Rapprochement With Realpolitik

Chapter 4 (Part 1 of 4) of the book

The Discovery of First Principles, Volume 3

Edward J. Dodson

We stand for freedom, say both ["conservatives" and "liberals"] -- and proceed to declare what kind of controls, regulations, coercions, taxes, and "sacrifices" they would impose, what arbitrary powers they would demand, what "social gains" they would hand out to various groups, without specifying from what other groups these "gains" would be expropriated. Neither of them cares to admit that government control of a country's economy -- any kind or degree of such control, by any group, for any purpose whatsoever -- rests on the basic principle of statism, the principle that man's life belongs to the state. A mixed economy is merely a semi-socialized economy -- which means: a semi-enslaved society -- which means: a country torn by irreconcilable contradictions, in the process of gradual disintegration.[1] [Ayn Rand]

The void created by the destruction of fascism in the Old World was quickly filled by a delicate balance between democratic socialism and social democracy, adopted by societies where state socialism had been all too familiar and now dominated life throughout eastern Eurasia in the guise of communism. In the United States, however, the ascendancy of Liberalism occurred despite a deeply-ingrained and broadly felt disdain for interventionism. Worldwide economic depression followed by wholesale commitment to the conduct of war had accelerated the process of centralization and broadened federal powers over Americans. Liberalism, unconsciously for the most part, became the political center's compromise solution to U.S. and global socio-political problems. With the passage of four decades during the twentieth century, neither the monopoly-prone system of laissez-faire nor the generation of interventionist policies attached to the Progressive movement had been sufficiently powerful to retain broad support or acquiescence. War had blessed the United States with a renewed and broadened material prosperity. Liberalism promised to maintain that prosperity while comforting the privileged that their economic licenses would not be taken away. Minorities and other disenfranchised groups would be pressured to settle for gradual mitigations of rather than solutions to their circumstances. Thus, the architects of Liberalism advanced the theoretical arguments and introduced practical programs for incremental improvement in conditions while successfully discrediting wholesale change as revolutionary or reactionary. To defend the Democracy from extremists -- of the left or the right -- became their driving motivation.

In the minds of the new interventionists, the Democracy had successfully survived its darkest and most dangerous period, beginning in the late nineteenth century and ending with Roosevelt's experiments in social engineering. Within the Remnant, however, there was great chagrin over the loss of individual freedom and the willingness of people to trade their liberty for a small degree of economic security. John Dos Passos, for example, argued that the Roosevelt era accelerated the continuum of centralizing power under the pretext of saving the Democracy from ruin:

The aim of all the diverse radical movements of [the period of the first of the century's great wars] was somehow to restore the dignity of the man who did the work. Staid Single-Taxers, direct action IWWs and bombthrowing anarchists had the same eventual goal. They believed that if every man could be assured of the full product of his labor, the Kingdom of Heaven would be installed on earth. Their quarrel was about ways and means.

The history of the twentieth century has been the history of a series of denials of these hopes. We can now see that the radical view was grossly oversimplified. It made no allowance, among other things, for the fact that man is an institution-building animal. In our enthusiasm for the "producer" we underestimated the importance of the planner and manager in industry.[2]

That Dos Passos chose to include "staid Single-Taxers" in the same category as radicals is unfortunate but hardly unexpected. Calls for justice were and are radical challenges to the status quo. Yet, some of the most dedicated Single-Taxers were also among the staunchest defenders of the Democracy. Tom L. Johnson served as mayor of Cleveland and then in the Ohio state legislature. Louis F. Post served in the Wilson administration. Frederick Howe was appointed Commissioner of Ellis Island. Raymond Moley headed Roosevelt's brain trust. The list goes on. The real problem was that these talented individuals were not being replaced as they aged and left this world. Within the Remnant there awaited rediscovery of the rich heritage of cooperative individualist thought, radical in its departure from all conventional wisdoms handed down in defense of power and privilege. Georgists (as opposed to some Single-Taxers) never abandoned Henry George's flowering socio-political philosophy, although many assisted in the pursuit of concrete gains in the legislative arena. They were fighting against the wind.

In response to the desperation of the 1930s, downtrodden Americans succumbed to the attractive illusion that a trusted leader, elevated to the Presidency and encouraged to take action, could by some alchemy return the nation to its former innocence. This atmosphere of despair, combined with Franklin Roosevelt's long tenure in office, resulted in the creation of an enlarged, organized and deeply-entrenched bureaucracy. When Harry S. Truman became President, he gradually brought in his own cadre of trusted advisers, but he relied even more heavily than Roosevelt upon the bureaucratic architecture through which Liberalism was to flourish.

Roosevelt had acted in pragmatic fashion, without a guiding philosophy or detailed plan of action. John Kenneth Galbraith warmly describes Roosevelt as "a man who saw the United States as would a kindly and attentive landlord, concerned in all aspects for the lives of his tenants and the estate on which they dwelt."[3] The same could not be said of Truman, who, upon entering his third year as President, remained in the minds of many others a mere caretaker of programs initiated by Roosevelt. He was, in fact, facing the rapid disintegration of the tenuous national unity forged under the pressures of global war. And, within his own Administration, he was wounded by friends and advisers practiced in the art of political corruption. As any good Roosevelt Democrat would, Truman accused Republicans of belonging to the party of special privilege. In truth, the Democrats had an equally strong claim to that distinction. Key members of Truman's own staff and inner circle, products of Missouri's patronage system, were found to be deeply involved in profiteering at public expense.[4] Later, when Truman's tenure in the Presidency was ending and the nation awaited the arrival of Dwight D. Eisenhower, Walter Lippmann observed that what separated the Truman years from those of his predecessors was not so much the depth of corruption but the quantity of resources to which those in power controlled:

The fatty degeneration of government is a serious disease. It is serious not only, or mainly, because it means the waste of so much money. The worst of the disease is that it destroys the effective control of the government, with its vast powers at home and in all parts of the globe. ...As time went on, the [Truman] Administration has acquired more and more powers and has spent more and more money but it has had less and less control over the use of that power and of that money.[5]

Already, the bureaucracy was gaining independence from Executive control. Harry S. Truman and each U.S. President thereafter had to somehow accommodate the vast distance between the promise of participatory government and the realities of party politics and bureaucratic administration. Truman was of the old school; and, one of his weaknesses in the role of national leader was, as William Manchester writes, his reliance "on old friends, in trusting them."[6] As President of the world's most powerful nation at a time of tremendous uncertainty, he nevertheless was faced with a continuous onslaught of complex problems requiring historically crucial decisions. There was, it seemed, no turning back from the course by which the United States had emerged center stage in the global arena. Inheriting the Presidency and lacking his own constituency, Truman remained outside the circle of influence that had guided U.S. domestic and foreign policy for thirteen years. Surrounding him were many who had dedicated themselves to Roosevelt's incremental advance into social democracy. The more idealistic hoped a brave new world might be emerging out of the ravages of global war. Some patiently worked within the confines of existing socio-political institutions toward a future where economic socialism would be democratically adopted. Others championed the new Liberalism as the proper and necessary approach to balancing the interests of all. A tiny but highly visible group was coming under suspicion of treason, accused of passing scientific and military secrets to agents of the Stalinist empire. The air was filled with a building sense of insecurity and distrust followed by deep over-reaction.

While the military had succeeded in thwarting the ambitions of Japanese and German empire-builders, the leadership (and much of the general population) of the surviving social democracies had failed to protect millions of people from continuous subjugation. Even in those societies where the people were ostensibly liberated from oppression, the end of war failed to bring down the polarizing socio-political institutions upon which privilege had been converted by conventional wisdom into broad acquiescence. Those who proved the most vigorous opponents of Stalinism were invariably linked to the nationalistic and aristocratic Old World past. To a remarkable extent, the same resurgent drive to preserve traditional privileges and inequalities of opportunity appeared in the United States, where the citizenry remained divided by race, religion, ethnicity, level of personal wealth and degree of political influence. Truman recognized these as serious weaknesses that threatened the Democracy. He was determined to use the powers of the Executive -- and some of the vast financial reserves of the U.S. government -- to continue and extend Roosevelt New Deal policies, believing the time had come for the United States to more completely institutionalize the higher principles of the Founding Fathers with new Federal laws. He would also do something concrete to ensure that minorities finally gained their rightful equal protection under the laws of the land. Speaking to the annual convention of the National Association for the Advancement of Colored People (NAACP) on June 29, 1946, Truman declared:

As Americans, we believe that every man should be free to live his life as he wishes. He should be limited only by his responsibility to his fellow countrymen. If this freedom is to be more than a dream, each man must be guaranteed equality of opportunity. The only limit to an American's achievement should be his ability, his industry and his character.[7]

Noble in sentiment, Truman's words clearly demonstrate he did not appreciate the full application of equality of opportunity, nor the power of entrenched privilege to slow or halt meaningful reform. In his Memoirs, he wrote of the Jeffersonian struggle against "special privilege" and interpretation of the Constitution "in favor of those who controlled the land and the banks."[8] Yet, he somehow failed to see that the concentrated control over locations and natural resource-laden lands in the United States (what Henry George referred to as our "natural opportunities") existed because in the forging of a new nation principles of justice and equality of opportunity had been compromised by special interests vested in the monopolization of nature and manipulation of government spending and borrowing. At the same time, Truman identified what he believed to be a serious threat to the Democracy caused by an increasing consolidation of business ownership, a process nurtured by government's appetite for the goods of warfare.

