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January 22, 1958

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# CHAPTER I. THE NEED FOR THIS STUDY

We Americans are passing through a great divide in our national history. We were brought up to assume that time was on our side -- that history would insure our preeminence among nations and prove the superiority of our free institutions. These assumptions have been rudely shattered by recent events. We have moved from an era of complacency to an age of anxiety, from a time of easy confidence in our national policies to a testing time when we must prove their adequacy before a grave challenge to the very survival of our way of life.

The Sputnik has dramatized one major aspect of this challenge: the challenge to our military and scientific preeminence. It has forced us to test the adequacy of our defense effort and our strategy for resisting forcible extensions of Soviet power. But there are other aspects of this challenge. We face a challenge also in the economic field. The nature of this challenge and its relation to our international economic objectives and strategy forms the subject of the present study.

Our last Thanksgiving holiday, the traditional occasion for rejoicing in our material abundance, was interrupted by a particularly blunt statement of the economic challenge by the recognized leader of world Communism. Said Nikita Khrushchev: "We declare war upon the United States in the peaceful field of trade. The threat to the United States is not the ICBM, but in the field of peaceful production."

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January 22, 1958

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In our bygone era of national confidence these words would have seemed a vain and idle boast. Yet, to many Americans, they now have an ominous and portentious ring. In one respect this is a paradox. We are still by far the richest country in the world. With scarcely 6% of the world's population and 7% of its area, we account for nearly one half of the world's production. Our people enjoy material advantages unprecedented in the history of the world. Our riches are not only a source of satisfaction in themselves. They are a powerful instrument for achieving non-economic ends at home and also abroad. As the world's greatest market and the world's greatest source of capital we possess unrivalled weapons for promoting our national objectives on the world scene.

Yet the fact remains that our economic strength has not produced confidence in our international economic objectives and strategy. Foreign economic policy seems today not an area of strength, but an area of weakness; not an area of possibility, but an area of danger. We have had another blow to our self-esteem in recent months besides the Sputnik. It is the mounting feeling that our Communist adversaries are making great gains in the very economic field we had considered our own private preserve and that, to put it crudely, they are even beating us at our own game.

Why do we have this feeling? The short answer lies on opposite sides of the same coin -- in our awareness of the increasing effectiveness of Communist economic policies and of the declining effectiveness of our own.

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January 22, 1958

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The Soviet Union, while growing at a rapid rate at home, is unquestionably mounting a major effort in the foreign economic field. It is using its large and growing domestic market as a powerful magnet to attract the exports of countries of the non-Communist world. It is using its growing supply of capital goods and technicians to assist in the industrialization of the underdeveloped countries. By both trade and aid it is seeking to make non-Communist countries dependent upon Communist favor and thereby vulnerable to Communist influence. Within this overall strategy Communist foreign economic policies are well-conceived, well executed, and strikingly effective.

To the Communists orderly and effective development of foreign economic policy as an instrument of their national strategy we present a pitiful contrast. This is true even after allowing for the illusion of confusion and weakness which a democratic society always creates in comparison with its totalitarian counterpart. There is a widespread feeling in the United States that our trade and aid programs are being carried on from year to year more from inertia than from conscious design, without a clear cut philosophy, without a purposeful sense of direction, and without the conviction that our chosen means are properly related to our stated ends.

While our confusion is sharpened by Communist successes, it is not wholly the result of them. We are deeply divided over questions which would confront us in any case. Are we receiving adequate

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January 22, 1958

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returns from our foreign aid? Why have our aid and trade policies failed
to cure the "dollar shortage"? Will the Common Market in Europe clash
eventually with our interests? Is our reciprocal trade program consistent
with our domestic prosperity and national defense? Is it consistent with
the various elements of our foreign policy? And, superimposed on all
these questions of foreign economic policy: Is our economy sound? Can
we maintain our postwar rate of economic growth?

In the midst of this confusion our national leadership is calling
for the strengthening of existing programs of trade and aid. Yet these
same programs have met increasing resistance in recent years both from
Congress and from the public at large. We believe the situation will
continue to deteriorate until we can clarify our international economic
objectives and the ways in which specific policies will help in their
achievement.

This study is designed to be a contribution toward that clarification
of ends and means which our foreign economic policy so desperately
needs. In undertaking this task we must deal with the following questions:

What are the ends we seek?

What are the problems we face in seeking those ends?

What foreign economic policies should we adopt to deal with
these problems and promote these ends?

What foreign economic policies should we adopt to deal with these problems?

What are the problems we face in seeking these ends?

What are the ends we seek?

In undertaking this task we must deal with the following questions: What are the ends and means which our foreign economic policy so deliberately needs? In undertaking this task we must deal with the following questions:

This study is designed to be a contribution toward that classification of objectives and strategies in which specific policies will help in their achievement.

In the spirit of this configuration, our national framework is calling for the strengthening of existing programs of trade and aid. Yet these programs have a very limited relationship in recent years both from the point of view of the public at large. We believe the situation will continue to deteriorate until we can fully realize the international economic Congress and from the public at large, we believe the situation will continue to deteriorate until we can fully realize the international economic

In the various elements of our foreign policy, are our economy, sound? Can these questions of foreign economic policy be discussed with our domestic majority and national defense? Is it consistent with the various elements of our foreign policy? And, subsumed on all these elements, is our foreign policy based on all the various elements of our foreign policy?

Will the Common Market in Europe close to the dollar shortfalls? Will the dollar shortfalls? Why have our aid and trade policies failed to return from our foreign debt?

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January 22, 1958

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How can we achieve the domestic support necessary to adopt
and carry out such policies?

This study concerns itself, in turn, with each of these questions.

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January 22, 1958

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CHAPTER II. THE WORLD WE SEEK

Foreign economic policy is not an end in itself. As its name suggests, it is a part of our total foreign policy and our total economic policy. These, in turn, are only instruments for achieving our national objectives. Therefore we cannot know what our foreign economic policy should be unless we know what our national objectives are.

There are many people who think that our principal national objective is the defeat of Communist imperialism. We reject this narrow and negative conception. Even victory over Communism -- if it ever could be achieved in any permanent sense -- would be but a step toward achieving the purposes of our society. Those purposes exist, have existed, and will exist quite independently of international Communism.

The objectives of American society are numerous and complex and can be classified in many alternative ways. For the purpose of this report, we find it convenient to summarize them under three broad headings.

