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INTERNATIONAL LABOUR O F F I C E

THE COMMON INTEREST
IN

INTERNATIONAL
ECONOMIC ORGANISATION
by
J. B. CONDUSSE and A. STEVENSON

MONTREAL, 1944

STUDIES AND REPORTS
Series B (Economic Conditions), No. 39

PUBLISHED BY THE INTERNATIONAL LABOUR OFFICE,
3480 University Street, Montreal, Canada
Published in the United Kingdom for the INTERNATIONAL LABOUR OFFICE

by P. S. King & Staples, Ltd., London

Distributed in the United States by the INTERNATIONAL LABOUR OFFICE,

Washington Branch, 734 Jackson Place, Washington, D.C.

PREFACE
Only by exchanging goods and services between, as well as
within, nations can the peoples of the world take full advantage
of the varied endowments of different countries in climate and
natural resources, in skill and capital. Only with the aid of specialisation and exchange can production and living standards be
raised to the levels which modern advances in science and technique
have made possible. Only thus, moreover, can the different countries and regions of the world build up the mutually advantageous
economic relations essential to the speedy re-establishment of
economic order and prosperity after the war.
In a resolution which outlined the economic policies required
for the attainment of social objectives 1 , the Philadelphia Session of the International Labour Conference recognised explicitly "the great contribution which the international exchange
of goods and services can make to higher living standards and to
high levels of employment". The Conference accordingly urged
the United Nations to take vigorous action to promote the expansion of international trade. By the terms in which it did so it showed
at the same time a keen appreciation of the complexity and difficulty
of the problem.
As the experience of the inter-war years clearly disclosed, the
fact that an expansion of world trade is desirable does not make
it easy to achieve. Successive international conferences recommended the reduction of trade barriers, but in fact these barriers
grew steadily more numerous and more effective. As the Philadelphia Conference realised, the problem is not one which can be
solved by unco-ordinated national action or by international action
directed solely to tariffs and other direct obstructions to trade.
More liberal commercial policies are a prerequisite to any substantial expansion in trade; but they are unlikely to suffice, and
may themselves make little progress, unless parallel action is
taken in the related fields of exchange stabilisation and international
lending. In the case of the exchanges, for example, the experience
of the inter-war period showed how currency devaluation, under1
The parts of this resolution which relate to international trade are reproduced in an appendix to the present study: see pp. 128-129 below.

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taken in the hope of expanding exports, could lead to reprisals
which restricted the volume of trade; and it showed conversely
how currency appreciation, such as occurred when sterling was
restored in 1925 to its pre-1914 gold parity, could raise the cost
of goods (in this case British exports) to buyers in other countries.
and lead to widespread and persistent unemployment in industries
and areas dependent on the export trade.
The complexity of the problem and the obstacles hitherto encountered in all efforts to solve it have raised doubts as to the
practicability of promoting any great expansion of international
trade in the post-war world. Such doubts are strengthened by the
emphasis which post-war plans for social security and full employment are apt to place on national as distinct from internationaleconomic policy, and by the fact that the consequences of failure
to secure these objectives are more obvious, and therefore politically more formidable, than the consequences of failure to achieve
the most favourable international division of labour. At the same
time, because of the spread throughout the world of modern methods
of mass production and the development of substitutes for many
of the natural raw materials which hitherto have bulked large in
world trade, those who identify the advantages of international
trade in general with those of a particular pattern of international
economic relationships, are inclined to question the reality, in
modern conditions, of the benefits which such trade has traditionally
been assumed to yield.
Because of these doubts, and because of the need for wider
understanding of the relation between international trade, employment and living standards, as a basis for a constructive postwar international economic policy, the International Labour
Office has felt that it could render a service by publishing a simple
statement of the benefits to be derived from international trade
in the conditions of the modern world and of the ways in which
these benefits might be secured without endangering the economic
development and full employment on which social security and
higher living standards must be based. For such a statement the
Office has enlisted the services of J. B. Condliffe, Professor of
Economics in the University of California and Associate Director
of the Division of Economics and History of the Carnegie Endowment for International Peace, whose earlier writings in this field
have gained an international reputation and whose first-hand
knowledge of the Pacific, the Far East, Europe and North America
is such as to ensure an awareness of the special conditions and
problems of different regions of the world. In preparing the report
Professor Condliffe has had the assistance of Alexander Stevenson,

PREFACE

ill

Research Associate in the Division of Economics and History of
the Carnegie Endowment for International Peace, and has worked
in consultation with E. J. Riches, Acting Chief of the Economic
and Statistical Section of the International Labour Office.
The report consists of five chapters. The first two define and
clarify five main objectives of post-war economic and social policy:
higher living standards, full employment, social security, economic
development and international collaboration. The third chapter
analyses the changing conditions of production and trade, with
special reference to monopolistic competition and tendencies to
instability, and examines the case for freer trade. Chapter IV
discusses the special problems of transition from war to peace
economy. The final chapter argues that positive national policies
designed to maintain employment and improve the lot of the
ordinary citizen are compatible with an increased volume of international trade—provided that appropriate international machinery
is created through which such national policies can be cleared and
co-ordinated.
The pattern of future international economic organisation thus
outlined is, of course, tentative in character. Like the analysis on
which it is based, it expresses the individual views of the authors.
The study as a whole is published in the hope that it will contribute
to a wider understanding of the part which improvements in international economic organisation may play in promoting the basic
objectives of economic and social policy.
The International Labour Office.

CONTENTS
Page
PREFACE

The Four Freedoms

II.

Objectives of Post-War Planning

A.
B.
C.
D.
III.

Full Employment
Social Security
Economic Development
International Collaboration

11
18
23
29

The Changing Conditions of Production and Trade. . .

A. Monopolistic Competition and Instability.
B. The International Aspects of Instability.
. C. The Case for Freer Trade

36
49
64

IV. The Transition from War to Peace Economy
A. Total War and the Domestic Economy. .
B. International Co-operation in the Transition Period
V.

International Co-ordination of National Policies
A. Problems of Domestic Policy
B. Need for International Co-operation
(1) Food, Agriculture and Raw Materials.
(2) International Monetary Arrangements
(3) Commercial Policy
(4) International Investment

78
79
86
93
94
100
100
106
112
117

CONCLUSION

126

APPENDIX

128

INDEX

130

I. THE FOUR FREEDOMS
This is a people's war. The nearer one comes to the fighting
fronts, the truer this statement becomes. The "underground"
in Europe is a popular front. It is not confined to one economic
class or dependent upon particular economic ideologies; but it
could not function except with the sympathy of the great mass of
the people. There is great significance also in the fact that the army
which has done most so far to smash the strength of the Axis in
Europe is a people's army which can count not only on admirable
generalship, trained forces and mechanisms, but upon stubborn
partisans behind the lines, and, in great crises, upon the embattled
populations of besieged cities. In China, the long struggle, now in
its thirteenth year, could not have been maintained if the common
people had not been resolutely united in opposition to the invader.
The British people also, in their fortitude under bombings and in
their great effort of economic discipline and production, have
gained new cohesion and strength. Whenever the United Nations
have been able to draw upon the united and sustained resistance
of the masses of the population they have been invincible. They
have lost where the masses have been apathetic or hostile.
There is another sense also in which this war, perhaps more
than any other in history, has depended upon popular support for
its effective prosecution. Great as are now the armies deployed
on battlefronts that circle the globe, they represent only the spearhead of the great phalanx of workers behind the lines. Modern
war uses to the full the mechanisms of modern industry and transport. The fighting men use weapons that call for a supreme effort
of scientific invention, planned organisation and mass production.
Ships fight with unseen enemies below the horizon or beneath the
surface of the sea using detection apparatus developed in scientific
laboratories. War production calls for new materials and new
methods of organisation. But in the long run the unceasing flow
of food, materials and weapons depends primarily upon sustained
labour and curtailment of civilian supplies. A greater proportion
of the total population than in any previous war is engaged directly
or indirectly in the war effort—by actual labour, by taxation, by
lending, and by being rationed. The proportion of national budgets
devoted to civilian purposes becomes almost insignificant compared

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with war expenditures. The volume of production and the proportion of manpower devoted to the civilian sector of national
economies constantly shrinks.
It is inevitable, therefore, that the issues arising from the conduct of the war, and in increasing measure the principles upon
which a settlement may be based after the war, must be of vital
concern to the people as a whole. This is a conflict not of nations,
but of beliefs. It is perhaps primarily a struggle for national survival, but in a sense much wider than the mere preservation or
extension of territorial sovereignties. It is not a struggle to preserve
the particular political, economic and social institutions by which
the United Nations have sought to safeguard their independence
and liberties; but rather a struggle to preserve the opportunity
of determining and developing such institutions by the democratic
process. When this principle has been vindicated, and while it
is being vindicated, many complex issues will arise concerning the
institutional mechanisms to be established for the preservation of
peace and the achievement of more equitable and efficient economic
systems.
Already a momentous change can be noted in the drift of public
discussion of these issues. Vague and inconclusive as such discussion must necessarily be at this stage of the war, one fact is very
clear. It is concerned with much broader questions than was the
similar but less widespread discussion that arose during the last
war. This is perhaps truest of the economic and social questions
now being debated.
Students of the last war period have remarked that "during the
War, labour was not so narrowly preoccupied with the protection
of its own interests as to bring to the peace negotiations an overwhelming demand for its recognition. On the contrary it spoke not
merely for itself but for humanity at large. Its programme, taken
as a whole, dealt with social justice the world over rather than with
the narrow issues of domestic economic welfare." 1
This is again true. Organised labour, and the associations of
private citizens concerned with the conduct of the war and the
principles of post-war organisation, have concentrated their attention upon the broad issues of a lasting and guaranteed peace. The
Atlantic Charter, to which the United Nations subscribed by
their initial Declaration, expresses this preoccupation in its emphasis upon the four freedoms. There is no doubt of the concern which
ordinary people feel first for the winning of the war and then for
such measures of settlement and collective security as will enable
1
James T. SHOiwEU«(ed.): The Origins oj the International Labor Organization
(Columbia University Press, 1934), Vol. I, p. 56.

THE FOUR FREEDOMS

the nations, individually and collectively, to embark upon policies
aiming at prosperity as well as peace.
When, in the closing stages of the last war, the attention of
citizen groups was turned to the economic aspects of post-war reconstruction, it is obvious that, in their different ways, practically
all of these groups conceived economic reconstruction in terms of
restoring the pre-war structure. While this structure was by no
means wholly of a laissez faire type, since the beginnings of social
security and some measure of State enterprise were functioning in
most countries, there was little effort to change the type of organisation. The universal prescription was "the mixture as before". Sir
William Beveridge, to give one example, after recounting the story
of the British food control, came to the conclusion that "the Ministry of Food, suppressing private enterprise completely, accomplished
what private enterprise in the War could never have accomplished.
The British people were fed not only better and more cheaply than
without the Ministry they could possibly have been fed in the War,
but probably on the whole better than before the War, because
wages were relatively high, work was regular, and distribution
fair." Nevertheless his final conclusion, after canvassing the arguments for and against continuing the control in peacetime was "a
personal doubt of any gain either to consumer or producer from
public regulation of food supply in peace, that would repay the
cost of the vast organisation involved, or justify diversion to it of
any of the limited store of political energy and ability needed for
more urgent problems, or outweigh the risk of bribery by subsidies". 1
This was the conclusion reached by an economist who had at
least considered both sides of the question; but the overwhelming
majority opinion at the close of the last war was in favour of speedy
abolition of wartime controls. It is significant of the change in this
war, however, that the first United Nations conference has been
called to consider questions of agricultural organisation and improved nutrition standards. So much attention has been centred
in recent years upon the desirability of improving physical health
and vigour, that there is now widespread acceptance of the need
for positive action towards that end.
Another illustration of the acceptance of the pre-war framework
was to be seen in the preoccupation of organised labour after the
last war with the restoration of hard-won standards and practices.
The national and international conferences which asserted the right
of organised labour to a place at the peace table, and which finally
1
Sir William H. BEVERIDGE: British Food Control (New Haven, 1928),
Chapter XVI.

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led to the negotiations that created the International Labour Organisation, were generous and forthright in their support of collective
security and a just peace. But when they came to labour's interest
in economic reconstruction their demand was primarily to safeguard
the right to organise and to maintain or restore standards and
workshop practices. The story is very clear in the statements made
by individual participants in the negotiations as well as in the
documents recording the resolutions of organised groups. 1
Perhaps the clearest expression of this view is to be found in
the preamble to the resolutions of the international trade union
conference at Leeds, July 1916, which reads:
The Conference declares that the peace treaty which will terminate the present war and will give to the nations political and economic independence should
also ensure to the working class of all countries a minimum of guarantees of a
moral as well as of a material kind concerning the right of coalition, emigration,
social insurance, hours of labour, hygiene, and protection of labour, in order to
secure them against the attacks of international capitalistic competition.2

It is true that then, as now, there was much concern about
employment, though this was often qualified, as in the resolution
of the Leeds Conference referred to above, as "the right to work
wherever he can find employment". The "question of preventing
or providing against unemployment" figured as the second item on
the agenda for the First Session of the International Labour Conference, held a t Washington in October 19193; but it was neither
as specific nor as documented as the items dealing with the
eight-hour day, thé employment of women and children and the
extension and application of international conventions on the
model of those already promoted by the International Association for Labour Legislation. The work of the I.L.O., therefore,
began along the line of promoting Conventions to establish minimum
labour standards.
During the inter-war years, however, two great sets of forces, one
negative and the other positive, carried public opinion far on the
road to a realisation that labour standards are dependent upon
effective, economic organisation. This is not to say that the setting of standards has ceased to be important; but merely to accept the elementary economic fact that the attainment and preservation of decent standards is dependent upon efficient production.
1

James T. SHOTWELL, op. cit.

Md., Vol. II, p. 23.
3
Ibid., p. 453.

THE FOUR FREEDOMS

This fact was forcibly brought home by the great depressions
which followed in the wake of the first world war. Prolonged mass
unemployment was not of course a new phenomenon. It was responsible for great misery after the Napoleonic Wars, after the United
States Civil War, and after the Franco-Prussian War of 1870.
Indeed the severity of depressions and the suffering from unemployment were greatest in the post-war periods of falling prices from
1819 to 1849 and from 1873 to 1895 and relatively light in the
upswing of the price level from 1850 to 1873 and from 1896 to
1914.
The period between the first and second world wars, however,
was too short for effective adjustment. Many other factors—
such as the increased proportion of urban employment, the more
effective administration of economic nationalism, a greater rigidity
of prices, and the more stubborn resistance of organised labour to
the lowering of wage levels and standards which had formerly been
used to break out of depression—accentuated the problem of unemployment. The consciousness of these facts is now widespread
so that the provision of "full employment" now ranks high among
the objectives of post-war planning. As will be made clear later,
this objective needs to be clearly distinguished from the guarantee
of employment to returned soldiers which was so marked a feature
of the last war years and such an embarrassing commitment in the
demobilisation period.
One sharp lesson of the inter-war years has been that organisation to defend or restore previous standards is not enough. In
the last war, as now, trade unions gained great strength. Their
bargaining power was enhanced by war conditions. Their funds
were built up not only by increased membership, but by the regularity of contributions and the lessening of strike and unemployment drains during the war. At the close of the war they had never
been stronger in most of the industrial countries. One case of a
particularly strong group of unions may .indicate how economic
forces beyond sectional control worked havoc. The Welsh coal
miners were strongly organised and fought for retention of their
standards in terms of the war pledges given by successive Government spokesmen. But a Treasury decision stabilised the pound
sterling at a level which entailed a deflation of British prices and
export costs. Welsh coal was a major export. Labour cost was
a large proportion of the total production cost. To compete on the
export market these costs had to be cut by at least ten per cent.
The miners resisted the wage cut. The result was not only bitter
industrial conflict and unemployment, but a considerable loss of
export markets. This had been foretold by Mr. Keynes in a famous

INTERNATIONAL ECONOMIC ORGANISATION

tract. 1 Even the strongest unions fought a losing battle for their
standards in face of a technical monetary decision over which they
had no control, and indeed of which they had no knowledge until
too late.
The sequel, however, is not less significant. In 1929, a Royal
Commission, appointed to investigate the health conditions of the
miners of South Wales, reported that, although there appeared to
be no significant rise in infant mortality or tuberculosis rates,
there were disturbing signs of an increase in the prevalence of
rickets.
This disease, according to the evidence we could obtain (the Report went on),
has until recent years not been common in South Wales and Monmouth. We
thought it of importance, for two reasons, to explore with some care the question
whether there has been a recent increase. In the first place, apart from the deformity which may result from the disease, it indicates directly a low health standard
among children affected and therefore of the rising generation. In the second
place, an extended prevalence of the disease may be regarded as a warning of a
lowering of the standards of nutrition generally. From the investigations we have
made, it is clear to us t h a t in some districts, but not uniformly, there is an increase
in the occurrence of rickets. The increase nowhere affects a large proportion of
the child population, b u t the children it affects are children in the early years
of life. It is not so much the extent of the prevalence we regard as important
as the fact of its occurrence as a fresh development which we think carries the
definite significance of a deficiency in the quality, if not the quantity, of the diet
of the child population. 2

On the positive side also much water has flowed under
the bridge. A thoroughly planned Socialist State has been in
existence since 1917 and has demonstrated the effectiveness of
its organisation, at least in the military sphere. What is
perhaps more immediately applicable to the problems confronting
the United Nations is the experience of many others among
them which have experimented with limited government intervention, especially in the field of employment. Denmark and
Sweden, Australia and New Zealand, Belgium and France, as well
as the United States, have all had such experience. In some of them
Socialist Governments have held office for long periods. In all of
1
"The orthodox answer is to blame it on the workingman for working too
little and getting too much. . . On the contrary, the explanation can be found
for certain in another direction. For we know as a fact t h a t the value of sterling
money abroad has been raised by 10 per cent., whilst its purchasing power over
British labour is unchanged. This alteration in the external value of sterling
money has been the deliberate act of the British Cabinet and the Chancellor of
the Exchequer, and the present troubles of our export industries are the inevitable
and predictable consequences of i t . " (J. M. K E Y N E S : The Economic Consequences
of Sterling Parity, New York, 1925, pp. 5 et seq.) ; and again, " T h e plight of the coal
miners is the first, b u t not—unless we are very lucky—the last of the economic
consequences of sterling p a r i t y " (ibid., p. 23).
2
Report on Investigation in the Coalfield of South Wales and Monmouth. Cmd.
3272, 1929.

THE FOUR FREEDOMS

them the central control of monetary policy has been nationalised
and in all of them social security legislation has won its way.
It is not surprising to find, therefore, that there is a distinct
shift in the objectives of post-war planning, and still more in the
methods proposed to achieve those objectives. There is, for example,
a notable emphasis in the pronouncements of organised labour upon
the necessity of "planning" and much more attack upon "the unplanned competitive world of the inter-war years". There is a
considerable body of business opinion which would go a long way
in agreeing with the necessity for the maintenance of the wartime
economic controls at least over a transitional period. While there
will clearly be a sharp divergence of opinion as to the wisdom or
possibility of building these controls into "planned production for
community use", there may well be substantial agreement between
management, labour and government in regard to the necessity
of such controls in the immediate post-war period.
There is moreover widespread agreement on the objectives of
economic and social policy. The "improved living standards,
economic adjustment and social security" referred to in the Atlantic
Charter are common aims, and there is a general recognition that
"the fullest collaboration between all nations in the economic
field" will be essential to this achievement. There is general agreement also as to the desirability of avoiding mass unemployment.
It is clearly desirable that the problems raised by such statements as the Atlantic Charter and the more detailed programmes
put forward in different countries should be carefully examined.
Agreement on broad objectives does not necessarily entail agreement on methods, yet decisions are already being taken and policies
are now being shaped that will go far to determine the framework of
institutional organisation within which economic and social policy
must proceed for the future. A great deal is being expected, if not
demanded, by the peoples and much has in fact been promised, at
least by implication, by political leaders of the United Nations. The
frustration and disillusion that followed the much more modest
promises of the last war are a very recent memory. It would be
living in a fool's paradise to encourage hopes of a brave new world
without serious effort to analyse the implications of those hopes
and to examine the mechanisms necessary for their achievement.
This is all the more necessary since the essence of the whole
problem lies not in the statement of formulas or even in the creation
of institutional arrangements, but in the actual operation and
management of such institutions as may be created. Planning
is an attractive word, but much depends upon who does the planning and for what purposes. One of the greatest risks always to

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be run in a democratic society is the risk that the machinery of
government will fall into the hands of organised and compact vocal
groups representing minority interests. The more complicated the
machinery and the more ambitious the tasks set for it, the greater
becomes the risk. The ordinary citizen finds difficulty in comprehending the long-run and often hidden implications of technical
policy decisions, and even in following the workings of the machinery. Democratic planning calls for a distribution of civic responsibilities and a continuous application of social controls that cannot
be improvised. Many of the programmes now being advocated
call for a considerable extension of public activity and public
control over individual economic activity. Who will direct that
activity and exercise that control? If such programmes are adopted,
how can they be safeguarded against exploitation by privileged and
powerful minorities against the public interest?

II. OBJECTIVES OF POST-WAR PLANNING
In the following sections it is assumed that general acceptance
has been gained for five major objectives of post-war preparation
and planning. These are higher standards of living, full employment,
social security, economic development and international economic
collaboration. Acceptance of these objectives does not imply
acceptance of any particular methods advocated for their achievement. Before the inevitable debate on the desirability of particular methods can be fruitful, however, it is necessary to clarify
and define the objectives on which there is broad general
agreement.
We live in a world which is rapidly being knit into close neighbourhood by the increasing speed and frequency of communication.
News is diffused almost instantaneously and far more adequately
than ever before. Individuals can travel rapidly to the most distant
parts of the globe, and more and more do so. Goods are not transported so readily; but new methods of transportation are being
developed, and in the light of historical experience it seems highly
improbable that economic isolation can be maintained once the
advantages to be gained by trading become generally known. The
commerce of ideas was never more active than it is now, and there
are bound to be radical changes in economic organisation, involving
closer economic collaboration between the world's peoples. It is
against this background that plans for higher living standards, full
employment and social security must be considered. Necessarily
such plans are national in character. There is no world government
through which they can be achieved.
National governments
must undertake this responsibility. But in doing so they must take
account of the international repercussions of their actions and
policies.
International economic relations in the past have rested upon
the assumption that competitive forces focussed by, and acting
through, stable exchange rates would bring about an equilibrium
of market prices. As long as the international gold standard worked
effectively this assumption was vindicated. As soon as economic
forces in any country moved in such a way as to disturb the price
equilibrium with other countries, gold moved into or out of the
banking reserves. This gold movement was interpreted as a signal

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calling for corrective measures to restore equilibrium. As long as
the disturbances were not great and there was general acceptance
of the necessity for correcting them, exchanges were kept stable
and the world market was kept in shifting but effective equilibrium
by this means.
This system promoted and in turn was made workable by a
great development of international investment and trade. It was
responsible for the remarkable growth of economic interdependence
in the latter part of the nineteenth century. Its effective functioning,
however, demanded flexibility of national price structures and
continuous adaptation of costs, including wages, to the fluctuating
conditions of the world market.
After the war of 1914-18 the economic disequilibria between
national communities proved to be too great, and the resistances
to adaptation too strong, for the restored gold standard to be effective. The disequilibria were caused largely by the distortion of international specialisation during the war. They will be much greater
at the close of the present war.
The resistances to adaptation grew partly out of changes in
the technical methods of industrial production. Instead of competitive small units too numerous and too equal in bargaining power
for any group to dominate the market, manufacturing establishments tended to grow in size. There was a strong tendency towards
monopoly, monopolistic competition and cartel agreements. The
very nature of the new machine methods tended to make overhead
costs a more important factor in total costs and therefore to make
prices less flexible. The smaller number of large units or the preponderance of their power in the market led to imperfect competition, price leadership or other approximations to a monopolised
market. Industrial production tended to become more efficient but
less flexible.
In part, however, the lessened flexibility of prices, and therefore
the greater resistance to adaptation as international circumstances
demanded, grew out of a developing concern with the security of
the wage earner. Trade unions became more powerful and were
able to insist upon shop practices and stable wage rates. Unemployment insurance and other measures of social security, beneficial
as they were in other respects, tended to stiffen these rigidities.
In default of international collaboration to sustain employment,
the national governments were presented in the great depression
with a choice of preserving external equilibrium at the cost of
inflicting harsh adjustments upon their domestic producers, or of
resorting to domestic policies designed to sustain employment even
at the cost of partial isolation from the world market. Invariably

OBJECTIVES OF POST-WAR PLANNING

they chose the latter. This was an inevitable choice since no democratic government could have continued in power which refused
to use all its resources to combat the prevalent distress arising
from widespread unemployment. Since no effective machinery
existed for parallel action, co-ordinated by international agreement,
the governments were forced to act independently. The result
was a complete collapse of international equilibrium marked by
violent price deflation, disordered exchanges, a severe decline of
international trade, and wholesale default on foreign investments.
In such circumstances national action is inevitably restrictive
rather than expansive, and the experience of restrictive economic
nationalism in the decade preceding the present war has proved
that independent national action is incapable of solving the economic problems with which the modern world is confronted. It leads
to regimentation of employment, production and trade. Politically
it is highly dangerous since regimentation offers the best possible
opportunity for militarist seizures of power.
Since competitive equilibrium cannot be restored without
changing the structure of modern industry and at the same time
abandoning much recent progress towards social betterment, and
since independent national action has proved to be restrictive and
ineffective, there remains only the alternative of attempting parallel national action co-ordinated by international consultation.
It is not the purpose of the present study to suggest the institutions through which this consultation should take place, but it is
perhaps not out of place to remark that the International Labour
Organisation, which is one of the few international agencies already
in effective operation, will have a major role to play. This study
is an attempt to outline the broad principles on which parallel
national action, co-ordinated by international consultation, may
be organised. It sets forth an attempt to combine national policies
aiming at broad objectives of social policy with international
stability and expansion of international trade and investment.
Such a combination cannot be effected unless the objectives to be
aimed at are clearly defined and agreed upon.
A. F U L L EMPLOYMENT

The phrase "full employment" and the economic theories connected with it in the popular mind have gained wide acceptance
in recent years. As used by economists the phrase refers not to
labour employment alone, but to the employment of all the factors
of production. Indeed much of the theory depends upon the argument that savings accumulate in the form of unused balances of

INTERNATIONAL ECONOMIC ORGANISATION

credit beyond the outlets for them in productive investment. 1
Analysis of the working of the individual firm has shown that in
the monopolistic conditions of modern industrial societies the
combination of the factors of production which is most profitable
to those who control investment decisions may well deviate from the
technical and social optimum. In order to bring about a higher
level of employment and a better combination of the factors of production, it is argued that government intervention may be necessary, to open up new avenues of investment, to redistribute income
or to break through price rigidities. Free competition, it is believed,
is no longer able to bring this about.
The word employment, however, has come in our industrial age
t o be associated so closely with the employment of labour that the
phrase "full employment" inevitably tends to concentrate attention on jobs as such rather than on the need for ensuring the
"fullest and most productive use of all the various types of labour
and other resources. The subtle and intricate theorising which
is postulated upon defined assumptions tends to be crystallised
into slogans. What begins as economic analysis of the conditions
in which the optimum use can be made of available materials,
capital and labour is apt to end up, therefore, as a programme
of work creation. It must be borne in mind, however, that in the
past positive policies to combat unemployment have been almost
exclusively anti-depression measures. Sweden is one of the very
few countries which have followed any long-term policy aimed
a t full employment of resources.
There is no denying the importance of the concept of full employment, even though its meaning tends to be narrowed. All over
the world, on fighting fronts and in war factories, men and women,
when they think of the future, wonder whether there will be jobs
for them when the war ends. They remember what happened after
the last war. They recall still more vividly the mass of long-term
unemployment just over a decade ago in the great depression of the
early 'thirties. It is politically, as well as economically, important,
therefore, to plan for the most active possible productivity when
the war ends, if only because of the great desirability of keeping
labour unemployment within the narrowest possible limits. But
this does not mean that at the most effective level of economic
organisation there will be no unemployment at all. On the contrary, it is probable that this level cannot be reached if the pro1
" T h e acuteness and peculiarity of our problem arises . . . out of the possibility that the average rate of interest which will allow a reasonable average level
of employment is one so unacceptable to wealth owners that it cannot readily
be established merely by manipulating the quantity of money." (J.M. K E Y N E S :
The General Theory of Employment, Interest, and Money (London and New York,
1936), pp. 308-9.)

OBJECTIVES OF POST-WAR PLANNING

vision of jobs, instead of being regarded as one of several prime
objectives, becomes the sole criterion of organisation. This probability will become a certainty if work provision takes the form
of freezing existing jobs so that mobility is restricted and new
avenues of expanding employment are thereby hampered in their
development. There is some need to emphasise the fact that employment is not an end in itself, except as it satisfies the worker's
need to feel himself an effective and useful member of the community but is a means to the production of goods and services.
The fact that employment has come to be regarded as a social
objective and unemployment is felt to be a major social evil is
indicative of the precarious instability of our economic system.
There is more employment of labour, and indeed of all t h e
factors of production, at the present moment than there has been
since the last war. It is easy to conclude that the only purpose
into which our nationally-organised world is willing to throw all
its energy and resources is that of destruction. As war proceeds,.
shortages and bottlenecks begin to occur. Among them, shortagesof manpower are the most serious and in the long run are probablydecisive for victory or defeat.
The United States, which was the last of the great powers to'
be involved in direct hostilities, had reduced its unemployment
in the period of pre-belligerency from 9.3 million in July 1940 t a
3.8 million in December 1941. By September 1943 the figure had
fallen to 0.8 million.1 In other countries the drain on manpower
is even more pronounced. By the beginning of 1943 the manpower
shortage in Germany had become so acute that an estimated 6.5
million foreign workers had been transferred from occupied Europe
to feed the German war machine. 2 The potential supply of slave
labour has recently been increased by conscription decrees in
France, Czechoslovakia and Greece. Full employment of labour
has been achieved in these and other warring countries. In fact
it is perhaps the major tragedy of our generation that only in war
or in the preparation for war has it been achieved or even
approached.
The experience of wartime full employment, however, only
emphasises the major obstacle to the achievement of a high level
of employment after the end of hostilities. That difficulty is n o t
so much one of technique as of agreement on purpose. The purpose
of a war economy is agreed upon by all social groups and classes;
1

U.S. D E P T . OF COMMERCE, BUREAU OF F O R E I G N AND DOMESTIC C O M M E R C E :

Survey of Current Business, Nov. 1943, p . S-8.
2

INTERNATIONAL LABOUR O F F I C E : The Displacement of Population

Europe,

by Eugene M. KULISCHER, Studies and Reports, Series O (Migration) No. S
(Montreal, 1943), p. 160.

INTERNATIONAL ECONOMIC ORGANISATION

the aims of a peace economy are not so agreed. And unless a rather
wide area of agreement on social purposes between social groups
and classes can be achieved the quest for full employment at the
close of the war will be vain.
One more preliminary observation may be made at this point.
Examination of unemployment statistics in industrial countries
reveals that by far the highest unemployment rates are to be found
among unskilled manual workers. The percentage of unemployed
falls steadily as we pass from the unskilled workers through the
various social groups of the occupied population to owners, managers and to the professions.1 The problem of mass unemployment
is to a very great extent a problem of the wage-earning group, and
particularly of unskilled labour. Differences in census classifications
render international occupational comparisons hazardous, but
there is no doubt that in most countries wage earners make up well
over half the occupied population. 2
Almost 60 per cent, of the occupied population in the United
States in 1930 and over 70 per cent, in England and Wales in 1931
were numbered in what might be termed the working-class group.
About 30 per cent, in both countries were unskilled labourers. Wage
earners, about half of whom are unskilled, are numerically the most
important single group in the total population of a modern industrial State. 3 They constitute the lowest income groups of the
population, least able to withstand any loss of income, and most
affected by fluctuations in the level of economic activity and employment.
1
Cf. Colin CLARK: The Conditions of Economic Progress (London, 1940),
pp. 230 ff.
2
In recent years the relative numbers of the professional and lower salaried
groups in industrial countries have increased rapidly while those of farmers and
farm workers have declined so that the proportion of wage earners has remained
rather stable and, in the United States, has even tended to fall. Cf. Colin CLARK,
op. cit., p. 208.
3

Cf. INTERNATIONAL LABOUR O F F I C E : Year Book of Labour Statistics,

1942

(Montreal, 1943), "Structure of the Gainfully Occupied Population", pp. 6-18.
Thanks to the industry of Mr. Clark comparable figures are available for the
United States and England and Wales and these are reproduced in part below:
PERCENTAGE DISTRIBUTION OF SOCIO-ECONOMIC GROUPS IN THE OCCUPIED
POPULATION OF THE UNITED STATES (1930) AND ENGLAND AND WALES (1931)
U.S.A. England and
(1930) Wales (1931)

(a)
(b)
(c)
(d)

«
(/)

Professional
Owners, managers and officials
Clerks and kindred workers
Skilled workers
Semi-skilled workers
Unskilled

Workers: (d) and (e) and (J)

6.0
19.8
16.3
12.9
16.3
28.7

4.4
10.3
13.9
16.4
22.4
32.7

100.0

100.1

57.9

71.5

OBJECTIVES OF POST-WAR PLANNING

The concentration of the problem of unemployment upon this
substantial community group, of mainly unskilled industrial wage
earners, is a modern phenomenon, the outgrowth of the factory
system. Idleness and slack time are and have always been characteristic of all social groups in depression and are by no means confined to highly industrialised nations. But in a highly industrialised
community the wage earners are divorced from any means of subsistence except what they can buy with the wages of their labour.
They are, moreover, organised and politically vocal. Other community groups—farmers, professional men, small enterprisers and
craftsmen—suffer from lower prices and less demand, but they
usually have a wider margin between them and starvation. They
have as great a stake, however, in the organising of a productive
and stable economy as have wage earners. Their demands and their
share of production are important also in the total economic effort.
It is therefore prima facie unlikely that full employment, even of
60 per cent, of the working community, can be the sole test of efficient organisation. Efficient utilisation of productive resources,
including human energy, must be the test of policy.
When the causes of industrial unemployment are examined this
becomes clearer still. Economic analysis usually classifies these
causes with respect to time and to function, though these classifications necessarily overlap. Short-period unemployment may arise
from factional or seasonal causes. Long-period unemployment is
usually due to a profound change in the structure of industry or to
a deep economic depression. It is obvious enough that these analytical categories cannot be' sharply defined in real life; but they are
helpful in gaining an understanding of the complexity of the problem. Examples may perhaps suffice by way of definition. The
employment lost in changing from one job to another is frictional;
the building industry is subject to severe seasonal fluctuations of
employment largely because of weather conditions; structural
unemployment occurs mainly because of technical changes which
cause shifts in the location of industries; cyclical unemployment is
usually common to most industries and most countries and is the
result of a breakdown in price relationships impeding the exchange
of goods and services.
It will be obvious that each of these types of unemployment
not only shades into the others; but each cause is influenced by the
existence of the others. Thus in a great depression when unemployment is general, all the other types of unemployment are accentuated. Indeed the structural changes in industry usually come to a
head in a series of violent paroxysms or cyclical depressions. In the
same way frictional unemployment becomes worse when effective

INTERNATIONAL ECONOMIC ORGANISATION

demand is low. On the other hand any substantial cause of immobility in the factors of production, and especially labour, is apt to
worsen both structural and cyclical unemployment. It should also
be noted that a specially difficult problem confronts most agricultural countries since not only farming but the industries built upon
it are subject to seasonal pressure.
In attempting to define "full employment" as an objective in
post-war planning, and in doing so to take account of the necessity
for securing the fullest possible employment of all the factors of
production, and of all classes of the community, it is clear that
certain kinds of unemployment are probably inevitable and perfectly compatible with the broad objective of maximum productivity from the optimum use of the factors of production. There must
be increased "factional" unemployment in the demobilisation and
reconversion period. Seasonal unemployment will persist. These
can, and should, be taken care of by other means, notably by
improved social security legislation.
What is incompatible with the objective of full employment
defined in realistic and practical terms, is that the readjustment
of international specialisation, and all the structural readjustments
involved in reconverting from war to peace production, shall be
allowed to cause widespread and prolonged unemployment in a
series of destructive depressions which add to the inevitable factional displacements of labour a large amount of general cyclical
unemployment.
In the immediate post-war period, therefore, the attainment of
"full employment" implies a positive programme of reconversion
involving tremendous changes in production equipment within
national communities and considerable shifts also in the international exchanges between those communities. Such a programme
cannot eliminate seasonal unemployment. It may even aggravate
frictional unemployment for a time as industry is retooled, international trade reorganised and labour transferred to new employment opportunities. Such a programme indeed is incompatible with
the freezing of present employment. In endeavouring to avoid
prolonged structural and cyclical unemployment, it must strive
for increased mobility of labour.
A positive programme of conversion from war to peace production, concerted on an international scale, must necessarily attempt
to mitigate, and as far as possible eliminate, the fluctuations of
employment that are characteristic of cyclical swings in economic
activity. The cumulative deflation which always accompanies
cyclical depressions has in the past greatly increased the unemployment and other human costs involved in structural reorganisa-

OBJECTIVES OF POST-WAR PLANNING

tion. The latest example of this exaggeration of unemployment
may be recalled briefly. Even in 1929, at the height of the boom,
there were a million unemployed in Britain, two million in Germany
and nearly three million in the United States. 1 The total unemployed in those countries for which statistics are available was
about ten million. Part of this was the so-called "hard core" of
persistent long-term unemployment. Unless this "hard core",
which persists even in boom periods, is to be accepted as an unpleasant permanent feature of the modern capitalist economy,
it must be regarded as largely a legacy of structural maladjustments never remedied in the period between the wars.
It should be emphasised, however, that the ten million out of
work in 1929 had become thirty million at the depth of the depression in 1932. It is this vast increase in unemployment as a result
of the spiral of cyclical deflation that represents the most dangerous
risk to be confronted in the adjustments that must necessarily
follow the distortion of production in a great war.
A post-war programme seeking to maintain a high level of
economic activity should be so designed as to guard against this
risk. If complete mobility could be assumed, full employment
would be reached in all industries at the same time. Actual scarcity
of labour would then arise, there would no longer be any downward pressure on money wages, and employers, as well as employees, would add to the pressure for higher wages. If some check
did not operate on this pressure an inflationary spiral would start.
At this point, however, the stock of money available for investment would decline, thus causing a rise in interest rates which
would operate to check further investment and thus to reduce the
demand for labour and relieve the pressure for higher wages.
In the real world, where very considerable immobility of factors
prevails, "full employment" is not reached in all industries at the
same time. "Bottlenecks" appear in some industries, and some
money wages (and prices) tend to rise rapidly (and cumulatively),
before "full employment" is reached in the economy as a whole.2
The critical point beyond which an increase in the demand for
labour leads not to an increase in employment or real wages but
to instability and inflation, is thus reached sooner in the real world
than it would be in a state of perfect mobility. In pursuing the
objective of full employment the authorities responsible for economic policy must therefore allow for the imperfect mobility of human
1
In 1937 a t the peak of the recovery from the great depression there were from
one and a quarter to one and a half million wholly unemployed in Great Britain
and about seven million in the United States.
2
Cf. Joan ROBINSON: Essays in the Theory of Employment (New York, 1937),
" T h e Mobility of Labour", pp. 40-60.