Truman's answer to the many problems faced by the United States was to advocate a broad program of limited, incremental interventionism. In his own mind, he nevertheless remained a staunch defender of democratic processes and the principle of the self-governing individual. "Democracy maintains," he declared, "that government is established for the benefit of the individual, and is charged with the responsibility of protecting the rights of the individual and his freedom in the exercise of those abilities of his."[9] Government intervention to secure equal opportunity seemed not only appropriate but absolutely essential. And, that is certainly true. Government is the instrument by which just law is enforced; however, throughout history government has been the instrument by which privilege rather than just laws is enforced. Truman found himself very much in the middle of the great struggle between those who saw interventionism as the mechanism by which privilege could be more deeply protected and those who sought interventionism as the way up from the bottom. Pursuing legislative and regulatory solutions without the guidance of a comprehensive set of principles meant that Truman's initiatives, as those of Roosevelt before him, always contained the seeds of unforeseen consequences. Truman's mistake in judgment was to believe the combination of broadened educational opportunities, the systematic pursuit of new scientific knowledge and technological know-how, expanding industrial capacity and a determined political will were sufficient to dramatically mitigate circumstances of widespread misery and poverty. The role of government had changed for the better, he thought, and an era of enlightened leadership spearheaded by the United States was on the horizon. Laissez-faire and the Social-Darwinist faith in unbridled individualism had to be forever tempered by "guaranties in the interest of the people whose resources and whose labor"[10] sparked the emerging global economy.

People everywhere were in desperate need, and goods were being produced in more than sufficient quantity to meet their requirements for a decent human existence. All that was missing was the widespread introduction of democratic institutions and processes to make certain wealth would not become overly concentrated in the hands of a few. A true romantic, Truman's faith in the power of democracy was enormous:

In due time, as our stability becomes manifest, as more and more nations come to know the benefits of democracy and to participate in growing abundance, I believe that those countries which now oppose us will abandon their delusions and join with the free nations of the world in a just settlement of internal differences.[11]

Social democracy has, indeed, outlasted state socialism in its capacity to balance competing interests, to harness and develop resources, to carry a continuously increasing amount of government debt, to mitigate poverty by the establishment of social welfare agencies and by philanthropy, to achieve significant reductions in the poisoning of the environment and to work around the impact of highly dysfunctional land markets. Today, almost the entire global population is inching toward Liberalism's centrist policies. And still we continue to frequently exhibit a remarkable callousness toward the fate of our fellow human beings, particularly those to whom we have no attachment by ethnicity, religion or culture.

Despite Truman's keen interest in history, he followed in a long line of sincere and thoughtful leaders who failed to identify the root causes of societal malfunctioning. The socio-political arrangements and institutions of the Democracy had failed to prevent -- and in many ways sanctioned -- capture of political power by the wealthy. Political parties proved more concerned with how to divide the spoils of government largess than in creating and preserving a climate of equality of opportunity and broad citizen participation in government. Back in 1937, Truman had delivered a speech in the U.S. Senate that decried "the concentration of wealth, the concentration of population in industrial centers, mass production, and a lot of other so-called modern improvements"[12] but without offering a clear path to the just society.

On the surface, the United States seemed to be a place where the future shined brightest. From the inside, one's perspective depended very much on where one stood on the economic, social and political ladders. One could argue that the depression and war years demonstrated the wisdom and benefits of interventionism, whereas the pressure exerted by mainstream conservatives for a dismantling of wartime controls over the economy had unleashed on consumers a rapid rise in prices for essential goods. Rexford Tugwell, writing from his perspective as one of the architects of interventionism, put the responsibility for this period of disruption squarely on the Republican majority in the House of Representatives:

At the end of 1946 the [cost-of-living] index had risen ten per cent over 1945; and by 1948 it had risen to more than twenty-five percent above 1945. No such pressure on a people had been known since the Civil War. The most visible cause of this abrupt rise was the abandonment of wartime controls and the return of economic management to the mercies of a "free" market that no longer existed. Immediate advantage was taken of their freedom by big business and big labor alike. Consumers suffered; and naturally they held it against Truman. It had always been so even during times when there had been no governmental responsibility for the management of economic affairs. Now resentment was intensified because, since the New Deal, there had been such a responsibility. Lightening wartime controls might at least have been more gradual, and time might have been given for adjustments. There naturally followed a period of industrial unrest as workers sought to keep wages within sight of rising prices. Those with fixed incomes were quite helpless. ...

... [T]he Republican majority in the House ... had been more responsible than [Truman] for demanding the liquidation of economic controls, for the disordered rush to bring home American troops, and for rejecting all proposals for measures calculated to meet the problems of postwar adjustment.[13]

Despite these very real setbacks described by Tugwell, Truman believed the U.S. had found in Liberalism the appropriate level of interventionism. He took his message to the voting public, and in the 1948 elections convinced them that responsibility for the nation's domestic problems rested with the Republican majority in the U.S. Congress. The Republicans as a group had not yet reconciled themselves philosophically to the need for pragmatism in pursuit of political power. Not for the final time they fell victim to their depression-era legacy of failure in the face of economic crisis and a general perception that they remained the party of privilege. The party's aging stalwarts would have to depart before Liberalism would also find consistent support among Republicans. The election behind him, Truman acted without hesitation to complete the Roosevelt revolution. He combined a tough anti-communist foreign policy with an interventionist domestic program that sounded progressive and was welcomed by those citizens most in need.

Within the U.S. foreign policy establishment, a new consensus was rapidly emerging that the U.S. had both an obligation and a right to exercise its economic and military power to bring the rest of the free world under its protective wing. Doing so in the face of growing Soviet aggression justified in the minds of some leaders an institutionalized intolerance for dissent -- conformity in the interest of converting the Democracy into a more orderly national security state. This was pursued incrementally and in disjointed fashion, with decisions reached that seemed sensible at the time to the small number of policy makers and others who dwelled on such matters. From within the Remnant,/i>, however, there were disquieting murmurs. Francis Neilson, for one, sounded yet another warning against this new prevailing attitude (preaching, unfortunately, largely to the choir):

The taxpayer is now the servant of the State. He toils for a bureaucracy that does not spin. He no longer is in command. During the past ten or fifteen years a grave change has taken place in the attitude of men and women toward the government. ...All the warnings expressed by the Founding Fathers and many of their followers are forgotten. Truth to tell, they were extraordinary prophets, for many of their predictions have come true.[14]

Sociologist Paul Meadows added that it was no accident that both liberal and totalitarian countries in the last generation had experienced a rapid assumption of social and economic functions by the State. He pointed to the evolution of the industrial process itself as the explanation for the demise of individualism:

Recourse to the State as the arbiter of conflict and the channel of action spells the surrender of personal and group autonomy, or at least of a good share of it. In the name of public interest, demands can be made and sacrifices exacted which less dynamic societies might not experience.[15]

In reality, hardly anyone took much notice or made much of the changes taking place. In exchange for what seemed to be the promise of the rising tide analogy, the majority of U.S. citizens simply acquiesced to the expanded role of the State. Up to this point, taxation had not yet become an undue burden on production. Business profits were high and climbing. The Remnant was forced to cry out almost unheard from the wilderness while mainstream economists and policy makers created a new species -- economic man -- whose motivations were limited to the purely material and whose actions could be forecasted and manipulated by government policies. Interventionists were not even willing to concede the Keynesian perspective that the degree of intervention ought to rise and fall with economic conditions. They were committed to a permanent program of government planning and to the maintenance of the regulatory bureaucracy required to sustain intervention. Keynes became a convenient, simultaneously credible and controversial figure around which the debate over interventionism would rage. The fact that he had died in 1946 and could not challenge these departures from his directives was a great advantage.

