The experts say we can — but will we? With economic storm signals already flying, will Malenkov’s peace offensive increase the danger of a slump and turn it into a propaganda victory for the Communists? Or can the West, with boldness and imagination, defeat these ends?

BLAIR FRASER June 15 1953


The experts say we can — but will we? With economic storm signals already flying, will Malenkov’s peace offensive increase the danger of a slump and turn it into a propaganda victory for the Communists? Or can the West, with boldness and imagination, defeat these ends?

BLAIR FRASER June 15 1953


The experts say we can — but will we? With economic storm signals already flying, will Malenkov’s peace offensive increase the danger of a slump and turn it into a propaganda victory for the Communists? Or can the West, with boldness and imagination, defeat these ends?


WASHINGTON UNLESS the Western nations are extremely wise or the Kremlin is extremely stupid, we are threatened with a serious defeat in the cold war.

Malenkov’s “peace offensive,” forecast by Stalin in his last public utterance in October, aims to prove that only Communist economies can stand peace. Communists say capitalism must have war in order to keep going. Without the stimulus of defense spending, they say, capitalist boom must inevitably topple into capitalist bust. This isn’t so, but there is danger that developments of the next few months might make it appear so. As John Foster Dulles, United States Secretary of State, said last month to a congressional committee, “we could by our own mistakes make Stalin’s predictions come true.”

Maclean’s Ottawa Edito r

It needn’t happen. Once already since World War II the West has proved the Communists wrong in their view of fundamental economics. All signs pointed to an old-fashioned capitalist depression in 1946, but it didn’t come. It was averted by rare wisdom and unique generosity on the part of the United States. Through the Marshall Plan, the Point Four program and other devices of foreign aid the United States restored the machinery and maintained the buying power of the free world. It cost the American taxpayer more than thirty billion dollars, but it saved Western Europe and dealt a crushing defeat to international Communism.

By contrast with 1946 the economic problems of 1953 look trivial. War had been eating up half the budgets of United Nations; suddenly defense spending shrank to less than a tenth of the average government’s outlay. Millions of men had to be got out of uniforms and into jobs. Millions of refugees had to be returned or resettled, millions of homes and factories rebuilt. All these challenges were met.

This time, no matter how far the Russians press their “peace offensive,” the adjustments in defense spending will be gradual. Korea, for example, accounts for only about ten percent of the current American defense budget. A very large fraction of defense spending in all Western countries is made up of contracts already let for equipment permanently required. No imaginable offer from Malenkov, in the Far East or in Europe or both,

could bring the vast program to a sudden standstill.

Yet the defense program itself is trifling by wartime standards. Eighty-five to ninety percent of Western output is civilian goods and services. Most Western countries are busy and prosperous, with living standards higher than ever before. It seems absurd to suggest that all this would be blighted by gradual reduction in one field of activity. But Malenkov, by good luck or good management, timed his “peace offensive” well. If he is shrewd enough to press it, and to make sure of real progress toward peace in the coming months, he has a good chance of making this progress coincide with economic trouble in the West.

Peace won’t be the cause of it. Signs of economic difficulty are there anyway, truce or no truce. The difficulties are not insuperable but they are complicated, and they call for treatment more subtle than the heroic surgery of the postwar years.

To begin with, the period of “dollar aid” is just about over. The United States is still budgeting for a mutual security program of more than five billion dollars, less than last year’s appropriation but about as much as the amount actually spent. But almost all of this vast sum now goes to military aid, whereas half of last year’s spending was for economic aid. Even in the so-called “Truman Budget” of last January, economic aid had been sharply cut. John Foster Dulles told Congress he had “cut in half” the Truman allocation. Congressmen like Senator Joe McCarthy promptly threatened “ruthless” cuts in the amount Dulles had left. Final figures are not yet known, but even at the April meeting of NATO, in Paris, Dulles gave European allies a breakdown which showed economic aid very near the vanishing point. For the British, who got four hundred and eleven million dollars altogether in 1952, the new schedule was a severe blow which will knock their foreign exchange position out of its new, precarious balance.

No country has any real right to complain about this, though. The American taxpayer has done more for the rest of the world in the last six or seven years than anyone in history, and gets very little gratitude for it in many recipient countries. These ex-beneficiaries needn’t, and don’t, grieve because the flow of direct aid is dwindling. They do complain that U. S. trade policy prevents them from earning the dollars which are no longer to be given. Earning more dollars means selling more goods to the United States. This is the very thing Congress seems determined to forestall.

