Wriston, Walter B.
In thinking about any aspect of foreign policy, it is always tempting either to oversimplify or unduly complicate the problem. The simple answer to the complex problem is readily offered on every hand, and newspaper columnists can instruct us in everything from our love lives to Vietnam. Each complex series of problems is neatly categorized. In these circumstances, it was extremely refreshing and instructive to read a report from a businessman serving a stint in Washington as a White House Fellow. From an "observation post" in the office of the Secretary of Interior, he described what he had learned of the complexities of setting government policy.
"Just as a random example," he wrote, "how many ducks do you think there should be? Twice as many as now? Half as many as now? Should you listen to the duck hunters ? Or to the naturalist? What value should be placed on ducks anyway? How much money should we spend on ducks? They are all killed in one fashion or another. And they certainly aren't a major source of food. These problems are real for the fellow setting "duck policy."
The same kinds of questions apply to every facet of American life. In thinking about the balance of power in the world, many people do not readily associate it with our balance of payments. I suggest to you, however, that nations with weak currencies rarely speak with strong voices in international councils. History is replete with examples which illustrate the fact that a nation living in isolation can often get by with a weak currency but that a world power, like the United States, whose internal money is the reserve currency of the world, must inevitably be subject to different pressures and limitations. The Spanish historian, Salvador de Madariaga, traced the decline of Spain as one of the world's most important powers to the importation of Peruvian gold which started a cycle of inflation that eventually broke up the greatest colonial power in the world. Historical cause and effect is probably never this sharp or simple, but there is little doubt that runaway inflation has often been a major factor in the decline of national power.
Since a strong currency to some extent is the mirror image of the health of our balance of payments, it would be prudent to ask at least as many questions about our monetary and fiscal policy as the White House Fellow poses about ducks. What constitutes acceptable equilibrium in our international payments? Have we achieved our objective when we reach plus or minus $250 million as the Administration has suggested? By whose measurement? The so-called regular basis? Or should we adopt the accounting procedures recommended in the Bernstein report? Should we listen to corporations that want to enter overseas markets through the acquisition of equities? Should we play for short-term figures by choking off foreign investments? Should we listen to the voices of individuals who think we ought to have a planned economy, and see our current problems as an ideal springboard to power? What value should we place on equilibrium in our international balance of payments? Is it more important to favor our domestic economy? Or should we try to absolve ourselves of all responsibility for self-discipline, and concentrate on devising a system of international exchange that will relieve us of that responsibility?
Make the list as long as you wish, the variables involved in the decision-making equation are virtually limitless. As a further complication, the solution of that equation is made still more difficult because at any one time in history, we simply do not know where we are. When historians look backward many years after the event, they are often able to identify what seem to be clear trends in the affairs of men. Trends which become visible in retrospect, are extremely difficult to identify while they are experienced. You can be certain that in the 14th century, one teenager did not turn to another and say, "dig this crazy Renaissance." Indeed, some 500 years later, historians are still arguing just when the Renaissance did begin and they are about 100 years apart.
If we cannot spot economic or historical trends precisely, we can nevertheless try to detect variations in our attitudes toward the political climate in which economies must operate. We can attempt to collect and weigh existing evidence that suggests a change in political temperature.
In the postwar world, the thrust of affairs clearly appears to have been toward the liberalization of international trade and commerce, and the dismantling of barriers erected against the movement of men and money. The evidence is to be found in the formation of the Common Market in Europe, the conception of Latin American Free Trade Association, the Common Market in Central America, the GATT organization and many others.
This movement away from controls and toward freedom created the environment which produced a sustained economic advance unparalleled in the history of the world. Despite the success of these policies, it seems to me that the momentum of the world toward greater economic freedom may now be slowing. Europeans, Asians, Africans and Americans alike are turning away from that freedom which produced their prosperity and are retreating toward a mass of controls, guidelines and other restraints, each one of which usually said to be justified by "special circumstances."
Here and abroad, the voices urging us to become economic Luddites grow stronger and more numerous. We appear to be throwing a spanner into the extraordinary economic machinery that has produced since World War II, a degree of prosperity unequalled in man's long struggle to better his condition. The beginning of such an anti-liberal trend -- if indeed it is a trend -- would have tragic consequences.