At the periphery of intellectual debate over the consequences of interventionism momentum for a serious and well-orchestrated response was beginning to take shape. Felix Morley (president of Haverford College) and journalist Frank C. Hanighen had been writing and publishing the newsletter Human Events since early 1944, offering serious analysis of U.S. foreign policy to a small readership. Oswald Garrison Villard, William Henry Chamberlin and Norman Thomas were among a long list of respected contributors. In its second year, Hanighen brought Henry Regnery aboard as treasurer. Regnery broadened their reach by publishing two speeches made by Robert M. Hutchins and one by economist Karl Brandt[16] addressing the challenges of the postwar socio-political environment. Other pamphlets followed in rapid succession through the remainder of the 1940s. Regnery also came to know Frank Chodorov during this period, who, as Regnery later recalled, "firmly distrusted government in all its forms."[17] These individuals worked together to defend what they felt were the fundamental values of western civilization, though not always in agreement themselves and finally branded by the mainstream press as ultra-nationalist conservatives. Regnery's influence continued well beyond the life of Human Events, as the publishing company he founded in 1947 not only brought out new works that challenged conventional wisdoms but saw to it that classic works of socio-political philosophy were reprinted and kept in print. The resources amassed against them were enormous. And the Remnant was to lose many of its younger but less stalwart members to the statist camp. Not long after William F. Buckley, Jr. condemned the State in a 1952 essay as "hardly equipped, on the basis of its historical performance, to superintend the common good"[18] he would yield to the temptations and pressures of realpolitik and establish National Review, reminding his readers of the dangers of Liberalism, while advancing his own peculiar version. He started out with an attempt to define and clarify conservative principles in order to build an intellectual and activist movement. "The conservative movement in America has got to put its theoretical house in order,"[19] he declared. Moreover, he recognized in Dwight D. Eisenhower the transitional figure whose tenure promised to legitimize Liberalism as the policy agenda of both mainstream Republicans and Democrats:

Our domestic political engagements are not fought, for the most part, with Communists, none of whose premises we share, but with Liberals, with whom we share some. The pragmatic directive of [Abraham] Lincoln would not suit Communist ideas of history or dogma, but there is nothing there, as I say, that will separate the Liberal from the Modern Republican. That being so, it is simply not useful as a philosophy of government distinctive to a single faction in American political life. ...[20]

...Conservatives have failed to alert the community to the interconnection between economic freedom and -- freedom. No government would dare be so abusive as ours is of our economic freedoms if we were alive to the relationship. It is a part of the conservative intuition that economic freedom is the most precious temporal freedom, for the reason that it alone gives to each one of us, in our comings and goings in our complex society, sovereignty -- and over that part of existence in which by far the most choices have in fact to be made, and in which it is possible to make choices, involving oneself, without damage to other people. And for the further reason that without economic freedom, political and other freedoms are likely to be taken from us.[21]

Consistent with Buckley's conservative principles, then, choice must be available and coercion absent. Price is the market-clearing mechanism by which goods and services are exchanged voluntarily, resulting in a win/win transaction for all parties involved. But, what of control over nature? And, what about monopolistic licenses granted by the State that restrict competition and grant privilege to some? How is it that some have acquired the ability to control part of nature without compensating society as a whole for the privilege they enjoy? The closest that Mr. Buckley came to a serious discussion on these issues occurred in 1985, when he interviewed journalist Roger Starr on his televised program, Firing Line, in connection with the social, fiscal and economic problems of New York City. He and Roger Starr elicited from one another a fair representation of Henry George's analysis of the importance of distinguishing production (i.e., wealth) from nature (i.e., the source of wealth), then discussed the implications of the tax policies advocated by George:

MR. BUCKLEY: ...[I]f Henry George's principles were introduced here, two things would happen, as I understand you. Number one, there would be a greater density of building in midtown Manhattan; number two, investors would be prepared to reclaim land because it would become economically viable to build on it knowing that they wouldn't instantly be taxed out of existence, right?

MR. STARR: Right.


MR. STARR: Now, we developed some laws to sort of make up for our stupidity in not adopting the Georgean theory. We have laws with cabalistic names like J-51 and 421-A, which in effect exempt new construction or rehabilitation from taxes, and they've caused a great deal of conflict because one always argues over whether construction would have taken place without this form of assistance.

MR. BUCKLEY: Enterprise zones and stuff like that.

MR. STARR: Yes, and Henry George would have eliminated all of that and it would have been natural to exempt improvements from taxation and the whole system of penalizing someone for improving his property would have come to an end.[22]

In 1965, when running for the office of Mayor of New York City, Mr. Buckley proposed the replacement of all taxes on business enterprise with the so-called "value-added tax" being adopted by the even more highly interventionist social democracies of Western Europe. From a purely administrative standpoint, the new type of taxation offered substantive advantages. Thirty years later we are still debating the merits of this form of taxation. Producers will certainly attempt to pass on the added expense to consumers, to whom the total tax is ostensibly hidden in the price. Successful price competition with goods produced in environments without such taxes assumes heavy taxation of imported goods, again passed on to consumers in the form of higher prices. Thus, the impact on living standards is to broadly reduce private sector purchasing power. To Henry George, such a proposal would have made no sense whatsoever, when the prospect for creating a full employment economy without inflation was within the grasp of any government committed to sound fiscal policies.


Looking back from the vantage point of the mid-1970s, author Joseph C. Goulden examined the five-year span of life in the United States ending with 1950 and called them The Best Years.[23] When the war ended, U.S. citizens had jobs (53,000,000 of them, with unemployment less than two percent) and money ($140 billion in liquid savings, in war bonds, in banks and in their wallets; this amounted to about three times the national income for the year 1932).[24] Although this wealth and income remained highly concentrated at the top, a broader prosperity than had ever previously existed in the United States emerged out of this storehouse of purchasing power. This allowed U.S. policy makers to pursue domestic and global objectives without having to worry very much about the short-run financial implications. In the private sector, many corporations flush with cash were eager to make overseas investments and expand into new markets. The U.S. government encouraged their efforts by providing the war-ravaged economies of the Old World (at least those not absorbed into the Stalinist orbit) with grants, loans and credit guarantees. The Keynesian experiment was underway. The world would soon learn whether the measures adopted were effective at creating a sustainable higher level of consumption to match the rebuilt productive output capacity, while providing the revenue to government necessary to gradually retire the amount of debt taken on to finance the expansion.

People living behind the Iron Curtain were required to endure continued sacrifices in the interest those who controlled the State machinery. Stalin was anxious to end the West's nuclear monopoly and to develop the military hardware supplied to Soviet forces during the war by the United States. After consolidating their grip over the Central and Eastern European states, the Soviet leaders continued their prewar strategy of undermining the stability of other governments by intrigue and attempted control of indigenous communist organizations. One considerable advantage to them was the fact that the impetus for reform in Western European societies before the Second World War had come from democratic socialists and communist extremists. There surviving leaders re-emerged after the war to fill the void created by the collapse of the traditionalists, too many of whom had recklessly embraced fascism in their desperate bid to protect their ancient privileges. In the struggle for political power that ensued, extremism gradually gave ground to the desire to strengthen national sovereignty -- to a determination to resist external domination. Communism, the traditionalists grudgingly realized, could be thwarted only by adoption of social democracy and the introduction of strong social welfare programs (funded, of course, by revenue generated by increased taxation of production and commerce rather than unearned income associated with land ownership).

Within a year after the end of the Second World War, French socialists orchestrated a broad program of nationalization and guarantees to workers. While these measures softened the impact of tremendous price increases, they discouraged the type of private investment the French needed to bring their agricultural and industrial enterprises up to modern world standards of productivity. Jean Monnet, architect of the French economic recovery plan, worked tirelessly to overcome the political instability that continued to plague his nation. "The black market, the spread of speculation, the flight of capital, and the standstill in productive investment were together putting France back by several years,"[25] Monnet later recalled. Decisive action to stem inflation was desperately needed, so Monnet turned to Princeton-trained economist Pierre Uri to head a commission on the economy. With broad-based support, they devalued the franc by 80 percent against the U.S. dollar, making French goods very attractive to U.S. buyers; and, conversely, driving up the price of U.S. goods in France. U.S. financial assistance was then used for the modernization of basic industries, with a primary objective of becoming a net exporter of agricultural products by the early 1950s. With his own economy stabilized, Monnet hoped France could lead the way toward development of an integrated European Community.

