Foreign Relations of the United States, 1951, National Security Affairs; Foreign Economic Policy, Volume I
Truman Library, Truman Papers, PSF-Subject File
The Chairman of the Council of Economic Advisers (Keyserling) to the President 1
Dear Mr. President: I am sending you herewith an original and two copies of a letter from me to you, also dated November 2, and designated as “Top Secret”.
I am sending this letter to you this evening because I am earnestly hopeful that you will be able to read it during the weekend and prior to your important conferences starting next Monday.2 The letter is fairly long, but I feel morally convinced that it contains material which you will consider important at this time, whether you agree with all of it or not.
If you want to cut my head off after you read it, that will be all right too.
Respectfully yours,
The Chairman of the Council of Economic Advisers (Keyserling) to the President
Dear Mr. President: The recent visit of Mr. Harriman, and the coming visit of General Eisenhower, impel me to present to you a summary statement of my views on current economic issues related to the defense effort. Mr. Harriman tried to contact me when he was here, and I had hoped to have a talk with him. But I was called out of town by the death of my father, and consequently missed seeing Mr. Harriman.
The views contained in this letter are my individual views. They are transmitted to you in my role as an ad hoc participant in the work of the National Security Council, considering the implications of the defense program. I appreciate very much the opportunity which you have given me to work with the NSC on this matter. Consequently, [Page 246] and in view of the shortness of time before the problems which will again be confronting you next week, and for other reasons as well, I am not presenting these views in this form to anyone except you. This I feel it my duty to do. However, you know that I have held these views for a long time, and have expressed similar views in the presence of other appropriate persons.
As you know, I have devoted most of my time since the Korean aggression to study of the economic problems of national defense. I have pondered the lessons of World War II, while recognizing that the current situation is very different. I have attended, by choice, most of the meetings of the NSC senior staff, and discussed the issues with members of the NSC itself and with the other top mobilization officials. For all of them I have the highest respect and regard.
My views at this time may be summarized in two main points as follows:
(1) Even within the limits of congressional authorizations already made, the primary defense program in the United States, including both (a) the buildup of end items of fighting equipment at home and (b) the supply by the United States of already pledged materiel and equipment to forces and peoples overseas and particularly in Western Europe, should be moving faster than it has thus far moved. It is well within our economic resources and our organizing abilities to speed up these already determined programs. I can appreciate the many specific difficulties being encountered in meeting present production schedules. But I am firmly convinced that, despite these difficulties, much more could be done in the present mobilization framework. I shall not undertake in this communication to indicate what specific steps might be taken to accomplish this result. That is not the main purpose of this letter.
Briefly, however, I think that there is need for a more complete and firm programming and scheduling of primary defense production targets. There is need for a closer integration of these primary defense production targets with other aspects of domestic economic mobilization. And there is need for better integration of the whole domestic effort with the scheduling and meeting of established and contemplated foreign requirements. These needs seem to me to call for further improvement and further centralization of the overall programming of requirements and supply. As you know better than anyone else from your World War II experience, this overall programming of requirements and supply is at the very heart of the whole matter, whether the mobilization is “partial” or “total”. In some respects, the need for this process is even greater in “partial mobilization”, because in a total war the pressure of absolute necessity forces decisions which in a [Page 247] period of partial mobilization may be too long delayed in the absence of effective overall programming. It seems to me that the first step in this direction would be the development of better production scheduling, and more effective expedition of production, in the defense establishment itself. I know that you will not regard these comments as being critical of anybody, in view of the great work which has already been accomplished. But I do not feel that these are the times for one to be silent for fear of being improperly accused of being “critical”.
(2) The second point I want to make seems to me even more important that the first point as made above. This second point is that, if necessity so dictates, it is well within our economic resources as a nation, our organizing skills, and the attitudes of our people, to lift considerably even above current plans and programs the size and speed of our domestic defense program and our supply of needed items to forces and peoples overseas. As you know, I have never regarded it within my province or capacity to advise concerning the total size of the defense effort required for our national security and the security of the free world. That is a task for others in positions of greater competence on this subject. But I have recurrently stated my conviction that we should not let false economic considerations stand in the way of what the world situation may require; that many persons have consistently underestimated the productive power and expansive capacity of the United States economy; and that programs even larger than those now in process could be undertaken, if and only if they are needed, without overtaxing our basic economic strength. The record of what we did in World War II, and how far we exceeded conservative expectations, should be conclusive on this point. In making this observation, I am fully mindful of the important differences between the problems of “partial mobilization” and the problems of “total mobilization”. These differences are not only economic, but also “political” in the broadest sense because they involve what the people are willing to do as well as what they are able to do. I shall make reference to these differences further on in this letter, but I do not believe that they impair the basic soundness of the two major conclusions which I have set forth.