Our first objective is security. It is obvious that the United States, like any nation, is resolved to survive as a national entity. We want to preserve the opportunity to shape our own destiny. When we speak of security we mean first of all the power to insure our survival. We also mean something more -- the power to reduce threats to our survival to a tolerable level so that we can pursue our other national purposes in freedom from fear.

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Our second objective is prosperity -- material abundance for the American people. This has two aspects. We want an abundance of economic goods for every American. Moreover, we want to increase that abundance as the years go by.

Our third objective is human freedom. We use this as a shorthand phrase to include a whole set of non-material values which are important to our society. Our concept of freedom is not merely a negative one -- the absence of restraint on the individual. It is a positive one -- that every man should have the opportunity to realize to the full his potentialities as a human being.

It is this goal of human freedom that distinguishes us most sharply from the Communists. For them, the end of the social process is the development of society as a whole. For us, it is the development of the free creative individual personality. We believe that certain elements of social organization are necessary to promote this goal: political rights -- freedom of speech, press, and assembly, the right to vote, equality before the law; economic rights -- freedom to work, freedom to strike, freedom to participate in the benefits accruing from increased productivity; and social rights -- freedom from discrimination based on race, color, nationality, religious belief, caste, or sex. Since we are not concerned with power and wealth alone, we do not regard our society or any society as entirely successful unless it includes all of these elements.

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In considering our three broad ends of policy, we should be clear
about two things.

First, each of the three ends is not only an end in itself but a
means toward the achievement of the other ends. If we fail to protect
our security we will fail in promoting our prosperity and our freedom.
Conversely, if we deal effectively with the security problem we will be
able to concentrate our energies and resources on the pursuit of our other
ends. In the same way, our achievement of material prosperity gives us
the wherewithal to promote security and freedom. Finally, our achievement
of human freedom nourishes a climate favorable to security and prosperity.
If we lose ground in our progress toward our non-material ends, toward
our goal of the free and creative individual personality, we will lack the
ultimate foundation of our political and economic strength.

Second, our pursuit of security, prosperity and freedom cannot
be circumscribed by the continental limits of the United States. In an
earlier decade of our history it was aptly said that "foreign policy begins at
home." As we enter the second half of the twentieth century we must also
recognize that "domestic policy begins abroad." However strongly our natural
instincts and traditions may impel us to close our windows to foreign
problems and concentrate instead on our problems at home we cannot
escape the fact of their interdependence. We are forced to recognize that
events abroad have an increasing influence on the plans and careers of our

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January 22, 1958

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young men, on the employment of our scientific and engineering talent,
on the use we make of our national production, on the development of our
political and social institutions, and even on our attitude toward our most
strongly held values.

Thus security, prosperity, and freedom are indivisible. Their
achievement at home is intimately related to their achievement abroad.
In a previous study on International Security we argued that security for
the United States requires the building of strong and friendly allies. In
this study we will show why the maintenance and expansion of our domestic
prosperity requires the development of prosperity abroad.

We also believe that the interdependence in domestic and foreign
objectives applies to human freedom as well. The achievement of the free
and creative human personality cannot be accomplished solely within the
continental United States. An obvious reason is that full freedom and
creativity for Americans includes the freedom to travel and partake of the
world's intellectual and spiritual resources. But there is a deeper reason
for our concern with the achievement of freedom on a world scale. It is not
merely a means to our own enjoyment of freedom -- it is an end in itself.
It is part and parcel of our national purpose.

This universal element in our national purpose is nothing new. It
has been expressed by American leaders from the earliest days of our history.

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January 22, 1958

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In the opinion of John Adams the settlement of America was "the opening of a grand scheme and design in Providence for the illumination and emancipation of ... mankind all over the earth." With a similar world view Woodrow Wilson declared a century later that "America was created to unite mankind" and advised his fellow Americans that to be truly American they must "think first of humanity." The same high purpose has been restated in our own times by President Eisenhower.

In the present world situation the universal element of our national purpose has tremendous importance. For the American people, presently enjoying unprecedented prosperity and power, it represents the best, the most important opportunity to express their basic moral, spiritual and religious beliefs about one God, the brotherhood of man, the dignity and worth of the individual, and the love of their neighbors. It gives us something to work for that is above and beyond our own selfish interests. It provides the deeper purpose for the direction of our creative energies. Without that deeper purpose we have no antidote to self-indulgence and decadence. In the long run, therefore, we can fail to pursue our non-material objectives in the wide world only at the cost of frustrating their achievement at home.

This does not mean that we are crusaders for an ideology seeking to impose our own political, economic, and social institutions on other peoples. To others we must never say "be like us," but "be what you

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January 22, 1958

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want to be." We must help men everywhere to realize the goal of human freedom through institutions which are suited to their own traditions and environments.

Essentially this is the transfer to the world scene of the concept of the open society which we have at home. We have been able to pursue our objectives of security, prosperity and freedom within a loose social framework permitting great diversity in cultural, linguistic and religious patterns. Our job is now to do among nations what we have done for ourselves. We should tolerate diversity abroad as we do at home. We should not seek to foreclose the development of any system in foreign countries except one which seeks to destroy human values and the open society. This should be the real basis of our opposition to Communism or any other totalitarian system.

Our emphasis on the idealistic element in our national purpose may be attacked by some as "unrealistic." They will argue that national policy must be founded on power rather than morality. We believe this is a false contrast. Idealism is realism. Morality is power. Ideas influence the minds of men, upset nations, defy armies, and write history. Our policy must have a moral basis or we will not remain strong.

Our national actions must reflect a keen appreciation of the relation between power and morality, between our objectives of security, prosperity, and freedom. For our own and for the world's sake, we must offer a vision

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January 22, 1958

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of ourselves not simply as an arsenal of weapons or as a storehouse of
commodities, but as a society which encourages the highest realization
of man's fundamental destiny.

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January 22, 1958

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# CHAPTER III. THE ENDURING REALITIES

A clarification of our national objectives along the lines we have suggested is a necessary foundation for the formulation of our foreign economic policy. By itself, however, it is not enough. In the words of Mr. Justice Holmes, "General principles do not decide concrete cases." We need a clear conception not only of the ends we seek but of the specific problems we face in pursuing those ends.

