Working Our Dollars Abroad

by EVERETT M. DIRKSEN

THERE are three choices before the United States today. The first choice is to abandon Europe. It would mean a retreat from the Elbe River, our present bastion of freedom. It would mean the return of our troops and the end of substantial trade relations for years to come. It would, of course, mean new burdens at home — a super army, navy, and air force which would cost infinitely more in the long run than the most generous estimates yet advanced for European assistance under the Marshall Plan. It would mean additional help in building up the resistance of the republics in Latin America, and it would certainly mean the ultimate regimentation of industry and agriculture at home. And obviously it would mean that the Kremlin would take over in Europe.

The second choice before us is to render niggardly aid. I call it the first mile. If such aid, in the language of a steelworker in the devastated city of Essen, was “too little to live on and too much to die on,” it would be the most inefficient course we could pursue because it would provide neither the vitality nor the incentives nor the freedom from fear which are so essential to the reconstruction of Europe. It would be like trying to create a WPA on a world scale.

There is a third course and it consists of aid — immediate, adequate, aggressive, and selective.

It must be immediate because time fights on the other side. Winter is cruel, crop conditions have been bad, Communism is crowding and Red bayonets are right behind it. Aid must be immediate to stir hope, for hope is the first step in driving back despair and in quickening energy.

It must be adequate. Anything short of adequate aid is only another name for a subsistence program which does not reach the basic objectives. It might prove to be nothing more than a colossal waste of money and supplies, so far as the containment of Communism is concerned.

It must be aggressive. Food, fuel, and credit are weapons in a cold war. Let us use them as weapons and quit all shallow pretense and mockery. Let us publicize our aid, for this is serious business and we are playing for keeps. Too long we have played the role of depositing a charitable gift on the back doorstep of some nation after sundown. Those who would enslave the rest of Europe are not so shy. Economic aids, let me repeat, are weapons in the continuing struggle for peace and freedom.

Our aid must be selective and there must be flexibility in its administration. Aid must be rendered not only with proper regard for the needs of the recipients but also with respect to its inflationary effect on our own domestic economy. The problem of supplying food and other commodities is not here for a day or a season or a year. It will haunt the world for years. For that reason the more emphasis we place on increasing production in every country in the Western world, including Europe, and not merely here at home, the more successful we shall be in reaching these two objectives. Today, the world cries for food, fuel, fiber, and materials with which to make a new start. The need of the hour is for production and more production through every available means to meet that need.

Private dollars to implement the Marshall Plan

By now the elements of the Marshall Plan for meeting critical European needs are well known. In essence, it calls for a survey of the capacity of European nations to help themselves, an estimate of their needs, a measurement of the gap between needs and capacity, and a careful calculation of the selective aid which we can render within the limit of availability of supplies to fill that gap.

The Marshall Plan is a vital step on the pathway toward European recovery. But it must be supplemented by substantial American private investment in enterprises which can produce the goods to fill those needs not only in European countries which are scheduled for public aid but in all free countries throughout the world.

American business made very important contributions to increased production in foreign countries in the years before the war. Specifically, we built power plants and automobile assembly plants in the far corners of the earth. Wherever we found oil in deserts and jungles to drive naval vessels, tanks and planes, tractors and trucks, we built pipelines and refineries to convert it into gasoline and heating oils for use in both war and peace. We built chemical plants and factories for the production of agricultural machinery. We built industries abroad for the production of everything from typewriters with Chinese keyboards to plumbing equipment. We ventured into the sugar business and the banana business. American enterprise went into foreign fields in search of profit on otherwise idle dollars, and we made profits by producing an endless variety of goods to fill the needs and the desires of people at prices which they could afford to pay.

What impedes the flow of capital?

The need and the desire for goods of all kinds, from bathtubs to building materials, is greater today than it ever was before the war. The world is filled with customers who are hungry for goods. It is obvious that this consumer demand for goods in foreign countries could at long last be met if American firms could and would build plants in other countries to meet this demand, supplementing, of course, scarce and necessary items for factory construction from here.

As a specific example, I think of the masses of rubble in Europe which once served as homes, stores, and factories where people lived and labored. If American genius and American tools could provide the equipment for demolishing millions upon millions of these bombed buildings, precisely where they stand, and convert the rubble into some kind of building aggregate material, mix it with a binder, and transform the very debris itself into habitable structures where people can live and carry on productive business pursuits, what a service to rehabilitation it would be!

But American business today is not building abroad the plants in which fertilizer or farm machinery or a host of consumer goods might be produced. It is not building petroleum refineries, powdered milk plants, or plants in which rubble can be converted into homes. It is not building the plants with which production can be increased abroad and the load lightened at home. In other words, there is no flow of capital and know-how to foreign countries.