John Foster Dulles has a weakness for preaching at people, and he made himself unpopular at the NATO conference by moral lectures to the

Europeans. He went on at length about the need to “stand on your own feet.”

“He kept telling us to walk without crutches,’* one delegate said, “while Congress was plowing up the road he wanted us to walk on.” This was an exaggeration. Congress had before it several bills to raise tariffs and exclude foreign goods. Congress was studying, in a notably unfriendly committee, the Reciprocal Trade Agreements Act under which all the tariff cuts of the past eighteen years have been obtained, and which would have expired on the twelfth of this month.

But Congress had not yet, in fact, taken any hostile action at all. The U. S. tariff was still what it had been all along, under a Democratic administration dedicated to freedom of trade.

Unhappily that is not enough. It will not be enough for the liberal wing of the Republican Party to “hold the line” against Old Guard demands for higher tariffs. To replace dollar aid with dollar trade, the Allies must have sharp reduction or even elimination of the U. S. tariff wall. Prospects for that are not very bright, to say the least, but attempts are being made, even in the harsh climate of Republican Washington. Senator Ralph Flanders, liberal vice-chairman of the Joint Committee on the Economic Report, sent out a letter on April 28 asking the committee for an immediate, intensive study of foreign trade.

Senator Flanders drew attention to the fact that little is known about the probable effects of a sudden drop in U. S. exports. If other countries have to balance their trading account with the United States, and if they are not to be allowed to earn more dollars, they must obviously cut down on their buying of U. S. goods. Senator Flanders wants to know what that will do to the United States’ own economy. He also wants to know what would happen if the accounts were balanced the other way—if the United States allowed imports to go up by some five billion dollars, to equal her current exports.

A Faint Chance for More Imports

“What particular areas or industries would be injured by each policy?” Flanders asked. “How serious would be the injury in each case? How could the injury be alleviated? To what extent have we ‘unnecessary’ tariffs and other restrictions to imports which are not particularly competitive with domestic producers, or cover commodities exported in world markets in heavy volume by American producers? To what extent are claims for protection made by domestic producers who have not kept up technologically, or who have


not exhibited enterprise in meeting the changing demands of the market?”

These questions indicate the line of Flanders’ own thinking. He is one of those Americans who think the United States must buy more goods from other countries. Unfortunately there is no evidence that Flanders speaks for a majority in Congress. I talked to an economist on Flanders’ committee staff, one who had prepared a good deal of the material on which Flanders’ letter was based.

“I think there’s a chance, just a faint chance of our letting in more imports if we don’t have a slump,” he said. “But if we do have a slump this fall or next spring, then there isn’t a hope in the world.” And like all the other economists to whom I spoke, he thought a recession by next spring is all too likely.

All the signs are there. Business inventories are as high now as they were in the so-called “inventory recession” of 1949, which was followed by the Korean War boom. There is no such backlog of pent-up civilian demand as followed World War II —on the contrary, civilian goods are plentiful while civilian demand is slackening. “No Down Payment, Thirty-six Months to Pay” signs are popping up on shop windows all over the continent.

Almost every normal index of business activity is down below the Korea peak. Farm prices in the U. S. are down sixteen percent, farm exports down thirty percent, all exports down nineteen percent, wholesale prices down four percent, stockmarket average down seven percent.

Employment is still high on an over-all basis, but soft spots are cropping up in certain regions. Even before the end of 1952, for example, basemetal prices had weakened enough to put a lot of high-cost lead, zinc and copper mines out of action. Generally when a mine closes, a whole town is hit. The immediate reaction to the lead and zinc situation was ominous—the “Simpson Bill,” which would have slapped on a sliding-scale tariff high enough to keep out all Canadian lead and zinc. Last year Canada sold ninety-three million dollars’ worth in the United States.

Evidently we can expect instant pressure for tariffs and embargoes whenever any United States product is threatened by a slump in prices. Whether the pressure is successful or not, it creates a poor climate for tariff reductions. Nor has the climate been very good for other devices or even negotiations to stimulate international trade.

The British have not been publicizing the fact, but the spring visit to Washington of Right Hon. R. A. Butler, Chancellor of the Exchequer, was a total failure. He laid before the Eisenhower administration a scheme, still secret in detail, for making the pound sterling convertible into dollars. It would have called for American support not necessarily a large outlay of cash, but a guarantee to keep the pound from being bid down below its real value.

