Douglas Henderson (Oxford, 1954), p. 245. 1 The Times (11 Jan. 1941).

32

The British Response

Committee of the Empire Industries Association announced their ‘emphatic objection to any action which would in any way interfere with the fuller development or even weaken the permanent effective­ ness of our domestic and Imperial tariff system, or which would sacrifice home and Empire production for the sake of some illusory project for the revival of economic internationalism’.1 A short time later the Federation of British Industries began to negotiate a com­ prehensive set of restrictive arrangements with the industrialists of Nazi Germany.2British business groups showed no signs of abandon­ ing these policies in their planning for the post-war period. In notable contrast with their American counterparts, they urged the main­ tenance of widespread government controls and the development of more effective private agreements to control the movement of prices and the flow of trade.3 The London Chamber of Commerce went so far as to suggest that international trade should be conducted perma­ nently by a system of bilateral clearing,4*and the Federation of British Industries declared: It is easy to talk of Anglo-American co-operation, but we must be realistic and face the difficulties. . . . After the war we shall not be in the same favourable position as in the past. Instead of being a creditor, we shall be a debtor nation___In such circumstances the view is widely held in industrial circles in this country that we must, at any rate for some con­ siderable period, rely on a policy of directive imports, on the assumption that we only import from overseas countries those essential commodities for which such overseas countries are prepared to accept payment by the only means which will be open to us—i.e., by the export of our own pro­ ducts and such services as we can render. In effect, almost a system of barter, or, at any rate, a system of bilateral trade which will regulate our imports by our capacity to pay for them. This involves import and export controls, possibly by quota, preferential treatment of the imports of those countries which are prepared to assure us of the means of paying for them, and exchange control.6 1 The Times (9 June 1937). * The project was hastily terminated when the Germans marched into Prague. For the text of the agreement, see 345 H.C. Deb. 1107-9 (21 Mar. 1939). * See Association of the British Chambers of Commerce, Report o f the Special Com­ mittee on Post-War Industrial Reconstruction (London, 1942); London Chamber of Commerce, Report on General Principles o f a Post-War Economy (London, 1942); and Federation of British Industries, Reconstruction: A Report by the Federation o f British Industries (London, 1942). For a comparison of the views of British and American business groups, see the report on their trip to England of Eric Johnston and William Benton in Life (25 Oct. 1943); also Anonymous, ‘The Post-War Exchange Regime*, The Banker, lxiii (1942), p. 8. 4 London Chamber of Commerce, op. cit., citing with approval Economic Reform Club, Twentieth Century Economic System (London, 1942). • Op. cit.

The Critics o f Multilateralism

33

The most obvious form of right-wing opposition to multilateralism came in the passionate defence of Imperial Preference. A consider­ able portion of British industry had become devoted to the Preference system, which provided shelter in Commonwealth markets and, so long as the Dominions did not become serious industrial rivals, no threat of competition at home. But Preference probably drew its widest support on non-economic grounds. To the people of a small island nation, confronted with increasingly powerful military and industrial rivals, the concept of membership in a vast Empire, knit together by intimate economic ties, naturally exerted a powerful appeal. This political aspect of Imperial Preference, though it had declined in importance in the inter-war period, was revived considerably by the Second World War. The members of the Commonwealth had stood together, and, for a time, virtually alone, against the German onslaught. Sentiment as well as self-interest, therefore, brought new support to the Ottawa idea. The supporters of Imperial Preference found two strong spokes­ men in the war-time Government. The first was L. S. Amery, Secre­ tary of State for India, a veteran of the early campaigns for Imperial Preference fought under the leadership of Joseph Chamberlain. Amery was now Chairman of the Empire Industries Association and perhaps the most effective public spokesman for the Preference cause. The second spokesman for Preference was Lord Beaverbrook, Mini­ ster of Supply, the wealthy titan of the publishing world whose newspapers made a ritual of extolling the British Empire. Beaverbrook’s close relations with the Prime Minister put him in a strong position to influence official policy. Churchill had not forgotten that when he was Chancellor of the Exchequer in 1925 Beaverbrook vir­ tually alone among his friends had warned against the return to gold. He would be particularly sensitive to Beaverbrook’s new warn­ ings that Preference must not be sacrificed in any Anglo-American programme for reconstructing a liberal régime. In discussing right-wing opposition to multilateralism we have so far concentrated on the attitude of industry. The influence of British agriculture was also considerable. The landowning classes, after all, had been traditionally protectionist, and the experience with free trade had done nothing to change their position. British agriculture had found it increasingly difficult to compete with cheap foreign supplies of grains and other foodstuffs; consequently, it had suffered a steady and serious decline. Although increasing reliance on overseas food-

34

The British Response

stuffs was economically justifiable, it did have grave implications for the national security. With the coming of the Second World War this consideration reinforced the supporters of agricultural protection. It proved necessary to achieve a large and rapid expansion in farm production. R. S. Hudson, the Minister of Agriculture, backed by the landed interests in the Conservative Party, urged that a large part of the expansion should be maintained after the war, even if it required substantial resort to subsidies, tariffs, and other devices. This was another factor obstructing a liberal approach to inter­ national trade. For all these reasons the British right was profoundly sceptical of the American challenge. There was opposition also on the other end of the political spectrum. Here two main groups could be dis­ tinguished. The most extreme was composed of left-wing Socialists and miscellaneous radicals who advocated a thorough reordering of society in which capitalism would be replaced by centralized govern­ ment planning of economic life. The members of this group, in­ fluenced by the writings of Marx and Lenin, feared the effects of capitalism in the international no less than in the domestic sphere. Its leading intellectuals, such as Harold Laski, G. D. H. Cole, and E. H. Carr, attacked liberal trade policy as a sure recipe for social injustice, depression, and even war.1 In their view the competitive struggle for markets, raw materials, and investment outlets consti­ tuted one of the major causes of international conflict. This group was never, by itself, a very potent political force; but the ideas put forward by its major spokesmen sometimes found their way into the official statements of the Labour Party.2 A second group on the British left was of rather more political importance. Its opposition to multilateralism was based more on non-Socialist economic theory and Britain’s inter-war experience. Industrial depression and balance of payments difficulties had focused attention on the workings of the free trade, gold standard system, which had so long been a part of British policy. This system, it was now widely understood, maintained international equilibrium through adjustments in domestic prices, interest rates, incomes, and 1 One of their most influential books was Carr’s The Conditions o f Peace (London, 1942). In this stinging indictment of the capitalist system, Carr urged that ’we must cease to regard the mere removal of trade restrictions as an ideal—even as an impractic­ able ideal—and recognise that organised trading is an essential condition of the fulfil­ ment of our purposes’. Id., p. 267. 1 See, for example. The International Post-war Settlement (London, 1944), pp. 2-7, which held the elimination of capitalism essential both for social justice and world peace.

The Critics o f Multilateralism

35

employment. External stability might therefore be achieved only at the cost of instability in the domestic economy. In the event of an American depression, for example, American prices would fall; this would stimulate British imports from the United States and retard British exports; Britain would lose gold until it experienced a similar deflation. At the same time, American interest rates would rise; capital would be drawn away from Britain to the United States until British interest rates were increased to a similar ex­ tent. Finally, the fall in American income and employment would reduce the American demand for British goods; this would reduce income and employment in Britain’s export industries and eventu­ ally, through the operation of the ‘multiplier’ effect, income and employment throughout the country as a whole. Keynes himself had probably made the most persuasive explana­ tion of how the old-fashioned liberal trade system interfered with the requirements of domestic expansion. More than anyone else he had given to mercantilist doctrine a new respectability. Despairing of international solutions, he had urged his countrymen to remain ‘as free as possible of interference from economic changes elsewhere, in order to make our own favourite experiments toward the ideal social republic of the future’.1 Although he was turning away now from nationalistic solutions, his former writings had a continuing effect. A number of younger economists, taking up where Keynes left off, were investigating how domestic full employment and socialist re­ forms could be effectively insulated from foreign influence. A similar movement of opinion was taking place in left-wing political circles. By the outset of the Second World War, therefore, the Labour Party was considerably divided on the issue of liberal trade. Not simply exchange-rate flexibility, but exchange control, bilateralism, and state-trading had achieved a considerable vogue. This tendency would provide a further restraint on the British response to the American challenge. T H E C O N D IT IO N E D R E S P O N S E

Thus far we have concentrated on the irreconcilable opponents of the multilateral régime. In so doing we have engaged in exposition, not criticism. To refute with detailed argument the positions adop­ ted toward multilateralism by the extremists of the left and right would unduly impede this historical study. That these positions were 1 ‘National Self-Sufficiency*, Yale Review, xxii (1933), p. 769.

36

The British Response

fundamentally unsuited to British interests is already suggested by our earlier observations. The policies of protection and Preference, for example, were already proving to be self-defeating, since they reduced British and Commonwealth exports to non-Commonwealth markets. They could bring benefits to selected segments of British industry and agriculture only at a considerable cost to the nation as a whole. The policies of bilateralism or autarchy, in a similar way, could protect stability and domestic reforms only at the cost of general impoverish­ ment. Moreover, as Britain had already discovered, a country so greatly dependent on overseas supplies was not in a strong position when government bargaining replaced private arrangements as the primary method of international trade. Yet the criticisms put forward on the left and right could not be entirely dismissed. Official planning could hardly afford to ignore such an influential constellation of attitudes, however misguided they might be. There were, moreover, some legitimate difficulties in de­ veloping a favourable response to the American challenge. Although the difficulties did not justify the negative approach of extremist criticism, they did justify some qualifications in the British response. These qualifications were raised increasingly in unofficial discussions and pondered quietly in Whitehall itself. The first qualification involved the relationship between Britain and the Commonwealth. There was no justification, as we have in­ dicated, for the doctrinaire devotion to the Preference system. But the United Kingdom had a strong stake in strengthening Commonwealth political and economic unity in an uncertain and insecure world. There were many unique aspects of this association which Britain had an interest in preserving. For example, the British Government always preceded its participation in international conferences by close con­ sultation with other Commonwealth Governments. These consulta­ tions by no means produced a uniform Commonwealth point of view, but they made it possible for Commonwealth members to take one another’s interests into account in putting forward their own views. In laying plans for the revival of multilateral trade the United Kingdom would insist upon continuing this practice. As for Imperial Preference, it was true that Britain’s interests would not be served by the retention of the system as a whole. But there might be in­ dividual preferences of no great international significance—such as those granted to the British West Indies—whose elimination would work very severe hardship. In short, the British Government could

The Conditioned Response

37

not support any American programme which seemed to be aimed indiscriminately at weakening Commonwealth ties. The second qualification derived from the concern with full em­ ployment and social welfare in the domestic sphere. The extremists’ demands for complete insulation from world market forces were unrealistic, but it was not unreasonable to insist that any multilateral system should provide some safeguards against the spread from one country to another of industrial depression. Although moderate opinion considered the gains from multilateralism of sufficient impor­ tance to justify the frictional employment accompanying the adjust­ ment of Britain’s resources to changing patterns of international demand, it considered mass unemployment too high a price to pay. It was generally agreed that any future projects for the revival of multilateral trade would have to have an expansionist bias, with safeguards to protect the United Kingdom from fluctuations origi­ nating abroad. British opinion was particularly concerned with the danger of post-war depression in the United States. The British response to the American challenge would have to insist that some means be found to ensure that an American slump did not occur, or, failing this, that the United Kingdom and other countries be per­ mitted to protect themselves against the spread of the slump to their own economies. If such safeguards could be devised it might yet be possible to reconcile the objectives of foreign and domestic economic policy. The third qualification related to the balance of payments. Even before the war, it was becoming increasingly difficult for Britain to balance its accounts without liquidating foreign investments or drawing on gold and foreign exchange reserves. The war was aggravating this problem by causing further liquidation of reserves and investments. It would leave Britain at the end with a smaller income from invisible earnings. As we noted earlier, there would have to be a substantial increase in exports to make up for these losses. But now British exports were falling to a fraction of their pre-war level and Britain’s productive capacity was being reduced by depreciation and aerial destruction.1 How could the necessary in­ crease in exports be achieved? It was clear, to begin with, that post-war equilibrium could be only gradually restored. During the transition period Britain would have to 1 A summary of the effect of the war on Britain’s economic position is given in Chapter IX, infra.