INTERNATIONAL ECONOMIC ORGANISATION

beings and other factors of production and must aim, not at the
point which would constitute the optimum in a world of perfect
competition, but at the highest level of employment which is compatible with reasonable stability.
B. SOCIAL SECURITY

The argument of the preceding section is based upon the assumption that the displacement of labour may be considerable in the
process of reconversion from war to peace production. In aiming
at the most efficient utilisation of labour and natural resources, so
as to achieve a stable and enduring prosperity, an effort must be
made to achieve the maximum degree of labour mobility. To seek
"full employment" by protecting workers in their wartime jobs
would be to invite certain defeat of the ultimate objective. There
may well be great political pressure to prevent workers from being
thrown out of employment by shifts in production or trade, particularly international trade, which are essential to the achievement of
a new equilibrium. Such pressure will be increased by reluctance
to scrap capital equipment and to destroy property values that are
likely to prove redundant if exposed to competitive production.
Most of the restrictive government intervention of the interwar years was, in fact though not in name, a protection of vested
interests that had become unable to meet the tests of competitive
efficiency, rather than a protection of employment. A clear line
needs to be drawn between human rights and property rights.
There is a good case, on grounds of efficiency, for exposing property
rights to the acid test of competition. There is an equally good case,
also on grounds of efficiency, for protecting the individual human
being from the consequences of economic misfortune beyond his
control. This is the case for social security. It is economically
profitable for a community to safeguard its members against the
harsh consequences that result from the death of a breadwinner,
industrial accidents, old age, or prolonged unemployment. This is
particularly true in a period of rapid economic change and adjustment such as is likely to come at the close of a great war.
The idea of social security is by no means new. Extensive
schemes of social insurance have long existed in many countries.
They have not always been prompted by the same motives. Fear
of revolution and anarchy led William Pitt in 1796 to propose a
system of compulsory national insurance 1 ; the threat of a militant
1
Cited by John Chamberlain in the New York Times, 31 Dec. 1942, p. 13.
" I n 1796, when England was digging in for two decades of warfare against Napoleon, Prime Minister William Pitt advocated a system of compulsory national
insurance, family allowances for children and free technical education. 'With
reform', so Mr. P i t t declared, 'you disarm the Jacobins of their most dangerous
weapons'."

OBJECTIVES OF POST-WAR PLANNING

labour movement played an important part in prompting Bismarck
in 1871 to inaugurate the first plan for social insurance in Europe.
But such motives, many of which still operate, are not the driving
force behind the contemporary movement to secure for each individual in the community an assured minimum of material subsistence. The power behind this movement is the popular will to assure
minimum subsistence as a right of citizenship.
Recent manifestations of this will have appeared in various
countries and several government reports have been published. 1
Naturally these differ both in scope and in methods but the main
•trend of development is similar in all countries. The character
and direction of this trend can perhaps best be seen from a brief
summary of recent events in Great Britain.
In wartime Britain, with imports of food and materials cut to
the bone and limited to those goods essential for the prosecution
of the war, and with production of civilian supplies drastically
restricted, the idea of a "National Minimum" of food, clothing and
shelter for each individual citizen was readily accepted. In a war
of machines the production army has grown vastly in importance,
far outstripping the numbers of military personnel. At the same
time the bombing plane has extended the front lines of battle into
the very homes of the civilians who produce the engines of war.
Keeping this great civilian army fit for efficient war service was,
and is, a primary military necessity. As the war dragged on from
year to year, and as participation in the common effort and in the
common sacrifice drew the community closer together, the idea of
making this "National Minimum" a permanent and integral part
of the British social system caught and held the popular imagination. 2
In June 1941 an Inter-Departmental Committee on Social
Insurance and Allied Services was set up under the chairmanship of
Sir William Beveridge, to survey "existing national schemes of
1
Cf. Report on Social Security for Canada, prepared by Dr. Leonard C. MARSH
for the Advisory Committee on Reconstruction, and presented to the House
of Commons Special Committee on Social Security, 16 March 1943. For Great
Britain cf. Social Insurance and Allied Services, Report by Sir William BEVERIDGE,
Cmd. 6404, 640S (London H.M. Stationery Office, 1942; American edition:
New York, Macmillan Company, 1942). In the United States, cf. NATIONAL
RESOURCES PLANNING BOARD: Security, Work, and Relief Policies (Washington,
U.S. Government Printing Office, 1942). For a review of the evolution of the
idea of social security, see INTERNATIONAL LABOUR O F F I C E : Approaches to Social
Security:
An International Survey (Montreal, 1942). Note the resolution—
reproduced as an appendix—of the Second Labour Conference of American
States Members of the International Labour Organisation on the aims and functions of social insurance.
2
For extended discussion of the idea, cf., for example, the columns of the
Economist and an article by its editor, Geoffrey CROWTHER: "Where Do We Go
from Here?", in Fortune, Oct. 1941.

INTERNATIONAL ECONOMIC ORGANISATION

social insurance and allied services, including workmen's compensation, and to make recommendations". Since all thè members of
the Committee, except Sir William, were civil servants, responsibility for making recommendations was left to him alone. The
results of this investigation were published in November 1942.
Extensive social studies of various industrial areas in the
British Isles were used in the preparation of the report. These
showed that in from 75 to 82 per cent, of the cases examined in
different areas, want was a consequence of loss or interruption of
earning power. In the remaining cases it was found to be due to
failure to relate earning power to the size of the family. The report
therefore concludes that abolition of want calls both for a comprehensive system of social insurance and for some redistribution of
income to meet family needs. Social security is accordingly defined
in the following terms: "the securing of an income to take the place
of earnings when they are interrupted by unemployment, sickness
or accident, to provide for retirement through age, to provide
against loss of support by the death of another person and to meet
exceptional expenditures, such as those connected with birth,
death and marriage. Primarily social security means security of
income up to a minimum, but the provision of an income should be
associated with treatment designed to bring the interruption of
earnings to an end as soon as possible." 1 In this definition, it may
be noted, the concept of social security includes family allowances
and health 2 and rehabilitation services as well as provision for the
aged and for the very young.
The particular plan which Sir William Beveridge has suggested
is based upon existing social security legislation and upon the
survey of actual needs in Britain. Neither the forms of administration nor the suggested amounts of contributions and payments
are necessarily applicable to other countries. No analysis of either
is attempted here since what is under consideration at this point
is the definition of social security rather than the means of assuring
it in specific areas. There are, however, three respects in which the
Beveridge proposals draw attention to important aspects of social
security which cannot be omitted in any realistic definition.
The first of these is to be found in the emphasis placed throughout the report upon the necessity for some redistribution of real
1

Sir William BEVERIDGE, op. cit., p. 120.

I t has been estimated that in the United States on the basis of a peacetime
labour force, about 400,000,000 mandays are lost annually from disabilities of
all types, a t an economic cost of $10 billion. In 1940 this loss of working time
was fifty times greater than the time lost as a result of strikes and lockouts.
NATIONAL RESOURCES PLANNING BOARD: National Resources Development, 1943,

Part I, p. 60.

OBJECTIVES OF POST-WAR PLANNING

income. The proposals do not consist merely in measures of insurance designed to guarantee to each industrial worker a minimum
standard of subsistence such as he might obtain if he were employed
without interruption. They include payments such, for example,
as family allowances, the provision of school meals, widows' and
orphans' and old-age pensions, which constitute definite transfers
of real income from the taxpayers to the recipients. Such payments
are a logical extension of educational, health and other services
provided freely to the public and paid for out of general taxation.
Moreover the various insurance schemes themselves are generally
subsidised by the State out of general taxation, and part of the
contributions is paid by the employers, so that as a rule less than
half the cost is borne by the worker directly. Social insurance
is therefore not merely a spreading of risks based on actuarial
calculations; it is also a means of redistributing real income.
Following the pattern of the pioneer social security legislation
enacted in New Zealand in 1938, the Beveridge plan definitely
accepts the necessity for guaranteeing a minimum standard of subsistence to every member of the community, a necessity which
involves a larger measure of income redistribution than has hitherto
been practised in Great Britain. If this necessity is finally accepted,
voluntary thrift will become a means whereby individuals may hope
to rise above, rather than reach, their minimum standards of subsistence.
The second respect in which the Beveridge proposals draw
attention to an essential element in social security is to be found
in the repeated insistence upon their correlation with measures to
avoid mass unemployment. The calculations upon which proposed
contributions and benefits are based do, indeed, assume an average
volume of unemployment (83^ per cent.) which may seem at first
glance to be inconsistent with the objective of "full employment".
In the probable circumstances of Britain in the immediate post-war
period, however, this does not seem to be an unduly pessimistic
assumption. The fact that such an assumption must be made
emphasises the importance of the considerations set forth in the
preceding section of this study.
Nevertheless, Sir William Beveridge also assumes, and his
whole report is based upon the assumption, that positive policies
will be adopted aiming at "not indeed, absolute certainty of work,
but a reasonable chance of productive employment". The report
makes specific reference in this connection to "an announced determination to use the powers of the State to whatever extent may
prove necessary". This reference may well be interpreted as meaning the provision of employment by direct State action in the form

INTERNATIONAL ECONOMIC ORGANISATION

of public works; but it is vague enough to be interpreted merely as
action to ensure that employment shall be available. 1
Whatever may turn out to be the best methods of ensuring
maximum employment, there is no doubt of the essential dependence of any scheme of social security upon the productive efficiency
of the national economy as a whole. Prolonged mass unemployment
will wreck the actuarial soundness of contributory insurance schemes
and involve relief expenditures on such a scale as either to endanger
the continuance of the social services or to force drastic changes
in the whole economic system. It is as a supplement to, rather than
a substitute for, active employment that social security must be
envisaged. By and large private employment is not only more
likely to be productive than relief works, it also yields revenue to
the State instead of increasing the public debt. Indeed it seems
obvious that the greater the degree to which employment can be
provided by taxable enterprise, and the less resort there must be
to relief works, the more chance there will be of establishing social
security schemes upon a workable and continuing basis.
The third point raised by the practical proposals of the Beveridge report concerns the effect of guaranteed social security upon
the incentives to productive activity as a means of assuring personal independence. Sir William Beveridge is clearly conscious of
this issue. "The plan", he writes, "is not one for giving to everybody something for nothing and without trouble, or something
that will free the recipients forever thereafter from personal responsibilities. The plan is one to secure income for subsistence on
condition of service and contribution and in order to make and keep
men fit for service." 2 As he writes in another part of his report:
"The State in organising security, should not stifle incentive,
opportunity, responsibility; in establishing a national minimum,
it should leave room and encouragement for voluntary action by
each individual to provide more than that minimum for himself
and his family." 3
It is perhaps inevitable that any proposal for social security
should evoke fears of demoralisation associated with the spectral
memory of the Poor Laws. There are those in the United States,
also, who point out that long-continued relief was not followed
1
"Income security which is all t h a t can be given by social insurance is so
inadequate a provision for human happiness that to p u t it forward by itself as a
sole or principal measure of reconstruction hardly seems worth doing. I t should
be accompanied by an announced determination to use the powers of the State
to whatever extent may prove necessary to ensure for all, not indeed absolute
certainty of work, but a reasonable chance of productive employment." Sir

William BEVERIDGE: op. cit., p. 163.
2
3

Ibid., p. 170.
Ibid., pp. 6-7.

OBJECTIVES OF POST-WAR PLANNING

after the great depression by a revival of individual initiative on
the part of some recipients of relief. It may perhaps be argued that
this sapping of initiative and self-reliance is traceable to individual
frailty or to the demoralisation resulting from months if not years
of hopeless pessimism and unemployment, rather than to the provision of a meagre subsistence.
Wherever the truth may lie in particular cases, it is obvious
that social security schemes must endeavour to reinforce rather
than sap initiative. For this reason retraining and rehabilitation,
increasing both efficiency and mobility, must form part of any
effective programme. In the long run social security can be effectively achieved only if the guaranteed minimum is less attractive
than the level of living offered by active employment. Security
is not to be achieved by stagnation.
In the post-war world there must be anticipated not only great
readjustments to the changed patterns of international specialisation, but the possibility of revolutionary new methods of production. Scientific research is only at the threshold of its industrial
applications. Instability of employment may be increased for a
time, so that there will be greater need for tiding individuals over
transitional difficulties and at the same time assisting them to find
new avenues of useful service to the community.
But it would be folly in such circumstances, and harmful to
the interests of those who are protected, if the measures taken to
protect them from passing hardship should prevent or even hinder
them from taking full advantage of the opportunities of new employment that might be provided by the quickest and most complete utilisation of the changed techniques made possible by scientific discoveries.
C. ECONOMIC DEVELOPMENT

The economic relations between industrially developed countries and those whose economic equipment has not kept pace with
modern scientific achievements have been changing rapidly in
recent years. Politically there has been a marked growth of national
sentiment both in colonial areas and in those where economic penetration had resulted in limiting national independence. New and
vigorous life is stirring in national communities that had seemed
apathetic. Colonies have claimed autonomy ; States have thrown
off unequal treaty obligations.
On the economic side there has been equal vigour. Most of
the dependent or semi-dependent countries have been both poor and
inefficiently organised, though many of them have potential resour-

INTERNATIONAL ECONOMIC ORGANISATION

ces capable of development. Even where national independence
has been unquestioned, economic enterprise has often been lacking.
The fact is too often forgotten that the foreign investment,
trading enterprises and migrations that created the nineteenth century trading system were dominantly directed from northern and
western Europe. The industrial applications of new scientific discoveries, and notably the use of new sources of mechanical energy
in production and transport, gave the pioneers of their development
overwhelming advantages in economic activity and in military and
naval strength. Britain led in this industrial revolution and in the
revolutions of commercial and banking practice which accompanied
it; but other countries in the north and west of Europe followed
close behind. One result was a rapid increase of population which
in turn led to vast migrations that occupied the thinly populated
grasslands of the temperate zone. In these new settlements population grew even faster than in the countries of emigration. In them,
too, mechanical methods of production and transport were pushed
to more effective development.
Where old-established populations were too numerous or tenacious to be pushed aside, or where conditions were not favourable
to large-scale settlement, economic penetration took place. In
some instances, as in India, this led to the establishment of colonial
government. In other cases, as in China, lodgments of trading
enterprise and investment were effected which often secured exceptional privileges from weak national governments. In still others,
as in many Latin American countries, foreign traders and investors
established economic dominance and political influence.
Whatever the political arrangements, economic development
was determined mainly by investment decisions taken in the
dominant industrial countries and primarily for the promotion of
their trading interests. This fact is graphically illustrated by the
location of the trading towns on the sea coasts of the less developed
countries and by the transport systems connecting those towns with
the resources of the interior. The network of world trade that was
woven in the nineteenth century was centred upon northern and
western Europe.
In the years between the wars, however, the economic dominance of this region proved to have been seriously weakened. There
was no longer available a stream of capital investment and a parallel
stream of migration outward to the regions of undeveloped natural
resources. Population increase had slowed up and the pools of
potential emigration were smaller. The old centres of industrial
energy seemed to have exhausted, at least temporarily, the impulses that had promoted their great expansion.
Continuous

OBJECTIVES OF POST-WAR PLANNING

supplies of new savings were no longer being added to the capital
fund. Indeed ownership of much former investment had passed
from European and particularly from British hands in the war
of 1914. The wastage of capital resources that resulted not so
much from the actual destruction of the war as from the economic
demoralisation that followed, drew much new capital into reconstruction of formerly developed areas. The accumulation of
new savings diminished as income was redistributed to meet the
new levels of living demanded after the war.
On the other hand, in many hitherto backward areas, the war
period had witnessed an acceleration of industrial development
together with a growth of nationalism. The former interchange of
raw materials and foodstuffs against manufactured goods and capital
equipment which was an important part, but by no means the
larger part, of pre-war international trade was difficult to restore. 1
The network of world trade was not easy to reweave.
When the first effort to restore the pre-war international economic system broke down in the great depression of 1929-32, there
was actually a marked involution. The currents of migration were
reversed. Labourers returned from the British Dominions to
Britain, from Indonesia to China, from South America to continental Europe. There was a similar reversal of capital movements
from debtor to creditor countries.
In all these changes the situation of Britain was crucial. London
had not only been a collecting and distributing centre for the world's
capital resources, but had become the clearing and regulating
centre for the whole world system of trade and investment. Britain's
resources were seriously strained by the war of 1914-18 and the
functioning of her monetary system was further handicapped by
the stabilisation of sterling in 1925 at the pre-war parity. From
that time until the attempt to sustain this parity was abandoned
in the autumn of 1931, the British balance of payments was almost
continuously strained, British exports were hampered by the
necessity of getting costs down to a competitive level on world
markets and large numbers of British workers were victims of
unemployment. There is some reason to believe that an adverse
balance of payments was covered by failure to replenish past capital
investments and even by some withdrawal of them. The suspension of specie payments in Britain in September 1931 marked the
collapse of the restored gold standard.
It should be said that if little new economic development had
been possible in these years, much had been accomplished parti1
Cf. Albert O. HIRSCHMAN: "The Commodity Structure of World Trade",
in Quarterly Journal of Economics, Vol. LVII, pp. 565-595.

INTERNATIONAL ECONOMIC ORGANISATION

cularly in regard to European reconstruction. The collapse of the
gold standard mechanism, it is true, brought much of that reconstruction down with it; but the causes of the breakdown lie deeper
than a failure of monetary mechanisms. It is significant that the
first symptoms of the great depression appeared in the raw-material
producing debtor countries, particularly in those outside Europe,
whose economic prosperity depended largely upon world markets.
Australia was in difficulties with its balance of payments as early
as the autumn of 1928.
The fundamental fact is that expanding trade and economic
development promoted by capital investment are intimately connected. The process by which new areas of production were opened
up in the nineteenth century depended essentially upon the readiness
and capacity of the investing countries to absorb the new production by expanding their imports. Such countries as Australia had
equipped themselves to the point where the capital already invested
imposed overhead costs that were economical only on the assumption that production and exports could be further expanded. New
Zealand, with the highest per capita foreign debt in the world,
proceeded actively with such expansion: it doubled its already
large butter exports in the decade from 1920 to 1930 and still
had not reached the peak of its potential production. In a world
of restricted trade and increasing self-sufficiency, continued expansion of exports might no longer be possible. Past investment consequently was jeopardised and new investment became impossible.
New Zealand, indeed, reduced its foreign indebtedness every year
between 1935 and 1939. Many other debtor countries did the
same, though new loans have been made, for example, in Latin
America, particularly since the war, and mainly by the United
States.
It seems evident that the mechanisms of international investment which were centred.upon London in the nineteenth century
must now be replaced. These mechanisms produced great results,
though often at heavy cost. The full story of their ventures has not
yet been written ; but such incomplete surveys as have been made
indicate not only considerable fluctuations in the process of investment, but heavy periodic liquidation of misdirected ventures. Both
were the inevitable counterpart of the reliance upon competitive
enterprise. The great merit of the system was the willingness it
engendered to take risks, even if those risks were sometimes illconsidered or even fraudulent. Venture capital was the spearhead
of economic development. In the aggregate result, it transformed
the economic world, creating productive new communities in the
countries of European settlement, and introducing the new tech-

OBJECTIVES OF POST-WAR PLANNING

niques of mechanical industry to backward economic areas. In its
persistent search for gold, for oil, for minerals, and for less spectacular materials, it opened up new productive possibilities even
while it disturbed social organisation in the countries it penetrated.
The great expansion of numbers and the equally marked rise of
living levels in northern and western Europe, and their offshoots
overseas, were directly caused by it.
In the world after the present war, however, a new element
will enter into the consideration of economic development. The
productivity of new investments was estimated in the nineteenth
century by investment bankers. It was their judgments and decisions which determined the financing of new ventures. Though by
no means infallible, their judgment proved on the whole to be good
as judged by the tests of economic productivity and profitability.
But the productivity was for the world market and profitability
was judged partly by immediate financial returns in the process
of flotation and partly by profitable sales mainly for export.
The new element that has entered into the situation is the
insistence of the borrowing countries that national and social objectives must enter into the planning of new industries within their
borders. They are no longer content to accept the judgment of
cosmopolitan financiers as to the desirability of new enterprises;
but insist upon exercising a large measure of national control over
these developments. In part this control is exercised for strategic
and political reasons, but in part also it springs from a determination to secure the social advantages of industrial developments.
The borrowing countries are no longer content with the indirect
economic and social advantages that have accrued to them from
the operations of foreign capital directed mainly to the export
market. These advantages have in many cases been substantial;
but the borrowing countries now manifest concern over the conservation of their national resources. They are concerned also to develop
transport, to improve agriculture and consumption goods industries
for their own domestic markets as a means of improving their levels
of living. Moreover they are conscious of the educational effects
of industrial development and desire to train their own technicians
including not only managers and scientific experts but foremen and
skilled workers, both as a reservoir of leadership and as a direct
means of improving living standards.
An important step in the recognition of these social objectives
has recently been taken by the United States Government. Believing "that men and women who work under decent conditions produce more per person than those who work under less desirable
conditions; that work stoppages and labour shortages are less likely

INTERNATIONAL ECONOMIC ORGANISATION

under better working conditions and loss of man-hours from accident or occupational disease is reduced by a programme of safety
and sanitation" 1 , it now includes in all contracts for the procurement of strategic materials from other countries a clause designed
to maximise production by the maintenance of certain minimum
standards of working conditions. In the words of the Board of
Economic Warfare, " I t is the first time in history that one nation,
in negotiating for the products of another, has given an express
guarantee against the exploitation of labour; has realistically and
frankly recognised that labouring men and women who receive a
fair wage, work reasonable hours and work and live under decent
conditions of health and sanitation, actually produce more and
better products than those who do not. "The labour clause policy,
in short, applies a sound business principle to assure the greatest
possible manpower efficiency in the procurement of materials
needed for the war programme of the United States." 2 This clause,
which does not seek to impose the labour standards of the United
States upon other countries, but merely to maintain local standards,
is in fact an international "fair wages clause".
The need for development capital is increased rather than
lessened by the desire of the less industrial countries to improve their economic processes. But the mechanisms by which
such capital may be transferred from creditor to debtor countries
must be established on new bases. It does not necessarily follow
that the mechanisms must be intergovernmental rather than
private. In recent years, and notably since the "great depression",
a large part of the rather small volume of international investment
that has taken place has been negotiated between governments or
their subsidiary agencies. This type of foreign lending, however,
has certain undesirable features. In particular it injects a political
or diplomatic element into economic transactions.
There is great need for an international investment authority
which would deal chiefly with loans for reconstruction and development, somewhat as the League of Nations administered the Reconstruction Loans to Austria and Hungary after the last war.
Private transactions, especially in the form of direct investment
by great corporations, may indeed be important for industrial
development; but for the provision of basic transport services,
for flood control, irrigation and similar public works, the capital
may in some cases best be provided by governments through
the medium of an international investment authority. 3
1

INTERNATIONAL LABOUR O F F I C E : Labour

Conditions

War

Contracts,

2nd ed. (Montreal, 1943), p. 55. Quoted from a statement supplied by the Board
of Economic Warfare.
2
Ibid., p . 57.
3
See below, p p . 117-125.

OBJECTIVES OF POST-WAR PLANNING

Such a mechanism is also required if foreign investment and
development programmes are to be effectively co-ordinated. It
is commonly agreed that one of the major causes of the breakdown of reconstruction lending after the last war was that such
lending put impossible burdens on the international balances of
payments of the borrowing countries. The loans were often too
great in the aggregate, many of them were ill-considered, and too
little account was taken of the possibilities of payment. Free
investment is necessarily correlated with free trade, but trade
was progressively restricted by the creditor countries. Economic
development in the future should be correlated with trade policy
so that balances of payments are not strained to the point where
the debtor countries must either default or impose exchange
control or depreciate their currencies. The usual result in the
recent past has been that, lacking adequate trade outlets, the
debtor countries depreciated, defaulted and imposed exchange
control.
It is in this field of international investment, where enterprise
has in fact been the determining factor in planning new production,
that the clearest case can be made for overall planning. Investment
is the growing point of any economic system. Decisions in regard
to it determine the possibilities of future production, employment
and trade. It will be argued in the next section that overall planning
is not practicable for the world as a whole. What is possible, and
in the field of foreign investment very necessary, is some mechanism
at least for registering and as far as possible for regulating capital
movements across national frontiers.
D.

INTERNATIONAL COLLABORATION

It has been argued above that the rapid development of communications and the increasing ease with which knowledge is
diffused in the modern world has rendered inevitable much closer
contacts between the world's peoples. Isolation is now impracticable. It is not possible to quarantine ideas. Nor is it possible to
prevent the effects of population and production changes in one
part of the world from influencing economic activity in other areas.
Even if an effort is made to regulate actual trading contacts, the
very fact of such regulation affects economic activity in the regulating country. Imports may be shut out in an effort to preserve
domestic production from being affected by foreign competition;
but the inevitable result is to destroy the exports which pay for
the imports and thus to shift the adverse effects to another, and
presumably more efficient, sector of the national economy. The

INTERNATIONAL ECONOMIC ORGANISATION

interdependence of industrial production resulting from the necessity to utilise raw materials drawn from widely scattered sources is
sufficient to make the world one economic neighbourhood. This
interdependence is on the whole increased, rather than lessened,
by scientific invention and research. New synthetic products may
displace imported raw materials, and substitutes may be found for
imported manufactures; but the same process of scientific research
calls for increasing use of materials in which no country is selfsufficient. Moreover the most striking advances are in the field of
transport and communication and these inevitably bring new trading possibilities within profitable reach.
It is not necessary, however, to jump to the conclusion that
because of this increasing degree of interdependence the world
must be organised as a single economic unit. The economic activity
of the more than two thousand million people in the world is infinitely varied, while their political loyalties, from which even
the best constitutions must draw vitality, remain obstinately
national. There is at the present stage of political and economic
evolution little reality in the somewhat vague proposals sometimes advanced for unitary or federal world organisation. These
proposals are necessarily vague even when constitutional arrangements are sketched in seemingly practical detail. There is no way
in which the actual processes of democratic election and executive
policy-making can be charted. The test of a constitution lies in its
actual working. Without established loyalties and traditional procedures such constitutions are apt to become a façade. The real
problem of organisation is the location of power, and power is
always exercised by those who can command a following in support
of their policies.
The time may come when it will be possible to erect such institutions and ensure their effectiveness by building loyalties of world
citizenship. Perhaps the best way to build up such loyalties is by
the creation, in specific fields of common interest, of institutions
with defined powers and responsibilities. The efficient working
of such institutions may come to command the loyalties of individuals in ways consistent with their national allegiances, as some
of the great religions now do. It is possible to be a loyal citizen
a t the same time of a town, a State, and a nation, even of an association of nations like the British Commonwealth, provided that there
is a reasonable definition of the duties owed at each stage of citizenship. It is also possible to be a loyal adherent of a church transcending national boundaries provided there is clear demarcation
between the things which are Caesar's and the things which are
God's.

OBJECTIVES OF POST-WAR PLANNING

However this may be, it does not need much reflection to grasp
the fact that in the immediate post-war years the only organised
machinery of government capable of administering social programmes aimed at full employment and social security will be that of
already established nation-states. Administrative machinery of
this kind cannot be improvised overnight. The slow growth of the
social services in such a country as Britain illustrates this fact very
well. The Beveridge report could not have been written if there
had not been a long process of social legislation, establishing a
series of administrative services staffed by trained specialists who
have gradually accumulated a wealth of practical experience in
their respective fields. Much of the Beveridge report in fact consists of a survey of the various social services and recommendations
for their administrative integration and improvement. The number,
variety, and specialised nature of these services in a single country
is sufficient evidence of the impossibility of creating international
services for direct administration, even if all the countries were on
approximately the same level of need and development.
The extraordinary diversity of social development in the world
today emphasises the necessity, from the purely administrative
viewpoint, of national organisation. Indeed those most familiar
with the administration of the social services in the United States
have been quick to point out that the administration proposed in
the Beveridge report would need to be considerably modified before
it could be applied to the federal structure of the United States.
This is not only because of States' rights, but because of great
differences in the social conditions of different sections of the country. If this is true in a federal State, it is obviously much truer for
the world as a whole. New Zealand or Denmark presents quite
different questions from those which must be faced in such countries as India or China. Britain will be in a better position to handle
its social services than Germany will be at the close of the war.
There is no need to labour this obvious point. As soon as any
attempt is made to grapple with the realistic application of such
policies as those postulated as the objectives of post-war action,
it is clear that centralised administration is impossible.
This conclusion accords not only with expediency, but with the
sound political principle that government should so far as possible
be confined to essential principles rather than detailed administration and should be decentralised to the greatest degree compatible
with efficiency. The true safeguard of individual liberties is vigilant
local government. The closer government is to the governed, the
less chance there is of power passing into the hands of privileged
groups. It is an axiom of democracy that government should

INTERNATIONAL ECONOMIC ORGANISATION

function at the lowest possible level of regional organisation. The
larger the area covered the less government should be attempted.
Effective international collaboration therefore postulates a
minimum of functional responsibilities at the centre in order that
the people shall retain the greatest possible control over those
whose decisions affect their daily lives. Social security is necessarily
administered as a national service. The organisation of employment
must also be national. In the same way proposals for economic
development must be conceived and executed by national governments.
Such national policies, however, if they are to be effective, must
be co-ordinated by international consultation and agreement.
Pursued independently, they are likely to lead, as similar policies
led in the decade before the war, to restriction of international
trade and isolation of national economies. Costs and prices get
out of equilibrium and the necessity soon arises to choose between
abandoning the national policy or restricting competition from
abroad. One country after another had this experience in the years
of restrictive economic nationalism. The impossibility a t that
time of securing agreement in regard to fiscal and credit policies
among even the leading powers led to successive strains on national
balances of payments. Thus, Italy began, even before the Ethiopian
war, to follow a policy of credit expansion for re-employment and
rearmament. Prices rose, imports increased and exports fell off.
There was a loss of exchange assets which was aggravated by
speculative capital flight and it was not long before exchange control had to be adopted.
Isolation achieved in greater or less degree by such measures
as exchange control and strict import quotas inevitably entails
State control of the domestic economy. The very mechanisms of
import control are selective. Such imports are allowed as suit the
purposes of the controllers. Decisions in this regard—whether
the imports are foods, raw materials or manufactures—are decisions
as to the kind of production and employment desired within the
country. They lead also to organisation of the domestic industries,
usually by some form of cartellisation.
Domestic control so
fostered, however effective it may be in promoting the political
purposes of the government, involves some measure of impoverishment, some decline in real levels of living. This may take such
forms as lowered quality and limited choice of consumer's goods,
increased personal taxes or restricted leisure, rather than reduction
of money incomes; but the lowering of living levels is very real.
It is accentuated by the cumulative effect of reprisals by one
country against the restrictions imposed by another. Policies of

OBJECTIVES OF POST-WAR PLANNING

economic nationalism attempt to preserve domestic markets for
the home producer. In doing so they shut out competitive imports
from other countries. Thus the United States tariff of 1930 raised
the import duty on butter. This duty effectively checked butter
imports both from Canada and from New Zealand. The New
Zealand butter was diverted for a time to Canada just when the
Canadians had lost their main export outlet. There was an outcry
and the Canadian tariff was raised, whereupon the New Zealand
butter could find a market only in Britain.
There were very many instances of such trade diversions which
channeled export surpluses into a constantly narrowing world
market. Protection became competitive in all its forms. Higher
tariffs were met by reprisals and exchange depreciation begat
further depreciation. Denmark (and many other butter exporting
countries) quickly matched the depreciation of the New Zealand
pound when that currency followed the Australian currency to a
lower level.
Bilateral trade agreements, using new methods of trade restriction such as import quotas and exchange allocations, were particularly destructive of multilateral trade. It was obvious that any
country whose balance of payments was strained would try to
reduce imports from any country which did not take its exports.
The inevitable result, however, was that it found that a third
country to which it exported heavily was quickly forced to bargain
those exports down because the second country had redressed its
balance by cutting exports from the third, as its exports to the
first had been cut. There was an international round-about of
impoverishment, a continuous circle in which every country cut
down the market for its neighbour and had its own cut when the
wheel came full circle.
This process of mutual impoverishment, begun as a protection
for national expansionist policies, quickly ensured their failure.
Thus the United States tariff of 1930 was intended primarily as a
protection of the home market. It touched off a whole series of
tariff increases, some of which were direct reprisals, and all of which
cut off American export markets. Widespread currency depreciations added to the confusion and a very effective set of new quota
restrictions and exchange controls completed the damage to American export business. Both the domestic market and the export
market reached depression depths by the beginning of 1933.
This familiar story does not need elaboration. It has been
recalled here to point the definition of international collaboration.
Continuing means of international consultation and clearing of
policies are needed, if national policies aimed at social security and

INTERNATIONAL ECONOMIC ORGANISATION

full employment are to have a chance of succeeding in the post-war
world. These means of consultation and clearing must aim at
forestalling strains on the international balances of payments, so
that the countries pursuing expansionist policies will not be forced
either to abandon them or to cut international payments in a vain
attempt to protect them.
What is to be aimed at, therefore, is not centralised economic
planning by world institutions. Nor is it a rigid, pseudo-automatic,
monetary system in which the pace of expansion is set by the least
active member and others move faster only at the risk of disequilibrium. The objective must be to hold national economies together
in an international system which allows them a good deal of freedom
to follow policies suited to their particular circumstances. A modern
automobile is constructed with a rigid body, but its wheels are
attached with knee-action or other flexible devices that allow them
to follow the unevenness of the roadway without communicating—
and even exaggerating—the jarring shocks to every part of the
automobile. There should be enough flexibility in national monetary
systems to take the strains of temporary difficulty without communicating a deflationary shock to the whole world trading system.
To achieve such flexibility—which has obvious and definite
limits—both national and international organisation must be
modernised. The world trading system of the nineteenth century,
which is often described elliptically and somewhat inaccurately as
the international gold standard system, did in fact achieve a great
measure of success in facilitating international investment, promoting world trade, and raising levels of living. It functioned successfully as "an instrument of change and growth". Stability of the
exchanges, ensured by the convertibility of the major currencies
into gold at fixed parities, was an important part of the co-ordinating mechanism. That stability was the fixed point upon which the
balancing of international payments was pivoted.
Whenever
national policy or economic development in any country threatened
to cause strain, the exchange rate fell. If it fell or threatened to
fall to the point where gold began to flow out of the monetary reserves, corrective measures were undertaken by the monetary
authorities. These took the form of credit restriction designed to
reduce prices and diminish out-payments.
As national banking systems developed, it became possible to
cushion the strain on the balance of payments. The more extended
use of credit by modern commercial communities rendered the
monetary systems more flexible. There was more possibility of
tiding over temporary strains without imposing drastic deflation
upon the whole national economy. The art of central banking came

OBJECTIVES OF POST-WAR PLANNING

to include a larger element of conscious management aimed at
stabilising prices and employment. Gold disappeared from circulation and gold shipments became the consequence rather than the
cause of adjustments of the international balances.
This monetary technique, however, proved inadequate to
prevent violent fluctuations of prices and employment when it was
restored after 1918. It proved indeed to be a means whereby fluctuations arising in one country were transmitted and even exaggerated throughout the trading system. The reason is not difficult to
understand. The international gold standard was only part, though
an important part, of an economic system. It was the mechanism
by which and through which payments were effected. The national
economies between which payments had to be transferred were able
to adjust themselves to the slight adverse balances when the total
volume of payments was large. When trade was restricted and the
payments owed by debtor countries were large relatively to the
total value of their.exports, the strain on their exchange rates proved
intolerable.
Moreover after 1918 both the readiness and the ability of monetary authorities to make corrective adjustments in their national
economies were diminished. The price corrections that were necessary to restore international equilibrium were much greater and the
resistance to them was much stronger. Both these statements will
be true again after the present war. No monetary mechanism,
however streamlined it may be, will be able to cope with the adjustments needed in national economies, unless it functions as part of
an expanding system of international trade. The secret of post-war
policy is to get people working again and working in lines of production that cater for expanding demands. There will be a transitional period during which firm controls must be maintained over
prices and raw material allocations so that employment may be
directed into channels compatible with international equilibrium.
This involves energetic action to exploit new processes, open up
new markets and develop hitherto backward industrial areas. For
these purposes international institutions must co-operate with
national agencies and co-ordinate the efforts of those agencies.

