Rapprochement With Realpolitik
Chapter 4 (Part 1 of 4) of the book
The Discovery of First Principles, Volume 3
Edward J. Dodson
We stand for freedom,
say both ["conservatives" and "liberals"] --
and proceed to declare what kind of controls, regulations,
coercions, taxes, and "sacrifices" they would impose,
what arbitrary powers they would demand, what "social gains"
they would hand out to various groups, without specifying from
what other groups these "gains" would be expropriated.
Neither of them cares to admit that government control of a
country's economy -- any kind or degree of such control, by any
group, for any purpose whatsoever -- rests on the basic
principle of statism, the principle that man's life
belongs to the state. A mixed economy is merely a
semi-socialized economy -- which means: a semi-enslaved society
-- which means: a country torn by irreconcilable contradictions,
in the process of gradual disintegration.[1] [Ayn Rand]
|
The void created by the destruction of fascism in the Old World was
quickly filled by a delicate balance between democratic socialism and
social democracy, adopted by societies where state socialism had been
all too familiar and now dominated life throughout eastern Eurasia in
the guise of communism. In the United States, however, the ascendancy
of Liberalism occurred despite a deeply-ingrained and broadly
felt disdain for interventionism. Worldwide economic depression
followed by wholesale commitment to the conduct of war had accelerated
the process of centralization and broadened federal powers over
Americans. Liberalism, unconsciously for the most part, became
the political center's compromise solution to U.S. and global
socio-political problems. With the passage of four decades during the
twentieth century, neither the monopoly-prone system of laissez-faire
nor the generation of interventionist policies attached to the
Progressive movement had been sufficiently powerful to retain broad
support or acquiescence. War had blessed the United States with a
renewed and broadened material prosperity. Liberalism promised
to maintain that prosperity while comforting the privileged that their
economic licenses would not be taken away. Minorities and other
disenfranchised groups would be pressured to settle for gradual
mitigations of rather than solutions to their circumstances. Thus, the
architects of Liberalism advanced the theoretical arguments
and introduced practical programs for incremental improvement in
conditions while successfully discrediting wholesale change as
revolutionary or reactionary. To defend the Democracy from
extremists -- of the left or the right -- became their driving
motivation.
In the minds of the new interventionists, the Democracy had
successfully survived its darkest and most dangerous period, beginning
in the late nineteenth century and ending with Roosevelt's experiments
in social engineering. Within the Remnant, however, there was
great chagrin over the loss of individual freedom and the willingness
of people to trade their liberty for a small degree of economic
security. John Dos Passos, for example, argued that the Roosevelt era
accelerated the continuum of centralizing power under the pretext of
saving the Democracy from ruin:
The aim of all the diverse radical movements of [the
period of the first of the century's great wars] was somehow to
restore the dignity of the man who did the work. Staid
Single-Taxers, direct action IWWs and bombthrowing anarchists had
the same eventual goal. They believed that if every man could be
assured of the full product of his labor, the Kingdom of Heaven
would be installed on earth. Their quarrel was about ways and means.
The history of the twentieth century has been the history of a
series of denials of these hopes. We can now see that the radical
view was grossly oversimplified. It made no allowance, among other
things, for the fact that man is an institution-building animal. In
our enthusiasm for the "producer" we underestimated the
importance of the planner and manager in industry.[2]
That Dos Passos chose to include "staid Single-Taxers" in
the same category as radicals is unfortunate but hardly unexpected.
Calls for justice were and are radical challenges to the status quo.
Yet, some of the most dedicated Single-Taxers were also among the
staunchest defenders of the Democracy. Tom L. Johnson served
as mayor of Cleveland and then in the Ohio state legislature. Louis F.
Post served in the Wilson administration. Frederick Howe was appointed
Commissioner of Ellis Island. Raymond Moley headed Roosevelt's brain
trust. The list goes on. The real problem was that these talented
individuals were not being replaced as they aged and left this world.
Within the Remnant there awaited rediscovery of the rich
heritage of cooperative individualist thought, radical in its
departure from all conventional wisdoms handed down in defense of
power and privilege. Georgists (as opposed to some Single-Taxers)
never abandoned Henry George's flowering socio-political philosophy,
although many assisted in the pursuit of concrete gains in the
legislative arena. They were fighting against the wind.
In response to the desperation of the 1930s, downtrodden Americans
succumbed to the attractive illusion that a trusted leader, elevated
to the Presidency and encouraged to take action, could by some alchemy
return the nation to its former innocence. This atmosphere of despair,
combined with Franklin Roosevelt's long tenure in office, resulted in
the creation of an enlarged, organized and deeply-entrenched
bureaucracy. When Harry S. Truman became President, he gradually
brought in his own cadre of trusted advisers, but he relied even more
heavily than Roosevelt upon the bureaucratic architecture through
which Liberalism was to flourish.
Roosevelt had acted in pragmatic fashion, without a guiding
philosophy or detailed plan of action. John Kenneth Galbraith warmly
describes Roosevelt as "a man who saw the United States as
would a kindly and attentive landlord, concerned in all aspects for
the lives of his tenants and the estate on which they dwelt."[3]
The same could not be said of Truman, who, upon entering his third
year as President, remained in the minds of many others a mere
caretaker of programs initiated by Roosevelt. He was, in fact, facing
the rapid disintegration of the tenuous national unity forged under
the pressures of global war. And, within his own Administration, he
was wounded by friends and advisers practiced in the art of political
corruption. As any good Roosevelt Democrat would, Truman accused
Republicans of belonging to the party of special privilege. In
truth, the Democrats had an equally strong claim to that distinction.
Key members of Truman's own staff and inner circle, products of
Missouri's patronage system, were found to be deeply involved in
profiteering at public expense.[4] Later, when Truman's tenure in the
Presidency was ending and the nation awaited the arrival of Dwight D.
Eisenhower, Walter Lippmann observed that what separated the Truman
years from those of his predecessors was not so much the depth of
corruption but the quantity of resources to which those in power
controlled:
The fatty degeneration of government is a serious
disease. It is serious not only, or mainly, because it means the
waste of so much money. The worst of the disease is that it destroys
the effective control of the government, with its vast powers at
home and in all parts of the globe. ...As time went on, the [Truman]
Administration has acquired more and more powers and has spent more
and more money but it has had less and less control over the use of
that power and of that money.[5]
Already, the bureaucracy was gaining independence from Executive
control. Harry S. Truman and each U.S. President thereafter had to
somehow accommodate the vast distance between the promise of
participatory government and the realities of party politics and
bureaucratic administration. Truman was of the old school; and, one of
his weaknesses in the role of national leader was, as William
Manchester writes, his reliance "on old friends, in trusting
them."[6] As President of the world's most powerful nation at
a time of tremendous uncertainty, he nevertheless was faced with a
continuous onslaught of complex problems requiring historically
crucial decisions. There was, it seemed, no turning back from the
course by which the United States had emerged center stage in the
global arena. Inheriting the Presidency and lacking his own
constituency, Truman remained outside the circle of influence that had
guided U.S. domestic and foreign policy for thirteen years.
Surrounding him were many who had dedicated themselves to Roosevelt's
incremental advance into social democracy. The more idealistic hoped a
brave new world might be emerging out of the ravages of global war.
Some patiently worked within the confines of existing socio-political
institutions toward a future where economic socialism would be
democratically adopted. Others championed the new Liberalism
as the proper and necessary approach to balancing the interests of
all. A tiny but highly visible group was coming under suspicion of
treason, accused of passing scientific and military secrets to agents
of the Stalinist empire. The air was filled with a building sense of
insecurity and distrust followed by deep over-reaction.
While the military had succeeded in thwarting the ambitions of
Japanese and German empire-builders, the leadership (and much of the
general population) of the surviving social democracies had failed to
protect millions of people from continuous subjugation. Even in those
societies where the people were ostensibly liberated from oppression,
the end of war failed to bring down the polarizing socio-political
institutions upon which privilege had been converted by conventional
wisdom into broad acquiescence. Those who proved the most vigorous
opponents of Stalinism were invariably linked to the nationalistic and
aristocratic Old World past. To a remarkable extent, the same
resurgent drive to preserve traditional privileges and inequalities of
opportunity appeared in the United States, where the citizenry
remained divided by race, religion, ethnicity, level of personal
wealth and degree of political influence. Truman recognized these as
serious weaknesses that threatened the Democracy. He was
determined to use the powers of the Executive -- and some of the vast
financial reserves of the U.S. government -- to continue and extend
Roosevelt New Deal policies, believing the time had come for the
United States to more completely institutionalize the higher
principles of the Founding Fathers with new Federal laws. He would
also do something concrete to ensure that minorities finally gained
their rightful equal protection under the laws of the land. Speaking
to the annual convention of the National Association for the
Advancement of Colored People (NAACP) on June 29, 1946, Truman
declared:
As Americans, we believe that every man should be free
to live his life as he wishes. He should be limited only by his
responsibility to his fellow countrymen. If this freedom is to be
more than a dream, each man must be guaranteed equality of
opportunity. The only limit to an American's achievement should be
his ability, his industry and his character.[7]
Noble in sentiment, Truman's words clearly demonstrate he did not
appreciate the full application of equality of opportunity,
nor the power of entrenched privilege to slow or halt meaningful
reform. In his Memoirs, he wrote of the Jeffersonian struggle
against "special privilege" and interpretation of
the Constitution "in favor of those who controlled the land
and the banks."[8] Yet, he somehow failed to see that the
concentrated control over locations and natural resource-laden lands
in the United States (what Henry George referred to as our "natural
opportunities") existed because in the forging of a new nation
principles of justice and equality of opportunity had been compromised
by special interests vested in the monopolization of nature and
manipulation of government spending and borrowing. At the same time,
Truman identified what he believed to be a serious threat to the
Democracy caused by an increasing consolidation of business
ownership, a process nurtured by government's appetite for the goods
of warfare.