Representatives from all over Europe met at The Hague in 1948 to initiate discussions on how integration might be accomplished. Out of this meeting came the proposal for a Council of Europe, which was established the following year in Strasbourg. While some of the more idealistic transnationals[26] and many socialists hoped for the equivalent of a United States of Europe, few others were at all prepared to discuss any diminution of national sovereignty in favor of a new European Parliament. Only the most forward-thinking realized that change would have to come -- slowly and incrementally but inevitably -- if Western Europe was not to be drawn into a relationship of dependency with the United States. Monnet's interim response was to propose a plan for the joint development of French and German iron and coal reserves. Pierre Uri then introduced "the notion of a 'common market', an area without customs barriers and without national discrimination, but with rules to preserve the common interest."[27] Preliminary steps toward this objective had been taken in September of 1950 with the establishment of the European Payments Union -- to manage credit obligations between member nations -- and the gradual reduction of protectionist quotas against imports.

Britain's participation in either the common market or the European Payments Union presented special problems for the British government. A Labour Party report issued in June, 1950 stated the nature of the problem in remarkably candid terms:

In every respect except distance we in Britain are closer to our kinsmen in Australia and New Zealand on the far side of the world, than we are to Europe. We are closer in language and in origins, in social habits and institutions, in political outlook and in common interest.[28]

Only days later, representatives from France, Italy, Belgium, The Netherlands, Luxembourg and Germany met in Paris to begin hammering out the details of economic integration. The United States played an important if inadvertent role by pressuring the Germans to break up the cartel that dominated coal production in the Ruhr. The treaty establishing the European Coal and Steel Community was signed on April 18, 1951. This was not unity, nor even full integration of the economies of the member nations; but, the experiment in joint management of natural resources was a first step in resolving the centuries-old competition for territorial expansion at the expense of one's neighbors.

Meanwhile, in Britain, the Labour Party succeeded in nationalizing the country's coal reserves. Steel was next on the socialist agenda, but its nationalization was strongly opposed by the Conservatives, who won a slight majority in the elections of October, 1951. Winston Churchill, at age seventy-nine and having suffered strokes in 1948 and 1949, his hearing and eyesight diminished and his memory and attention span failing him, was once again Prime Minister. The Conservatives could hardly turn back the clock. The electorate demanded the dismantling of class privileges in favor of a more equitable balance between the powers of government, the trades unions, agrarian landlords and industrial landlords. Moreover, many in Britain were now seriously focused on how to best reduce the obligations that empire had for so long imposed on the treasury and taxpayers.

As time would reveal, Britain's participation was not required to stimulate economic expansion on the continent. Additionally, fear of communist domination over Western European parliamentary democracy passed as workers experienced rising standards of living (and the constitutional protections and legislative actions consistent with social democracy were implemented). Despite very real signs of progress during this first decade following the war, Swedish economist Gunnar Myrdal expressed concern in 1956 that "trade liberalization in Western Europe has not reached the normalization of trade relations which was confidently hoped for in all these countries immediately after the war, when bilateral agreements and quantitative restrictions had to be relied upon as a transitory means of opening up trade."[29] He viewed the achievements of Jean Monnet in establishing the European Coal and Steel Community as not transferable to other "economic fields," particularly agriculture and transport. Moreover, Myrdal warned his fellow Europeans that productivity of the type experienced in the United States was linked directly to the free movement of goods across state boundaries and the mobility as well of labor and financial reserves. Europeans remained heavily protectionist, nationalistic and deeply attached to their sovereignty:

The fact is that each country in Western Europe is a welfare state and looks upon its own industry, its own population, its natural resources, and the nationally available capital for investment as a completely separate collection of economic resources to be utilized for the benefit of its own citizens.[30

On the other side of the scale, perhaps, was the greater openness that comes when one feels reasonably secure. The Western European states were passing through a transitional stage of development, the first decades of which were to be dominated by internal needs. The social welfare needs of citizens became a priority for national political leaders. Full (or nearly full) employment at wages high enough to provide families with the necessary goods for a decent human existence quickly evolved from a commitment into a social contract. European society had long been characterized by the distinctions and privileges attached to class. Personal wealth and social position were far more often inherited than earned. Social democrats were not so much interested in demolishing this system as in removing its most egregious elements. In Britain, the labor historian and political activist, R.H. Tawney, suggested how progress ought to be assessed:

The contribution to the increase of equality ... is not ... to be measured merely or mainly in terms of a quantitative alteration in the distribution of wealth. Their most significant aspect consists in the qualitative change in the character of a society which is produced when disabilities afflicting particular classes are diminished or removed, and advantages formerly restricted to a minority are made more nearly a general possession. Sharp disparities of income ... may, in such circumstances, continue to plague it. The important fact is the contraction of the area of life dominated by them. It is the partial removal of certain of the essentials of civilization to a plane where the decisive factor is neither private wealth nor the absence of it, but the concern of a self-respecting democracy to meet the needs and develop the powers of all its citizens, irrespective of differences of financial means.[31]

Nearly all postwar European leaders realized that traditional institutions and arrangements had to change. Individuals such as Jean Monnet were truly in the vanguard. Thinking back on his efforts to bring Europeans together, he observed that "major psychological changes, which some seek through violent revolution, can be achieved very peacefully if men's minds can be directed towards the point where their interests converge."[32] To some extent, this peaceful revolution was well on its way. Influenced by the experience of the United States, European societies committed new resources to public education. The number of students in the 1950s attending universities doubled over what had been the norm in the 1930s. While Robert M. Hutchins worked at the University of Chicago to resurrect the curriculum of a classical liberal education, universities on the European continent were moving in the direction of most U.S. colleges and universities -- toward becoming centers of scientific experimentation and applied research, serving the needs of government and corporations. The emphasis of schooling shifted from preparing individuals for citizenship to preparing them for employment in the industrial economy.

Throughout Eastern Europe, people were in large numbers voting with their feet against involuntary adoption of state socialism. They began to understand that the Soviet Union under Stalin did not provide -- and perhaps would never offer -- a real alternative to incrementally-adopted social democracy. Two years of purges in Czechoslovakia between 1950-52 provided the object lesson in blunt fashion to all but the most ardent communists. This did not mean, however, that workers (and the propertyless) were willing to live within the old rules of laissez-faire, agrarian and industrial landlordism or aristocratic privilege. They instinctively demanded from their postwar leaders more concrete protections for their economic and political well-being. Throughout Western Europe (Spain and Portugal excepted), social democracy was characterized by rapid growth in the number of young people entering universities and the professions, long the preserve of the privileged elite. This generation of professionals would emerge indoctrinated with the doctrine of interventionism and the principles of democratic socialism.

In Italy, De Gasperi achieved a remarkable degree of land redistribution in the south. Adenauer introduced worker participation in corporate management in Germany. British Conservatives declared their commitment to the welfare state. In response, those who continued to hold most of Europe's material wealth and retained sizable holdings of natural resource lands, locations in the cities, and most of the financial reserves on deposit with the banks made certain that if governments were to take on the responsibility for economic stabilization they (or their agents and representatives) would be there to materially influence government policies and decisions. Not even the Soviet threat was sufficient, however, to unite Europeans behind Monnet's vision of a borderless European federation. Yet, despite the resurgence in nationalism throughout Europe, Monnet was hardly discouraged. "To face one's responsibilities when the objective is to unite Europe means recruiting others -- politicians or labour leaders -- who are prepared to join in the task,"[33] he later recalled. What Monnet did was to create in 1955 what he called The Action Committee for the United States of Europe, the task of which would be to "persuade Governments to transfer more and more of their powers to common institutions."[34] He recruited Max Kohnstamm to serve as his Vice President, then forged a small group of advisers that included Italian banker Guido Carli, French economist Pierre Uri and the U.S. economist Robert Triffin. Monnet traveled throughout Europe to gather support from its diverse pool of political and labor leaders. By virtue of Monnet's enormous patience and efforts to reconcile divergent opinions, the Committee became a pragmatic first step toward a unified European community. By creating this non-governmental Committee, Monnet hoped "Europe could become aware of its identity and affirm its sovereignty."[35] That is, affirm its independence from and need for protection by the United States.