III.

THE CHANGING CONDITIONS OF PRODUCTION
AND TRADE
A.

MONOPOLISTIC COMPETITION AND INSTABILITY

The preceding sections have sought to define in simple and
precise language the five main objectives of post-war action.
Analysis and definition inevitably limit the rather vague aspirations
expressed in the slogans which embody such objectives in popular
discussion. There is a great deal of agreement on the broad objectives. There is much agreement even on the limits imposed
by definition and by attempts to apply such definition in actual
practice.
Disagreements arise when specific policies are proposed to
achieve these objectives. Any practical policy which involves a
reorganisation of economic activity entails sectional costs and
sacrifices, at least temporarily. The allocation of these costs between different social groups and classes is always the storm centre
of political disagreement. The conflict is real rather than theoretical; but it is often stated and argued in theoretical terms. To
be realistic, however, policy must be based not on theories derived
from analysis of past situations but on recognition of changed and
changing conditions at the present time.
The real questions at issue are sometimes obscured by general
and inconclusive debates which revolve around such phrases as free
enterprise, individual initiative, laissez faire, capitalism and their
opposites. The controversy between advocates of socialism or
capitalism, or between planners and believers in free enterprise,
however, is largely academic in character. For the immediate
post-war period there will be little choice of instruments for action.
Use will have to be made in most countries of the mixed system
of private enterprise and public control that will emerge from the
experience of war.
In the following paragraphs it will be argued that the economic
system which operates in modern industrial communities has
developed elements of rigidity and instability which hamper the
smooth adjustments and self-correcting competitive mechanisms
expounded by economic theorists. This, however, is not an argument for centralised economic planning. The planned world of

CHANGING CONDITIONS OF PRODUCTION AND TRADE

socialist thought is just as remote from present-day realities in most
countries as the self-equilibrating market mechanisms of laissez
faire theory. What actually exists is a mixture of private enterprise,
often monopolistic in its tendencies, and public controls which are
largely improvised and often restrictive in character. In this situation there is continuous struggle between sectional groups to gain
advantage from, and avoid paying the costs of, any policies introduced to achieve new social objectives.
One school of academic thought, which until recently was dominant, and a large body of business opinion, which perhaps is still
dominant, insist that private enterprise, unrestricted in its search
for profit, will be forced by competition to the optimum use of the
factors of production and therefore to maximum productivity. In
this view individual initiative is the mainspring of the economic
system, so that government intervention which handicaps such
initiative will result in less than maximum output and more than
minimum prices of the goods and services demanded by consumers.
A strong logical case can be made for this view, provided the assumptions upon which it is based are accepted as conforming with
reality.
Any attempt to examine these arguments should distinguish
between two related but separate issues. The first question to ask
is whether in fact the practical circumstances of economic activity
at the close of this war will be such as to correspond to those assumed
as a basis for the logical analysis by which free enterprise is justified.
This whole analysis depends upon the assumption that the organisation of economic activity is such that competition can work
freely so as to bring about an equilibrium of forces. It was developed in relation to simpler forms of economic organisation than
those in operation today. There is no prima facie reason to believe
that competition will in fact be able to work freely at the close of
the war.
It should be recognised, however, that a great and effective
degree of competition remains in the capitalist system as now
organised. Preoccupation with monopolistic tendencies of individual businesses sometimes tends to obscure this fact. A great
firm producing plastics by a patented process may exercise a significant degree of monopoly over their manufacture. But other
similar firms produce plastics by different processes. Moreover
scientific progress is continuous and new processes emerge from
time to time. The older industries—wood, glass, and various
metals—do not accept the intrusion of new materials without a
struggle, so that in the long run there is a considerable measure of
competition and the ultimate consumers exercise considerable

INTERNATIONAL ECONOMIC ORGANISATION

influence in determining the fate of both new and old processes.
These facts should be borne in mind in considering the various
manifestations of imperfect competition discussed below. Economic production is a dynamic process. Monopoly or monopolistic
influence is a partial and temporary state of affairs, dependent
for its continuance upon efficiency in meeting the demands of
consumers. Considerable elements of competition remain; but
equilibrium is no longer maintained by pure competitive bargaining of the laissez faire type. Indeed monopolistic competition tends
to increase the potential instability in the economic system.
The second question is whether a policy of non-intervention,
or laissez faire, will bring into existence the economic conditions
favourable to the effective working of competitive forces. Granted
that hindrances to competition exist, will a policy of non-intervention remove them ? Are the hindrances to competition simply
the consequences of ill-advised political interference with economic
forces, or are they the inherent and inevitable result of that competition ? Can we be sure that the removal of political controls
will in fact restore a competitive situation ?
It seems obvious that the circumstances of the immediate
post-war period will not be such as to correspond to the assumptions of laissez faire theory. These may be summed up as the
effective working of a market economy capable of reaching and
maintaining equilibrium through the free play of competition. The
working of the economic system is assumed to be such that it tends
naturally towards an equilibrium, brushing aside and destroying
obstructive elements such as attempts at monopoly. It is also
assumed to be such as automatically to correct departures from
equilibrium. In this broad assumption of a self-equilibrating and
self-correcting market economy, two other assumptions are usually
embodied. The first is that the point of equilibrium to which competitive forces tend always to return, is one which approximates to
reasonably full employment of the factors of production. Indeed
one of the distinguishing features of a monopolistic as distinct from
a competitive system is that it combines the factors of production
at a level below that of full employment. The second subordinate,
though important, assumption is that the competitive market
economy is not impeded by non-economic interferences such as the
structural dislocations resulting from a great war. It is therefore assumed that the fluctuations of employment and production which represent departures from normal equilibrium will not be so violent as
to exceed the recuperative and self-regulatory powers of the market.
To state such assumptions is sufficient to indicate how far they
are from the realities likely to be encountered in the immediate

CHANGING CONDITIONS OF PRODUCTION AND TRADE

post-war period. The logic of the laissez faire argument may be impeccable; but it is largely irrelevant to the practical circumstances.
It is clear that the similar logic by which public as distinct from
private enterprise is defended in ideal circumstances, is equally
remote from realities. It is highly improbable that farsighted,
disinterested action by competent agencies, following well-thoughtout and consistent policies, will be achieved in the stress and urgency
of the post-war world.
Action is likely, on the contrary, to be a confused mixture
of public and private operations, incompletely co-ordinated. It is
in this confusion of policies that an attempt must be made to achieve
the social objectives of a people's peace. Neither completely free
competition nor completely planned public action is in fact possible.
There will be elements of both and the proportion in which those
elements should be combined in any particular country will be a
major political issue.
There is some risk that vigorous action by powerful economic
groups may lead to a form of industrial planning embodying large
elements of monopoly. Many proponents of laissez faire policies
recognise this danger. They realise that enlightened self-interest
works towards maximum production and community service only
when competition forces it to do so. But the technical conditions
of modern industry and trade are such as to give rise to many forms
of imperfect or monopolistic competition as well as to actual monopolies. It is argued, however, that "in a world free from trade
restrictions and statutory support for monopoly, the tendency of
free enterprise to break down monopolistic positions would be
sufficiently strong". 1
The validity of this proposition today is open to serious question. In a predominantly agricultural and handicraft or simple
manufacturing society, where the output of an individual unit
was a small fraction of the whole output and where fixed costs
made up but a small proportion of total costs, competition undoubtedly tended to destroy attempts at monopoly. Today the
case is very different. The use of modern technical methods calls
for the organisation of large units of production 2 , so that in largescale modern industries the percentage of total demand for a given
1
Lionel ROBBINS: Economic Planning and International Order (London, 1937),
p. 157.
2
This technical cause of large-scale economies should be distinguished from the
financial causes of mergers and combinations which have often resulted in the
building up of inefficient units of production. The increasing financial independence of great industries appears to be causing a shift from financial to industrial
management once again. The inter-war difficulties of the British textile and iron
and steel industries, for example, are in part attributable to the increasing size
of the optimum unit of production. Cf. A.F. LUCAS: Industrial Reconstruction and
the Control of Competition (London, New York, and Toronto, 1937), passim.

INTERNATIONAL ECONOMIC ORGANISATION

product filled by an individual producer is often very large. The
single entrepreneur, therefore, has a good deal of choice not only
as to the size of his output but also as to the price he will charge.
He must decide not just how much he will produce at the price
set by the market, but how much he will produce and at what price
he will sell it. His decision is governed by the combination of output and price that brings maximum net profits. Theoretically this
is not the point of greatest output and lowest price or even the combination of price and output that is in the consumer's interest.
The causes of the prevalence of monopolistic competition, moreover, are not exclusively technical in character. They may arise
also from "product differentiation". 1 By ambitious advertising
campaigns a company may create, over a period of time, a psychological preference for its particular brand which amounts to a
significant degree of monopoly power. The social importance of
this characteristic of modern business organisation has been convincingly demonstrated by the development of the wartime phenomenon of "prestige advertising". Even when his products are no
longer available on the consumer market, the corporation executive,
in order to preserve for the future the degree of monopoly power
which he has succeeded in building up in the past, may well deem
it advisable to maintain his already considerable advertising outlays. And in an economy of monopolistic competition, when some
firms start, others must follow suit. 2 A recent British study showed
that roughly 6,900 tons of paper a year were used to advertise
products which the consumer could no longer buy. 3 A survey of
conditions in the United States would probably yield similar results.
We must beware of mistaking the brand-conscious mass society
of large-scale and often monopolistic production in which we live
for the ideal world of free competition where "the dictatorship of
the consumer is a drastic purge of inefficiency".4
In the foregoing discussion of monopolistic conditions and practices no specific mention has been made of the development of monopoly in the labour market, which has often been stressed as a cause
of long-term unemployment. Since the depression, and especially
1
E. H. CHAMBERLIN: The Theory of Monopolistic Competition (Cambridge,
Mass., 1938).
2
As marginal tax rates on corporation profits are raised steeply to pay for the
costs of war, this incentive is likely to grow stronger.
3
K. W. ROTHSCHILD: "Advertising in Wartime", in Bulletin of the Institute
of Statistics, Vol. 4, No. 8 (Oxford, 6 June 1944), p. 173. The annual quota for book
production was 20,000 tons.
4
Lionel ROBBINS, op. cit., p. 237. Of the situation in American industry Professor E. S. Mason has said, "We are presented . . . with the spectacle of the representatives of industries in which concentration is very marked, asserting—and
believing—that the prices of their products are determined by the impersonal
forces of supply and demand". C. J. FRIEDRICH and E . S . MASON (eds.): "Price
Policies and Full Employment", in Public Policy (Cambridge, Mass., 1940), p. 30.

CHANGING CONDITIONS OF PRODUCTION AND TRADE

during the war, a significant change of attitude towards the problem
of unemployment has occurred. Among the general public it has
taken the form of a shift of emphasis from opportunity to security.
Among the workers it has taken the form of a similar shift of emphasis from insistence on minimum standards to demands for social
security and the provision of full employment.
This change has important consequences. For while it may be
true that rigidity in the labour market has been a source of unemployment, there are today but few responsible groups who would
advocate a return to complete flexibility in that market. The
idea of a "social minimum" is becoming more widely accepted,
though inevitably opinion differs as to what that "social minimum"
ought to be and how it should be achieved. What is important for
the present argument, however, is the widespread acceptance of
some degree of rigidity in the labour market, since it implies that in
this sector of economic life a return to the conditions of free competition is no longer considered desirable, if indeed it were possible.
For if downward rigidity of wages within a certain range is accepted,
the laissez faire doctrine of non-interference with the price mechanism is no longer valid.
As the labour market has tended to become rigid, so has the
market for capital. It used to be argued that the rate of interest, by
equating the supply of savings to the demand for investible funds,
acted as a balance wheel equating savings and investment so that
the economic system continually tended towards a position of equilibrium at full employment. In the real world, however, few individuals or corporations now save more or less as the interest rate rises or
falls. The amount which an individual saves is influenced far more by
the level of his income and by the probability of being able to maintain
it. Thus the amount and distribution of personal incomes will affect
the level of economic activity since, other things being equal, the
greater the inequality of incomes, the greater will be the propensity
of the community to save. Gluts of savings may therefore ensue
even if the rate of interest falls to zero and an inherent tendency
may exist for a community to save more and spend less than is
necessary to keep it at a level approximating full employment.
"The personal distribution of incomes is an important determinant
of both the supply of credit (the rate of saving) and the demand
for credit (the rate of investment geared to expectations as to the
rate of spending on consumer goods). In the one case it is the existing distribution, in the other case it is expectations as to the future
distribution, that determines basic economic decisions." 1
1
Werner BAER: "Equality and Prosperity", in Social Research, Vol. 10, No. 1,
Feb. 1943, p. 120.

INTERNATIONAL ECONOMIC ORGANISATION

Account must be taken, in addition, of certain dynamic developments in the economic system. It is true that "progress necessarily
involves the destruction of existing capital values" 1 , but it is easy
to underestimate the strength of capitalist resistance to that process. As the accumulation of capital proceeds and the importance
of capital costs increases, the maintenance of existing capital values
becomes a matter of increasing concern to the entrepreneur. This
brings a change in the conditions of competition. A price war now
becomes an expensive and hazardous undertaking. In such a situation it becomes more probable that, rather than risk his whole enterprise, the entrepreneur will seek an agreement with his rival. In
the early period of American railroad expansion following the Civil
War, for example, when large-scale industry was a comparatively
new development, bitter cutthroat competition was the rule. As
time went on, however, the lesson was learned. Agreements became
more common, price competition less keen. As Adam Smith well
knew, to combine is not less "natural" than to compete—when it
pays higher dividends.
The progress of modern industry, moreover, has not only led
to an increasing degree of monopoly and monopolistic competition.
It has also increased the degree of instability in the market economy.
In an economy where individual units of production were small,
and fixed costs relatively unimportant, the "automatic mechanisms"
of competition acted as effective instruments of progress and smooth
structural change. But where fixed costs are high and low-cost
production is made possible by operating on a large scale, it is by
no means certain that the economic system remains flexible enough
for the "automatic mechanism" to operate as an effective "governor". It has been demonstrated that the growing relative importance of large industries producing capital goods is itself a
potential source of economic instability. 2 As consumer demand
increases a process of expansion is set going in these capital goods
industries. Should the increase in consumer demand even be stabilised, a substantial drop in the level of activity of the industries
producing new capital goods is bound to ensue. There seems no
doubt that this fact goes far to explain the greater violence of
recent cyclical fluctuations in economic activity.
Furthermore, the high degree of specialisation which characterises many of our modern productive processes has brought with
it increasing obstacles to smooth changes in the structure of industry. A simple illustration may be cited from agriculture. Production of many specialised crops such as tea, coffee, rubber, de1

Lionel ROBBINS, op. cit., p. 151.

Cf. J. M. CLARK: Strategic Factors in Business Cycles (New York, 1935).

CHANGING CONDITIONS OF PRODUCTION AND TRADE

ciduous fruits, olives and citrus fruits is a long process. In prosperous years, if demand for such products increases, individual producers may be induced to extend production by planting new
orchards or plantations. The trees may take three, five, seven or
even more years to mature. Producers can hardly be expected to
be accurate in forecasting consumer demand so far ahead. In a
period of prosperity their forecasts are likely to be over-optimistic
and the outcome may well be a glutted market and continuing overproduction. This has in fact occurred in all the industries mentioned
above. The cycles of production in the great corn-hog belt of the
United States are perhaps also traceable, at least in part, to this
type of inflexibility.1
In a provocative article, Mr. D. H. Robertson has suggested
also that the spread of industrialisation may be causing the margins
of comparative advantage in certain lines of manufacture to narrow
significantly.2 This does not mean that the progress of industrialisation is bound to cause a decrease in the volume and importance of
international trade. A shrinkage in the "gaps" of comparative
advantage is quite compatible with an increasing volume of trade.
Mr. Robertson's point is rather that structural changes of this
sort are likely to render the volume, composition and direction of
trade less stable. As he points out, although it is difficult to say
how much weight ought to be given to this argument, it is likely
that it will have great practical influence on trade policies.
The very fact of increasing production, shifting from necessities
to a wide and variable range of luxury goods and services, adds t o
the instability of the economic system. As early as 1691 Sir William
Petty drew attention to the fact that the relatively high per capita
income in Holland was associated with the employment of a large
proportion of the Dutch population in manufacture and commerce.
This connection still holds true. 3 As average real income per head
1
For an ingenious theoretical explanation, cf. Mordecai E Z E K I E L : " T h e
Cobweb Theorem", in Quarterly Journal of Economics, Vol. LII (1938), pp. 255280. In spite of Professor N . H. BUCHANAN'S severe and searching criticism of
the above article ("A Reconsideration of the Cobweb Theorem", Journal of
Political Economy, Vol. 47 (1939), pp. 67-91), we are inclined to believe t h a t
Ezekiel's argument, while it may not be consistent with the behaviour of the
"economic man", may be applicable to the Middle-western farmer.
2
D. H. ROBERTSON: " T h e Future of International Trade", reprinted in
Essays in Monetary Theory (London, 1940), p . 218.
3
Cited by Colin CLARK: The Conditions of Economic Progress (London, 1940),
pp. 176-7. " T h e highest ratio of tertiary producers to occupied population is
shown by Great Britain and U.S.A., where the figure was 50 per cent. Almost
equally high figures are shown by New Zealand and Australia. These countries
enjoy the highest average real income per head. The countries in which 50 per
cent, or more of the occupied population are engaged in primary production are
all . . . found a t the lower end of the list. Furthermore, no country whose average income per head is below 400 units fails to show a t least 40 per cent, of its
population engaged in primary production, with the exception of Japan, where
the proportion engaged in tertiary production is inexplicably high." Ibid., p. 182;

INTERNATIONAL ECONOMIC ORGANISATION

rises, an increasing proportion of that income is spent on goods
and services the demand for which may be rather unpredictable.
It is true that higher real incomes extend the range of "conventional necessities" so that demand becomes stabilised for many
commodities that were formerly luxury goods. Many of these
commodities, however, are articles of durable rather than immediate consumption, so that replacement demands may be postponed when incomes fall. When as many as 20-30 per cent, of the
working population are engaged in secondary, and 40-50 per cent.
in tertiary production, this potential instability may become serious
and there is increased danger of a small decline in purchasing power
leading to a substantial fall in effective demand and a destructive
spiral of secondary deflation.
Recent trends in population growth are also calculated to
bring changes in the composition of aggregate consumer demand
which may cause increased instability. It is difficult to evaluate
the importance of factors such as these but the slowing down of the
rate of population increase, now characteristic of the Western
world, may well bring a slowing or a cessation of the expansion of
demand for certain consumers' commodities, such as food, clothing
and shelter, which are functionally related to population growth.
In few of these industries has anything like a saturation point been
reached. But catering for a rising standard of living for a given
population is likely to be more risky than providing the same
simple goods and services for more people. Demand for luxuries
a n d semi-luxuries is liable to be uncertain. Furthermore, in that
type of market, selling costs are high and monopoly and monopolistic competition widespread. Progress may thus become even
more discontinuous. As the relatively rigid sectors of the economy
grow in importance, the introduction of innovations may become
more difficult. Existing entrepreneurs may not wish to undertake
the financial risks and these may be too great for new entrepreneurs.
Aside from these technical and structural causes of increasing
instability, but equally important, are those intangible psychological causes which go to make up "the prevailing spirit of optimism
or pessimism". Individuals and firms base their decision upon their
judgment or "expectations" as to the future. The effect of these
expectations, operating through speculation in an inherently stable
and purely competitive system is very different from their effect
in a system subject to violent and unpredictable fluctuations in
economic activity. Under the classical assumption that any movement away from the point of equilibrium will tend to set in motion
forces bringing about a return to equilibrium, speculation will act
as a counterweight to any fluctuations that may occur and will

CHANGING CONDITIONS OF PRODUCTION AND TRADE

tend to minimise them. But when the movements away from
equilibrium are expected to be followed by still greater movements
in the same direction (as in the downswing of the business cycle),
the "expectations" of producers, or more exactly the decisions
based upon these "expectations", are calculated to reinforce the
secondary fluctuations, rather than to counteract them.
The "artificial shortages" which make their appearance in wartime illustrate this cumulative process. If, in the absence of rationing, consumers come to believe that supplies of some commodity
are limited, they are apt to stock up and, in so doing, make their
fear a reality. On the stock exchange this very human failing has
long been exploited by experts who, acting rationally and in their
own interests, seek to anticipate changes in the market and gain
by the resulting price movements, which have little relation to the
prospective returns on the stocks involved. 1
There is little disagreement now with the facts set forth above.
The disappearance of free competitive conditions and the unreality
of attempts to restore them by attacking certain of the more overt
forms of monopoly is generally recognised. Debate on the merits
of free enterprise in a self-adjusting market economy is largely
academic—a repetition of irrelevant conclusions from past experience. The real issues of present policy centre upon the location
and concentration of power in the existing economic system. 2
The concentration of economic power which flows from technical developments is increased by the "splitting of the atom of
property" as a result of which the control of great enterprises has
passed from scattered owners to the small, compact boards of
directors. 3
All these developments, changing the character of industrial
organisation and relocating the power inherent in its operation,
have rendered invalid or have seriously weakened the controlling
mechanisms by which economic equilibrium was achieved in the
past. Policies, whether of business or government, evolved from
the simpler conditions of an earlier period, may therefore often
1
Cf. J. M. K E Y N E S : The General Theory of Employment, Interest and Money
(London and New York, 1936), pp. 150-164.
2
The most important social criticism of great inequalities has been forcefully
stated by Professor Laski: "Every approach to objective tests of social good,
all the groundwork, therefore, of political obligation, is ultimately a function of
increasing equality. For men think differently who live differently and . . . the
unity which gives endurance and stability to a society is therefore unattainable
when they live so differently that they cannot hope to see life in the same terms.
It is the poison of inequality which has wrought the ruin of all great empires in
the past." The State in Theory and Practice (New York, 1935), p. 84.
a
Robert A. GORDON: "Ownership by Management and Control Groups in
the Large Corporation", in Quarterly Journal of Economics, Vol. L I I (1938),
pp. 367-400.

46 '

INTERNATIONAL ECONOMIC ORGANISATION

become inappropriate. An illustration is provided by the attitude
to monopoly typified by the Sherman Act and the recent policy of
the Department of Justice in the United States. This attitude is
derived from a legal theory based on economic concepts of pure
competition which have long been discarded by most economists and
business men. Its inadequacy results from the oversimplified
concept of monopoly from which it works. This concept tends to
identify "monopoly" with "collusion". Actually the absence of
hidden agreements proves very little. If, for example, an individual
from among a relatively small number of producers assumes that
if he cuts his price all his rivals will do the same he will clearly not
be likely to do so since such an action will leave him the same
proportion of the total trade at a smaller margin of profit. Only
if the demand for his product is highly elastic, so that the cut in
price calls forth an increase in total sales large enough to offset the
fall in the profit margin, would it be profitable for him to make it.
Thus a situation similar to that of monopoly can exist without
collusion among the individual firms.1 Control of monopolistic
tendencies in modern industrial society calls for new devices which
recognise the changed technical conditions of productive efficiency.
Classical economic theory, and the political theory which
developed along with it in the nineteenth century, was based upon
the assumption that in a free society of rational men, suitable and
desirable forms of social organisation would develop as the need
arose for them. Social organisation, however, does not change without cost. The scale of organisation is now so great, the pace of technical change so rapid, and the dislocation caused by it so vast, that
no simple formula of adjustment can be adequate. A determined
effort of reorganisation is required and it is inevitable that the
costs of any projected change in social organisation shall form the
subject of obstinate and even bitter conflict.
"Free enterprise" or "capitalism", it should be recognised, is
now something very different from what was described by those
terms some generations ago. A strong case may still be made, and
is made, for it; but the issue should not be confused by arguments
derived from history. The case should be made, and criticised, in
relation to present facts rather than past controversies.
It should be recognised that private enterprise, in the setting
of modern methods of production, transport and communications,
tends more and more towards large-scale organisation. This inevitably entails not only monopolistic tendencies in marketing but
1
For an excellent analysis of these problems, cf.E. A.G. ROBINSON: Monopoly
(London and Cambridge, 1941), chapter II.

CHANGING CONDITIONS OF PRODUCTION AND TRADE

increasing concentration of control within the organisation. Large
units of organisation cannot be managed except by some measure
of autocracy.
The case for large-scale private enterprise, vigorously managed,
is primarily based upon its claim to efficiency. The real issues
of policy, therefore, turn on the question whether private industry
is likely in fact to be more efficient—in its reliance on scientific
research, in the boldness with which it exploits new discoveries,
in the shrewdness with which experimental investment is ventured.
The tests of efficiency are wider than mere productivity and certainly can no longer be confined to the sole criterion of profitability.
An efficient business must be both profitable and productive; but
if private business is to survive it must also prove its ability to
meet the needs of society. It should be remembered also that large
profits are not always a sign of monopoly. Indeed the case against
monopoly rests less upon the reaping of excessive profits than upon
the lack of enterprise, conservative management and inefficient
organisation by which it is often characterised, and upon the power
it accumulates to obstruct more efficient methods of production.
This is as true, or truer, of public as of private monopolies.
The extraordinary success of the great armament programme
by which the United Nations have out-produced the Axis has been
hailed both by the proponents of public control and by the defenders
of private enterprise as justifying their viewpoint. The fact is that
success has been due to clear social objectives having been accepted
and energetically implemented by public and private executives
alike. There have been delays, false starts, mistakes and waste,
but in time of war results are what count and in this case ships,
planes, guns and munitions have been produced in quantities to
beat the Axis.
The post-war transition years will be the testing ground for
the survival of private enterprise. Doubtless the sphere left for its
operation will be less in some countries than in others. It will
perhaps be greatest in the United States where the great manufacturing industries are most developed. If it can provide jobs and
maintain living standards so that the mass of the people can live
their private lives in reasonable security and comfort, there will not
be much questioning of its monopolistic tendencies. Much of the
complicated government regulation of its activities will disappear
at the end of the war and it is possible that programmes of public
employment in the United States at least may be held in abeyance
pending the results of private initiative.
The issue of monopoly power is even more fundamental than
that of profit. The critics of private enterprise rightly stress its

INTERNATIONAL ECONOMIC ORGANISATION

importance. 1 There can be no doubt that the efficient management of great private enterprises places great power in few hands.
The proponents of private enterprise, however, maintain that such
power is justified by the economic and social results of its exercise.
They admit that it involves inequality of income distribution but
argue that this is a small price to pay for abundant production.
They point also to the undeniable danger that public enterprise
may lead to a situation in which even greater power is placed in
the hands of those who control the State.
There is a similar cross-argument about bureaucracy. All
large undertakings move cumbrously, and business, as well as
government, develops bureaucratic tendencies as it grows in scale
of operation. To break through red tape requires some measure
of dictatorial authority. Civil services, established when the tradition of government was on the whole negative rather than positive,
do not normally produce men of courageous innovation. 2 In so far
as the economic functions of the State are concerned, the need for
civil servants with these qualities may be met in time by new
methods of recruitment designed to secure men with some experience of industrial and commercial affairs who would be the advisers of the government on economic questions and the executants of its policy.3 But until such time as civil servants of this
type are available authority to make innovations and take risks
must come from above. It is at least arguable that such authority,
exercised in the limited spheres of private businesses, is less dangerous than when exercised over society as a whole. Even if there is a
tendency towards consolidation of business power by interlocking
organisations 4 , this argument can be maintained. That such a tendency exists is clear, though its extent is difficult to gauge and perhaps easy to exaggerate. It should be recognised and controlled;
but it would be poor policy to risk the greater evil of complete State
tyranny through fear of partial industrial monopoly power. It is, of
course, always possible that integrated industrial power may ally
1
Cf. R. S. LYND, in Foreword to R. A. BRADY: Business as a System of Power
(New York, 1943). "Liberal democracy", warns Professor Lynd, "has never
dared face the fact that industrial capitalism is an intensely coercive form of
organisation of society t h a t cumulatively constrains men and all of their institutions to work the will of the minority who hold and wield power; and t h a t this
relentless warping of men's lives and forms of association becomes less and less
the result of voluntary decisions by 'bad' or 'good' men and more and more an
impersonal web of coercions dictated by the need to keep 'the system' running."
2
Sixteenth Report from the Select Committee on National
Expenditures,
Session 1941-42 (London, 1942).
3
Cf. Economist, 23 Oct. 1943, pp. 544-545, and Sir Josiah STAMP: " T h e
Administrator and a Planned Society", in Public Administration, Vol. XVI, 1938,
pp. 3-22.
4

Cf.

R. A. BRADY, op.

cit.

CHANGING CONDITIONS OF PRODUCTION AND TRADE

itself with State tyranny in the shortsighted illusion that by so
doing it can use the machinery of State for its own purposes. The
recent experience of the totalitarian countries shows that by so
doing it encompasses its own destruction. The costs of such an
alliance are now evident and ought not to be forgotten. If the temptation should recur the true antidote is to be found not in controls
that cripple industrial efficiency but in a vigilant democratic enforcement of the constitutional safeguards of individual liberty 1 ,
and in a strong and responsible organised labour movement.
B.

T H E INTERNATIONAL ASPECTS OF INSTABILITY

The preceding section of this study has been devoted to a
summary statement of the various ways in which national economic
activity has changed in recent years in most countries. The organisation of production and trade now differs considerably from the
small-scale competitive market economy on which the main body
of classical economic theory was postulated. Units of industrial
organisation are larger; the technical complications of modern industry involve not only large-scale operation but expensive research, marketing and advertising. They have also changed the
character of the patent rights upon which specialised production
largely rests. A greater degree of monopoly and monopolistic competition has therefore emerged and this is in large measure independent of overt agreements.
As living standards are raised production becomes less flexible.
The major element of rigidity is to be found in the growing importance of fixed capital in total production,costs and of the capital
goods industries in the economy as a whole. At the same time
labour costs have become less flexible and developments during the
war have strengthened this tendency. With consumers' demand
more variable in some respects and both labour costs and capital
costs more rigid, the pressure for adjustment as economic conditions
change tends to be concentrated on a narrowing segment of economic activity and mainly on raw material prices. These fluctuate
violently and bear harshly upon the less highly organised economic
groups and countries.
In these circumstances the conflict between the principles of
organisation usually described as private enterprise or government
planning has shifted to a new plane. There is no longer the prospect of returning to a self-regulating competitive market economy.
Neither is there at present any real possibility in most industrial
1

Douglas MILITER: YOU Can't Do Business with Hitler (New York, 1941).

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countries of inaugurating a completely planned system of public
enterprise. What exists, and is likely to exist after the war, is a
mixed system in which the sphere of public operation, and still
more of public controls, has been extended; but in which private
enterprise still plays a powerful role. The proportions in which
public and private enterprise are combined will clearly differ from
country to country. A strong case can be made for the preservation of a considerable measure of free enterprise on the ground of
efficiency in production and readiness to experiment. Such enterprise
contains larger elements of monopoly than it once did and therefore
concentrates a great deal of economic power in relatively few hands.
Against this must be balanced the risk that, in default of free enterprise, an even greater aggregation of power may fall into the hands
of political groups controlling the whole machinery of economic
activity in the name of the State. The working out of policies designed to achieve maximum employment and increased social
security must therefore be attempted by a combination of private
enterprise and public controls.
International economic relations naturally reflect the impact
of these changes in industrial and market organisation. The classical theory of international trade and investment was worked out
upon the assumption that for most products the whole trading world
formed a single market or at least an integrated series of connected
markets. One of the great merits of free trade was assumed to be
its efficacy in linking the whole world into a great commercial
republic. Government, in this view, was to be confined to purely
political issues, keeping the ring free for private enterprise to
operate efficiently on a world scale. Goods would be produced
where costs were lowest and sold where demand was strongest.
Capital, in Bagehot's famous phrase, would run everywhere as it
was wanted, or as the rate of interest tempted it.
Upon the assumption of a world-wide market economy, the
classical theorists built up an attractive picture of an intricate but
integrated self-regulating structure in which not only the prices
of commodities, but the costs of production—wages, interest and
prices—were kept in a shifting equilibrium all over the world. The
neatness and symmetry of this theory had a great fascination for
economic students. It was often compared with a beautiful and
powerful piece of machinery or with the working of natural forces
such as those which govern the solar system.
The centre and pivot of the whole structure was the fixed and
stable ratio at which national currencies were exchanged. This
ratio was determined, when the international gold standard was
in operation, by establishing legal tender gold currencies of a fixed

CHANGING CONDITIONS OF PRODUCTION AND TRADE

weight and fineness. A simple arithmetical calculation established
the parity between each pair of currencies. Thus when 123.274
grains of gold, eleven twelfths fine, was coined into one pound
sterling and 25.8 grains of gold, nine tenths fine, was coined into
one U.S. dollar, simple division showed that one pound was equal
in gold content to 4.8665 dollars. The fact that gold was used as a
common denominator was incidental. The important fact was that
this rate of exchange was kept stable within narrow limits. Payments between the United States and Britain were made largely
by clearing, or offsetting. If at any moment there was a balance
due to the United States because of heavy exports to Great Britain,
pounds would be sold and dollars bought on the exchange market.
This would depress the value of pounds and raise the value of dollars so that perhaps $4.83 would buy one pound. If the balance
was small it would be absorbed by banking credits. If it was great
enough to cause a shift in the exchange rate, a whole series of speculative and real transactions would be set in motion, tending to bring
the rate back to parity. Speculators would buy pounds if they were
cheap and such was the ease with which funds could be transferred
that even a slight difference would attract them to the cheap currency. If, however, the cheapness persisted, American exporters
would find the price for their goods reduced. For example, a shipment of 10,000 bushels of wheat at 5 shillings per bushel would
bring £2,500. At $4.8665 to the £ this would be worth $12,166.25.
But if the exchange rate fell to $4.83 it would be worth only
$12,075.00. Even such a slight difference, less than one per cent.,
was often important enough to divert trade at this period when the
markets were highly organised and ships, touching at a port for
orders, might be diverted from one market to another as a result
of fractipnal price changes much smaller than one per cent. In the
opposite direction British exports would be encouraged as imports
were discouraged.
If the exchange rate remained off parity because of a persistent
disequilibrium of inward and outward payments, the monetary
authorities would take positive steps to accelerate the corrective
processes. If the exchange rate fell below the point at which it
would become cheaper to buy gold and export it rather than pay as
dearly for the foreign currency needed, the loss of gold from bank
reserves was always regarded as a danger signal calling for such
positive steps. Usually these were taken before gold was shipped.
The rate of rediscount was raised. Fixed interest securities might
also be sold so as to tighten up interest rates. These measures were
usually sufficient to deflate prices and check imports in the country
whose balance was under strain. Opposite steps in the country

INTERNATIONAL ECONOMIC ORGANISATION

whose currency was strong would release credit, raise prices and
encourage imports.
This is a highly simplified description of an intricate and complex system which included free movements of goods, free gold
shipments, and free currency transactions, as well as constructive
speculation anticipating and correcting price discrepancies in and
between these markets. There was an incessant series of operations
in which the movement of prices was continuous but small. As compared with the violence of such price and currency changes since
the international gold standard broke down these incessant changes
were like the ripples that rufBeacalm surface rather than great waves.
The essential conditions for success in such a system of international payments, however, were flexibility of costs and prices
and readiness to accept adjustments of production, employment,
wages and prices as these were imposed by external influences.
The case for free trade, as practised by Britain in the nineteenth
century, rested essentially upon the belief that market equilibrium
in a free competitive economy could be achieved and maintained
on a world scale.
In the circumstances that will follow the present war, however,
it would be highly unrealistic to base proposals for exchange stabilisation or even for freer trade upon the assumption that a competitive equilibrium can be restored and maintained between
national economies merely by removing controls and allowing competition to work freely. That experiment was tried after the last
war with results now only too familiar. By 1939 only two countries,
the United States and Belgium, remained on a standard based on
gold and the world trading system, like the world currency system,
had virtually broken down. 1 If any attempt to restore world trade
- is to be successful, it must reckon with the disequilibria that have
been created by two great wars and aggravated by policies of
economic nationalism between the wars. It must start, too, from
a recognition of the domestic rigidities and instabilities summarised
in the preceding section and from the changes in the pattern of
international economic relations described briefly below.
In recent years a great network of private international agreements has been organised between individual producers or national
producers' organisations. These agreements have taken various
forms. In some industries a loosely organised "gentleman's agreement" has been chosen, in others an elaborately organised cartel
has been preferred.
1
Cf. LEAGUE OF NATIONS: The Transition from War to Peace Economy,
Report of the Delegation on Economic Depressions, Part I (Geneva, 1943),
pp. 24-26.