Truman's answer to the many problems faced by the United States was
to advocate a broad program of limited, incremental interventionism.
In his own mind, he nevertheless remained a staunch defender of
democratic processes and the principle of the self-governing
individual. "Democracy maintains," he declared, "that
government is established for the benefit of the individual, and is
charged with the responsibility of protecting the rights of the
individual and his freedom in the exercise of those abilities of his."[9]
Government intervention to secure equal opportunity seemed not only
appropriate but absolutely essential. And, that is certainly true.
Government is the instrument by which just law is enforced; however,
throughout history government has been the instrument by which
privilege rather than just laws is enforced. Truman found himself very
much in the middle of the great struggle between those who saw
interventionism as the mechanism by which privilege could be more
deeply protected and those who sought interventionism as the way up
from the bottom. Pursuing legislative and regulatory solutions without
the guidance of a comprehensive set of principles meant that Truman's
initiatives, as those of Roosevelt before him, always contained the
seeds of unforeseen consequences. Truman's mistake in judgment was to
believe the combination of broadened educational opportunities, the
systematic pursuit of new scientific knowledge and technological
know-how, expanding industrial capacity and a determined political
will were sufficient to dramatically mitigate circumstances of
widespread misery and poverty. The role of government had changed for
the better, he thought, and an era of enlightened leadership
spearheaded by the United States was on the horizon. Laissez-faire
and the Social-Darwinist faith in unbridled individualism had to be
forever tempered by "guaranties in the interest of the people
whose resources and whose labor"[10] sparked the emerging
global economy.
People everywhere were in desperate need, and goods were being
produced in more than sufficient quantity to meet their requirements
for a decent human existence. All that was missing was the widespread
introduction of democratic institutions and processes to make certain
wealth would not become overly concentrated in the hands of a few. A
true romantic, Truman's faith in the power of democracy was enormous:
In due time, as our stability becomes manifest, as more
and more nations come to know the benefits of democracy and to
participate in growing abundance, I believe that those countries
which now oppose us will abandon their delusions and join with the
free nations of the world in a just settlement of internal
differences.[11]
Social democracy has, indeed, outlasted state socialism in its
capacity to balance competing interests, to harness and develop
resources, to carry a continuously increasing amount of government
debt, to mitigate poverty by the establishment of social welfare
agencies and by philanthropy, to achieve significant reductions in the
poisoning of the environment and to work around the impact of highly
dysfunctional land markets. Today, almost the entire global population
is inching toward Liberalism's centrist policies. And still we
continue to frequently exhibit a remarkable callousness toward the
fate of our fellow human beings, particularly those to whom we have no
attachment by ethnicity, religion or culture.
Despite Truman's keen interest in history, he followed in a long line
of sincere and thoughtful leaders who failed to identify the root
causes of societal malfunctioning. The socio-political arrangements
and institutions of the Democracy had failed to prevent -- and
in many ways sanctioned -- capture of political power by the wealthy.
Political parties proved more concerned with how to divide the spoils
of government largess than in creating and preserving a climate of
equality of opportunity and broad citizen participation in government.
Back in 1937, Truman had delivered a speech in the U.S. Senate that
decried "the concentration of wealth, the concentration of
population in industrial centers, mass production, and a lot of other
so-called modern improvements"[12] but without offering a
clear path to the just society.
On the surface, the United States seemed to be a place where the
future shined brightest. From the inside, one's perspective depended
very much on where one stood on the economic, social and political
ladders. One could argue that the depression and war years
demonstrated the wisdom and benefits of interventionism, whereas the
pressure exerted by mainstream conservatives for a dismantling of
wartime controls over the economy had unleashed on consumers a rapid
rise in prices for essential goods. Rexford Tugwell, writing from his
perspective as one of the architects of interventionism, put the
responsibility for this period of disruption squarely on the
Republican majority in the House of Representatives:
At the end of 1946 the [cost-of-living] index had risen
ten per cent over 1945; and by 1948 it had risen to more than
twenty-five percent above 1945. No such pressure on a people had
been known since the Civil War. The most visible cause of this
abrupt rise was the abandonment of wartime controls and the return
of economic management to the mercies of a "free" market
that no longer existed. Immediate advantage was taken of their
freedom by big business and big labor alike. Consumers suffered; and
naturally they held it against Truman. It had always been so even
during times when there had been no governmental responsibility for
the management of economic affairs. Now resentment was intensified
because, since the New Deal, there had been such a responsibility.
Lightening wartime controls might at least have been more gradual,
and time might have been given for adjustments. There naturally
followed a period of industrial unrest as workers sought to keep
wages within sight of rising prices. Those with fixed incomes were
quite helpless. ...
... [T]he Republican majority in the House ... had been more
responsible than [Truman] for demanding the liquidation of economic
controls, for the disordered rush to bring home American troops, and
for rejecting all proposals for measures calculated to meet the
problems of postwar adjustment.[13]
Despite these very real setbacks described by Tugwell, Truman
believed the U.S. had found in Liberalism the appropriate
level of interventionism. He took his message to the voting public,
and in the 1948 elections convinced them that responsibility for the
nation's domestic problems rested with the Republican majority in the
U.S. Congress. The Republicans as a group had not yet reconciled
themselves philosophically to the need for pragmatism in pursuit of
political power. Not for the final time they fell victim to their
depression-era legacy of failure in the face of economic crisis and a
general perception that they remained the party of privilege. The
party's aging stalwarts would have to depart before Liberalism
would also find consistent support among Republicans. The election
behind him, Truman acted without hesitation to complete the Roosevelt
revolution. He combined a tough anti-communist foreign policy with an
interventionist domestic program that sounded progressive and was
welcomed by those citizens most in need.
Within the U.S. foreign policy establishment, a new consensus was
rapidly emerging that the U.S. had both an obligation and a right to
exercise its economic and military power to bring the rest of the free
world under its protective wing. Doing so in the face of growing
Soviet aggression justified in the minds of some leaders an
institutionalized intolerance for dissent -- conformity in the
interest of converting the Democracy into a more orderly
national security state. This was pursued incrementally and in
disjointed fashion, with decisions reached that seemed sensible at the
time to the small number of policy makers and others who dwelled on
such matters. From within the Remnant,/i>, however, there were
disquieting murmurs. Francis Neilson, for one, sounded yet another
warning against this new prevailing attitude (preaching,
unfortunately, largely to the choir):
The taxpayer is now the servant of the State. He toils
for a bureaucracy that does not spin. He no longer is in command.
During the past ten or fifteen years a grave change has taken place
in the attitude of men and women toward the government. ...All the
warnings expressed by the Founding Fathers and many of their
followers are forgotten. Truth to tell, they were extraordinary
prophets, for many of their predictions have come true.[14]
Sociologist Paul Meadows added that it was no accident that both
liberal and totalitarian countries in the last generation had
experienced a rapid assumption of social and economic functions by the
State. He pointed to the evolution of the industrial process itself as
the explanation for the demise of individualism:
Recourse to the State as the arbiter of conflict and the
channel of action spells the surrender of personal and group
autonomy, or at least of a good share of it. In the name of public
interest, demands can be made and sacrifices exacted which less
dynamic societies might not experience.[15]
In reality, hardly anyone took much notice or made much of the
changes taking place. In exchange for what seemed to be the promise of
the rising tide analogy, the majority of U.S. citizens simply
acquiesced to the expanded role of the State. Up to this point,
taxation had not yet become an undue burden on production. Business
profits were high and climbing. The Remnant was forced to cry
out almost unheard from the wilderness while mainstream economists and
policy makers created a new species -- economic man -- whose
motivations were limited to the purely material and whose actions
could be forecasted and manipulated by government policies.
Interventionists were not even willing to concede the Keynesian
perspective that the degree of intervention ought to rise and fall
with economic conditions. They were committed to a permanent program
of government planning and to the maintenance of the regulatory
bureaucracy required to sustain intervention. Keynes became a
convenient, simultaneously credible and controversial figure around
which the debate over interventionism would rage. The fact that he had
died in 1946 and could not challenge these departures from his
directives was a great advantage.
At the periphery of intellectual debate over the consequences of
interventionism momentum for a serious and well-orchestrated response
was beginning to take shape. Felix Morley (president of Haverford
College) and journalist Frank C. Hanighen had been writing and
publishing the newsletter Human Events since early 1944,
offering serious analysis of U.S. foreign policy to a small
readership. Oswald Garrison Villard, William Henry Chamberlin and
Norman Thomas were among a long list of respected contributors. In its
second year, Hanighen brought Henry Regnery aboard as treasurer.