38

The British Response

have some means of making payments for imports while repairing its war damage and rebuilding its export trade. It would also need to re­ store its reserves to something like the pre-war level. This would mean substantial assistance from the United States. Without such assis­ tance Britain could not participate in a system of multilateral trade. Even beyond the transition period there might still be a balance of payments problem. In British eyes, this underlined the importance of a substantial reduction in the American tariff and the revival of American foreign lending. How far Britain participated in trade liberation would depend on how nearly balance of payments equili­ brium was achieved. Since the United States was likely to run a large surplus, it would have to make a more than proportionate contribu­ tion to the lowering of trade barriers; Britain, in turn, if it continued to run a considerable deficit, could make only a small contribution. As Henderson put it: The objective o f securing a general lowering o f trade barriers m akes a strong appeal to us. N one the less, this is not a m atter on which we feel in a position to take a leading part. As we see it, the essential problem is to reconcile the aims of an expansion o f international trade and equilibrium in the balance o f payments. F or this purpose what is chiefly needed is th a t those countries which are otherwise likely to have an unduly favourable balance o f payments should be willing to do most to reduce im port duties and to remove other impediments to imports. Countries which are likely to be faced with an adverse balance o f payments should n o t be expected to respond in an equivalent degree. Indeed, it is only in so far as an ex­ pansion of their exports serves to bring their balance o f payments tow ard equilibrium that measures likely to increase their bill for im ports could be reconciled with ordinary prudence.1

In short, it could not be assumed that the universal resort to multi­ lateral policies would in itself be sufficient to ensure equilibrium. For this reason, it was widely argued, Britain would have to remain free to achieve equilibrium by restrictive devices. To say this was not necessarily to depreciate the value of multilateral trade. But, in the words of Geoffrey Crowther, the editor of The Economist, it was ‘ no longer possible to believe, as it was in the Free Trade era, that imports automatically produce exports, that if bread is cast upon the waters in the form of purchases from overseas it will return in due season in the form of orders from abroad’.2This was yet another ground for caution in responding to the American challenge. 1 'Great Britain’s Post-war Commercial Policy*, memorandum of 6 Jan. 1943, in Clay (ed.), pp. 272-3. * 'Anglo-American Pitfalls’,For. Aff.t xx (1941), p. 14.

Conclusion

39

CO N C LU SIO N

The American challenge in foreign economic affairs evoked a mixed and uncertain response in the United Kingdom. In govern­ ment circles there was a distinct revival in the liberal economic philosophy that had marked British policy in the nineteenth century. But outside Whitehall there were powerful forces working in the opposite direction. There were pressures on the right for protection and Preference; and on the left for autarkical measures to insulate domestic programmes of planning and control. Even moderate opinion had considerable misgivings about British participation in a multilateral régime. Official planning on post-war economic policy was inevitably in­ fluenced by these facts. Out of regard for public opinion as well as for British interests the response to the American challenge would have to be qualified in three major respects. First, it would have to take account of the historic ties between Britain and other members of the Commonwealth. Second, it would have to take account of the need to protect the British economy against the kind of violent fluctuations that had marked the inter-war period. Third, it would have to take account of the need to maintain equilibrium in the balance of payments. To put it another way, British officials charged with preparing an agenda for Anglo-American economic collaboration had to ask a number of questions. Would the United States, in its emphasis on non-discrimination, refrain from interfering with useful economic ties between the Commonwealth countries? Would it take steps to maintain reasonably full employment, or, failing that, provide some mechanism for easing the impact on other countries in the event of an American slump ? Would it assist the United Kingdom in restoring equilibrium in its balance of payments? With respect to the latter question, would it provide financial aid for British reconstruction? In the longer run, would it reduce barriers to imports and undertake foreign investment in sufficient magnitude to bring about equili­ brium? These were a considerable list of questions to put to the American Government. But unless affirmative answers were received on all of them, it would not be possible to participate fully in the ambitious programme for multilateral trade.

CHAPTER III

THE ATLANTIC CHARTER O u r preliminary survey of American and British foreign economic policy has indicated that powerful forces in both countries were working for the reconstruction of multilateral trade. But we have also noted substantial differences between the two countries, not only on the specific means by which multilateralism was to be achieved, but also on the precise meaning of that elusive term. Clearly no common programme could be successfully worked out until the participants agreed on precisely where it was they wanted to go. During the early years of the Second World War the United States and Britain made two major attempts to define their common objec­ tives in the international economic field. The first occurred in the Atlantic Conference held in August 1941. Here, in the fourth and fifth paragraphs of the Atlantic Charter, the two governments drafted a definition of multilateralism to guide their subsequent efforts at post-war reconstruction. To understand this definition and its relation to Anglo-American policy we must return to the scene of the Atlantic Conference. T H E SE T TIN G OF T H E A TLA N TIC C O N F E R E N C E

The famous conference between Roosevelt and Churchill interests us here because it produced an important statement of economic objectives. But we would do well to recall that the Atlantic Charter was, as one leading history puts it, ‘a by-product of the conference rather than its primary objective’.1President Roosevelt first suggested the meeting because he wanted to exchange views with the British Prime Minister on Lend-Lease and other questions relating to the war. Churchill, for his part, had little desire to discuss post-war issues and was chiefly concerned with improving the desperate military position of Britain. In accepting the suggestion for a conference with the American President he saw an excellent opportunity to associate the United States more closely in the European war and to present a united Anglo-American front in the face of Japanese aggression. 1 William L. Langer and S. Everett Gleason, The Undeclared War (New York,

1953), p. 677.

The Setting o f the Atlantic Conference

41

The decision to seek a joint statement of Anglo-American war aims appears to have been made by Roosevelt early in the summer of 1941. Political rather than economic problems were uppermost in the President’s mind. He believed that an authoritative declaration of the principles for which the Allies were fighting might ‘hold out hope to the enslaved peoples of the world’.1 He also considered that a declaration of this kind would have a beneficial effect on domestic opinion. At the time of the Atlantic Conference, it should be remem­ bered, the United States was still neutral. The American public had been brought by exceptional efforts to support the enactment of Lend-Lease, but it seemed reluctant to endorse additional measures which involved the risk of direct participation in the war. To rally support for such measures Roosevelt felt he needed dramatic evi­ dence that Britain was fighting for the same principles of freedom and justice that had been affirmed as the objectives of the United States. No doubt he remembered the unfortunate experience of Woodrow Wilson, who had drafted a unilateral statement of Ameri­ can war aims during the First World War in ignorance of the secret treaties already concluded between America’s allies. Roosevelt’s conception of a joint statement did not include any very detailed definition of economic objectives. As a rule he took little interest in discussions of economic principles, and this was no exception. He was mainly concerned with reaching Anglo-American agreement on political questions such as self-determination, dis­ armament, and freedom of the seas. As far as issues of post-war economic policy were concerned, he would be satisfied with a general statement—for example, that the nations of the world should have equal opportunity to enjoy the world’s resources and should work together to improve their living standards. As we have seen, how­ ever, the President’s attitude in this regard was not shared by the State Department and certain other branches of his Administration. It was to be expected that Cordell Hull would press the President to seek more specific commitments in the economic field. This natural tendency was reinforced by an event that occurred in Washington shortly before the Atlantic Conference. In the midst of negotiations on the Mutual Aid (Lend-Lease) Agreement Keynes shocked American officials by making a strong statement about Britain’s post-war economic policies. He declared that the British Government would find itself beset by such grave economic 1 Sumner Welles, Where Are We Heading? (London, 1947), p. 6.

42

The Atlantic Charter

difficulties at the end of the war that it would be forced to resort to bilateral arrangements and other forms of outright discrimination against the United States.1 This statement made a profound im­ pression. It prompted Hawkins, who represented the State Depart­ ment in these negotiations, to draw up a new draft of the Mutual Aid Agreement which prohibited any form of discrimination by Britain in the post-war period.2 It also set in motion a process by which similar prohibitions found their way into the draft of the joint statement which Under-Secretary of State Welles, at the behest of Roosevelt, was preparing for the Atlantic Conference.8 In this way detailed issues of economic policy seeped into the preparations for a conference whose primary concern was with the military problems of the war and the political problems of the post-war settlement. T H E F IR S T D E F IN IT IO N O F M U L T IL A T E R A L IS M

The Atlantic Conference began on 9 August 1941, when Roosevelt and Churchill met at a secret ocean rendezvous in Placentia Bay, Newfoundland. The President was accompanied by Welles, represent­ ing the Department of State, and Harry Hopkins, his trusted personal adviser. Churchill was assisted by Sir Alexander Cadogan of the Foreign Office and later by Beaverbrook, at this time Minister of Supply, who arrived on the scene by air. At a preliminary meeting on the first day Welles suggested to Cadogan the drafting of a joint declaration and placed particular emphasis on the economic issues involved. Welles cited the attitude that had been expressed in Washington by Keynes, remarking that an element in British opinion seemed to be ‘directing its energies towards the resumption or continuation by Great Britain after the war of exactly the kind of system which had proved so fatal during the past generation*. He advanced the hope that Cadogan recog­ nized ‘the need, when the time came for world reconstruction to be undertaken, of the freest possible economic interchange without discriminations, without exchange controls, without economic pre­ ferences utilized for political purposes and without all of the mani­ fold economic barriers which had in my judgment been so clearly responsible for the present world collapse*. Cadogan expressed 1 For a description of Keynes’s warnings and the American reaction see Harrod, p. 513, and E. F. Penrose, Economic Planningfor the Peace (Princeton, 1953), pp. 14-15. * For the text of the revised draft, see infra, p. 56. * Langer and Gleason, p. 679, citing Berle Diary (MS.) (17 July 1941) and memo­ randum of the Division of Commercial Treaties (4 Aug. 1941).

The First Definition o f Multilateralism

43

general sympathy with Welles’s remarks but was not prepared to pursue the matter further until the question of the joint statement was taken up by the two leaders themselves.1 On the evening of 9 August Roosevelt dined with Churchill and proposed that they draft a joint declaration ‘laying down certain broad principles which should guide our policies along the same road’.2 The Prime Minister responded eagerly and by noon of the following day, with a speed suggesting anticipation of the President’s proposal, produced a five-point draft which formed the basis of the final declaration. ‘Considering all the tales of my reactionary, Old World outlook, and the pain this is said to have caused the President, I am glad that it should be on record that the substance and spirit of what came to be called the “Atlantic Charter” was in its first draft a British production cast in my own words.’3 But the Prime Minister, having heard of Welles’s strong representations to Cadogan, was anxious to avoid an untimely controversy. His draft on economic matters was deliberately vague: Fourth, they will strive to bring about a fair and equitable distribution o f essential produce, not only within their territorial boundaries, but between the nations o f the world.4

For Welles this formulation was unacceptable. He was determined to execute the precise commitment which was sought by Hull and the officials in the State Department’s Commercial Policy Division. He was also personally convinced of the ineffectiveness of the Churchill draft, which he found ‘reminiscent of the pious hopes expressed in a thousand and one economic conferences that “ a fair and equitable international distribution of commodities” would come into being, during the very years when tariffs were being built up in the United States, and when every variety of discriminatory trade barrier was being erected in an increasingly autarchic world’.6 Since it was his responsibility to redraft the British version on behalf of the United States, he seized the opportunity to spell out a precise commitment: Fourth, they will strive to prom ote mutually advantageous economic relations between them through the elimination o f any discrimination in either the U nited States o f America or in the United Kingdom against the im portation o f any product originating in the other country; and they will 1 Memorandum of conversation between Welles and Cadogan (9 Aug. 1941), cited in Langer and Gleason, pp. 681-2. * Winston S. Churchill, The Grand Alliance (London, 1950), p. 385. * Id., p. 386. 4 Ibid. 4 Welles, p. 7.

44

The Atlantic Charter

endeavour to further the enjoyment by all peoples of access on equal terms to the markets and to the raw materials which are needed for their economic prosperity.1 The phrases before the semicolon in Welles’s draft were virtually identical to those of the revised text of Article Seven of the Mutual Aid Agreement which Hawkins and his associates in the Commercial Policy Division had drafted in response to the alarming statements by Keynes.2 To Roosevelt, they read too much like the text of a detailed trade agreement and seemed out of place in what was intended to be a lofty statement of general purpose. He told Welles it would be better ‘to limit the scope of the entire declaration to principles, rather than include therein references to immediate issues’. For this reason he struck out the words before the semicolon; but he retained their general import by inserting the words ‘without discrimination’ in the passage that followed, so that the section now provided for ‘access without discrimination and on equal terms’. In Welles’s view this retained the ‘essential point’ of the excised section. Welles re­ wrote his draft of the Charter once more, incorporating the sugges­ tions of the President, and in this form it was discussed on the morning of 11 August by Churchill and Roosevelt, assisted by Welles, Hopkins, and Cadogan.8 Churchill immediately noted the revised wording of his fourth paragraph. He asked whether the phrase ‘without discrimination’ would be held to proscribe the Ottawa Agreements. If so, it would be his duty as Prime Minister to submit the text not only to his own Government but to the Governments of the Dominions, and, he added, ‘I should have little hope that it would be accepted’.4 Welles acknowledged the difficulty, but called attention to the words ‘en­ deavour to further’, which he said negated the suggestion of an immediate contractual obligation. Roosevelt added that the question was of importance ‘as a means of assurance to the German and Italian peoples that the British and the United States Governments desired to offer them, after the war, fair and equal opportunity of an economic character’.6 With this objective the Prime Minister ex­ pressed his personal sympathy, but he repeated that at least a week would be required to seek the necessary approval. 1 Welles, p. 8. * See infra, p. 56. * Welles, pp. 9-10. 4 Churchill, p. 387. Robert E. Sherwood, in Roosevelt and Hopkins (New York, 1948, vol. i), p. 360, credits Beaverbrook, who had arrived at the Conference by this time, with persuading the Prime Minister that he had no authority to accept the American draft as it then stood. • Welles, p. 13.