Many of our national leaders grew to maturity in the years before the First World War. The world of which they formed their first impressions was essentially the world of the nineteenth century. In the economic field, it was a world of orderly growth, of free trade and stable currencies, with a single center in Western Europe, more specifically, in the City of London. It was a world in which the United States could go about its domestic business without paying much attention to economic developments in other countries.

It is understandable that many Americans should regard this world of their youth as the "normal" world whose reconstruction (with some comparatively minor alterations) is the primary object of American policy. But the beginning of rational thinking in this field is to realize that this world is irretrievably gone -- shattered beyond recall by the two World Wars and the Great Depression. We have to deal with the world as it is, not as we should like it to be. If we are to build a foreign economic

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January 22, 1958

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policy to serve our national objectives it must take account of the new
world in which we find ourselves. It must deal with the major problems
and opportunities that face the United States at the present time.

Our next step must be to outline these problems and opportunities
and their main implications for our foreign economic policy. The problems
are essentially of two kinds. Here we will discuss the first kind -- the
enduring problems which would face us even if the Communist world
did not exist. In the next Chapter we will discuss the problems which
are largely or wholly the result of the Communist challenge.

A. Economic Interdependence

The first of the enduring realities with which we have to deal is the
fact of economic interdependence.

It is no longer possible for any nation, regardless of its power or
wealth, to preserve its independence or advance its other objectives in
isolation from other nations. This fact of interdependence is widely
recognized in political affairs. It is not so well appreciated in
the economic field.

Yet international trade is a vital and growing part of our economic
life. In the first place, imports are an important supplement to our
domestic resources. How far we have moved from self-sufficiency is seen
most clearly in the fact that we now look outside our borders for 10% of our

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January 22, 1958

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raw material requirements. We import almost all of our natural rubber, chromium, tin, and manganese (which is essential to the manufacture of steel). We also import one-half of our lead and zinc and one-third or more of our copper, mostly from the underdeveloped countries of the world.

With the growth of our population and production and the continued depletion of our natural resources our dependence on foreign materials is bound to increase. It has been estimated that by 1975 our domestic production will at least double the 1950 rate and that by that time we will have to import at least 20% of our raw material requirements and at least 55% of our metals requirements.

Our dependence on imports is not measured only by our need for essential materials which we cannot obtain at home. There are some essential materials which are available here -- but only at a much higher cost than the cost of buying them abroad. By importing these materials we reduce our production costs and give our consumers more for their money. And quite apart from providing us with essential raw materials, imports bring us many non-essentials which are "the spice of life." Some of these, like coffee, tea and cocoa, we cannot produce at all. Others, like bicycles, watches, wines and spirits, kitchenware, gloves, cheese, handmade glass, and certain textiles, we can produce only in greatly inferior quality or at much greater cost. In short, we heavily depend on imports to maintain our high living standards.

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Our living standards depend on imports for yet another reason -- they are an important stimulus to domestic production. This is a qualitative advantage of international trade which has little to do with its size. Even when imports are small they exert a continuous competitive pressure on domestic industry, inducing an intensive search for lower costs and technical improvements which benefit the economy as a whole.

So far we have considered only the role of imports. Our dependence on trade becomes more striking when we include exports in our calculations. Some four and one half million workers -- about 7% of our entire labor force -- owe their livelihood directly to international trade. These are the workers employed in producing exports, dealing with imports, and transporting and selling internationally traded goods. International trade thus provides more employment for American workers than the textile, auto, chemical and steel industries combined. And even these figures leave out of account the workers indirectly dependent on foreign trade, such as those whose employment would cease without the imported materials essential to the industries in which they work.

Our dependence on international trade is particularly acute in certain sections of the economy. We export between one-fifth and one-third of our total production of civilian aircraft, railroad cars, construction and mining equipment, textile machinery, sewing machines and steel and rolling machinery. We export between 20% and 40% of our rye, barley and

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January 22, 1958

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tobacco, and more than one-half of our wheat, rice and cotton. Overseas markets for our farm products are an important factor in maintaining commodity price levels and alleviating domestic surpluses. The loss of these export markets would have devastating consequences for our farm community as a whole.

But the full measure of our economic interdependence is not taken by considering our own needs alone. We must also consider our dependence on other countries of the world which themselves depend on international trade.

The ratio of international trade to total production in the United Kingdom and France is three to four times as great as in the United States. For smaller nations such as Belgium, The Netherlands, Sweden and Switzerland, it is five to nine times as great. Our main industrial allies are even more dependent than we are on foreign supplies of raw materials. For example, Western Europe relies on the Middle East for 70% of its oil requirements. For the major industrial countries who are our principal allies international trade is not simply an important element in the economy--it is the means of survival itself.

The same may also be said for the underdeveloped countries. Few of these countries are self-sufficient even in food. All of them must look abroad for machinery and technical aid vital to their economic development. To pay for imports they have had to specialize heavily on one or two export

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crops. The loss of foreign markets for these crops or a collapse in their world prices can plunge these countries into an economic crisis.

The natural forces of interdependence have bound the United States, the industrial countries, and the underdeveloped countries of the non-Communist world into an intimate economic relationship. The fruitful flow of trade and investment which has resulted from this relationship is far beyond the Communists capacity to match. We must nourish the natural flow of trade and investment not only because it directly promotes our domestic prosperity but also because it promotes the prosperity of our allies and thus indirectly promotes our national objectives. Although individual or group interests may sometimes be served by obstructing this flow, we should regard every obstacle we place in its path as a self-imposed blockade which must have grave consequences for the general welfare both of our country and of the free world as a whole.

How can we strengthen the free world economic relationship on which the achievement of our objectives depends? In the nineteenth century this relationship was developed and preserved by colonial empire. But this method is alien to our traditions, inconsistent with our objectives, and impractical in the modern world. The challenge of economic interdependence must be met today by an alternative to empire -- by cooperative action in which independent states make markets and resources available in the common interest. This is the basic implication for American policy of the first enduring reality of the present-day world.

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B. The Revolution of Rising Expectations

The world today is in a state of turbulence and upheaval unique in its history. Around the globe there is a restlessness, a rejection of traditional ways, and a fervent, sometimes fanatical search for new ones. These disturbances are largely related to the second enduring reality with which America has to deal -- the revolution of rising expectations. To frame policies which will promote our national objectives we must understand exactly what this term means.

