Chapter IX. You Can’t Buy Good Will

13.It will be a profound mistake to count on gratitude, or to believe that we are purchasing any permanent good will by government loans and gifts to Europe.

It should be sufficient to remind ourselves that we did not get gratitude or good will from the Yugoslavian government in return for the millions of dollars worth of supplies poured into that country by UNRRA, and that we did not get it from the Russian Government even in return for $11,000,000,000 of Lend-lease, extended at a time when it meant the very survival of Russia.

Nor is it from communist-controlled countries alone that our financial help has failed to buy gratitude or good will. Passing over the effect in this direction of the $30,000,000,000 of American Lend-lease to Great Britain, the whole amount of which was written off, we need merely consider the response to the special post-war loan to Britain of $3,750,000,000. Far from hearing continual grateful references to this in Parliament and in the British press, we hear constant resentment about its alleged “onerous” terms. (And, indeed, as it is impossible in the long run to work an economy half “planned” and half free, even a moderate requirement like sterling convertibilty broke down, though it is essential to multilateral trade and much more in England’s ultimate interest than in our own.)

When the terms of the American loan to Britain were first announced, even the dignified London Economist wrote: “If the purpose of the American Congress which decides American policy is, as it often seems to be, deliberately to wound and afflict the British people, it has certainly succeeded. It is aggravating to find that our reward for losing a quarter of our national wealth in the common cause is to pay tribute for half a century to those who have been enriched by the war.” The London New Statesman thought the loan a “disastrous bargain,” and added: “We run grave risk of ultimately being compelled to invoke all the ingenious ‘escape clauses’ in the Agreements and of becoming an insolvent debtor. . . . Since everything points to Britain being compelled ultimately to repudiate commitments whose fulfillment United States trade policy will make impossible, we must face the probability of a future quarrel with America, and unrestricted commercial warfare.” As late as July 19 of this year, Ernest Bevin, the British Foreign Secretary, appealed to the coal miners to keep Britain “out of the money-lenders’ grip.”

One could continue to quote ad libitum such adverse European comments on the effect of our help. Today the United States has become the scapegoat for politicians in virtually every country that has received grants from our government. Either our help, in their opinion, has been too paltry compared with their country’s real needs, or it has been accompanied by onerous, humiliating or unworkable conditions. These conditions, it is always implied or stated, were imposed not to help revival in the aided country but for some narrowly selfish reason of our own capitalists or militarists. Even conservative foreign politicians blame us for giving credits which have helped to maintain socialist governments in office.

How, in the face of such a record, can any Americans still think that inter-governmental foreign loans buy the good will or friendship of the governments and people to whom they are made?

Gratitude, certainly as between governments, has been correctly defined as “the lively expectation of future favors.”

CONFUSION OF PURPOSE

14.Inter-governmental peacetime loans become ambiguous and confused in purpose.

It is beyond the scope of this study to consider the wisdom of loans, gifts or other aid from one government to an allied government in time of war. This question raises political and military issues which must be dealt with on their own merits. But once the war has been successfully terminated, the primary reasons for such loans or contributions terminate with it. A few inter-governmental transactions may be necessary to take care of conditions growing directly out of the war or to liquidate the war alliance. But once this has been done, the continuation of inter-governmental loans in peacetime for peacetime purposes raises questions of an entirely different nature.

During a war, the purpose of inter-governmental war loans is clear: it is to keep one’s allies in the war and to make their contribution to victory as great as possible. But the purpose of inter-governmental peacetime loans is certain to become confused. Few Americans are clear in their minds today regarding precisely what the central purpose is of our government’s program of foreign aid.

Is it to relieve starvation and poverty? Then people in India, Africa, China, and parts of South America may need our help far more than people in Europe do.

Is it to halt communism? Then we must coldbloodedly distribute our help, not to the points at which it relieves the greatest human distress, but to the most strategic points to hold against communism. We must first of all ask ourselves, indeed, whether in a fight against communism loans to wobbly European governments are really our most effective weapon.