Butler got absolutely nowhere. Reports at the time spoke of his having “a sympathetic hearing,” but there is now plenty of reason to doubt that the hearing was even sympathetic. The whole incident left a bad taste in both British and American mouths.

There has been no change yet in British trade policy, but some change is inevitable if no constructive solution to Britain’s dollar problem can

be found. If Britain cannot earn more dollars in the U. S., and if Britain cannot get the necessary help to make the pound and the dollar interchangeable, then Britain will have only one course left open to her: cut dollar imports to the bone, turn the

sterling hloc into a closed trading area which would be as nearly self-sufficient as possible, and would trade with the rest of the world on a straight barter basis—in so far as it would trade at all.

This makes a gloomy prospect for Canada. It would be quite impossible for Canada to enter such a closed sterling bloc—more than three quarters of all that we buy abroad comes from the United States, and nearly two thirds of what we sell abroad is sold to the United States. But Britain is still the major market for some of Canada’s most important products, notably wheat.

Another Straw for a Tired Camel

Politicians who say that Canada has already “lost the British market” haven’t seen anything yet. If Britain is ever forced to cut her Canadian purchases to the level of her Canadian sales, Canadian farmers and other exporters would take a real beating. In the first three months of this year Canada’s sales to Britain exceeded her purchases from Britain by fifty-seven millions.

Moreover, chances are poor for making up any reduction in sales to Britain by an increase of sales to the United States. Basic items like newsprint, nickel and aluminum might not be much affected by a leveling off in the American economy, but they certainly wouldn’t go up. Marginal items like lead and zinc, and especially farm products of all kinds, would be almost sure to go down. With an elaborate and expensive price support program to keep American farm prices high, the U. S. can hardly be expected to let cheaper foods in from other countries while buying huge “surpluses” of her own.

This is the basic economic situation on which Malenkov’s “peace offensive” falls. The opportunities it presents to Communist propaganda, for a major Communist victory in the cold war for men’s minds, are all too painfully obvious. Even a slight decline in defense spending at this moment, when a fourteen-year boom is showing signs of nearing its end, would be one more straw on the back of an already overloaded camel.

However, the Communist challenge has its good side as well as its bad side for the West. The Soviet Union has unintentionally helped us before, and may do so again. In February 1947, Communist seizure of Czechoslovakia spurred the Marshall Plan through Congress. Stalin captured one small country which lay within his grasp anyway; he lost Western Europe.

We can’t depend on Malenkov to be as shortsighted as that. But even the obvious fhreat of a cold war defeat, fihe obvious advantage that Commdnism might expect to gain from a Western depression, may well stir the West into action to prevent it.

What action?

When you put that question to economists in either Washington or Ottawa, they all reply that it must be American action in the main. The U. S. is the keystone of the Western arch, economically as well as militarily. The American market,

the American dollar, the American willingness to invest overseas these are t he major factors in the problem of the Western world.

There isn’t a great deal Canada can do by itself. But there are a few important things we can do, and some even more important, things we can take care not to do.

First, we can take care not to get into a premature panic. Several important figures for the calendar year 1953 are certain to be lower than the records of 1952, for several separate reasons. The 1952 crop was an all-time record, following on another bumper crop which wasn’t all harvested in 1951. The 1952 autumn was the mildest and longest in sixty-eight, years, allowing construction jobs to go on for weeks longer than is normally possible. A combination of circumstances made ordinary consumer buying in 1952 abnormally high. Nothing but a miracle could make the 1953 figures equal any of these—but the “slump” won’t necessarily mean a thing. By crying before we are hurt, we might set off a deflationary spiral that would end in a real recession.

Second, we can make careful and thoughtful use of our friendship with the United States. Canadians are fond of talking, even boasting, about our influence in Washington which, as we smugly remark, is “out of all proportion to our size.” It really is, too. But Canadians sometimes forget that this influence depends wholly on mutual friendliness, and not at all on puffing and pounding the desk.

When Prime Minister St. Laurent went to Washington last month to see President Eisenhower and discuss trade among other things, parliament sent him off with a unanimous resolution deploring United States restrictions on imports. Parliament evidently felt, as you can see from Hansard, that it was taking a strong stand and generally asserting itself, and that the United States would pay respectful attention. No Washington paper carried a single line about that unanimous resolution, though they all had stories about the Prime Minister’s visit. The New York Times, which tries to publish all the news, managed to print four short paragraphs about it under a small heading on page twenty. President Eisenhower doubtless heard about it from his distinguished guest, but President Eisenhower is on our side already in this argument. The senators and congressmen who write the tariff and trade legislation are still sublimely unaware that the Parliament of Canada rebuked them.