The First Definition o f Multilateralism

45

At this point the President’s advisers gave divided counsel. Hop­ kins, who was concerned more with the importance of reaching speedy agreement on the joint declaration than with specific ques­ tions of commercial policy, suggested that Cadogan and Welles be asked to work out a compromise draft of the controversial provision. ‘It was inconceivable’, he declared, ‘that the issuance of the joint declaration should be held up by a matter of this kind.’1 Welles, however, was adamant: I said that in my own judgm ent further modification o f that article would destroy completely any value in that portion o f the proposed declaration. I said it was not a question o f phraseology, but that it was a vital principle which was involved. I said that if the British and the United States govern­ ments could not agree to do everything within their power to further after the termination o f the present war, a restoration o f free and liberal trade policies, they might as well throw in the sponge and realize that one o f the greatest factors in creating the present tragic situation in the world was going to be permitted to continue unchecked in the postwar world. . . . I said . . . that it seemed to be imperative that we try to agree now upon the policy of constructive sanity in world economics as a fundamental factor in the creation o f a new and better world and that except through an agree­ ment upon such a policy by our two governments there would be no hin­ drance whatsoever to the continuation later o f the present German policies o f utilizing trade and financial policies in order to achieve political ends.2

This forceful presentation of the State Department’s views appears to have provoked the British Prime Minister. T could not help mentioning the British experience in adhering to Free Trade for eighty years in the face of ever-mounting American tariffs. . . . All we got in reciprocation was successive doses of American protection.’3 At these observations, Churchill recalls, Welles looked ‘a little taken aback’.4 The Prime Minister then proposed amendments to the American draft—strike out ‘without discrimination’, substitute ‘trade’ for ‘markets’, and, most important, insert the saving clause ‘with due respect for existing obligations’. The President, evidently impressed, asked Churchill to undertake the job of drafting the article in acceptable terms. At the close of this discussion Churchill cabled to the War Cabinet in London a text of the Charter and some of his own comments. On the economic question he remarked: The fourth condition would evidently have to be amended to safeguard our obligations contracted in Ottawa and not prejudice the future o f 1 Ibid.

2 Id., pp. 13-14.

2 Churchill, p. 387.

4 Ibid.

46

The Atlantic Charter

Imperial Preference. This might fall into its place after the war in a general economic settlement, with decisive lowering o f tariffs and trade barriers throughout the world. But we cannot settle it now. F o r the sake o f speedy agreement I have little doubt he [Roosevelt] will accept our amendments.1

On the last point the Prime Minister's judgement proved to be correct. The cable was hardly sent when Welles made a brave but fruitless effort to carry out the State Department’s wishes. He warned the President that to remove the phrase ‘without discrimination’ and to add the saving clause ‘with due respect for existing obligations' would leave intact the Ottawa Agreements and cause the article to be ‘gravely weakened’. He begged the President to ask Churchill to ‘cut corners’ and accept the American draft without consulting the Dominions.2 Roosevelt rejected this advice. He wanted publication of the joint declaration to coincide with announcement of the Atlan­ tic Conference and agreed with Hopkins that the commercial policy issue was not important enough to stand in the way. Thus, shortly before the next meeting to discuss Churchill’s compromise text, he wrote to Welles : ‘Time being of the essence I think I can stand on my own former formula—to wit: access to raw materials. This omits entirely the other subject which is the only one in conflict : discrimina­ tion in trade.’3 The note suggests how little understanding the Presi­ dent had of the State Department’s economic doctrines, since De­ partment spokesmen had repeatedly held that a system of discrimina­ tory import tariffs such as the Ottawa Agreements was inconsistent with the principle of equal access to raw materials.4 One might almost conclude that even apart from the saving clause about ‘existing obligations’ the President did not consider Imperial Preference and other commercial policy issues to be affected by a promise to provide equal access ‘to the raw materials of the world’.6 The President’s decision to accept Churchill’s amendments re­ moved further impediments to agreement on the fourth paragraph. On the morning of 12 August Roosevelt and Churchill met over the final draft of the Atlantic Charter. The controversial paragraph now expressed the desire of the two countries ‘with due respect for their existing obligations, to further the enjoyment by all States, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their 1 Churchill, p. 391. * Welles, p. 15. * Id., p. 16. 4 See p. 19, supra. 5 In any case, the final draft of the Charter specified equal access to trade as well as raw materials.

The First Definition o f Multilateralism

47

economic prosperity*. Since the previous meeting Churchill had received a message from the War Cabinet suggesting qualifications to the fourth paragraph beyond those which he had already made, but the Prime Minister did not press them when the President ex­ pressed a preference for the wording of Churchill’s own amend­ ments. The misgivings of the War Cabinet apparently included both the Preference issue and the issue of protection generally, since the Prime Minister found it necessary to cable back: ‘Phrase about “ respect for existing obligations” safeguards our relations with Do­ minions. We could not see how competition of cheap labour would come in as all countries preserve the right of retaining or imposing national tariffs as they think fit pending better solutions.’1 In addition to suggesting amendments to the fourth paragraph the War Cabinet proposed a fifth, which expressed in more affirmative terms the objectives of economic betterment and social justice— objectives which occupied such a conspicuous place in British post­ war planning: Fifth, they desire to bring about the fullest collaboration between all nations in the economic field with the object o f assuring, for all, improved labour standards, economic development and social security.

With the ready acceptance of this new paragraph by the President the drafting of the first definition of Anglo-American post-war economic objectives was finally complete. T H E A T L A N T IC C H A R T E R IN A N G L O -A M ER IC A N O P IN IO N

The text of the Atlantic Charter was released to the public on 14 August 1941 in a communiqué which announced that the Presi­ dent and the Prime Minister had met at sea to discuss the problem of war supply and the wider implications of Axis aggression. The joint declaration itself was presented simply as a statement of ‘certain common principles in the national policies of their respective countries on which they base their hopes for a better future for the world’.2 The cautious tone of these phrases reflected the concern of both Roosevelt and Churchill to avoid the appearance of having made firm commitments on behalf of their respective governments. The Presi­ dent knew that any formal instrument in the nature of a treaty 1 Churchill, p. 397. * For the text of the communiqué and a comprehensive report of the Conference see The New York Times (15 Aug. 1941).

48

The Atlantic Charter

would probably require Congressional approval; he feared the reaction of Congress to any document which looked like an AngloAmerican military alliance against the Axis powers. Roosevelt’s anxiety was fully justified, for even with its cautious introduction the Charter was bitterly assailed by isolationist Congressmen. Admini­ stration supporters had to give assurances that the document con­ stituted only ‘a general statement of policy’ and involved ‘no moral obligation of any sort during or after the war’.1 The Prime Minister was faced with a similar problem. Just as Roosevelt feared the domestic political repercussions of a formal association with the Allied powers, so did Churchill fear the divisive internal controversies that might accompany specific engagements about the future of the British Empire. In reporting to the British people, therefore, he emphasized that the Charter was not a declara­ tion of ‘final and formal peace aims’ but only ‘a simple, rough-andready war-time statement of the goal towards which the British Commonwealth and the United States mean to make their way’.2 Similarly, in his presentation to Parliament, he sought to convey the impression that the Charter imposed no new commitments but simply affirmed principles which had ‘long been familiar to the British and American democracies’.3 As might be expected, however, qualifications of this kind made less impression on the public mind than the eight bold paragraphs of the Charter themselves. In Britain the reference to ‘the final destruc­ tion of Nazi tyranny’ and ‘a wider and permanent system of general security’ were welcomed as heralding the end of American isolation. Although British opinion evinced some disappointment that a more definite commitment of military support was not included, the Char­ ter served to encourage hopes that the United States would eventually enter the European war.4 The American public set even greater store by the document. Because it provided not only for ‘equal access’ to raw materials but also for the ‘self-determination’ of subject peoples, it was hailed as a significant anti-imperialist manifesto. One historian captures what was the American mood when he describes the effect of the Charter as ‘cosmic and historic’, adding: ‘The British learned that when you state a moral principle, you are stuck with it, no matter how many fingers you have kept crossed at the moment___ Even the qualifying 1 87 Cong. Rec. 7209 (19 Aug. 1941). 9 374 H.C. Deb. 67 (9 Sept. 1941).

* The New York Times (25 Aug. 1941). 4 The New York Times (15 Aug. 1941).

The Atlantic Charter in Anglo-American Opinion

49

phrase about “ existing obligations” became inconsequential under the superior weight of the new responsibilities firmly if not formally assumed.’1 When the text of the Charter was released it was described triumphantly by Hull as a ‘statement of basic principles and funda­ mental ideas which are universal in their practical application’.2 Other government spokesmen saw in the Charter the promise of a new order of international relationships. Welles exclaimed: The age of imperialism is ended. The right o f all peoples to their freedom must be recognized. . . . The principles o f the Atlantic Charter must be guaranteed to the world as a whole—in all oceans and in all continents.8

Particular enthusiasm was displayed in the United States over the Charter’s economic clauses. Administration spokesmen held out the fourth and fifth paragraphs as a victory for the principles of foreign economic policy which the United States had been advocating in recent years. Welles was quite specific in his interpretation: ‘The Atlantic declaration means that every nation has a right to expect that its legitimate trade will not be diverted and throttled by towering tariffs, preferences, discriminations or narrow bilateral practices.’4 He suggested that the pledge to economic good-neighbourliness would mainly require changes in the policies of other countries, since the principles of the Atlantic Charter had already become a part of the foreign economic policy of the United States: M ost fortunately we have already done much to put our own house in order. So long as we adhere to and persistently implement the principles and policies which made possible the enactment o f the Trade Agreements Act, the U nited States will not furnish, as it did in the last war, an excuse for trade-destroying and trade-diverting practises.®

British leaders spoke less often and less specifically than their American counterparts about the economic clauses of the Atlantic Charter. In explaining the fourth and fifth paragraphs to the British public, the Prime Minister remarked simply that ‘instead of trying to ruin German trade by all kinds of additional trade barriers and hindrances, as was the mood of 1917, we have definitely adopted the view that it is not in the interests of the world and of our two countries that any large nation should be unprosperous or shut out from the means of making a decent living for itself and its people by its industry and enterprise’.6 Nothing was said about specific issues 1 Sherwood, pp. 440-1. * Id. (31 May 1942). « Ibid.

a The New York Times (15 Aug. 1941). 4 Id. (8 Oct. 1941). fl Id. (25 Aug. 1941).

50

The Atlantic Charter

in British trade and financial policy which might provoke differences in the War Cabinet. Indeed, the scepticism with which many business leaders as well as left-wing Socialists regarded the restoration of multilateralism made it dangerous to try to spell out the implications of the Charter’s economic clauses in any great detail. The silence maintained on this score caused one British commentator to com­ plain that ‘the implications of our acceptance of the principle of equal access are hardly anywhere yet being taken seriously in this country’.1 This last remark was probably something of an over-statement. Despite the silence from Whitehall, the British press was quick to see the far-reaching significance of the Charter’s economic clauses. The Times spoke for the large majority, declaring: ‘Equal opportu­ nity for all is a principle which must be written large in our inter­ national, as well as in our national, programme of reconstruction.’2 The Editor of The Banker noted approvingly that the Charter fore­ cast ‘an integrated world economy and not a series of independent and mutually exclusive systems’.8 The News Chronicle remarked with satisfaction that ‘the considerable number of people in this country who are already planning our post-war trade in terms of barter, bilateralism, trade zones, clearings, exchange control, and by the concepts of the “ between wars” era must begin at once to recast their ideas’.4 And The Economist declared: The Atlantic D eclaration. . . i s . . . a statement in the most general terms, o f the joint and several need o f all nations to re-establish the equality o f trading opportunity upon which the prosperity and progress o f the world have depended in the past; and, more specifically, it is a repudiation o f the considerations o f power which have elevated self-sufficiency from being a sauve qui peut expedient to be a principle o f national policy.6

If any reservations were heard, they were not so much to the general objective as to the specific means designed to achieve it. The Times issued a warning: The negative conception o f the removal o f trade barriers is n ot enough. I t may be doubted whether equal access to raw m aterials. . . will suffice. . . to bring about that revival o f international trade which G reat Britain, above all countries, ardently desires. D uring the troubled interval between the two wars purchasers were rarely if ever excluded from markets in which 1 Oscar Hobson, ‘Point Four—Do We Mean It?*, News Chronicle (25 Sept. 1941). * (18 Aug. 1941). 8 ‘An End to Economic Nationalism*, lx (1941), p. 174. 4 (15 Aug. 1941). 8 ‘Freedom to Trade’, cxli (1941), p. 221.

