Subsidizing Planned Chaos

June 23, 1947

It is unfortunate that Secretary Marshall, in his speech at Harvard, could come so close to diagnosing the real economic disease of Europe and then miss it. He pointed out that “in many countries, confidence in the local currency has been severely shaken.” But he did not tell us why. It is because the governments of these countries have insisted on living beyond their fiscal means; because they have financed the difference by printing more money; and because the ideology and vested political interests within these countries give little assurance that this process can be brought to a halt.

But there is an obstacle to European recovery even more serious. The money, though fallen in value, would still facilitate production and exchange if commodity prices and foreign rates were free to move in response to actual supply and demand. But precisely this is prevented by government controls which make it a crime for anyone to buy or sell goods in accordance with the shrunken value of the currency. The European farmer refuses to plant wheat, or feeds it wastefully to livestock, not, as Secretary Marshall says, because “he cannot find the goods for sale which he desires to purchase,” but because the distortions of price fixing either make it more profitable for him to sell wheat in the form of poultry, hogs, or beef, or make it unprofitable for him to raise wheat at all. And the principal reason why he cannot get goods in the cities is because price fixing in turn discourages and prevents production and sale in the cities.

Secretary Marshall’s speech at Harvard represents an advance in American policy in at least one important respect. It indicates that further financial aid will not be forthcoming from this country except under conditions. But it is extremely vague regarding what these conditions ought to be. There must, said Mr. Marshall, be “some” agreement among the countries of Europe as to the requirements of the situation. Everything depends, however, on precisely what this agreement is. It is not important whether or not some European nations agree to a “joint” program. What is important is whether the programs they adopt, jointly or individually, are really such as to promote economic recovery.

Secretary Marshall’s reluctance to suggest a definite program is understandable. He does not wish to put the American Government in the position of “dictating” to Europe or “interfering in its internal affairs.” But this is the inescapable dilemma of government lending. For unless the American Government does impose conditions, its future loans, like its past loans, will merely subsidize and prolong the socialistic and restrictive policies that are strangling production and making recovery in Europe impossible.

We now seem ready to make loans to practically any government that says it is anti-Communist, even though the policies it follows mean that the loan will soon be used up, that it will be back for more, that private enterprise in that country is tied hand and foot, and that the borrowing government, in short, though it is “fighting the Communists,” is meanwhile pursuing the very economic course that leads toward Communism.

All this suggests that, instead of framing still more grandiose foreign lending schemes, our government ought to get out of the foreign lending business as soon as possible. The best immediate policy is to leave all further foreign loans either to private hands or to the International Bank, which is compelled to take credit-worthiness into account because of the fact that it must sell its debentures to private investors. If the International Bank sends an expert economic mission to each country that applies for a loan, if it frankly tells each borrowing country that investors will not be interested unless that country makes certain specified economic reforms, then a loan may really achieve its purpose. Under such conditions, in fact (as experience with the League of Nations loans proved after the first world war), it is not the loan itself that is important in assuring recovery, but the reforms made in order to get the loan.