Where Our Interest Lies


BEFORE the war broke out in Europe, American public opinion was rather evenly divided on the chances of our participation. Then, during the terrible weeks of the invasion of Poland, the danger that we should be drawn in weighed more and more heavily on our minds. Everywhere, thoughtful persons found the possibility ‘that we might have to take a hand to save England and France’ the topic most worth serious discussion. But now military action on our part seems much less imminent. The war in Europe is still in the foreground of our thinking, but our attention, for the present, is centred on the economic rather than the political aspects of our position as a nonbelligerent.

The Pittman Act helped to bring about this change. By keeping American ships and American citizens out of danger zones, and by its cash-and-carry provisions, it quieted the apprehensions of those who feared that our commercial and financial interests might drag us into war. The price paid for these guarantees of security, the repeal of the arms embargo and the restrictions placed on American shipping, some thought altogether too high, but they were in a minority. The absence thus far in this war of the predicted wholesale slaughter and devastation has helped to quiet our apprehensions. London and Paris have not been bombed. Perhaps our military aid will not be required.

Still, no thoughtful person can escape the conviction that the interests of the United States, as well as those of all other so-called neutrals, are terribly involved in the European struggle. Whether or not we send troops overseas, the basic conditions of our life — economic certainly, and perhaps social and political — are endangered. Will the experience of 1914-1918 be repeated? Shall we have a war boom, followed by a series of post-war depressions? What measures of policy are best adapted, in this critical period, to safeguard American interests? These are the problems that now perplex us.

The fear of war is deflationary, but war itself, when it finally comes, usually produces inflation, both in neutral and in belligerent countries. Last year we blamed political uncertainties abroad for delaying our recovery from the great; depression; business was afraid of war. But as war came closer and closer, business seemed to find its aspect less disturbing. In the midst of the tense and anxious summer of 1939, a recovery movement was already under way in this country, which, when war actually came, was not checked, but stimulated. Prices rose, Wall Street became a scene of intense activity, the index of industrial productivity shot up, in a few weeks several hundred thousand jobless men went back to work. The striking gains of last September were not fully retained, but American business is still operating on a level much higher than that of a year ago, and its tone is more optimistic.

Whether or not this new optimism and this renewed activity develop into a war boom depends in the first instance on how long the war lasts. Export trade is the first point of contact between the war and our economy, and in a short war the prospects for great expansion of our sales abroad are not promising. This is a thrifty war. Years of feverish rearmament programs have provided much larger reserves than were available in 1914, and yet both the Allies and Germany seem to be postponing their use as long as possible.

This is a cautious war, as far as purchases from neutrals are concerned. Almost immediately the French and English decided not to compete in buying abroad. Both are endeavoring to supply as much as possible of their needs from their colonies and dominions. England is giving preference in its purchases of wool, copper, wheat, and other materials and foodstuffs, to sources of supply within the Empire, thus economizing precious dollar exchange. Neutrals as well as belligerents are imposing new restrictions on imports, which, reënforced by higher ocean freights and uncertainties of delivery, seriously affect some of our export industries.

Certain types of American manufactures will gain even in a short war. Canadian factories, temporarily, may prove adequate to supply shells and certain simple types of industrial products for English and French armies, but in airplanes and machine tools the United States has no competitor. For in these complex products the larger dimensions and greater flexibility of our iron and steel industry, and of our whole industrial structure, give us a decisive advantage over our northern neighbor and over all other neutrals. Thus far the only American farm products going abroad in increased quantities are cotton, pork, and lard, and these gains must be balanced against losses of English markets for tobacco and fresh fruits.

Should the war be prolonged well into a second year, or longer, there seems little reason to doubt that demands for both primary products and war material will spill over the artificial confines of the British and French empires, causing large imports from neutrals. Even if not a shot is fired, the transfer of eight or ten million adult males (English, French, Finnish, Belgian, Dutch, Scandinavian, and so forth, not including Russians or Germans) from civilian to military life steps up their consumption of foods and clothing. In barracks they consume substantially more meat, cereals, fats, sugar, tea, and coffee than when at home with their families; in front-line trenches their rations are substantially increased. The quartermaster general provides better shoes and warmer clothes, more and better blankets, than the bulk of enlisted men ever enjoyed as civilians. It would seem very difficult to offset this increased consumption with the rationing of civilians, especially since a large proportion of them are now not far above subsistence levels.