This condition does not spring from a conviction that there is no profit to be made. American businessmen are not building abroad, and dollars are not going abroad, for the simple reason that foreign exchange is not convertible into dollars. An American corporation which puts some of its dollars into foreign countries under conditions which prevail today knows that it may never get them back, no matter how successfully and carefully it operates its business. And, of course, foreign exchange must be convertible into dollars if it is to attract American investors. Dollars have a homing instinct, and very properly so.

Suppose a Chicago company, having first carefully surveyed the European field to determine whether the production of goods abroad might be a good investment, should consider erecting a tenmillion-dollar plant in western Europe. At the very outset it would be confronted with the fear that the European government might decide to nationalize or socialize the industry of which the plant was representative.

If nationalization should take place, it is to be assumed that the foreign government would compensate the company for the reasonable cost of the plant. But the compensation would be paid in the currency of the country where the plant is located, and that currency as of today could not be converted back into dollars. If the company could secure no return of dollars, there would be a total loss of plant investment for the stockholders, and obviously that is too great a risk for management to take with other people’s money. In other words, here is a hazard that lies within the unpredictable judgment of the government of a foreign country; and so long as the hazard exists, private capital will not produce the goods so urgently needed in Europe.

To be sure, the Chicago company knows from its survey that the loss to American business through the nationalization of industries abroad since V-J Day has been relatively small outside the so-called Iron Curtain countries. (Behind the Iron Curtain it has been almost total.) Nevertheless, it does not dare take the chance of being one of the firms which might get caught in such a situation with no power to defend itself.

Notwithstanding this condition, American business appears willing to run the extra risk of operating under foreign tax laws and foreign labor laws. It appears willing to assume the risk of merchandising in a commercial climate wholly different from that in the United States. And this willingness to assume normal business risks, even though conditions are different, springs from the fact that profits abroad would tend to be higher than those at home. But American business is very properly unwilling to risk the outright seizure of its property, even though statistically the chances of total loss may be no more than one in fifty. It is a good deal like the risk of destruction by fire without fire insurance. So long as this type of hazard continues to exist, few if any American plants to produce goods that would help to curb inflation abroad and get devastated European countries back on the recovery road will be built.

Now, let us look at still another hazard. If the Chicago company could be assured against the nationalization and loss of its plant, it would be confronted with other difficult problems. Manifestly, the machinery which it installed in its tenmillion-dollar European plant would wear out, and ordinary prudence and good business practice would dictate that the company should set up reserves for the depreciation of machinery and equipment. This reserve would be carried on its books in terms of foreign currency.

But to keep its plant modern and keep unit production costs low, machinery would have to be repaired and replaced, and that would require repairs and replacements from the United States, which must be purchased with American dollars. And how would the currency of the country be converted into dollars to purchase repairs and replacements if the period of inconvertibility should last as many years as might be required for the machinery to become obsolete or to wear out? The result would be about the same as if the whole plant had been lost through nationalization at one fell blow, because the depreciation account in foreign currency would still be abroad, with no way to bring it back home.

Prudent businessmen will not take this hazard when they are trustees of money belonging to investors and stockholders. So the directors of the Chicago company properly appraise the risk, dolefully shake their heads, and keep the dollars at home. And it might be added that the impoverished people in the European countries will continue to do without the goods that might have been produced. Inasmuch as there are less goods to buy in their own currencies, prices abroad will continue to rise and inflation will become more and more menacing.

Now let us assume that the risks to which I have just referred could be overcome. There is still a third risk which stands in the way. The stockholders of the Chicago company, like the stockholders of any other company, would approve this capital outlay in a foreign country if there was a decent chance for dividends. But of what value are dividends measured in terms of francs, pounds, marks, lire, or zloty unless investors are able to spend those dividends in terms of dollars wherever they happen to live? Foreign currencies would mean nothing to the average American investor, large or small, unless they could be spent over the counter for sirloin steak, nylons, or other merchandise. Until this risk, over which the operators of American enterprise have no control, is covered, it will stand in the way of the development of productive plants abroad to fill the needs of hungry and despairing people, and a reduction in the demands upon American taxpayers.

At this point I presume someone will say that all this merely involves profit for American dollars and American know-how. A few years ago, when we were burdened with surpluses of all kinds, it was fashionable in some quarters to speak of profits as though they were sinful. They may be sinful, but the Bureau of Internal Revenue likes them and is only too glad to stand by and get its share. Today, however, when the world is beset with tragic scarcities, it might be well to remember that in an imperfect world with imperfect people, we have not yet found a substitute for the profit motive to get efficient production into high gear. And it might be added that present tax rates keep the profit process well on this side of anything that might be regarded as sinful and shameful.