Until the dawn of the nineteenth century the majority of mankind accepted the view that their position in life was determined by forces over which they had no control. Poverty and want were no more to be questioned than illness and death. In the pyramid of each society some would be born to wealth or power; a very few might rise there; but for the mass of mankind, the best that could be hoped for was subsistence.

In the late eighteenth century the inevitability of this social order was challenged and with it the validity of the political systems by which it was maintained. The philosophers of the American Revolution proclaimed the doctrine of political equality and of the inalienable right of all men to life, liberty and happiness. The French Revolution issued a clarion call for liberté, égalité, and fraternité. During the next century most nations of the western world (with the notable exception of Russia) embraced these principles and revised accordingly their systems of government.

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The concept of equality and progress was soon extended to the
economic field. It was not a far step from the assertion of political
equality to the doctrine that political equality was meaningless without
economic well-being. The conviction grew that when men lacked the
material basis of a good life they could not make any real use of the right
of political participation.

This doctrine might have remained of interest only to philosophers
but for three factors: the growing productivity made possible by the
industrial and technological revolution; the Great Depression of the
1930's; and the impact of the two World Wars. The first showed that
improvement in material circumstances was possible as well as desirable.
The second required nearly every government to intervene in the economic
life of its people to maintain the stability of the social order. The third
forced governments waging total war to promise and then to implement
further reforms in the social and economic order.

The result of these factors is that the revolution of rising
expectations is now a dominant current of contemporary affairs. Conditions
accepted for centuries have come to seem intolerable. There is a widespread
conviction among the peoples of the world that what was good enough for
their fathers is not good enough for them. Change is demanded -- within
the existing social framework, if possible -- through a new framework, if
necessary.

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Although the revolution of rising expectations is a world-wide phenomenon, it is occuring with greatest force in the underdeveloped countries. Here live two-thirds of the world's people, many of whom have only just been released from colonial rule. For them the revolution of rising expectations is a triple revolution -- a revolution of rising economic expectations, of rising resentment at racial discrimination and social inequality, and of rising demands for political independence. This three-pronged revolution, largely the product of Western example and Western philosophy, is now in full swing throughout Asia, Africa and Latin America.

The revolution of rising expectations has created a great gap between what men have and what they want. For the United States this gap presents both grave problems and great opportunities.

The problems are caused by the size of this gap and the question of how it will be closed. Unless the disparity between aspirations and realities is somehow reduced there will be built up in the underdeveloped countries tremendous tensions which will destroy the chance for their orderly development within an open world society. If the gap is closed by means of totalitarian institutions, whether Communist or otherwise, it will equally frustrate the achievement of our national objectives. The underdeveloped Countries will seek economic advance by rigid suppression of consumption and forced mobilization of capital and labor. For their

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vast populations, economic development will be a Frankenstein which crushes freedom. For us, it will spell the loss of vital raw materials and markets, a vast erosion of our world power, and most important, the end of our opportunity to further our universal goal of human freedom.

We cannot afford to let this happen. It need not happen if we seize the opportunity to influence the development of the underdeveloped countries afforded us by the fact of our economic interdependence. We can be the main source of the capital they need to promote their economic development. We can provide the principal markets for their raw material and industrial production. By sending them our experts and helping to train theirs we can be their main supplier of scientific and administrative know-how.

Beyond these capacities we are uniquely qualified by our own philosophy and historical experience to give to the underdeveloped countries a vision of the process by which their expectations can be satisfied within an environment of human freedom. Their cause of economic progress, social equality and political independence is our cause as well. That we live in an age of revolution should not dismay us, who are born of revolution. If we remain true to our ideals and use our natural advantages we will find in the revolution we have done so much to inspire not just problems -- but opportunities as well.

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C. <u>The Population Explosion</u>

The revolution of rising expectations would be a formidable
problem in itself. But it is immensely complicated by the world population
explosion.

World population will increase by several thousand persons in the
hour or so it takes to read this study. In the course of the day it will
increase by about 100,000 -- the population of a fair sized town. In the
course of this year it will increase by nearly forty million -- the population
of a whole country.

Since 1650 the population of our planet has been increasing at
an ever-accelerating rate. From 1940 to 1954 the annual percentage
increase was one and one-half times the rate of increase between 1900
and 1950 and over twice the rate of increase between 1850 and 1900.
Since the base of the population is ever larger, the rise in percentage
increase means huge absolute increases in numbers. In the short span
between 1920 and 1954, for example, the number of persons
added to our world was greater than the entire world population of 1750.

The present population of the world is about two billion persons.
If the present rate of growth is maintained, it will increase by one billion
in the next generation; in another century, it will have doubled; in 200
years, it will have multiplied five times to fifteen billion.

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But the rate of increase of population is not constant -- it is
accelerating. If the rate of acceleration of the last fifty years is
projected into the future, the world's population will double in the next
generation, quadruple in a century, and in 200 years will reach the
fantastic total of 191 billion or forty times its present size.

It is difficult for most Americans to take seriously this explosive in...
increase in population. In the first place, our own experience has
inclined us to believe that population growth can be matched by the
growth of production. When industrialization began in the Western
Hemisphere and in Europe, the relation of population to resources was
favorable. In the New World, the existence of virgin lands meant that
increases in population led to the settlement of new territory and the
development of natural resources. In Europe, the greatest growth of
population occurred after industrialization had widened the economic
base. In our Western world industrialization, population, and living
standards were able to increase at the same time.

The present population explosion, however, poses an entirely
different problem. The rate of increase is greatest in the underdeveloped
countries where it is most difficult to assimilate. In most of these
regions, with the exception of Latin America, population is vastly greater
in relation to resources than was the case in Western Europe or in North
America at the beginning of our industrial revolution. Moreover, population

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increase in these countries, in contrast to our own experience, is
occurring quite independently of domestic economic progress. The
population explosion is largely the result of importations from the West
of new scientific discoveries which have drastically reduced the death
rate. Therefore it is not accompanied by a growth in resources sufficient
to produce a better standard of living.

A second reason why we tend to discount the importance of
population growth is our feeling that the present rate of growth will not
be maintained. Industrialization in the Western countries was accompanied
by profound changes in social and religious attitudes which led to some
diminution in the birth rate. But population growth in the underdeveloped
countries, having been stimulated by external factors, has been divorced
from domestic, social and religious changes which might reduce the
number of births. In short, the extraordinary growth of population in
underdeveloped countries is not taking place along with the economic
and social changes which could forestall its ominous potentialities.