Perhaps that’s just as well. Americans are generally more polite to us than we are to them, and they don’t always say what they think as candidly as we do, but they do get tired of Canadian self-righteousness. To hear the average Canadian talk, you’d think the United States was the only country in the world with a tariff wall.

At dinner one night with a Washington reporter who spent several years in Canada, and who is one of my best friends, I remarked that Canadians were rather sanctimonious about free trade. The American grinned. “I never dared say it before,” he said, “but that’s the word. Sanctimonious.”

He could have made it even stronger, and said “hypocritical.” The cold fact is that in matters of trade, Canadians behave in much the same way as Americans. To take a recent example, not long ago the United States Continued on page 86

Can the West Stand Peace? CONTINUED FROM PAGE 19 refused to let a public power contract to the British company which submitted tIn lowest, tender. Among fl'iafly editorials (Ieplori ng t,hi~, none we'i'e' (T1Oi'e 5U perci I bus than those appearing in Canada. Rut less than a year ago, th(~ ( a nad inn government, took precisely the same aft itude toward a low I 1)i(I from tin N,et.Iierlands. `I'he l) I't'l mister of i'a'onomi(: Affairs, here tee See our International Irade Fair, had asked Right lion. ( 1). I-lowe if' Dutch firms might. bi(I on Canadian (icieliss' e'ont i'a('ts. Mr. Howe indisereetly said "Sure. `i'enders were (`ailed leer en ml (`Wit ra('t, for a I'ITl\' bo )t 5. 1 y f~ist. work on trans-Al Iant.i(' planes, a i)utch syndicafe was able t.o put. in a hid hef'ore the tin rt `y -cia v (leadi tie, and I heir hid to ,`ned 0(11 tO I e thirty percent. 1 ewe r than the next loW('St bid, which caine from mc shoe factory in Quebec. Who got. tire cient rml('t..' `ion get only one less t iie' fact ory in ( iiebec. `[[`lie I )utche were told, good-nat.llre(ily hut, firmly, that to accei~ t their low hid was i)01i1i('iiIIY impossible. A ill )t 11(1' (`U5~, (`Veil more (`(ce ut. a rid VIII lull )I'e' re k'va ut , was t. he smile of' (~iilneuu refined sugar in Ontario. Snigmir mliii )OI't 5 we're tb rca t (ni uig the markets of Ontario sugar-heet. growers, who clamored for a higher tariff or an im port quota. The government piously refused to raise the tariff or to impose anything SO immoral as quota restric tions. But C. I'). F-I owe got in touch with the Cuban exporters, and had t lie Cuban shipments stopped altogether. Adam Smith Isn't Enough Canadian government economists will argue, with rather red faces, that "this was different." This wasn't a violation of the Geneva agreements, nor the kind of "blunt instrument" that a general tariff increase would have been. This was just a private personal deal for mutual advantage. Maybe flay are right. But in any case, Cuban sugar in Ontario proved one thing: No country, not excepting Canada, will tolerate foreign competition that knocks out a large and impor tant borne' industry. So we might:. as well stop preaching to the Americans, and urging them to do something we wont. do ourselves. Instead, we might. concent rat.e on soniet hing more useful and construc tive. \ee in ight. try to figure out. some alternative method that would give reasonable protection t.o A me rican industries witiiou t shutting out im ported goods altogether. ``We've got to suggest. some alternat ke,'' a U. S. government econon) ist said. ``It's ne enough just to quote Adam Smith at them. You may tell me the U. S. C('OOOITIV is the st ronge-'st in t lie world, and that mcliv American industries which can't compete are unimportant and uneco noinic. ihats true. But what lie) I say t.o a senator from `tab, who tel Is me `my whole stale is founded on those u ni ni portan I i nd ii st ries `.` `[[`here isn't. a single I hing that Utah produces which can't be made cheaper somewhere else.'' No American administration, Demo crat ic or Republican, is going to adopt a policy that will put the entire state of Utah out of work. If you think a Canadian government would behave differently, ask ourself what would happen if American steel and coal knocked out the industry of Nova Scotia.