In this uncertain world, there is sometimes a case to be made for short-run restrictions on economic activities, providing it is clearly understood and agreed that temporary controls are designed to buy time during which more fundamental remedies can be applied. The current American Administration's guidelines on bank loans and commercial foreign investments fall into this category. These programs within their own perimeters have been, and will be, successful in achieving their limited objectives though perhaps not as quickly as we had thought. To load upon them the whole burden of solving our balance of payments problem, is to ask too much.
The argument for controls in general, however, is always the same and in the end rests upon the premise that some central planner has better judgment than the market place. This argument is as old as economics, as old even as Adam Smith, who wrote that "The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted to no council and senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it."
It is, of course, out of style, not to say bad form, to quote from Adam Smith in a world dominated by the New Economics. In these circumstances, therefore, it is only prudent to summon to our defense John Maynard Keynes who put his stamp of approval on Adam Smith's point. Just forty years ago Keynes criticized state socialism because, he wrote, "It misses the significance of what is really happening because it is, in fact, little better than a dusty survival of a plan to meet the problems of fifty years ago, based on a misunderstanding of what someone said one hundred years ago." It is no less important today to know what's happening than it was in the past.
Men's memories are short, but I remind you that when President Eisenhower took office in 1953, we had price and wage controls in this country, and when he made the decision to lift them and thereby free the economy to start its unparalleled upward course, there were warnings of doom on every hand that the free market could not be trusted. During the Campaign of the preceding year, Averell Harriman, then Mutual Security Director, warned that those who wanted to remove controls were "unwittingly laying the basis for the economic crackup the Kremlin has been looking for in vain for the last six years." I find something decidedly strange in the suggestion that a democracy must impose controls to compete with a nation of controllers. It is not a unique idea, but recurs again and again in history.
There are many instances of this nagging doubt about the efficiency of a free market. Ambassador Murphy, in his book, "Diplomat Among Warriors," delineated the problem with great clarity in describing the economic chaos created by the Berlin blockade and in recalling the alternatives suggested to handle the situation. In order to supply the city, the Western Powers finally elected to cancel all existing controls on the free flow of consumer goods. Immediately, as if by magic, the city was deluged with items that had not been seen for a decade. Even luxuries from the East like caviar and vodka became readily available. In Ambassador Murphy's words, "All of this was accomplished by simply demobilizing bureaucratic controls." Although the Berlin experience occurs repeatedly in history, there are always those who express amazement that a free market works.
A discussion of this kind about controls and freedom is, of course, triggered today by Americans' current absorption with the balance of payments problem of the United States. We have had an enormous number of suggestions put forward as to how to solve the problem ranging from complete exchange controls and capital issue committees to suggestions that we don't really have a problem. Many commentators regard our balance of payments as only an economic problem, but as I suggested to you earlier the problem runs much deeper than this. Any failure on the part of the U.S. to bring its balance of payments into equilibrium has far-reaching political consequences around the world which alter the world's political balance of power.
By now, the U.S. balance of payments story is a familiar one. Beginning with 1958, we have run an annual deficit that has ranged from $3.9 billion in 1960 to an estimated $1.3 billion for 1965, and now totaling $22.5 billion. The result is that foreigners, primarily Europeans, now hold 24.1 billions in dollar balances.
Simultaneously, our gold stocks have declined from $22.9 billion in 1957, the year before the heavy drain began, to $13.8 billion last year. The balance of $9 billion has gone partially to meet our deficits.
While this was going on, the American economy chalked up new records almost daily. Since 1960, this country has experienced--
- a 42 percent rise in total national output;
- a 39 percent rise in consumer spending;
- a 60 percent rise in investment in plant and equipment;
- a growth rate for the economy of 6.0 percent in current dollars;
- a drop in unemployment to 3.8 percent;
- a relatively stable price level until 1965.
But the real impact of this record is more clearly visible from a breakdown of those items that compose the balance of payments. Three factors stand out. One, the terms of trade have been running our way. The Cassandras who predicted that we were pricing ourselves out of world markets were contradicted by the record. Our price level turned out to be more stable than that of most of our neighbors. Consistently, exports have been above imports. Since 1959, the U.S. trade surplus of exports over imports: has exceeded $4.5 billion, and reached $7 billion in 1964 when total exports were $25.7 billion. Last year the surplus was $5.2 billion.
Secondly, we are the world's largest exporter of capital, which includes loans and investments. During 1964 private capital outflow amounted to $6.5 billion, and for 1965 the high was $3.5 billion, reaching a total of some $80 billion of foreign investments owned by Americans. But against the annual export of capital must be placed an annual remitted return on that investment, which in 1965 reached $6 billion inflow. While this net inflow in our nation's P & L account is often recognized, our overseas investment itself is a source of strength that is not emphasized when we list our assets.