The Atlantic Charter in Anglo-American Opinion

51

they could afford to buy. The crux of the problem was the drying up of purchasing power, of production brought to a standstill and men kept in idleness, not because there was no demand for their products, but because there was apparently no method known to orthodox finance of bridging the gap between consumer and producer. This is the barrier which must be broken down.1 As statements of an ultimate objective, therefore, the economic clauses of the Atlantic Charter were widely approved on both sides of the Atlantic. But one untidy and insistent detail intruded in this broader picture: the question of Imperial Preference. Immediately following publication of the Charter, Secretary Hull was asked whether the phrase ‘with due respect for existing obligations’ meant the continuation of the Ottawa Agreements.2 Although Welles be­ lieved that the phrase was inserted ‘solely to take care of what it was hoped would be merely temporary impediments to the more farreaching commitment originally envisaged*,3 Hull regarded it as of greater importance. He did not say so publicly at the time, but he felt that the saving clause ‘deprived the article of virtually all signifi­ cance’, since it meant that the preferential system would be retained.4 Discouraged and resentful, he regarded the concession to the Prime Minister as a serious betrayal of State Department purposes. Indeed, he felt so strongly on this score that some weeks later he proposed adding to the fourth paragraph an unqualified commitment for the elimination of Preference. Only when Ambassador Winant reported the misgivings of Churchill about the reception such a proposal would have from the War Cabinet and from the Dominion Govern­ ments was the Secretary prevailed upon to abandon his project.5 The statement by Secretary Hull that the saving clause of para­ graph four ‘deprived the article of virtually all significance’ was striking evidence of his passionate concern with the Ottawa Agree­ ments. In the light of history, it may be thought to show a certain lack of perspective. These agreements were, after all, only one of many forms of discrimination which the promise of ‘equal access* was designed to proscribe. Moreover, the statement seems to concede a greater exception for the Ottawa Agreements than is required by the language of the Atlantic Charter. The saving clause provided only that ‘due respect’ should be accorded to ‘existing obligations’. The preferential agreements in existence between the Dominions ran 1 (18 Aug. 1941). a The New York Times (IS Aug. 1941). * Welles, The Time for Decision (New York, 1944), p. 176. 4 Hull, Memoirs, vol. ii, pp. 975-6. 5 Langer and Gleason, p. 680.

52

The Atlantic Charter

only for a specific term of years and could be terminated at any time by mutual consent. Accordingly the qualifying phrase did not make Imperial Preference a permanent exception to the principle of equal access ; it merely permitted a short-run exception to avoid violation of the temporary preferential agreements then in force. This was, in fact, the general interpretation given—and given approvingly—during public discussion in the United Kingdom. Most of the major periodicals minimized the saving clause and stated flatly that the Ottawa Agreements stood in contradiction to the objective stated in the fourth paragraph of the Charter.1 In the words of the Financial News: ‘It is true that all this is subject to the qualify­ ing clause, “ with due respect for existing obligations’*. But the im­ plication is surely, that when those obligations conflict with the spirit of the new Anglo-American agreement, they will be amended at the earliest possible moment.’2 C O N C LU SIO N

The Atlantic Charter embodied the first agreed statement of the post-war economic objectives of Britain and the United States. This fact alone may be considered sufficient to justify its place in the annals of modern history. But perhaps there will be an objection to this view. It may be argued that the economic clauses of the Charter were drafted in such general terms as to be virtually meaningless, that ‘access on equal terms’ was an abstraction designed to obscure specific Anglo-American differences, and that the abortive attempt to resolve the Preference issue provided proof that beneath the sonorous phrases there lay no real agreement on ultimate objective. The answer to this objection may be stated in both negative and affirmative terms. In the first place, as the Prime Minister himself declared, the Charter ‘does not try to explain how the broad prin­ ciples proclaimed by it are to be applied to each and every case.. . . It would not be wise for us, at this moment, to be drawn into labo­ rious discussions on how it is to fit all the manifold problems with which we shall be faced after the war.’3 In August 1941 the United States had not entered the war; it was impossible to determine how the war would be won—even whether it would be won at all. The leaders of the two great Western nations had met primarily to reach 1 See, for example, ‘Freedom to Trade*, The Economist, cxli (1941), p. 221 ; Financial Editor, The Manchester Guardian (15 Aug. 1941); Editor, The Banker, lxi (1941), pp. 188-9. a (15 Aug. 1941). » 374 H.C. Deb. 68 (9 Sept. 1941).

Conclusion

53

a broad understanding on resistance to Nazi aggression. This had, for reasons already described, brought them to consideration of the kind of world which might eventuate if such resistance were success­ ful. A meeting devoted to these ends was not the proper occasion for discussing specific issues of financial and commercial policy—subjects with which the two leaders had neither the time nor the competence to deal. One may even regret that an issue like Imperial Preference was raised in direct form and that the controversy about it became such a celebrated part of the history of the Atlantic Conference. There is also a more affirmative case for the Charter’s economic clauses. Despite their generality, they contained clear enough markers to direct the foreign policies of the two governments. The promise of equal access to trade and raw materials meant as a very minimum the avoidance both of exclusive economic blocs and the use of totalita­ rian trade practices for political ends. The promise of international collaboration for economic advancement meant that the United States and Britain, through appropriate bilateral or multilateral institutions, would work together to improve the living standards and economic security of their own and other friendly peoples. In view of the history of the inter-war period, the significance of these two promises was not inconsiderable. It remained to be seen, how­ ever, whether and under what circumstances they would both be kept.

CHAPTER IV

ARTICLE SEVEN h e United States and Britain made a second major attempt to define their post-war economic objectives in the Mutual Aid Agree­ ment signed on 23 February 1942. The primary object of the Agree­ ment was to lay down certain principles governing the provision of Lend-Lease supplies; but Article Seven, dealing with the eventual terms of Lend-Lease settlement, stimulated a further exchange of views on post-war trade policy. This Article went well beyond the hastily drafted economic clauses of the Atlantic Charter. It required eight months of intermittent negotiation and emerged in final form as a binding international commitment which defined the multilateral objective in some detail. Its terms were subsequently incorporated in the Mutual Aid Agreements concluded by the United States with other Lend-Lease recipients. In this way Article Seven became the basic legal framework for post-war planning in the economic field.

T

T H E Q U E ST IO N OF ‘CO N SID E R A T IO N *

‘The existence of the great war debts is a menace to financial stability everywhere___We shall never be able to move again, unless we can free our limbs from these paper shackles. A general bonfire is so great a necessity that unless we can make it an orderly and goodtempered affair in which no serious injustice is done to anyone, it will, when it comes at last, grow into a conflagration that may destroy much else as well.’ Keynes wrote these prophetic words in the aftermath of the First World War.1 Unfortunately, they had gone unheeded. The European Allies had sought to collect huge reparations from a defeated Ger­ many. They had been required, in turn, to service large war debts owing to the United States. The result had been economic disloca­ tion, eventual default, and an enduring legacy of bitterness and ill will. The British and American Governments were determined now to avoid a repetition of this experience. There was little difficulty in agreeing that the defeated nations should not be asked to pay huge 1 The Economic Consequences o f the Peace (New York, 1920), pp. 279-80.

The Question o f 4Consideration'

55

reparations. But avoidance of war debts between the Allied powers posed a more difficult problem. Thanks to some ingenious New Deal lawyers, Lend-Lease had been devised just in time to avoid exhaus­ tion of Britain’s reserves of gold and dollars, which had been brought to the vanishing-point by the ‘cash and carry’ system.1 Still, a nation for whom neutrality still seemed a practical possibility naturally regarded Lend-Lease more as a generous measure on behalf of one belligerent than as an instrument necessary to its own survival. Most Americans (and most of their representatives in Congress) thought the United States should be repaid for Lend-Lease supplies, either by cash settlements or by the granting of military bases and raw materials concessions.2 The Administration was reluctant to jeopardize the enactment of the Lend-Lease bill by making a frontal attack on the repayment question. Consequently the bill left the whole matter unresolved. It authorized the President to ‘sell, transfer title to, exchange, lease, lend, or otherwise dispose of* any ‘defense article’ to any country whose defence he deemed ‘vital to the defense of the United States’. It gave him broad discretion to determine the conditions of the LendLease settlement. But—and this was a very important qualification— the terms of that settlement were to contain some ‘benefit to the United States’—a ‘payment or repayment in kind or property, or any other direct or indirect benefit which the President deems satisfactory \ 8 This arrangement had the effect of removing the decision on Lend-Lease repayment from the jurisdiction of the American Con­ gress. But the matter was still subject to Congressional influence. For the power to appropriate public funds was lodged in Congress by the Constitution. From the very beginning the price of Congres­ sional co-operation in appropriating Lend-Lease funds was the assurance that the President would require some ‘benefit’ in return for Lend-Lease beyond the defence of the United States by the mili­ tary action of other countries. Accordingly, the President and his advisers had to find a ‘benefit’ which they could hold out as the ‘consideration’ for Lend-Lease assistance. What they hit upon was 1 British reserves were down to $12 million in the spring of 1941. Statistical Material Presented During the Washington Negotiations, Cmd. 6706 of 1945, p. 5. a Witness the results of a public opinion poll taken in Feb. 1942, where 84 per cent, of those interviewed expressed the opinion that Britain should repay the United States for Lend-Lease aid; 9 per cent, thought Britain should not repay; 7 per cent, gave qualified answers or expressed no opinion. Eugene Staley, ‘The Economic Implications of Lend-Lease’, Am. Ec. Rev., xxxiii (Supp., 1943), p. 367, n. 4. * Section 3. 55 Stat. (Part 1) 31 (1941).

56

Article Seven

the promise by Britain and other aid recipients to co-operate in the post-war reconstruction of multilateral trade. This decision was not determined by domestic political considera­ tions alone. The leaders of the Administration genuinely believed that they would enhance the prospects for multilateralism by exacting specific commitments from the Allies on post-war trade policy. To get such commitments seemed both a shrewd exercise of ‘bargaining power’ and a logical arrangement suggested by the history of the recent past. After all, it was argued, the attempt of the United States to collect ‘war debts’ after the First World War had provided a major obstacle to achievement of the multilateral objective. It seemed only reasonable that if the American Government now promised to remove that obstacle the beneficiaries should promise to support the objective itself. Thus it happened that formal undertakings on post-war trade policy were inserted in the Mutual Aid Agreement concluded with Britain and the other Lend-Lease recipients. Whether these under­ takings would really promote the cause they were designed to serve is a question which future events would have to answer. T H E SECON D D E F IN IT IO N OF M U L T IL A T E R A L ISM

The historic Anglo-American negotiations on Article Seven began with the visit of Keynes to Washington in the summer of 1941. As we have already noted, his blunt warning about Britain’s post-war trade policy spurred the American negotiators to define the ‘con­ sideration’ for Lend-Lease in precise and unambiguous terms. On 28 July Keynes was handed a draft of Article Seven containing the same strict commitment to non-discrimination that Welles was to press without success two weeks later in the Atlantic Conference: The terms and conditions upon which the United Kingdom receives defense aid from the United States of America and the benefits to be received by the United States of America in return therefor, as finally determined, shall be such as not to burden commerce between the two countries but to promote mutually advantageous economic relations between them and the betterment of world-wide economic relations: they shall provide against discrimination in either the United States of America or the United Kingdom against the importation of any product originating in either country; and they shall provide for the formulation of measures for the achievement of these ends.1 1 Harley A. Notter, Postwar Foreign Policy Preparation 1939-1945 (Washington. 1949), App. 8, p. 463.

The Second Definition o f Multilateralism

57

Although this draft left no doubt that Britain would have to for­ swear Imperial Preference and other forms of discrimination against the United States, it said nothing at all about the essential counter­ parts in American policy—the lowering of tariffs and the avoidance of a serious post-war depression. Accordingly, Keynes found its provisions unacceptable—he even referred to them as the ‘lunatic proposals of Mr. Hull*.1 The negotiations reached an impasse, and Keynes returned home without agreement on Article Seven. Although this did not mean any interruption in Lend-Lease supplies, it did mean that the British were still without the vital American com­ mitment to make a generous settlement of the Lend-Lease ac­ count. Nevertheless, it was deemed untimely to pursue the matter further. In September Ambassador Winant informed the State Department that the British were absorbed in urgent war problems and asked that further negotiations on the Article be postponed. In the meantime, E. F. Penrose, economic adviser to Ambassador Winant, had been called to Washington to receive from the State Department an account of the issues which were standing in the way of Anglo-American agreement. In these conversations, and in later talks in London with Keynes and others, Penrose probed the major grounds of British resistance to Article Seven. He found that British reservations fell under the two major heads already described. In the first place, there was concern with the balance of payments problem which would face Britain in the post-war transition period. In Keynes’s view the full seriousness of this problem was not appreciated in Washington. Here Penrose did not find it possible to be very reassuring. Personally, he felt that Lend-Lease should be made retroactive, so that Britain could be reimbursed for the sizeable expenditures made in the United States before the programme had begun. But he could not cite any specific plans under way in the American Administration for implementing this view. Nor could he hold out any hope that such a plan would have the slightest chance of Congressional approval.2 On the second main ground of British anxiety—the fear of an American slump—Penrose sought to be more reassuring. The idea was widespread in Whitehall that the State Department was entirely absorbed with the reduction of trade barriers and was blind to the importance of complementary measures to maintain high levels of 1 Harrod, p. 512.

* Penrose, pp. 16-17.