What are the implications of these facts for American policy?

To begin with, the population explosion makes it immensely
more difficult to cope with the revolution of rising expectations. The
underdeveloped areas are tending toward a three percent annual increase
in their populations -- a rate sufficient to double their numbers every
23 years. It is extremely difficult to raise national income to keep pace

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with this increase, much less to improve the standard of living. If the
population is increasing at the rate of two to three percent a year, even
an annual investment of 10 - 15% of the national product will probably do
no more than maintain per capita income. To improve the standard of
living may require an investment of 20 - 25% of the national product.
Such rates of investment are unattainable in most of the countries where
population pressure is most severe.

Because of the population explosion the underdeveloped countries,
like Alice in Wonderland, are having to run faster and faster to stay in
the same place. But most of them are not even able to do that. Per
capita income in these countries is probably lower today than ever before.
This deterioration has been taking place side by side with a great increase in
the living standards of the advanced countries of the world. It is no
exaggeration to say of the present world, therefore, that the rich are
getting richer and the poor are getting poorer -- that, far from satisfying
rising expectations, we are actually moving in the opposite direction.

This situation is clearly inconsistent with the achievement of our
national objectives. In the first place, it makes the underdeveloped
countries weaker and weaker elements in the network of trade so vital
to prosperity. As population grows unchecked in these countries they will
absorb an ever-greater proportion of their foodstuffs and natural resources --
leaving less and less available for export. Their low living standards and

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stagnant economies will make them poor markets for American exports and
poor risks for American capital. In desperation at their economic difficulties
they may pile obstacles and exactions on our trade and investment.

The population explosion works also against security and freedom.
The poor and stagnant economies of the underdeveloped countries breed
political instability. Having contributed to this explosive situation,
unchecked population growth complicates it further by creating two special
dangers -- a youth-dominated citizenry and disproportionate increase
in racial minorities. Pressures build up for totalitarianism at home and
aggression abroad. Nationalism and militarism are used to turn men's
minds from their deprivations. Faced with chronic unemployment and
growing unrest at home the leader of an overcrowded and impoverished
nation may find his easiest way out in a zealous and reckless foreign
policy.

Our analysis of the population explosion leads us to two main
conclusions. First, since we have contributed to this problem by reducing
mortality, we should not close our eyes to its existence. Second, since
the present multiplication of human beings is incompatible with the
achievement of our national objectives, we should start devising rational
policies of population control.

The population explosion must eventually be brought to an end --
let us make no mistake about that. It may be done by the killing of

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January 22, 1958

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millions of persons by war or by famine, or by a planned reduction in the birth rate. The latter is the only rational alternative of national policy. The United States should make an open statement of this fact and encourage appropriate birth-control policies in the underdeveloped countries. These are the inescapable implications of the population explosion -- our third main contemporary reality.

### D. The Precarious Position of our Industrial Allies

The fourth enduring reality of the world we live in is the precarious position of our industrial allies. This is no temporary difficulty suffered by one or two of them in isolation. It is a long-term problem common to nearly all of them, resulting from profound changes in the structure of the world economy.

We have already noted the great dependence of our industrial allies -- the countries of Western Europe and Japan -- an overseas supplies of foodstuffs and raw materials. To be self-supporting these countries must be able to finance their imports of these and other products from the proceeds of their exports. But they have been unable to do this -- to maintain balance of payments equilibrium simultaneously with tolerable living standards and rates of growth. Their inability to do so and their resulting dependence on grants and loans from the U. S. government has come to be known popularly as the "dollar shortage."

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January 22, 1958

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Although experts are not unanimous in their diagnosis of the "dollar shortage" most of them attribute it to some or all of the following causes: the damage done to European industry and to the normal pattern of international trade by the Second World War; the inflation and excessive demands for imports resulting from over-ambitious domestic welfare and investment programs; the doubling of commodity prices unaccompanied by a rise in the price of gold; and the refusal of the United States to adjust its policies to permit an adequate increase in American imports.

In the early post-war years, the "dollar shortage" amounted to many billions of dollars a year. In the early 1950's it seemed to disappear -- but it was only disguised by abnormal U. S. government financing. This abnormal financing (apart from direct military assistances) has included some three billion dollars a year in American military expenditure abroad -- base construction, NATO contributions, troop pay spent overseas, and procurement of military equipment in other countries. Our government has also continued to make available nearly two billion dollars in non-military grants and loans. This makes a total of nearly five billion dollars -- nearly one-quarter of our total international trade.

Most of the abnormal financing which has helped disguise the "dollar shortage" is of a temporary nature which will eventually taper off; some of it is already doing so. Base construction expenditures are being reduced, offshore procurement programs are drawing to a close, and a

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January 22, 1958

gradual withdrawal of troops stationed in foreign countries will cut the
dollar proceeds from troop spending. There has also been a tapering
off of direct U. S. government assistance to the industrial countries.
Thus the abnormal expenditures of recent years provided a breaking spell
rather than a durable solution to the dollar problem of the industrial
countries.

Recently we have become increasingly aware of this fact. In
the last few years our overall trade surplus -- a rough measure of the
global "dollar shortage" -- has grown alarmingly. A large part of this
surplus is in trade with our industrial allies. As our abnormal financing
has been reduced their gold and dollar reserves have fallen seriously.
As a result the free world has had to fight off a financial crisis by various
stopgap measures -- loans and standby credits (from the International
Monetary Fund and other agencies), unpopular tight money policies, and
the devaluation of the French franc. These ministrations have kept the
heart of the free world economy beating -- but they have not provided
the basis for durable health.

The long-term character of the difficulty facing our industrial
allies can be illustrated by two examples -- the United Kingdom and
Japan. The British problem is a central one. About one-quarter of
Britain's pre-war national wealth was lost in the last war. This took
the form of shipping losses, physical destruction at home, the running

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January 22, 1958

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down of industrial equipment, the liquidation of external investments,
the loss of gold and dollar reserves, and the frightful increase in external
debt. To make matters worse British exports at the end of the war were
only one-third of their prewar volume.

These wartime losses gravely impaired Britain's capacity to achieve
equilibrium in her external accounts. The British leaders estimated that
merely to keep up her prewar level of imports the United Kingdom would
have to increase its exports by 75%. Even this figure proved too conservative:
it made no allowance for adverse changes in Britain's terms of trade (the fact
that the prices of its raw material and food imports rose faster than the prices
of its industrial exports) or for the increased imports required to satisfy
domestic demands for higher living standards.