CHANGING CONDITIONS OF PRODUCTION AND TRADE

Such private international agreements are not new. A French
study 1 shows that in the iodine, potash and bismuth industries
they have been in existence for well over sixty years, and that
by 1914 international controls were in force covering such important
products as nickel, aluminium, zinc, mercury, potash, calcium
carbide, platinum, sugar and quinine. It is noteworthy that most
of these early agreements covered scarce mineral raw materials
found in only a few deposits on the earth's surface.
While the great majority of existing controls were swept away
by the impact of the first world war, the movement towards conscious control was given added impetus and to some extent new
direction by the institution of numerous administrative control
boards—both during the war and in the first "reconstruction
period". Some of these, like the Copper Export Association, the
Bandoeng Tin Pool and the British Australian Wool Realisation
Association formed precedents for later schemes. In the decade
following the first world war, severe industrial dislocation made
such agreements seem more desirable, and between 1922 and 1929
rubber, copper, steel, coal, nitrates and cement, electric lamps,
wire and many products of the dyestuffs industry 2 were added to
the list of "controlled" materials. With the onset of the depression
the pace of organisation quickened enormously and production and
other direct controls spread to wood pulp of various types, to rayon,
to paper, and to various products of the chemical, electrical and
many other industries. The outbreak of war, waged as much with
economic as with military weapons, has made it inevitable that
administrative regulation should play an increased role in economic
life, and some of the wartime control boards, like some of their
predecessors in the last war, may well continue after the war.
The study cited above lists 140 international economic agreements covering a great variety of raw materials and manufactured
products ranging from aluminium, coal, copper, jute, lead, mercury,
petroleum, potash, steel; sulphur, wood, zinc, wheat, coffee, cotton,
nitrates, rubber, tin, tea, sugar, soda ash, pyrites, ferro-alloys, coke,
tubes, electric lamps, steel rails, whale oil, platinum, wire, wire rods,
and tinplate, to bolts and nuts, ball-bearings, buttons, corks and
matches. Despite this wide variety the study makes no claim to be
exhaustive. It certainly underestimates the importance of the
United States in the system of control since it does not take account
of the effects of the Sherman Act on the large American producers.
1
Laurence BALLANDE: Essai d'étude monographique et statistique sur les ententes économiques internationales (Paris, 1936).
8
Cartel agreements apparently existed in the dyestuffs industry much earlier;
cf. Joseph BORKIN and Charles A. W E L S H : Germany's Master Plan (New York,
1943).

INTERNATIONAL ECONOMIC ORGANISATION

There is no mention, for example, of the Zeiss—Bausch and Lomb
agreement on optical glass, the I. G. Farben—Standard Oil agreement
on synthetic oil products, that between Alcoa and the Alliance
Aluminum Cartel and others which have recently come to light.
Cartel agreements ha.ve thus increased greatly in number and
have spread more and more to manufactured goods. The reasons
for this development are to be found in the same technical and
organisational changes in industry as brought about the growth
of monopoly within the national economy. Indeed these international arrangements were possible only after the various national
industries had been relatively closely integrated. 1 Thus the rise of
national trade associations is closely connected with the growth
of international industrial agreements. The scope and effectiveness
of these agreements have likewise increased. Many have been
extended geographically, as, for example, aluminium and nitrates,
while others have been made more flexible by the inclusion of clauses
concerning stocks, as for example in the tin, rubber and sugar agreements, and by focussing control on exports rather than on production as in the Steel Cartel agreement of 1933.
The attitudes of governments towards such agreements have
also undergone significant changes. In France, Germany and Italy
such agreements between producers, both national and international, have long been accepted and even regarded with favour.
It is perhaps significant, for example, that the first French quotas
were set up (in 1932) by agreement among the interested parties. 2
In Great Britain, cartel agreements used to be looked upon with
suspicion. Since the war of 1914-18, however, and especially
since 1931, a significant change has taken place. Agricultural
marketing boards became widespread within the country and the
National Government not only looked kindly upon, but even actively promoted international producers' organisations. 3 The International Tea Committee, in which the British Government took
the initiative, was an intergovernmental organisation, as were the
International Rubber Regulation Committee and the International
Tin Committee. 4 The part played by the British Government in the
1
Cf. the circumstances surrounding the British entry into the International
Steel Cartel. Ervin H E X N E R : The International Steel Cartel (Chapel Hill, 1943),
pp. 113 ff.
2

Laurence BAIAANDE, op. cit., p. 317.

"As the early rejection of centralised control by British industry rested upon
the prosperity of the nineteenth century, so its final acceptance resulted from the
adversity of the twentieth." A. F . LUCAS, op. cit., p. 20.
4
For a collection of the texts of the various existing intergovernmental commodity control agreements, and of extracts from the principal international
pronouncements on commodity control policy, together with a discussion of some
of the social issues involved, see INTERNATIONAL LABOUR O F F I C E : Intergovernmental Commodity Control Agreements (Montreal, 1943).

CHANGING CONDITIONS OF PRODUCTION AND TRADE

negotiations between the British steel producers and the Internationale Rohstahl Exportgemeinschaft is of special interest in
this regard. Presumably to increase the bargaining strength of
the British industry the import duty on steel products was raised
to 50 per cent, ad valorem on condition that the industry formed a
national organisation. Agreement was finally reached with the
continental steel cartel in 1935. The British share of exports was
to be the same as in 1934, while continental exports to Great Britain
were restricted to 670,000 tons in the year ending 7 August 1936
and to 525,000 tons thereafter. "At the same time it was agreed
that the British duty should be reduced to 20 per cent, ad valorem
in order to give a higher profit margin to the continental producers
on the permitted tonnage of imports. This was combined with a
licensing system . . . later the duty was reduced to 10 per cent." 1
In the United States the governmental attitude, typified by
the Sherman Act and the policy of the Anti-Trust Division of the
Department of Justice, has been steadily hostile except to agreements relating to the export market. The anti-trust legislation,
however, has not prevented the adherence of American producers
to international industrial agreements.
The immediate aims of the governments have ranged from a
desire to increase revenue, as in the Japanese camphor monopoly—
now broken by the development of the synthetic product—to the
wish to preserve natural resources as in the International Whaling
Convention. But a careful examination reveals that aid to producers is almost invariably in the background. Now it is evident that
high-cost producers stand to gain most by such arrangements. In
practice the regulation committees are producer-controlled, and
it is but natural that, in "stabilisation" measures, they should tend
to raise prices readily but find the idea of lowering them distasteful.
The main, reasons for international control have their roots in
those technological and organisational changes in the economic
system which have been discussed above. One such change, the
international control of patents, has recently been much in the
public eye. Patents are of various types. Today a patent may
establish the exclusive right to manufacture some small contrivance;
it may also cover the improvement of an existing process; but most
important of all, a basic patent may stake out a claim to research
in some scientific field, or in other words, may set up a monopoly
on a branch of scientific knowledge. Originally a patent was granted
1
P . E . P . : Report on International Trade (London, 1937); cf. A. F . LUCAS,
op. cit., p. 118; Ervin HEXNER, op. cit., p. 114. "When the steel industry asked
for an extension of these duties for an indefinite period, the government urged
the industry to establish a national organisation in which all of its pressing problems could be solved or considerably mitigated."

INTERNATIONAL ECONOMIC ORGANISATION

to ensure the carrying out of some project considered desirable.
Nowadays the granting of patents is justified on the ground that
it encourages and stimulates invention.
Like classical political economy, contemporary patent law
developed in and was suited to a small-scale economy. It has not
changed as large-scale production developed and industrial concentration proceeded so that today the cost of research and the cumulative effect of a large block of patents, together with the financial
strength of the great corporations, have combined to give these
corporate giants a high degree of monopoly power in their respective
industries, and sometimes to "create an atmosphere in which it is
easier to combine to the detriment of the consumer than to serve
him". 1 In short, it is possible that patent protection today, instead
of giving the maximum encouragement to enterprise, may give to
those who put inventions on the market the power and often the
incentive actively to discourage enterprise and development in
order to maintain existing capital values. Under the existing legal
position relating to the private ownership of patents, corporations
working on the same problems along similar lines in different countries are likely at some point to have to choose between pooling
their resources by agreement or facing expensive patent litigation
or an even more expensive laboratory search to evade the blocking
patents of their rivals. The actual importance of patent rights is
lessened by the rapid and continuous progress of scientific research ;
but the possibility of litigation based upon such rights is always an effective inducement to the taking of prompt and complete legal cover.
The methods of cartel control are almost as varied as the commodities regulated. Their legal form may be anything from a
"gentlemen's agreement" 2 to a State monopoly 3 , and they may
ration production 4 , regulate exports 6 , reserve home markets 6 , or
involve some other geographical market division7, and exercise
direct control of price 8 , or stocks. 9 New variations will no doubt
make their appearance, and although many of the agreements have
been disrupted by the war, any realistic policy of international
economic reconstruction must take account of their probable reappearance.
1

Economist, 16 J a n . 1943, p. 78.
Cf. wood pulp (Sulphite Pulp Suppliers) and ferro tungsten.
Camphor.
4
Aluminium, cocaine, cinchona bark-quinine, tea, wheat, platinum, etc.
6
Mercury, sugar, tea, tin, wheat, kapok, wood pulp, rubber, steel.
8
Nitrates, mercury, potash, sulphur, cement, codine.
7
Phosphates, potash, quebracho, sulphur, paraffin and sugar.
8
Aluminium, cobalt, ferro-silicon, opium, platinum, potash, quebracho, sugar
and tin.
9
Aluminium, cobalt, opium, sodium sulphate, cinchona bark-quinine, coffee,
sugar and tin.
2
3

CHANGING CONDITIONS OF PRODUCTION AND TRADE

It has frequently been claimed by those who favour the extension
of the cartel system in the international sphere that it leads to rationalisation and increased efficiency in the industry concerned.
Examination of some of the schemes in existence leads, however,
to the conclusion that so far from increasing efficiency, one of the
greatest dangers of such a system is that, by protecting high-cost
producers in the interest of existing capital values, it may set obstacles in the way of technical progress. Illustrations might be taken
from the tin industry, the copper industry, the Chilean nitrate
industry and others. A smoothly functioning control scheme must
eliminate excess capacity arid not simply protect existing investment and put off the day of reckoning as most existing control
schemes have done. If the cartel is strong it can, and will, exact
monopoly profits; if it is weak, like the first copper cartel, it can
lead only to an aggravation of the evils that brought it on.
The opinion is voiced, more often now than formerly, that the
shortcomings of cartels can be eliminated as the organisation is
improved, and that the instability which they have sometimes
caused arises from faulty, shortsighted and avaricious management. "Producers are realising", says the P.E.P. Report on International Trade1, "from the aspect of enlightened self-interest, that
it pays to maintain the good will of consumers at all times". Again,
"We believe that the technique of trade control by cartels is coming
increasingly to be based on sound economic principles and can
contribute to the orderly expansion of trade, and perhaps also to
the elimination of excessive fluctuations in economic activity.
But it cannot be sufficiently emphasised that progress in this direction can only be secured by the active intervention of governments
to ensure that agreements should not take a form detrimental to
consumers." 2
It is thus argued that private cartel organisation can be used
in the general welfare. It may be true that by maintaining the good
will of the consumers (and in many cases these too are large monopolistic concerns) international cartels have learned to some extent
to mitigate instability in their own particular industries. But to say
that they have learned to do this is simply another way of saying
that they have learned to exploit their monopoly position more intelligently. In technical language, where they formerly gauged the
demand in the short run they now do so in the long run.
1

P.E.P., op. cit., p. 93.
Ibid., p. 10. Cf. W. OUALID: International Raw Materials Cartels (International Studies Conference, Paris, 1938); the Federation of British Industries
Report on Reconstruction adopted on 15 April 1942; and the programme of the
World Trade Alliance Association cited in the New York Herald Tribune, 20 July
1943, p. 23.
2

INTERNATIONAL ECONOMIC ORGANISATION

If governments are to prevent cartels from following policies
detrimental to consumers they must prevent monopoly producers
from acting rationally and in their own immediate interests. It
would appear, therefore, that there must be a constant conflict
of interest between the organised producers and governments representing the mass of consumers. This conflict is not always apparent, for in the recent past governments have increasingly favoured
the cartellised producers and have often lent active support to
industrial agreements which could hardly benefit those whose
interests the governments were said to safeguard. As the Economist
trenchantly remarked, "The result has been to revolutionise the
attitude of industry to the State: the policeman has turned Father
Christmas." 1
In the national commodity control boards created since the
present war began the influence of organised business groups has,
on the whole, increased. In Great Britain, for example, the majority
of the boards are headed by men prominent in the corresponding
trade associations. It could indeed hardly be otherwise. In peacetime the great bulk of goods and services is produced by private
industry. In a national emergency the government must turn to
private industry for the goods it requires. 2
This increase of the political power of organised industrial
groups, if not carefully controlled, may lead nationally to a sort of
industrial feudalism, and internationally to a trading system increasingly dominated by agreements between powerful national
industrial groups. 3
The increasing resort to international commodity agreements
and cartels which has been outlined was partly caused by the prevailing instability of prices in the years immediately preceding the
war. In turn it further concentrated the pressures of competitive
adjustments and increased the instability of prices in the uncontrolled sectors of international trade.
In the inter-war period one of the most disturbing factors in
the international economic system was the extreme instability of
prices of foodstuffs and raw materials. "During the last twenty
years", runs the League of Nations report on the transition period,
"the price of wheat and of jute has been halved three times within
about twelve months, the price of cotton three times in periods
under eighteen months. The price of copper and of lead was halved
1

Economist, 18 Mar. 1939, p. 551.
Cf. Donald C. BLAISDELL : Economic Power and Group Pressures, Temporary
National Economic Committee, Monograph No. 26 (Washington, 1941).
3
Cf. the negotiations between the Federation of British Industries and the
Reichsgruppe für Industrie which failed only when German soldiers entered
Prague and forced a change in British foreign policy.
2

CHANGING CONDITIONS OF PRODUCTION AND TRADE

four times within periods of two years, and doubled three times
even more rapidly. The price of zinc was halved twice in eighteen
months, of tin twice in twenty-four months; zinc and lead doubled
in price three times in two years or less; copper three times in
eighteen months. On one occasion the price of coffee was halved
in eight months, on another the price of sugar trebled in four months.
Between 1920 and 1933, the price of crude rubber fluctuated between four cents a pound and twenty-five times that amount and
was on several occasions doubled or halved in the space of a few
months." 1 In agricultural crops produced annually there were two
main types of price change, those which took place within a single
year 2 and those which corresponded to the general cyclical movement
in economic activity.
In most of the commodity markets these cyclical price changes
did not take place about any healthy "norm", but in markets that
had suffered from chronic, deep-seated maladjustments at least
since the first world war. These violent price changes must be
considered not as the underlying causes of the breakdown of the
international economic system but rather as manifestations of the
faulty working of that system and symptoms of the structural
disequilibria which did so much to bring about the final collapse.
The violent falls in agricultural export prices of which illustrations have been cited above strained the balances of payments of
the raw material countries which were for the most part debtors
on capital account. The burden of their existing debt service was
thereby increased and had to be paid out of a smaller supply of
foreign exchange. At the same time the current supply of loans
which they had used in part to pay for the imported goods they
required suddenly ceased. Quickly these debtor countries were
forced to adopt policies of quantitative restriction of imports and
of exchange control.
The reasons for these wide and rapid fluctuations vary with
the characteristics of the markets for the various commodities.
In the wheat, jute, coffee, sugar and cotton markets there is a
large number of individual sellers and conditions on the supply
side approximate those of pure competition. The world copper
market, on the other hand, is supplied by relatively few sellers.
In the markets for rubber and tin the situation is complicated by
the fact that there are some large and powerful units, owned by
1
LEAGUE OF NATIONS: The Transition from War to Peace Economy, op. cit.,
pp. 23-4.
2
If the minimum and maximum monthly average price of wheat, sugar,
coffee, cotton, and wool are expressed as percentages of the annual average price,
the average annual percentage fluctuation over the twenty-year period was 41
per cent., in the case of wheat, 44 in t h a t of sugar, 28 in coffee, 34 in cotton and
35 in wool.

INTERNATIONAL ECONOMIC ORGANISATION

Western capital, and a great many small Native producers. Zinc
and lead and some copper are produced under conditions of joint
supply. Effective demand for some products tends to fluctuate
more than for others, and for different reasons. The market for
rubber, tin, zinc and lead is more sensitive to cyclical movements
than that for wheat and sugar, partly because they are used in
quantities that are small as compared with the value of the finished
goods. In addition some of the upward swings of prices in the
metals markets are directly traceable to increased demand for
rearmament purposes. The copper market is highly monopsonistic
(subject to monopoly demand), and there are relatively few large
buyers for some of the other products mentioned.
All the commodities just mentioned have, at least for part of
the inter-war period, been subject to regulation. The copper, lead
and zinc markets have been controlled by private producers' organisations; coffee and jute have been regulated by national governments; tin, sugar and wheat were controlled by organisations in
which several governments were represented, while rubber has
been subject first to private and then to public international control. The distinction between private and government control is
perhaps not as crucial as it might appear since the government
bodies regulating the various commodity markets have in fact been
dominated by producers' organisations or have acted largely in the
interests of the producers.
These commodity controls were instituted in periods of market
dislocation. Especially after the last war there was widespread
excess capacity which was sometimes aggravated by the rapid and
ephemeral reconstruction boom. Some control schemes, for example
the Stevenson Rubber Control Scheme and the second copper
cartel (Copper Exporters, Inc.), seem to have sought high prices
more than others ; and in fact all seem to have paid too much attention to price and production regulation narrowly conceived and
too little attention to the basic causes of the disequilibria in prices
and output. They attempted in general to relieve the situation by
restricting the production of all, or as many as possible, of the existing producers, and by maintaining prices, rather than by eliminating
the high-cost production and expanding the output of the efficient
low-cost producers. Not one of them made a determined attack
on the root problem of excess capacity. 1
The causes of this chronic maladjustment were various. The
war of 1914-18 had led to a great expansion of wheat and sugar
production outside Europe. When no extensive policy of agricul1
Individual control schemes could not, of course, stimulate world effective
demand.

CHANGING CONDITIONS OF PRODUCTION AND TRADE

turai adaptation was undertaken and the wheat and sugar-beet
fields of Europe came again into production, persistent surpluses
appeared, glutting the markets. Improved technology, the substitution of tractor for animal power, and biological improvement bringing cold- and rust-resistant wheats and highly productive strains
of sugar-cane changed the competitive positions of the various
producers. Cotton production outside the United States expanded
rapidly in the years- after the war and this was later aided by the
price-supporting actions of the United States Government. The
war demand for metals had brought—with a lag—the development
of new production areas. But producers were unwilling to see the
inflated capital values of their older mines decline and struggled
to keep them in production. Sometimes, too, new methods of lowcost production required a steady volume of output of a product,
like copper, for which demand was notoriously erratic. The war
boom in rubber had led to extensive plantings. When the first slump
came, the Stevenson control scheme was instituted to stabilise, in
fact to raise, prices and succeeded so well in its immediate goal that
it led to further plantings and increased disequilibrium.
Neither free-market conditions nor regulation by producer
groups brought a stable adjustment of supply to demand. Clearly
there is no universal cure. The causes of disequilibrium are many
though the symptoms may be the same. The smoothing of seasonal
and short-period price fluctuations must be treated differently from
the problem of assisting adaptation to long-run changes in the productive structure. Price movements which are associated with
monopoly are in still another category. If stable international
economic relations are to be achieved in the post-war world, a satisfactory solution must be sought for these problems.
The present war, again, has caused great changes in the structure and mechanisms of international economic relations. The
whole complex structure of private trade, finance, investment,
shipping, insurance and industrial agreements has been affected
and new mechanisms of intergovernmental co-operation have
grown up. It would be inaccurate to say, however, that with the
outbreak of war a system of international economic organisation
based upon government decisions replaced one in which the motive
force had been provided by the decisions of private individuals.
For years before the outbreak of military hostilities there had in
fact been no international economic system but only the shattered
remnants of one which had barely survived the shock of the first
world war and had finally collapsed in the "great depression". W h a t
has developed since the war is not a new system of international
economic organisation but a series of ad hoc arrangements among

INTERNATIONAL ECONOMIC ORGANISATION

the various members of the United Nations. This is not to say that
these wartime organisations will not be important in the future.
They will be influential in shaping the post-war world if only
because they will provide the only instruments of immediate action
in the crucial period after the fighting ends. The most important
of the wartime organisations, at least for the time being, is the
exchange of weapons, ammunition, food and industrial equipment
under the mutual aid (lend-lease) agreements. 1 This new war trade
already accounts for well over half the trade of the United States
and will continue to increase as private trade contracts still further.
Perhaps more significant for the future, however, is the series of
agreements whereby governments have contracted to purchase the
entire production of strategic crops and materials in certain countries. These operations have been carried out in some instances by
local governments. The United Kingdom Commodity Corporation
and certain United States agencies such as the Reconstruction
Finance Corporation and its subsidiaries, the Metals Reserves
Corporation and the Rubber Reserves Corporation, have also been
active. 2 Exchange controls and import and export licensing systems, vital weapons in the struggle to obtain imports essential to
maintain and increase a country's war potential and to prevent
the enemy from procuring from abroad the products he requires,
have now spread everywhere. Action has now been taken in the
United States to co-ordinate the foreign economic activities of
Government departments and place them under the leadership
of the State Department. 3
Even before the war the organised capital market had lost much
of its earlier importance in mobilising funds available for investment abroad. Portfolio investment had remained at an extraordinarily low level since the depression of 1929-32 and what foreign
lending was undertaken took the form either of intergovernmental
lending, often largely for political purposes, or of "direct" investments, such as the establishment of branch plants, by great- industrial corporations. As long-term lending declined, the granting
of medium-term credits, often backed by a government guarantee,
became a commoner method of financing trade in capital goods.
During the war virtually all foreign lending has been done by governments. In the United States these financial operations, which
1
Cf. J. B. CONDLIFFE: " T h e Economic Implications of Lend-Lease", in
Foreign Affairs, Apr. 1943.
2
A new subsidiary, the Petroleum Reserves Corporation, has been set up
more recently " t o acquire petroleum, petroleum products, and petroleum
reserves outside the Continental United States" (New York Times, 2 July 1943,
p. 24).
3
Department of State Bulletin, 27 July 1943, p. 32.

CHANGING CONDITIONS OF PRODUCTION AND TRADE

have sometimes taken the form of stabilisation loans, sometimes of
loans for development, and which have often been granted to increase the production of strategic materials, have been carried out
by the Treasury, the Export-Import Bank, the Reconstruction
Finance Corporation and its subsidiaries, and by the Office of
Economic Warfare.
Shipping is now rigidly controlled—and often moved—by governments. The Combined Shipping Adjustment Board co-ordinates the shipping policies of the British Ministry of War Transport,
the American War Shipping Administration and the other United
Nations merchant fleets chartered to them. Ships move in great
convoys along unaccustomed routes carrying and distributing
goods which have been allocated to their various destinations
mainly by the Office of Lend-Lease Administration, the Combined
Food Board, the Combined Raw Materials Board and the Munitions Assignment Board.
A large number of international industrial agreements, some
with government support but most private, existed before the war,
often between business men of the Axis countries and those of the
various United Nations. The majority of these, which had laid
increasing emphasis on the allocation of export markets among
their members, have been dissolved or disrupted by the war. The
charge that in some cases these cartel agreements have in fact
hampered American production of vital war materials has called
forth much criticism. The international allocation of markets,
however, has not disappeared with these agreements. The export
market for various products is now divided into areas which are
allocated to the industrial enterprises of the two countries by agreements between the British Ministry of Economic Warfare and the
United States Office of Economic Warfare.
Not only has the war resulted in the growth of many new types
of international commercial, financial and technical institutions,
it has also brought important shifts in the distribution of capital
and equipment throughout the world. The pre-war pattern of
world trade was set largely by the distribution of past international
investments. The most significant of the wartime changes in the
ownership of foreign resources has been the decline in British
overseas investments which, especially before the passage of the
Lend-Lease Act, were sold to pay for the costs of war. If Great
Britain is to maintain or improve its pre-war level of living, it must
export even more than before, since it must now pay for a greater
proportion of its imported products by utilising receipts from current exports. But this is not all. Since countries did not settle their
claims on one another directly but through a complicated system

INTERNATIONAL ECONOMIC ORGANISATION

of roundabout trading relationships 1 , these changes in the international distribution of foreign assets will affect not only the balances of payments of those countries whose holdings have declined,
but also the balances of payments of the countries through which
the claims were transferred. Adaptation to the post-war situation
will therefore involve a very large number of changes in the pattern
of world trade. This will not be easy. A decline in the overseas
holdings of a great creditor country will reduce the amount of debt
service payments which have to be transferred, within the trading
system, but it will not itself change the amount or type of goods
needed by those countries through which the debt service payments
were formerly transferred. 2
It seems obvious that the pattern of international trade after
the war will be very different from that of the pre-war trade and
still more different from the competitive multilateral trade of textbook theory. National economic systems are no longer meshed
into a stable international equilibrium. A great variety of agreements, bilateral and multilateral, public and private, regulate the
interchange of important products, but do so often with little reference to comparative costs. Cartels and commodity agreements have
enabled trade to be organised for so many products on a basis of
monopoly or limited competition that the adjustments of prices
and production needed to fit national economies into a world
market have been obstructed since the last war. The pressure of
adaptation has been concentrated on a constantly narrowing
segment of trade and therefore has caused violent price fluctuations.
A second world war has added even greater dislocation and bids
fair to produce a new crop of cartels and commodity agreements.
In the circumstances it seems very probable that the restoration
of freer multilateral trade may prove a very difficult and complicated operation. And yet the need for expanding trade was never
clearer than it is now.
C. T H E CASE FOR FREER TRADE
Up to this point the argument has been concerned with the
difficulties likely to be encountered in any attempt to restore a
smoothly working system of international economic relations.
These difficulties arise from two main sources. In the first place,
1

Cf. LEAGUE O F NATIONS: The Network of World Trade (Geneva, 1942).
" T h e lessening of the need for multilateral trade through structural changes
should not be overrated. I t is obvious, for example, t h a t while a decline in British
oversea investments will reduce the debt service payments which exercised an
important influence in maintaining the multilateral trading system, it will not
alter the commodity requirements of the countries through which such payments
2

used to be transferred." LEAGUE OF NATIONS, op. cit., p. 96.

CHANGING CONDITIONS OF PRODUCTION AND TRADE

the objectives of a people's peace lay stress on social considerations
such as full employment, social security and economic development
which may formerly have been regarded as desirable by-products
of economic activity, but have now come to rank as prime objectives of policy. It is clear that these objectives must be approached
primarily in the sphere of national action and by using the instruments of national government. Little has been done as yet to
develop international machinery by which policies directed to their
achievement might be pursued for the world as a whole. As will be
argued later, there is a possibility of creating international organs
primarily for the co-ordination and regulation of international
payments. The objectives of social policy must be pursued nationally; but they may be facilitated and their economic and financial
consequences may be prevented from wrecking international equilibrium, if they can be cleared through international consultation.
In the second place the changed and changing character of
economic activity has gone far to invalidate the assumptions upon
which the laissez faire case for free trade has always been based.
Production is not now organised simply in a great series of relatively
small units no one of which is in a position to exert great influence
on the market. There still remain segments of production and trade
in which competition is active; but industrial manufacture tends
more and more to be organised in large units, each of which controls a significant part of the production of commodities catering
for specialised markets. The emergence in recent years of a strong
public opinion against exposing wage earners to unemployment
and wage reductions in a period of crisis adjustment has further
concentrated the necessity for cost adjustment upon the narrowing
segment of economic activity where competitive forces remain
powerful. The result has been great pressure upon the prices of
raw materials, which have fluctuated violently and brought hardship to the less organised producers. They have striven to protect
themselves by organising, or pressing their governments to organise, national and international commodity controls which in the
recent past have invariably restricted production and trade.
Both of these sets of difficulties arising from the emphasis on
social objectives and from the imperfect working of competition
have reinforced the trend to economic nationalism. This trend
was always supported by those economic groups in every country
that were exposed to the necessity of making adaptations to meet
foreign competition, which has been both more erratic and more
destructive since price fluctuations became so violent. National
action has come to be advocated also by those in every country
who are concerned with protecting the wage earners from the social

INTERNATIONAL ECONOMIC ORGANISATION

consequences of violent fluctuations of employment and living
levels. Indeed one of the tragedies of our time has been the growing
conflict between social reform and internationalism. In the nineteenth century liberalism and reform movements were international
in their outlook. The great protagonists of free trade argued their
case largely on international grounds, as a means of realising both
peace and prosperity for all peoples.
The laissez faire case for free trade as a means of securing economic progress and prosperity through peaceful trade depended
essentially upon the belief that free competition could be relied
upon to bring about an equitable, stable and effective use of the
world's resources for the benefit of consumers all over the world.
Now that the world market has been broken up into a series of
disconnected and independent national markets it is clear that the
case for international trade must be made on other grounds than
those of competitive equity and efficiency. As Professor Viner has
recently pointed out, the weaknesses of State trading monopolies
may be criticised by comparing them with an ideal, smoothlyfunctioning competitive world market; but if that market does
not exist the case for and against State trading must be reconsidered. 1 Whether trade is organised by private or by public enterprise, however, there is a strong case for expanding the exchange
of goods and services across national frontiers. In default of that
case being accepted by public opinion, the trend to national selfsufficiency will be strengthened as each government is pressed by
a combination of interested producers and social reformers to organise full employment, social security and development within its
own borders.
The real alternatives at the present time, therefore, are on the
one hand to accept these pressures for national self-sufficiency as
a necessary condition of achieving an equitable and stable organisation of economic activity, or, on the other hand, to devise instruments of international economic co-operation which will enable
governments to pursue their national policies without sacrificing
the gains of international specialisation. Neither the restoration
of free competition nor centralised international planning is likely
to be practical at the close of the war. The international machinery
for international planning of this type does not exist and cannot
be improvised. The restoration of free competition would quickly
result in such violent fluctuations of prices and employment as
would force resort once again to economic nationalism.
It seems obvious that, in default of international co-ordinating
1
LEAGUE OF NATIONS: Trade Relations between Free-Market
Economies, by Jacob V I N E R (Geneva, 1943), pp. 82 et sea.

and Controlled

CHANGING CONDITIONS OF PRODUCTION AND TRADB

instruments, greater national or regional self-sufficiency would be
not only practicable, but inevitable. Within national boundaries,
or more probably within regional or imperial units, it is perfectly
possible—at least temporarily—to organise an equitable and reasonably stable system of production and distribution. To do so would
involve sacrificing a good part of the gains from international trade
and from international capital movements. Specialised production,
utilising natural resources that are abundant enough to provide a
basis for profitable exports, would need to be curtailed. Labour and
capital would need to be transferred from these strong industries
to others less advantageous. In the same way there would be a
stoppage of imports bought advantageously abroad from areas
where they can be produced cheaply as a result of specialised production under favourable conditions. These imports would need
to be replaced by national production at a higher real cost in labour
time. For such imports, mainly of raw materials, and especially
mineral raw materials, as are indispensable, bilateral barter arrangements would need to be made. This was in fact one of the most
characteristic features of the economic nationalism which preceded
the present war. The concentration of international trade upon
the securing of essential raw materials is one of the most disconcerting aspects of modern mercantilism since it accentuates national
rivalries and turns trade into a form of economic warfare rather
than a mutually beneficial exchange of commodities and services.
It does not need much reflection to realise that such developments, while they may for a time achieve a certain degree of national
stability and equitable income distribution, inevitably involve
lowered efficiency and reduced levels of living. This has been
abundantly demonstrated in recent experience, in the totalitarian
countries, and also in the democratic countries which have attempted to gain a greater degree of national self-sufficiency. The
struggle for self-sufficiency also enhances the probability of war.
It involves a much greater measure of government regulation
of both external and internal economic activity. National policies
aimed at full employment and social security pursued on a basis
of self-sufficiency, in practice if not always in theory, raise production costs. In order to pursue such policies credit must be kept
abundant and cheap. Credit policy may need to be supplemented
by government measures to force credit into circulation, for example by public works expenditures. The result of such measures,
as experience has shown, is to raise the level of costs and prices in
the country concerned. Imports are attracted and exports diminished, while liquid capital is exported. Strain on the balance
of payments causes resort to import controls and often to export

INTERNATIONAL ECONOMIC ORGANISATION

subsidies. The allocation of import licences, either directly or by
the priorities granted to importers in securing foreign exchange,
determines what kind of goods can be imported and therefore puts
a powerful weapon in the hands of governments for the control of
domestic industry. The totalitarian governments made effective
use of this weapon to compel industrialists to serve the needs of
the State. The information obtained in the course of exchange
control and import licensing was an important instrument of
economic espionage, enabling the governments to check subversive
activities.
One of the strong arguments for freer trade, therefore, is the
political argument that it limits the power of State officials to
regulate domestic economic activity as a means of preparing war.
I t needs only one great power to begin an autarkic programme of
war preparations. Given international organs through which
national payments can be cleared, so that intolerable strains are
not imposed on the national balances of payments, it is desirable
to expose national production to the competitive tests of efficiency
imposed by the possibility of import competition, and at the same
time to safeguard the national economies against militarist perversion.
There are strong economic arguments also for freer trade. They
may be summarised first as those which flow from the advantages
of specialisation. These are the same arguments as form the basis
for the classical free-trade case. They are reinforced at the present
time by a further set of arguments derived from the recent technical
developments of modern large-scale industry. Finally, there is a
new series of considerations that flow from the desirability of
working towards the social objectives of a people's peace. These
three sets of arguments will be recapitulated in the pages immediately following, the first somewhat briefly and categorically, the
two latter at more length.
The classical argument for free international trade rests upon
the simple axiom that it pays to specialise. In the language of
economists this truism becomes the theory of comparative costs or
advantages, the theory that if competitive forces were allowed free
play, countries would come to concentrate their economic activities
upon the production of goods for which they had specific economic
advantages, such as abundant raw materials, skilled labour, favourable climatic conditions, or even established industrial organisation.
This does not mean that each country would specialise narrowly.
In some exceptional cases, where the country was small and had a
special advantage in a particular form of production—as Cuba,

CHANGING CONDITIONS OF PRODUCTION AND TRADE

for example, has in sugar—monoculture might develop. But in
the generality of cases the great bulk of domestic consumption
would continue to be met by domestic production. An excellent
statement of this fact is contained in the evidence presented recently
to the Ways and Means Committee of the United States House of
Representatives by Dr. J. Raymond Walsh, Research Director
of the Congress of Industrial Organizations. 1 Appearing as a witness in support of the renewal of the Reciprocal Trade Agreements
Act, Dr. Walsh analysed the employment statistics of the United
States in considerable detail. He was able to demonstrate that the
great majority of workers were employed in occupations which
could not be affected by import competition. Not more than two
to three million worked in occupations effectively sheltered by
tariff protection, and this number is probably less than those whose
occupations depend directly on the export market. It is obvious
that personal services, transport and communication, retailing,
local building and similar services must be performed on the spot.
These offer by far the greatest and most elastic opportunities of
employment in any country.
It is clear also that the fear, often expressed, that any lowering
of the barriers to imports will cause a wholesale flooding of the
markets of the receiving country are not only exaggerated, but
inherently impossible of fulfillment. There are cases, it is true,
where, in special circumstances and for political reasons, there
may occur a concentrated drive of cheap imports. Thus, in the
years immediately following the depreciation of the yen in 1931,
Japanese manufactured goods of many kinds poured into such
markets as the Netherlands Indies, China and the British colonies
in Asia and Africa on terms that defied competition. In much the
same way Germany got control of the markets of central and eastern
Europe between 1935 and 1939.2 These, however, are instances
not of free, but of controlled trade used as an instrument of national
power.
In the same way there may be temporary concentrations of
cheap imports of particular commodities dumped on certain markets at prices disconcerting to the local producers. Cheap Japanese
cottons, pencils, and even electric lamps, entered many national
markets, even over high tariffs, after 1931. Upon analysis, however,
1
U.S. Congress, House Committee on Ways and Means, Extension of Reciprocal Trade Agreements Act, 1943. Hearings, Unrevised committee print, Pt. 9,
23 April 1943, pp. 1054-1057.
2
Cf. the forthcoming volume by Albert O. Hirschman on trade as an instrument of power politics, to be published shortly by the University of California
Press.