The Johnson Act and the credit restrictions of the Pittman Act prevent the Allies from drawing as liberally on our capital markets as in 1914-1918. But their holdings of gold and their dollar balances, added to the value of readily negotiable securities which could be liquidated here, give them spending power estimated as high as eight billion dollars. Also, as long as our Treasury continues to buy gold in unlimited quantities at $35 an ounce, the output of mines in the British Empire will yield around 700 millions yearly in dollar exchange. These resources will be economized as long as possible, but eventually the purse strings will have to be loosened. When that time comes, it seems inevitable that much of the money will be spent in our markets.

The shorter haul on our farm products, as compared with Australian, South African, or Argentinian, will be decisive when the frightful costs of the clumsy convoy system make nearness a vital consideration. Our great industrial plant renders us the logical source of supply when great quantities of manufactured products must be had quickly. We shall profit by these direct sales, and also, indirectly, we shall feel the effect of war purchases in other countries. For a great wave of war buying, wherever the money is spent, is bound to stimulate American business. It is impossible to imagine a war boom in Canada, for example, which would not spread across the border.

Our trade connections with Latin America, also, will be strengthened by the war. Larger English and French purchases of Argentinian and Uruguayan meat and wool, and of Venezuelan oil and perhaps Chilean copper and nitrates, will result in larger exports of American manufactures to those countries.

All this foretells increased demand for American goods, a shifting to the right of many of our demand curves.


Usually we are not in the habit of looking our gift horses in the mouth; we welcome without hesitation all opportunities to sell more goods abroad. But now farsighted business men are apprehensive; recalling 1918 and 1919, they see the spectre of inflation already raising its horrid head. Wartime demand, they recall, is peculiar; for, when national security is at stake, government buying is not restrained by rising prices. In their own markets, the Allied governments may commandeer goods at fixed prices; in Empire markets, they may weight the scales with patriotic appeals; but in our markets they must pay what is asked.

If the new demand were evenly distributed over the whole range of American industries, its disturbing effects might not be so serious. But, concentrated on a relatively narrow segment of our economy, it is bound to distort our price structure. Despite the presence of eight million jobless persons, a scarcity of welders, toolmakers, electricians, and other skilled workers is already in evidence. Other bottlenecks, in labor, materials, or, it may be, transportation, will give rise to sudden price increases in individual commodities, which, like stones dropped in a pool, will affect the whole nexus of interrelated prices. As the finished products of one firm become the raw materials of another, the waves of price increases gain in amplitude. Business men expand their inventories, speculators enter the market, and, before we know it, business is booming.

What can we do about it? Are we powerless to avert the war boom and resulting depression? Or have we available instruments of economic policy by which we can cushion the shock? In answering these questions two contrasts between 1914 and 1939 should be considered. First, with the experiences of 1920-1922 and 1929-1933 so recently in mind, we are more aware of the impending danger. Also, the great extension of government regulation of business, banking, the stock exchanges, and agricultural production and marketing under the New Deal has provided us with a variety of instruments of control, ready at hand. The Federal Reserve Board, for example, is far better equipped with powers to deal with problems of credit expansion than it was twenty-five years ago. Largely on this account, economists in government service, particularly the younger ones, seem confident that, once business is on the upgrade, they will be able to control the rapidity of its ascent.

Academic economists are skeptical; but admitting, for the sake of argument, that inflation can be controlled if we apply the brakes soon enough, are we sure that we want to control it? What really are the objectives of American policy in this crisis? How far is checking the wartime boom consistent with other aims?


How to have one’s cake and eat it too is probably the oldest of all human dilemmas. Just now our government is wrestling with it in a peculiarly aggravated form in trying to harmonize four major objectives of American policy. The objectives disclosed in the discussions of the Pittman Act, and of earlier neutrality legislation, are separable into two groups: —

I. Political objectives

(a) We want to keep out of war, but

(b) We want to help France and England

II. Economic objectives

(c) We want to escape a war boom in American business, but

(d) We want the stimulus to business which comes from rising prices

It does not require a profound knowledge of business-cycle theory, nor an intimate acquaintance with international relations, to detect the obvious conflicts within each group.

In repealing the arms embargo, Congress very definitely had in mind Objective I (b) — that is, putting the resources of our munitions plants, and particularly our airplane factories, at the disposal of the Allies. Official utterances necessarily camouflaged the real motive under the intricacies of international law, but our newspaper writers, and even a few Congressmen, not restrained by considerations of formal neutrality, did not hesitate to cull a spade a spade. Foreign newspapers, both in the Allied countries and in Germany, were not deceived; they agreed with their American colleagues in interpreting the action of Congress.

The economic benefits of repeal, II (d), were not stressed either in Congress or in the press, for, since the Nye Investigation, Americans have shown a certain squeamishness about war profits. But President Roosevelt, in his message to Congress, bolstering some rather feeble arguments drawn from international law, called attention to the increase of factory employment which might result from unrestricted exports of arms and munitions. Turning to the cash-and-carry provisions, we find in them a curious combination of political and economic aims. The restrictions on granting credit to belligerents are supposed to serve a double purpose of keeping us out of war and forestalling a war boom in this country.