Regnery broadened their reach by publishing two speeches made by
Robert M. Hutchins and one by economist Karl Brandt[16] addressing the
challenges of the postwar socio-political environment. Other pamphlets
followed in rapid succession through the remainder of the 1940s.
Regnery also came to know Frank Chodorov during this period, who, as
Regnery later recalled, "firmly distrusted government in all
its forms."[17] These individuals worked together to defend
what they felt were the fundamental values of western civilization,
though not always in agreement themselves and finally branded by the
mainstream press as ultra-nationalist conservatives. Regnery's
influence continued well beyond the life of Human Events, as
the publishing company he founded in 1947 not only brought out new
works that challenged conventional wisdoms but saw to it that classic
works of socio-political philosophy were reprinted and kept in print.
The resources amassed against them were enormous. And the Remnant
was to lose many of its younger but less stalwart members to the
statist camp. Not long after William F. Buckley, Jr. condemned the
State in a 1952 essay as "hardly equipped, on the basis of
its historical performance, to superintend the common good"[18]
he would yield to the temptations and pressures of realpolitik and
establish National Review, reminding his readers of the
dangers of Liberalism, while advancing his own peculiar
version. He started out with an attempt to define and clarify
conservative principles in order to build an intellectual and activist
movement. "The conservative movement in America has got to
put its theoretical house in order,"[19] he declared.
Moreover, he recognized in Dwight D. Eisenhower the transitional
figure whose tenure promised to legitimize Liberalism as the
policy agenda of both mainstream Republicans and Democrats:
Our domestic political engagements are not fought, for
the most part, with Communists, none of whose premises we share, but
with Liberals, with whom we share some. The pragmatic directive of
[Abraham] Lincoln would not suit Communist ideas of history or
dogma, but there is nothing there, as I say, that will separate the
Liberal from the Modern Republican. That being so, it is simply not
useful as a philosophy of government distinctive to a single faction
in American political life. ...[20]
...Conservatives have failed to alert the community to the
interconnection between economic freedom and -- freedom. No
government would dare be so abusive as ours is of our economic
freedoms if we were alive to the relationship. It is a part of the
conservative intuition that economic freedom is the most precious
temporal freedom, for the reason that it alone gives to each one of
us, in our comings and goings in our complex society, sovereignty --
and over that part of existence in which by far the most choices
have in fact to be made, and in which it is possible to make
choices, involving oneself, without damage to other people. And for
the further reason that without economic freedom, political and
other freedoms are likely to be taken from us.[21]
Consistent with Buckley's conservative principles, then, choice must
be available and coercion absent. Price is the market-clearing
mechanism by which goods and services are exchanged voluntarily,
resulting in a win/win transaction for all parties involved. But, what
of control over nature? And, what about monopolistic licenses granted
by the State that restrict competition and grant privilege to some?
How is it that some have acquired the ability to control part of
nature without compensating society as a whole for the privilege they
enjoy? The closest that Mr. Buckley came to a serious discussion on
these issues occurred in 1985, when he interviewed journalist Roger
Starr on his televised program, Firing Line, in connection with the
social, fiscal and economic problems of New York City. He and Roger
Starr elicited from one another a fair representation of Henry
George's analysis of the importance of distinguishing production
(i.e., wealth) from nature (i.e., the source of wealth), then
discussed the implications of the tax policies advocated by George:
MR. BUCKLEY: ...[I]f Henry George's principles were
introduced here, two things would happen, as I understand you.
Number one, there would be a greater density of building in midtown
Manhattan; number two, investors would be prepared to reclaim land
because it would become economically viable to build on it knowing
that they wouldn't instantly be taxed out of existence, right?
MR. STARR: Right.
MR. BUCKLEY: Okay.
MR. STARR: Now, we developed some laws to sort of make up for our
stupidity in not adopting the Georgean theory. We have laws with
cabalistic names like J-51 and 421-A, which in effect exempt new
construction or rehabilitation from taxes, and they've caused a
great deal of conflict because one always argues over whether
construction would have taken place without this form of assistance.
MR. BUCKLEY: Enterprise zones and stuff like that.
MR. STARR: Yes, and Henry George would have eliminated all of that
and it would have been natural to exempt improvements from taxation
and the whole system of penalizing someone for improving his
property would have come to an end.[22]
In 1965, when running for the office of Mayor of New York City, Mr.
Buckley proposed the replacement of all taxes on business enterprise
with the so-called "value-added tax" being adopted
by the even more highly interventionist social democracies of Western
Europe. From a purely administrative standpoint, the new type of
taxation offered substantive advantages. Thirty years later we are
still debating the merits of this form of taxation. Producers will
certainly attempt to pass on the added expense to consumers, to whom
the total tax is ostensibly hidden in the price. Successful price
competition with goods produced in environments without such taxes
assumes heavy taxation of imported goods, again passed on to consumers
in the form of higher prices. Thus, the impact on living standards is
to broadly reduce private sector purchasing power. To Henry George,
such a proposal would have made no sense whatsoever, when the prospect
for creating a full employment economy without inflation was within
the grasp of any government committed to sound fiscal policies.
THE KEYNESIAN ARMY
AND THE NEW EQUILIBRIUM MODEL
Looking back from the vantage point of the mid-1970s, author Joseph
C. Goulden examined the five-year span of life in the United States
ending with 1950 and called them
The Best Years.[23] When the war ended, U.S. citizens had jobs
(53,000,000 of them, with unemployment less than two percent) and
money ($140 billion in liquid savings, in war bonds, in banks and in
their wallets; this amounted to about three times the national income
for the year 1932).[24] Although this wealth and income remained
highly concentrated at the top, a broader prosperity than had ever
previously existed in the United States emerged out of this storehouse
of purchasing power. This allowed U.S. policy makers to pursue
domestic and global objectives without having to worry very much about
the short-run financial implications. In the private sector, many
corporations flush with cash were eager to make overseas investments
and expand into new markets. The U.S. government encouraged their
efforts by providing the war-ravaged economies of the Old World (at
least those not absorbed into the Stalinist orbit) with grants, loans
and credit guarantees. The Keynesian experiment was underway. The
world would soon learn whether the measures adopted were effective at
creating a sustainable higher level of consumption to match the
rebuilt productive output capacity, while providing the revenue to
government necessary to gradually retire the amount of debt taken on
to finance the expansion.
People living behind the Iron Curtain were required to endure
continued sacrifices in the interest those who controlled the State
machinery. Stalin was anxious to end the West's nuclear monopoly and
to develop the military hardware supplied to Soviet forces during the
war by the United States. After consolidating their grip over the
Central and Eastern European states, the Soviet leaders continued
their prewar strategy of undermining the stability of other
governments by intrigue and attempted control of indigenous communist
organizations. One considerable advantage to them was the fact that
the impetus for reform in Western European societies before the Second
World War had come from democratic socialists and communist
extremists. There surviving leaders re-emerged after the war to fill
the void created by the collapse of the traditionalists, too many of
whom had recklessly embraced fascism in their desperate bid to protect
their ancient privileges. In the struggle for political power that
ensued, extremism gradually gave ground to the desire to strengthen
national sovereignty -- to a determination to resist external
domination. Communism, the traditionalists grudgingly realized, could
be thwarted only by adoption of social democracy and the introduction
of strong social welfare programs (funded, of course, by revenue
generated by increased taxation of production and commerce rather than
unearned income associated with land ownership).
Within a year after the end of the Second World War, French
socialists orchestrated a broad program of nationalization and
guarantees to workers. While these measures softened the impact of
tremendous price increases, they discouraged the type of private
investment the French needed to bring their agricultural and
industrial enterprises up to modern world standards of productivity.
Jean Monnet, architect of the French economic recovery plan, worked
tirelessly to overcome the political instability that continued to
plague his nation. "The black market, the spread of
speculation, the flight of capital, and the standstill in productive
investment were together putting France back by several years,"[25]
Monnet later recalled. Decisive action to stem inflation was
desperately needed, so Monnet turned to Princeton-trained economist
Pierre Uri to head a commission on the economy. With broad-based
support, they devalued the franc by 80 percent against the U.S.
dollar, making French goods very attractive to U.S. buyers; and,
conversely, driving up the price of U.S. goods in France. U.S.
financial assistance was then used for the modernization of basic
industries, with a primary objective of becoming a net exporter of
agricultural products by the early 1950s. With his own economy
stabilized, Monnet hoped France could lead the way toward development
of an integrated European Community.
Representatives from all over Europe met at The Hague in 1948 to
initiate discussions on how integration might be accomplished. Out of
this meeting came the proposal for a Council of Europe, which was
established the following year in Strasbourg. While some of the more
idealistic transnationals[26] and many socialists hoped for the
equivalent of a United States of Europe, few others were at all
prepared to discuss any diminution of national sovereignty in favor of
a new European Parliament. Only the most forward-thinking realized
that change would have to come -- slowly and incrementally but
inevitably -- if Western Europe was not to be drawn into a
relationship of dependency with the United States. Monnet's interim
response was to propose a plan for the joint development of French and
German iron and coal reserves. Pierre Uri then introduced "the
notion of a 'common market', an area without customs barriers and
without national discrimination, but with rules to preserve the common
interest."[27] Preliminary steps toward this objective had
been taken in September of 1950 with the establishment of the European
Payments Union -- to manage credit obligations between member nations
-- and the gradual reduction of protectionist quotas against imports.