In spite of its weakened economic position Britain has been trying
to carry out its accustomed responsibilities as a world power. Amid growing
postwar tensions it has sought to maintain military forces around the globe
and to develop the capacity to wage a nuclear war. It has clung tenaciously
to its position at the center of one of the two great financial systems of
the non-Communist world -- the sterling area. Thus it continues to serve
as banker for a group of countries whose populations total 700 million
persons and which account for nearly one-half of free world trade. In
performing this function it is obliged to maintain a large measure of free
trade and payments with these countries and to offer them liberal credit

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January 22, 1958

facilities. It does this with reserves of only $2 billion against annual imports of $10 billion and external liabilities of $12 billion. In such a situation normal fluctuations in the foreign trade of Britain or other members of the sterling area can bite deeply into the common reserves, induce a speculative flight from sterling, and precipitate a full-scale financial crisis affecting a large share of world trade.

The position of Japan is scarcely less precarious. Unlike Britain, Japan does not carry on its shoulders the burden of upholding a great world currency. But it has some extraordinary difficulties of its own. Japan's ratio of population to domestic resources is even less favorable than Britain's. It supports about 600 persons per square mile (compared to 60 persons per square mile in the United States). Moreover, Japan has very few mineral resources. Only about 16 per cent of its land is cultivated, the remainder being in pasture, forests or rugged volcanic wastelands.

Prior to the Second World War Japan built a prosperous empire by supplementing its home island resources with coal, iron, raw cotton, fertilizers, soy beans, rice, sugar and other necessities from the Chinese mainland, Korea and Formosa. But now the resources and markets of the mainland are largely closed to Japan. No longer does it exercise political and economic control over Korea and Formosa. It has had to look elsewhere for its raw material supplies and for the export markets to pay for them.

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January 22, 1958

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Unfortunately, it has found few countries eager to expand their imports of Japanese goods. Instead of being able to pay its way in world trade it is living from hand to mouth on American military expenditures and periodic doses of American aid.

What does the precarious economic position of Britain, Japan, and other industrial countries mean for the United States? In the first place, it represents a serious threat to our own and to world prosperity. These countries are the best customers for the output of our factories and farms. When they cannot balance their external accounts, there is usually no alternative to American aid. Since they are both customers and dependents, we have a double interest in their economic health. In the case of Britain, there is a third interest -- that of preserving and strengthening the position of sterling as a key instrument of free world trade.

The economic weakness of these countries is no less a threat to our other objectives. They are the centers of our alliances in Europe and the Far East. They provide major air bases, trained armies, and other contributions to the common defense. Moreover, Europe is the source of our humanistic tradition and shares much of our passion for individual freedom. Japan is a crucial testing ground for these values in the Far East. As with prosperity, therefore, the security and freedom of these countries is intimately related to our own. Their weakness is our weakness, their strength, our strength.

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January 22, 1958

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To promote our national objectives we must help reduce the economic
difficulties of our industrial allies. We can do this by four main lines of
action. First, we should encourage them to correct the domestic causes
of their external deficits. Second, we must help insure their continued
access to overseas supplies of raw materials. Third, we should support
their regional efforts to reduce their dependence on external aid.
Fourth, we must make available by trade and investment a greater and
steadier flow of dollars both to them and to the rest of the world. These
are the main implications of American policy of the fourth enduring contemporary
reality.

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January 22, 1958

# CHAPTER IV. THE COMMUNIST CHALLENGE

Our task would be difficult enough if we had only to deal with the four enduring realities outlined above. But it is immensely complicated by additional problems which are largely or wholly due to the activities of our Communist adversaries.

## A. Comparative Rates of Growth

The first of these problems is raised by comparative rates of economic growth in the Communist and non-Communist worlds. It was posed for us dramatically in Khrushchev's remarks last Thanksgiving:

> "We declare war upon the United States ... in the field of peaceful production, We are relentless in this and it will prove the superiority of our system.

> "We want to win over the United States not in arms but in the production of commodities. We want to win in housing, construction, goods, more food, improvements, services rendered to the people.

> "You have a higher standard of living in the United States. After all, you started years earlier than we. But we will win. We will outstrip the United States. And it will be this that will convince the people that we are right."

Economic developments of recent years give us no reason for complacency about this Communist challenge. Even allowing for the unreliability of Soviet statistics, it is roughly accurate to say that the Soviet growth rate

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January 22, 1958

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is running at about double our own. This is a long-term estimate for the economy as a whole (Gross National Product) which averages fluctuating rates of growth in different years. In 1957 there was no increase in our national product over 1956 while Soviet production continued to grow at a rapid rate.

The contrast in growth rates is even more dramatic in the case of certain key heavy industries. Between 1928 and 1955, Soviet iron and steel production (in millions of metric tons) grew from 3.3 to 33.3; United States production grew from 38.8 to 70.5. Soviet coal production (in millions of metric tons) grew from 35.5 to 391.0; United States production dropped from 522.6 to 448.5. Soviet electric power production (in billions of kilowat hours) grew from 5.0 to 170.1; United States production grew from 108.1 to 624.9.

With respect to both the overall economy and certain basic industries, therefore, it would appear that the Soviet Union is growing at a faster rate than the United States. This fact has led many people to give considerable weight to Khrushchev's boast. Will the Soviet Union eventually overtake the United States? Will this prove the superiority of the Soviet system?

In answering the first question, we obviously have no formula to foretell the future. But there are reasons for suggesting that a positive answer is by no means a foregone conclusion from the present disparate rates of growth. To begin with, our smaller growth rate applies to a much

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January 22, 1958

- 37 -

larger production base. As a result, the amount by which our production grows each year is -- on the average -- somewhat larger than the amount of Soviet growth. Measured in absolute terms, the size of our lead over the Soviet Union is actually increasing. It will continue to do so as long as the Soviet's relative advantage in growth rate does not exceed our relative advantage in absolute size. The fact of our increasing absolute lead applies not only to overall production but also to the production of basic industries, with the notable exception of coal. In this field the slackening margin of the United States is due to a special factor -- the development of alternative fuels such as petroleum and natural gas.