Even a child can understand the inconsistency of wanting to keep out of war and wanting to help one side in the conflict. For every bit of assistance we afford the Allies, no matter how small, whether in the conduct of diplomacy or trade, binds our interests and sympathies that much more closely to their cause, and alienates us by that much from Germany and Russia. It is equally obvious that our economic aims, II (c) and (d), are conflicting. We want ‘prosperity,’ but without the violent dislocation of consumption and production brought about by rapidly rising prices, and without the burdens which inflation imposes on wage earners, salaried workers, professional people, and all persons on fixed incomes. We want to avoid a speculative mania in the stock market, with the inevitable crash and the ensuing deflation and depression.

But can we check an incipient wartime boom without at the same time weakening our economic support of the Allies? In this conflict of purposes between our domestic policy and our foreign policy lies a threat to both. The most effective aid we are now giving the British Empire, more effective probably than furnishing airplanes, is our purchasing of unlimited quantities of Canadian and South African gold at the generous price of $35 an ounce. We don’t need this gold, we have no use for it; in fact, its presence in this country might imperil our economy. These billions of unwanted gold constitute a potential basis for the most stupendous inflation this country has ever known, and yet our gold policy forces us to keep on buying the yellow metal for which, in the past five years, we have exchanged some eight billions of American goods and securities. As we acquire from year to year an increasing share of the world’s gold (we already have 60 per cent of the total), the suspicion grows that perhaps the rest of the world may never be willing to make the sacrifice necessary to reestablish the gold standard. In that case, we should be left sitting on a mountain of demonetized metal whose value might be one tenth of what we paid for it.

Cutting our buying price of gold would seem an obvious move to forestall inflation, but, quite apart from possible internal damage, this action would have devastating effects on the export trade and the whole domestic economy of gold-exporting countries. The British Empire would be the principal loser, and here again we are faced with a conflict of objectives: to keep on buying gold may endanger our domestic credit system, and yet to quit buying it will pull the props from under our support of the Allied cause.

We have, it is true, a variety of other devices for damping a war boom, but it is hard to find any whose action, however beneficial to ourselves, might not weaken our economic contribution to the Allies. High taxes, for example, are an effective deflationary measure; but, if they are applied, business men, faced with the loss of a large share of their possible profits, will lose some of their enthusiasm for accepting war contracts. A drastic check on the expansion of bank credit might have the same effect. In a dictatorship, industrial plants can be commandeered, and labor shifted arbitrarily from one job to another, but in a democracy we have to rely on rising prices and rising wages to bring about these changes. The truth of the matter seems to be that, under a system of private enterprise, we cannot suddenly step up our output and bring about a large increase in the productivity of industrial and farm enterprises without a certain measure of price and wage inflation.

Were the United States itself at war, profits and prices might be limited without damping production; patriotism would reenforce the weakened profit motive. But while we are non-belligerents we can appeal to factory operatives and owners to work longer hours, and to farmers to extend production, only by the promise of larger returns. Here is a real conflict of objectives. We can focus our domestic policy on business stability, or, disregarding stability, we can put our whole economic strength on the Allied side. But it seems we cannot do both.

From this dilemma there is one way of escape, if we are bold enough to seize it: by reducing import duties, we can help England and France, and at the same time put a damper on inflation.

This proposal, I am aware, will be condemned as visionary by all political realists, even those convinced of the desirability of lower tariffs. The proposal will, of course, profoundly shock all staunch protectionists. Already they arc moving in the opposite direction, toward higher tariffs, and have launched a drive to destroy the Trade Agreements Program. Advancing by a flank route, certain Senators demand that no new agreement shall become effective without ratification by their august body. Such an amendment would be equivalent, as every informed person recognizes, to sentencing the Hull Program to a lingering death. Another line of attack hides behind the smoke screen of scientific tariff revision, insisting upon elaborate studies of foreign and domestic costs before tariff bargains take effect. Supporting these attacks, other Senators have laid down a barrage of constitutional law, denouncing the Trade Agreements Act as an illegal delegation of legislative power.

Should these attacks prove successful, we may expect the demise of the Hull Program to give the signal for the second stage of the protectionist campaign, the drive for higher tariffs.

But, in the light of the previous discussion, raising the American tariff at this time would seem a profoundly wrong policy. It would not help us to realize any of the objectives which the American people have set before themselves. Higher import duties would neither safeguard us against being drawn into war, nor strengthen our aid to the Allies, nor promote internal economic stability, nor aid us in recovering prosperity.