Britain's participation in either the common market or the European
Payments Union presented special problems for the British government.
A Labour Party report issued in June, 1950 stated the nature of the
problem in remarkably candid terms:
In every respect except distance we in Britain are
closer to our kinsmen in Australia and New Zealand on the far side
of the world, than we are to Europe. We are closer in language and
in origins, in social habits and institutions, in political outlook
and in common interest.[28]
Only days later, representatives from France, Italy, Belgium, The
Netherlands, Luxembourg and Germany met in Paris to begin hammering
out the details of economic integration. The United States played an
important if inadvertent role by pressuring the Germans to break up
the cartel that dominated coal production in the Ruhr. The treaty
establishing the European Coal and Steel Community was signed on April
18, 1951. This was not unity, nor even full integration of the
economies of the member nations; but, the experiment in joint
management of natural resources was a first step in resolving the
centuries-old competition for territorial expansion at the expense of
one's neighbors.
Meanwhile, in Britain, the Labour Party succeeded in nationalizing
the country's coal reserves. Steel was next on the socialist agenda,
but its nationalization was strongly opposed by the Conservatives, who
won a slight majority in the elections of October, 1951. Winston
Churchill, at age seventy-nine and having suffered strokes in 1948 and
1949, his hearing and eyesight diminished and his memory and attention
span failing him, was once again Prime Minister. The Conservatives
could hardly turn back the clock. The electorate demanded the
dismantling of class privileges in favor of a more equitable balance
between the powers of government, the trades unions, agrarian
landlords and industrial landlords. Moreover, many in Britain were now
seriously focused on how to best reduce the obligations that empire
had for so long imposed on the treasury and taxpayers.
As time would reveal, Britain's participation was not required to
stimulate economic expansion on the continent. Additionally, fear of
communist domination over Western European parliamentary democracy
passed as workers experienced rising standards of living (and the
constitutional protections and legislative actions consistent with
social democracy were implemented). Despite very real signs of
progress during this first decade following the war, Swedish economist
Gunnar Myrdal expressed concern in 1956 that "trade
liberalization in Western Europe has not reached the normalization of
trade relations which was confidently hoped for in all these countries
immediately after the war, when bilateral agreements and quantitative
restrictions had to be relied upon as a transitory means of opening up
trade."[29] He viewed the achievements of Jean Monnet in
establishing the European Coal and Steel Community as not transferable
to other "economic fields," particularly agriculture
and transport. Moreover, Myrdal warned his fellow Europeans that
productivity of the type experienced in the United States was linked
directly to the free movement of goods across state boundaries and the
mobility as well of labor and financial reserves. Europeans remained
heavily protectionist, nationalistic and deeply attached to their
sovereignty:
The fact is that each country in Western Europe is a
welfare state and looks upon its own industry, its own population,
its natural resources, and the nationally available capital for
investment as a completely separate collection of economic resources
to be utilized for the benefit of its own citizens.[30
On the other side of the scale, perhaps, was the greater openness
that comes when one feels reasonably secure. The Western European
states were passing through a transitional stage of development, the
first decades of which were to be dominated by internal needs. The
social welfare needs of citizens became a priority for national
political leaders. Full (or nearly full) employment at wages high
enough to provide families with the necessary goods for a decent human
existence quickly evolved from a commitment into a social contract.
European society had long been characterized by the distinctions and
privileges attached to class. Personal wealth and social position were
far more often inherited than earned. Social democrats were not so
much interested in demolishing this system as in removing its most
egregious elements. In Britain, the labor historian and political
activist, R.H. Tawney, suggested how progress ought to be assessed:
The contribution to the increase of equality ... is not
... to be measured merely or mainly in terms of a quantitative
alteration in the distribution of wealth. Their most significant
aspect consists in the qualitative change in the character of a
society which is produced when disabilities afflicting particular
classes are diminished or removed, and advantages formerly
restricted to a minority are made more nearly a general possession.
Sharp disparities of income ... may, in such circumstances, continue
to plague it. The important fact is the contraction of the area of
life dominated by them. It is the partial removal of certain of the
essentials of civilization to a plane where the decisive factor is
neither private wealth nor the absence of it, but the concern of a
self-respecting democracy to meet the needs and develop the powers
of all its citizens, irrespective of differences of financial
means.[31]
Nearly all postwar European leaders realized that traditional
institutions and arrangements had to change. Individuals such as Jean
Monnet were truly in the vanguard. Thinking back on his efforts to
bring Europeans together, he observed that "major
psychological changes, which some seek through violent revolution, can
be achieved very peacefully if men's minds can be directed towards the
point where their interests converge."[32] To some extent,
this peaceful revolution was well on its way. Influenced by the
experience of the United States, European societies committed new
resources to public education. The number of students in the 1950s
attending universities doubled over what had been the norm in the
1930s. While Robert M. Hutchins worked at the University of Chicago to
resurrect the curriculum of a classical liberal education,
universities on the European continent were moving in the direction of
most U.S. colleges and universities -- toward becoming centers of
scientific experimentation and applied research, serving the needs of
government and corporations. The emphasis of schooling shifted from
preparing individuals for citizenship to preparing them for employment
in the industrial economy.
Throughout Eastern Europe, people were in large numbers voting with
their feet against involuntary adoption of state socialism. They began
to understand that the Soviet Union under Stalin did not provide --
and perhaps would never offer -- a real alternative to
incrementally-adopted social democracy. Two years of purges in
Czechoslovakia between 1950-52 provided the object lesson in blunt
fashion to all but the most ardent communists. This did not mean,
however, that workers (and the propertyless) were willing to live
within the old rules of laissez-faire, agrarian and industrial
landlordism or aristocratic privilege. They instinctively demanded
from their postwar leaders more concrete protections for their
economic and political well-being. Throughout Western Europe (Spain
and Portugal excepted), social democracy was characterized by rapid
growth in the number of young people entering universities and the
professions, long the preserve of the privileged elite. This
generation of professionals would emerge indoctrinated with the
doctrine of interventionism and the principles of democratic
socialism.
In Italy, De Gasperi achieved a remarkable degree of land
redistribution in the south. Adenauer introduced worker participation
in corporate management in Germany. British Conservatives declared
their commitment to the welfare state. In response, those who
continued to hold most of Europe's material wealth and retained
sizable holdings of natural resource lands, locations in the cities,
and most of the financial reserves on deposit with the banks made
certain that if governments were to take on the responsibility for
economic stabilization they (or their agents and representatives)
would be there to materially influence government policies and
decisions. Not even the Soviet threat was sufficient, however, to
unite Europeans behind Monnet's vision of a borderless European
federation. Yet, despite the resurgence in nationalism throughout
Europe, Monnet was hardly discouraged. "To face one's
responsibilities when the objective is to unite Europe means
recruiting others -- politicians or labour leaders -- who are prepared
to join in the task,"[33] he later recalled. What Monnet did
was to create in 1955 what he called The Action Committee for the
United States of Europe, the task of which would be to "persuade
Governments to transfer more and more of their powers to common
institutions."[34] He recruited Max Kohnstamm to serve as his
Vice President, then forged a small group of advisers that included
Italian banker Guido Carli, French economist Pierre Uri and the U.S.
economist Robert Triffin. Monnet traveled throughout Europe to gather
support from its diverse pool of political and labor leaders. By
virtue of Monnet's enormous patience and efforts to reconcile
divergent opinions, the Committee became a pragmatic first step toward
a unified European community. By creating this non-governmental
Committee, Monnet hoped "Europe could become aware of its
identity and affirm its sovereignty."[35] That is, affirm its
independence from and need for protection by the United States.