The Committee had already focused on the challenge of peaceful and collective development of nuclear energy. Egypt's takeover of the Suez Canal Company and the threat this posed to Europe's energy supplies provided the catalyst for discussions that culminated with treaties creating the Common Market and Euratom. By the end of December the treaties had been ratified in succession by West Germany, France, Italy, Belgium, Luxembourg and the Netherlands. Ten years later, Anthony Sampson assessed Monnet's achievement in these terms:

Many hopes were to be dashed. But after the vague idealism about 'Europe' of the post-war years, the Treaty of Rome marked the first major practical achievement. From this point onwards, people in the six countries and even in Britain were apt to use the word 'Europe' to mean the common market -- to the fury of everyone else.[36]

At the time, there remained great uncertainty over the capacity of the European social democracies to survive on their own. The German historian Ludwig Dehio, for one, was convinced that the future of the peoples of Europe had become inextricably pressed between the interventionist designs of the United States and the Soviet Union. In 1960, he ended his study of four centuries of European conflicts with the warning that social democrats still had much to fear from communists:

The collapse of the European system of states, which has undermined the sovereignty of the Continental nations, has made them dependent upon trans-atlantic backing. Exhausted, their time-honored political ethos has been thrown into confusion, and a new one is being only hesitantly pieced together. All the less easy is it for them to adopt an attitude of lofty impartiality toward the social tensions which the permanent socio-economic revolution is producing everywhere and which hinder a clear-cut decision between East and West. Resentments going back to the days of the system of states -- in particular, memories of the frightful conduct of the Germans in their pursuit of world dominance -- exert a similar influence on European feelings. ...[37]

From Keynesian Doctrine And
The International Monetary System

In January of 1958, Jean Monnet was dispatched to the United States to negotiate a loan on behalf of the French government. Suffering from rapid price increases and a destabilized currency, French policy makers felt they had no choice but to initiate an austerity plan accompanied by increased taxation. The French government once again chose to burden producers with taxation rather than focus on rent-seeking income flows and assets of the landed. Thus, rather than stimulating investment in capital goods, these measures exacerbated the problems. The U.S. loan for a time allowed the French to purchase francs in an effort to prop up its value; however, by mid-1958, the French government was on the verge of bankruptcy and economic collapse. Keynesian economists explained that French difficulties were the result of their own lagging productivity and resulting trade deficit, particularly with the United States. In the midst of the uprisings in Algiers, the Fourth Republic fell. Charles de Gaulle was called upon to rescue the nation from the very real possibility of civil war. His price for stability was high. " De Gaulle insisted that he had to have absolute powers for two years and must be free to send parliament into recess while he drafted a new constitution and put the affairs of France back in order again."[38]

Upon his return from the United States, Monnet had immediately outlined a plan for creating "a European financial and money market, with a European Bank and Reserve Fund, using jointly a part of national reserves, with free convertibility of European currencies, free movement of capital among the Community countries, and the development of a common financial policy."[39] He saw this as the necessary next step in European economic unification -- and liberation from any dependency on the international financial structure assembled by John Maynard Keynes, Harry Dexter White and other British and U.S. officials during the Second World War. At the same time, de Gaulle's Finance Minister Antoine Pinay orchestrated a national bond drive for economic recovery. French citizens responded by a record subscription, and more:

By the end of the "de Gaulle loan" citizens had turned in the astonishing total of 140 tons of gold and had subscribed a total of 320 billion francs -- almost one billion dollars at the exchange rate of that time -- of which 290 billions were in "fresh money" [savings funds rather than conversions of other assets]. It was an economic and financial miracle, one of the most impressive votes of confidence that a people can give a president.[40]

Citizens do often moderate pure self-interest in periods of national crisis. Modern governments have also come to realize that those able to do so will seek safer harbors to protect the purchasing power of their financial assets. The conversion of gold into francs during a period of declining purchasing power is, therefore, a remarkable nationalistic statement. Rather than hold the gold in reserve, the French treasury sold its stock for U.S. dollars and other foreign currencies, eliminating its balance of payments deficits and stabilizing the purchasing power of the franc. The French managed to do what few other nations would accomplish during the decades to come; namely, pull themselves out of a serious economic crisis without turning over management of their fiscal and monetary affairs to agents of the International Monetary Fund (IMF). This could not have been accomplished within the framework of the international monetary structure, for the following reasons:

When a member country of the Fund has to settle a debit balance abroad, it requests the Fund to provide it with the necessary foreign exchange against payment in its national currency. Under the convertibility system, the domestic currency thus expended would be reabsorbed. Its disappearance would set in motion the regulating process tending to correct the deficit. But the International Monetary Fund, being provided with such resources, invests them -- subject to a ten per cent liquidity margin -- in Treasury bills payable on demand and carrying no interest, instead of sterilizing them. As such, those resources, far from being reabsorbed, are placed again at the disposal of the State from which they come and can be spent forthwith by that State. Thus, no regulating influence is set in motion. Even if the public Treasury was in strict balance, the financing of a balance-of-payments deficit by the International Monetary Fund would, in such circumstances, tend to make the corresponding deficit a permanent deficit.

Administered in this way, the International Monetary Fund has every appearance of a convertibility system, but has none of its regulating virtues. ...The Bretton Woods institution makes it possible to play the monetary convertibility game, but not to reap the benefits thereof.[41]

The global economy was, depending upon one's point of view, blessed or cursed by the creation of the IMF -- postured to intervene (with loans) to make sure that a country with heavy net imports could maintain a stable exchange rate for its currency, thereby adding one more element of fictional stability to the State and its assumed power to self-create credit by exchanging government bonds for paper currency issued by the central bank. The interests of multinational corporations and the world's elite were also furthered by the creation of the International Bank for Reconstruction and Development (the World Bank), ostensibly created to assist countries in their efforts to modernize and industrialize. Subscribed along the lines of traditional commercial banks, World Bank policies required that loan recipients meet strict credit standards. Early loans went to France, the Netherlands, Denmark and Luxembourg. Infrastructure development loans followed to Chile and a number of what are generally referred to today as Less Developed Countries (LDCs). As critics have observed in more recent years, virtually no funds were made available until the early 1970s (and even since then the amount has been relatively insignificant) for the financing of such social goods as schools, hospitals, water treatment facilities, housing or food production. World Bank loans often had the interesting consequence of worsening the living conditions of those most in need. As Gunnar Myrdal concluded in 1957: "In many of the poorer countries the natural drift toward inequalities has been supported and magnified by built-in feudal and other inegalitarian institutions and power structures which aid the rich in exploiting the poor."[42] In those societies where the burden of taxation was carried by those at the lower end of the socio-economic scale, repayment of development loans hinged on their ability to absorb even greater hardship.

A Flawed Revolution Is Attempted

The key to a broad improvement in the standard of well-being for the people in any society is maintaining an environment where there are consistently more jobs looking for people than people looking for jobs. Opportunities under such circumstances are widespread and varied. Real wages, as measured by the purchasing power of paper currency, are high and rising in conjunction with productivity advances. For a significant majority of U.S. citizens, this happy situation prevailed during the years immediately following the end of the Second World War. An enormous unfilled demand for housing, automobiles and other consumer goods allowed producers to raise prices and expand profit margins, while the rapid conversion to a peacetime economy kept unemployment far lower than most economists and policy analysts thought possible. Although the construction of expressways and the interstate highway system was still in its infancy, investors close to political insiders obtained and held onto large tracts of undeveloped land for speculative purposes. This was still a time when virtually every city in the United States was ringed by open space, and land prices remained relatively low during the first decade of the population shift from urban centers to suburban bedroom communities.[43] U.S. residents also benefited by the fact that the dollar had become the dominant currency used in international trade.

Few countries other than the United States held any sizeable quantity of gold or silver reserves backing their currencies (although, as suggested by the French example, private individuals held a great deal of gold as a hedge against the declining purchasing power of paper currency). As a by-product of its sale of war goods to Britain and other nations, the United States government in 1946 had accumulated gold reserves worth over $20 billion,[44] some 60 percent of the world's total. Before long, countries in desperate need of U.S. capital goods and foodstuffs had nothing left to give in exchange. By 1949, and despite the large grants provided under the Marshall Plan, U.S. gold reserves increased to nearly $25 billion. Britain, whose leaders had been determined to protect their core power role within the Commonwealth bloc, eventually yielded to the pressures on its currency caused by the cost of imported goods. Faced with the impossibility of adhering to fixed exchange rates established in 1946, Britain (followed by West Germany, France and a number of other continental governments) devalued their currencies in an effort to make their goods more attractive to foreign buyers and to stem the flow of imports. They accepted the premise that a nation's economic well-being is at least partially dependent on a positive balance between the exchange value of exports and imports. By definition, the interests of government were served (i.e., a favorable balance of trade existed) when domestic producers were exchanging goods and services of a higher value than those received from foreign producers.