INTERNATIONAL ECONOMIC ORGANISATION

the quantities actually exported in this way turn out to be very
small in relation to local production, the circumstances of their
importation were temporary, and the initial success wore off as
consumers discovered that the quality was as low as the price. In
any case the statistics show that the increased exports were paralleled by increased importsThere is in fact no possibility of one country underselling others
in all lines of trade. Trade is a two-way street. Imports are, and
must be, paid for by exports. There may be a temporary disturbance of local industries by increased imports. It is obvious that
undue fluctuations of imports are to be avoided. No business can
be organised successfully if it is likely to be faced by a flood of suddenly cheapened imports. But two things must be said on this
point. First, the best way to check sudden fluctuations of import
prices is to create conditions—and international institutions—in
which exchange depreciation and violent price fluctuations may be
minimised. And, second, that tariffs or other import barriers are
no protection against such fluctuations unless they are so high as
to shut trade out at all times.
It is perhaps necessary to add that the so-called "cheap labour"
argument against freer trade is a variant form of the fallacy just
pointed out. It depends essentially upon the belief that a country
with low labour standards can undersell another whose labour
standards are higher. The elementary point must first be made
that wages per hour or per day are no indication of labour cost per
unit of production. The automobile workers of the United States
have wage rates higher than automobile workers in any other country; but automobile production costs are lower, and labour forms
a smaller proportion of total production costs, in the United States
than anywhere else. The fact is that low wages are often a sign
not of efficient, but of inefficient, production and in most industries
low wages indicate inability, rather than ability, to compete effectively in foreign markets.
It is of course true that there are some industries in which labour
cost is a high proportion of the total costs of production and in
which hand skills are preferable to machine efficiency. Hand embroideries offer a good example of such an industry. Cheapness of
labour cost per hour is reflected in labour cost per unit of production
and in total cost of production. It is unlikely that machine products
can compete successfully in such markets. The most effective
method of dealing with this situation, however, is not to debar
consumers from the cheapness and satisfaction to be gained from
such imports, but to raise living standards by direct action in the
countries of cheap labour. Trade union organisation and properly

CHANGING CONDITIONS OF PRODUCTION AND TRADE

enforced legislation to improve working conditions and wage levels
are most likely to be successful when the industry is reasonably
prosperous. If it is thrown into depression by the closing of its
export markets, there is little chance of achieving a levelling up
of labour standards.
In any case trade must be maintained on a two-way basis if
living standards are to be maintained where they are now high.
Not only is employment in the industrial countries dependent upon
export markets in addition to local demands; but a substantial
part of the improvement that has taken place in living standards
has come from ability to import a variety of foods, textiles, minerals and manufactures for personal use from wherever they are best
made. Thus the greatly improved diet of European peoples in the
nineteenth century was made possible by massive imports first of
cheap bread grains, then of meat, butter and cheese, and still later
of fruits, and especially citrus fruits, from overseas. Tropical and
sub-tropical products also—sugar, coffee, rice, sago, cocoa, tea—
have added variety. The reversal of this process was very marked
as economic warfare preceded actual hostilities and whole nations.
were forced back from a varied diet towards reliance largely on
domestic cereals and potatoes. If large populations must be fed
from domestic production, it becomes uneconomical to feed cereals
to animals and even to rely upon the more desired cereals such a s
wheat for the main supply of bread grains.
In the same way the great flocks of sheep in the newly opened
grazing countries made wool more readily available. Silk also was
used by the great mass of the people, as cotton had become available
to them earlier as a result of international trade. The first attempts
at self-sufficiency in Europe cut down supplies of wool and cotton
and silk. Manufactured fibres replaced them and were improved
in quality, but costs were relatively high and abundance as well as
variety was reduced. There is no doubt that years of warfare, following these trade restrictions, have lowered clothing standards
and that trade must be reopened to restore them to their pre-war
levels.
An even greater reduction of consumption has occurred in the
less elementary necessities and luxuries. If the amenities of life
are to be restored there will need to be a great revival of trade ia
these articles after the war.
If one turns to consider the second set of arguments based upon
the technical development of modern industry, the case for international specialisation and interchange is strongly reinforced.
There is a tendency in some quarters to argue that scientific research
and its industrial application will reduce the necessity for inter-

INTERNATIONAL ECONOMIC ORGANISATION

national trade. 1 It is argued that electrical power and gasoline will
tend to replace coal, that new light metals and plastics will increasingly take the place of the older metals—iron, lead, tin, copper,
zinc—that synthetic chemistry will produce effective substitutes
for natural fibres, for rubber, for petroleum, for vegetable oils, and
even foods, that industrial raw materials will be drawn from the
farm rather than the mine.
No-one is likely to underestimate the great changes in industrial
production that have already resulted from scientific research; or
to doubt that even greater changes may confidently be expected.
The organisation of scientific research, and especially the development of great industrial laboratories exploiting, and at the same
time contributing to, new scientific discoveries, is a new and powerful instrument of revolutionary change the full possibilities of which
cannot at present be foreseen. It may be accepted without much
question that new sources of power, new methods of production
and new products are likely to appear and that the pace of development is likely to accelerate. It may also be accepted that many
cases will occur where these changes will destroy the necessity for
particular types of international trade. This has often happened
in the past, though the pace of change was much slower than it is
now or is likely to be in the future. Haber's process for the fixation
of nitrogen from the air dealt a heavy blow at the Chilean trade in
nitrates. The diffusion of improved methods for treating phosphates, coupled with the emergence of cartels in the chemical
industry, caused the trade in superphosphates practically to disappear. The introduction of oil-burning and motor vessels took away
much of the bunker trade in coal as the introduction of new dyes
destroyed the indigo trade and new fibres ruined the jute trade.
These are but striking examples of a continuous process of change
induced by scientific progress.
In the past such changes have not reduced but have increased
the aggregate of international trade. There is good reason to believe
that what has been true in the past will be true also in the future.
Unless it can be shown that scientific discovery has reached a point
which will revolutionise the whole industrial system, the experience
of the past is useful as a guide to the future. There are, moreover,
many definite indications that the new industrial techniques are
likely to cause increased need for trade.
The first fact to be noted is that, despite the increasing use of
such new metals as aluminium and magnesium, the consumption
1
O. W. WILCOX: Nations Can Live At Home (New York, 1935); Lancelot
H O G B E N : Dangerous Thoughts (New York, 1940), p. 19; Lewis COREY: The Unfinished Task: Economic Reconstruction for Democracy (New York, 1942).

CHANGING CONDITIONS OF PRODUCTION AND TRADE

of the older metals is still very much greater than that of the new.
Their consumption continues to increase cumulatively. Högböm
indeed has been able to calculate what he calls the doubling periods
—the number of years within which consumption doubles and redoubles. 1 Except for the interruptions caused by recurrent war,
these periods have been surprisingly regular. Modern industry
needs more and more iron, coal, tin, lead, copper, and zinc. The
most conveniently placed reserves of these basic metals become
progressively exhausted. European sources, for example of copper,
have been exploited for centuries and the search for new deposits
must now be pushed further and further afield. Even iron ore must
be imported to the older industrial countries such as Britain and
Germany. The highest-grade ores of the Mesabi Range in the
United States will be exhausted in a period estimated at 15 years
at the war rate of consumption or 30 years at the pre-war rate.
Petroleum is a good example of the rapid progressive exhaustion
of reserves placed conveniently near to the great centres of consumption and of the consequent necessity for discovering new
sources whose exploitation increases international trade. There
is very ample statistical evidence for the conclusion drawn from
the most recent survey of world minerals that interdependence
and the need for international trade persists, despite the development of new metals. 2
It is clear that the new processes of industry also create a need
for trade to supply new materials, as well as to replenish supplies
of the basic metals. In some instances the new processes accelerate
the exhaustion of already scarce materials. Thus synthetic rubber
manufactured from coal or petroleum may accentuate the drain
on national reserves. New fibres create a demand for imported
lumber. The increased use of hydroelectric energy causes a demand
both for heavy machinery and for greatly increased quantities of
copper.
Moreover the new manufactures use a very long list of subsidiary materials many of which must be imported to the industrial
countries. The alloy minerals used for making special steels are a
good illustration. They rank high among the strategic materials
for which great nations are willing to exert all their financial, and
even military strength.
But a great variety of other products
enter into the making of an automobile or a telephone system—
lac, kauri gum, cobalt, carnauba wax, and the like. One of the
1
Ivar HÖÖBÖM: "Development of World Production of Raw Materials",
Annex to LEAGUE OF NATIONS: Report of the Committee for the Study of the Problem
of Raw Materials (Geneva, 1937), p. 38.
2
C. K. LEITH, J. W. FURNESS and Cleona L E W I S : World Minerals and World
Peace (Brookings Institution, Washington, D. C , 1943). p. 101.

INTERNATIONAL ECONOMIC ORGANISATION

most characteristic developments of our industrial age therefore
has been the reaching out of great industrial enterprises to secure
sources of raw materials in foreign countries. The necessity to do so
has indeed been a factor in the development of these giant concerns.
Rubber plantations, oil reserves, tin deposits, forests, mines, even
land capable of specialised farm production, are among the major
objects of direct foreign investment.
International trade in the aggregate is increased by these
developments; but its character changes. The volume of commodities interchanged across national boundaries has been increasing cumulatively ever since the Industrial Revolution. Great wars
and depressions interrupt the trend, but it continues when the
emergency is past. There seems no reason to doubt that the trend
will continue since it is rooted in the technical nature of modern
industrial processes.
Finally attention must be drawn to the fact—obvious as soon
as it is stated—that the social objectives set out as those of a
people's peace cannot be achieved unless there is a reopening of
the channels of trade. An approximation to full employment in the
great industrial countries, such as the United States and the United
Kingdom, presupposes not only the maintenance of their national
incomes and purchasing power in their domestic markets; but
an expanding volume of international trade. These are the great
consumers of raw materials. If their industrial activity is to be
maintained at a high level, they will need to absorb large quantities
of imported ores, fibres, and food. They will need Chilean and
African copper, Australian and Argentine wool, Malayan and
Bolivian tin. Such requirements will enable the raw material exporting countries to maintain employment and at the same time
to absorb a proportion of the industrial exports of the manufacturing countries.
There is a particular reason why at the close of a great war the
channels of trade need to be reopened. The needs of war economy
stimulate the engineering industries and repress those catering for
the consumer markets. Coal, petroleum, electrical energy, aluminium, machine tools, steel, automotive vehicles, ship construction,
aircraft, are the typical war industries where expansion is greatest.
When the war demands cease or are tapered off abruptly, there
will be excess producing capacity. Moreover, new capacity will
have been added by the accelerated industrial development of such
countries as Brazil, India, and Australia. Unless new outlets can
be found for the products of heavy industry, the process of reconversion from war to peace production will be greatly accentuated.
A good example is that of rubber. To meet war demands there

CHANGING CONDITIONS OF PRODUCTION AND TRADE

has been remarkable development of synthetic production in all
the great manufacturing countries which formerly imported natural
rubber, mainly from the tropical plantations of southeastern Asia.
There has also been an attempt, often costly, to expand the production of natural rubber in many areas of Latin America. At the
close of the war, the impaired productivity of the Asiatic plantations, coupled with the accumulation of civilian demands, may for
a time make it possible to absorb the total supply of both natural
and synthetic rubber; but it will probably not be long before surplus
stocks begin to accumulate again. If this happens, there will be
demands to restrict production and trade—to impose tariffs protecting the new synthetic industries and to negotiate international
agreements controlling the exports, if not the production, of the
natural rubber. The necessity for such restrictions will be lessened
if consumption can be kept at high levels in the great markets.
offered by the industrial countries and if at the same time t h e
economic development of hitherto backward areas should open
up new markets. There is reason to believe that a considerable
demand might be created in China, for example, if the new roads
built during the war could be used by trucks employed at first ini
combating famine (and inflation), by distributing local food supplies
more evenly, and, later, in the normal development of trade.
Full employment in the industrial countries and economic
development in the countries which have hitherto lacked modern
equipment are two aspects of the same objective—improved living
standards. There is nothing particularly new in this objective.
The close connection between foreign investment, foreign trade
and expanding employment yielding higher living standards was
amply demonstrated throughout the nineteenth century. The
manufacturing countries gain by investing part of their production
in improving the transport and local manufactures of less developed
areas. It is true that they cannot hope to continue to export the*.
simpler manufactures like cotton goods. They must be prepared!
to rely upon their leadership in research and industrial methodsy
so that newly developing areas take over the simpler forms of
manufacture but continue to import the specialised products of the
most advanced countries. The economic history of the last two
centuries provides irrefutable evidence that the spread of industrial
development increases trade in the aggregate. Interchange was
greatest and most profitable between the fully industrialised countries such as Britain, Germany, and the United States. If the
processes of industrialisation are extended more widely, there is
every reason to expect an even greater development of international'
trade. There is little market for automobiles, radios, refrigerators

INTERNATIONAL ECONOMIC ORGANISATION

and typewriters in countries with low living standards and low
purchasing power. The great industrial countries, however, must
accept imports in payment for their exports and they must not
attempt to protect their existing industrial structure from the
adaptations necessary to conform to the changing pattern of world
trade. If they could bring themselves to rely upon the competitive
power of their technically specialised industries, the result might
well be an advance in living standards all over the world, greater
than at any previous period in history.
I t would seem to be overwhelmingly clear that an economy of
abundance rather than restriction, of scientific progress rather than
protection of interests, must be accompanied by a great increase
in world trade. It is not so clear that this increase can be organised
successfully, still less maintained, upon a basis of competitive
equilibrium. There are commodities, such as wheat, where many
of the conditions of a competitive market exist. There are numerous
producers and numerous consumers, no group of whom on either
side can effectively control the market. But even these commodities reach the international markets through dealers whose operations are more typical of imperfect competition than of pure competition. These commodities have suffered such great fluctuations
of prices in recent years—usually because of extraneous causes such
as geographical shifts in production areas, tariffs, exchange depreciations, and other unilateral State interventions—that the more
important of them have been subjected to international regulation.
A very large number of the less important commodities of this type
have suffered such severe fluctuations that international trade in
them has practically disappeared.
On the other hand a great and growing proportion of the manufactured commodities which enter into international trade are subject to some degree of monopolistic control. The proportion of
international trade which is actually regulated by overt agreement
is not very high—it may perhaps be as high as 17 per cent. 1 If,
however, one adds the commodities influenced by patents, by
brands supported by advertising and by other forms of monopolistic
competition or simply price leadership, the proportion of international trade subject to some form of market control may be as
high as 40 per cent.
There is competition over a great range of this controlled trade;
but it is not the competition of the text books. The automobile
industry, for example, is competitive in large measure. Within a
given price range different makes of automobile compete, but they
1
Estimate based on calculations by Dr. Peter G. Franck a t the University
of California.

CHANGING CONDITIONS OF PRODUCTION AND TRADE

do so through exclusive distributors within the national market
and increasingly by agreements, quotas, or market demarcation,
in foreign areas. There is a strong tendency for these manufactures
to become standardised, so that the finished product, though complex, becomes in the eyes of the consumer an almost homogeneous
article. When this happens agreement among competing manufacturers is the natural next step to take. Such agreements are even
more likely in the competition for foreign than for national markets
in a period of active State intervention. International cartels have
therefore multiplied.
There seems little likelihood that effective government action
can be taken to restore atomistic competition either in national or
in international markets. The tendency to monopolistic competition and to cartel agreements is firmly rooted in the technical processes of modern industry. As the influence of scientific research
increases cumulatively the trend towards at least partial monopoly
is bound to increase. The trade that will be restored when this war
ends seems likely, therefore, to contain much larger elements of
industrial monopoly on the one hand and of State control and
regulation on the other. This likelihood reinforces the argument
for international institutions competent to regulate, or at least give
publicity to, the operation of private industrial agreements. It also
suggests the probability that some part of international trade will
consist of State-operated or State-regulated exchanges. Where,
as in the U.S.S.R., foreign trade is a State monopoly, these exchanges will constitute the only means of trading. Over a large
part of Europe, at least for a time, the newly restored governments
or the occupying authorities will probably control a large part of
the trade. The importation of equipment to modernise China may
go through public corporations which are in fact State trading
monopolies.
Whether such State trading will be consolidated to provide the
main avenue of international exchanges for the future, or whether
it will prove to be a transitional device to tide over the period of
economic strain at the end of the war, is a question that cannot be
answered yet. There will be strong pressures for the restoration of
private trading enterprise and a good case can be made for such
restoration on the ground of technical efficiency and risk taking.
But it is clear that the private enterprise of the future is likely to be
large-scale enterprise, with a monopolistic tendency. There is
obvious need, therefore, to devise international institutions capable
of registering, and, if need be, controlling, the development of international trade and investment.

IV. THE TRANSITION FROM WAR TO
PEACE ECONOMY 1

Long-range post-war policies aiming at higher living standards
full employment, social security, economic development and international collaboration must be considered in the context of military
and economic demobilisation. The war has wrought great changes,
both in the national economies of the warring countries themselves
and in their international economic relationships. Some of these
changes, such as the maintenance of huge armed forces and war
industries, may be only temporary ; but others, such as the accelerated industrial development in some countries, are likely to remain.
Before considering such problems of long-range economic policy as
the maintenance of a high and steady level of employment, the
industrialisation of undeveloped countries and the reorganisation
of international economic relations, it is therefore well to touch
briefly on such developments as can now be foreseen as likely to
arise in the immediate post-war period.
The moment of economic and military demobilisation may not
come everywhere at the same time. Should "Fortress Europe"
crumble before the war in the Far East reaches its climax, some
measure of demobilisation and conversion may be necessary among
the United Nations before the end of all hostilities. The Pacific
war has been one of ships and long-range planes rather than of massed
land armies and short-range heavy bombers. Some materiel, such
as heavy bombers with a comparatively short range, may not be
suitable for the war against Japan. The end of the Nazi submarine
menace might render further construction of escort vessels unnecessary. If the liberation of the occupied countries should proceed gradually, the problems of relief and rehabilitation will be much
simplified. One cannot count on such hypothetical events in any
programme designed to meet the problems of the transition period,
but any such programme must be sufficiently flexible to be adaptable
to changes of this sort.
1
For a much fuller discussion of problems of the transition period, see LEAGUE
OF NATIONS: The Transition from War to Peace Economy, op. cit. ; J. B. CONDLIFFE:
Agenda for a Postwar World (New York, 1942); The Political Economy of Welfare
(Commission to Study the Organization of Peace, New York, 1943).

TRANSITION FROM WAR TO PEACE ECONOMY

A. TOTAL W A R AND THE DOMESTIC ECONOMY

The major countries of the United Nations are now devoting
well over 50 per cent, of their resources to war purposes. 1 When
peace comes they will find themselves with very large armed forces,
great and well-equipped industrial plant facilities, and highly
trained labour forces. A large part of the former will be "unemployed", while many of the factories and much of the labour and equipment will be producing goods that are no longer required. More
will be producing uneconomically. Many plants, among them aircraft factories, shipyards, powder mills, and shell-filling plants,
will have to cease production although some may be retained ready
for use, at least for a time. Some of the industrial changes brought
about by the war, such as the spread of steel-making to the west
and south of the United States, may prove to be permanent. Parts
of the industrial transformation brought about by the impact of
war in countries like Australia, now manufacturing aeroplanes,
anti-aircraft guns, Bren guns, Owen submachine guns, and other
weapons of war, and India, now producing much more steel than
ever before, will doubtless remain, both for economic and for strategic reasons. In addition to highly trained labour forces, the industrial countries will also possess machine-tool industries wellequipped to make the required process of retooling both rapid and
efficient. Some industries in Great Britain which have been "concentrated" 2 , such as the cotton textile industry, should probably
not be restored to their pre-war condition. In some countries,
notably Great Britain, agricultural production capacity may have
to be reduced, while in others, like the United States, the war will
have accelerated a movement out of agriculture which ought not
to be reversed.
1
Dr. M. Kalecki has estimated the British industrial war effort in terms of
manpower as follows: "As we estimated the insured labour employed directly
and indirectly in armaments in 1938 a t 0.6 million, the total volume of insured
labour employed in the war sector in 1941 may be estimated a t about 7.S million
workers. Insured workers in employment in 1938 were given as 13.1 million and
the increase in the volume of insured labour in 1941 has been estimated a t 1.5
million '1938 workers'. The total volume of insured workers in 1941 may then
be estimated a t about 14.5 million '1938 workers'. I t follows that the war sector
absorbed in 1941 something like 50 per cent, of the insured workers. This percentage would not be significantly changed if we added to the total volume of
insured labour workers excepted from unemployment insurance. It may thus
be said that roughly a half of all manual workers (except those in agriculture and
domestic service) and lower grade salary earners—below £420 p.a.—were employed in 1941 in the war sector." Bulletin of the Institute of Statistics, Oxford,
Vol. V, No. 1, 9 Jan. 1943.
According to the revised Federal Reserve Board index about 70 per cent, of
United States industrial production is going for war purposes; cf. Federal Reserve
Bulletin, Oct. 1943, p. 942.
' See below, p . 115.

INTERNATIONAL ECONOMIC ORGANISATION

In the Axis and Axis-occupied countries the problem of reconversion and replacement will be even more serious. Aerial bombardment will have destroyed a large part of their industrial plants.
A considerable amount of industrial equipment in the occupied
countries has long been dismantled and transferred to Germany,
where industrial production is now concentrated. Norwegian ores,
for example, which used to be refined in Norway, are now sent to
Germany to be worked up. The ownership of factories and firms
which have been bought up by the Nazis—in occupation currency
taken as tribute from the captive peoples—will raise extremely
complex questions in the post-war settlement. 1 Furthermore,
throughout Germany and German-controlled Europe, production
for the war effort is completely ruthless and takes no account of
post-war needs. The occupying forces will find ruined equipment
and little seed, breeding stock, or raw materials needed to restart
the process of production.
The war has probably somewhat accelerated the process of concentration in many lines of industry. Governments naturally find
it more convenient to place their large orders with the great corporations than to allocate their requirements among a large number
of small firms. Although many of the latter are working to capacity
on orders subcontracted from the great corporations, it seems
probable that on balance, plant expansions on the part of the
large firms will have increased their share in total output. At the
present time the subcontracting firms are in a strong position, but
it is possible that they may become dependent for orders on the
large businesses, much as the domestic craftsmen gradually became
dependent upon the early commercial capitalists. In the civilian
sector of industry, the shortage of manpower often weighs most
heavily on small enterprises. In addition they lack the financial
reserves of large companies and are apt to be forced out of business
first. As industry is rationalised to save labour, especially in the
retail trades, individual enterprises have been progressively eliminated. This process has gone furthest in Germany. 2
The trend towards concentration of economic power has also
taken another form. The official bodies controlling production in
various industries have often been directed by men important in
the respective trade associations who are at the same time associated
1
Cf. Inter-Allied Declaration against Acts of Dispossession committed in
Territories under Enemy Occupation and Control {with covering Statement by His
Majesty's Government in the United Kingdom and explanatory
Memorandum
issued by the Parties to the Declaration) (London, H. M. Stationery Office, 1943),
Cmd. 6418.
2
Cf. Hubert K. LANDENBURG: "German Retail Trade and Handicrafts
Today", in Foreign Commerce Weekly, 12 June 1943, pp. 3 et seq.

TRANSITION FROM WAR TO PEACE ECONOMY

with the giant corporations. Thus the most powerful enterprises
are likely to be in a very strategic position in their industries at the
end of the war. 1
The changeover from peace to war has resulted also in a widespread redistribution of the available labour forces. The example
of Great Britain is outstanding. Out of an active adult population
of 33 million, " a t least 75 per cent, are now effectively occupied in
the armed forces, in war industry, or in other work or service". 2
More and more men have been taken into the armed forces and
future drafts are still expected to be heavy; others have been shifted
from non-essential to essential industries, while those possessed
of special skills have been redistributed within the war industries.
Working hours have been considerably increased. From April 1941
labour in industries subject to curtailment has been concentrated
in "nucleus" factories. The process of concentration has been
steadily extended to various fields including the retail trade, where
it has, however, not been entirely satisfactory. In August 1942
the total number of workers already released and likely to be released under the schemes then under consideration was about
250,000, or rather more than one fifth of the number engaged in the
industries concerned before concentration. 3 Dock labourers have
been organised into a mobile unloading corps. More and more
women have been mobilised for war work, so that between June
1939 and June 1942 the number of women employed in munitions
and other essential industries increased by 1,750,000. In the first
three years of the war between four and five million people in
Britain were shifted from their homes and transferred to war work
in other parts of the country. "Persons never before employed in
industry and never before away from home have been brought into
war factories by the hundreds of thousands, while, in addition,
other hundreds of thousands of workers have been transferred from
less essential to more essential work." 4
Similar changes have occurred in all the belligerent countries,
in the United States, in Russia, in the British Dominions and in
German-controlled Europe. In pre-war Australia, for example,
there were about 540,000 factory workers, nearly all employed
in peacetime production. After the war broke out national service
1
Cf. the example of Great Britain in R. A. BRADY: Business as a System of
Power (New York, 1943), p p . 181-188.
2
INTERNATIONAL LABOUR O F F I C E : Wartime Transference of Labour in Great
Britain, Studies and Reports, Series C, No. 24 (Montreal, 1942), p. 1. W h a t follows has been mainly summarised from this report.
'Economist, 29 Aug. 1942, pp. 260-1; cf. also Foreign Commerce Weekly,
1 May 1943, pp. 3 et seq.
4
INTERNATIONAL LABOUR O F F I C E : Wartime Transference of Labour in Great
Britain, op. cit., p. 161.

INTERNATIONAL ECONOMIC ORGANISATION

offices were set up for the redirection of labour and by the summer
of 1942 the number of factory workers had risen to 700,000, only
200,000 of whom were engaged in peacetime production.
In the United States, which became an active belligerent in
December 1941, the changes have not yet reached such drastic
proportions. But by December 1942 about 23 million people, 23
per cent, of whom were women, were engaged in war work as civilians or soldiers, an increase of more than 14 million over December 1941. At the same date only about 21 million, 37 per cent.
of them women, were non-war employed, a decline of 8 million
from the total a year before.1 By July 1943 the total number in the
armed forces and war industries had risen to nearly 25 million and
by July 1944, according to an official estimate, it will be 28 million.2
In continental Europe the situation has some special features.
The economic activity of virtually the whole area from the Atlantic
to the Black Sea, from the Arctic to the Mediterranean, with the
exceptions of Sweden and Switzerland, is controlled from Berlin.
Workers have been conscripted in the occupied countries and transferred to the German economy to replace Germans going to the
front. According to a recent estimate there were a t the beginning of
1943 about 6.5 million foreign workers in Germany. 3 Many of these,
notably the "Ostarbeiter" from Poland and the occupied parts of
the Soviet Union, are treated more or less like prisoners of war.
Production for civilian use throughout Europe has been ruthlessly
eliminated, food supplies in many areas have fallen far below the
physiological limit of subsistence, and the end of the war will find
the available active population half-starved, ill-clad and ill-equipped
to produce the peacetime goods which will be so urgently needed.
The first responsibility of governments when the peace is
signed will be the orderly reconversion of the war sector of the
economy to civilian use. The extent to which the United Nations
armies will be demobilised will naturally depend upon policies
decided upon regarding the military occupation of the Axis countries. Some war plants will be adaptable to peacetime uses4, others
will not. War contracts will have to be liquidated and labour
redirected into peacetime production. In this reconversion process
it is essential that any sudden and large decline in total output be
1

U.S. NATIONAL RESOURCES PLANNING BOARD: National

Resources

Develop-

ment Report for 1943, P a r t 2, p p . 21 et seq.
* U. S. W a r Manpower Commission, Reports and Analyses Source: The
Labour Market, Dec. 1943, p. 7.
3

INTERNATIONAL LABOUR O F F I C E : The Displacement of Population in

Europe,

op. cit., p. 160.
4
Army trucks, for example, might be useful in replacing temporarily a t least
the commercial trucks which travelled on the roads of Europe before the war and
which have largely been requisitioned b y the Nazis for military use.

TRANSITION FROM WAR TO PEACE ECONOMY

avoided. Although it would be advisable to cancel at once all production of munitions and other materials which have no alternative use, it may be worth while to continue to produce certain goods
such as army trucks and jeeps and sell them below cost until accumulated inventories are exhausted. But, as the Director of Steel •
Supply of the United States War Industries Board wrote at the
end of the last war, it is cheaper to grant subsidies to labour, such
as dismissal wages, rather than use that labour to continue the
manufacture of high-priced, useless weapons of war. 1
National programmes of reconversion will differ widely. The
extent to which the responsibility for economic demobilisation will
be delegated to private industry and the actual planning decentralised will depend upon the economic and political structure of the
country after the war. In some countries government plants built
during the war but also useful in peacetime 2 may be retained and
operated by the government; in others they may be turned over
to private enterprises, while in some cases new forms of joint enterprise may develop. But in all such programmes the factor of timing
is crucial and this should remain a government responsibility. 3 I t
is essential that conversion plans should prevent the occurrence
of "bottlenecks" in production which might result in a lack of
necessary materials and consequently in intermittent unemployment of men and equipment. If economic demobilisation is left
to private industry alone, without general direction and allocation
of available supplies, the job is unlikely to be done satisfactorily. 4
In any consideration of the problems of economic demobilisation
the experience of the last war should not be forgotten, 5 For although
the immediate post-war period is likely to differ in many respects
from that following the armistice of 1918, many of the same major
1
" . . . " it would be better to immediately cancel all war material for which
we can see no use after the war. . . We could well afford the granting of subsidies
to labour rather than continuing the manufacture of high-priced munitions a t an
enormous profit to the manufacturer without real benefit to the Government."

Cited in U.S. NATIONAL RESOURCES PLANNING BOARD: National

Resources

De-

velopment Report for 1943, p . 25.
2
E.g., in the shipbuilding and light metal industries.
3
T h e general responsibility of governments in combating unemployment is
increasingly widely recognised by business groups. Cf. LEVER BROTHERS AND
UNILEVER: The Problem of Unemployment (London, J a n . 1943); Samuel COURTAULD: "An Industrialist's Reflections on the Future Relations of Government and Industry", in Economic Journal, Apr. 1942, pp. 1-17.
'
4
Recognising this, Sir William Beveridge has proposed the creation of an
Economic General Staff to carry out a national plan of resource allocation in Great
Britain, since without such a plan knowledge and control of investment and
employment would be impossible. Economist, 19 Dec. 1942, p . 758.
5
The process of economic demobilisation in the United States and Great
Britain after 1918 has recently been analysed in a valuable study by the
Economic, Financial and Transit Department of t h e League of Nations, entitled
Economic Fluctuations in the United States and the United Kingdom, 1918-1922
(Geneva, 1942).

INTERNATIONAL ECONOMIC ORGANISATION

problems will inevitably reappear. There will be the same sudden
increase in the labour supply available for the production of civilian
goods. 1 A great potential demand for consumers' goods will also
reappear. Price control and rationing, despite their shortcomings,
have thus far (1943-44) been much more effective than in 1914-18.
Although tax rates have been raised considerably, in some countries
to extraordinarily high levels, this has not been sufficient, especially
in the United States, to prevent the accumulation in private hands
of a large volume of liquid assets which cannot yet be converted
into real goods. Demand deposits have increased much faster than
prices have risen. The size and character of the public debt at the
end of war may also raise difficult problems especially if bondholders rush to cash their claims soon after the end of hostilities.
Thus the danger of inflation, should price and rationing controls
break down or be removed at the close of the war, is considerably
greater than it was after 1918. Money is likely to be more plentiful
and stocks of goods even scarcer. In some countries, notably in
China and to a less degree in occupied Europe, inflation has already
gone far and quick international action will be required if there is
to be any hope of preventing a runaway flight from the currency.
The impact of the war on technical progress must also be taken
into account. The influence of the first world war on motor traction
was decisive and there seems little doubt that the effect of the present war on air transport will be even more striking. Faced by
scarcities, scientists are developing new synthetic materials. Technical advances realised in wartime are likely to render our present
radios and automobiles quickly obsolete. But perhaps the most
significant wartime change has been not so much the development
of new products and new techniques as the spread of mass-production methods, adapted to extremely fine tolerances, to new industries, and more important, to new areas.
In view of the increasing importance of durable consumers'
goods, the greater magnitude of deferred maintenance and replacement, and the accelerated rate of technical progress, the demand
for capital is likely to be at least as insistent and as liable to cause
a runaway boom as it was after the first world war. If this expansion
is to be controlled, wartime rationing and price controls and other
instruments which ensure a steady supply of necessary goods and
services and an equitable distribution of that supply should be
retained in the immediate post-war period. Tax reductions, except
where taxes interfere with production incentives, should be post1
Both absolutely and relatively this increase in the labour supply will be much
larger than in 1918. This is especially true of the United States, which was then
devoting only a quarter of its total output to the war. At the present time, the
proportion is about 70 per cent.

TRANSITION FROM WAR TO PEACE ECONOMY

poned until conditions are more stable. After the last war the main
desire of governments and business alike in most countries was to
get rid of hampering control boards and return to "normalcy" as
quickly as possible. The result was a short inflationary boom period
followed by a sharp recession and a failure on the part of governments to attack the urgent problems of long-run economic reconstruction and adaptation. In the relaxation of wartime controls
it would probably be better this time to err on the side of caution
rather than suddenly to allow uncontrolled private demand to
replace government demand.
The main lesson of experience after the first world war is that to
separate the period of demobilisation and repair from that of longrange reconstruction is to invite disaster. After the armistice in
1918, "the one major concern" of the British Government, prompted
both by a fear of social unrest and by a sincere desire to recompense
the returning soldiers, "was to create a situation in which the
demobilised men might find employment readily at the most
favourable possible wages". 1 But neither in the United States nor
in Great Britain did this turn out to be the real problem. For a time
employment opportunities were relatively plentiful and the job of
repairing the national economies was relatively quickly accomplished2, but as the League of Nations analysis makes very clear,
1
'the major problem of the transition from war to peace economy . . .
proved itself to be not one of getting demobilised men and machines
re-employed, but of the cyclical effects of the perhaps unavoidably
bumpy nature of post-war pent-up demand". 3
The general contraction in industry immediately after the present war is likely to be much greater than after the armistice in 1918.
In individual industries it will be very high. The American aircraft
industry, for example, may face a 90 per cent, shutdown.. On the
other side of the ledger many economic adjustments which were
urgently required will have been carried out under the pressure of
war. The movement out of agriculture in the United States is but
one example; the contraction of the Lancashire cotton industry is
another. The traditional immobility of labour, a factor of great
importance to economic adjustment in an old industrial country
such as Great Britain, has been reduced, perhaps permanently,
by wartime transference. But despite these and other differences
1
LEAGUE OF NATIONS: Economic Fluctuations in the United States and the
United Kingdom, 1918-1922, op. cit., p. 76.
8
"At the end of the boom period of 1919-20, the productive capacity of the
world in nearly every respect was at least as great as might have been anticipated
eight years before even if there had been no war." A. L. BOWLEY: Some Economic
Consequences of the Great War (London, 1930), p. 93.
• LEAGUE OF NATIONS: Economic Fluctuations in the United States and the
United Kingdom, 1918-1922, op. cit., p. 79.