Having summarized my position in the two points above, I shall now discuss some of the important issues arising in connection with the second of these two points.
A general view of economic developments seems clearly to illustrate that a larger and swifter program could be undertaken if it should be needed. The following table sets forth, adjusted to the price level of the first half of 1951, the gross national product and its major [Page 248] components (at annual rates) for 1948, for the second quarter of 1950 (the period immediately preceding the Korean aggression), for the second quarter of 1951, and preliminary estimates for the third quarter of 1951.
Gross National Product in First Half of 1951 Prices
Billions of dollars, seasonally adjusted annual rates
| Period | Total gross national product | Personal consumption expenditures | Gross private domestic investment | Net foreign investment | Government purchases of goods and services (Fed., State, local) |
| 1948 | 278. 5 | 190. 7 | 47. 2 | –1. 1 | 41. 7 |
| 1950–2nd half | 306. 8 | 209. 5 | 56. 0 | –4. 2 | 45. 7 |
| 1951–2nd qt | 324. 7 | 201. 2 | 63. 2 | . 5 | 59. 8 |
| 3rd qt.* | 325. 0 | 202. 0 | 56. 5 | 1. 0 | 65. 5 |
It is clear from the above table that, despite the enlarged defense program which is reflected in the expansion of Government purchases of goods and services, we have nonetheless maintained a tremendously high level of personal consumption for all the people of the United States. In addition, the expanding defense program and the very high level of personal consumption have left over enough resources to enable an enormous increase in private domestic investment, which means the build-up and sharpening of our productive tools and equipment and the expansion of plant and inventories. It seems to me that anyone looking at these figures would come to a full realization of the fact that our economy has not been fundamentally impaired, and is in no danger of being “wrecked,” by the current defense program or even by a larger program if it should be needed.
Moreover, in looking toward the future, one must take into account not only the growth in the total productive power of the economy which has already occurred, but also the further growth which is clearly in prospect. It is a reasonable certainty that over the next few years, particularly with the vast expansions of production facilities which have occurred and which are now under way, that total national production should increase by about 5 percent per annum. This means that, even if a larger or swifter defense program should be necessary, there will be abundant resources left over to maintain a very high level of consumer supplies and to continue the build-up of basic productive equipment. Many of those persons who underestimate what programs our economy can stand make the fundamental mistake of measuring future needs against a static instead of a dynamic concept of the economy as a whole. You will recall vividly how that mistake [Page 249] was made by some people in relatively high places a decade ago, and what it would have cost the country and the world if their views had prevailed.
The relative abatement of inflationary pressures and upward price movements, since early 1951, is a concrete illustration of the point I have just made. It is true that the establishment of a wide range of controls, both direct and indirect, has helped greatly to hold down the inflationary forces. But even more fundamental has been the fact, fore told by some of us in analyses made at the time of the Korean aggression, that the productive power of the American economy was sufficient to carry a very large defense program and at the same time service more than adequately the other needs of our economy. In fact, as the above table shows, total production since the Korean aggression has grown almost as much as the defense take, so that our whole economic plant is bigger and stronger today than it was at the middle of 1950.
The argument is made in some quarters that the aggregate figures which I have cited do not convey a true picture, because they do not reveal the strain upon particular facilities and materials in short supply. It is true, of course, that the strain on some parts of our economy is much greater than the strain on the economy as a whole. It is also true that certain specific shortages hold the feasible expansion of the defense program down to lower levels than would be possible if one looked only at the economy as a whole. Nonetheless, these specific shortages of facilities and materials are by no means as serious or limiting a factor as they were during the early stages of World War II. They do not of necessity hold the defense program to its current size or pace. A more careful analysis, item by item, of where these short ages exist, would make it clear that the defense program, if necessary, could be further expanded or expedited. Of course, such a decision would require somewhat further cutbacks in the supply of durables for consumer use, and a somewhat tougher policy toward nonessential construction. But such changes would by no means be intolerable.