The surface evidence suggested that only under those circumstances would employment remain high and wages have a tendency to increase. No mainstream economist of the postwar period has argued longer or harder that such thinking runs against logic than Milton Friedman. If, asked Friedman, our " national objective" was "the promotion of a healthy and balanced growth of world trade, carried on, so far as possible, by private individuals and private enterprises with minimum intervention by governments" with the expectation of bringing "the free world more closely together, and, by fostering the international division of labor, raise standards of living throughout the world,"[45] then, he suggests, "it seems to me undesirable to have government intervene [to stave off balance-of-payments pressures], because they have no special advantage over private speculators in stabilizing it, because they can make far bigger mistakes than private speculators risking their own money, and because there is a tendency for them to cover up their mistakes by changing the rules ... rather than by reversing course."[46] Under a system of floating exchange rates, the market establishes the price of each currency in terms of others. A similar argument is made for ending government control over the world's supply of gold.

Political leaders and policy analysts were, in every country, extremely confused by the modern global economy. Until around 1953, Americans were selling goods and services to foreign consumers far in excess of the dollar value of what they were purchasing, even though the value of imported goods and services exceeded any previous levels. Marshall Plan grants and IMF loans helped foreign governments over this period while their own output of goods and services increased. Not many years passed before U.S. demand for foreign goods and services surpassed foreign demand for U.S. goods and services. Depending upon one's perspective, the U.S. now experienced an unfavorable balance of trade; or, people in the U.S. were expending much less labor to obtain foreign-made goods than their foreign counterparts.

Looking only at the social democracies, where the production of goods and services was largely still a function of the private sector, governments were always under pressure to protect domestic producers from external competition. As I have taken great pains to detail, protectionism operated alongside systems of taxation and monopolistic license that sanctioned enormous subsidies to nonproducers. In the first instance, consumers are penalized by diminished pressures on producers to provide the highest quality goods at the lowest possible prices. In the second instance, the burden of taxation tends to fall on those who must depend on their continuous labor for income. Where increases in direct taxation are politically difficult to impose, those in power have managed to impose heavy taxes on goods at the point the sale to consumers. By means of gradual or rapid expansion of the supply of credit and currency, governments systematically confiscate the purchasing power of creditors and savers, repaying bondholders with paper currency dramatically depreciated in purchasing power from what was received. All of these factors combined after the Second World War to prevent buyers and sellers engaging in commerce in a manner where price served as an effective clearing device, where natural disasters rather than governments disrupted market equilibrium and where the only coercive influences were producers' own flawed decisions.

Postwar policy makers had invested an enormous amount of energy in building an institutional framework for global economic stabilization - a system of levers and cables to keep the leaning economic tower from crashing to the earth. The real solution to the problem of continuous disequilibrium involved reforms to the socio-political structure within the social democracies that only a handful of policy analysts and economists either embraced or gave thought to. Under the circumstances, what the world got was a system where national governments tended to take the wrong actions at the worst times, to resort to protectionism when their producers were unsuccessful in exporting goods that could not be sold domestically, and to use borrowing in lieu of taxation to pay for government expenditures. Only when governments became so financially distressed that they had no recourse but to turn to the IMF and international bankers did an element of fiscal and monetary discipline take hold. And, although Harry Dexter White and John Maynard Keynes are generally referred to as the primary architects of this system, they were themselves little satisfied with the end result.

Keynes died in 1946 from heart disease, too soon to play a role trying to resolve some of the system's more serious problems. Death would also soon bring an end to Harry Dexter White's career (leaving unresolved the dark accusations of treason in service to the Soviet Union). The acceptance and modification of Keynesian insights was to serve as the cornerstone for the coming interventionist revolution. Even to many of those who believed in individualism and self-reliance, there seemed a real necessity for government to intervene at least for awhile in the interest of sustaining economic growth. Few were willing to take the risk of a prolonged recession and the kind of socio-political upheaval certain to result.

Those who still believe in Keynesian prescriptions, or in the modified proposals of Neo-Keynesians or Post-Keynesians, view government action as a study in failed implementation rather than disproven theory. Joan Robinson, on the other hand, arguing the Post-Keynesian case after more than two decades of economic volatility, suggested to her economist colleagues that they pull their heads out of the sand and begin to examine economic theory in the context of socio-political constraints:

An economic theory which is seriously intended to apply to reality is neither an ideological doctrine, such as the presumption in favour of laissez-faire, nor a tautology true by definition, such as the so-called quantity formula, MV=PT; it is an hypothesis about how an actual economy operates. Hypotheses have to be first examined for logical consistency and a priori plausibility, before being applied to historical and contemporary experience. A successful hypothesis is one which suggests new answers to formerly unsolved problems, or frames formerly unrecognized questions.[48]

In general terms, Robinson and other like-minded economists recognized the tendency of rising demand to fuel speculation in "basic materials" and "commodity markets." Government and extensive private sector borrowing added fuel to the speculative fires. From this observation, however, she put forward the hypothesis that "the very success of industrial growth has a built-in tendency to generate inflation."[49] Had she been armed with an understanding of the laws of production and distribution as developed by Henry George, Joan Robinson would have described general price rises as a desperate attempt on the part of producers to pass on to others the demands by landlords for a greater and greater portion of that which was being produced. Government might attempt to push out into the future the inevitable crash by means of expanding access to credit and by direct purchases of goods and services, but eventually the prices demanded in order to protect profit margins come to be too high and aggregate consumption declines. Anyone willing to look objectively at the age-old problem of wealth distribution and concentrated control of locations and natural resource-laden lands would have recognized immediately the primary and root cause of recessions. Unfortunately, economists had been trained for two generations to think in terms of economic rent rather than land rent, arbitrarily applying to all forms of unearned income the same characteristics and role in the economy. The importance of nature and who controlled it in an industrial society was accepted as far less important than who held stocks, bonds, precious metals and currency balances. From as early as 1933 on, Joan Robinson accepted this definition, writing:

The essence of the conception of rent is the conception of a surplus earned by a particular factor of production over and above the minimum earnings necessary to induce it to do its work.[50]

Whether or not Robinson and other economists were consciously acting to reduce direct attacks on existing socio-political arrangements is a matter of some conjecture. Much of the evidence is anecdotal. The researcher is fortunate, indeed, when the private correspondence or recorded conversations of an economist are published to shed light on their intellectual development. Keynes, certain of the superiority of his nation's socio-political arrangements and traditions, defended them without apology. In his view, that which had made Britain a great empire (even though by that time the effects of unsound public policy were sapping Britain of its vitality) was to be protected and nurtured.

American students of classical political economy, if not other economists, should have seen without difficulty that price as a market clearing device fails when applied to land, the factor of production required by labor and capital to actually produce wealth. The more concentrated the control of land by individuals or entities not dependent on cash flow from production for survival, the greater the probability that they will withhold land off the market rather than accept a lower price. Absent an appropriate annual charge for holding onto land, the only landowners who really risk much are those who had to borrow from the banks to gain access to land and must produce goods and services others want and are willing to pay a price for that allows the producer to cover debt service and the costs of production. For those who have held title to land for many years or even generations, hoarding becomes less a deliberate strategy for speculative gain than an acknowledgment that doing nothing is easiest and costs very little. Rural land can be leased to an actual farmer. Urban land can be paved over and turned into a parking lot.

Accepting the existing socio-political structure, what Keynes and his successors hoped to accomplish was to somehow work around the constraints imposed on economic growth by the concentration of privilege that plagued the British people. Britain's government in the years immediately following the end of the Second World War tried to create a welfare state on very meager revenues. The British producer remained burdened by the commitments of empire and by a leadership lacking the moral courage to purge the nation's socio-political arrangements and institutions of ancient privileges attached to the land. Winston Churchill, the one person in a leadership role who still possessed the power to unite the Remnant in Britain against the age-old privileges was no longer the energetic leader. In any event, he had long ago abandoned his zeal for reform. Now in his twilight years, he experienced a breakdown and temporarily took refuge in painting and writing.[51]

Facing a new world order that no longer included Britain as a central arbiter of power, the postwar Labour government had dispatched Keynes to the United States to negotiate for financial assistance in rebuilding Britain's infrastructure. The result was not entirely to the liking of the government. In return for a loan of $3.75 billion, Britain was required to end its system of imperial preference, open its gates to imports from the United States and return sterling to convertibility by 1947. The sudden death of Keynes marked the beginning of departure by his colleagues from the guideposts he had established for triggering periodic interventions in the economy. Ironically, the terms he agreed to with the United States set off a chain reaction of events in Britain which could have seriously tarnished his reputation, had he lived:

Meeting the requirement [of convertibility] proved a disaster. Up to 1947, the British economy had done surprisingly well. In the second half of 1946, British exports were running at 111 percent of prewar, and imports had been reduced to 72.2 percent. Only one quarter of the American loan had actually been used up. But with convertibility came collapse. The trade account deteriorated rapidly -- partly, it was felt, because foreign traders hoarded sterling to convert it into dollars. Since Britain had the only convertible currency in a Europe starved for dollars, the pressure on sterling proved immense. The whole operation, moreover, was not handled very well. Britain had not managed to fund her wartime indebtedness to the rest of the sterling bloc, and regulations to limit convertibility to transactions on current account proved ineffective. In any event, once the run on sterling began, the rest of the American loan quickly disappeared. The experiment in liberal economics was abandoned. Sterling was devalued and convertibility was not re-established until 1958.[52]

British and U.S. leaders were taking their nations on two very different, seemingly irreconcilable paths. Britain's Labour leaders were committed to the principles of democratic socialism and to the incremental adoption of the welfare state. U.S. leaders were committed to policies that emphasized production rather than justice in wealth distribution as the means by which full employment might be maintained and the economic pie enlarged. As had Jefferson long before, they viewed open access to foreign markets (particularly where they could anticipate what they looked upon as a favorable balance of trade) as key to securing the nation's place in the new world order. Only when the threat of Soviet expansionism became clear did U.S. leaders come to the realization that the European social democracies would require many billions of dollars in aid -- supplied as grants or on extremely liberal terms -- if the communists were to be silenced and purged from Western European governments.

In the midst of such hegemony-shattering pressures, the debate over economic theory and policy (in which the teachings of Keynes played such an enormous role) was actually confined to a relatively few individuals who occupied the inner circle of economists turned planners in the emerging global economy. Had Keynes been able to overcome his instinctive adherence to the moral relativism of his class, perhaps his prestige could have been put to more productive use in solving the world's problems. Had Keynes pointed to privilege -- and particularly the privilege attached to the private appropriation of land rent -- as the primary reason why labor and capital were periodically forced into unemployment, the history of economics and of twentieth century public policy might have been very different indeed. Instead, Keynes looked to the powers granted to central bankers and the constraints imposed by international monetary agreements to maintain a rough market equilibrium. Earlier periods of financial crises had developed because governments had been at the mercy of the bankers without a reciprocal degree of control to ensure a balance on behalf of (what the political leaders construed as) the public interest. The Great Depression initiated and the Second World War seemingly cemented a shift in power away from the bankers and into the hands of government officials. Keynes was convinced that if these officials would only adhere to a consistent application of fiscal policy (i.e., public saving during periods of expansion and public spending in periods of contraction), the new international monetary structure hammered out at Bretton Woods and refined in Geneva would largely guarantee that full employment economies could be maintained indefinitely.

From a practical standpoint, the only countries in which Keynesian-style demand management could be practiced were those with stable to declining levels of national debt and a growing tax base. In the last years of the 1940s, the United States seemed to many economists in an ideal position to establish the institutional framework necessary to manage Keynesian interventionist strategies. Truman and many others in the government were eager to find means other than militarism to preserve the full employment economy. A generation of professional economists and policy analysts, with the experience of wartime planning under their belts, were eager to put their version of Keynesian policies to the test. They gained their opportunity when, as an outgrowth of the Employment Act of 1946, a Council of Economic Advisers was established within the Executive branch of government. The Council's role was to provide the type of objective analysis too often lacking when cabinet Secretaries advanced programs and shifts in policy. The Council would also offer support for or an effective counter to the actions taken by the Board of Governors of the Federal Reserve Banks. There was, of course, broad concern in the banking community that the Federal Reserve system be protected from political influence. Pressure was already building to replace Marriner Eccles as Chairman because of his proposals to curtail bank lending in order to dampen inflation.[53] Business leaders and a good many economists responded with a warning that higher interest rates would have a damaging effect on job creation. In 1947, Eccles was replaced by the more accommodating Thomas B. McCabe.

In the face of intense business lobbying, neither Truman nor leaders in the U.S. Congress could find the will to do much of anything to halt the upward spiral in prices. Eccles later wrote that Truman's efforts "were completely inadequate to meet the economic needs of the hour" and "were attacked or defended ... according to the current political needs."[54] He warned against attempts to reinstitute wage and price controls and against an unbalanced federal budget. Despite a national housing shortage, Eccles expressed concern that easy credit and federal subsidies had created an imbalance between supply and demand, with the result that housing (he should have said "land") prices continued to climb and might soon become unaffordable for many of those most in need. In subsequent testimony before a subcommittee of the Joint Committee on the Economic Report, Eccles initiated a major theme in support of monetary and fiscal reform, charging that the Federal Reserve System could function effectively only if granted independence from the public debt management decisions of the U.S. Treasury. Along with these measures and a program of government austerity, he argued for a sizeable tax increase to balance the budget and curb inflation. Truman also received similar advice from Chester Bowles, who added that the government ought to enforce some minimum degree of production controls. Bowles later recorded what then happened:

Unhappily, the government first postponed action, urged everyone to cooperate, and then in September, 1950, established across-the-board price and wage controls. This produced all of the inequities and bitterness which I had feared, and which had been largely avoided during World War II.[55]

Among all the other problems faced by Truman was that of a nation undergoing rapid demographic changes. Millions of citizens were migrating from rural and agriculture regions to the urban and industrialized cities. The process had started in the 1930s and accelerated during the war. In Truman's mind, this migration threatened far more than the agricultural output of the United States. Freeholding family farmers were the backbone of the Democracy, the guardians of Jeffersonian self-reliance and individualism. To save this way of life Truman was more than willing to use Federal powers and funds to improve rural conditions. This could be justified, he reasoned, in order to satisfy the needs of a growing population. Agriculture was as or more important than many other industries, and farmers had to be provided with a safety net in the form of "a permanent system of price supports for agricultural commodities."[56] Neither Truman nor his advisers made the connection between price supports and a continuing increase in the price of agricultural land, an outcome that would actually devastate the family farm and the rural communities these farmers long made possible. Anticipating conservative opposition, Truman argued that government had a moral obligation to support the family farmer to preserve the vital link to the Democracy's egalitarian past:

The old laissez-faire theorists would tell us that the answer is to cut down on producing units until the fittest survive. But this theory is without humanity, for in human terms it means the breakup of homes, the destruction of families, and the surrender of the family farm to the absentee landlord or the corporate owner. No American government worthy of the name can allow this sort of thing to recur every twenty years or so. The farmers' sense of security is a vital part of the foundation of American life.[57]

Truman was correct that the survival of rural communities and small towns across the United States depended on the existence of large numbers of moderate size farms. Farmers purchased household goods, farm equipment and other goods and services locally. Corporate agribusiness made little or no positive contribution to nearby communities. When enough family farmers were foreclosed upon and forced to migrate in large enough numbers, entire communities died.

To some extent, Truman seemed to understand that part of the problem rested with unstable land prices, but he proposed no solutions. Moreover, he ignored the fact that temporarily high prices for agricultural products often lured farmers into mortgaging their farms in order to acquire additional acreage. There was no way to accurately forecast prices or yields from one growing season to the next. Those farmers who saved in good years and bought more land when their less astute neighbors became desperate for cash gradually increased the size of their farms. Farmers forced to sell because of heavy debt loads sometimes became tenants or sharecroppers. Truman's proposals for price supports sought to protect farmers from the misfortunes nature sometimes imposed and the tremendous volatility of market prices. And yet, guaranteed prices for their crops merely encouraged farmers to borrower to acquire and plant ever more acreage. In the process, they drove up agricultural land prices beyond what was sustainable over the long term. The cycles of land speculations, ending when global demand falls or supply from lower cost producers increases, are followed by widespread mortgage loan defaults and foreclosure sales. This has become an integral characteristic of the farm economy. As a result, there has been a continuing process of consolidation in agriculture and an accelerated disappearance of the family farm. At the same time, millions of acres of marginal land, cultivated only because of tremendous government subsidy (in particular, the delivery of water for irrigation at pennies on the dollar of true cost) has resulted in the abandonment of much more fertile but unsubsidized farmland in other parts of the country. In the United States, the anomaly exists of deserts put into agricultural production while millions of acres of previously-farmed acreage sit uncultivated or converted into suburban communities with homes constructed on multi-acre parcels of land lost to cultivation.