INTERNATIONAL ECONOMIC ORGANISATION

from the last post-war period, it is overwhelmingly probable that
the immediate post-war employment problem will not be how to
provide employment for the demobilised soldiers and workers,
but how to give employment which will not be subject to sudden
and violent fluctuations in volume.
The demand of the workers for re-employment has mainly
taken the form of insistence on reinstatement in their former jobs.
In some cases, such as those of workers conscripted into the armed
forces, this has been legally guaranteed. 1 In others, such as compulsory transfers to essential industries in Great Britain, no assurance has been given. It is coming to be recognised more and more
widely, however, that reinstatement is not an adequate solution.
In Great Britain, which has been most preoccupied with this question, the Government "considers that the problem is one which
affects the whole industrial and military population of the country
and that the solution for it must be on an equally broad basis. The
Government's efforts are thus directed towards planning for the
existence of adequate employment opportunities in the post-war
period. Throughout the country, increasing emphasis is being
placed on employment security as the corner stone of the post-war
economy." 2 There is no escape from the conclusion that a satisfactory solution for the problem of economic demobilisation can
be found only within the framework of a long-run policy designed
to maintain a high and steady level of economic activity and employment.
B.

INTERNATIONAL

CO-OPERATION IN THE TRANSITION

PERIOD

The point has been made that in the situation of acute scarcity
which will prevail at the end of the war, national governments
must take resolute action by means of the available price and
rationing controls, licensing systems and other instruments of resource allocation to prevent or arrest runaway inflations, and to
ensure equitable distribution of many of the very limited supplies
that will be available in order to get national economies back to
efficient production as quickly as possible. Some countries will be
better equipped to take such^action than others. The United States
1
In the United States the Selective Service Act, 1940, "directed t h a t arrangements be made for the return to previous employment of all men called for service
with the armed forces of the Government". The President, in approving the
extension of the Selective Service Act to include youths aged 18 and 19 years, said
t h a t consideration was being given to the problem of post-war continuation of

education interrupted by war. NATIONAL RESOURCES PLANNING BOARD: National

Resources Development Report for 1943, p. 10.
2
INTERNATIONAL LABOUR O F F I C E : Wartime Transference of Labour in Great
Britain, op. cit., pp. 143-4.

TRANSITION FROM WAR TO PEACE ECONOMY

will emerge from the war still comparatively rich in foodstuffs and
raw materials, and with its productive structure distorted but
not physically damaged. The countries of occupied Europe will be
at the other extreme. Starvation conditions will rule1, raw material
supplies will be exhausted, and industrial equipment will have
been looted to feed the Axis war machine. Great Britain and
Russia will be in an intermediate position, both with their productive machinery damaged and foodstuffs and raw materi?ls in
very short supply. Most countries will face large budgetary deficits
and their balances of payments will be severely strained.
In this situation of general scarcity, strong national action to
combat the problems of the immediate post-war period, though
necessary, is not likely to be sufficient. If, for example, a relatively
wealthy country like the United States were to remove the wartime
controls of demand and let prices rise, while other nations retained
these controls and kept prices stable, this might jeopardise the
whole reconstruction process. At first other countries would be
deprived of their share of imported materials which they so desperately need, and the inflationary pressure on their price levels would
increase. Later the country which had allowed prices to rise would
find its exporting capacity impaired, and if it undertook a unilateral
currency devaluation, other countries would surely counter by
erecting barriers to imports from it. The economic problems of the
transition period will be difficult enough even with a considerable
measure of national discipline and international co-operation;
without such discipline they will be insoluble.
It is already clear that many countries will not at first be able
to pay for the materials they urgently need if governments are to
be able to nurse their economies through the difficult period of
transition. Although recovery from .the effects of the war will in
the end depend upon the productive work of the populations themselves, these countries will in the beginning need aid in the form
of goods and services for which no payment can be expected either
immediately or in the future. During and after the first world
war large quantities of food, mainly from America, were distributed
to the stricken countries of Europe as "relief aid". But although
that prompt action saved numbers of lives in the years of near
famine, it was conceived as a relief undertaking rather than as an
integral part of a programme of economic reconstruction.
Two main lessons can be drawn from the experience of the
American Relief Administration. "Relief", as then understood,
covered goods paid for by the receiving countries in gold or in other
1
Cf. NATIONAL PLANNING ASSOCIATION: Relief for Europe, Planning Pamphlets, No. 17, Dec. 1942, pp. 3-30.

INTERNATIONAL ECONOMIC ORGANISATION

assets. Between the signing of the Armistice on 11 November 1918
and the conclusion of the Peace Treaty on 28 June 1919, 32 per
cent, of the aid was paid for in cash and 68 per cent, was received
on credit, while only 0.4 per cent, was distributed as a free gift.1
After the signing of the peace treaty, official inter-Allied relief
operations were quickly liquidated. The relatively small deliveries
made in the so-called "reconstruction period", which lasted from
mid-1919 until the end of 1924, were principally outright gifts and
were actually emergency measures taken to combat conditions of
the most extreme distress. In fact the period of "immediate relief"
was ill-named, while the "reconstruction period" existed in name
only and was actually a series of relief operations. Ultimately the
"relief loans" went into default and "the United States, though on
paper selling for about $1,000,000,000 on credit, actually made a
transaction equivalent to a cash sale of some 10 per cent, plus a
gift of 90 per cent, of the total amount of relief".2 The cash payments in the Armistice period served only to weaken further the
already shaky recipient economies and to reduce their future
capacity to pay. The credit transactions, though less damaging,
were likewise unfortunate. Relief loans were never commercial risks.
The bulk of available assets were pledged on them with the result
that no collateral was left for real reconstruction loans. It would
have been both more charitable and economically sounder to make
an outright and immediate gift of the supplies needed in the "relief
period" and to reserve aid in the form of international loans for
a real period of reconstruction.
The second point relates to the comparative treatment of exallies, liberated countries, and ex-enemy countries. After the
Armistice the liberated and ex-allied countries received the bulk
of their "relief" supplies on credit; ex-enemy countries, on the other
hand, had to pay cash.3 Mainly as a result of this arrangement,
deliveries to Germany were far below the amounts she was permitted to import under the terms of the Brussels Agreement 4 ,
while the amounts sent to liberated countries and ex-allies exceeded
the estimates. Shipments to Germany were held up and the Allied
blockade maintained until the required deposits of gold had been
made and the German merchant marine had sailed out of its home
1
Cf. LEAGUE OF NATIONS: Relief Deliveries and Relief Loans, 1919-1923
(Geneva, 1943), p. 8.
1
Ibid., p. 29.
3
" I t is broadly true to say t h a t during the Armistice Period the liberated countries and ex-allies received relief on credit (85 per cent, and 93 per cent, of the
total net value) whereas the ex-enemies paid cash." Ibid., p. 24.
4
Cf. F . M. SURFACE and H. L. BLAND: American Food in the World War and
Reconstruction Period (Stanford University Press, 1931), p . 198.

TRANSITION FROM WAR TO PEACE ECONOMY

ports. This discriminatory treatment was long and bitterly resented
by the German people.
In contemporary discussion of these problems the concept of
relief aid has been redefined. It is no longer thought of in terms of
food alone, but includes seeds, livestock, fertilisers, and clothing. 1
Plans for the organisation of relief and rehabilitation are well advanced. Before the United States' entry into the war the InterAllied Committee on Postwar Requirements, of which Great Britain
and eight European Governments-in-exile were members 2 , was
formed in London under the chairmanship of Sir Frederick LeithRoss of the British Treasury. The task of this body was to try to
assess the minimum requirements of all the occupied countries
for food, clothing, medicine, seeds, tools and raw material in the
immediate post-war period. It had, however, no powers or funds
with which to buy surpluses, but was apparently, successful in discouraging allies with funds from buying up products of which shortages exist.3
In November 1943, by an agreement signed by representatives
of the forty-four nations united and associated in the war, a United
Nations Relief and Rehabilitation Administration was set up with
the task of ensuring that "immediately upon the liberation of any
area by the armed forces of the United Nations or as a consequence
of retreat of the enemy the population thereof shall receive aid and
relief from their sufferings, food, clothing and shelter, aid in the
prevention of pestilence and in the recovery of the health of the
people, and that preparation and arrangements shall be made for
the return of prisoners and exiles to their homes and for assistance
in the resumption of urgently needed agricultural and industrial
production and the restoration of essential services". 4
The executive authority of the Administration is vested in a
Director-General who has full power to carry out relief operations
according to broad policies determined by the Council of the Administration or its Central Committee. The Council held its first
session in November 1943, appointed Mr. Herbert H. Lehman,
former Governor of the State of New York and head of the United
States Office of Foreign Relief and Rehabilitation Operations, as
1
In a speech to the Foreign Policy Association, Mr. Herbert Lehman said:
" I n all situations the technique of salvage and rehabilitation must constantly be
oriented towards the objective of reconstituting the economy of the recipient
nation." New York Times, 18 June 1943.
2
The Soviet Government was not a member, but was kept informed of each
new development.
3
New York Times, 20 Mar. 1943, p. 6.
4
Preamble to Agreement for United Nations Relief and Rehabilitation
Administration. First Session of the Council of the United Nations Relief and
Rehabilitation Administration,
Selected Documents, Atlantic City, New Jersey,
November 10-December 1, 1943, p. 7.

INTERNATIONAL ECONOMIC ORGANISATION

Director-General, and adopted a number of resolutions laying down
the policies to be followed.1
Throughout this first session of the Council it was stressed that
the principal objective of the United Nations Relief and Rehabilitation Administration is to help people to help themselves and thus
bring the need for relief to an end as speedily as possible. Thus,
a resolution on agricultural rehabilitation states that—
. . . it shall be the responsibility of the Administration to assist governments
and recognised national authorities in the liberated areas immediately to take
the necessary steps in providing the supplies and services needed to enable farmers
to sow and harvest essential crops during the first crop year, to maintain their
dairy herds, and to rehabilitate their farms for immediate food production. I t
shall also be the responsibility of the Administration to assist in restoring necessary processing facilities; in providing for the early expansion of fisheries and of
the whaling industry; in reinstating the agricultural labour needed to carry out
the production programme; and, to the extent t h a t they can contribute to
the solution of relief problems, in re-establishing experimental stations and
essential agricultural institutions, organisations, and services, in making the
necessary technical surveys to determine agricultural requirements and to lay
the basis for production programmes.

A corresponding resolution concerning the rehabilitation of such
industries, transport and other services as are essential to relief
stresses the same objective of bringing an end to relief as rapidly
as possible. No new construction or reconstruction is contemplated,
but it is clear from these statements of policy that the activities
of the United Nations organisation which has been set up will
include rehabilitation as well as actual relief.
Estimates of the quantities of foodstuffs, clothing, raw materials
and equipment which different countries will need can only be
provisional and approximate and it is improbable that they will
be met in full. If the process of military conquest and reoccupation
is gradual and piecemeal, the United Nations may find it possible
to provide most of the goods urgently required. If, on the other
hand, the European front collapses suddenly, they will be faced
with needs far beyond their capacity to fill. In the latter case it
would seem advisable to consider the continent of Europe as a single
unit, to.set up, as far as possible, definite principles according to
which the urgency of needs is to be calculated, and to allocate the
available supplies on the basis of greatest need. In the distribution
of goods for relief and rehabilitation, the wartime experience gained
by the Combined Food Board, the Combined Production and
1
Agreement for United Nations Relief and Rehabilitation Administration.
First Session of the Council of the United Nations Relief and Rehabilitation Administration, Selected Documents, Atlantic City, New Jersey, November 10-December 1, 1943. Cf. "The United Nations Relief and Rehabilitation Administration",
in International Labour Review, Vol. X L I X , No. 2, Feb. 1944, pp. 145-159.

TRANSITION FROM WAR TO PEACE ECONOMY

Resources Board, the Combined Raw Materials Board and the
Combined Shipping Adjustment Board will be invaluable.
It is likewise impossible to say now what means of payment
will be available and, therefore, what proportion of the goods will
be required as relief aid. 1 For the present the United Nations
Relief and Rehabilitation Administration is to be financed by a
contribution of one per cent, of their national income from all the
"non-invaded" nations; while the countries which have been occupied by the enemy will make what contribution they can.
The amount of goods which will be forthcoming will depend
upon the willingness of the more fortunate nations to co-operate
with the less fortunate in the common effort to restore productivity
as quickly as possible. In order to secure the optimum distribution
of available supplies, it may be found desirable to co-ordinate and
continue for a time national rationing policies, and to regulate the
flow of scarce raw materials according to an agreed system of priorities. It is to be hoped that the peoples in the more favourably
situated countries will be persuaded that it is in their own best
interests in the long run to bear with such wartime discomforts
for some time after the end of hostilities.
The nucleus of the machinery necessary to carry out these
policies already exists in the inter-allied bodies controlling foods,
raw materials, and tonnage. 2 These are still for the most part in
fact Anglo-American rather than United Nations organisations.
General agreement has however been reached that a permanent
organisation of the United Nations is to be established in the field
of food and agriculture and detailed plans for such an institution,
which is to be mainly concerned with long-run problems relating^
to the improvement of nutrition and agriculture 3 , have been drawn
up by an Interim Commission.
No precise criteria of comparative need can as yet be set up by
which relief and rehabilitation supplies should be allocated. As the
League of Nations experts suggest, the aim should be to mitigate or
avoid inflation, and to avoid commitments which are likely to lead
to a subsequent financial collapse.4
Conflicts of interest will certainly arise in this process of resource
allocation, and a large measure of sympathetic understanding
and generous co-operation on the part of the more fortunate nations
will be necessary if it is to be carried through successfully. Reprovi1
Sometimes, as in North Africa, money may be available to pay for the goods
required. Distribution through commercial channels might then relieve inflationary pressure on the currency.
* See above, p. 63.
a
See below, p. 101.
4

LEAGUE OF NATIONS, op. cit., p. 79.

INTERNATIONAL ECONOMIC ORGANISATION

sioning of the impoverished areas can be carried out much more
easily if stable international monetary and trading relationships
are restored with all possible speed. For until a healthily functioning
system of multilateral trade and finance is built up, creditor countries will be unwilling to grant reconstruction credits, either directly
or through an international agency, to finance the purchase by the
debtor countries of the products necessary to maintain production,
and the debtor countries will have little chance of paying for those
products. The whole calculation of relief aid is postulated upon
the restoration of a multilateral trading system, for without such
a system all help provided would be relief aid and'there would be no
real reconstruction. Consideration of such problems is best postponed until the following chapter. For the moment it is sufficient
to underline the fact that the international aspects of economic
demobilisation, relief and rehabilitation, like the parallel domestic
problems, cannot realistically be separated from the long-run problems of reconstruction and adaptation.

INTERNATIONAL CO-ORDINATION O F
NATIONAL POLICIES

The preceding chapters have sought to define the main economic
objectives of post-war planning and to analyse the probable conditions in which these objectives will have to be pursued. Special
emphasis has been laid upon the disturbed situation likely t o arise
immediately a t the close of the war.
It has been argued that modern developments in communications and industry have rendered the nations of the world mutually
more interdependent than ever before.1 I t may be true that the
development of synthetic materials and the advance in agricultural
techniques have made it easier for nations t o live a t home. But if
the aim of economic policy is to maximise human welfare, home
production by itself will not suffice. The great improvement in
living standards which was achieved in the nineteenth century
was in great part a consequence of the system of multilateral trade
which developed under British leadership. The present world
distribution of population and capital equipment has been greatly
influenced by that system. To renounce the benefits which multilateral trade can bring would inhibit further advances and even
entail a considerable lowering of existing standards of living almost
everywhere.
In the past, policies aimed at fuller employment and a greater
measure of social security have frequently clashed with policies
designed to encourage international trade and investment. This
conflict is not inevitable. It will be argued in this chapter that
positive national policies designed to maintain employment and
improve the lot of the ordinary citizen are compatible with an increased volume of international trade—provided that there are
international arrangements through which such national policies
can be co-ordinated and cleared.
1

Cf. pp. 29-30. See also, e.g., LEAGUE OF NATIONS, ECONOMIC INTELLIGENCE

SERVICE: The Network of World Trade (Geneva, 1942), and LEITH, C. K.,
FURNESS, J. W., and LEWIS, Cleona: World Minerals and World Peace (The
Brookings Institution, Washington, D.C., 1943), Part V.

INTERNATIONAL ECONOMIC ORGANISATION
A.

PROBLEMS OF DOMESTIC POLICY

Full employment and social security in every country are
increasingly recognised as being matters of international concern 1 ;
but most of the measures by which they must be achieved are
likely for some time to come to remain primarily a national responsibility. Changes both in political boundaries and in national
economic systems may occur during or after the present war,
but it is overwhelmingly probable that the prerogatives and
powers of sovereign States will not be fundamentally altered in the
near future. It is true that the establishment of any effective
organs of international co-operation depends upon the willingness
of States to give up certain rights hitherto considered sovereign.
Such concessions have been made in the past; more must be made
in the future. But no government which permits the recurrence
of mass unemployment after the war will be likely to remain in
office for long. For this reason, if for no other, programmes designed
to maintain employment and provide improved standards of
social security will in the main be devised and put into effect by
national governments.
Leaders of commerce and industry, business and labour agree
that the prevention of mass unemployment after the war is a categorical imperative. The main difficulty is that there is not only
widespread disagreement on the diagnosis of the ultimate causes
of unemployment 2 , but opinions clash among different social groups
in different countries as to what evils they are anxious to avert and
what cures they are prepared to accept. Within the limits of the
present study it is not possible to put forward a complete programme of business cycle control and anti-depression measures.
Indeed, that is not our purpose. For no single programme would
be universally suitable. We wish here to direct attention to certain
practical questions upon which a fairly wide measure of agreement
must be secured if any programme directed towards the achievement
of full employment and social security is to have any chance of
success.
Some of these questions raise fundamental issues of social
policy. Others are less controversial. It is generally agreed, for
example, that every effort should be made in the post-war period
1
Cf. the Declaration concerning the aims and purposes of the International
Labour Organisation and the resolution concerning social provisions in the peace
settlement, adopted by the International Labour Conference a t its 26th Session,
Philadelphia, 1944 (INTERNATIONAL LABOUR O F F I C E : Oficial Bulletin, Vol. X X V I ,
No. 1, J u n e 1944, pp. 1 and 79).
2
For excellent discussions of some of the main points of controversy, cf. D. H.
ROBERTSON: " T h e Snake and the W o r m " and "A Survey of Modern Monetary
Controversy", in Essays in Monetary Theory (London, 1940).

CO-ORDINATION OF NATIONAL POLICIES

to increase labour mobility, even though that effort should bring
with it a temporary rise in "frictional" unemployment.
The problem of labour immobility is most acute in old industrial
countries and in those where peasant agriculture is the predominant
occupation. In the former, where the unemployment problem is
largely that of providing steady employment for the unskilled
labourer, severe structural disequilibria—the legacy of past failures
to adapt the productive structure to changing needs—add to the
difficulties which must be faced.1 The flow of labour to secondary
and tertiary industries in the countries with the highest living
standards, although striking, has not been fast enough, and means
must be sought to help and encourage workers to move from stagnant or declining industries to new and expanding sources of employment. 2 Peasant agricultural countries, on the other hand,
where the labour market is relatively unorganised, are characterised by a high degree of "underemployment" rather than by a
large"percentage of the active population totally unemployed. In
those countries, the main problem is to increase the speed of transference from agricultural to industrial occupations. Although much
can be accomplished by improvements in both educational and
employment services, the problem can be solved only by a comprehensive programme of agricultural and industrial development.
There are many reasons for the comparative immobility of
labour. Poverty, family ties, insufficient knowledge of the state of
the labour market, or mere inertia, may prevent a worker from
seeking employment in another industrial region. Lack of education and training may hinder him from obtaining employment in a
new occupation.
Immobility of the first type may be alleviated by the extension
and co-ordination of employment offices and there is reason to
believe that in some countries the situation has been favourably
affected by the war. Additional machinery for the redirection of
labour has been set up, for example, in Great Britain and Australia.
These offices will be invaluable in the post-war period. In addition,
the prevalent inertia of workers in old industrial countries has been
affected, perhaps permanently, by forced wartime transfers. Ex1
In Great Britain just before the war the rates of employment absorption
varied widely from region to region. In the old industrial area of the northern
counties only 426 out of 1,000 men who became unemployed in the last quarter
of 1938 found new jobs, at least temporarily, within three months. In the new
centre of light manufacturing industries, around London, 701 out of 1,000 added
to the unemployment register in the last quarter of 1938 were re-employed within
the next three months. Over a rather longer period these rates show a tendency
to become more nearly equal. Cf. H. W. SINGER: "Regional Labour Markets and
the Process of Unemployment", in Review of Economic Studies, Vol. VII, pp.
42-58.
5
Cf. A.G.B. FISHBR: The Clash of Progress and Security (London, 1935).

INTERNATIONAL ECONOMIC ORGANISATION

perience has also been gained in the rapid construction of low-cots
prefabricated housing units in areas experiencing boom conditions.
The process of industrial demobilisation and adaptation will be
made much easier if these improvements are retained and extended
and if the wartime experience of some countries is drawn upon by
others.
Adequate provision for retraining has been emphasised in the
various government reports on social security. " I t is not necessary
to emphasise further", states the Canadian report, "the crucial
importance of turning the fullest resources of training and retraining to the problem of occupational transference immediately the
need for war production is over". 1 Here, too, much has been learned
in wartime, and effective industrial training facilities have been
built up which should be fully utilised in the transition period. In
some countries the abolition of obsolete apprenticeship rules in
craft unions, which hinder the training of skilled workers, is very
necessary. But union opposition to such measures has in the
past, and in the absence of positive employment policies, been
powerful.
It is sometimes forgotten that the armed services are also training large numbers of skilled workers, aeroplane and motor mechanics, radio operators and mechanics. The United Nations, and
notably the industrial countries among them, will emerge from
this war with a better trained and equipped labour force than they
have ever before possessed. From its centre in the United States,
technical knowledge and ability to utilise techniques of mass production requiring extremely fine tolerances has spread to other
industrial countries. The long-run effect of this change on the
economies of these countries is certain to be important.
In a study of occupational maladjustment in London, Colin
Clark, using data analysed by Professor Bowley, has shown that
unequal educational opportunity, the result of parental poverty, was
an important cause of the surplus of unskilled labour in Great
Britain. 2 Even in the United States, where mass education is more
nearly achieved than in most other countries, this conclusion would
still apply, at least in the South. All efforts to attain better stand1

Report on Social Security for Canada, op. cit.
"Generally speaking these figures show t h a t the most potentfactorincausing
the present surplus of unskilled labour in Great Britain was the existence of a
large unskilled population in the last generation (for whom there was work a t
t h a t date, however) coupled with the marked difficulty experienced by sons,
under present laws, customs and economic stresses governing apprenticeship and
education, in entering any occupation better paid t h a n t h a t of their fathers. . .
The supposed high quality of British education does not compensate for its lack
of quantity." Colin CLARK: The Conditions of Economic Progress (London, 1940),
pp. 235 et seq. The figures Clark uses are from A. L. BOWLEY: "New Survey of
London Life and Labour", in Economica, 1935, p. 402.
2

CO-ORDINATION OF NATIONAL POLICIES

ards of education, liberal and vocational, are at the same time
measures calculated to reduce the surplus of unskilled labour and
by the same token to reduce unemployment.
It is more and more recognised also that merely negative policies
such as the removal of tariffs and the other obstacles to trade cannot
by themselves ensure a high and steady level of economic activity
and employment. Fluctuations in the rate of capital formation
would remain a serious problem. There is also substantial agreement that control of the rate of real investment by means of the
interest rate is not an adequate solution for this problem. The
opinion therefore gains ground that a policy of investment control
by the State, perhaps involving some degree of public investment,
may be required. 1 But what is to be the extent of State intervention
in the investment process ? Is it to be confined to anti-depression
measures or is it to be a more permanent policy ? Will its continuance beyond some "normal" level of activity—at which large
numbers of men are still without jobs—set in motion a cumulative
expansionary process which sows the seeds of its own destruction ?
Is State investment to take the form exclusively of "non-remunerative" public works, or is it to include "remunerative" projects like
the Tennessee Valley Authority which compete with private concerns operating in the same field ? Is such a programme compatible with private capitalism ?
In any case, control of investment, on which great emphasis is
currently being placed, is only half a solution. 2 For unless labour
is satisfied with the existing distribution of income the pressure for
higher wages will continue, and the attempt to achieve full employment through a policy of investment control alone will lead to
wage inflation. It is not enough to take the view that full employment is to be sought within the pre-war social and economic organisation. The broader question of the adequacy of that organisation
must be raised.
One of the most disturbing features of our society has been the
growth of restrictive agreements and the spread of monopolistic
conditions leading to concentration of economic power and faulty
allocation of resources throughout the economy. There is little
doubt that these developments are an important cause of unemployment. The question must be asked, therefore, whether a democratic
economy of abundance, social security and full employment is, in
1
.E.g., "Mass unemployment can be prevented if the community's annual
investment can be made both large enough to embody the total of savings, and
regular from year to year." Economist, 3 Oct. 1942, p. 408. The writer of this
article advocates that a National Investment Board be set up to encourage and
facilitate investment when the State requires it.
2
Cf. letter of Thomas Balogh in the Economist, 28 Nov. 1942, p. 663.

INTERNATIONAL ECONOMIC ORGANISATION

fact, possible without some measure of centralised co-ordination
and planning of national economic activities.
Such questions involve value judgments as to the desirability
of different forms of social organisation. Different nations will
give different answers to them, depending upon the distribution of
political power among the various economic groups. Some countries
may rely wholly on State enterprise, others largely on private enterprise, to provide employment for their resources of men and machinery, while in still others mixed systems of State and private
enterprise may be developed. This wide variation constitutes one
of the major difficulties confronting attempts to establish workable mechanisms of international co-operation.
National measures to combat depression, even when based
almost entirely upon domestic considerations, cause repercussions
far beyond the national boundaries. For example, if, in a period of
crisis, a country, trading under gold standard conditions, attempts
to redress its balance of payments by the classical remedy of credit
contraction and deflation, it erects an indirect barrier to imports.
But the imports of one country are the exports of another and such a
barrier will, therefore, have an adverse effect upon economic activity
in the exporting countries. This is not to say that international
trade and the operation of the gold standard mechanism are responsible for the business cycle. But if the assumptions upon which
the classical theory of the balance of payments was based are not
substantially valid and there exists in the economic system of a
country a tendency to periodic fluctuations, these will be transmitted to other countries by way of international trading and
financial connections.
National measures taken to relieve unemployment have been
classified as "selfish" or "unselfish". 1 A country which devalues its
currency and raises the level of domestic activity by curtailing its
imports and stimulating its exports, does so at the expense of the
rest of the world (unless the devaluation is necessary to bring the
domestic price system into harmony with world prices). On the
other hand, if a country chooses to combat a rising volume of unemployment by a positive programme of cheaper credit, the increased purchasing power will exert a favourable influence on
economic activity in the rest of the world. In practice such a policy
is seldom possible. In a country with large export industries in a
depressed condition it could hardly be chosen, and if the depression
was in part the result of an overvalued currency, as in Great
Britain in 1931, it would not be an adequate remedy. Furthermore,
1

D. H. ROBERTSON, op. cit., pp. 105 et seq.

CO-ORDINATION OF NATIONAL POLICIOS

if such a policy is to give the maximum stimulus to employment,
the multiplying effect of the initial investment must be as large as
possible, and this can be achieved only if none of the investment
leaks out through foreign trade or secondary investment abroad.
It is therefore not surprising that in the past governments adopting
positive measures to combat unemployment have followed "selfish"
policies and have assumed direct and far-reaching control over
international trade and investment.
Experience with these national controls in the last decade has
not been happy. Almost without exception such autonomous
business cycle policies to stimulate domestic employment have led
in the end to a vicious circle of economic strangulation. Imports
and foreign investment were restricted. As a result, exports shrank
and the "unsheltered" trades languished. Subsidies, direct or
indirect, were used to force the dwindling volume of exports upon
unwilling customers. The total volume of trade shrank progressively and unemployment in the export trades was severe. The bitter
experience of the, 'thirties showed clearly that a country cannot
cure unemployment by exporting it. It may benefit temporarily
by a restrictive policy, especially if the terms of trade are in its
favour and the foreign demand for its goods is inelastic; but when
other countries introduce parallel restrictions its export industries
are liable to be adversely affected. If all the restrictions are uniformly effective, each country retains its former share in a reduced
volume of world trade. The world and all the countries in it are
poorer than before.
Thus, although it remains true that the most important single
contribution that any country can make to world prosperity is to
achieve a high level of employment and economic activity at home,
it is perhaps equally important that it should do so with due consideration for the repercussions of its policies upon other nations.
This is especially true of the great powers. They are the great
manufacturing centres as well as the largest markets for raw
materials and foodstuffs.
Some among them, notably the
United States, will be in a position to provide on credit the
capital goods required by industrially "backward" countries
for their economic development. If, in attacking their domestic
problems of economic demobilisation and adaptation to the changing needs of the world market, they will take account of the international repercussions of their domestic policies, the way will be
open for the establishment of a stable framework of international
economic relations.
If, on the other hand, they follow the
narrowly nationalistic, beggar-my-neighbour policies which brought
chaos to international monetary and commercial relations in the

100

INTERNATIONAL ECONOMIC ORGANISATION

period between the wars they will set the stage for a third world
conflict. Theirs is a grave responsibility; but it is the inevitable
responsibility that goes with power.
B. N E E D FOR INTERNATIONAL CO-OPERATION

The argument in the preceding section has laid stress upon the
importance of national policies, and especially those of the great
powers, in determining the course of international economic relations. Some domestic policies, such as the setting of tariff rates and
import quotas, affect other economies directly; others, like the
management of credit to combat unemployment, do so indirectly.
But as long as the nation-State retains its sovereign rights, the
authority which will be decisive in international affairs will be that
of the national government.
In this situation the success or failure of any institutions of international co-operation or administration will depend upon the
will of the member States to make them work. Members of the
governing councils of such institutions usually represent and speak
in the name of their national governments. The policies of such
international organisations will therefore be determined by the
instructions given to the delegates by their national governments.
Will this mean in practice that the scope of the authority vested
in such international bodies is likely to be strictly limited ? In
matters of vital importance this is indeed likely to be the case:
the ultimate decisions will be taken by the national governments
themselves. It is, however, to be hoped that States will be willing
a t least to delegate certain specific functions to appropriate specialised international institutions. There is, of course, a risk that
the policies followed by such institutions may not be adequately
co-ordinated, or may even conflict with one another. As the United
Nations Conference on Food and Agriculture has clearly demonstrated, the various economic aspects of world order, relief and
agricultural organisation, agricultural organisation and commercial
policy, commercial policy and monetary stabilisation, monetary
stabilisation and international lending, are inextricably interwoven. But against the risk of inadequate co-operation and coordination among more or less autonomous institutions must
be set the advantage that by this procedure the imperfect working of one element is less likely to disrupt the rest.
(1) Food, Agriculture and Raw Materials
After the last war the first efforts at economic reorganisation
centred around monetary and financial problems. The first United

CO-ORDINATION OF NATIONAL POLICIES

101

Nations conference met, however, "to consider the goal of freedom
from want in relation to food and agriculture". 1 The conference
surveyed the existing world food situation in which underconsumption with its attendant evils of malnutrition and disease is widespread, and examined the possibilities of increasing production and
improving distribution so that the people of the world might have
sufficient food for adequate nutrition and good health. It was
recognised that the achievement of this goal was closely bound up
with national policies to maintain a high level of employment and
with national and international policies relating to trade, currency,
and investment. The field chosen for the first attempt a t longrange co-operation among the United Nations, as well as the procedure followed by the conference, reflect the growing preoccupation with broad social objectives to which attention has already
been drawn.
The results of the conference, embodied in the Final Act and in
the individual section reports, constitute a manifesto setting forth
new directives of policy rather than a detailed programme of practical action. But the conference also recognised the need for a permanent international organisation in the field of food and agriculture
and recommended the establishment in Washington of an Interim
Commission, one of whose functions would be to draw up detailed
plans for such an organisation. This Commission has since held a
number of meetings.
The main function of the proposed permanent body would be
to act as a permanent consultative organisation in which specific
national policies designed to raise levels of living and standards of
nutrition would be discussed and as far as possible co-ordinated.
Some of its subsidiary functions were foreshadowed a t the conference. It would act as a centre of research, information and advice on
matters of nutrition and agricultural policy. It would collect and
seek to improve statistical data. There might also be set up within
the larger organisation a division of agricultural credit, which
would work with and advise national agricultural credit institutions.
Closely related to the functions of such an institution, though
not necessarily organised under its supervision, would be such international arrangements as might be set up for the control of basic
foodstuffs and agricultural raw materials entering international
trade. One of the chief symptoms of economic maladjustment in
recent years has been the marked instability of prices of foodstuffs
and raw materials. Many attempts, private and public, national
1

UNITED STATES, DEPARTMENT OP STATE: United Nations Conference on Food

and Agriculture, Final Act and Section Reports (Washington, D.C., 1943), p . 1.

102

INTERNATIONAL ECONOMIC ORGANISATION

and international, have been made in the past to combat this evil,
but in general their success has been meagre.
The main criticism of past international commodity control
schemes is that they have been, in fact if not always in name,
bodies representing the interests of organised producers. Sometimes consideration was given to the intermediate consumers,
usually great manufacturing industries—if they were powerful
enough to command attention—but the final consumers were never
adequately represented. For this reason, and also because of their
establishment in times of acute crisis, it is not surprising that these
organisations of producers should have sought to protect their own
positions and consequently have never made a resolute attempt t o
deal with the underlying problems of excess capacity and areas of
high-cost production. The prevalence of widely differing cost conditions and the disinclination of the regulating committees to eliminate
high-cost producers foredoomed these agreements to failure either
because all producers could not be persuaded to join, or because
the low-cost producers who were parties to the agreement found
themselves hamstrung in periods of expansion, and constantly
threatened to break the agreement.
Experience with past controls has likewise made it clear t h a t
such market regulation is complex and difficult. The history of
agricultural market regulation in the United States and of the national and international rubber control schemes shows clearly that
price control alone is of little use. Once control has been introduced
the scope of regulation tends to spread from price to production,
acreage, and exports.
In spite of the shortcomings of past arrangements, the need for
some measure of international control remains, since, if no agreement is reached, nations will not hesitate, but will be tempted, if
not forced, to subsidise directly or indirectly their high-cost producers as they did for years before the present war. Failure to
reach agreement on policies of stabilisation and adaptation is thus
likely to lead to a repetition, with new weapons as well as with old,
of the policies of exaggerated economic nationalism and trade warfare of the 'thirties.
Although each commodity has its own special problems of production and marketing, it is possible, in the light of accumulated
experience, to set down certain general objectives at which such
international agreements should aim. In accordance with the
fourth point of the Atlantic Charter they should be non-discriminatory. They should include provisions for adaptation in highcost areas, for the removal of excess capacity, for the disposal of
accumulated stocks and the maintenance of adequate reserves,

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103

and for the regulation of prices so as to eliminate excessive fluctuations and keep prices at a level sufficient to call forth adequate
supplies from the most efficient producers. They should include
arrangements to ensure that labour employed on the production of
controlled commodities receives fair remuneration and adequate
social security protection and that the other conditions of employment are satisfactory. 1 Finally they should safeguard the legitimate
interests of the unorganised final consumers and seek measures to
expand consumption rather than to restrict production.
The technical management of any acceptable scheme must be
given over to disinterested experts, members of the executive staff
of the international agricultural organisation or some other international agency who have the welfare, not of any national or sectional group, but of the whole world community at heart. Suitable
technical experts, willing to be true international civil servants,,
can be found. The real difficulties appear at the policy-making
level where conflicts are likely to arise between national governments which identify their interests exclusively with those of their
domestic producers, especially if the crop is important in the national economy, and those which speak out only on behalf of their
great consuming industries. Only if a reasonable compromise can
be based on a sincere consideration of the general welfare will such
agreements have a chance to operate as effective instruments of
progressive growth and change.
In the post-war period the main technical questions which will
arise in connection with the international regulation of markets for
foodstuffs and agricultural raw materials will be: (1) how to eliminate excessive seasonal and short-period price fluctuations and to
maintain stocks at an adequate level; (2) how to effect international
co-ordinated policies of progressive national adaptation to changing world market conditions, aimed at eliminating high-cost areas
and excess capacity. In some commodity markets where regulation
is contemplated, only the first of these questions will be relevant.
Methods of solving the same problem will also have to vary widely
because of the specific market characteristics of different commodities.
For several years before the outbreak of the present war, national
stabilisation funds had been used successfully to absorb short-term
fluctuations in the demand for foreign exchange. 2 If the conditions
1

Cf. INTERNATIONAL LABOUR OFFICE: Intergovernmental Commodity Control

Agreements
(Montreal, 1943), p. xxix.
1
For excellent descriptions of the British Exchange Equalisation Account,
which operated extremely successfully, cf. N. F. HALL: The Exchange Equalisation
Account (London, 1935), and Leonard WAIGHT: The History and Mechanism of the
Exchange Equalisation Account (Cambridge, 1939).