58

Article Seven

employment and economic activity. This idea Penrose rejected in emphatic terms: I did my best to impress on Mr. Keynes and other government economists th at the desire for freer and for non-discriminatory trade in the State Departm ent should not be written off as the product o f a nineteenth century laissez-faire attitude toward economic affairs, untouched by recent economic thought and experience. It was true that Secretary Hull and H arry Hawkins had a particular concern with trade, but this arose from the Secretary’s lead­ ing role in that field for many years and Hawkins’ position at the head o f the division concerned with trade matters. In conversations in W ashington both Acheson and Hawkins showed themselves progressive in outlook and under no illusion that freer trade alone was a panacea for all economic ills.1

These arguments may have helped to allay British fears. But it was unlikely that the resistance to Article Seven would be overcome without more concrete evidence of American concern with the goal of economic expansion. During the autumn hiatus developments occurred on both sides of the Atlantic which enhanced the possibility of agreement. On the British side an important factor appears to have been the evolution of Keynes’s thinking. Here one can only speculate on the major influences at work. Keynes delved more deeply into projects such as his Clearing Union, which could form the basis of a multilateral system. He also pondered the consequences of a possible trade war with the United States. The likelihood of such a conflict in the event of discriminatory practices by the United Kingdom had been im­ pressed upon him during one of his conversations in Washington. Hawkins had said in no uncertain terms that the United States had its own exponents of economic nationalism and that in a trade war between the two countries the United States would inevitably triumph. This was a strong argument, Keynes saw, for attempting a more constructive approach to the problem.2 On the other side of the Atlantic a more flexible attitude toward Article Seven was also emerging. After informal negotiations with Lord Halifax, the British Ambassador in Washington, and Redvers Opie, economic advisor to the British Embassy, the State Depart­ ment produced a new, and, as it turned out, final draft of the Article. This contained the same preface as the State Department’s July draft but continued instead with the following language : To that end, they shall include provision for agreed action by the U nited States o f America and the U nited Kingdom, open to participation by all 1 Penrose, p. 18.

8 Harrod, p. 513.

The Second Definition o f Multilateralism

59

other countries o f like mind, directed to the expansion, by appropriate international and domestic measures, o f production, employment, and the exchange and consumption o f goods, which are the material foundations o f the liberty and welfare o f all peoples; to the elimination o f all forms o f discriminatory treatm ent in international commerce, and to the reduction of tariffs and other trade barriers; and, in general, to the attainm ent o f all the economic objectives set forth in the Joint D eclaration made on August 14, 1941, by the President o f the United States o f America and the Prime M inister o f the United Kingdom. A t an early convenient date, conversations shall be begun between the two Governments with a view to determining, in the light o f governing economic conditions, the best means o f attaining the above-stated objectives by their own agreed action and o f seeking the agreed action o f other likeminded Governments.1

About this draft, which awaited British approval in the closing weeks of 1941, two observations must be made. First, the new word­ ing represented a notable attempt to meet the major grounds of British anxiety already described. The terms of settlement were to provide, not directly for a régime of non-discrimination, but rather for ‘agreed action... directed to’ this end—action to be determined ‘in the light of governing economic conditions’. Moreover, the elimination of discrimination was no longer formulated as the only aim ofjoint action, but was balanced by an equally important end—‘the expansion... of production, employment, and the exchange and consumption of goods’. This much is fairly obvious. But the revised draft of Article Seven was significant in a second respect. The ‘consideration’ clause of the Article now contained mutually interdependent obligations. The pro­ mise to move towards the elimination of discrimination, for example, depended on the promise to promote economic expansion. Failure on the part of the American Government to combat a slump would therefore release the British Government from its obligation to re­ move discrimination. Moreover, the elimination of discrimination was to occur in step with the ‘reduction of tariffs and other trade barriers ’. Thus if the United States determined to pursue a protectionist policy, it could not demand that Britain eliminate ‘discriminatory treatment ’. In short, the whole character of Article Seven had been subtly changed. The July draft, by providing for mutual undertakings of non-discrimination, had put the greater burden of practical imple­ mentation on the shoulders of the United Kingdom, since no appre­ ciable discrimination was being practised by the United States. This greater burden had been justified on the grounds that the obligations 1 Dept, o f State Bull, vi (1942), p. 192.

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Article Seven

undertaken by Britain were the ‘consideration’ for the promise of a generous Lend-Lease settlement on the part of the United States. But with the revisions of late autumn an effective mutuality had been brought about within the ‘consideration* section itself—the British undertakings on economic policy were payment for similar American undertakings of equal value. Was it necessary to continue to suggest that they were also payment for the promise of a generous LendLease settlement? Were not the American undertakings on tariffs and economic expansion adequate ‘consideration’ for British pro­ mises to embrace a multilateral régime? These questions apparently were answered in the negative. The link between the promises on trade policy and the terms of the LendLease settlement was retained—even after the entry of the United States into the Second World War. In retrospect this may seem rather surprising. Administration leaders probably felt that the American public would continue to demand a quid pro quo for the provision of Lend-Lease beyond the co-operation of the recipients in a common war effort. Perhaps, too, some British leaders feared that the exchange of promises about post-war economic co-operation could not command public support on its own merits but needed the additional argument that it was required as an inducement to a favourable settlement of Lend-Lease. The most likely explanation of all is that the negotiations begun before Pearl Harbour to put a ‘consideration’ in the Mutual Aid Agreement simply drifted along on their own momentum. In any case, when approval of Article Seven was finally sought at the highest political level, the linking of Britain’s post-war policy obligations to the terms of the Lend-Lease settlement provided a major source of difficulty. What particularly concerned the members of the British Cabinet was the commitment to eliminate ‘discrimina­ tory treatment’. This, the American negotiators had explained in unmistakable terms, definitely meant the elimination of Imperial Preference.1 Some members of the Cabinet, such as Beaverbrook and Amery, were opposed to the elimination of Preference in any circum­ stances. The majority did not take such an uncompromising view, but shrank from approving any agreement which seemed to make the dismantling of Commonwealth economic arrangements the ‘price’ of Lend-Lease aid. As Penrose recalls: Early in February [1942] Ambassador Winant spent a week-end at Chequers with the Prime Minister. Returning, he described the ministerial 1 See infra, p. 66, for more detailed discussion of this point

The Second Definition o f Multilateralism

61

position to me as follows : some three-quarters o f the Cabinet were opposed to having any reference to trade preferences in the Lend-Lease agreement. O f these, a few were out-and-out supporters o f Empire preference on principle but others, including Mr. Churchill, did not believe that preferences served any useful purpose and were ready to begin discussions immediately, outside the scope o f the Lend-Lease negotiations, on preferences, tariffs and other postwar questions o f economic policy. They objected, however, to carrying on such discussions within the framework o f the Lend-Lease negotiations, on the ground that the association o f these two subjects gave the impression that Empire ties would be bartered away or sold in exchange for goods which Britain needed to wage the war.1

As the British Cabinet hung back from final agreement on Article Seven, the State Department became increasingly restive. When Churchill visited Washington in December 1941, shortly after America’s entry into the war, Hull pressed Roosevelt and Halifax to take up Article Seven with the Prime Minister. The British Ambassa­ dor pleaded that Churchill was absorbed with war matters, but Hull replied ‘that it was very important from our viewpoint that some action be taken without delay, for the reason that another LendLease appropriation bill would come up in Congress in January and we would be called upon to explain why Britain delayed signing the proposed agreement’.2 The Secretary himself brought the matter to Churchill’s attention during a dinner at the White House on 12 January. But the Prime Minister was resolute in refusing to agree to the inclusion of any provision calling for the elimination of Prefer­ ence in the pending Lend-Lease agreement.8 Having made no headway on Article Seven during Churchill’s visit in December, Hull at last succeeded in enlisting the intervention of Roosevelt himself. Early in February the President, at Hull’s suggestion, cabled the Prime Minister requesting speedy affirmative action by the British on the Article Seven draft. This intervention came at a time of grave British reversals culminating in the fall of Singapore—the event Churchill later described as ‘the worst disaster and largest capitulation of British history’.4 The Prime Minister cabled back that in the opinion of his Cabinet it would be a serious mistake to associate a promise to eliminate Preference with the provi­ sion of Lend-Lease aid—particularly at such an unfortunate moment in the war. An arrangement of this kind would provoke unpleasant debates in Parliament and enable enemy propagandists to say that 1 Penrose, p. 24. 2 Hull, vol. ii, p. 1152. 4 Churchill, The Hinge o f Fate (London, 1951), p. 81.

3 Id., p. 1153.

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Article Seven

the United States was capitalizing on British adversity to seize con­ trol of the British Empire.1 Roosevelt replied to this message in sympathetic and imaginative terms. Sherwood has paraphrased his words as follows: H e [Roosevelt] told Churchill, ‘I understand something o f the nice relationships which are required by your constitution for dealings between your Home Government and the Dominions.’ He said that nothing could be further from his mind than an attem pt to use Lend-Lease as a trading weapon over the principle o f imperial preference. He urged that there be ‘bold, forthright and comprehensive discussions looking forward to the construction o f what you so aptly call “ a free, fertile economic policy for the postwar w orld” ’. He expressed the belief that developments ‘which neither o f us dreams o f will be subjects o f the most serious consideration in the nottoo-distant future. So nothing should be excluded from the discussions.’*

There was also another statement of the President’s which proved of particular significance to the Prime Minister. As Churchill later declared, the President provided ‘a definite assurance that we were no more committed to the abolition of Imperial Preference, than the American Government were committed to the abolition of their high protective tariffs’.8 On the basis of this and the President’s other state­ ments, the Cabinet was won over. In Washington, on 23 February 1942, the revised draft of Article Seven was finally signed. T H E A N G L O -A M E R IC A N R E A C T IO N

The Anglo-American response to the publication of Article Seven was similar to that which greeted the publication of the Atlantic Charter. With only a few exceptions, comment was generally favour­ able. At the same time, there was some difference in emphasis on the constituent parts of the Article and considerable disparity in the weight attached to the Article as a whole. The favourable comment which the Mutual Aid Agreement evoked in the United States was mainly inspired by its promise of a liberal international trading system. There was no noticeable surprise that such a commitment should have been included in the document. And the fact that Britain and the United States had reached broad agreement on post-war economic matters received more attention than all the rest of its provisions put together.4 1 Sherwood, pp. 506-7. * Id., p. 507. * The full text of the Prime Minister’s statement is given infra, p. 65. 4 See, for example, James Reston, 'Pact with Britain Sets Freer Trade as Basis of Peace*, The New York Times (25 Feb. 1942).

The Anglo-American Reaction

63

In explaining Article Seven to the public, Administration spokes­ men put rather more emphasis on non-discrimination and the reduc­ tion of trade barriers than on the additional goal of economic expansion. There was also a tendency, evident in discussion of the Atlantic Charter, to equate the commitments included in the Article with the policies already being applied by the United States. Hull, for example, declared that Article Seven was implementing the promise of the Atlantic Charter that post-war economic relations would be based ‘on the principles and objectives which have been tirelessly advocated by our Government on all appropriate occasions in recent years’.1 The Mutual Aid Agreement was well received in the United King­ dom mainly because it offered hope of a Lend-Lease settlement which would avoid the repetition of the unhappy experience with war debts after the First World War. Although certain business groups entered qualifications to the non-discriminatory and anti-protec­ tionist flavour of Article Seven,2 most public discussion took a line similar to that of The Economist, which, while expressing surprise that commitments on post-war trade policy should have been inclu­ ded in a Lend-Lease agreement, stated nevertheless that the terms of the Article ‘admirably combine a statement of the objectives with a realisation that they cannot be attained overnight’.8 Most of the favourable comments concentrated on the objective of economic ex­ pansion rather than on that of lower trade barriers. The Times con­ sidered the agreement ‘a great step forward’, explaining: The common economic policy to which the two Governments are thus committed opens up the prospect o f a world in which the two greatest industrial and commercial nations, in co-operation with other countries will work together to prom ote the prosperity for all instead o f competing for selfish advantages. Once the expansion o f production and consumption and o f employment is accepted as the overriding objective o f policy, all other obstacles—finance, tariffs, discriminatory arrangements—become comparatively unim portant and lose most o f their power for mischief.4

No less notable than these differences in emphasis were the differences in the weight which public opinion in the two countries accorded to Article Seven as a whole. The British Government made little effort to impress upon the British public the significance of its new com m itm ent. Indeed, it said hardly anything about Article 1 Dept. State Bull., vi (1942), p. 479. 9 See, for example, The Times (5 June 1942). * ‘Lend-Lease Terms’, cxlii (1942), p. 281.

4 (25 Feb. 1942).

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Article Seven

Seven at all. In the United States, on the other hand, a vigorous campaign was launched to convince the public that the Article con­ tained a valuable quid pro quo for the provision of Lend-Lease. Roosevelt told Congress that two of the direct benefits the United States was getting in return for Lend-Lease were the defence of the United States and reverse Lend-Lease, adding that the ‘third direct benefit received in return for our aid is an understanding with Britain (and prospectively with others of our allies) as to the shape of future commercial and financial policy’.1 Welles declared that the exchange of promises between the United States and its allies in the Mutual Aid Agreements might become ‘the nucleus of a United Nations organization for the relief and economic reconstruction of the post­ war world’2and later noted more generally that the ‘future prosperity and peace of the world, and of the United States, depend vitally on the good faith and the thoroughness with which we and they to­ gether carry out those promises’.8 Another American Government official went so far as to describe Article Seven as ‘virtually a Magna Carta for postwar economic collaboration’.4 In the wake of govern­ ment statements of this kind, unofficial publicists began to attach considerable significance to Article Seven. As one of them put it: ‘The master Lend-Lease agreement is a solemn contract signed for the United States government with the approval of Congress and signed by other nations because of definite advantages to be received in return for definite services rendered. If this solemn agreement in section 7 regarding trade barriers is not good, nothing else in inter­ national relationships can be trusted.’6 A PRO BLEM OF IN T E R P R E T A T IO N

No further discussion of Article Seven would be required at this point were it not for one particular detail that has provided a persis­ tent source of controversy. Did the Article commit the United King­ dom to the elimination of Imperial Preference? In the years that followed the signing of Article Seven the members of Churchill’s war-time government were frequently accused of having bartered Preference away in return for Lend-Lease aid. Naturally enough, I A Report on the First Year o f Lend-Lease Operations (11 Mar. 1942), Holbom, vol. i, p. 78. II Id., p. 96. * Id.,p. 117. 4 Lynn R. Edminster (member of the U.S. Tariff Commission), ‘International Trade and Postwar Reconstruction*, Am. Ec. Rev., xxxiii (Supp., 1943), pp. 303-4. 8 Otto T. Mallery, ‘A Practical Approach to a World Trade Board*, Annals Am. Ac. o f Pol. and Soc. Sei., ccxxxiv (1944), p. 84.