The Committee had already focused on the challenge of peaceful and
collective development of nuclear energy. Egypt's takeover of the Suez
Canal Company and the threat this posed to Europe's energy supplies
provided the catalyst for discussions that culminated with treaties
creating the Common Market and Euratom. By the end of December the
treaties had been ratified in succession by West Germany, France,
Italy, Belgium, Luxembourg and the Netherlands. Ten years later,
Anthony Sampson assessed Monnet's achievement in these terms:
Many hopes were to be dashed. But after the vague
idealism about 'Europe' of the post-war years, the Treaty of Rome
marked the first major practical achievement. From this point
onwards, people in the six countries and even in Britain were apt to
use the word 'Europe' to mean the common market -- to the fury of
everyone else.[36]
At the time, there remained great uncertainty over the capacity of
the European social democracies to survive on their own. The German
historian Ludwig Dehio, for one, was convinced that the future of the
peoples of Europe had become inextricably pressed between the
interventionist designs of the United States and the Soviet Union. In
1960, he ended his study of four centuries of European conflicts with
the warning that social democrats still had much to fear from
communists:
The collapse of the European system of states, which has
undermined the sovereignty of the Continental nations, has made them
dependent upon trans-atlantic backing. Exhausted, their time-honored
political ethos has been thrown into confusion, and a new one is
being only hesitantly pieced together. All the less easy is it for
them to adopt an attitude of lofty impartiality toward the social
tensions which the permanent socio-economic revolution is producing
everywhere and which hinder a clear-cut decision between East and
West. Resentments going back to the days of the system of states --
in particular, memories of the frightful conduct of the Germans in
their pursuit of world dominance -- exert a similar influence on
European feelings. ...[37]
THE FRENCH DECLARE THEIR INDPENDENCE
From Keynesian Doctrine And
The International Monetary System
In January of 1958, Jean Monnet was dispatched to the United States
to negotiate a loan on behalf of the French government. Suffering from
rapid price increases and a destabilized currency, French policy
makers felt they had no choice but to initiate an austerity plan
accompanied by increased taxation. The French government once again
chose to burden producers with taxation rather than focus on
rent-seeking income flows and assets of the landed. Thus, rather than
stimulating investment in capital goods, these measures exacerbated
the problems. The U.S. loan for a time allowed the French to purchase
francs in an effort to prop up its value; however, by mid-1958, the
French government was on the verge of bankruptcy and economic
collapse. Keynesian economists explained that French difficulties were
the result of their own lagging productivity and resulting trade
deficit, particularly with the United States. In the midst of the
uprisings in Algiers, the Fourth Republic fell. Charles de Gaulle was
called upon to rescue the nation from the very real possibility of
civil war. His price for stability was high. "
De Gaulle insisted that he had to have absolute powers for two
years and must be free to send parliament into recess while he drafted
a new constitution and put the affairs of France back in order again."[38]
Upon his return from the United States, Monnet had immediately
outlined a plan for creating "a European financial and money
market, with a European Bank and Reserve Fund, using jointly a part of
national reserves, with free convertibility of European currencies,
free movement of capital among the Community countries, and the
development of a common financial policy."[39] He saw this as
the necessary next step in European economic unification -- and
liberation from any dependency on the international financial
structure assembled by John Maynard Keynes, Harry Dexter White and
other British and U.S. officials during the Second World War. At the
same time, de Gaulle's Finance Minister Antoine Pinay orchestrated a
national bond drive for economic recovery. French citizens responded
by a record subscription, and more:
By the end of the "de Gaulle loan" citizens
had turned in the astonishing total of 140 tons of gold and had
subscribed a total of 320 billion francs -- almost one billion
dollars at the exchange rate of that time -- of which 290 billions
were in "fresh money" [savings funds rather than
conversions of other assets]. It was an economic and financial
miracle, one of the most impressive votes of confidence that a
people can give a president.[40]
Citizens do often moderate pure self-interest in periods of national
crisis. Modern governments have also come to realize that those able
to do so will seek safer harbors to protect the purchasing power of
their financial assets. The conversion of gold into francs during a
period of declining purchasing power is, therefore, a remarkable
nationalistic statement. Rather than hold the gold in reserve, the
French treasury sold its stock for U.S. dollars and other foreign
currencies, eliminating its balance of payments deficits and
stabilizing the purchasing power of the franc. The French managed to
do what few other nations would accomplish during the decades to come;
namely, pull themselves out of a serious economic crisis without
turning over management of their fiscal and monetary affairs to agents
of the International Monetary Fund (IMF). This could not have been
accomplished within the framework of the international monetary
structure, for the following reasons:
When a member country of the Fund has to settle a debit
balance abroad, it requests the Fund to provide it with the
necessary foreign exchange against payment in its national currency.
Under the convertibility system, the domestic currency thus expended
would be reabsorbed. Its disappearance would set in motion the
regulating process tending to correct the deficit. But the
International Monetary Fund, being provided with such resources,
invests them -- subject to a ten per cent liquidity margin -- in
Treasury bills payable on demand and carrying no interest, instead
of sterilizing them. As such, those resources, far from being
reabsorbed, are placed again at the disposal of the State from which
they come and can be spent forthwith by that State. Thus, no
regulating influence is set in motion. Even if the public Treasury
was in strict balance, the financing of a balance-of-payments
deficit by the International Monetary Fund would, in such
circumstances, tend to make the corresponding deficit a permanent
deficit.
Administered in this way, the International Monetary Fund has every
appearance of a convertibility system, but has none of its
regulating virtues. ...The Bretton Woods institution makes it
possible to play the monetary convertibility game, but not to reap
the benefits thereof.[41]
The global economy was, depending upon one's point of view, blessed
or cursed by the creation of the IMF -- postured to intervene (with
loans) to make sure that a country with heavy net imports could
maintain a stable exchange rate for its currency, thereby adding one
more element of fictional stability to the State and its assumed power
to self-create credit by exchanging government bonds for paper
currency issued by the central bank. The interests of multinational
corporations and the world's elite were also furthered by the creation
of the International Bank for Reconstruction and Development (the World
Bank), ostensibly created to assist countries in their efforts to
modernize and industrialize. Subscribed along the lines of traditional
commercial banks, World Bank policies required that loan recipients
meet strict credit standards. Early loans went to France, the
Netherlands, Denmark and Luxembourg. Infrastructure development loans
followed to Chile and a number of what are generally referred to today
as Less Developed Countries (LDCs). As critics have observed in more
recent years, virtually no funds were made available until the early
1970s (and even since then the amount has been relatively
insignificant) for the financing of such social goods as schools,
hospitals, water treatment facilities, housing or food production.
World Bank loans often had the interesting consequence of worsening
the living conditions of those most in need. As Gunnar Myrdal
concluded in 1957: "In many of the poorer countries the
natural drift toward inequalities has been supported and magnified by
built-in feudal and other inegalitarian institutions and power
structures which aid the rich in exploiting the poor."[42] In
those societies where the burden of taxation was carried by those at
the lower end of the socio-economic scale, repayment of development
loans hinged on their ability to absorb even greater hardship.
IN THE FOOTSTEPS OF KEYNES
A Flawed Revolution Is Attempted
The key to a broad improvement in the standard of well-being for the
people in any society is maintaining an environment where there are
consistently more jobs looking for people than people looking for
jobs. Opportunities under such circumstances are widespread and
varied. Real wages, as measured by the purchasing power of paper
currency, are high and rising in conjunction with productivity
advances. For a significant majority of U.S. citizens, this happy
situation prevailed during the years immediately following the end of
the Second World War. An enormous unfilled demand for housing,
automobiles and other consumer goods allowed producers to raise prices
and expand profit margins, while the rapid conversion to a peacetime
economy kept unemployment far lower than most economists and policy
analysts thought possible. Although the construction of expressways
and the interstate highway system was still in its infancy, investors
close to political insiders obtained and held onto large tracts of
undeveloped land for speculative purposes. This was still a time when
virtually every city in the United States was ringed by open space,
and land prices remained relatively low during the first decade of the
population shift from urban centers to suburban bedroom
communities.[43] U.S. residents also benefited by the fact that the
dollar had become the dominant currency used in international trade.
Few countries other than the United States held any sizeable quantity
of gold or silver reserves backing their currencies (although, as
suggested by the French example, private individuals held a great deal
of gold as a hedge against the declining purchasing power of paper
currency). As a by-product of its sale of war goods to Britain and
other nations, the United States government in 1946 had accumulated
gold reserves worth over $20 billion,[44] some 60 percent of the
world's total. Before long, countries in desperate need of U.S.
capital goods and foodstuffs had nothing left to give in exchange. By
1949, and despite the large grants provided under the Marshall Plan,
U.S. gold reserves increased to nearly $25 billion. Britain, whose
leaders had been determined to protect their core power role within
the Commonwealth bloc, eventually yielded to the pressures on its
currency caused by the cost of imported goods. Faced with the
impossibility of adhering to fixed exchange rates established in 1946,
Britain (followed by West Germany, France and a number of other
continental governments) devalued their currencies in an effort to
make their goods more attractive to foreign buyers and to stem the
flow of imports. They accepted the premise that a nation's economic
well-being is at least partially dependent on a positive balance
between the exchange value of exports and imports. By definition, the
interests of government were served (i.e., a favorable balance of
trade existed) when domestic producers were exchanging goods and
services of a higher value than those received from foreign producers.
The surface evidence suggested that only under those circumstances
would employment remain high and wages have a tendency to increase. No
mainstream economist of the postwar period has argued longer or harder
that such thinking runs against logic than Milton Friedman. If, asked
Friedman, our "
national objective" was "the promotion of a
healthy and balanced growth of world trade, carried on, so far as
possible, by private individuals and private enterprises with minimum
intervention by governments" with the expectation of bringing
"the free world more closely together, and, by fostering the
international division of labor, raise standards of living throughout
the world,"[45] then, he suggests, "it seems to me
undesirable to have government intervene [to stave off
balance-of-payments pressures], because they have no special advantage
over private speculators in stabilizing it, because they can make far
bigger mistakes than private speculators risking their own money, and
because there is a tendency for them to cover up their mistakes by
changing the rules ... rather than by reversing course."[46]
Under a system of floating exchange rates, the market establishes the
price of each currency in terms of others. A similar argument is made
for ending government control over the world's supply of gold.
Political leaders and policy analysts were, in every country,
extremely confused by the modern global economy. Until around 1953,
Americans were selling goods and services to foreign consumers far in
excess of the dollar value of what they were purchasing, even though
the value of imported goods and services exceeded any previous levels.
Marshall Plan grants and IMF loans helped foreign governments over
this period while their own output of goods and services increased.
Not many years passed before U.S. demand for foreign goods and
services surpassed foreign demand for U.S. goods and services.
Depending upon one's perspective, the U.S. now experienced an
unfavorable balance of trade; or, people in the U.S. were expending
much less labor to obtain foreign-made goods than their foreign
counterparts.