So our Chicago company, in the light of today’s transitory and difficult international conditions, has a third very realistic reason for being hesitant about building a ten-million-dollar plant abroad even though it has the capital to do so and the need for its goods is there. It is too much to expect that American business will establish plants abroad even though such a course would help to retard inflation everywhere in the world by producing more goods for more people in more places. Some plan must be devised to remove these restrictions on the free flow of private capital into productive facilities abroad.

The Plan

I believe there is a reasonable and businesslike way to surmount the difficulties which I have enumerated. Moreover, it seems to me to be a typically American way. Briefly, it would be to empower whatever agency administers the Marshall Plan to sell insurance policies to American enterprise which desires to go abroad, against those hazards which might result from the governmental action of a foreign country and over which American business would have no control and which it could not foresee. It is the only practical method I see at the moment for enabling American capital to assist in the development of production and rehabilitation in those foreign countries where it is so imperative. If private dollars can go to work alongside of government dollars, the Marshall Plan will have a much greater chance of success and the investment of private capital should materially shorten the period during which government aid would be required. This is clear when we consider the uses which other nations make of the dollars which they get from our government under foreign-aid programs.

The dollars which we loan or give are now being spent primarily for such consumer goods as fuel, food, and fiber. This is unavoidable in a critical transition period. It is the only way our friends abroad can keep body and soul together. But the end result has more to do with subsistence than with recovery because subsistence is the foundation for new hope. On the other hand, private dollars which are used to build plants with which to produce consumer goods have quite a different result.

If there were no Marshall Plan it might be too hazardous for us to insure American private investment in foreign industries against unforeseeable contingencies. There might be political and economic collapse before American-built factories in Europe could turn a wheel. On the other hand, the Marshall Plan might be a long gamble without some encouragement to private investment. It would, of course, keep Europe from starving or freezing, but it still might fail to bring about that type of lasting recovery for which we hope. The whole aid program is a gamble, after all, but it is a gamble well worth taking. We want it to succeed, and it should be obvious that it requires both public dollars and private dollars to make it succeed. Finally, private dollars invested in plants producing consumer goods abroad would be the best assurance for lightening the load on the backs of American taxpayers.

How would it work?

Let us assume that a plant was established in a European country and shortly thereafter it was nationalized and brought under the ownership and control of the state. Doubtless the company would be reimbursed for the fair value of its property in terms of the currency of the country. The problem would be to bring about the conversion of that currency so that the dollars could return home. Or suppose the company had been operating for a time and required repairs and replacements of machinery and equipment but did not have the dollars to procure them, because its depreciation reserves were set up on the books in terms of foreign currency. How could those currency reserves be converted into dollars so that the plant could be kept in tiptop condition? Or suppose the company had been operating and was in a position to declare a dividend, how could those dividends be converted into dollars so that they might be spent in the United States?

The procedure as I envision it would be simply this. As an adjunct of the Marshall Plan, Congress could create or authorize the creation of an initial revolving fund. An annual premium rate would be established. It might be 1 or 2 per cent, depending upon the hazard, and it might be expected to diminish as the plan got under way. The rates should be founded on as much actuarial experience as possible and should be high enough to cover any losses which might be sustained. I am certain that American business is not seeking subsidies, but only adequate coverage against the risks involved.

This type of insurance should be available to cover investments in all countries where the Iron Curtain has not yet closed down. It should be made available to companies having or contemplating investments not only in Europe but in Latin America and in the Far East as well. It is of transcendent importance that we help the expansion of production in every free country in the world. The precarious condition of Europe makes this more vital than ever before. We must get production under way on a lasting basis or Western civilization will come apart at the seams. Government cannot curry the load alone. Private initiative, money, and brains are needed as well.

It should be made clear that American business would be expected to assume all the normal business risks abroad. What is envisioned here is only insurance against those hazards which it cannot foresee and over which it has no control. I fancy that the ultimate cost would be no greater than those insurance programs now carried on by the Federal government in the field of home mortgages and bank deposits.

No interference contemplated

It is not the purpose of this insurance proposal in any way to restrict the internal operations of any foreign government. Already we have been attacked on the ground that our purposes are imperialistic and that the grand design of American policy is to interfere in the internal affairs of foreign governments. This is not the case. We can, however, and we should, implement this proposal by providing for the negotiation of bilateral agreements with countries receiving aid under the Marshall Plan, to prevent possible abuses by either side.

