Eisenhower Library, Randall Commission records, 1953–1954
Paper Prepared for the Working Group on Review of American Economic Foreign Policy1
EFP D–2/1
Note on Economic Assumptions Underlying American Economic Foreign Policy
I believe it would be useful to schedule one or possibly two meetings of the working group which could be devoted to a discussion of certain fundamental economic notions about the working of the international economic system. I have the feeling that differences of viewpoint which have been expressed with respect to the wisdom or practicality of some of the economic programs we have been thinking about may be rooted in disagreements on basic assumptions. I also feel that it may be these differences in fundamental concepts which account for the differences in approach to the economic problem represented by, say, the Rosenson paper on convertibility2 and the Economist suggestion for an Atlantic Clearing Union.
The points to which I think we should address our attention are these:
1. How is it expected that a world system of trade and payments, free of quantitative restrictions and exchange controls and with [Page 47] convertible currencies, would be kept in balance? In other words, what equilibrating forces are expected to operate so as to prevent persistent surpluses and deficits (not accounted for by normal capital flow)? Under the gold standard the notion was that an inflow of payments produced by an export surplus would tend automatically to increase prices in the surplus country and reduce prices in the deficit country, thus stimulating imports into the surplus country and deterring imports into the deficit country. Whatever may have been the validity of this notion in the past it is clear that under present and foreseeable circumstances there is no direct or automatic connection between the inflow and outflow of payments and internal price levels. Whatever connection may exist would presumably have to be established through conscious acts of internal credit and fiscal policy by the governments concerned. If this is in fact the case I wonder whether it is enough to say that balance will be achieved if only governments pursue “stable” internal financial policies. In other words, do not internal fiscal and monetary policies need to be much more closely tailored to the condition of the external balance (and to the internal policies of other governments) than would be implied by a simple undertaking to promote internal stability? Again, if this is true, isn’t it almost a prerequisite of equilibrium through the price mechanism that internal policies be brought into the international arena in a much more powerful way than some of our papers seem to contemplate, and may this not be an argument for some new kind of international organization?
2. It may be objected to the foregoing that in the case of a country such as the United States, whose international trade is such a small portion of total GNP, under no circumstances could the state of the external balance be expected to have an important equilibrating influence on internal price levels even if the old gold standard were in operation and certainly not under present circumstances under which comparable effects could be achieved only through internal policy. This is probably true, but the fact that it is would seem to have little practical importance so long as the United States is on a surplus basis and so long as the United States, for a variety of reasons, is prepared to maintain an internal policy directed at high levels of employment. However, to some extent a similar problem exists elsewhere, for example France, whose international trade is only about 10 percent of GNP.
3. We have been assuming that it would be possible over time to bring United States international accounts into balance through commercial policy measures designed to increase imports, through investment flow to underdeveloped areas, through special projects such as the food program to remove “structural” distortions in the situation by increased output of food elsewhere, and by appropriate [Page 48] internal policies abroad. During the past few years, however, a number of people have come to believe, without being able to prove the point, that the United States has an inherent bias toward an export surplus. So far as I have been able to discover, two main reasons have been put forward for this belief. The first is that since the rate of increase of over-all productivity in the United States is greater than elsewhere, the United States will perpetually tend to run an export surplus. If this belief is correct then it is difficult for me to see how any of the things that we have been discussing (with one exception) could bring about equilibrium through the price mechanism. While reductions in the United States tariff and appropriate internal policies elsewhere would increase the level of imports into the United States, presumably the tendency toward U.S. exports would also increase. Similarly, the stimulation of food output in underdeveloped areas and of capital flow to underdeveloped areas would not seem to help the balance-of-payments situation under these circumstances. The one exception is to be found in a change in foreign exchange rates, but presumably so long as our total productivity tends to increase at a faster rate than others, there would have to be a continuing depreciation of foreign currencies over time. The disadvantages of continuous depreciation as a solution to the problem may argue for much stronger emphasis than we have been giving to measures to increase foreign productivity.
The second main explanation which has been given of the U.S. bias toward export surplus lies in the structure of American imports and exports. The argument here is that since the great bulk of American imports is in crude materials and semi-finished manufactures, the level of total U.S. imports tends to be affected primarily by the rate of industrial production and is little affected by changes in price. On the contrary price declines tend to reduce rather than increase the total value of imports. On the other hand American exports, which are largely manufactures, are sensitive to price changes, so that price declines tend to stimulate exports from the United States. In other words, for the United States, price declines tend to work in only one direction. They stimulate exports without stimulating imports. What the policy implications of this may be I am not quite clear except to confirm what we already know—that effective tariff reductions by the United States very largely relate to imports of finished manufactures.*
[Page 49]4. I am not sure how the foregoing ideas with respect to the persistent export bias of the United States economy square with the concept of comparative cost of [as] a basis for international trade. If comparative cost operates, presumably trade would take place even though the United States were more productive in each item of trade than other countries so long as there were disparities in productivity between different industries in the United States. I hope someone will be in a position to explain this at the meeting. One point I would like elucidation on, incidentally, is whether the idea of comparative cost is intended to be only a very long run factor, significant at points of new investment, or whether it is also assumed to be a short run factor which currently influences the quantities of commodities exported and imported through the price mechanism.
I do not believe that the discussion on these various theoretical subjects should be pushed too far but I believe that some examination of these points may help to throw light on what we may expect from some of the specific policies and programs we are considering.
- A covering transmittal memorandum, dated Dec. 11, by William S. Lambert, Secretary to the Working Group, is not printed. No list of the members of the Working Group was found in Department of State files.↩
- Not printed; a copy is in the Randall Commission records.↩
- It should be noted that the proportion of finished manufactures in total U.S. imports has increased from about 10 percent of the total pre-war to about 13 percent in 1950 and to 17 or 18 percent in 1951 and 1952. [Footnote in the source text.]↩