Looking only at the social democracies, where the production of goods
and services was largely still a function of the private sector,
governments were always under pressure to protect domestic producers
from external competition. As I have taken great pains to detail,
protectionism operated alongside systems of taxation and monopolistic
license that sanctioned enormous subsidies to nonproducers. In the
first instance, consumers are penalized by diminished pressures on
producers to provide the highest quality goods at the lowest possible
prices. In the second instance, the burden of taxation tends to fall
on those who must depend on their continuous labor for income. Where
increases in direct taxation are politically difficult to impose,
those in power have managed to impose heavy taxes on goods at the
point the sale to consumers. By means of gradual or rapid expansion of
the supply of credit and currency, governments systematically
confiscate the purchasing power of creditors and savers, repaying
bondholders with paper currency dramatically depreciated in purchasing
power from what was received. All of these factors combined after the
Second World War to prevent buyers and sellers engaging in commerce in
a manner where price served as an effective clearing device, where
natural disasters rather than governments disrupted market equilibrium
and where the only coercive influences were producers' own flawed
decisions.
Postwar policy makers had invested an enormous amount of energy in
building an institutional framework for global economic stabilization
- a system of levers and cables to keep the leaning economic tower
from crashing to the earth. The real solution to the problem of
continuous disequilibrium involved reforms to the socio-political
structure within the social democracies that only a handful of policy
analysts and economists either embraced or gave thought to. Under the
circumstances, what the world got was a system where national
governments tended to take the wrong actions at the worst times, to
resort to protectionism when their producers were unsuccessful in
exporting goods that could not be sold domestically, and to use
borrowing in lieu of taxation to pay for government expenditures. Only
when governments became so financially distressed that they had no
recourse but to turn to the IMF and international bankers did an
element of fiscal and monetary discipline take hold. And, although
Harry Dexter White and John Maynard Keynes are generally referred to
as the primary architects of this system, they were themselves little
satisfied with the end result.
Keynes died in 1946 from heart disease, too soon to play a role
trying to resolve some of the system's more serious problems. Death
would also soon bring an end to Harry Dexter White's career (leaving
unresolved the dark accusations of treason in service to the Soviet
Union). The acceptance and modification of Keynesian insights was to
serve as the cornerstone for the coming interventionist revolution.
Even to many of those who believed in individualism and self-reliance,
there seemed a real necessity for government to intervene at least for
awhile in the interest of sustaining economic growth. Few were willing
to take the risk of a prolonged recession and the kind of
socio-political upheaval certain to result.
Those who still believe in Keynesian prescriptions, or in the
modified proposals of Neo-Keynesians or Post-Keynesians, view
government action as a study in failed implementation rather than
disproven theory. Joan Robinson, on the other hand, arguing the
Post-Keynesian case after more than two decades of economic
volatility, suggested to her economist colleagues that they pull their
heads out of the sand and begin to examine economic theory in the
context of socio-political constraints:
An economic theory which is seriously intended to apply
to reality is neither an ideological doctrine, such as the
presumption in favour of laissez-faire, nor a tautology true by
definition, such as the so-called quantity formula, MV=PT; it is an
hypothesis about how an actual economy operates. Hypotheses have to
be first examined for logical consistency and a priori
plausibility, before being applied to historical and contemporary
experience. A successful hypothesis is one which suggests new
answers to formerly unsolved problems, or frames formerly
unrecognized questions.[48]
In general terms, Robinson and other like-minded economists
recognized the tendency of rising demand to fuel speculation in "basic
materials" and "commodity markets."
Government and extensive private sector borrowing added fuel to the
speculative fires. From this observation, however, she put forward the
hypothesis that "the very success of industrial growth has a
built-in tendency to generate inflation."[49] Had she been
armed with an understanding of the laws of production and distribution
as developed by Henry George, Joan Robinson would have described
general price rises as a desperate attempt on the part of producers to
pass on to others the demands by landlords for a greater and greater
portion of that which was being produced. Government might attempt to
push out into the future the inevitable crash by means of expanding
access to credit and by direct purchases of goods and services, but
eventually the prices demanded in order to protect profit margins come
to be too high and aggregate consumption declines. Anyone willing to
look objectively at the age-old problem of wealth distribution and
concentrated control of locations and natural resource-laden lands
would have recognized immediately the primary and root cause of
recessions. Unfortunately, economists had been trained for two
generations to think in terms of economic rent rather than
land rent, arbitrarily applying to all forms of unearned
income the same characteristics and role in the economy. The
importance of nature and who controlled it in an industrial society
was accepted as far less important than who held stocks, bonds,
precious metals and currency balances. From as early as 1933 on, Joan
Robinson accepted this definition, writing:
The essence of the conception of rent is the conception
of a surplus earned by a particular factor of production over and
above the minimum earnings necessary to induce it to do its
work.[50]
Whether or not Robinson and other economists were consciously acting
to reduce direct attacks on existing socio-political arrangements is a
matter of some conjecture. Much of the evidence is anecdotal. The
researcher is fortunate, indeed, when the private correspondence or
recorded conversations of an economist are published to shed light on
their intellectual development. Keynes, certain of the superiority of
his nation's socio-political arrangements and traditions, defended
them without apology. In his view, that which had made Britain a great
empire (even though by that time the effects of unsound public policy
were sapping Britain of its vitality) was to be protected and
nurtured.
American students of classical political economy, if not other
economists, should have seen without difficulty that price as a market
clearing device fails when applied to land, the factor of
production required by labor and capital to actually produce wealth.
The more concentrated the control of land by individuals or entities
not dependent on cash flow from production for survival, the greater
the probability that they will withhold land off the market rather
than accept a lower price. Absent an appropriate annual charge for
holding onto land, the only landowners who really risk much are those
who had to borrow from the banks to gain access to land and must
produce goods and services others want and are willing to pay a price
for that allows the producer to cover debt service and the costs of
production. For those who have held title to land for many years or
even generations, hoarding becomes less a deliberate strategy for
speculative gain than an acknowledgment that doing nothing is easiest
and costs very little. Rural land can be leased to an actual farmer.
Urban land can be paved over and turned into a parking lot.
Accepting the existing socio-political structure, what Keynes and his
successors hoped to accomplish was to somehow work around the
constraints imposed on economic growth by the concentration of
privilege that plagued the British people. Britain's government in the
years immediately following the end of the Second World War tried to
create a welfare state on very meager revenues. The British producer
remained burdened by the commitments of empire and by a leadership
lacking the moral courage to purge the nation's socio-political
arrangements and institutions of ancient privileges attached to the
land. Winston Churchill, the one person in a leadership role who still
possessed the power to unite the Remnant in Britain against
the age-old privileges was no longer the energetic leader. In any
event, he had long ago abandoned his zeal for reform. Now in his
twilight years, he experienced a breakdown and temporarily took refuge
in painting and writing.[51]
Facing a new world order that no longer included Britain as a central
arbiter of power, the postwar Labour government had dispatched Keynes
to the United States to negotiate for financial assistance in
rebuilding Britain's infrastructure. The result was not entirely to
the liking of the government. In return for a loan of $3.75 billion,
Britain was required to end its system of imperial preference, open
its gates to imports from the United States and return sterling to
convertibility by 1947. The sudden death of Keynes marked the
beginning of departure by his colleagues from the guideposts he had
established for triggering periodic interventions in the economy.
Ironically, the terms he agreed to with the United States set off a
chain reaction of events in Britain which could have seriously
tarnished his reputation, had he lived:
Meeting the requirement [of convertibility] proved a
disaster. Up to 1947, the British economy had done surprisingly
well. In the second half of 1946, British exports were running at
111 percent of prewar, and imports had been reduced to 72.2 percent.
Only one quarter of the American loan had actually been used up. But
with convertibility came collapse. The trade account deteriorated
rapidly -- partly, it was felt, because foreign traders hoarded
sterling to convert it into dollars. Since Britain had the only
convertible currency in a Europe starved for dollars, the pressure
on sterling proved immense. The whole operation, moreover, was not
handled very well. Britain had not managed to fund her wartime
indebtedness to the rest of the sterling bloc, and regulations to
limit convertibility to transactions on current account proved
ineffective. In any event, once the run on sterling began, the rest
of the American loan quickly disappeared. The experiment in liberal
economics was abandoned. Sterling was devalued and convertibility
was not re-established until 1958.[52]
British and U.S. leaders were taking their nations on two very
different, seemingly irreconcilable paths. Britain's Labour leaders
were committed to the principles of democratic socialism and to the
incremental adoption of the welfare state. U.S. leaders were committed
to policies that emphasized production rather than justice in wealth
distribution as the means by which full employment might be
maintained and the economic pie enlarged. As had Jefferson long
before, they viewed open access to foreign markets (particularly where
they could anticipate what they looked upon as a favorable balance of
trade) as key to securing the nation's place in the new world order.
Only when the threat of Soviet expansionism became clear did U.S.
leaders come to the realization that the European social democracies
would require many billions of dollars in aid -- supplied as grants or
on extremely liberal terms -- if the communists were to be silenced
and purged from Western European governments.