Is the purpose of our aid to meet a European economic crisis? Then the first thing to do is to ask what has caused the crisis. And in this case too we must ask whether loans are the most effective method of dealing with it.

Is the central purpose of our aid merely to increase our export trade and to create prosperity? Then we must ask ourselves whether on these grounds the program makes any sense at all.

The Export-Import Bank was originally set up in the belief that it would promote foreign trade by making loans to foreign buyers. Whether a government institution was really needed or justified for this original reason we need not here inquire. It is enough to point out that the operations of the Export-Import Bank have drifted insensibly from commercial loans to political loans and then to thinly disguised relief.

When President Truman on March 12, 1947, made his first appeal to Congress for a loan of $400,000,000 to Greece and Turkey, he rested his appeal frankly on the argument that “the very existence of the Greek state” was being “threatened by the terrorist activities of several thousand armed men, led by communists.” He told them that Turkey needed financial assurance “for the purpose of effecting that modernization necessary for the maintenance of its national integrity,” and that “we shall not realize our objectives unless we are willing to help free peoples to maintain their free institutions and their national integrity against aggressive movements that seek to impose on them totalitarian regimes.” His reference to our government’s protests “against coercion and intimidation, in violation of the Yalta Agreement, in Poland, Rumania and Bulgaria” left no doubt that his program was directed against aggression by Russia.

But by May 13—apparently in order once again to appease Russia and those Americans who were declaring that the “Truman Doctrine” led to war—Secretary Marshall was saying in an overseas broadcast: “There has been much of misunderstanding regarding our program of aid to Greece. There has been much of distortion and misrepresentation of our purpose. We are answering the call of a valiant ally who has suffered much. . . . It is as simple as that.”

But if it was as simple as that, why had the President gone out of his way to raise so much needless hostility in the first place?

Secretary Marshall’s statement did nothing to lull the suspicion or hostility of Russia, but it apparently helped to confuse our own policy to such an amazing extent that we were soon inviting Russia herself to ask for loans from us! To paraphrase Santayana’s definition of fanaticism, we redoubled our lending efforts after we had forgotten their aim.

AGAIN: THE DILEMMA OF CONDITIONS

15.Inter-governmental loans raise insoluble dilemmas regarding the imposition of conditions.

Inter-governmental loans, as we have already seen, 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. They may even be used for the precise opposite of the purpose that the lender had in mind. 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. The resentment is quickly exploited by the Communists in that nation. The bitter comments we have already quoted from the London Economist, on the “crippling” and “intolerable” conditions of the American loan to England, show that the resentment is felt also by supposedly responsible opinion in the borrowing nation.

The dilemma is, in fact, inherent. It lies in the attempt of one government to bribe another into following economic policies which that other government does not believe in sincerely enough to follow without the bribe. The dictation must be resented even if accepted. The people in the borrowing nation are led to feel that they have sold their economic birthright for a mess of pottage. Everything that goes wrong is blamed on the conditions of the loan. The ill will caused by this is in itself enough to offset any good will that the loan might otherwise have brought.

Many people still suppose that this dilemma was escaped by the so-called Marshall plan. Under that plan the American government has not ostensibly dictated any conditions whatever. It merely asked the borrowing governments themselves to set forth a program of self-help before the loans were extended. But the dilemma was not escaped. For the report of the sixteen nations shows that they have no intention of abandoning the major policies which have brought them to their present crisis. They will continue as before to impose price control and exchange control, food subsidies, cheap money, ambitious capital investment programs, government-dictated production, nationalization and socialism. Naturally. For these policies that distort and paralyze the economic process are the very ones that were adopted in the belief that they promote recovery. And not less important, most American government officials themselves seem to think that these policies are necessary and good. They have, in fact, imposed most of them on Germany and Japan. How, then, can we expect them to be reversed?