Beyond this point, there are good reasons for believing that the present rate of Soviet growth cannot be indefinitely maintained. The Soviet Union began by importing the accumulated technology and know-how of the West. Thus its relative backwardness enabled it to move ahead at a relatively faster rate once it had embarked on a determined effort to catch up. Moreover, the Soviet Union began with great unemployed or underemployed resources of material and manpower. The availability of these resources facilitated rapid expansion in the early stages. As the Soviet Union approaches the West in the development of technology and the effective employment of its resources, its rate of growth is likely to decline.

With respect to the second question, we must not make the error of accepting the Communist thesis that the relative growth of overall production

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January 22, 1958

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or of certain basic industries is an adequate measure of the success of an
economic system. For us, growth is not an end in itself; it is a means to
the satisfaction of human needs. This must be true so long as our objective
is the fullest possible self-realization of the individual human personality.

When measured in these terms, the rates of growth of the two systems
are placed in a very different perspective. The tremendous growth rate of
the Soviet economy has been achieved by diverting a very high proportion
of the national product to capital accumulation and leaving a relatively
small proportion for current consumption. Consequently there is a tremendous
gap between the Soviet and American economies in the material goods they
offer the individual. For example, a Soviet worker has to work six times
as long as an American worker to buy a quart of milk, 13 times as long to buy
a pair of shoes, 18 times as long to buy a radio, 22 times as long to buy a
shirt, and 25 times as long to buy a pound of sugar.

These figures should be placed alongside the statistics of overall
growth in assessing the relative accomplishments of the two economic systems.
Moreover, we must keep in mind that our ultimate objective is not just growth
of total production or even of individual consumption -- but rather growth in
satisfying human potentials. This larger kind of growth requires expanding
opportunities for the individual outside the economic field -- something which
can never be fully accomplished by the Communist system.

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January 22, 1958

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Nevertheless, despite all these qualifications, the Soviet rate of
growth does pose serious problems for the United States. Three at least
deserve special attention:

First, the greater rate of Soviet growth has tremendous psychological
significance. Its effect is felt by our own people, by the Soviet people,
and, perhaps most important, by the vast numbers of people in the under-
developed countries of the world who are yet uncommitted in the cold war.
If the differences in growth rates between the Soviet and American economies
should widen much further, the Soviet Union would begin to overtake us --
to reduce the absolute margin of our economic advantage. This could not
help but influence the judgment of many people concerning the relative
efficiency of our two systems.

The psychological problem is particularly acute when the growth
problem is seen not simply as a contest between the United States and the
Soviet Union but as a contest between other countries in the Communist and
non-Communist worlds. Communist China, for example, is now concentrating
an estimated 22% of its national product on capital accumulation, most of it
for the development of heavy industry, transportation and power. At the same
time, India has so far been unable to push the annual rate of savings available
for similar development to more than seven or eight per cent. One result of
this disparity is that China's steel production is expected to grow from the
1952 level of 1.5 million tons to 17 million tons in 1962, while India's
production, which in 1952 started at a similar point, will by then have reached

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January 22, 1958

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only 30% of the Chinese total. Obviously such dramatic differences in growth rates will profoundly influence the economic and political institutions which other countries choose to speed their economic advance.

The second problem posed by comparative rates of growth relates to the capacity for foreign economic activity. As a result of its high rate of growth, the Soviet Union will have an increasing margin of resources which it can devote to economic development abroad. It has been estimated that the Soviet Union can double its aid shipments to other countries during the next eight years by drawing on only 5% of the projected increase in its national production. Moreover, the Soviet Union is turning out scientists, technicians and other trained personnel at a rate which will enable it to send increasing numbers of these people abroad in years to come.

The third problem posed by comparative rates of growth is in their military significance. Economic growth generally means the growth of military power. This is particularly true of selective and unbalanced Communist growth which is concentrated on heavy industry. Since we devote a much greater share of our resources to peacetime consumption the Soviet Union is able to build a much greater military effort on a much smaller economic base.

If we wish to have both high living standards and military superiority over the Soviet Union we have no choice but to preserve and strengthen our present lead in the economic race.

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January 22, 1958

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and to put as little as possible in. By means of so-called joint companies (dominated by Soviet managers) and by reparations and long-term trade agreements (by which the Soviets received large and unrequited annual deliveries of goods), the Soviet Union detached the satellites from the world market and exploited them for its own domestic economic purposes.

The growing unrest in Eastern Europe, culminating in the Hungarian uprising of October 1956, forced the Soviet Union to alter its policies. Under new arrangements, it is making substantial contributions to the satellite economies. In the twelve months following the Hungarian revolt the Soviet Union has granted to other members of the Communist bloc at least $1 billion in new credits. It has also granted other economic concessions such as the revision of unfair prices and exchange rates, and debt cancellations in the amount of $1.5 billion. These changes have been designed not only to increase the stability of Communist regimes in the satellite countries but also to prevent any substantial increase in their economic relations with the non-Communist world.

The change in Soviet policy has been no less marked with respect to the industrial countries of the West. Since 1953, the level of Soviet trade with these nations has been rising rapidly. The Soviet Union has increased its efforts to bring to Western markets its timber, petroleum, coal, wood pulp, cotton, manganese, platinum, pig iron and steel mill products. It has imported an increasing amount of goods helpful to its development --

[L]

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January 22, 1958

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metals (notably copper), industrial machinery, electrical equipment and
ships. It has ordered whole new industrial plants, including the latest
technology in the field of fuel, to assist its neglected civilian industries.
In particular, it has sought to provide markets within its own and the satellite
economies for the industrial production of Germany and Japan.

Much of the Soviet trade with the West has been designed -- often successfully -- for political effect. Iceland provides a case in point. In 1951, that country exported virtually nothing to the Soviet Union or its satellites. It made its territory available for a NATO airbase and a large number of American troops. At about this time the American fishing industry (which employs several thousand workers) intensified its campaign to restrict our imports of fish. Since 97% of its export trade consists of this product, Iceland was placed in a fearful dilemma -- a dilemma the Soviet Union was quick to exploit. By 1955, Iceland was sending 28% of its exports to the Soviet Union and taking 22% of its imports from the Soviet Union in return. There was a striking increase in Soviet economic and political influence on the island. In the middle of 1956, Iceland's Parliament called for the removal of both the NATO airbase and American troops. Although this decision was later reversed, the Soviet Union has weakened Iceland's attachment to the NATO alliance.