A Problem o f Interpretation

65

they sought to minimize the commitment that had been undertaken. Probably the most famous statement was made by Churchill himself on 21 April 1944 when he told the House of Commons how strictly I have during my stewardship, safeguarded the structure of Imperial Preference, which has arisen out of the controversies and the achievements of the last forty years, against any danger of being swept away in the tumult of this war.. . . [I]n February, 1942, when the United States was our closest ally, I did not agree to Article 7 of the Mutual Aid Agreement without having previously obtained from the President a definite assurance that we were no more committed to the abolition of Imperial Preference, than the American Government were committed to the abolition of their high protective tariffs. The discussions as to how a greater volume of trade and a more harmonious flow of trade can be created in the immediate post-war years, in agreement,leave us, so far as action is concerned, perfectly free. How could it be otherwise, when Parliament itself would not only have to debate the matters, but would have to legislate upon them, when they were brought before it?1 Statements of this kind appear to have encouraged the view that Article Seven did not really provide for the elimination of Imperial Preference and that the American Government had consented to grant some sort of special exemption for the Preference system. Shortly after the Prime Minister’s first statement Sir John Anderson, then Chancellor of the Exchequer, told the financial and commercial leaders of the City of London: ‘Under Article VII of the Mutual Aid Agreement. . . we agreed to work for the elimination of all forms of discrimination in international commerce. The only qualification was concerned with imperial preferences.’2 Some months later, when discussing the ‘Proposals for an International Conference on Trade and Employment’ worked out by American and British negotiators,8 Anderson declared: sir John Anderson. I find in this document a very unpleasant and challeng­ ing reiteration of the new word ‘elimination’. That has not appeared in any document of this kind before in this relation. MR. Dalton . Article 7. sir John anderson. I do not think elimination of preference comes in there. the president of the board of trade [Sir Stafford Cripps]. The elimina­ tion of discriminatory practices. sir John anderson. Yes, the elimination of discriminatory practices, but it was left rather at large how far Imperial Preference between a group of 1 399 H.C. Deb. 579-80 (21 Apr. 1944). For a subsequent statement by Churchill to the same effect see 417 H.C. Deb. 723 (13 Dec. 1945). a Speech at the Mansion House, London (4 Oct. 1944), Holborn, vol. ii, p. 521. * See Chapter VIII, infra.

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nations, bound together by special ties, could in this connection be so treated.1

These statements by Anderson are hard to reconcile with the mani­ fest intention of the drafters of Article Seven. There can be little doubt that the State Department officials intended ‘discriminatory treatment9 to embrace Imperial Preference and made this clear to their British counterparts. The purpose of using the more inclusive term was to embrace other forms of discriminatory treatment along with preferences—discriminatory internal taxes, discriminatory ex­ change restrictions, and the like. Another purpose may have been to avoid the difficulties for the British Government which specific men­ tion of preferences might have entailed. As Hull has written: We informed British Ambassador Halifax th at we had expressed Article V II in general terms so as to avoid specific reference to preferential arrange­ ments, which reference might cause political embarrassment to the British Government. We added that all such arrangements were included within the scope o f our general provisions and that, if the agreement were published and we were asked to explain what did fall within the term, we proposed to say it was all-inclusive.*

The suggestion that preferences occupied a specially reserved posi­ tion seems equally improbable when Article Seven is interpreted in the light of its major purpose. The Article was designed to chart the way in general terms toward the agreed objective of multilateral trade. Given this objective it is difficult to justify a privileged position for tariff preferences, which divert trade and distort the market mechanism in much the same way as other forms of discrimi­ nation. Article Seven could hardly have granted preferences a special exemption consistently with Roosevelt’s desire for ‘bold, forthright and comprehensive discussions’ from which ‘nothing should be excluded’.3 Thus the interpretation of Article Seven suggested in the Ander­ son statements must be rejected. But what of Churchill’s declara­ tion that ‘we were no more committed to the abolition of Imperial Preference, than the American Government were committed to the abolition of their high protective tariffs’? What of his remark that ‘so far as action is concerned’ the provisions of Article Seven left the British Government ‘perfectly free’? These statements are in a 1 417 H.C. Deb. 453 (13 Dec. 1945). » Hull, vol. ii, p. 1152. * See p. 62, supra. It should also be noted that at the time Article Seven was signed British commentators took it for granted that the 4elimination of discriminatory treat­ ment’ included the elimination of Imperial Preference. See, for example, ’Lend-Lease Terms’, The Economist, cxlii (1942), p. 281.

A Problem o f Interpretation

67

different category. Unlike those of Anderson, they do not assert that Article Seven distinguished between preferences and other forms of discrimination. They merely express the truism that neither the Prime Minister nor the President, nor any of their subordinate Ministers, has the power to legislate for their respective governments. They only emphasize that Article Seven was a commitment to work toward certain long-term goals and not a commitment to make immediate changes in trade policies. Thus the statement that Britain was not committed to action with respect to preferences was technically accurate. But this was true of action with respect to other obstacles to multilateral trade as well. For this reason the form of Churchill’s statement must be regarded as somewhat misleading. A more comprehensive exposition of the legal position would be the following, drafted by a Congressional committee considering appropriations for Lend-Lease: Article VH . . . does not reduce tariff barriers, nor remove discrimina­ tions, nor set up machinery to secure an expansion o f employment, produc­ tion and consumption. It does, however, bind the signatories to confer together, with all other countries o f like mind, to determine the best means o f attaining the economic objective which it sets forth. Those conversations will concern all the subjects dealt with in Article VII, without limitation or exception. The results o f negotiations undertaken in accordance with this provision are then to be referred for action to the proper constitutional authority in each of the countries concerned.1

Somewhat less formal, but no less accurate, was this statement given to Congress by Dean Acheson : Now, in this agreement what [the President] has tried to do is to stop a tendency which might very easily develop o f having a series o f closed economies, closed against us and against one another, and to say to the other countries, ‘You must agree to sit down with us and work out an arrangement which will have the effect o f increasing the whole volume o f production in the world, o f consumption and employment and reducing the barriers o f trade and doing away with discrimination.’ And they agree th at they will do that. They are not holding out any o f their special arrange­ ments as being sacred or being protected from these negotiations.*

In the light of the history and purpose of Article Seven this emphasis on its all-inclusive character seems entirely justified. 1 U.S. Congress, House, Committee on Foreign Affairs, Report on the Extension of Lend-Lease, House Rept. no. 188, 78th Cong., 1st sess. (Washington, 1943). a Italics supplied. U.S. Congress, House, Committee on Foreign Affairs, Extension o f Lend-Lease, Hearings on H.R. 1501, 78th Cong., 1st sess. (Jan.-Feb. 1943), p. 109.

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Article Seven CONCLUSION

Agreement on Article Seven of the Mutual Aid Agreement repre­ sented a second important step in the definition of the post-war economic objectives of the United States and Britain. It had not been achieved without considerable difficulty. Because of their con­ cern with domestic full employment and the post-war reconstruction problem the British negotiators had resisted a firm commitment to multilateral principles. Their resistance had been finally overcome by making economic expansion a companion goal of post-war policy and by relating the pursuit of non-discrimination to ‘governing economic conditions9. British acceptance of Article Seven was also hampered by the linking of commitments on post-war economic policy (notably the elimination of Imperial Preference) to the promise of a generous Lend-Lease settlement. This link had been forged at the behest of the American Government, which believed that it would help overcome domestic political opposition to Lend-Lease and would further the cause of multilateralism itself. Whether the American view was justified on either of these grounds is a question to which we shall subsequently have occasion to return. Despite attendant difficulties, agreement on Article Seven was significant in reaffirming the decision of the two governments to collaborate in the reconstruction of the world economy along multi­ lateral lines. The air was soon filled with hopeful reports of bold planning to implement this objective. In his fifth quarterly report on Lend-Lease Roosevelt forecast the development o f‘a series of agree­ ments and recommendations for legislation, in the field of commer­ cial policy, of money and finance, international investment and reconstruction’.1 British spokesmen, responding to American initia­ tive, were quick to announce the support of their government. As one of them put it: ‘There is no scheme for the maintenance of inter­ national peace and of financial stability in the post-war world so bold or far-reaching that we are not prepared to consider it with the utmost goodwill, or in which, if agreement can be reached, we are not prepared to take our full share of responsibility—heavy though it may be.’2 By the beginning of 1943 the British Government had joined the American in announcing specific topics for the economic agenda.3 The definition of the objective had been accomplished: the hour of planning was now at hand. 1 (11 June 1942), Holbom, vol. i, p. 93. 9 Harcourt Johnston, Secretary of the Department of Overseas Trade, The Sunday Times (19 July 1942). * Sir Kingsley Wood, 386 H.C. Deb. 825 (2 Feb. 1943).

PART II

PLANNING FOR MULTILATERALISM

CHAPTER V

PLANNING FOR FINANCIAL COLLABORATION T h e drafting of an agreed definition of multilateralism was but the prelude to a second and more difficult stage of Anglo-American collaboration—that of devising the specific means by which the objective could be achieved. Fortunately, planning for post-war economic collaboration was well advanced in both countries by the time Article Seven was finally signed. Particular progress had been made in the financial field. Indeed, two highly placed economists working independently on either side of the Atlantic had already produced detailed blue-prints of a mechanism for international monetary co-operation. K E Y N E S , W H IT E , A N D H IS T O R Y

In origin and basic purpose the British and American financial plans were remarkably similar. The principal author of each was a former academic economist with a special interest in problems of monetary policy. Both plans were framed in the light of the monetary difficulties which had disrupted international trade in the inter-war period. Both were designed to facilitate the achievement of balance of payments equilibrium in an international environment of multi­ lateral trade and in domestic conditions of full employment. They differed in their emphasis on these objectives according to the philosophies of their authors and the national interests of the two countries. The White Plan The American plan for post-war financial collaboration originated in the United States Treasury and particularly in the mind of Harry Dexter White. These facts had a decisive influence on the future course of Anglo-American economic collaboration. We would do well to consider for a moment how it was they came about. By the time the United States entered the Second World War its great executive departments were engaged in a major struggle over their respective responsibilities for the planning of post-war foreign

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economic policy. By virtue of its jurisdiction in the general field of foreign affairs, the Department of State might have been expected to assume the dominant role. Indeed, a vast amount of planning on foreign economic policy was taking place under the direction of Cordell Hull’s special adviser on post-war planning, Dr. Leo Pasvolsky. But other departments were advancing claims in this field as well—among them, the Board of Economic Warfare, the Depart­ ment of Commerce, and the Department of Agriculture. The most serious challenge of all came from the Treasury Department itself. In the ensuing struggle for control of foreign economic planning the State Department was hampered by the lack of thoroughly close relations between Roosevelt and Cordell Hull. Roosevelt considered Hull rather hidebound and conservative; he came to depend on others to carry responsibilities in the international field. On economic matters Henry Morgenthau, Jr., the Secretary of the Treasury, was the obvious choice. Morgenthau appeared to have a ‘New Deal* outlook. His Department contained some of the ablest young expo­ nents of that philosophy. Besides, he and Roosevelt had practically grown up together as neighbours in New York’s Dutchess County. When Morgenthau came to see the President he brought with him not only a congenial outlook but the unparalleled advantage of a lifelong personal association. Thus it happened that the State Department had to share with the Treasury the primary responsibility for the planning of post-war foreign economic policy. The State Department took charge of plan­ ning on commercial policy—planning that led eventually to the drafting of the Charter of the International Trade Organization and the General Agreement on Tariffs and Trade. The Treasury took charge of planning on financial policy—planning that led eventually to the creation of the International Monetary Fund and the Inter­ national Bank for Reconstruction and Development. The co-ordina­ tion of planning in the financial and commercial fields, obviously a vital necessity, was persistently hampered by defective liaison between the two Departments. This condition was only somewhat ameliorated by the development of a system of inter-departmental committees to discuss the general problems of foreign economic policy.1 1 A description of the machinery for co-ordinating the planning of foreign economic policy between the various departments can be found in Notter, op. dt.