o. governone or two.! red / a would cost p tty /1 assets, retrain n r workers, of unecoiir whole industrial ie \) éred if this would cost as ,e Marshal! Plan, and if ’ .Jo even mo > good in the bold thinking in any country , liwif 11 I >\.r 1 . . « .• i » - ; • w-v el « « •.

tne aay after tomorrow. Meanwhile, the only thing to do is to keep our heads and our tempers, and not expect miracles. “Neither we nor the British have yet faced the fact that we lost the American election,” a Canadian official said wryly. “We keep thinking Eisenhower is a Democrat. He isn’t, he’s a Republican. The Republican Party has always been protectionist, ft’s just silly to think Eisenhower should, or could, tackle his whole party head-on and reverse the policy of the last hundred years. He can’t possibly do it, and he’d weaken himself if he tried.” There’s reason to hope, though, that, time and the test of events may modify Republican policy. Already big business, the giant companies which are the real foundation of American prosperity, are converts to freedom of international trade and reduction of American protective tariff. The oil companies, steel companies, automobile companies want their foreign customers to earn enough to keep on buying American exports. They may yet convert a businessminded Congress, but it will take time. Economists in both capitals are unanimously glum, in private, but we might remember that they were equally glum in 1946. What sensible man would have predicted then that a Republican Congress would enact the Marshall Plan, the most enlightened single act of statesmanship in all history? Today, therefore, a sensible man may hope that another Republican Congress may do other things which appear equally unlikely. Here are some of the things it might do: 1. Carry out President Eisenhower’s own suggestion, in his great speech of April 16, that some of the money now spent upon arms might be spent building up the underdeveloped, underprivileged areas of the world. Much has already been done in this field, by the Colombo Plan and the Point Four program, which has not yet had time to bear fruit. It might not take much, relatively speaking, to raise the world’s production level by a considerable fraction. 2. Adopt the British plan, or some other equally effective, to make the

pound sterling freely interchangeable with the dollar. Such a scheme would cost the American taxpayer little or nothing so long as the pound remained strong, but would become very expensive if the pound became weak. Therefore it would be in the American as well as British interest to let Britain earn as many dollars as she can. 3. Reform the II. S. tariff structure and administration, perhaps on the advice of the eleven-man commission which President Eisenhower has already recommended, to allow an increase of American imports without ruining any important American industry. 4. Cont inue economic aid to Fat rotte an countries, perhaps in a different form and on a different scale, but enough to bridge the narrowing gap between their expanding purchases from the U. S. and Canada and their expanding sales. The important thing is that production everywhere, and trade among all countries, keep on expanding. The Inevitable Ups and Downs Meanwhile Canada at least is in better shape to endure heavy economic weather than she has ever been before. Canada’s population is half as big again as it was in 1929, when the stock-market crash set off the Creat Depression. Real per capita income is up fifty-six percent, too, so the domestic market for Canadian farm and factory is twice what it was in the Twenties. Canada has a program of social insurance that didn’t exist twenty years ago. Unemployment insurance, floor prices for farmers, family allowances, old-age pensions combine to weave a safety net under the economy, a floor below which the national income cannot fell. It may be a low floor by present standards, but it would have looked like wealth and ease in 1932. Canada has a new self-confidence in her own strength and ability. In the 1930s the late Hon. Norman Rogers, a real small-1 liberal whose interest in human welfare was as deep as any man’s, brushed aside a CCF motion for unemployment relief works because the scheme would cost one hundred million dollars, a preposterous sum. It’s no longer preposterous. No Canadian government would hesitate today to launch public works on a mass scale to keep men working and money circulating. Things that were turned down in a time of full employment, like the South Saskatchewan River dam, would he virtual certainties in slack times. None of these things are enough to make a depression impossible. We haven’t solved the problem of the business cycle; a free economy still has ups and downs. It will take skill, forbearance and mutual co-operation to make Malenkov’s “peace offensive” a Communist defeat instead of a Communist victory. But it can be done. Economic surveys in Canada and the U. S. alike point to needs for peacetime investment —needs for more schools, more hospitals, more homes—which could more than take up the slack of defense spending. As for European nations, they have been complaining bitterly about the burdens of rearmament; presumably they can manage the burdens of peace.

The big question is whether we can work together for mutual prosperity as we have worked for mutual safety. If the western nations can have the same regard for each other’s interests in peace as in war, then Malenkov’s “peace offensive” will end in victory for our side. *