RESTORE PRIVATE LENDING

16.All this must lead us to the conclusion that the business of international lending should be returned to private hands.

Before the First World War, and even after it, international lending meant loans made by private investors in the expectation of profit. “Freedom of international trade” meant the freedom of private individuals to buy and sell, lend and borrow, in whatever market they chose and wherever they found it most advantageous to do so.

When international loans are made by private lenders, either to governments or to private firms or projects, the dilemmas we have been discussing disappear. In private transactions commercial considerations are certain to dominate. Loans will be made only if the lender has good reason to believe that the borrower intends to repay the loan and will be in position to do so. They will be made only for projects that promise to pay their own way. All this follows from the fact that the private lender is risking his own funds, and wishes to make sure that his capital is safe. Capital invested in projects that pay for themselves assures that world resources are being most efficiently utilized and that borrowed capital is being used in the ways that do most to promote production.

Of course private lenders are not omniscient. They do make mistakes. After the First World War private international lenders made some bad ones (though not as big or as bad as our government made). When private lenders err, resources of labor and capital are misdirected and at least partly wasted. But nobody had to buy the unsound foreign bonds floated in this country after the First World War. Private errors are, indeed, kept down to a minimum by the fact that people are risking their own funds. Those who lose cannot indefinitely continue to make such mistakes. Their money is gone. It is only those who have shown good judgment who have more funds for more investment. When a private lender makes a mistake in lending he pays for it himself. When a government official makes a mistake in lending the rest of us are forced to pay for it.

The private lender does not “impose conditions” in any direct sense. If he is a banker to whom a foreign government has come for a loan, there are times when he must simply tell that government that as long as it continues certain policies he is afraid American investors will not be interested. This is not because investors have any desire to control the policies of that government, but because they wish assurance of repayment. Unsound policies do not provide that assurance.

The reforms brought about in the effort to conform with the wishes of private lenders are nearly always sound reforms. They are the kind of reforms that make for private or governmental solvency. They are not the kind of reforms imposed by one set of governmental planners upon another set of governmental planners. They do not mix politics with economics. They are reforms that anyone in any nation should welcome, because they give increased confidence that loans will be repaid.

When an American government official decides to grant a loan to Ruritania, on the other hand, it may be for any number of reasons. He may decide that this is necessary to carry out some political policy that he thinks is good. He may decide that it is “America’s duty” to lend or give money to Ruritania. He is not, it is important to observe, giving his own money for such reasons. He is deciding that, in accordance with his judgment, A and B and C must be coerced into paying higher taxes so that these may be turned over to Ruritania.

It becomes a nice problem to decide whose charity this coerced charity really is. Is it the charity of the government official who is being so liberal with other people’s money? Or is it the charity of A, B and C, who contributed the money not by their own voluntary choice but because it was seized from them by their own government to turn over to Ruritania?

It is commonly said that private capital is “inadequate” to take care of the present world crisis. This argument is of course untenable. Governments have ultimately no funds but the funds they take, directly or indirectly, from individuals and business concerns. Government capital is not a net addition to private capital; it is merely the portion of private capital that the government has seized for its own uses.

Another argument often put forward against private capital is that, under present conditions, only the most minute amounts of private American capital would be loaned to Europe. But if it is true that private capital today would be lent abroad only in comparatively small amounts, it is for very good reasons. The long and shocking record of government repudiation, of exchange control, of expropriation and paralyzing restrictions, of prohibition of export of gold and export of capital which has made private lenders so distrustful, should certainly make us no less distrustful of the fate of money loaned by our government. International private lending will be restored when governments have taken the measures necessary to restore confidence. And it is of the first importance that at the earliest possible moment they should be made to take these measures.

INTERNATIONALISM: TRUE AND FALSE

THOSE who oppose heavy loans and grants from our own government to European governments are sometimes accused of being “isolationists.” But those who believe that, in place of government loans, the barriers should be removed to private loans, and that our private lending markets should be freely opened up to foreign borrowers, are in fact the true internationalists. They see economic internationalism as the freedom of individuals in all lands to deal freely with each other, to buy from and sell to each other, and to do all this without having to run to some nationalistic-minded government bureaucrat for a special license for every transaction.