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From the very outset, therefore, the American Treasury assumed the dominant role in the planning of post-war international financial policy. The supreme position of Harry White was rather more diffi­ cult to explain. He was widely considered to be a difficult personality —aggressive, irascible, and with a remorseless drive for power. His general unpopularity might have provided an obstacle to the realiza­ tion of his personal ambitions. But he was an indefatigable worker and his quick and active mind soon made a profound impression on Secretary Morgenthau. His rise in the Treasury was meteoric. He arrived in Washington in the early 1930’s from the campus of an obscure college in the American mid-west. Within a few years he became one of the principal Treasury technicians responsible for the operation of the American Stabilization Fund and the Tripartite Stabilization Agreement. He assumed a leading role in the drafting of an abortive plan for an Inter-American Bank. Even before Pearl Harbour his thoughts were turning to questions of post-war financial policy. By the end of 1941 he had produced, probably on his own initiative, an outline of the plan that was subsequently to bear his name. In December of that year Morgenthau put him in full charge of Treasury planning on post-war international financial policy. Unfortunately, there is now some difficulty in evaluating White’s historical role. Recent charges have coloured his reputation with a sinister ambiguity. It has been asserted on the highest authority that while working in the Treasury White was a ‘Communist spy’ who helped to smuggle secret documents to the Soviet Union.1 Since complete evidence for this charge has not been made public, we do not know precisely how far White was subject to Communist disci­ pline. So far no evidence has appeared to disprove the traditional assumption that White put forward his financial plans in the sincere belief that they would further the interests of the United States. It should also be remembered that in drafting these plans White had a number of brilliant associates whose loyalty has not been questioned. For these reasons we must discuss the plans on their merits, even though we can hardly forget the cloud that has since enveloped their principal author. The main objectives of the Treasury’s post-war financial planning were stated in the detailed blue-print which White and his assistants i Speech by Attorney-General Herbert Brownell, The New York Times (7 Nov. 1953).

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brought forth early in 1942. This bore the title ‘Suggested Plan for a United Nations Stabilization Fund and a Bank for Reconstruction of the United and Associated Nations’.1 It aimed ‘to prevent the disruption of foreign exchanges and the collapse of monetary and credit systems; to assure the restoration of foreign trade; and to supply the huge volume of capital that will be needed virtually throughout the world for reconstruction, for relief, and for economic recovery’. The twd institutions whose creation was proposed were designed ‘to carry on effective work as soon as the war is over. It would be ill-advised, if not possibly dangerous, to leave ourselves at the end of the war unprepared for the stupendous task of world­ wide economic reconstruction.’ The programme set out in this early plan was bold and idealistic. It called for a notable departure from powerful traditions of political isolation and financial orthodoxy which still had a strong hold on American opinion. The Fund and Bank were to be the principal agencies for the post-war conduct of international finance. Their membership was to be open to all of the United and Associated Nations. They were to become genuine institutions of international government, serving the needs of their members without regard to national political considerations. The Stabilization Fund was to have total resources of at least $5 billion, made up of contributions from member countries in gold, local currencies, and government securi­ ties. These resources were to be available for short-term lending to members in temporary balance of payments difficulties. In return for this additional source of international liquidity members would be required to part with a considerable measure of economic sove­ reignty. In specific terms, they would have to surrender the right to vary their exchange rates; abolish all forms of exchange control; and submit to Fund supervision over domestic economic policies. The Bank plan was even more ambitious. The Bank was to have a capital stock of $10 billion, half paid in immediately by members in the form of gold and local currency. It was ‘designed chiefly to supply the huge volume of capital to the United and Associated Nations that will be needed for reconstruction, for relief, and for 1 The White Papers contain three very early drafts of a plan for a Fund and Bank. The undated typescript bearing the title quoted in the text appears to be the first of these. This is followed by a typescript dated Mar. 1942 and a mimeographed draft dated Apr. 1942. These second and third drafts are virtually identical; the first draft contains several significant differences from the other two. The following citations to the ‘first draft* of the Fund and Bank plans refer to this undated typescript.

Keynes, White, and History

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economic recovery*. It was designed also to eliminate world-wide fluctuations of a financial origin and reduce the likelihood, intensity, and duration of world-wide depressions; to stabilize the prices of essential raw materials; and more generally to raise the productivity and living standards of its members. It was specifically empowered to buy and sell gold and securities of participating governments, to dis­ count and rediscount bills and acceptances, to issue notes, and to make long-term loans at very low rates of interest. In the beginning, therefore, Treasury planning for financial col­ laboration dealt equally with the problem of monetary stabilization and with the problem of post-war recovery and reconstruction. But as time went on the latter problem came to be overshadowed by pre­ occupation with the former. The inter-departmental committee on financial planning established in the spring of 1942 devoted itself mainly to developing the Stabilization Fund.1 Work on the Bank plan began to languish. Without equivalent progress on the urgent tasks of reconstruction, discussion of the technical problems of monetary stabilization occurred in an increasingly unrealistic atmo­ sphere. Indeed, White was warned by representatives in other execu­ tive departments that his Stabilization Fund assumed the solution of all the world’s major post-war economic problems.2*The planners in the Department of State who were more aware of the need to devise a prior and separate solution to the general reconstruction problem were inhibited by the Treasury’s jurisdictional supremacy.8 White and his assistants remained the chief architects of post-war international financial policy and continued to devote their main attention to the long-term problem of monetary stabilization. White’s great emphasis on the problem of monetary stabilization 1 Two committees were actually in existence, a Cabinet-level committee and a sub­ committee known as the ‘American Technical Committee', the latter consisting of technicians from the Treasury, the Department of State, the Department of Commerce, the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission, and the Foreign Economic Administration. The Technical Committee met under White's chairmanship and was mainly responsible for the development of the financial plans. 1 This objection was raised by such members of the Technical Committee as Alvin Hansen and Benjamin Cohen of the Department of State and E. A. Goldenweiser of the Federal Reserve System. * John Parke Young and other technicians in the Department of State produced a plan which made special provision for the prior solution of the major tasks of economic reconstruction. The Young plan called for the creation of an International Bank with a special reconstruction and rehabilitation fund to be administered on different prin­ ciples from those used in the Bank’s long-term operations. A copy of this plan can be found in the White Papers.

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Planning for Financial Collaboration

was not a personal foible; it reflected the general Treasury attitude bom in the experience of the inter-war period. Treasury planning was profoundly influenced by the symptoms of economic disorder which had followed the last armistice—the wild currency fluctuations, the speculative capital movements, the bank failures. White and his colleagues identified these developments with the onset of the Great Depression. They also identified an illiberal international monetary policy with the onset of the Second World War. For in the hands of Nazi Germany exchange control and exchange discrimination had become the handmaidens of military aggression. Accordingly, the Treasury planners considered the elimination of such practices one of the primary tasks of post-war reconstruction. But it would be a mistake to suggest that Treasury planning was confined to these rather negative objectives. Morgenthau, White, and their subordinates were not believers in laissez-faire \ they shared the belief of most New Deal planners that government had an important responsibility for the successful direction of economic life. To some extent they were under the influence of the new formulations of Keynesian economics.1 They sought to make finance the servant, not the master, of human desires—in the international no less than in the domestic sphere. In their view the events of the 1920’s and early 1930’s had discredited private finance. They considered government control of financial policy the key to the objectives of high employ­ ment and economic welfare. Morgenthau’s dominant objective as Secretary of the Treasury was—in his own words—‘to move the financial center of the world from London and Wall Street to the United States Treasury, and to create a new concept between nations in international finance’.2*He wanted to erect new institutions which would be ‘instrumentalities of sovereign governments and not of private financial interests’8—in short, ‘to drive . . . the usurious money lenders from the temple of international finance’.4*Thus the primary aim of the Treasury planners was not to restore a régime of private enterprise but to create a climate of world expansion consis­ tent with the social and economic objectives of the New Deal. 1 This is not to say that either Morgenthau or White ever studied Keynes’s General Theory in detail, but the ideas of the General Theory certainly exerted a major influence in their intellectual milieu. * Letter to President Truman quoted in The New York Herald-Tribune (31 Mar. 1946). • Ibid. 4 Address of Morgenthau at the final session of the Bretton Woods Conference (22 July 1944), U.S. Department of State, Proceedings and Documents o f the United

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By the spring of 1943, however, the expansionist bias of the Treasury’s post-war financial plans had been considerably reduced. Domestic political factors had begun to exercise a restraining in­ fluence. The Democratic party lost considerable ground in the Con­ gressional elections of 1942; the balance of power on economic issues was shifting to a conservative coalition of Republicans and Southern Democrats. Within the Administration itself some unrepen­ tant New Dealers were being ousted by more conservative leaders recruited from the ranks of finance and industry. White considered himself a shrewd judge of the political mood; rather than risk rejection he would cut his plans to an acceptable pattern. The more ambitious aspects of the Bank plan were gradually eliminated, in par­ ticular the function of contra-cyclical lending in the event of world depression. The project itself was held in abeyance. In April 1943 only the plan for a Stabilization Fund was released for publication— and even it now contained substantial compromises with the demands of national sovereignty.1 There was a growing danger that the Treasury’s financial programme might not form an adequate basis for reaching a compromise with British opinion. The Keynes plan To Keynes as well as White the Second World War brought a unique opportunity to apply a long-standing interest in international monetary problems. When, with the coming of the war, he was called from Cambridge into government service, he brought a com­ bination of theoretical training and practical experience which could not be matched by any other living economist. In the summer of 1940 Keynes moved into an office in the Treasury and began a new career as adviser to the Chancellor of the Exchequer. Since he was not a civil servant and drew no salary, his position was rather anomalous. But his very independence from formal ties enabled him to exert a profound influence. Characteristically, he wanted to make his views known right away on a wide variety of current problems. Soon the regular Treasury officials were receiving his unsolicited memoranda on matters over which they had hitherto exercised a largely exclusive jurisdiction. Nations Monetary and Financial Conference, Bretton Woods, New Hampshire, July l-22t 1944, vol. ii (Washington, 1948), p. 1227. 1 Some examples of these compromises are given infra.

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Planning for Financial Collaboration

It was not long before Keynes turned his attention to devising a mechanism of international finance which might facilitate Britain’s participation in a multilateral régime. This was the International Clearing Union, which eventually achieved the status of a Cabinet paper and became the basis for inter-departmental discussion. At first it was ‘regarded as impractical, a sketch of something one might achieve in a world not realised.. . . But in the course of discussion, comment and re-drafting, gradually, over a period of many months, by an imperceptible process, it came to be regarded as the main Treasury plan.’1 The major purposes of the Clearing Union were essentially the same as those of the Stabilization Fund. As the Chancellor of the Exchequer explained: We want a system in which blocked balances and bilateral clearances would be unnecessary. We want an orderly and agreed method o f deter­ mining the value of national currency units, to eliminate unilateral action and the danger which it involves that each nation will seek to restore its competitive position by exchange depreciation. Above all, we want to free the international monetary system from those arbitrary, unpredictable and undesirable influences which have operated in the past as a result o f largescale speculative movements o f capital. We want to secure an economic policy agreed between the nations and an international monetary system which will be the instrument o f that policy. This means th at if any one Government were tempted to move too far either in an inflationary o r a deflationary direction, it would be subject to the check o f consultations with the other Governments, and it would be p art o f the agreed policy to take measures for correcting tendencies to dis-equilibrium in the balance o f payments o f each separate country. O ur long-term policy must ensure th at countries which conduct their affairs with prudence need not be afraid that they will be prevented from meeting their international liabilities by causes outside their own control.2

The last sentence was the key to the British approach. The most important purpose of the Clearing Union was to resolve the dilemma between internal and external financial stability which had posed such difficult problems in the inter-war period. The gold standard had assured stability in the external value of sterling; but it had deprived the British Government of effective control over domestic monetary and fiscal policy. In the inter-war period it had been accompanied by the spread of deflationary forces from one country to 1 Harrod, p. 528.

386 H.C. Deb. 826 (2 Feb. 1943).

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another, falling prices and incomes, and mass unemployment. What was needed was some way to combine a policy of stability in the exchanges with a policy of domestic expansion—in Keynes’s own words—to ‘obtain the advantages, without the disadvantages, of an international gold currency’.1 The Clearing Union was designed to provide such a way. If it worked successfully it would substitute ‘an expansionist, in place of a contractionist, pressure on world trade’.2 The outline of the Keynes plan was essentially simple. The Clearing Union would make large overdraft facilities available to its members, facilities related to their pre-war share of world trade. According to the tentative formula suggested in the plan, overdraft facilities to the United Nations and their dependencies would amount to some $26 billion.3 Since no limits were set on the value of individual credit balances, the Union provided a complete clearing mechanism.4 Sur­ pluses and deficits in the balance of payments of member countries would be reflected in credits and debits on the books of the Union, expressed in ‘bancor’, an international unit of account. With these vast reserves of liquidity at their disposal, members would be able to eliminate all exchange restrictions on current account, maintain stability in their exchange rates, and pursue policies of domestic expansion without fear of the consequences on their foreign balance. The structure of the Clearing Union reflected the preoccupation of Keynes and other British planners with the importance of domestic expansion. The large overdraft facilities would certainly go far to assure the members that policies of domestic expansion would not be inhibited by deficits in their balance of payments. Thus it might effectively guard against the spread of unemployment. But did it make equally sure that the pursuit of inflationary policies in member countries would not be a persistent cause of disequilibrium? Here, as we shall soon see, the plan may have been less satisfactory. It assumed that deflation rather than inflation would be the main source of danger in the post-war period. There was little recognition of the possibility that other causes besides the failure to maintain full employment could produce balance of payments disequilibria. As the plan put it, ‘there is great force in the contention that, if active employment and ample purchasing power can be sustained in 1 U.K. Treasury, Proposals for an International Clearing Union (London, 1943), Section V, Para. 20. * Section IV, Para. 10. * For the basis of this calculation, see Joan Robinson, ‘The International Currency Proposals*, Ec. Journ.t liii(1943), p. 161. 4 This point is discussed in greater detail infra.