There are many who concede the foregoing propositions. But they argue that to shift from the current defense program to a larger or faster program would require a shift from the current policy of “partial mobilization” to a policy of “total mobilization,” and that this would be unwise. This argument, it seems to me, gets the wrong answer by mis-stating the issue. Everybody in his right mind admits that it would be well-nigh fatal to embark now upon a “total mobilization.” We hope we will never have to do so. But neither a “total mobilization” nor a “partial mobilization” is an arbitrary concept with fixed and unchangeable boundaries. You will recall from World War II experience [Page 250] that, throughout that war, different people had very different ideas about the content of “total mobilization.” Even after “total mobilization” was an actuality, the program undertaken changed as to size and composition, and as to the concept of what we were able to do and should do. Likewise, a “partial mobilization” can vary considerably as to size and composition, depending upon the need, without approaching “total mobilization.”
It is obvious, theoretically, that a “partial mobilization” could be pushed so far that it would be the same thing as “total mobilization,” or pushed so far that it would be economically or politically unwise to attempt it during a period when “total mobilization” is clearly undesirable. But the current “partial mobilization” has not reached that point, and it is still a long, long way from having reached that point. I believe that the “partial mobilization” could be considerably larger or faster, if necessary, without any fundamental departure from the basic policy or philosophy now prevailing. It would simply require a harder organizing effort, and, as I have said, some further cutbacks in some areas and some further conversion of a few of our basic productive facilities. Both of these changes are well within our economic capacity, and neither of them would disrupt our economy or prevent maintenance of a very high level of consumption and productive expansion.
Manifestly, a larger program is harder to do than a smaller program, and causes more inconvenience to many interests. But what is hard should not be confused with what is impossible; and inconvenience should not be confused with real hardship. I believe that the defense program, if need be, could be made larger or faster without imposing real hardship upon any large or vital segment of the economy; and, of course, the hardship imposed must be balanced against the urgency of the defense need.
I do recognize that material shortages are currently causing serious difficulties for many small firms. As you know, I have been very sympathetic toward the small business problem. However, I am firmly convinced that ingenuity and sympathetic effort can bring small business into the defense effort or cushion the shock imposed upon some of them. No one should expect, however, to do the defense job and not disturb any of the thousands of small producers of non-essentials.
The argument is made in some quarters that a larger or more rapid defense program might be feasible if the Congress were willing to take more adequate measures to contain inflation; but that such enlargement is not feasible because the Congress has not demonstrated [Page 251] willingness to take such action. I believe that this argument is weak in several vital respects. In the first place, the argument seems to me to move around in a circle. It seems to me to say: “The Congress has been deficient; therefore the Chief Executive should adjust the programs which he recommends for the national defense in accord with these deficiencies; and this in turn will provide a rationale for the Congress to be even more deficient.” The times seem to me too perilous for that kind of circular process. In the second place, the productive power of our economy is such that I believe a considerably larger or faster defense program might be undertaken, if needed, without causing irreparable inflationary damage, even under the control and tax programs thus far initiated (although, of course, stronger controls and higher taxes are now highly desirable). The record of economic events since the beginning of 1951 seems to bear this out. Even if some substantial additional inflationary pressures should be generated, that should be balanced against the imperative character of the needs of the United States and of the free world. Inflation is a bad thing and should not be underestimated. But it would seem to me highly dangerous to be concerned so exclusively with inflationary dangers as to underestimate Communist dangers. The Communist danger is the central, overwhelming danger which our economy faces. If that danger is not met, our economy and our way of life may be destroyed. If that danger is met, no one who has studied the history of United States economy can doubt that our economy and our people will continue to be productive and to thrive and prosper even if unavoidably there should be some more inflation. Besides, if an enlarged program should produce the actuality of renewed inflationary pressures, it is at least arguable that the Congress would respond with the reassertion of stronger controls. In any event, those who are not defeatists must bank on this possibility. Beyond all this, we should always bear in mind that our inflationary problem is slight indeed compared with that of the Western European nations who are attempting large rearmament programs with shortages of productive facilities and of raw materials far more serious than ours. We have an inflationary problem, but it is not to be compared with the inflationary problem in England or France, in Italy or Belgium.
The question of taxation and balancing the budget relates closely to the foregoing question. There are those who say that we could have a larger defense program if the Congress were willing to raise more taxes, but that we cannot have it because of the large deficits which will arise under current and prospective tax programs. Of course, it is highly desirable to increase taxes further, to avoid large deficits, [Page 252] and to try to balance the budget. If this can be done consistently with meeting security needs, so much the better. But a serious deficiency in the security strength of the free world, or of the United States, would be infinitely more dangerous and devastating than a sizeable deficit in the Federal budget. Whether the national debt increases by 5 or 10 or even 20 billion dollars over the next few years is of great economic importance; but it is of relatively minor importance compared with the satisfaction of defense needs. An economy which is producing 325 billion dollars worth of output per annum, and which will achieve a 400 billion dollar output within a few years, is not going to be overturned or “wrecked” depending upon whether or not the current national debt is enlarged by 5 percent or 10 percent or 15 percent within the next few years. There have been other periods in our fairly recent history when some people have thought it more essential to balance the budget than to fight evils which threatened to overturn our whole society. Those people were wrong. I do not want what I have just said to be construed as a failure to realize that we should go as far as we can toward balancing the budget and as far as we can toward avoiding deficits. But even from the purely economic viewpoint, not to speak of the viewpoint of national security, first things should come first. In passing, I think the deficit under current programs will be less than some estimates which do not allow sufficiently for further increases in production and national income. This miscalculation has already occurred in recent years.