In the midst of such hegemony-shattering pressures, the debate over
economic theory and policy (in which the teachings of Keynes played
such an enormous role) was actually confined to a relatively few
individuals who occupied the inner circle of economists turned
planners in the emerging global economy. Had Keynes been able to
overcome his instinctive adherence to the moral relativism of his
class, perhaps his prestige could have been put to more productive use
in solving the world's problems. Had Keynes pointed to privilege --
and particularly the privilege attached to the private appropriation
of land rent -- as the primary reason why labor and capital
were periodically forced into unemployment, the history of economics
and of twentieth century public policy might have been very different
indeed. Instead, Keynes looked to the powers granted to central
bankers and the constraints imposed by international monetary
agreements to maintain a rough market equilibrium. Earlier periods of
financial crises had developed because governments had been at the
mercy of the bankers without a reciprocal degree of control to ensure
a balance on behalf of (what the political leaders construed as) the
public interest. The Great Depression initiated and the Second World
War seemingly cemented a shift in power away from the bankers and into
the hands of government officials. Keynes was convinced that if these
officials would only adhere to a consistent application of fiscal
policy (i.e., public saving during periods of expansion and public
spending in periods of contraction), the new international monetary
structure hammered out at Bretton Woods and refined in Geneva would
largely guarantee that full employment economies could be maintained
indefinitely.
From a practical standpoint, the only countries in which
Keynesian-style demand management could be practiced were those with
stable to declining levels of national debt and a growing tax base. In
the last years of the 1940s, the United States seemed to many
economists in an ideal position to establish the institutional
framework necessary to manage Keynesian interventionist strategies.
Truman and many others in the government were eager to find means
other than militarism to preserve the full employment economy. A
generation of professional economists and policy analysts, with the
experience of wartime planning under their belts, were eager to put
their version of Keynesian policies to the test. They gained their
opportunity when, as an outgrowth of the Employment Act of 1946, a
Council of Economic Advisers was established within the Executive
branch of government. The Council's role was to provide the type of
objective analysis too often lacking when cabinet Secretaries advanced
programs and shifts in policy. The Council would also offer support
for or an effective counter to the actions taken by the Board of
Governors of the Federal Reserve Banks. There was, of course, broad
concern in the banking community that the Federal Reserve system be
protected from political influence. Pressure was already building to
replace Marriner Eccles as Chairman because of his proposals to
curtail bank lending in order to dampen inflation.[53] Business
leaders and a good many economists responded with a warning that
higher interest rates would have a damaging effect on job creation. In
1947, Eccles was replaced by the more accommodating Thomas B. McCabe.
In the face of intense business lobbying, neither Truman nor leaders
in the U.S. Congress could find the will to do much of anything to
halt the upward spiral in prices. Eccles later wrote that Truman's
efforts "were completely inadequate to meet the economic
needs of the hour" and "were attacked or defended ...
according to the current political needs."[54] He warned
against attempts to reinstitute wage and price controls and against an
unbalanced federal budget. Despite a national housing shortage, Eccles
expressed concern that easy credit and federal subsidies had created
an imbalance between supply and demand, with the result that housing
(he should have said "land") prices continued to climb and
might soon become unaffordable for many of those most in need. In
subsequent testimony before a subcommittee of the Joint Committee on
the Economic Report, Eccles initiated a major theme in support of
monetary and fiscal reform, charging that the Federal Reserve System
could function effectively only if granted independence from the
public debt management decisions of the U.S. Treasury. Along with
these measures and a program of government austerity, he argued for a
sizeable tax increase to balance the budget and curb inflation. Truman
also received similar advice from Chester Bowles, who added that the
government ought to enforce some minimum degree of production
controls. Bowles later recorded what then happened:
Unhappily, the government first postponed action, urged
everyone to cooperate, and then in September, 1950, established
across-the-board price and wage controls. This produced all of the
inequities and bitterness which I had feared, and which had been
largely avoided during World War II.[55]
Among all the other problems faced by Truman was that of a nation
undergoing rapid demographic changes. Millions of citizens were
migrating from rural and agriculture regions to the urban and
industrialized cities. The process had started in the 1930s and
accelerated during the war. In Truman's mind, this migration
threatened far more than the agricultural output of the United States.
Freeholding family farmers were the backbone of the Democracy,
the guardians of Jeffersonian self-reliance and individualism. To save
this way of life Truman was more than willing to use Federal powers
and funds to improve rural conditions. This could be justified, he
reasoned, in order to satisfy the needs of a growing population.
Agriculture was as or more important than many other industries, and
farmers had to be provided with a safety net in the form of "a
permanent system of price supports for agricultural commodities."[56]
Neither Truman nor his advisers made the connection between price
supports and a continuing increase in the price of agricultural land,
an outcome that would actually devastate the family farm and the rural
communities these farmers long made possible. Anticipating
conservative opposition, Truman argued that government had a moral
obligation to support the family farmer to preserve the vital link to
the Democracy's egalitarian past:
The old laissez-faire theorists would tell us that the
answer is to cut down on producing units until the fittest survive.
But this theory is without humanity, for in human terms it means the
breakup of homes, the destruction of families, and the surrender of
the family farm to the absentee landlord or the corporate owner. No
American government worthy of the name can allow this sort of thing
to recur every twenty years or so. The farmers' sense of security is
a vital part of the foundation of American life.[57]
Truman was correct that the survival of rural communities and small
towns across the United States depended on the existence of large
numbers of moderate size farms. Farmers purchased household goods,
farm equipment and other goods and services locally. Corporate
agribusiness made little or no positive contribution to nearby
communities. When enough family farmers were foreclosed upon and
forced to migrate in large enough numbers, entire communities died.
To some extent, Truman seemed to understand that part of the problem
rested with unstable land prices, but he proposed no solutions.
Moreover, he ignored the fact that temporarily high prices for
agricultural products often lured farmers into mortgaging their farms
in order to acquire additional acreage. There was no way to accurately
forecast prices or yields from one growing season to the next. Those
farmers who saved in good years and bought more land when their less
astute neighbors became desperate for cash gradually increased the
size of their farms. Farmers forced to sell because of heavy debt
loads sometimes became tenants or sharecroppers. Truman's proposals
for price supports sought to protect farmers from the misfortunes
nature sometimes imposed and the tremendous volatility of market
prices. And yet, guaranteed prices for their crops merely encouraged
farmers to borrower to acquire and plant ever more acreage. In the
process, they drove up agricultural land prices beyond what was
sustainable over the long term. The cycles of land speculations,
ending when global demand falls or supply from lower cost producers
increases, are followed by widespread mortgage loan defaults and
foreclosure sales. This has become an integral characteristic of the
farm economy. As a result, there has been a continuing process of
consolidation in agriculture and an accelerated disappearance of the
family farm. At the same time, millions of acres of marginal land,
cultivated only because of tremendous government subsidy (in
particular, the delivery of water for irrigation at pennies on the
dollar of true cost) has resulted in the abandonment of much more
fertile but unsubsidized farmland in other parts of the country. In
the United States, the anomaly exists of deserts put into agricultural
production while millions of acres of previously-farmed acreage sit
uncultivated or converted into suburban communities with homes
constructed on multi-acre parcels of land lost to cultivation.
Truman did have one sound idea that never made it off the drawing
board. Rather than have the Federal government continue to purchase
surplus agricultural products and incur the tremendous costs of
transport and storage, he advocated direct payments to farmers when
prices fell below targeted levels. Only family farmers of moderate
size were to be eligible for this support. After long and heated
discussion before House and Senate committees the plan was defeated.
The Federal government continued to fill warehouses with surplus
production harvested from land brought under cultivation largely
because of government promises to purchase what the private markets
could not absorb, thereby propping up market prices (and farm land
values). Truman's plan at least had the virtue of passing on lower
market prices to consumers. Ironically, despite these measures, over
ten percent of U.S. households in rural communities continued to live
in deep poverty, with annual incomes under $1,000. An increasing
number were becoming itinerant workers, too poor even to make their
way to the cities.
Industrial production was also undergoing dramatic changes, with
automation and the introduction of new production methods greatly
reducing the need for unskilled laborers. Industry was entering an age
of increasing demand for management talent, research and development
expertise, skilled machinists and what we now call knowledge
workers -- individuals with scientific and highly technical
backgrounds -- to build, run and maintain a modern industrial
infrastructure. Organized research had substantially if not entirely
replaced the type of experimentation practiced by Thomas Edison and
other turn-of-the-century inventors. Half of all workers were now
employed by corporations, the larger ones broadly owned by
shareholders no longer involved in management decisions. By the end of
Truman's second term in office, there was a growing consensus among
those who held out within the Remnant that the nation had
fundamentally changed, and not for the better. Addressing members of
the American Iron and Steel Institute in 1949, Harvard economics
professor, Sumner H. Slichter (1892-1959) declared the private economy
virtually dead:
Back in the nineteenth century there was more or less
general acceptance of the idea that the competitive pursuit of
individual interests would satisfactorily promote the interests that
all members of the community have in common. This view has gradually
been abandoned. First, here and then there the community undertook
to substitute public policies for the uncontrolled action of
markets. Fifty years of revolt against the results produced by free
markets has transformed the economy from one of free enterprise into
one of government-guided enterprise. Today the community expects the
government to put a floor under some prices, a ceiling over others,
to subsidize this industry, to put special taxes on that one, to
regulate the terms on which money is lent and to some extent the
purposes for which it is lent, to lend money itself, and to modify
drastically the distribution of income by a combination of steeply
progressive income taxes and large transfer payments. ...Free
private enterprise operated on the principle that ability and
willingness to buy determined what was produced and who got it. The
new economy operates on the principle that fundamental decisions on
who has what incomes, what is produced, and at what prices it is
sold are determined by public policies.[58]
Slichter was certainly overstating the case, but the trend was clear.