The third major item in the balance of payments is the government sector, which represents primarily military and aid expenditures, and today is running in the neighborhood of $6.5 billion. In short, this perhaps unorthodox recounting of the major items in the U.S. balance of payments shows clearly that the private sector is contributing a surplus while the public sector continues to post a deficit. But regardless of how we put the figures together, the fact remains that for the past eight years, the U.S. balance of payments has shown a deficit. And it is to the elimination of the deficit that the Kennedy-Johnson response of guidelines and restraints has been directed. They are all described as temporary measures to dampen the outflow of private capital and hopefully as I suggested before, to buy time to adjust our monetary and fiscal policies to bring our balance of payments into equilibrium.
The story of European recovery from the incredible destruction of World War II is equally familiar. Over $12.0 billion of Marshall Aid set European economies on their feet in just four years and enabled them to grow at rates that for many years were far ahead of U.S. rates of growth. Today, the Western European industrial community is now second only to the U.S. In some areas, unemployment has virtually disappeared and in others, such as the Federal Republic of Germany, labor shortages are common. In Europe, a substantial cost-push inflation has been underway as labor has bid up wage rates. And Japan and West Germany, countries with a high degree of inflation, also have high interest rates and low unemployment.
Here, too, the response to imbalance has been to resort to restrictions and controls of one kind or another, directed ultimately toward protectionism. In Europe, there is the added fillip that affluence has given to nationalism. But always the cry, throughout the Western World is that these controls are temporary. Surely we should know better.
We should know that controls, once installed, are rarely eliminated. It is a little startling to remember that a conference on exchange controls was held in Bergen, Norway, in 1939, as we tend to think of exchange controls as a postwar invention.
Exchange controls have never worked and they never will for the simple reason that the inventiveness of man is unlimited. This fact of life was indelibly imprinted on my mind by a conversation at lunch one day. A senior officer of a great central bank happened to share our table with a Lebanese business man. Our business friend inquired how many men in that central bank administered exchange controls. To the answer, about 100, he replied that there were two million Lebanese thinking up ways around them!
We should know that there is no magical power that permits legislation to circumvent natural law. No conceivable law could compel water to run uphill, or change the value of Pi to help bewildered fathers understand the new math. Basic economic relationships, like many scientific relationships, are simply not susceptible to legislative action or administrative fiat. Moreover the mixture of economics and legislation ignores the realities of governmental decision making that I outlined earlier.
There is no substitute for a free market. The unspeakable misery visited upon the Soviet people by Stalinization of the Soviet economy failed to get the economy in high gear. Communism has been an economic failure. Investments in agriculture have not paid off. For an increase of one-third In agricultural investment in the past seven years, agricultural production has gained barely one-sixth. And since the late Fifties, Soviet industrial growth has slowed appreciably. These, and many more examples, are plain for all to see.
The record reflects the fact that our major economic advances have been made within the context of economic freedom. The post World War II economic boom did not really gather momentum until exchange control restrictions had been lifted, and the Western World returned to currency convertibility. Nor did a faltering U.S. prosperity extend itself Into an expansion lasting more than five years until corporate and personal taxed were reduced.
In short, we seem once again to be in danger of missing, in Keynes' phrase, "the significance of what is happening." There are those who would misdirect our attention and entice us into a belief that perpetual prosperity and equilibrium in our balance of payments reside somewhere along the road to an increasing reliance on governmental restrictions. These intellectual conceits take several forms.
First there is the conceit of certitude, which infers that in the face of contrary historical evidence, we have nevertheless discovered the ultimate answers. This perhaps is our equivalent of Irving Fisher's historic remark in the spring of 1929, that the American economy was on a "permanently high plateau." For one example, in 1941, Professor John H. Williams, then Dean of Harvard's Littauer School and an officer of the Federal Reserve Bank of New York, told an annual meeting of the American Economic Association, "one of the chief difficulties of an easy money policy, when it is implemented or accompanied by large government borrowing, is that it becomes increasingly difficult to reverse the policy. This ... has been the main implication of our own experience of the past decade." It is possible that some of the critics who attacked last December's Federal Reserve Board action had not done their historical homework.