The Soviet Union is employing its trade offensive to detach other
countries of the West. But its most ambitious efforts of all are now concentrated

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January 22, 1958

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in the underdeveloped areas -- particularly in the vast arc of countries running from Southeast Asia through the Middle East to Africa. Here again, the change has been dramatic. Prior to 1953, Soviet economic activity in these areas was exceedingly small. The underdeveloped countries looked almost exclusively to the United States and our industrial allies for export markets and for the capital essential to economic development.

Stalin's techniques for spreading Communist influence in these countries was military pressure and political subversion rather than the subtler art of economic penetration. The first sign of change in Soviet policy came shortly after Stalin's death. Khrushchev and Bulganin toured several Asian and Middle East nations, making large promises of Soviet aid. Since then, the Soviet bloc has made agreements with ten underdeveloped countries to provide them with about $1.5 billion in economic aid. Although only 10 to 15 per cent of this amount has actually been expended so far, the funds are being made available as projects are approved, and about half of the total is already obligated or covered by specific contracts.

This increase in Soviet aid is matched by an increase in its trade with these countries. The Soviet Union has been taking the agricultural surpluses of underdeveloped countries -- Egypt's cotton and Burma's rice -- while sending arms or capital goods in return. Between 1953 and 1956 the Soviet Union nearly doubled its imports from the underdeveloped countries and increased its exports to them by more than five times. Other members of

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January 22, 1958

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the Communist bloc -- Poland and Czechoslovakia, for example -- increased their trade with the underdeveloped countries by lesser amounts.

The increase in Communist bloc aid and trade with underdeveloped countries has been matched by an increase in technical assistance and cultural exchange. During the first six months of 1957 more than 2000 Soviet bloc technicians worked for one month or longer in 19 underdeveloped countries of the non-Communist world. During the year as a whole about the same number of technicians, professional people, and students went for training in the Soviet Union. Moscow, suddenly, became a world center, is swarming with Arabs, Africans, and Asians eagerly absorbing Communist know-how.

There are three facts that should be specially noted about the Communist bloc economic offensive. First, it is highly selective -- concentrated in ten underdeveloped countries not yet committed firmly to either side in the cold war -- Afghanistan, Cambodia, Ceylon, Egypt, India, Indonesia, Nepal, Syria, Yemen, and Yugoslavia. Second, it emphasizes big industrial projects which will have an important psychological impact in the recipient countries -- a steel mill in India, a petroleum refinery in Syria, a flour mill in Afghanistan, a sugar refinery in Indonesia. Third, in contrast with most American assistance, Communist aid is provided on terms specially adapted to the needs and desires of the underdeveloped countries -- long-term low interest loans (commonly at 2-1/2%), with provisions for at least partial repayment

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January 22, 1958

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in commodities or local currencies, with no formal political or economic commitments, and with a minimum of administrative red tape.

What is the importance of the Communist economic offensive for the United States? Khrushchev provided a clue to answering this question when he told a group of United States Senators: "We value trade least for economic reasons, and most for political reasons, as a means for promoting better relations between countries." The Soviet Union is using trade and aid for political purposes -- to influence other countries to adopt or maintain policies consistent with Soviet objectives. Although Communist bloc loans and grants may not be used to aid local Communist elements directly, they do so indirectly by raising Communist respectability and prestige. And while Communist training and Communist technicians may be formally restricted to "scientific" or "economic" subjects, they frequently have an influence on the basic institutions of the developing country. In short, their new economic offensive is an instrument by which the Communists hope to effect a basic change in political orientation -- particularly in the underdeveloped countries which contain the vast majority of the world's people.

Our foreign economic policy must be adequate to the challenge presented by the Communist economic offensive. If we would promote the independence of the Soviet satellites, strengthen collective security with our industrial allies, and keep the underdeveloped countries out of the Communist fold, we must have trade policies which offer a superior alternative to trade with the

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January 22, 1958

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Communist bloc and foreign investment policies which surpass the Communist effort both in quantity and quality -- particularly in key uncommitted countries. In short, our policies must enable us to say: "Join the free world and thrive!" If they do not do this, we will wake up one day to find that we have been cut off from the resources and the people upon which security, prosperity and freedom depend.

### C. The Burden of Armaments

The United States presently is confronted with a grave threat to its security. The nature of this threat and the steps essential to meet it have been described in the report of Subpanel II, "International Security -- The Military Aspect." This report recommended measures to safeguard our security requiring successive additions to defense spending of about $3 billion each year for the next several years.

The federal budget for 1958-59 already provides some $47.1 billion for the nation's protection -- or 64% of all contemplated expenditures. Even this figure does not include all categories of spending that have their origins in war -- past, present and future. These other expenditures, such as veterans payments and interest on that part of the government debt accumulated in fighting two world wars and the present cold war, amount to an additional $14.5 billion. This brings the combined total of spending related to war to $61.6 billion, or 83% of the entire budget. Our peace budget, by contrast, is a mere $12.3 billion.

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January 22, 1958

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This is a tragic state of affairs. Our high level of defense expenditure constitutes a heavy economic burden. It diverts industrial facilities and raw materials from productive uses. It bloats our national budget to inflationary proportions. It takes trained manpower away from peaceful occupations. It imposes a cloud of fear inhibiting fruitful long-term programs of investment and training. These negative effects are felt even more keenly by our principal allies. Having a much smaller industrial base and much lower per capita income, they have but a slender margin of resources which can be diverted to military use.

Yet there is no rational alternative but for us and our allies to meet the draft on our economies necessary for our collective security. Our task is to insure that the draft is met without abandoning pursuit of our other objectives of prosperity and freedom. However much we may be preoccupied with the problem of survival, we are still interested in other than military values. We must reject the argument that military expenditures and productive peaceful expenditures are incompatible alternatives -- that we cannot have guns and butter, or missiles and schools. Fortunately, our economy is large enough and strong enough to provide a sufficient measure of both.

We emphasized earlier that there are important non-military ingredients of military power. The most complete armory of modern weapons is useless in the hands of a nation which lacks the economic or moral strength to make use

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January 22, 1958

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of them. In assessing the prospects for sharing the burden of armament
among the economies of the non-Communist world, we must constantly remind
ourselves of this fact.

In the preceding section we emphasized the importance of maintaining
rapid growth in our economy and in the economies of our allies. As our
foreign economic policies promote economic growth at home and abroad,
they will also help us to shoulder the arms burden without unduly sacrificing
our other values.