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the main centres of world trade, the problem of surpluses and un­ wanted exports will largely disappear*.1 This bias in an inflationary direction might well provide difficulty when the Keynes plan was presented to the United States. T H E TWO PL A N S AS IN S T R U M E N T S O F M U L T IL A T E R A L IS M

Both the Stabilization Fund and the Clearing Union were princi­ pally designed to assist the nations of the world to deal with financial crises of relatively short-term origin. They aimed to promote a system of multilateral payments in which external equilibrium could be maintained at levels of domestic full employment. To this end each provided its members with additional international liquidity— liquidity that would provide a protective cushion against temporary economic disturbances and make unnecessary the resort to illiberal internal or external policies. The success of any plans designed to achieve these purposes depended upon three basic conditions. The first was progress toward solving the deeper political and economic difficulties that threatened to beset the post-war world. The second was the provision of liquidity in such volume and on such terms as to give complete confidence to members that they could abandon resort to restrictive economic practices. The third was the creation of a suitable mechanism of adjustment by which temporary disequilibrating factors could be dealt with and equilibrium restored in the balance of payments. Our next task will be to determine whether and to what extent these three conditions were satisfied by the White and Keynes plans.8 The transitional issue The successful transition to approximate political and economic equilibrium after the war was the first prerequisite of an effective Stabilization Fund or Clearing Union.3 The political point was ob­ vious enough. The institutions were to operate, as it were, in a political vacuum—dispensing resources according to technical econo­ mic criteria and without regard to the political character of their mem­ bers. This was implicit in the very earliest drafts of the Stabilization 1 Section IV, Para. 18. * Unless otherwise indicated, the following analysis of the Keynes and White plans is based on the published drafts of April 1943. * It may be thought inapt to describe this as only a *transitional* problem, since the achievement of political and economic equilibrium had long-term aspects. But at this point it is the particular problem of the restoration of equilibrium in the transition period that we wish to emphasize.

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Fund. Similarly, the Clearing Union was expressly designed to have a ‘purely technical and non-political character’.1 One of its greatest merits was supposed to be its ‘anonym ous’ or ’im personal’ quality. N o particular member States have to engage their own resources as such to the support o f other particular States or o f any o f the international projects or policies adopted. They have only to agree in general that, if they find themselves with surplus resources which for the time being they do not themselves wish to employ, these re­ sources may go into the general pool and be put to work on approved pur­ poses___ We have here a genuine organ o f truly international government.2

This was an admirably idealistic aspect of the White and Keynes plans. But perhaps there was a danger in pushing ahead with plans fixed to this assumption before the post-war political climate could be foreseen with greater certainty. The White and Keynes plans were conceived in the very earliest days of the war and were published in the spring of 1943. This was before any comparable advances had been made in framing the post-war political order. Was it really wise to accord primacy to planning on the economic side—particularly to the rather technical problem of monetary stabilization? There were certain arguments, it is true, for seeking early agree­ ment on monetary matters. By giving evidence that constructive solutions would be found to the world’s post-war economic problems, the plans might provide a helpful stimulus to the allied cause.3 Agree­ ment on the plans might only prove possible in the midst of the close working war-time alliance.4Moreover, all projects for post-war organi­ zation were interdependent—a beginning had to be made somewhere.6 1 Section I (/). * Section IX, Para. 40. * In forwarding to Roosevelt an early draft of the Stabilization Fund and Bank Morgenthau declared: ‘I am convinced that the launching of such a plan at this time has tremendous strategic as well as economic bearing. It seems to me that the time is ripe to dramatize our international economic objectives in terms of action which people everywhere will recognize as practical, powerful and inspiring.* Memorandum (16 May 1942), White Papers. The next year Morgenthau told a joint meeting of House and Senate committees concerned with foreign affairs and economic policy that ‘a plan for international monetary co-operation can be a factor in winning the war*. (5 Apr. 1943), Documents on American Foreign Relations, vol. v, p. 649. Reading these state­ ments in retrospect one has the feeling that the point was rather over-emphasized. 4 In the words of the Keynes plan: ‘It may be doubted whether a comprehensive scheme will ever in fact be worked out, unless it can come into existence through a single act of creation made possible by the unity and purpose and energy of hope for better things to come, springing from the victory of the United Nations, when they have attained it, over immediate evil.* Section I, Para. 3. * The Preface to the Keynes plan explained that it was convenient to give finance priority ‘ because some general conclusions have to be reached under this head before much progress can be made with other topics*. It also made the point that the transi­ tion out of reconstruction into the long-term period ‘cannot be wisely effected unless we know into what we are moving*.

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Although something could be said for all of these arguments, still more could be said for the other side. No agreement on monetary matters could make any significant contribution to world peace without equivalent solutions in the deeper areas of possible conflict. Without an entirely new world political order which eliminated the need for special alliances and traditional power politics, the basic assumption underlying the Keynes and White plans would be de­ stroyed. Nations would not be willing to allow the free use of their financial contributions by monetary institutions with world-wide membership. The ‘impersonal’ and ‘anonymous’ character of the institutions would become not an asset but a liability. If the monetary plans were launched with detailed provisions on such matters they would quickly break down. Their failure would only add to the difficulties of promoting really effective international organization. The dependence of the monetary plans on the assumption of equilibrium was just as apparent on the economic as on the political side. The Stabilization Fund and the Clearing Union were both designed to deal with disturbances to economic equilibrium of a short-term nature—typically, the periodic industrial fluctuations and exchange crises which beset the world in the inter-war period. They provided only a mechanism of exchange clearing, not a mechanism for dealing with the problems of long-term investment or with those of relief and reconstruction. If the long-term economic problems were not solved outside the monetary organizations, the limits of their resources would soon be reached; they would fall into a lop­ sided position; the clearing mechanism would quickly break down. Indeed, both plans acknowledged, either implicitly or explicitly, their dependence on the assumption of economic equilibrium. One of the purposes of the Stabilization Fund was to ‘ shorten the periods and lessen the degree of disequilibrium in the international balance of payments of member countries*.1 Given its definitely limited re­ sources the Fund could not hope to do this unless the deeper disequilibrating forces were dealt with by outside agencies. Moreover, the Fund was to sell foreign exchange only where members needed assistance to ‘meet an adverse balance of payments on current account’.2The needs of the members for reconstruction and for long­ term capital assistance were to be met by the companion institution, 1 Section I, Para. 2. U.S. Treasury, Preliminary Draft Outline o f a Proposal for an International Stabilization Fund o f the United and Associated Nations (Washington, 1943). a Section III, Para. 3 (a).

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the Bank of the United and Associated Nations. Similar limitations were expressed in the plan for the International Clearing Union. It was emphasized that the Union was not ‘to assume the burden of long-term lending which is the proper task of some other institution’.1 The Keynes plan also declared: ‘Obviously, it [the Clearing Union] does not by itself provide any long-term solution against a continuing disequilibrium . . . the purpose of the overdraft facilities is mainly to give time for adjustments___’2 The most urgent threat to the assumption of economic equilibrium lay in the large-scale disequilibrium which was likely to exist at the end of the Second World War. The war was causing widespread physical destruction; perhaps even more important, it was disrupting the pre-war pattern of international trade. An ambitious programme of reconstruction would be needed to repair productive facilities and build a new trade pattern in which equilibrium could be restored. Unfortunately, the magnitude of this effort might be underestimated in the preoccupation with monetary stabilization. There was a danger of forgetting the limitations of the long-term plans as instruments of transitional finance. The danger was already becoming apparent in the United States. There was a regrettable tendency to bracket the Fund and Bank together and to assert that both would ‘provide a large part of the capital needed for reconstruction’.8 Great emphasis was placed upon putting the institutions into operation ‘as soon as the war is over’.4 It was pointed out that ‘international currency stability is essential to reconstruction in the post-war period’.5 This proposition was true enough on its face; but just how was the Fund to operate in the transition period ? Was it to make its facilities available as in normal times? If so, how could it ensure that they were not employed for other than short-term stabilization purposes? The repeated insis­ tence on the importance of the Fund’s role in the transition might encourage the view that it was not simply designed for monetary stabilization but was designed to assist in the broader tasks of recon­ struction as well. 1 Preface to Proposals for an International Clearing Union. * Section IV, Para. 16. * White, ‘Postwar Currency Stabilization*, Am. Ec. Rev., xxxiii (Supp., 1943), p. 387. 4 ‘Suggested Plan for a United Nations Stabilization Fund and a Bank for Recon­ struction of the United and Associated Nations* (undated typescript), White Papers. 4 Morgenthau before the joint meeting of the Congressional committees (5 Apr. 1943), D.A.F.R., vol. v, p. 649.

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There was one respect, indeed, in which the Fund made an express attempt to deal with the reconstruction problem. This was with regard to the large sterling balances that were being accumulated in London to the account of members of the sterling area and certain other countries.1 The growth of these balances reflected Britain’s large deficit in current war-time trade and its considerable military expenditures for the defence of its far-flung Empire. A large part of the balances could be considered analogous to the paper credits accumulating to the account of the United States under the system of Lend-Lease. Like Lend-Lease, they were extraordinary trans­ actions growing out of the war effort; they had eventually to be dealt with in a similar way. Obviously, a satisfactory method of deal­ ing with the inter-allied war debts was one of the major tasks of the transition period. The Treasury planners were concerned with the problem of the sterling balances from the very beginning. They sought to solve it through the mechanism of the Stabilization Fund.2 The Fund was to buy up these balances from the creditor nations, reselling part of them over a period of years both to the creditors and to the nations whose obligations they were. Thus the Fund, the creditors, and the debtors would each bear a part of the burden. This was an admirable attempt to reach a general solution of the war debt problem. But was it wise to attempt to achieve this purpose by means of the Stabiliza­ tion Fund? The Fund was an instrument for the conduct of normal finance. Its resources were limited. If it were burdened with the large sterling debts at the beginning of its operations, it might not be able to carry out those operations successfully. And if the problem of the sterling balances were finally removed from the jurisdiction of the Fund, would it be handled by some other institution? Was this mixing up of the stabilization with the reconstruction problem con­ ducive to encouraging a separate attack on the reconstruction prob­ lem itself? The answer to this question was already being suggested by the evolution of the plans for an International Bank. In its original form, the Bank was almost entirely directed at the problem of reconstruc­ tion. It was ‘designed chiefly to supply the huge volume of capital to the United and Associated Nations that will be needed for recon1 The problem of the sterling balances is discussed in greater detail in Chapter IX infra. * Section III, Para. 9.

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struction, for relief, and for economic recovery’.1 The destruction caused by the war was expected to be ‘stupendous’.2 In the post-war reconstruction period there would be an ‘unprecedented’ demand for capital.8 ‘To supply this capital at rates of interest low enough with a period of repayment long enough to give the borrowing country reasonable hope of being able to repay the loan, is the prime task and justification of a Bank of the character described in this report.’4 In this original version the Bank was given prodigious resources to carry out its task. Its capital stock of $10 billion may seem in­ adequate in retrospect, but it was an impressive sum in terms of the existing price level.6 Moreover, a large part of this capital was to be immediately paid in and available for use. Most important, the Bank could, with its broad powers to issue notes and securities, make available resources many times as large as its subscribed capital. Unfortunately, the Bank’s authority as an instrument of post-war reconstruction was subsequently reduced. The objective of economic development was given an equal claim on its resources.6 Its lending powers were scaled down. And the entire project was withheld from publication. Thus no basis was left for the assumption that the Stabilization Fund would operate in the requisite environment of economic equilibrium. An equivalent difficulty existed with the Keynes plan. Its role in the transition period was also ambiguous. On the one hand, it appeared to be intended only for purposes of short-term stabilization. On the other hand, it aimed at ‘starting off every country after the war with a stock of reserves appropriate to its position in world commerce, so that without undue anxiety it can set its house in order during the transitional period to full peace-time conditions’.7 More­ over, its facilities were to be ‘of particular importance in the transi­ tional period after the war, as soon as the initial shortages of supply have been overcome. Many countries will find a difficulty in paying for their imports, and will need time and resources before they can 1 First draft of the Bank plan. * Ibid. • Ibid. 4 Ibid. » One might double the $10 billion figure to get an idea of the real value which the resources of the Bank seemed to have at the time. • In the title of the original Bank draft the word ‘development’ did not even appear. It was added in the later drafts of Mar. and Apr. 1942. By the end of 1943 the development functions had become as important as those of reconstruction. 7 Section I (