As an example of a possible abuse, a European government which is at present making some of its currency convertible into dollars for depreciation reserves and dividend requirements might stop this practice and thus throw the whole burden of conversion upon the insurance program.

On the other hand, we might so favor our own businessmen at the expense of their foreign competitors as to give the absurd charge of imperialism some basis in fact. Neither of these courses would be fair, and both could be easily avoided by forthright bilateral agreements.

Queries

I have made no attempt in this article to go beyond the general principles involved in the proposal. Obviously there would be details to be worked out before such a plan was ready for application. But an insurance plan is so essentially American that it could be placed in operation with a minimum of delay.

Certain queries arise at once. For instance, is it not the purpose of the International Monetary Fund to assure the convertibility of foreign exchange?

Yes, it is, but the Fund cannot begin to function effectively until production rises in other countries so that there will be goods to buy with foreign currencies within those countries. To the extent that this insurance program increases production abroad, it will actually assist the Monetary Fund to function as it was intended.

The question will be raised as to how much private money might go abroad if this insurance program were in effect. The answer would at best be an estimate, but I should say it might run from five to ten billion dollars over the next five years.

What, if any, would be the losses to the Federal Treasury of the United States? Again this is a speculative answer. First of all, our government could afford to hold the currencies which it might acquire under this insurance plan for the first few difficult years much better than private industry. It could also make a broader use of such currencies. It could, for instance, spend them for strategic materials to be stockpiled in the United States. They could be spent to defray governmental costs which are incurred abroad. They could be used to pay for the services of foreign personnel or to acquire property for the State Department. They could be sold to other businessmen who might wish to establish plants in foreign countries.

As an example of the latter use, suppose an American electric utility company abroad was nationalized and the fair value of the plant was paid for in foreign currency. That currency could then be sold to any other American company which might have in mind constructing a plant abroad for the manufacture of powdered milk or textiles or electrical equipment or any other goods and commodities.

The premiums collected under the insurance program should, of course, be high enough to offset the losses. It is fair to suppose that as the Marshall Plan succeeded, these risks and losses would decline.

Still another question which might arise is, what about losses in the event that Communism wins out in large sections of the world or if the slender peace is shattered by another war?

The best answer I can give is that if either one of these conditions should develop, our losses under the Marshall Plan itself would be infinitely greater. When all is said and done, the whole international recovery program is a gigantic insurance program against the still more terrible costs of another war. We should he unlikely to sustain losses in every country of the free world. Furthermore, if ultimately we must again fight to avoid becoming slaves to a police state, the money losses would become insignificant anyway.

Still another question is one which arises now with greater frequency. It is simply this. Why have so many countries seemingly lost faith in free competitive enterprise?

The fact is that free competitive enterprise has never been tried in many of those sections of the world where faith has ebbed away. What was often called competitive enterprise was nothing more than a cartelized, monopolistic way of doing business which deliberately avoided the rigors of competition. Instead of making pretty speeches about the free enterprise system I urge that we concretely exemplify it in all corners of the earth as the enlightened way of operating modern business, which provides better goods for less money through efficient production and treats its workers with justice.

Still another query must naturally arise. Will this new program aid little business as well as big business? I firmly believe it would help many American firms of modest size even more than it will help our huge industries. Obviously little business is less able to take over the risks of exchange convertibility than big business. At the moment, however, neither dares build plants abroad in view of the hazards, and both big and little business must come into this program if our foreign economic policy is to be fully implemented.

One final query. Would all American plants that might be established abroad be wholly owned subsidiaries of United States companies? Not necessarily. Doubtless some would. Others might be owned on a fifty-fifty basis and covered by United States management contracts. In still other cases more than half of the stock might be owned by foreigners. In such instances it is to be assumed that an arrangement would be made to supplement the American minority interest with additional remuneration for American research and know-how. These, however, are problems which create no special concern, since American business has had broad experience in this field.

In summary then, let me say that I feel persuaded that adequate American aid to European countries is the price of peace and freedom abroad and freedom at home. And freedom is the core of our free competitive private enterprise system — that system which is under attack as imperialistic by the adherents of Communism. How then shall we persuade the people of those countries which are hanging in the balance today that our system can ring the dinner bell and provide the goods so sorely needed?

It takes more than talk and press-agentry. The creeping police state which today strikes fear into the hearts of millions of people with its unbridled tyranny, its midnight knock upon the family door, its communization of trade and business, will not wither away or stand still because of anything we say. It takes something more. It requires militant economic action in the form of demonstrations that this American system can supply the needs and elevate the living standards of impoverished people.

We must cease hiding the light of our achievements under a bushel.