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of pure competition were fully realised there would be no need
for such institutions since every movement away from the equilibrium position would set in motion forces which would tend to
counteract that movement. But where the tendency to such fluctuations exists, and especially where considerable uncertainty prevails,
such a fund or stock of foreign exchange can be used to absorb
these movements and prevent them from attaining dangerous proportions. What an exchange stabilisation fund cannot do is to
correct an underlying disequilibrium in the exchange situation.
Similarly in the commodity markets, where there are fluctuations
in effective demand, "a divergence immediately ensues between the
general interest and the course of action in respect of stocks which
is most advantageous for each competitive enterprise acting independently". 1 The main reasons for this are high storage costs,
the inability of primary producers to hold stocks, the speculative
motives of wholesale purchasers and the lack of long-term holding
power on the part of outside speculators. Buffer pools or stocks,
which would be drawn upon or added to in order to counteract the
excessive price movements resulting from these causes, could be used
in much the same way as a foreign exchange stabilisation fund, to
regulate the markets for the great agricultural staples where prices
have been relatively unstable. They could also be modified for use
in the markets for certain non-agricultural products where supplies
cannot be expanded or contracted quickly in response to price
change.
Buffer stocks have already been used in past commodity control
schemes, notably by the International Tin Committee. These have
however been administered by representatives of producing countries, primarily in the interests of the producers concerned.
Price stability is not an end in itself, since rigid prices may well
aggravate existing structural dislocations and prevent smooth
adaptation to changing market conditions; it is desirable only if
such maladjustments are not present and the market quotations
hover around an optimum equilibrium price. It has been suggested
that those operating a buffer pool, by varying the prices at which
they buy and sell the commodity, should combine a short-period
stabilisation of prices with a long-period price policy designed to
balance supply and demand and allow a steady rate of expansion
1
J. M. K E Y N B S : " T h e Policy of Government Storage of Foodstuffs and RawMaterials", in Economic Journal, Vol. X L V I I I (1938), p. 449. In Mr. (now Lord)
Keynes' proposal the Government was only to provide storage facilities for producers; ownership was to remain in the hands of depositors to whom the Government could advance free of interest or a t a rate equal to t h a t on Treasury Bills
up to 90 per cent, of the market price a t the date of delivery into storage. If this
proved insufficient to maintain stocks he proposed outright Government purchase.

CO-ORDINATION OF NATIONAL POLICIES

105

to the most efficient producers. 1 While this might be successful in
the regulation of some commodity markets it has already been
shown that price control alone is often insufficient to rule out the
possibility of serious market disturbances. The function of such
buffer stocks should be limited to the control of seasonal and shortperiod fluctuations and to the maintenance of adequate reserve
stocks. To overload such a body with functions differing rather
widely in character and purpose is to lessen its chances of successful
operation.
Yet the disagreeable fact remains that in the markets for many
of the great agricultural staples entering international trade deeprooted maladjustments already exist; some will be aggravated by
the present war as they were during the first world war. To remove
such long-term disequilibria, measures of quantitative control may
be necessary. Opponents of these object that they are necessarily
restrictive, that they tend to freeze the existing production pattern,
and that they are likely to forget the interests of the consumers.
If such controls are in the hands of independent bodies of organised
producers this is obviously true, but if individual countries are
attempting to raise domestic levels of employment and consumption and if the members of the regulatory organisations are in close
contact with an international co-ordinating body, such difficulties
may perhaps be avoided.
Stress has been laid upon the interconnection between the
various economic aspects of world order. Freedom from want cannot be achieved by measures of agricultural policy alone, no matter
how carefully co-ordinated. Decisions in regard to agricultural
policy will affect and be affected by monetary, commercial and
financial policies. There would be little use, for example, in drawing
up elaborate plans for expanding production of staple foods in lowcost areas if barriers to international trade, or the lack of international short-term credit facilities, prevented the distribution of
these goods among the great mass of potential consumers. The
central economic problem of the post-war world will be to secure
equilibrium in national balances of payments at levels of national
income which will make possible adequate standards of nutrition
and welfare and provide an expanding market for all products,
industrial as well as agricultural. Solution of this problem must be
sought through joint attack upon obstacles to international trade
on the one hand, and, on the other, through the co-ordination of
monetary, financial and other measures to maintain employment
and national income. It is therefore essential that the permanent
1
Cf. text of the British Declaration of Principles at the Food Conference, in
New York Times, 24 May 1943, p. 7.

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INTERNATIONAL ECONOMIC ORGANISATION

agricultural organisation maintain close liaison with other permanent institutions working in the related and equally important
fields of currency, trade, investment and social policy.
(2) International

Monetary

Arrangements

The function of the London Money Market in the nineteenth
century in acting as a clearing house of international payments and
as a stabilising influence on the foreign exchanges has been described
above. The successful operation of such a system depended upon
flexibility of costs and prices and on the willingness of countries
to adapt their productive structures in response to external influences. That system finally broke down. The main reasons for
its collapse are to be found in the technical and organisational
changes in production and trade, to which attention has already
been drawn. These changes influenced and were in turn influenced
by the violent upsurge of economic nationalism after the war of
1914-18.
It remains true, however, that the great improvements in living
standards which modern agricultural and industrial techniques have
made possible can be brought to ordinary people only if a large
and expanding volume of goods and services moves relatively freely
across national frontiers. A necessary precondition for the reestablishment of such a system of international trade is the existence
of a multilateral clearing system based on stable exchange rates.
But there can be no return to the nineteenth century. Postwar currency reorganisation must take account of the elements of
rigidity and potential instability which have developed in national
economic systems. It must also allow for the change of opinion as
to adequate standards of social security. Any acceptable postwar international monetary mechanism must make possible the
healthy development of international trade but at the same time
must not frustrate the desires of national governments to maintain
a high and stable level of employment and national income.
The Governments of the United Nations have already given
considerable attention to the problem of post-war international
monetary arrangements. In the first half of 1943, the United States,
British and Canadian Governments each announced tentative plans
for the reconstitution of an international monetary system after
the war. In addition two prominent French financial experts
drafted a plan with similar ends in view.1 After these proposals
1
The American plan for an International Exchange Stabilisation Fund is
understood to have been mainly the work of Dr. Harry D. White, Director of
the Division of Monetary Research of the United States Treasury while the
authorship of the British proposal for an International Clearing Union, issued

CO-ORDINATION OF NATIONAL POLICIES

107

had been discussed by technical experts for almost a year, a Joint
Statement by Experts on the Establishment of an International Monetary Fund of the United and Associated Nations1 was issued in April
1944. On the basis of this "statement of principles", delegates of
the 44 United and Associated Nations met in a formal diplomatic
conference in July, and drew up definite proposals for action.
Subject to ratification by national legislatures, the agreement
reached at the United Nations Monetary and Financial Conference
held at Bretton Woods will enter into force "when it has been
signed on behalf of governments having sixty-five per cent, of the
total of the quotas . . . , but in no event . . . before May 1, 1945".
The agreement proposes that an International Monetary Fund
of 8.8 billion U.S. dollars, subscribed in gold and local currencies,
be set up by the United Nations. A schedule of quotas, or subscriptions, is specified, the share of the United States being 2,750
million dollars, that of Great Britain 1,300 million, and that of
the Soviet Union 1,200 million. China will subscribe the next
largest quota, 550 millions, France 450 millions, India 400 millions
and other countries smaller amounts. One quarter of a member
country's quota or 10 per cent, of its holdings of gold and United
States dollars (whichever is the smaller) is to be subscribed in gold.
The purposes and policies of the Fund will be:
(i) To promote international monetary co-operation through a permanent
institution which provides the machinery for consultation and collaboration on
international monetary problems.
(ii) T o facilitate the expansion and balanced growth of international trade
and to contribute thereby to the promotion and maintenance of high levels of
employment and real income, and to the development of the productive resources
of all members as primary objectives of economic policy.
(¡ii) T o promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.
(iv) To assist in the establishment of a multilateral system of payments in
respect of current transactions between members and in the elimination of foreign
exchange restrictions which hamper the growth of world trade.
(v) To give confidence to members by making the Fund's resources available
to them under adequate safeguards, thus providing them with opportunity to
correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.
(vi) In accordance with the above, to shorten the duration and lessen the
degree of disequilibrium in the international balances of payments of members.
as a Government document in April 1943 is commonly attributed to Lord Keynes,
a member of the Court of the Bank of England and adviser to the British Treasury. The French plan, prepared by Messrs. André Istel and Hervé Alphand,
was published in the New York Times, 9 May 1943, Section 5. T h e Canadian
proposal for an International Exchange Union was issued as a Government
document on 9 June 1943. Cf. International Labour Review, Vol. X L V I I I , No. 2,
Aug. 1943: "Proposals for International Exchange Stabilisation: Analysis of
British, Canadian, French and United States Plans", pp. 157-173. by L. B. JACK.
» U.S. TREASURY (Washington, D.C., 1944).

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INTERNATIONAL ECONOMIC ORGANISATION

Thus the main aims of the Fund clearly centre on the related
tasks of maintaining stable exchange rates, establishing a system of multilateral clearing, and providing adequate supplies of
international short-term credit.
In the chaotic conditions which will prevail at the close of the
war, however, these will seem like long-range objectives. Before
any solution of them can be attempted, certain emergency measures must be taken to create an atmosphere favourable to such
a solution. One of the first tasks of monetary reorganisation, for
example, will be to free national monetary systems from their everincreasing load of. blocked balances. Sterling balances that have
been accumulated in London to the credit of suppliers of essential
materials all over the world are already so large 1 that it would be
impossible to open the market to free transactions in sterling so
long as the threat existed that payment of these balances might be
suddenly demanded. In occupied Europe, many countries will find
themselves pillaged of both real goods and liquid assets, having
received nothing in return but worthless paper arid large clearing
balances in Berlin. Strictly speaking, problems such as these do
not seem to fall within the scope of the Fund's, normal operations.
It is recognised, however, that in the transitional period some
members may have to maintain, adapt, and even introduce restrictions on payments and transfers for current international transactions. The Fund, however, provides machinery for the progressive removal, as soon as possible, of these restrictions damaging
to world trade, and for aiding members in choosing exchange rates
at which a large volume of international payments can be cleared
multilaterally. It could thus serve as a permanent agency of consultative co-operation on international monetary matters.
Until very recently the fixing of exchange rates, or more exactly
of gold parities, was considered to be a matter of national concern
only. In the second half of the nineteenth century, when country
after country adopted the gold standard, each did fix the gold value
of its currency independently. But in so doing it chose a value
which corresponded at least approximately to an already existing
equilibrium. In the currency reorganisation after 1918, on the other
hand, any semblance of an equilibrium had been destroyed by the
damage and dislocations of war. Under such conditions it would
have been practically impossible for all countries, each acting
independent^', to choose the rates of exchange which would have
restored equilibrium in the international balance of payments.
Some countries, notably Great Britain, do not appear to have paid
1

Recently estimated to reach 12,000 million dollars by the end of 1944.

CO-ORDINATION OF NATIONAL POLICIOS

109

much attention to the crucial question of the restoration of international equilibrium. When in 1925 the pound sterling was restored to its pre-war gold parity, Mr. Keynes was quick to point
out that sterling was then overvalued by about ten per cent. Inevitably the industries catering for the export market suffered acutely.
France, on the other hand, stabilised the franc at a level well below
the equilibrium point.
A decade of monetary nationalism, in which the gold standard
was abandoned by virtually all countries, has made it clear that no
country ever did possess the power to fix unilaterally the value of
its currency in terms of other currencies. For a rate of exchange is
nothing more than a ratio, whether one currency be expressed
directly in terms of the other, or whether each currency be expressed
in terms of a common medium such as gold. According to the agreement reached at Bretton Woods, the par value of a member's currency is tö be expressed in gold and agreed with the Fund when
the latter is of the opinion that it will shortly be in a position to
begin exchange transactions. Thus the fundamental principle of
determining post-war exchange rates or parities, neither by unilateral decision nor by bilateral negotiations, but by consultation and
joint action among the member states, is explicitly recognised.
The agreement does not suggest means of determining parity
levels. Indeed it is unlikely that any general formula could be
devised for arriving at these, for prices in different countries now
move in response almost exclusively to internal developments.
As a result national price systems have become virtually independent of one another, and are determined chiefly by the financial
and fiscal policies of governments and the effectiveness of price
controls and rationing programmes. Measures taken after the war
to fix parities will be determined by conditions then prevailing and
these cannot now be known. Yet it cannot be reiterated too often
that these decisions will be among the most important in post-war
policy; for the exchange rate is the pivot upon which a country's
external economic relations turn. A rate set too high, for example,
may subject a country to the loss of export markets or to a painful
deflation of domestic production costs, including wages. Although
it is impossible to give answers now to problems that are still unknown, it seems essential that some mechanism, such as the Fund,
be created as soon as possible to deal with these problems when
they arise.
The agreement recognises the complexity of these adjustments 1
1
But the devaluation of the Belgian franc in 1935, for example, shows that
under favourable conditions such calculations need not be of the hit-or-miss
variety.

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and offers an extremely practical solution. After countries have,
upon admission, agreed with the Fund on provisional parity levels,
the Fund's power to acquire and sell local currencies will be used
to protect these from destructive speculative raids, and nurse
them through an experimental period long enough to determine
their viability. Then, if a currency so pegged proves to be substantially out of line, the member country may, after consulting
the Fund, change the established parity of its currency up to a
maximum of ten per cent, of the initial par value. If the proposed
change "does not exceed a further ten per cent, of the initial par
value, the Fund may either concur or object" within three days.
If further changes are proposed, the Fund is to be entitled to a
longer period in which to declare its attitude. The Fund can thus
provide a flexible mechanism through which exchange rates may
be adjusted to the new international equilibrium. As is specifically
stated, it will interfere as little as possible in the domestic affairs
of member countries, and in particular, provided it is satisfied
that a proposed change is to correct a fundamental disequilibrium,
the Fund "shall not object to a proposed change because of the domestic social or political policies of the member proposing the change".
If the difficulties of the early transition period are successfully
surmounted, the character of the Fund's operations will change.
From being an instrument of monetary demobilisation and reconversion in which the emphasis will be on consultative co-operation,
it will become, if circumstances improve, an equilibrating mechanism managed, somewhat like a national exchange equalisation
fund, according to a set of empirically derived rules designed to
maintain balance in a system essentially in equilibrium, but in
which the balance is apt to be disturbed suddenly by speculative,
cyclical and other crises. In this situation the main function of
the Fund will be to provide foreign exchange within specified
limits and upon certain conditions, to those member countries
requiring it. If a member country desires a certain amount of
the foreign currency of another member country for reasons consistent with the purposes of the Fund, and if the Fund holds an
adequate amount of the currency desired, the member 1 will be
able to buy from the Fund until the Fund's holdings of its currency are equal to double the value of its quota at the rate of not
more than 25 per cent, in any twelve-month period. The Fund
will, however, retain considerable discretionary power, since it
reserves the right to waive any of these conditions on terms which
safeguard its interests.
1
Strictly speaking, its Treasury, Central Bank, Stabilisation Fund or other
fiscal agency.

CO-ORDINATION OF NATIONAL POLICIES

111

Fears have been expressed, especially in United States banking
circles, that the Fund might be used to peg weakened currencies at
levels which could not in the long run be maintained, and that
through it large amounts of credit would be given by the strong
currencies to the weaker, the only effect of which would be in the
end to weaken the strong. Such criticism misunderstands both
the place of the Fund in post-war economic reconstruction and the
limits of its operations. The Fund will not undertake the stabilisation of national currencies or the reconstruction of national economy nor will it render those things any less necessary; it can only
give governments an opportunity to choose, and a breathing space
in which to undertake, solutions to their national economic problems which will not be harmful to the world economy. If these
solutions are not achieved, no attempt at international currency
stabilisation can succeed. Conversely, if currency stabilisation is
postponed until national economies are rebuilt, it is unlikely that
the individual economy can then be fitted into a world economy
of expanding production and trade.
The Fund's capacity to extend credit is strictly limited. It
can easily be shown that if all countries paid up the required 25
per cent, of their quotas in gold, the total dollar and gold assets of
the Fund would be about $4,250 million. In fact, the total will
probably be much less, and the rights of members to borrow from
the Fund are carefully restricted. Many nations will at first be
able to subscribe only a small proportion of their quotas in gold
or foreign assets, so that the lending power of the Fund will be very
much less than $4,250 million and by no means large enough to
impair the stability of the stronger currencies.
Although one of the Fund's objects is "to facilitate the expansion and balanced growth of international trade", it can do this
only by keeping exchange rates stable, and, to a limited extent,
by financing current trade. Actually it is rather probable that most
nations will be reluctant to use their borrowing power at the Fund
to the limit to finance imports but will regard it mainly as a last
line of monetary reserves to be drawn upon only in emergency to
relieve sudden temporary strains on their balances of payments.
The Fund will therefore only supplement but cannot replace the
agencies which provided trading credit before the war. It can not,
and is not meant to, perform the function of the organised money
market in London before 1914 in providing an adequate fund of
international short-term credit. The question of how that is to
be done remains unanswered.
The "Obligations of Member Countries" are confined to the
maintenance of exchange rates and abstention from imposing

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INTERNATIONAL ECONOMIC ORGANISATION

restrictions on current payments and to the: furnishing of information to the Fund. There is no mention of the obligation of surplus
countries to use their accumulated balances to increase their purchases from abroad. In the inter-war years the persistent refusal
of some countries, notably the United States, to accept most imports other than gold contributed in no small measure to the world's
economic difficulties. Not only did it perpetuate maladjustments
within these economies; it also exerted powerful deflationary
pressures on the rest of the world. Unless creditor countries follow
commercial policies consistent with their international economic
positions, and increase their purchases from abroad, deficit countries will in the end, and despite any action which the Fund may
take, be forced to redress their balances of piayments by restricting
purchases from abroad. In other words, they will be compelled to
adopt exchange control.
Stabilisation of the exchange rates and provision of a fund
of international short-term credit are thus closely linked to postwar commercial policy. The setting up of such a Fund will be a
modest step in the right direction. But alone it will not be enough.
The success of even the soundest plan for currency stabilisation
will depend upon the degree of international co-operation in the
fields of commercial policy and foreign investment.
(3) Commercial Policy
The raising of consumption levels and the maintenance of high
and steady levels of employment and economic activity after the war
will depend to a great extent upon the co-ordination of national
credit policies and the restoration and balanced growth of world
trade. 1 Although exchange stability and the existence of an adequate fund of short-term credit are necessary pre-conditions of any
commercial expansion, they cannot themselves bring it about.
Without the liberal trading policy of Great Britain in the nineteenth
century, the London Money Market could never have developed
into the centre through which the bulk of international payments
were cleared. Only British readiness and ability to import a large
volume of goods from abroad made sterling exchange available
in sufficient quantities to keep the money market liquid. Unless
there is an abrupt reversal of pre-war restrictionist commercial
1
Indeed, for some countries, notably Great Britain, the existing standard
of living can be maintained after the war only with the aid of exports on a scale
exceeding that of the immediate pre-war years. Not only has Britain's "invisible
income" from past investments decreased by the liquidation of earning assets
abroad ; in addition the shortage of raw materials within its own borders continues
to increase although this may be offset to some extent by increased productivity
of domestic agriculture.

CO-ORDINATION OF NATIONAL POLICIES

113

policies, no international monetary system could long survive.
The provision of credit only allows a breathing space in which
necessary adjustments can be made ; it does not remove the necessity
for making these adjustments.
In pre-war years obstacles to world trade took many forms.
Imports were restricted directly by tariffs, quotas, cartel policies,
and similar devices, or indirectly by control of the foreign exchange
which was needed to pay for imported products. In the last section,
means were discussed which might be used to remove the necessity
for the imposition of discriminatory exchange control. Here methods
will be explored by which the direct restrictions upon the free flow
of trade might be eased.
In general, the waging of economic warfare has resulted in a
further spread of the manifold weapons used by national governments to restrict the entry of foreign goods. But exchange of goods
between allies has in some cases been facilitated. The United States,
Canada, and Great Britain, for example, have practically suspended
the operation of protective tariffs in their mutual exchange of war
materials. The Master Lend-Lease Agreements, too, foreshadow a
freeing of the channels of international trade. Article VII runs in
part as follows:
In the final determination of benefits . . . the terms and conditions thereof
shall be such as not to burden commerce between the two countries, b u t to promote mutually advantageous economic relations between these and the betterment of world-wide economic relations. To t h a t end they shall include agreed
action . . . open to participation by all other countries of like mind, directed to
the expansion by appropriate international and domestic measures, of production,
employment, and the exchange and consumption of goods, which are the material
foundations of the liberty and welfare of all peoples; to the elimination of all
forms of discriminatory treatment in international commerce, and to the reduction of tariffs and other trade barriers; and, in general, to the attainment
of all the economic objectives set forth in the [Atlantic Charter].
At an early convenient date, conversations shall be begun between the two
Governments with a view to determining, in the light of governing economic conditions, the best means of attaining the above-stated objectives by their own
agreed action and of seeking the agreed action of other like-minded Governments.

In the projected negotiations on the settlement of lend-lease
obligations, considerable steps might be taken to remove obstacles
to international commerce by the negotiation of a multilateral agreement designed to restore the essential conditions of competitive
trading. It is not always realised how much damage has been done
to the trading system by which economic and social progress benefited so greatly in the nineteenth century. It is necessary to take
action to restore "national treatment", the guarantee of trading
conditions equivalent to those enjoyed by a national citizen. Trade

114

INTERNATIONAL ECONOMIC ORGANISATION

•

and travel are not as simple as they used to be. Formalities need to
be simplified, discriminations against foreign traders need to be
removed.
If the conditions of competitive trade can be restored there will
be real possibilities of negotiating reciprocal trade agreements based
upon equality of trading opportunity. This method of reciprocal
bargaining has been used with good effect by the United States
for almost a decade. The renewal last year by Congress of the
executive power to negotiate such agreements has established it
even more firmly as the cornerstone of American economic foreign
policy. If it were used more vigorously than has been possible in
the past it could be of great influence in the reconstruction of international trade after the war.
A series of treaties with Great Britain and the Dominions might
be the best starting point. Since 1932, the Ottawa preferential agreements have operated as powerful instruments of imperial protectionism. In addition the huge buying power of Great Britain
enabled her to negotiate a series of bilateral agreements with countries such as Denmark and Argentina which made it difficult for
these countries to negotiate reciprocal agreements with the United
States. Since September 1939, the system of preferences has been
reinforced by a tight and effective mechanism of imperial exchange
control.
In spite of the concessions already made by the United States
under the Reciprocal Trade Agreements Act:, the greatest single
obstacle to the expansion of multilateral trade is the high level of
the Hawley-Smoot tariff. If the terms of Article VII of the LendLease Agreement with Great Britain would seem to call for the
surrender of the principle of imperial preferences, a substantial
scaling-down of American tariff schedules would also seem to be
the only acceptable quid pro quo. Unless the American protective
system is thus moderated, plans for international monetary reorganisation are likely to end in failure, with the United States
holding large credit balances (or stocks of gold) which she refuses
to put to work.
A British-American trade agreement involving substantial
concessions by both parties would open the way for a considerable
widening of the channels of trade. Concessions granted to
the Dominions on imports of foodstuffs and raw materials would
be granted automatically to South American primary producers.
American concessions to British manufactured imports would likewise be extended to other European manufacturing nations.
Such an agreement would obviously make inevitable considerable measures of adaptation to the changed conditions. Voices have

CO-ORDINATION OF NATIONAL POLICIES

115

already been raised in Great Britain against such a policy on the
ground that Britain will be unable to compete with the great
American mass-production industries and that a large volume of
domestic agricultural production is necessary for national security. 1
During the war, however, Great Britain has shown that it can
produce many war goods at less labour cost than the United States.
It can no longer produce cottons for export to India; the wartime
"concentration" of the cotton industry is in part a much-needed
adjustment. It must abandon its trust in the bulk goods that
brought it to the forefront in the nineteenth century, make more
attempt to find out what its customers want, and concentrate
on markets which are likely to expand. 2 Openings for such expansion are likely to be found in the light engineering trades which
not only pay high wages but are also economical in their raw material import needs. In the United States some agricultural products, notably wool, and some manufacturing industries, of which
the textile producers are probably the largest group, located chiefly
in the New England States, would be likely to suffer. But if a high
level of employment and rising volume of world trade can be maintained and secondary deflations thus prevented from spreading,
these adjustments would not be too difficult.
Although such bilateral negotiations, which havejjroved their
worth in the past, could be used effectively to reduce barriers to
world trade, alone they could not be sufficient. The experience of
the Reciprocal Trade Agreements programme indicates that this
method has not been very successful in dealing with direct quantitative restriction on trade or in eliminating discriminatory trade
relations between countries, one or both of which conduct part or
all of their foreign trade as a government monopoly.' Neither
can bilateral agreements, incorporating the most-favoured-nation
clause be effective if concessions made in them can be nullified
by a private international cartel agreement arbitrarily dividing the
export market. Under such conditions the automatic generalisation
of concessions is an empty phrase.
The problem of trade relations between "regulated" and "unregulated" economies will be of great importance. Professor
Viner has suggested that a multilateral conference of nations "at all
inclined toward the elimination or substantial reduction of direct
1
E. g., Reconstruction, Report by Federation of British Industries (London,
May 1942).
' Cf. C. M. WRIGHT: Economic Adaptation to a Changing World Market.
(Copenhagen, 1939).
' These problems have been treated in the recent study prepared for the
League of Nations by Professor Jacob VINER: Trade Relations between Freemarket and Controlled Economics, op. cit.

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INTERNATIONAL ECONOMIC ORGANISATION

controls of foreign trade" should be held to draw up a convention
binding the signatory countries:
(1)
(2)
(3)
(4)

T o move toward elimination of direct controls on a mutually-agreed
time schedule;
T o define the practices which would not be permissible in the trade
relations between participating countries;
To formulate the procedures to be followed in common in trade relations
with non-participating countries adhering to direct controls; and
To participate in the setting up of a continuing international agency
to which questions of violation of the convention, of needed revision of
its terms, and of admission of new countries could be referred. '

Professor Viner is well aware of the difficulties involved in
reaching a significant agreement on these questions. Indeed he
concludes that the most feasible agreement would be a convention
the general provisions of which were relatively rigorous, but which
would make provision for exemption from these provisions in particular cases subject to the approval of the international supervisory
agency outlined in his point (4)2. It does not appear likely, however, that State participation in international trade will diminish.
Russian trade will continue to be conducted by Government
monopoly, and the imports of capital goods for development purposes into hitherto industrially backward countries may well be
carried out by government agencies. It would seem advisable,
therefore, that the convention should aim first at the elimination
of discriminatory and restrictive types of direct regulation of trade.
The supervision and control of international cartels promises to
be one of the most difficult of all post-war international economic
problems. 3 Since, as we indicated earlier and as recent events have
shown 4 , these private organisations, controlling whole segments
of the world economy, seem on occasion to have operated against
the general interest and since there are a priori reasons for believing
that they may tend to do so, a strong case can be made for the
regulation of their activities. But how is this to be achieved?
1

Op. cil., p. 88.
" . . . since it will in all probability be a pre-requisite for general acceptance
of a significant agreement t h a t some provision be made for the particular situation
or special circumstances of individual countries, a rigid convention not allowing
of any important exceptions does not appear to be an available alternative. The
desirable and conceivably attainable solution of this difficulty would appear to
be an agreement whose general provisions were fairly rigorous; but with provision
for exemption from these provisions in particular cases upon application to the
international supervisory agency and approval thereby." Ibid., p. 9 1 .
3
As Professor Viner has observed in another connection, "when monopoly
power is present, there does not seem to be available any general formula, capable
of practical application and not somewhat arbitrary, which would restrain the
use of t h a t power for economic advantage". Op. cit., p. 81.
4
Cf., for example, speeches of the Assistant Attorney General in charge of the
Anti-Trust Division of the United States Department of Justice reported in the
New York Times, 23 Apr. and 29 J u n e 1943.
2

CO-ORDINATION OF NATIONAL POLICIES

117

Information on cartel organisation is difficult to obtain. Sometimes
the organisation of even a large and influential cartel is slight and
informal. 1 Furthermore, the attitudes of national governments,
both towards private monopoly at home and towards participation by their nationals in international industrial agreements,
have varied from bitter opposition to encouragement and assistance.
Since the nation-State is the dominant authority in economic
affairs, no attempt to control the activities of international cartels
can succeed without the support of national governments. It is
by no means certain that this support will be forthcoming. It is
even less certain that such support, if given, will be sufficient. In
these circumstances no final solution can be offered, but an approach
to the problem might be made along the following lines. If it were
obligatory to make public the terms of all proposed international
industrial agreements, an analysis of their probable effect upon
international commerce could be made, and suitable action recommended to national governments. It must be recognised, however,
that such a procedure will depend, like all international institutions,
upon the will of the States to make it work.
(4) International

Investment

It is in the field of international lending on long term that the
greatest changes in organisation are needed. There have been
numerous proposals, Utopian as well as realistic, for planned economic reconstruction and development to offer outlets for the expanded capital-goods industries of the great manufacturing countries. Some such development programmes, notably in Latin
America, have been started during the war in co-operation with
agencies of the United States Government.
Capital will be needed chiefly for two purposes, the rebuilding
of devastated areas, and the modernisation of hitherto industrially
backward countries. In the first case the main aim will be to restore
former levels of productivity; in the second, the aim will be to
raise former levels of productivity and thus provide a solid basis
for expanding international trade and rising consumption levels.
At the outset certain questions of principle relating to international
long-term lending must be raised. 2 We have already alluded to the
effect on a country's balance of a large foreign debt. In an economic
system characterised by wide variations in the level of economic
activity, the existence of a large volume of foreign indebtedness at
1

Cf. Ervin H E X N E R : The International Steel Cartel (Chapel Hill, N.C., 1943).
Cf. LEAGUE OF NATIONS: The Transition from War to Peace Economy, op. cit.,
pp. 95 et seq.
2

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INTERNATIONAL ECONOMIC ORGANISATION

fixed interest has been a continual source of disequilibrium among
the debtor countries. 1 If prices for their products on the world
market sag, they tend to market increased quantities of these
products, spoil the market and reduce their own capacity to import.
On these grounds equity investment should therefore be preferred
to debt whenever possible.
In recent years equity investment has mainly taken the form
of direct investment by great industrial corporations. Branch
plants have been constructed, or existing industrial capacity has
been bought. So long as a mechanism existed whereby their profits
could be transferred to the investing country the lenders were
satisfied. They were concerned only incidentally with the welfare
of the people in the countries in which they built their plants.
They had little or no interest in raising domestic living standards,
or offering to the inhabitants opportunities for personal development except in so far as these contributed directly to the profitability of their own concerns. Against the utility of this type of "investor's investment" for economic development there must therefore be set the disadvantage that it may, especially where governments in the borrowing countries are weak or corrupt, develop into
a new kind of "financial imperialism".
The post-war world is not likely, a t least in the beginning, to
offer much encouragement to risk-taking capital. In the great industrial countries, which are also the potential exporters of capital,
the greatly increased burdens of taxation will bear heavily on venture capital. Many have also suffered great damage from enemy
action and will not have much capital available for investment
abroad. Remembering, too, their disastrous experience with international loans after the last war, investors are likely to be timorous
and unwilling to risk their capital abroad even at high prospective
rates of return.
In the borrowing countries, national resistance to the inflow of
foreign capital has increased.
Discriminatory taxation, more
stringent laws relating to the operation of foreign-owned enterprises,
and even expropriation, were familiar even before the war. In some
countries, notably in the Soviet Union, national plans for economic
development, designed to meet the needs of military strategy as well
as of the common welfare, have already been successfully carried
through. In many countries, and especially in the industrially undeveloped areas, there will be considerable pressure from within
to exclude foreign capital, especially entrepreneurial investments,
1
Cf., for example, G. L. W O O D : Borrowingand Business in Australia (London,
1930), and C. F . REMBR, in introduction to H . G. CALLIS: Foreign Capital in
Southeast Asia (Institute of Pacific Relations, New York, 1942).

CO-ORDINATION OF NATIONAL POLICIES

119

and rather to use for economic development the scarce supplies of
capital available at home.
One further change in the conditions of supply of foreign capital
must be mentioned. While portfolio investments in general have
declined relatively in recent years and the new issue market has
become less important as a mechanism for mobilising capital for
investment abroad, the State has steadily become a more powerful
factor in regulating the flow of capital. Of the rather small volume
of international loans contracted since 1929 the majority have been
undertaken either by governments directly, or with government
assistance. This lending has taken various forms. In order to
promote export trade, especially with countries trading under
exchange control, and with the U.S.S.R., and other areas where investors were unwilling to risk their capital and the borrowers sometimes did not wish to contract long-term debt, machinery was
developed for the purpose of providing short and medium-term
credits carrying a government guarantee.
In Great Britain, a
pioneer in this field, the provision of medium-term credits for the
purchase of capital goods grew in volume in the years just before
the war and partly replaced the new issue market as a source of
capital supply. These loans were given, however, in return for a
guaranteed export market. Governments also encouraged investments in certain areas—sometimes, but not always, colonial possessions—for political purposes, and even themselves undertook direct
investments for strategic ends. The more recent loans for stabilisation and relief have been exclusively intergovernmental. This
development has advantages but it also has dangers; for if political
conditions are unstable, every such loan transaction may easily
become a diplomatic incident.
The nineteenth century system of private international investment in the form of loans subscribed by private investors for foreign
enterprises and governments was an instrument of the greatest
period of economic development the world has yet seen. It also had
great faults. It was often wasteful and misdirected. When capital
flowed from the great lending centres of the west to industrially
primitive areas, to take advantage of the plentiful natural and
human resources, the lenders paid little attention to the educational
and social development of the native populations. But that system,
with the connected system of international trade, has gone, and
there is urgent need for new institutional arrangements designed so
as to retain the desirable features of past forms of international investment while eliminating their more unwelcome aspects.
The need for international machinery through which national
programmes of industrial reconstruction and development can be

120

INTERNATIONAL ECONOMIC ORGANISATION

cleared and the international movement of capital can be promoted
is increasingly recognised1, and considerable progress has recently
been made at the United Nations Monetary and Financial Conference where agreement was reached to establish an International
Bank for Reconstruction and Development. Before discussing
this proposed institution it may be well to consider what functions
such an authority might properly be called on to perform.
Lack of care in the granting of foreign loans after the last war
and lack of control over their expenditure played an important
part in the collapse of 1931 and an international reconstruction
and development authority could exercise the supervision necessary
to prevent the recurrence of such a collapse.
One of its most important functions might be to register all
international loan and investment transactions, both public and
private. The institution would receive from the international
monetary authority information on international balances of payments and thus would be able to see when a country was overborrowing or overlending on long term.
It would also advise
borrowers and lenders as to the desirability of prospective transactions.
It seems both necessary and desirable that such an agency should
also itself mobilise and lend at least part of the capital needed and
also guarantee loans granted through other channels. The risks
involved in providing capital for the restoration of devastated
areas, for example, are not properly regarded as commercial and
should not be shouldered by private investors. Besides it is doubtful
whether private capital will again be forthcoming for this purpose.
The experience of investors with reconstruction loans after the last
war is still a vivid memory. If such loans are made, they should be
made through or guaranteed by the international agency; by
this means the risks of political pressures and frictions would
be lessened.
In addition it would be easier to arrange for
a more flexible system of amortisation through such an organisation. If a debtor country's balance of payments showed that it
was in temporary distress, amortisation payments could be scaled
down or temporarily suspended. When the creditors are large
numbers of individual bondholders who are unaware of the economic position both of their own and of the debtor country, such a
1
Cf. the resolution concerning economic policies for the attainment of social
objectives which was adopted by the 26th Session of i:he International Labour
Conference (Philadelphia, 1944), and which recommends, inter alia, that "the
existing machinery of the international capital market should be supplemented
by the establishment of appropriate international machinery for the purpose
of promoting the international movement of capital". For this part of the
resolution, see pp. 128-129 below.