It is a completely false internationalism that sees dealings between nations as primarily dealings between the governments of those nations, as dealings between different groups of nationalistic bureaucrats, each preventing their own citizens from buying in the cheapest market, selling where they can sell most profitably, lending where their capital can be wisely used and properly safeguarded, and being allowed to indulge their own charitable instincts instead of those of the bureaucrats in charge of them.

It is a false internationalism which can only interpret “international cooperation” as meaning that the United States must be the perpetual innocent Candide among nations, or must act toward other nations like a rather soft-headed Santa Claus. It is a false internationalism that looks upon “cooperation” as a wholly one-sided affair in which one nation must lend or give without having anything to say about how its loans or gifts shall be used. It is a false internationalism that ignores or represses the freedom of individuals in one nation to buy or sell, lend or borrow, or cooperate as they please with individuals in another nation. It is a false internationalism that assumes it to be the responsibility of the government, rather than of the individual importer, to get the foreign exchange necessary to make his purchases.

In all former periods, when foreign exchange became scarce, importers simply paid a higher price in terms of their own currency to get hold of it. Today, as a result of carrying wartime practices over into peace, governments assume it to be their own responsibility to get foreign exchange for their importers; but when, as a result of over-buying abroad or inflation at home, or both, the dollar or any other foreign currency becomes scarce, the government not only refuses to pay anything more than its “official” price to get it, but forbids its importers to do so.

Would there be more “cooperation among the States,” or less, if New Jersey, instead of allowing its citizens to trade as they pleased with the citizens of New York, Pennsylvania and Ohio, decided that it was losing too many dollars to New York, put a ban on the export of dollars from New Jersey, put a ceiling on New Jersey imports from other states, forbade its own citizens to buy what it called luxury imports, subjected every import or export to special license, prohibited its own residents from spending more than $50 a year in travel outside the State, and then asked the Governor of New York to pass a law forcing every New York taxpayer to contribute to a State loan to New Jersey?

This sort of thing, which now parades as “international cooperation,” and has the stupidity and effrontery to call the advocates of a free world economic system “the New Isolationists,” is not internationalism at all. Its true name is statism. Its true goal is totalitarianism. Its true end is world impoverishment and the suppression of individual liberties.

A POSSIBLE BRIDGE

17.If it is thought necessary to provide public stopgap or emergency credits until the processes of private international lending can be fully resumed, then the best instrumentality for making loans to bridge such a gap would be the existing International Bank for Reconstruction and Development, under a modified charter. But this should be turned into an emergency institution only, and not authorized to make new loans beyond the next five years.

Several arguments will no doubt be advanced against the view that we can stop foreign lending by our government and by government institutions and switch over to private lending immediately. It may be urged that it will take time to organize private lending and to turn lenders and borrowers from a government-lending psychology back to a private-lending psychology. It may be argued that, just as it was necessary to make Lend-lease contributions to our allies to keep them in the war and to make their contribution to victory most effective, so it will be not merely just but far-sighted on our part to extend to our former allies—or at least our potential future allies—enough help to allow them to restore their peacetime economies. It may be contended that though a currency stabilization loan to a foreign country might entail too much risk for private capitalists, the general economic gains to this country and to the world which would follow stabilization loans if they turned out successfully would warrant this risk on the part of a government institution.

We have already indicated reasons for doubting the soundness of such arguments. They rest on the assumption that a loan would in fact be safe which would not be regarded as safe by people risking their own funds. Or they rest on the alternative assumption that a loan that would not be repaid would nevertheless stabilize the borrowing country’s currency at the chosen parity. But no nation’s currency can at once be free and stabilized unless that nation has won the confidence both of foreign owners of capital and of its own; and it cannot win this confidence unless it repays what it borrows. The assumptions on which the above reasoning rests are, in short, self-contradictory.