The rise of restrictionism completely ignores the lesson of what every country in the Western World has experienced in its attempts to manage internal economics, with the resultant side effects on its balance of payments. The lesson is clear: controls directed at external regulation must have internal effects or vice versa. In the end men come to realize that there is no distinction between sound internal and sound external economic policy.
Secondly, there is the conceit of scientism. In an international society that reveres science, governments have borrowed the apparatus without being certain of the precepts or even the implications. All of us look at precise numbers which often conceal the fact that the definitive numbers mirror imprecise estimates. All of you who deal with budgets --either personal or corporate -- must appreciate this point. Scientists have known, for example, at least since Heisenberg, that it is impossible to measure the location of an atomic particle precisely because the act of measurement alters its location. In much the same way, the control of items in the balance of payments reaches out infinitely. Artificially reducing capital exports by "x" dollars or pounds or francs does not merely alter the balance by "x" amount, but affects exports and imports, and eventually production, prices and employment. This simply reflects the fact that the economic variables are themselves constantly changing, and are simply not susceptible to precise manipulation.
In discussing some of our problems, in exposing some of our conceits, I do not suggest a return to a simple life which never really existed. Choices were always hard and life was always complex. Today our democracy in the United States has been accurately characterized by Barbara Ward as "a complex mechanism of political adjustment, economic intervention and social initiative." It always was.
What we may label the conceits of certitude and scientism, feed the culture in which controls are bred and nourished. If the world continues to feed that culture, we will eventually undermine our postwar boom. If we starve that culture, we shall see more clearly that unobstructed international commerce, not controls, is the foundation of peace and prosperity for the developed as well as the less developed countries around the world. This is what President Kennedy intended when, echoing Jean Monnet, he told Congress, "The two great Atlantic markets will either grow together, or grow apart ... that decision will either mark the beginning of a new chapter in the alliance of nations or a threat to the growth of Western unity."
The Western nations were indeed growing together. Now economic controls at least raise the threat of reversing that trend. The point of transition could be the revival of protectionism and the beginning of restrictions on free markets. For a free market today is not the so-called rugged individualism of the 19th century, but the innovative competition of the second half of the 20th century. The free market is Kaufmann's and Hong Kong harbour. It is quality, delivery, technological advance, and price that make India, for example, purchase a fully rated American generator in place of a partially rated European generator. In this environment, controls can only be a destructive influence leading to the deterioration of political as well as economic relationships among nations.
In an essay hoping that America's Illusion of Omnipotence was at an end, Dennis Brogan pointed out that "few things are less profitable than running scared in the wrong direction." There is some evidence to suggest that we are moving in the wrong direction, and the growth of controls and guidelines is a symptom of this movement. The lesson of the France of De Gaulle, which is employing a kind of a gold rattling diplomacy, illustrates definitively the necessity for having a strong currency to back up a persuasive voice in world affairs.
The position of America today is so unique in history that it requires all of our skills and effort to maintain our freedom and our power. Never before has an entire continent attempted to truly unify itself under a democratic form of government as a nation, and live and prosper in a world that has the technical competence to destroy itself in minutes. The pied pipers of the controlled economy would play us a siren song that the way to remain strong and free is to let "big brother" handle everything. What I suggest to you as an alternative is that we must, in the words of Ortega y Gasset, live up to "the level of our time." The level of our time requires that, like the man setting duck policy, we must do a lot of different things and balance many factors, rejecting the easy answers.
The most important single thing we must do is to maintain our relative price stability which is the foundation of our ability to compete in the world. It is after all our exports that pay the check for the public sectors spending.
Secondly, we must make it more attractive for foreign investment in this country, realizing that the world has a limited amount of capital and a practically unlimited choice of where to put it. There is legislation before Congress now designed to make it more attractive to foreigners to invest in the United States, and this should be supported.
Thirdly, we must slow down substantially the rate at which our Central Bank creates money. In the past twelve months, Federal Reserve credit to the banking system exceeded 3 and 1/2billion dollars, portions of which make possible an outflow of dollars from this country. To the extent is money creation is slowed we run the risk of producing side effects on our domestic economy, but in the end these side effects would be less destructive than the known result of controls.
Fourth, we must persuade our Government to take the inflationary fever out of our budget, for it is too much to rely entirely on monetary policy.
The judicious combination of all four methods would produce equilibrium, as economists of almost every persuasion will agree. Money policy no less difficult than duck policy, and the choices have wider implications. The implications are no less than the very stability of the U.S. dollar, and with it, the whole mechanism of the free world monetary system.