Subsidizing Socialism

September 30, 1957

Just before he retired as director of the International Cooperation Administration on Sept. 12, John B. Hollister issued a farewell directive to the effect that: “The United States is convinced that private ownership and operation of industrial and extractive enterprises contribute more effectively than public ownership and operation to the general improvement of the economy of a country . . . therefore . . . I.C.A. will normally not be prepared to finance publicly owned industrial and extractive enterprises.” This directive was promptly repudiated by the State Department, which was reported to be “flabbergasted” and “angered” by it.

The incident throws a brilliant light on the nature of our foreign-aid program. The New York Times account declared, for example: “More than half of India’s industry is state-owned. Thus, an announcement that the United States intended to follow a harsh line against aid for state-owned industry might logically have been read in New Delhi as a studied public insult. In addition, the department was unhappy about the implication that the United States intended to use its aid program as a form of bribery to stop socialization abroad.”

FOREIGN-AID DILEMMA

These comments reveal quite clearly the dilemma into which the foreign-aid program has landed us. We have been subsidizing, encouraging, and prolonging the continuance of socialism abroad. Therefore, by a strange, inverted logic, to stop subsidizing socialism in foreign countries is to interfere in their internal affairs! Not to subsidize India’s grandiose socialistic program by an enormous further “loan” of about $500 million becomes “a studied public insult.” To stop subsidizing socialistic programs abroad becomes “a form of bribery” to get them to adopt free enterprise!

This dilemma could have been foreseen. I discussed it myself in a book Will Dollars Save the World? ten years ago: “Intergovernmental loans are on the horns of this dilemma. If on the one hand they are made without conditions, the funds are squandered and dissipated and fail to accomplish their purpose. . . . But if the lending government attempts to impose conditions, its attempt causes immediate resentment. It is called ‘dollar diplomacy’; or ‘American imperialism’; or ‘interfering in the internal affairs’ of the borrowing nation.”

For ten years the champions of our foreign-aid program have not only failed to face this dilemma but have refused even to acknowledge its existence. When forced reluctantly to confess that their program does subsidize socialism, they reply that it would be “intolerant” to refuse aid to a country practicing socialism. This argument tacitly assumes that foreign socialism, like Epicureanism or Mohammedanism, is merely a private philosophy or religion quite irrelevant to the purpose of our aid. But socialism is a set of policies which reduce and distort production, perpetuate dependence, and nullify the very purpose of our aid.

SUPPORTING DISRUPTION

It is not merely socialism that our foreign-aid program has supported, but disruptive exchange controls, price controls, inflation, import quotas, and export subsidies. In fact, our foreign-aid dispensers once made it a condition of our aid that countries receiving it should discriminate against American goods! (This was called “limiting dollar imports.”)

If the “economic” part of our foreign-aid program were completely abandoned, foreign nations wishing to attract outside capital for development would have to appeal to private investors. This means that they would have to follow policies calculated to assure repayment of the loans made to them. But the free-enterprise policies necessary to create confidence on the part of private foreign investors happen to be precisely the policies that will most rapidly raise the production and living standards of the “underdeveloped” countries and balance their international trade.

The billions our government has given away have not merely failed of both their economic and political purpose, but they have delayed the return to currency convertibility and the restoration of private production incentives that would otherwise have taken place.