Knowledge that Transforms

EFFORTS to construct a workable system ~of international payments for Europe since the end of World War n1 have concentrated almost exclusively on the problem of finding suitable machinery to handle current account transactions between monetary areas. Capital transactions have been ignored, deprecated, and made as difficult as possible. This is in accord with the attitude toward international capital movements that has been dominant for the past ten or fifteen years. The concern of national treasuries to prevent a recurrence of the hot money movements of the I930's led the drafters of the Bretton Woods agreements to place capital movements in a kind of limbo where exchange controls, supposedly committed to let current transactions go free after the transition period, could exercise their ingenuity and regulate to the controllers' hearts' content. The resources of the International Monetary Fund cannot be used to finance capital movements unless the Fund's holdings of a currency remain below seventy-five per cent of that member's quota for more than six months, and then only if the effect of the operation does not raise holdings of that member's currency above seventy-five per cent and does not lower the Fund's holdings of the desired currency below seventy-five per cent of the appropriate quota. The existence of commitments to service debts in a money other than that of the debtor is regarded as an almost intolerable nuisance by technicians who have the duty of preparing and overseeing bilateral payments accords. Broadly speaking, a capital export, if it comes before the authorities at all, is treated by them as a hard currency transaction, whether it involves a movement of funds to a harder currency area or to an area whose money is as soft as that of the capital exporting country. Europe has innumerable committees dedicated to the removal of restrictions on international trade, and a good many sober groups working to establish greater freedom of movement across frontiers for labor. There are no committees to improve international capital movements, although there are lots of committees producing all kinds of reasons why countries need to import capital. The Bank for International Settlements is almost a lone voice in urging economic policy makers to remember that free movement of capital, both short and long term, has in the past been an important aid in the economic development of the world as a whole. 1 The problem of establishing greater convertibility of European currencies is commonly analyzed on the basis of the unstated assumption that there are no capital movements between monetary areas or between European and non-European parts of a given monetary area-i.e., that convertibility is possible only under circumstances in which net deficits and net surpluses on current account could be completely cleared, exception being made for more or less net capital inflow from the United States to European monetary areas as a group. The neglect of capital movements in current discussion and policy making has already led to serious practical difficulties. The United Kingdom balance of payments estimates have been consistently thrown off, and rather badly off, by the appearance of unexpected capital movements, both within the sterling area and with other areas. The figures are not very good, although Britain is the only country in Europe for which respectable data exist. At the time of the negotiations for the first U.S. loan to Britain, care was taken to establish criteria for disposing of the three billion odd pounds sterling of debt held by the (mostly sterling area) recipients of Britain's heavy overseas Dayments during the war. There is

BENJAMIN HIGGINS' review of my Full Employment and Free Enterprise 1 in the May I948 issue of this REVIEW shows that the proposals I have made for assuring continuous full employment in the United States are not always understood. This has also been demonstrated from time to time by the remarks of other critics for example, Professors Hansen 2 and Alan R. Sweezy.3 I am frankly mystified by some of the interpretations, and welcome this opportunity to try to clear up the main misunderstandings involved. These misunderstandings, as the following discussion should show, are fundamental. Confusion is multiplied when the reader is given to understand that my thesis -which offers, I believe, a distinctively new combination of elements-is quite familiar; e.g., Higgins says that many [economists] are ready to accept 4 and that these are now old ideas, 5 while Hansen calls the view in favor of underwriting private consumption widely held. 6 May I emphasize that my purpose in this article is not to argue my position but to clarify it by removing misapprehensions about it, so that future arguments about it may be more fruitful. First, some ideas that, with all due respect to my critics, my proposals do not contain: They do not contain the idea that full employment can be assured by underwriting or by maintaining private consumption alone. They do not assume that private consumption can be maintained by the mere act of underwriting it. They do not involve the notion that the maintenance of the right level of private consumption will (a) render private investment perfectly stable, or (b) raise private investment to the point where, averaging high and low years together, all tendency for savings to exceed investment is removed. They are not hostile to public works and services. These points, along with certain related issues, will be examined below in some detail.

The advancing recovery of European production and the apparent termination of the postwar boom in this country invite a new determination, of the objectives and magnitude of our foreign financing. We are rapidly moving into a new phase in which general shortfalls of production, compared with prewar, no longer represent the pressing problems to which our economic assistance must address itself. At least this is the case for the Western part of the world. Instead we are facing again the tensions between population growth and productivity particularly in the field of food in underdeveloped countries, and between the productive capacities of the developed industrial countries and the effective demand for their products. Insufficiency, instability, and unequal distribution of income in the world community threaten to limit and frustrate the postwar recovery.2 A broad and sustained economic expansion process on a world scale seems indicated to gear together existing productive capacities with existing but ineffective demands and to create new productive capacities that may provide more tolerable living standards for the people of the underdeveloped countries. As the leading and most productive nation of the world, the United States carries the major responsibility for the launching and direction of the expansion process. Such a process offers a way to satisfying simultaneously basic economic and political interests at home and abroad, our ability to supply investment and basic consumption goods and the needs for these abroad, our capacity to sustain a sizable export surplus and the need for a sizable import surplus in countries that want to develop their economies without resort to continual inflation, totalitarian politics, or civil war. It is the necessary basis for further progress in international cooperation and in the common management practices economic, political, military that have developed under our leadership in the war and postwar periods. The recovery process of the Western European nations, which has gone rather well so far in the field of production and inflation control particularly in Great Britain is beginnning to be marred by the lack of a longerrun policy of economic expansion. The expectation is spreading abroad that between now and I952 American foreign financing through existing channels will fall off without new channels being opened. The prospect of the termination of ECA without creation of a new and reliable stream of foreign financing adapted to the needs of the time invites retreats to economic isolationism, neglect of a balanced development of dependencies, and a destructive mania of saving dollars by cutting essential imports from America. The prospect discourages coordination of national investment policies and fosters economic warfare about limited markets between nations whose survival depends on persistent efforts to achieve a common management of their economic affairs. While economic cooperation in recovery necessarily must come to an end, uncertainty and confusion about its sequel make it appear that economic cooperation as such on the European continent, across the channel, and across the Atlantic is approaching its end. There arises a great problem of leadership for the United States, to renew the common venture and to define a fresh purpose.3 The