Corporations had come to depend on governments both as a protector and
as a customer. What they wanted from government was not a fair
field with no favors, but protection from competition, few
regulations on how they conducted their affairs, unrestricted access
to use and pollute the natural environment and exemption from taxation
imposed on others.
Another aspect of the changes taking place in the United States was
that at most universities across the country economists holding views
similar to those of Slichter were gradually being replaced by younger
persons nurtured on the economics of intervention. A handful of
economists trained by John R. Commons at the University of Wisconsin
had helped to bring the domestic policy agenda of Liberalism
to Wisconsin in the 1930s, and many of their proposals found their way
into Franklin Roosevelt's national programs. By the 1940s, one of
Slichter's colleagues at Harvard, Alvin Hansen (1887-1975) became a
leading proponent of permanent, institutionalized interventionism. By
virtue of the power of his lectures, he created a constituency for
interventionism among Harvard's young economics students. Hansen took
from Keynes his arguments in support of interventionism under special
circumstances and converted them into a truly general theory of demand
management. As early as 1941, in his book, Fiscal Policy and
Business Cycles (published by W.W. Norton & Company), Hansen
called on government to engage in fiscal and monetary intervention far
beyond that advocated by Keynes. Four years later he added another
book on the Bretton Woods agreements.
The Great Depression and the Second World War were instrumental in
creating the right political environment for interventionist economic
ideas to flourish. Although, as Joan Robinson later admitted, "Keynes
confined his argument almost entirely to the short-period aspect of
investment [and] paid little attention to the long-period ... capacity
to increase the stock of means of production,"[59] his
challenge to existing orthodoxy opened the door for others. By the
late 1940s, the propensity of socialist-leaning British economists to
call for government intervention in economic affairs had migrated
across the Atlantic Ocean. With Hansen securely entrenched as the
primary interpreter of Keynes to economists-in-training at Harvard,
there emerged into the government realm and second tier of university
economics departments an expanding cadre of professional economists
anxious to demonstrate their attachment to the new orthodoxy. "Men
of lesser reputation with less reputation to lose," writes
John Kenneth Galbraith, "made the Keynesian revolution."[60]
Underlying their economics was a pragmatic view of the world Joan
Robinson captured at the very beginning of the their rise to power:
Governments who are opposed in principle to extending
the sphere of socialism prefer that there should be less real
capital in existence rather than that they should be saddled with
the ownership of more capital. Revolutionaries who regard
unemployment as only one of the evils of a system of private
enterprise are not anxious for capitalist governments to learn the
trick of reducing fluctuations in trade, and so deprive them of the
most obvious, though not the most fundamental, of their objections
to the system. The adherents of laissez-faire, on the other
hand, fear that, if it once became clear to the public that state
interference can reduce unemployment, the public might begin to
think that state interference could do much else besides.[61]
Much has been subsequently written in clarification of or as an
attack on the General Theory and the real significance of what
Keynes contributed to the development of economic theory and public
policy. Robert Skidelsky repeats the point I made previously when he
concludes: "Keynes and the British economists ... took their
inherited institutions for granted, and relied on technical solutions
to economic problems."[62] Hansen did likewise. Convinced
that the U.S. economy was maturing, he advocated a program of
continuous debt-funded government spending on infrastructure to keep
excess private savings from being channeled into superfluous
consumption. Looking back in 1957 on the Keynesian experiment in
progress, Hansen applauded the fact that policy makers now had new
weapons in their arsenal with which to attack economic problems:
We have achieved a new freedom of monetary management
unrestrained by the old gold-standard chains which formerly bound us
hand and foot. We have achieved a certain degree of freedom to use
fiscal policy unrestrained, at least in considerable measure, by the
dogmas of so-called sound finance. These freedoms are of enormous
importance for the successful workability of the system of private
enterprise. Without these freedoms the future would indeed be
dark.[63]
In Hansen's mind the evidence was indisputable. Government spending
and other forms of intervention had been the catalyst for continued
economic expansion, nearly full employment and higher real wages. Now
the challenge was to agree as a society on how the productive
capabilities of the nation would be applied. "We have reached
a point in our economic and social evolution where social-value
judgments, not the market, must control the uses to which we put
something like one-fourth of our productive resources,"[64]
he wrote. Had he paid any attention to what Harry Gunnison Brown was
writing, he would have recognized that this type of societal spending
could have been accomplished by legitimizing the source of revenue for
public goods and services.
Despite the rapid expansion of government intervention and spending
that occurred during the 1950s, corporations (and individuals) engaged
in patterns of investment wholly unattached to increased production of
goods or services and motivated entirely by the prospects for high
short and intermediate term returns on investment. The potential for
Hansen's proposals to achieve public objectives depended, in fact, on
the ability of government to act before private interests learned of
government plans and shifted their own investment/asset preservation
strategies accordingly. At best, this could be accomplished only in
the short run and under circumstances where effective wage and price
controls were in place. Hansen, Paul Samuelson and others were
building elaborate models of the economy that had nothing to do with
reality and everything to do with the elevation of economics to the
standing of a speculative and mathematically-oriented field of study.
Assuming (without very reliable supporting historical evidence) that
an inverse relationship existed between unemployment and inflation,
their recommendation to Truman and his successors was to increase
taxes and tighten credit in periods of rising prices and do the
opposite in periods of rising unemployment. They advanced the idea
that when prices stabilized and most of those wanting to work were
working, the economy reached its equilibrium state. From that point on
(excepting the surprise appearance of major external shocks),
fine-tuning of the economy would keep things on an even keel.
This element of continuous application of fiscal and monetary
interventions is the most important difference between Keynes and
those who founded the U.S. Keynesian school. For Keynes, intervention
was necessitated because of the power of labor unions to prevent a
full employment equilibrium from being maintained at the expense of
wage levels. Thus, if production depended upon a minimum level of
return to agrarian and industrial landlords, and the only lawful means
of maintaining such returns was to release workers, then government
had as a social responsibility the role of bridging the investment gap
required to sustain full employment. For the emergency period of the
1930s, the source of revenue for government investment had to come
from borrowing. In the future, once natural full employment had
returned, sufficient taxes - broadly assessed -- were to be levied to
retire the debt and build up a reserve. The objective, in the view of
Keynes, was to eliminate what he called the "scarcity-value
of capital," by which he meant not capital goods but
financial reserves and credit. "Interest to-day rewards no
genuine sacrifice, any more than does the rent of land," he
wrote. "The owner of capital can obtain interest because
capital is scarce, just as the owner of land can obtain rent because
land is scarce."[65] Money lenders and those who acquired
stocks and bonds were "functionless investor[s]"
little different from the "rentiers" who absorbed so
much of what was produced simply because the State protected their
privilege of controlling locations and natural resource-laden lands
without a market-determined compensation to society. The trick would
be how to expand the supply of currency and credit without diminishing
purchasing power; that is, how to ensure there would be just enough
money chasing an increasing quantity of goods and services.
Keynes answered with the recommendation to impose a system of
progressive taxation on incomes and inheritances. The wealthy would
finally be called upon to contribute to a societal fund for stable
economic growth. To the extent such taxation absorbed income and
assets accumulated as a result of successful rent-seeking privilege,
the effects would be beneficial. Keynes did not make this connection,
however. What we ended with is the principle of taxing people on their
ability to pay without regard to how income is received or assets
acquired.
In the U.S., war had in fact allowed the State to convert the need
for revenue into progressively higher tax rates on income. Truman's
commitment to use government power to remedy societal imbalances could
only be achieved, in the minds of his advisers, if the income tax
remained progressive and was used for wealth redistribution as well as
to generate revenue. By the late 1940s and the ascendancy of Keynesian
thinking, Truman had little difficulty finding support for his program
within the economics community.
Rexford Tugwell, Lauchlin Currie and Marriner Eccles remained active
and vocal proponents of various forms of interventionism. Currie had
anticipated Keynes on substantive issues relating to monetary policy
and was instrumental in introducing Keynesian concepts to Alvin Hansen
and others at Harvard. Paul Samuelson, who studied under Hansen, then
brought the Keynesian revolution to other professors and
undergraduates with the first edition in 1948 of his economics
text.[66] Their efforts were given a considerable boost by Simon
Kuznets (1901-1985) and his work to develop a statistical model of the
economy -- the National Accounts system. These economists and
others who firmly believed in the interventionist agenda of Liberalism
were strong supporters of the Employment Act of 1946, which they hoped
would result in a commitment by government to take whatever actions
might be necessary to maintain full employment in the nation. Although
the Congress retreated from adopting such an automatic (and, to many,
socialistic) formula for executive power, the legislation allowed
Truman to appoint his first Council of Economic Advisers, chaired by
Edwin G. Nourse (1883-1974) of the Brookings Institution. Nourse was
joined by Leon H. Keyserling, general counsel to the National Housing
Agency and a graduate of the Harvard law school, and John Davidson
Clark of the University of Nebraska.
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