If, nevertheless, such reasoning prevails, the first problem to present itself would concern the most appropriate public institution for making stopgap loans of the type suggested. Proposals have been put forward for setting up an entirely new institution to make the contemplated loans under the Marshall plan. Yet one of the most troublesome features of the present situation is the multiplicity of governmental institutions already competing with each other to perform the same function. Students of bureaucracy will find nothing new in this: its whole tendency is to spawn ever-new overlapping agencies and create ever-new duplicating jobs.

For the purpose of making loans or grants to European governments, we have (surviving the now defunct Lend-lease and UNRRA), the Export-Import Bank, the Commodity Credit Corporation, the International Monetary Fund and the International Bank for Reconstruction and Development. In addition, the Treasury Department has acted as the agency to administer the loan to Great Britain. That ought to be about enough government foreign lending agencies without thinking up still another.

Of the two international institutions, the Fund in its present form ought not to exist at all. Its managers are virtually without power to insist on internal fiscal or economic reforms before they grant their credits. A $25,000,000 credit granted by the Fund to France, for example, is being used to keep the franc far above its real purchasing power and at a level which encourages imports and discourages exports. This merely prolongs the unbalance of French trade and creates a need for still more loans. Such a use of the resources of the Fund not only fails to do any good, but does positive harm.

The International Bank also lacks clear power to insist on reforms. As distinguished from the Fund, however, it at least has power to refuse loans unless the borrower is “in position to meet its obligations.” And if stopgap loans of the type suggested above are to be made, then the already existing International Bank, with suitable revisions in its charter, would seem the most appropriate instrumentality for the purpose.

This could be thought of as an institution for emergency repairs to the financial damage done by the war. As such, it has several great merits as compared either with the International Fund or with our own government. It is compelled to take credit-worthiness into account because of the fact that it must sell its debentures to private investors. Having this excuse, and being an international institution, it could impose conditions on foreign governments with far less danger of arousing resentment than if our own government made the attempt. The American Secretary of the Treasury himself declared, in speaking before its first annual meeting on September 27, 1946, that “the International Bank must now assume the primary responsibility for underwriting reconstruction loans to countries otherwise unable to borrow on reasonable terms.” But if the primary responsibilty is now the Bank’s, it has ceased to be that of the American government.

After the First World War, two types of non-private loans, as W. Randolph Burgess has pointed out, were effective—the central bank stabilization loans and the League of Nations loans. They were effective because each was preceded by a thorough review of the position and program of the borrowing country. The loans were accompanied by expert aid and supervision. The granting of the credit thus became itself an assurance to the world that an effective program had been adopted. Big results were obtained with moderate means. In fact, the total of the nine League of Nations loans for recovery and stabilization made to six different countries was only £81,000,000, or somewhat less than $400,000,000.¹

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, it is not the loan itself that is important in assuring recovery, but the reforms made in order to get the loan.

Candor obliges us, however, to notice an important and perhaps decisive distinction between the Financial Committee of the League of Nations and the present International Bank. The League loans were controlled by governments that still believed in free enterprise and the gold standard, and insisted that the borrowing governments make reforms in that direction. The International Bank today is controlled at least in part by socialistic governments who think that “managed” paper currencies are not only just as good as gold but better. Is such an institution likely to insist on reforms that will really restore confidence and bring revival and stability?

Even under the most favorable assumptions, it is difficult to see how the International Bank could serve any useful purpose beyond a reasonable period of emergency. It should not be authorized to make new loans beyond the next four or five years—and perhaps even during that period provision should be made for a gradual tapering off of the authorized volume of new loans.

If the International Bank, in brief, continues to be used at all, it should be as a temporary instrument to facilitate the transition to private international lending and not to delay or prevent it.

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¹ Cf. “The League Loans”, by Margaret G. Myers, Political Science Quarterly, December, 1945.