CO-ORDINATION OF NATIONAL POLICIES

121

suspension is much more difficult to secure even though it is economically the soundest policy.1
The risks involved in lending to undeveloped countries for
economic development will generally be less than those attached to
reconstruction loans. Equity investment would therefore be possible
here as well as economically preferable since it does not impose a
fixed debt burden on the borrower. But national resistance to
private equity investment has now become strong chiefly in those
very areas which lack capital for their economic development.
Though programmes of basic economic development, such as the
provision of transport and power, should be controlled by national
governments and financed as far as possible with domestic funds,
foreign financial assistance will frequently be necessary. It is impossible to set down hard-and-fast rules according to which an
international institution should give assistance, but it would seem
advisable that aid should be confined, as far as is practical, to the
provision of materials and equipment required from abroad. The
purchase of those materials available within the borrowing country's
borders should be financed through the national banking system.
This procedure would minimise transfer difficulties at the repayment stage. If equity investments can be arranged through the
international institution they should be preferred to loans; otherwise provision should be made in loan contracts for a relatively
flexible system of amortisation.
In the past, private initiative provided not only the capital for
economic development but also the technical knowledge necessary
to carry out that development. If private enterprise is to be replaced in some fields of foreign investment, alternative methods
must be found of providing the technical knowledge necessary to
execute plans for economic development. If an international reconstruction and development authority is to be successful it should
therefore undertake surveys of proposed programmes and suitable
methods of executing them and also give expert technical advice
and provide for the training of suitable technical personnel within
the countries concerned. The work of the League of Nations, particularly of the Health Section, in China, in bringing students to
advanced scientific centres for further study and in organising the
training of public health workers in China itself, is instructive in
this respect. In the present war a good deal of valuable experience
in this field is being gained by the various agencies of the British
and American Governments, who in their efforts to maximise production of strategic materials have sent technical missions and ad1
LEAGUS OF NATIONS: The Transition from War to Peace Economy, op. cit.,
p. 98.

122

INTERNATIONAL ECONOMIC ORGANISATION

visers to various parts of the world and have even assisted in large
public works and development programmes. This experience should
not be lost.
An international body supervising the volume and direction of
international investment could perform at least one further important function. The capital assistance provided in the past through
private investment decisions was sometimes wasteful and often
spasmodic. Although mainly an advisory body, such an international agency could, as far as its power of regulating the volume
and direction of the flow of international capital went, exercise contractionist or expansionist influences either on the world economy
as a whole or upon particular parts and thus help to mitigate cyclical
fluctuations.
The United Nations Monetary and Financial Conference,
believing that expanded international investment is a necessary
prerequisite for economic reconstruction and development, agreed,
subject to ratification by national legislatures, that an International Bank for Reconstruction and Development would be established at a suitable date after 1 May 1945. It remains to examine,
briefly, first, what the scope and functions of the proposed institution are to be, and second, whether it is likely to fulfil the needs
set forth above. As stated in the agreement the purposes of the
Bank are:
(i) To assist in the reconstruction and development of territories of members.
by facilitating the investment of capital for productive purposes, including the
restoration of economies destroyed or disrupted by war, the reconversion of productive facilities to peacetime needs and the encouragement of the development
of productive facilities and resources in less developed countries.
(ii) To promote private foreign investment by means of guarantees or participations in loans and other investments made by private investors; and when
private capital is not available on reasonable terms, to supplement private investment by providing, on suitable conditions, finance for productive purposes o u t
of its own capital, funds raised by it and its other resources.
(iii) To promote the long-range balanced growth of international trade and
the maintenance of equilibrium in balances of payments by encouraging international investment for the development of the productive resources of members,
thereby assisting in raising productivity, the standard of living, and conditions
of labour in their territories.
(iv) To arrange the loans made or guaranteed by it in relation to international loans through other channels so t h a t the more useful and urgent projects,
large and small alike, will be dealt with first.
(v) T o conduct its operations with due regard to the effect of international
investment on business conditions in the territories of members and, in the immediate post-war years, to assist in bringing about a smooth transition from a
wartime to a peacetime economy.

The authorised capital stock of the Bank is set at 10,000 million
U.S. dollars to be subscribed by the members according to a mini-

CO-ORDINATION OF NATIONAL POLICIES

123

mum schedule drawn up by the Conference. Out of 9,100 million
dollars, the total of the minimum subscriptions, the share of the
United States is to be 3,175 million, that of Great Britain 1,300
million, of the U.S.S.R. 1,200, of China 600 and of France 450.
Of these subscriptions only 20 per cent, is to be paid up or subject
to call for the Bank's operations, while the remaining 80 per cent.
is subject to call only to meet specific obligations such as, for
example, a default on a loan guaranteed by the Bank. Of the 20
per cent, to be used for the operations of the Bank only 2 per cent.
is to be paid in gold; the remaining 18 per cent, is subject to call
and payable in national currencies.
The Bank can directly encourage international investment in
three ways: (i) "by making or participating in direct loans out of
its own funds" (i.e., its unimpaired paid-up capital and surplus);
(ii) "by making or participating in direct loans out of funds raised
in the market of a member, or otherwise borrowed by the Bank";
(iii) "by guaranteeing in whole or in part loans made by private
investors through the usual investment channels".
If, for example, a member decides upon a specific project of
reconstruction or development and cannot get the necessary finance
through normal channels, it may apply to the Bank. The latter
will then appoint a committee to study the proposal. If this committee approves the project and the Bank is satisfied that the rate
of interest and other charges are reasonable and appropriate, it
may make, participate in, or guarantee a loan to the member for
that specific project. In the case of reconstruction loans special
regard is to be given to the lightening of the financial burden imposed by the loan. No loan may be "tied" to purchases in any
specific country, but any loan of national currency must have the
approval of the member whose currency is involved.
Outstanding guarantees, participations in loans, and direct loans may
not exceed 100 per cent, of the Bank's unimpaired subscribed
capital, reserves and surplus.
Thus, though the scope of the Bank's activities is relatively
wide, the size of its operations is strictly limited. It is clear from
the subscription provisions that its main function will be to guarantee loans rather than to make or participate in them. Guarantee
commissions will constitute its main source of income, out of which
guarantees will be met in cases of default. Its actual initial capacity
to make direct loans will not be much more than its resources in
gold and U.S. dollars. The initial paid-up capital will be $182
million. A further $571 million is callable in U.S. dollars, making
$753 million in all. This may increase to $2,000 million as the
total authorised capital is raised to $10,000 million, as calls are

124

INTERNATIONAL ECONOMIC ORGANISATION

made, and as national currencies become freely convertible. Yet
the importance of the Bank's power to guarantee loans should not
be underestimated. The League of Nations loans, floated with a
somewhat similar guarantee, did much to stabilise the economies
of Austria and Hungary in the early 'twenties. It was no fault of
these loans that that stabilisation was of short duration.
The proposed Bank will therefore be in a position to perform
most of the functions which we have mentioned as being within
the scope of an international investment authority. Its lending
capacity may be considerably smaller than some might think
desirable, but in view of the relatively small amounts of capital
likely to be available in practically every country except the United
States for international investment after the war, this is only to
be expected. No express provision is made for the registration of
all international financial transactions, but the Bank could not
function adequately if the loan committees were not in possession
of sufficient information on the positions of borrowing countries
on both current and capital accounts.
We concluded earlier that wherever possible equity investment
should be preferred to loans, on the ground that the flexible burden
makes it preferable both to borrower and lender. On the one hand,
it does not impose such a strain on the borrower's balance of payments as do loans at a fixed rate of interest, and, on the other, it
has in the inter-war years weathered periods of depression much
better than the latter. If loans are chosen, we have argued that
provision should be made for some flexibility in interest and amortisation payments. The Bank could hardly participate in equity investment, but it has made provision for relaxation of conditions
of interest and amortisation payments in cases of acute exchange
stringency. Such provisions do represent a. means, albeit somewhat weak and negative, of combating cyclical disturbances.
While it seems probable that neither national policy nor international equilibrium will again allow uncontrolled private investment decisions to chart the course of economic development, this
does not mean that private enterprise and investment will have no
place in the future organisation of international lending. The
Bank so far from taking the place of productive private investment, would rather encourage it, both through its guarantees,
and by helping to bring about stable international economic relations. Private medium-term investment, perhaps backed by Government guarantee, may again become important in financing
the export of capital goods to some countries.
The extent
to which private direct investments are permitted will vary
from country to country, but in industrial States, where gov-

CO-ORDINATION OF NATIONAL POLICIES

125

ernments are strong, resistance to such foreign capital will
probably be slight. The actual work of construction of both
public and private enterprises is likely to be undertaken mainly
by private firms. Where such firms are not indigenous to
the countries concerned, they should build the projects on
contract, and when they have completed the work, take payment and leave the ownership and management in national hands.
Not all of the fields in which economic co-operation is desirable
have been mentioned under the four main headings of the
foregoing discussion. Transport, for example, has been omitted,
though it is essential to trade and involves problems of great complexity which national action alone is powerless to solve. Nor has
any reference been made to those problems of double taxation,
customs nomenclature and indirect or "administrative" protectionism which so often baffle traders and which require to be solved
if the world is to derive full benefit from a more liberal commercial
policy.
Food, agriculture and raw materials, money, commerce and
investment represent, however, the four great fields in which international co-ordination of national economic policies is essential if high
levels of employment and economic security are to be maintained
and if the improvement of living standards is to progress beyond
the relatively narrow limits attainable through independent national action.

CONCLUSION
This study began with a brief statement of the social objectives
of a people's peace. Rising standards of living, full employment,
social security and economic development are now discussed more
widely and in more practical terms than ever before. There can be
little doubt that national governments will encounter a widespread
and earnest demand for action designed to achieve these objectives.
There is equally little doubt that independent and unco-ordinated
action by national governments is likely to hinder the international
economic collaboration that is essential if employment and security
are to be achieved together with high living standards.
For this reason mechanisms of consultative co-operation between
national governments are required. The International Labour
Organisation is such a mechanism and a start has been made to
organise additional examples, notably in the Conference on Food
and Agriculture and in the proposed International Monetary
Fund and International Bank for Reconstruction and Development. It has become evident that the Governments of the United
Nations are moving towards the co-ordination of national policies
of improved economic welfare through international institutions.
This is the positive approach to a peaceful and co-operative world
order.
The piecemeal creation of technical bodies in related and overlapping fields of international co-operation cannot, however, be
sufficient. The problems to be solved are both vast and interrelated. Employment and security must be based upon increased productivity, which in turn depends largely upon orderly
investment. Agricultural and industrial production, food, and
health—indeed all the varied aspects of human welfare—must form
part of an integrated economic policy. It is probably wise to start
by creating technical institutions for specific functions; but unless
those institutions are governed by common aims their usefulness
will be limited and they may even work at cross purposes.
If the objectives of a people's peace are to be achieved, therefore,
there is no escape from the necessity for a considerable measure
of integration and co-ordination of policy both internationally
and functionally. Independent international action in regard to
labour, agriculture, monetary policy, investment, or health, would be

CONCLUSION

127

just as futile as independent action by national governments in any
or all of these fields.
Moreover, positive action for the improvement of welfare
depends upon the assurance of peace. Freedom from want cannot
be achieved without freedom from fear of recurrent aggressive war.
Underlying all proposals for international economic co-operation,
therefore, is the double assumption that the United Nations will
not only be victorious, but will remain united in an effort to lay
the foundations of a lasting peace.
It is perhaps true that lasting peace depends upon the creation
both of means for constructive economic co-operation and of procedures whereby international disputes may be settled without
resort to war. But it is also true that some form of police power is
necessary to restrain those national governments which may resort
to war rather than accept the procedures of pacific settlement.
Economic co-operation, valuable as it may be in promoting individual »welfare, can never be an alternative to the political
machinery, supported if necessary by police power, which the
settlement of international disputes will require. Unless and until
effective action is taken to pledge the use of overwhelming force
in restraint of the law breakers, economic co-operation among the
nations will not be achieved.

APPENDIX
EXTRACT

FROM

RESOLUTION

CONCERNING

ECONOMIC

FOR THE ATTAINMENT OF SOCIAL OBJECTIVES,

POLICIES

ADOPTED

BY THE INTERNATIONAL LABOUR CONFERENCE AT ITS
TWENTY-SIXTH SESSION, PHILADELPHIA,
APRIL-MAY

19441

4. Recognising that a satisfactory international monetary system is essential to the full development of mutually advantageous
economic relations between nations, and consequently to the raising
of standards of living,
The Conference attaches great importance to the establishment
at the earliest possible moment of effective international machinery
for settling balances arising out of international trade and other
transactions and for maintaining stability in rates of exchange,
notes with satisfaction that the Governments of the United Nations
are giving careful attention to this matter, and urges that they
include in any agreement establishing such machinery a provision
requiring the authorities responsible for its application to have
regard in framing and applying their policies to the effect of their
decisions on employment and living standards.
5. Noting that imports of capital will be needed for reconstruction, development and the raising of living standards in many
countries, and believing that the provision of such capital will contribute to the maintenance of full employment in the lending countries,
The Conference:
(a) considers that the existing machinery of the international
capital market should be supplemented by the establishment of
appropriate international machinery for the purpose of promoting
the international movement of capital;
(b) considers that the promotion of full employment and higher
living standards should be regarded as a primary objective of any
such international machinery;
(c) considers that the authorities responsible for the operation
of such international machinery should consult the International
Labour Organisation as to the appropriateness of including in the
1

For the full text of the resolution see INTERNATIONAL LABOUR OFFICE:

Official Bulletin, Vol. XXVI, No. 1, 1 June 1944, pp. 92-99.

APPENDIX

129

terms under which development works financed in whole or in part
through such machinery are to be carried out, provisions regarding
the welfare and working conditions of the labour employed; and
that such provisions should be framed in consultation with the
International Labour Organisation;
(d) affirms the readiness of the International Labour Organisation to render every assistance in its power in determining the appropriateness of the inclusion of such provisions and in their framing
and application and in the promotion through the operations of
such international machinery of the general objectives of full employment and higher living standards.
6. Recognising the great contribution which the international
exchange of goods and services can make to higher living standards
and to high levels of employment,
The Conference:
(a) believes that the measures proposed in the foregoing paragraphs for the promotion of exchange stabilisation and international
lending will contribute to the expansion of international trade,
but considers that the United Nations should also examine wartime
changes in industrial capacity, should arrange for exchange of
information on post-war industrial programmes and should take
vigorous action to promote the expansion of international trade
by appropriate commercial policies; and considers that all countries,
creditor as well as debtor, should adapt their commercial policy
in such a way as to enable them to settle all obligations arising
out of international transactions;
(b) considers that the United Nations should initiate measures
to facilitate the co-ordination through appropriate international
machinery of the commercial policies of all countries for the purpose
of promoting a steady expansion in world trade on a multilateral
basis ;
(c) considers that in such co-ordination special consideration
should be given to the need of countries which are highly dependent
on returns from exports to take measures to ensure a high degree
of stability in the level of their economic activity and observes that
the need for these measures will decrease to the extent that international collaboration proves successful ; and
(d) considers that in such co-ordination special account should
be taken of the dislocation and the accumulated needs resulting
from the devastation caused by war operations and from the prolonged diversion from peacetime production in countries which
have been engaged for a long period in a sustained and total war
effort.

INDEX
Agricultural countries, unemployment
and underemployment in, 16, 95
Agricultural products, export prices of,
59; market regulation of, 102-104
Agriculture, 79, 100-106
Alphand, Hervé, 107
Argentina, trade agreements with
Great Britain, 114
Atlantic Charter, 2, 7, 102, 113
Australia:
depreciation of currency, 33
depression, 1929-32, 26
income levels and tertiary production, 43
industrial development of, and world
trade, 74
reconversion problems, 79
wartime redistribution of labour, 81
Austria, reconstruction loans, 28, 124
Baer, Werner, 41
Bagehot, Walter, 50
Balance of payments, 34, 120
advantages of equity investment
for, 124
depression and, 98
economic nationalism and, 67
equilibrium in, 105, 108, 117-118
instability resulting from monopoly
and, 59
problems of, 26, 29, 32, 33, 64
raw material countries, of, 59
Ballande, Laurence, 53
Banking, central, 34; reserves, 51
Belgium, gold standard, 52; devaluation of franc, 1935, 109
Beveridge, Sir William, 3, 19-22, 31, 83
Bilateral trade agreements, 33, 67
Blocked balances, problem of, 108
Borkin, Joseph, 53
Bottlenecks, in industry, 17, 83
Bowley, A. L., 85, 96
Brady, R. A., 48, 81
Brazil, industrial development of, 74
Buchanan, N. H., 43
Buffer stocks, 104-105
Bureaucracy, in business and government, 48
Business cycles, 59, 60
Business cycle policy, international repercussions, 98-99
Butter, international trade in, 26, 33
Callis, H. G., 118
Capital:
costs, rigidity of, and economic adjustments, 49

demand for, in post-war, 84, 117
reconstruction and development, for,
28, 120-122
values, maintenance of, 42, 56
venture, 26-27, 118
Capital movements, international, 25,
29, 50; see also International investment and lending
Capitalism, 36, 46
Cartels:
examples, 52-55
forms of, 56
Governments and, 58
instability of prices and, 58
international, 10, 63, 77, 116
obstacles to technical progress, 57
producers, interests of, 54-55
trade and, 64
see also Commodity controls and Trade
agreements
Chamberlain, John, 18
Chamberlin, E. H., 40
China:
economic penetration of, 24
inflation in, 84
social services in, 31
State control of trade in post-war, 77
technical assistance, from League of
Nations, to, 121
Clark, Colin, 14, 43, 96
Clark, J. M., 42
Classical theory of international trade
and investment, 50-52, 104
Combined Boards, 63, 90-91
Commercial policy, 112-117; see also
Tariffs, Trade and Trade agreements
Commodity controls, 52-65, 101-106
buffer stocks, 104-105
consumers' interests, 105
criticisms of existing schemes, 60
depression, in, 65
international economic policies and,
105
objectives, 102-103
obstacle to free competitive market,
64
price policies under, 103
private and Government, 60
producers, interests of, 54-55
restriction of production under, 103,
105
see also Cartels, Commodity control
schemes and organisations
and
Trade agreements
Commodity control schemes and organisations:

INDEX
aluminum, 54; copper, 53, 60; oil,
54; rubber, 54, 60; steel, 54; tea,
54; tin, 53, 54, 104; whaling, 55;
wool, 53
Competition:
classical theory, 52, 104
imperfect, and economic nationalism, 65
monopolistic, 10, 36, 38-39
private enterprise, 37-38
trade agreements, 42
Condliffe, J. B., 78
Conference on Food and Agriculture,
126
Co-ordination of national economic
policies, 112, 125-126
Corey, Lewis, 72
Costs:
capital, effect of increase, on competition, 42
labour, in relation to wages, 70 •
overhead, 10, 26
production, in classical theory of
international trade, 50
rigidity of labour and capital, 49
selling, 44
Cotton textile industry, 61, 79, 115
Courtauld, Samuel, 83
Credit policies, need for international
co-ordination of, 112
Creditor countries, 29, 92, 112
Crowther, Geoffrey, 19
Debtor countries, 29, 35, 59, 92, 112,
118, 120
Deflation, in Great Britain, 5; secondary, 44; unemployment and, 16
Demobilisation:
economic and military, 78
economic, lessons of first world war,
85
employment during, 5, 86
inflation, danger of, during, 84
see also Reconversion
Denmark:
bilateral agreements with Great
Britain, 114
depreciation of currency, 33
social services, 31
Dependent countries, economic development, 23
Depression :
Australia, in, 25
currency policies during, 98
employment and, 5, 10, 12
equity investment and, 124
Great Britain, in, 25
investment negotiated by Governments and, 28
migration and, 25
raw material producing countries
and, 25
Development, economic, 9, 23-29,
30, 32
dependent countries, in, 24
International Bank for Reconstruction and Development, 122

131

living standards and, 75
loans for, 121
post-war, and private investment,
124
Direct investment, 28, 62, 74, 118, 124
Distribution of income, 41, 97
Domestic economy and total war, 7986
Domestic policy, problems of, 10, 94100
Economic policy:
I.L.O. resolution concerning, 128-129
international co-ordination, used for,
93-125
social objectives of, 65
Economic power, concentration of, 50,
80, 97
Economic system, mixed, 50, 61, 62, 98
Economic theory, classical, 46, 50-52;
and modern production, 49, 50
Economist, The, 19, 48, 56, 81, 83
Economy, domestic, and total war,
79-86
Employment:
business cycle policy and, 99
commodity controls and, 103
competitive equilibrium and, 38
international collaboration and, 33,
65, 75
international trade and, 71, 74, 93
post-war, 86
see also Full employment
Employment offices, 95
Equilibrium:
balances of payments, 10-11, 35, 52,
110
classical economists and, 50-52,
104
competitive, and increase in world
trade, 76
full employment and, 38
international gold standard and, 9
Equity investment, 118, 121, 124
Excess capacity, in war industries,
74-75; commodity control schemes
and, 60, 102, 103
Exchange control, 29, 32, 33, 59, 62,
112
Exchange rates:
depreciation of, 33, 34
determination of, 109
importance of decisions concerning,
109
international gold standard, under,
9, 34, 51, 106
International Monetary Fund and,
108-111
trade restrictions and, 33, 35
Exchange stabilisation fund, 103-104,
111
Export-Import Bank (United States),
63
Exports, economic nationalism and,
29, 67-68; exchange fluctuations and,
51, 98
Ezekiel, Mordecai, 43

132

INTERNATIONAL ECONOMIC ORGANISATION

Fair wages clause, international, 28
Family allowances, 20, 21
Fisher, A. G. B., 95
Food, 100-106; see also Commodity
control schemes and organisations
Foreign investment, see International
investment and lending
Four Freedoms, 1-8
France, international commodity control agreements, attitude to, 54;
stabilisation of franc, 109
Franck, Dr. Peter G., 76
Free enterprise:
case for preservation of, 47, 49, 50
changes since 19th century, 46
future character, 47, 77
mixed system, with public control,
36-39, 50, 98
phrase used to obscure real issue,
36, 37
Free trade, see Freer trade and Laissez
faire
Freedom from want, 101, 105, 127;
see also Social security
Freer trade:
case for, 64-77
"cheap labour" argument against,
refuted, 70
Lend-Lease Agreements aïid, 113
social objectives and, 74-76
specialisation and, 68-71
standard of living and, 71
see also Trade
Friedrich, C. J., 40
Full employment, 5, 9, 11-18; see also
Employment
Furness, J. W., 73, 93
Germany:
attitude to cartel agreements, 54
control of European markets, 69
manpower shortage in, 13
Gold, see International gold standard
Gordon, Robert A., 45
Government intervention:
during transition from war to peace,
86-87, 98
economic nationalism and, 67
in industry, 18, 47, 50, 58, 60, 62,
65, 68, 77
in investment, 62, 97, 119, 124
in shipping, 63
in trade, 62, 99, 116-117
see also State control
Great Britain, 17, 19, 24, 25, 31, 33,
39, 40, 43, 51, 54, 55, 58, 62, 63, 79,
81, 85, 87, 95, 96, 106, 112-115, 123
allocation of markets between, and
U.S., 63
balance of payments, 25
cartel agreements in, 54
commercial policy, 112-115
employment offices in, 95
industrial concentration during the
war, 79, 81
industrial revolution, 24

iron and steel industry in, 39,55
market for New Zealand butter, 33
"National Minimum" in, 19
social services in, 31
wartime transference of labour in,
81, 85
Greece, 13
Hall, N. F., 103
Hexner, Ervin, 55, 117
Hirschman, Albert O., 69
Hog cycles, 43
Hogben, Lancelot, 72
Högböm, Ivar, 73
Holland, 43
Hungary, reconstruction loans, 28, 124
Imperialism, financial, 118
Import control, 32
Import licensing systems, 62
Import quotas, 32-33, 100
Imports:
business cycle and, 98
cheap, and tariffs, 69-70
economic nationalism and, 29, 67-68
restriction of, 59
Income, distribution of, 41, 48
India:
economic penetration, 24
industrial development of, 74
reconversion problems, 79
Industrialisation, social advantages of,
27; and world trade, 72-75
Inflation, 17, 84, 85, 87, 97
Instability, see International aspects of
instability and Monopolistic competition and instability
Insurance, unemployment, 10
Interest rates, 41, 50, 51, 97, 124
International aspects of instability,
49-59
International Association for Labour
Legislation, 4
International Bank for Reconstruction
and Development, 120, 122-124, 126
capital stock of, 122-123
private lending and, 124-125
purposes of, 122
scope of activities of, 123
International collaboration, 29-35; see
also International economic co-operation
International commodity control, see
Commodity control
International
commodity
control
schemes, see Commodity
control
schemes and organisations
International co-ordination of national
policies, 93-125
International economic co-operation,
29-35; transition period, in, 86-92;
need for, 100-125; see also International co-ordination
of
national
policies
International economic relations:
dependent on political security, 127

INDEX
domestic policies and, 99
problems of future, 64-65
wartime changes in, 61-63
International "fair wages clause", 28
International gold standard:
breakdown of, 25-26, 52, 109
business cycle policy and, 98
classical theory, 50-52
during 19th century, 9, 10, 34, 108
restoration of, after World War I,
10
International investment authority,
28, 29, 124 •
'
International investment and lending,
11, 29, 117-125
amortisation payments, flexibility in,
120-121, 124
British, decline in, 63
China, in, 24
foreign capital, resistance to, 118,
125
forms of, 62
Governments, role of, 28, 119
India, in, 24
International Bank for Reconstruction and Development, 122
International Investment Authority,
need for, 28, 29, 129
Latin American countries, in, 24, 26,
117
long-term, in post-war, 117
transfer difficulties, 59, 121
under gold standard, 10, 24, 26, 34,
119
International Labour Organisation, 4,
11, 120, 126, 128-129; publications
cited, 14, 19, 81, 94, 103
International monetary arrangements,
106-112
International Monetary Fund, 107-112,
126
International producers' organisations,
54-55; see also Cartels, Commodity
controls, and Trade agreements
International reconstruction and development authority, 120, 121, 122
International trade, see Trade
Investment, see Direct
investment,
Equity investment and International
investment and lending
Istel, André, 107
Italy, attitude to cartel agreements,
54; economic policy, 32
Jack, L. B., 107
Japan, camphor monopoly, 55; depreciation of yen, 69
Kalecki, Dr. M., 79
Keynes, J. M., 6, 12, 45, 104, 107, 109
Kulischer, Eugene M., 13
Labour:
clause in international contracts, 28
conditions, commodity control agreements and, 103
costs, 49, 70

133

mobility of, 16, 17, 18, 95
movement, antidote to fascism, 49
standards, dependent on economic
organisation, 4; and international
trade, 70-71
unskilled, 14; causes of surplus of, 96
wartime redistribution of, 81
Laissez faire, 36-39, 41, 52, 65-66
Landenburg, Hubert K., 80
Laski, H. J., 45
Latin American countries, foreign investment in, 24, 26, 117
League of Nations:
China, aid to, 121
publications cited, 52, 58, 64, 78,
83, 85, 93, 117, 121
reconstruction loans, 28, 124
Lehman, Herbert, 89
Leith, C. K., 73, 93
Leith-Ross, Sir Frederick, 89
Lending, international, see International investment and lending
Lend-Lease Agreements, 62, 113
Lever Brothers and Unilever, 83
Lewis, Cleona, 73, 93
London money market, 106, 112
Lucas, A. F., 39, 55
Luxury goods and economic instability,
43
Lynd, R. S., 48
Marsh, Leonard C , 19
Mason, E. S., 40
Migration, during depression, 25
Monopolistic competition and instability, 36-49
Monopoly:
attitudes to, 46
cartels and, 54, 57
case against, 47, 58
in labour market, 40
in modern industry, 10, 37, 39-40,
42, 46, 49, 50, 97
international trade and, 64, 76
patents and, 56
State, 56, 66, 77
technical development and, 45
see also Monopolistic competition and
instability
Multilateral clearing, and International Monetary Fund, 108
Multilateral trade, 33, 64. 92; and improvements in living standards, 93
106
"National minimum", 19-22
National self-sufficiency, see Nationalism, economic
Nationalism, economic:
collapse of 19th century trading
system and, 106
criticisms of, 11, 30, 52, 66-68
danger of, if international agreements not reached, 32, 102
Government control of industry and,
68

134

INTERNATIONAL ECONOMIC ORGANISATION

living standards and, 71
social reformers and, 65-66
New Zealand:
butter exports, 33
income levels and tertiary production, 43
social security, 21, 31
Objectives of post-war planning, S, 7,
9-35 ; see also Social objectives
Oualid, W., 57
P.E.P., 55, 57
Patents, 55-56
Pensions, 21
Petroleum, 73
Petty, Sir William, 43
Pitt, William, 18
Planning:
international, machinery non-existent, 66
objectives of post-war, 5, 7, 9-35
of international investment, need for,
29
risks of, 7-8
Population, 24, 43, 44
Post-war planning, objectives of, 5, 7,
9-35; see also Social objectives
Prices:
control of, need for, a t end of war,
84, 87
cyclical changes in, 59
metals, of, 59, 60
raw materials, of, 49, 65
rigidity of, 5, 10
see also Deflation and Inflation
Private enterprise, see Free enterprise
Producers:
high-cost, 57, 102
organisations of, 60, 102, 104
regulation of industry by, failure of,
61
Product differentiation, 40
Production and trade, changing conditions of, 36-77
Protection, tariff:
"cheap labour" argument for, fallacy
of, 70
technical development and, 71-74
see also Nationalism, economic and

Tariffs
Public control, mixed system of, with
private enterprise, 36-39, 50, 98;
see also Government intervention and
State control
Public works, 22, 28, 67
Rationing, need for, post-war, 84, 91
Raw materials:
countries producing, 59
instability in prices of, 58, 65
international co-operation.and, 100106
minerals, 53, 73
production of, chronic maladjustments in, 60-61, 105
see also Commodity controls, etc.

Reciprocal trade agreements, 69, 115
Reconstruction:
international economic, and cartels,
56
I.L.O. and, 4
loans for, 28, 29, 120-123
of Europe, after 1918, 3, 26, 53, 88
Reconstruction Finance Corporation,
62
Reconversion, problems of post-war,
16, 18, 74-75, 78, 80, 82-86
Rehabilitation of armed forces, 5; and
social security, 20
Relief, 87-89; see also United Nations
Relief and Rehabilitation
Administration
Remer, C. F., 118
Robbins, Lionel, 39, 40, 42
Robertson, D. H., 43, 94
Robinson, E. A. G., 46
Robinson, Joan, 18
Rothschild, K. W., 40
Rubber, 59, 62, 74-75, 102
Savings, 11, 25, 41
Sherman Act, 46, 53, 55
Shotwell, James T., 2
Singer, H. W., 95
Smith, Adam, 42
Social minimum, 4 1 ; see also National
minimum
Social objectives:
economic development and, 27
economic policies for, 128-129
enterprise, private or public, and,
39, 97-98
international economic relations and,
65-66
I.L.O. and, 126, 127-129
international trade and, 74-76
of post-war planning, 5, 7, 9-35
see also International fair wages
clause
Social security, 18-23
and redistribution of income, 21
and unemployment, 10, 16
freedom from want, 101, 105, 127
international collaboration and, 33,
65
post-war, 9, 106
Socialism, 36, 37
Specialisation, free trade and, 68-71;
in industrialised countries, 75
Stamp, Sir Josiah, 48
State control:
economic nationalism and, 68
of cartels, 116-117
of employment, 94
of industry, 3, 12, 17, 27, 32, 37, 4849, 50, 58, 60, 68, 86, 98
of investment, 97
of trade, 66, 77, 116, 119
see also Government intervention
Sterling, 112; see also
International
gold standard
Subsidies, 90, 102

INDEX
Sweden, 12
Synthetic products, 30
Tariffs:
Canadian, on butter, 33
employment and, 69
Hawley-Smoot, 114
imperial preferential, 114
reduction of, possibilities of, 114-115
results of high, 33
suspension of, between allies, during
war, 113
see also Protection, tariff and Trade
Tennessee Valley Authority, 97
Total war and the domestic economy,
79-86
Totalitarian countries, 49, 67
Trade:
adaptation, industrial, and, 76
and standards of living, 71, 93
breakdown of world, 52, 106
changing conditions of, 36-77
economic development and, 24, 29,
72-74
exchange stability and, 10, 35
in 19th century, 34
industrialisation and, 43, 75-76
multilateral, need for, 33, 64, 92,
93, 106
obstacles to, pre-war, 113; post-war,
64, 77, 92
wartime changes in, 64
see also Freer trade and Trade agreements
Trade agreements:
bilateral, 114
British-American, need for, 114-115
multilateral, desirability of, 113
mutual aid (lend-lease), 62, 113
Ottawa preferential, 114
reciprocal, 114
see also Cartels, Commodity controls
and Commodity control schemes
and organisations
Trade unions:
bulwark against fascism, as, 49
gains of, during war, 5, 10
in countries of cheap labour, encouragement of, 70-71
Training and retraining programmes,
96
Unemployment:
"frictional", and labour mobility, 95
"hard core" of, 17

135

monopoly and, 41
national measures to relieve, 98
social security and, 21
types of, 15
United States, in, 13, 17
unskilled workers and, 14-15
see also Employment
United Kingdom Commodity Corporation, 62
United Nations:
Conference on Food and Agriculture,
91, 100-101
Monetary and Financial Conference,
107, 120, 122
Relief and Rehabilitation Administration, 89-90
wartime economic arrangements,
61-62
United States, 13, 14, 17, 20, 26, 31,
33, 40, 43, 46, 47, 51, 52, 53, 55, 62,
63, 79, 82, 85, 87, 106, 107, 112, 114,
117, 123
loans to Latin America, 26, 117
monopoly, attitude to, 46
private enterprise in, prospects of,
47
production, tertiary, in, 43
social services, administration of, in,
31
tariff policy, 33, 53, 55, 112, 114
unemployment in, 13, 17
wartime redistribution of labour in,
82
U.S.S.R.:
condition a t end of war, 87
economic development in, 118
foreign trade, 77, 116
socialist State, 6
Viner, Jacob¿115, 116
Wages, 10, 15, 17, 28, 41, 70
Waight, Leonard, 103
Walsh, J. Raymond, 69
War, structural dislocation caused by,
38; total, and domestic economy,
79-86
Wartime redistribution of labour, 81,
82, 85
Welsh, Charles A., 53
White, Dr. Harry D., 106
Wilcox, O. W., 72
Wood, G. L., 118
Wright, C. M., 115

I.L.O. PUBLICATIONS
World Economic Development
Effects on Advanced Industrial Countries
Studies and Reports, Series B (Economic Conditions), No. 36
by
Eugene STALBY
The development of industry in countries which have not
hitherto been industrial is already at hand. How will that development affect world economic policy ? What will be its social
repercussions in old as well as new industrial countries ? These
are the problems which Professor Staley discusses and to which
he suggests the solutions.
CONTENTS
PREFACE
INTRODUCTION AND SUMMARY

Part I. Effects Arising out of International Investment for Developmental
Purposes
A. The Nature of These Effects
I. Activation of Economies: A Contribution towards Full Employment
and Prosperity
II. Easing Post-War Readjustments
III. Income Distribution and the Transfer Problem in Repayment
IV. The Order of Magnitude of These Effects
B. What Policies will Yield Greatest Mutual Benefit?
V. The Advantages of Multilateral Co-operation: An International Development Authority
VI. Anti-Depression Timing and Direction of Equipment Orders
VII. Some Objections to this Programme Considered
Part II. Longer-Range Effects Resulting from Shifts in Production,
Consumption and Trade
A. The Nature of These Effects
VIII. Economic Development and Trade Prospects
IX. New Opportunities and New Competition
X. The Importance of Industrial Adaptation in the Advanced Countries
B.

What Policies will Yield Greatest Mutual Benefit?
XI. Measures to Encourage Industrial Adaptation within each Country
XII. International Arrangements to Ease Transition Adjustments
Part III. Some Broader Implications of Economic Development in
New- Areas
XIII. Population Pressures, Political Power and Cultural Influence
April 1944. v + 2 1 8 p p .

Price: paper, $1.25; 5s.
boards, $1.75; 7s.