The argument is also made that we in the United States should not do more until and unless other nations do more. This argument has a degree of merit, and is certainly valuable for bargaining purposes. But when this argument is pushed too far, it takes on the nature of a new and dangerous form of quasi-isolationism. The strongest rower in a boat, engaged in a race for life itself, must pull as hard as he can. He must pull harder than the other rowers because he is stronger, and he must realize that his doing his best will stimulate the other rowers toward doing their best. Part of the job of exhorting the other rowers should be left to the cox. If too much of it is done by the strongest rower, the crew may become demoralized. In fact, the analysis of what we are doing compared with what other nations are doing sometimes uses figures which are not valid. For example, to say that we are devoting a larger portion of our national product to defense than some other nations gives a distorted picture. It overlooks the fact that their standards of living are so near the bottom of the level of tolerance by their people, and their resources for building up their productive equipment so scanty, that they simply cannot afford [Page 253] to devote even so large a proportion of their total resources to the military effort.
Finally, the argument is made that, whatever the economic facts of life might be, the “political” considerations require that the defense program and its inconveniences not be pushed beyond the level which the American people will support for a long period of time. This is undoubtedly a sound argument in principle, but its practical application gets down to questions of hard fact and quantitative degree. As one observer, I have not yet detected widespread evidence that the American people in the main are writhing or rebellious under the impact of national defense. There are some noisy groups who are complaining, or who are hollering before they are really hurt. But they would be hollering even if the program were smaller, and will not be able to holler much louder even if it were larger. This does not mean that I think that the American people would be willing to sustain, during a cold war, burdens of a size which they would gladly bear in a total war. But I believe that, if necessary, a substantially larger or faster defense program could be undertaken without very great impairment of the fundamentals of living standards. I believe that considerably further reductions in such things as new model automobiles and television sets and many other things of that type would be manfully tolerated by the American people if they know the need. I believe that they would support some further industrial “conversion”. It seems to me that the great “political” danger may arise, not from the size of the defense burden, but from a feeling on the part of the American people that the defense accomplishment is not large or swift enough even in terms of the authorizations already made available, or a feeling on the part of the American people that the defense program falls short of the need. Of course, I do not pretend to any expertness on this particular subject. But I do not like to see “political” arguments advanced by some to hide their cloudy thinking or lack of determination. May I make bold to suggest that it has always been the outstanding characteristic of your leadership to state the need as you see it, and to trust that the American people will also recognize the need. I do not believe that such trust will ever be misplaced.
You will recall, Mr. President, that when you decided that the defense program had to be raised above 13 billion dollars, more or less, there were a great number of sound and responsible citizens—including highly competent economists and some other Government officials—who thought that any substantial lifting of that program would seriously embarrass or even fundamentally impair the United States economy. There is no need now to comment upon the fallacy of this [Page 254] view which was then held. This does not mean that there is no limit to what our economy can stand, or that we can lift the effort above current levels as easily as we could lift it above 13 billion dollars a year. But there is some value nonetheless in the lessons of the past, which have repeatedly demonstrated the power of our economy, and have revealed the danger which would arise if we set aside the most imperative of national needs on the mistaken ground that we could not afford to meet them. Whatever might be the point of safety beyond which the defense effort could not be lifted in a period of “partial mobilization”, I feel strongly that a careful analysis of the facts will not support the contention that this point has yet been reached.
While I am presenting these views to you alone, Mr. President, it goes without saying that in your judgment they are available for presentation wherever you see fit. I am prepared, at your direction, to reinforce these general views with a more elaborate presentation of facts. But I have thought it more desirable at this moment to cover the high spots.
Whatever my views may be, I assure you that, in the future as in the past, whatever decisions you may reach will have my support to the limits of my strength and ability. For I realize that you are in the best position to view the whole picture, including parts of it which I cannot possibly see.
Respectfully yours,