Tariff reduction, no matter how difficult it may prove politically, is a means much better adapted to these ends. Tariff bargaining may prove a more difficult business in wartime, for the control of foreign trade has become for the belligerents a weapon of economic strategy. Both England and France, taking advantage of the escape clauses in the trade agreements recently negotiated with us, have already withdrawn some of their concessions to our exporters. But it is not necessary to rely exclusively on tariff bargaining; we can revise our tariff unilaterally whenever we feel so disposed. In fact, this is our traditional method of changing customs duties.

In the present situation, quite apart from compensating action by other countries, it would be to our advantage to reduce tariff barriers. The consequent expansion of imports would provide the Allies with dollar exchange to help pay for an increased volume of our exports of foodstuffs and manufactures. Certain of our domestic industries, it is true, might suffer from increased foreign competition, but this danger can easily be exaggerated. For rising internal prices in England and France have already largely offset the depreciation of the pound and the franc, and, in addition, imports from all countries are now heavily burdened by high costs of ocean transportation and by delays in shipping. On balance, we may expect that war disturbances, unless we take contrary action, will substantially add to the economic protection now enjoyed by American industries. Unless we reduce our tariff, the war will raise it.

If, as seems probable, we are now entering a period of inflation, the upward swing of the business cycle, with rising prices and increasing employment, affords an excellent opportunity for real downward revision of import duties. In such a period, tariff cutting can be made an almost painless process.

Furthermore, tariff reduction provides a valuable preventive to inflation: first, as we have already pointed out, by helping to stem the avalanche of gold from abroad; and, secondly, by giving added elasticity to our supply of commodities. The essence of war disturbances, as far as our economy is concerned, is the impact of a huge new and inelastic demand upon a supply situation which also has many elements of inelasticity. A lower customs tariff will make it easier for us to ease the strain of heavier demands for manganese, wool, cutlery, scientific instruments, cement, iron and steel products, and many other commodities, by supplementing domestic with foreign goods. Cuban sugar, Argentine canned beef, Canadian milk and cream, Bermuda potatoes, Mexican beans and tomatoes, were tariff barriers lowered, would all be available in larger quantities and at lower prices, thus alleviating the wartime pressure on living costs and on real wages.


But try as we may, with all our wise foresight and careful planning, we cannot hope fully to avert from our national life the shock of the war in Europe. For, no matter how disunited politically the world may be, in spite of tariff barriers and exchange controls, it. still retains in business and finance a very real unity. Consequently, no matter how great or how small may be our immediate profit , we, like all other nations, cannot escape heavy losses in the painful period of postwar reconstruction. In this sense there are no neutrals in this war, and no nonbelligerents.

Inspired by reflections of this sort, thoughtful persons are turning their attention to a fifth objective of American policy, an objective with longer range than those already discussed. The American people are vitally concerned with who wins this war, and with reducing to a minimum the disturbing effects of war on our economy. These are immediate objectives. But our people are also concerned with the terms of peace. If it is in any way humanly possible, they don’t want their world upset by war again in 1965; hence they are interested in establishing international relations at the end of this war on a basis which will give more prospects of permanence than the settlement at Versailles.

Among the conditions favorable to an enduring peace, freer international trade is essential; yet a post-war period is usually characterized by high tariffs and drastic restrictions on imports. At the end of this war, no matter which side is technically the victor, neither the Allies nor Germany will be in a position, or in a mood, to initiate tariff reductions. Logically, the initiative in setting in motion a movement for lower tariffs can come only from the United States. But for us also the deflationary post-war period will be less favorable for tariff reduction than the present. The twenty trade agreements already signed have shown that our protectionist system is not impregnable. Now is the time to proceed with plans for general downward revision.

Political realists, even those of lowtariff leanings, will condemn this proposal as ‘impractical’ and ‘visionary.’ Perhaps it is impractical. But, viewing the failure of the so-called practical politicians the world over to solve either their domestic economic problems or the problems of international relations, impractical people need not feel too apologetic. The proposal for tariff reduction is probably visionary, too, but we need more vision. We need to see ahead, to envision what this second world war may do to us.

No one at all familiar with events abroad can doubt that the disturbances resulting from even a short war will set back economic progress in Europe a full generation. Already this disaster is casting a lengthening shadow across the Atlantic. Before it reaches us, we should make every effort to put our house in order. Our agricultural policy, our banking policy, our labor policy, our policy toward big business — all should be examined and, if necessary, revised so that we may most effectively meet the coming emergency. Reform of tariff policy for the moment is most important, for it is through the medium of our foreign trade that the war will affect us.