Truman did have one sound idea that never made it off the drawing board. Rather than have the Federal government continue to purchase surplus agricultural products and incur the tremendous costs of transport and storage, he advocated direct payments to farmers when prices fell below targeted levels. Only family farmers of moderate size were to be eligible for this support. After long and heated discussion before House and Senate committees the plan was defeated. The Federal government continued to fill warehouses with surplus production harvested from land brought under cultivation largely because of government promises to purchase what the private markets could not absorb, thereby propping up market prices (and farm land values). Truman's plan at least had the virtue of passing on lower market prices to consumers. Ironically, despite these measures, over ten percent of U.S. households in rural communities continued to live in deep poverty, with annual incomes under $1,000. An increasing number were becoming itinerant workers, too poor even to make their way to the cities.

Industrial production was also undergoing dramatic changes, with automation and the introduction of new production methods greatly reducing the need for unskilled laborers. Industry was entering an age of increasing demand for management talent, research and development expertise, skilled machinists and what we now call knowledge workers -- individuals with scientific and highly technical backgrounds -- to build, run and maintain a modern industrial infrastructure. Organized research had substantially if not entirely replaced the type of experimentation practiced by Thomas Edison and other turn-of-the-century inventors. Half of all workers were now employed by corporations, the larger ones broadly owned by shareholders no longer involved in management decisions. By the end of Truman's second term in office, there was a growing consensus among those who held out within the Remnant that the nation had fundamentally changed, and not for the better. Addressing members of the American Iron and Steel Institute in 1949, Harvard economics professor, Sumner H. Slichter (1892-1959) declared the private economy virtually dead:

Back in the nineteenth century there was more or less general acceptance of the idea that the competitive pursuit of individual interests would satisfactorily promote the interests that all members of the community have in common. This view has gradually been abandoned. First, here and then there the community undertook to substitute public policies for the uncontrolled action of markets. Fifty years of revolt against the results produced by free markets has transformed the economy from one of free enterprise into one of government-guided enterprise. Today the community expects the government to put a floor under some prices, a ceiling over others, to subsidize this industry, to put special taxes on that one, to regulate the terms on which money is lent and to some extent the purposes for which it is lent, to lend money itself, and to modify drastically the distribution of income by a combination of steeply progressive income taxes and large transfer payments. ...Free private enterprise operated on the principle that ability and willingness to buy determined what was produced and who got it. The new economy operates on the principle that fundamental decisions on who has what incomes, what is produced, and at what prices it is sold are determined by public policies.[58]

Slichter was certainly overstating the case, but the trend was clear. Corporations had come to depend on governments both as a protector and as a customer. What they wanted from government was not a fair field with no favors, but protection from competition, few regulations on how they conducted their affairs, unrestricted access to use and pollute the natural environment and exemption from taxation imposed on others.

Another aspect of the changes taking place in the United States was that at most universities across the country economists holding views similar to those of Slichter were gradually being replaced by younger persons nurtured on the economics of intervention. A handful of economists trained by John R. Commons at the University of Wisconsin had helped to bring the domestic policy agenda of Liberalism to Wisconsin in the 1930s, and many of their proposals found their way into Franklin Roosevelt's national programs. By the 1940s, one of Slichter's colleagues at Harvard, Alvin Hansen (1887-1975) became a leading proponent of permanent, institutionalized interventionism. By virtue of the power of his lectures, he created a constituency for interventionism among Harvard's young economics students. Hansen took from Keynes his arguments in support of interventionism under special circumstances and converted them into a truly general theory of demand management. As early as 1941, in his book, Fiscal Policy and Business Cycles (published by W.W. Norton & Company), Hansen called on government to engage in fiscal and monetary intervention far beyond that advocated by Keynes. Four years later he added another book on the Bretton Woods agreements.

The Great Depression and the Second World War were instrumental in creating the right political environment for interventionist economic ideas to flourish. Although, as Joan Robinson later admitted, "Keynes confined his argument almost entirely to the short-period aspect of investment [and] paid little attention to the long-period ... capacity to increase the stock of means of production,"[59] his challenge to existing orthodoxy opened the door for others. By the late 1940s, the propensity of socialist-leaning British economists to call for government intervention in economic affairs had migrated across the Atlantic Ocean. With Hansen securely entrenched as the primary interpreter of Keynes to economists-in-training at Harvard, there emerged into the government realm and second tier of university economics departments an expanding cadre of professional economists anxious to demonstrate their attachment to the new orthodoxy. "Men of lesser reputation with less reputation to lose," writes John Kenneth Galbraith, "made the Keynesian revolution."[60] Underlying their economics was a pragmatic view of the world Joan Robinson captured at the very beginning of the their rise to power:

Governments who are opposed in principle to extending the sphere of socialism prefer that there should be less real capital in existence rather than that they should be saddled with the ownership of more capital. Revolutionaries who regard unemployment as only one of the evils of a system of private enterprise are not anxious for capitalist governments to learn the trick of reducing fluctuations in trade, and so deprive them of the most obvious, though not the most fundamental, of their objections to the system. The adherents of laissez-faire, on the other hand, fear that, if it once became clear to the public that state interference can reduce unemployment, the public might begin to think that state interference could do much else besides.[61]

Much has been subsequently written in clarification of or as an attack on the General Theory and the real significance of what Keynes contributed to the development of economic theory and public policy. Robert Skidelsky repeats the point I made previously when he concludes: "Keynes and the British economists ... took their inherited institutions for granted, and relied on technical solutions to economic problems."[62] Hansen did likewise. Convinced that the U.S. economy was maturing, he advocated a program of continuous debt-funded government spending on infrastructure to keep excess private savings from being channeled into superfluous consumption. Looking back in 1957 on the Keynesian experiment in progress, Hansen applauded the fact that policy makers now had new weapons in their arsenal with which to attack economic problems:

We have achieved a new freedom of monetary management unrestrained by the old gold-standard chains which formerly bound us hand and foot. We have achieved a certain degree of freedom to use fiscal policy unrestrained, at least in considerable measure, by the dogmas of so-called sound finance. These freedoms are of enormous importance for the successful workability of the system of private enterprise. Without these freedoms the future would indeed be dark.[63]

In Hansen's mind the evidence was indisputable. Government spending and other forms of intervention had been the catalyst for continued economic expansion, nearly full employment and higher real wages. Now the challenge was to agree as a society on how the productive capabilities of the nation would be applied. "We have reached a point in our economic and social evolution where social-value judgments, not the market, must control the uses to which we put something like one-fourth of our productive resources,"[64] he wrote. Had he paid any attention to what Harry Gunnison Brown was writing, he would have recognized that this type of societal spending could have been accomplished by legitimizing the source of revenue for public goods and services.

Despite the rapid expansion of government intervention and spending that occurred during the 1950s, corporations (and individuals) engaged in patterns of investment wholly unattached to increased production of goods or services and motivated entirely by the prospects for high short and intermediate term returns on investment. The potential for Hansen's proposals to achieve public objectives depended, in fact, on the ability of government to act before private interests learned of government plans and shifted their own investment/asset preservation strategies accordingly. At best, this could be accomplished only in the short run and under circumstances where effective wage and price controls were in place. Hansen, Paul Samuelson and others were building elaborate models of the economy that had nothing to do with reality and everything to do with the elevation of economics to the standing of a speculative and mathematically-oriented field of study. Assuming (without very reliable supporting historical evidence) that an inverse relationship existed between unemployment and inflation, their recommendation to Truman and his successors was to increase taxes and tighten credit in periods of rising prices and do the opposite in periods of rising unemployment. They advanced the idea that when prices stabilized and most of those wanting to work were working, the economy reached its equilibrium state. From that point on (excepting the surprise appearance of major external shocks), fine-tuning of the economy would keep things on an even keel.

This element of continuous application of fiscal and monetary interventions is the most important difference between Keynes and those who founded the U.S. Keynesian school. For Keynes, intervention was necessitated because of the power of labor unions to prevent a full employment equilibrium from being maintained at the expense of wage levels. Thus, if production depended upon a minimum level of return to agrarian and industrial landlords, and the only lawful means of maintaining such returns was to release workers, then government had as a social responsibility the role of bridging the investment gap required to sustain full employment. For the emergency period of the 1930s, the source of revenue for government investment had to come from borrowing. In the future, once natural full employment had returned, sufficient taxes - broadly assessed -- were to be levied to retire the debt and build up a reserve. The objective, in the view of Keynes, was to eliminate what he called the "scarcity-value of capital," by which he meant not capital goods but financial reserves and credit. "Interest to-day rewards no genuine sacrifice, any more than does the rent of land," he wrote. "The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce."[65] Money lenders and those who acquired stocks and bonds were "functionless investor[s]" little different from the "rentiers" who absorbed so much of what was produced simply because the State protected their privilege of controlling locations and natural resource-laden lands without a market-determined compensation to society. The trick would be how to expand the supply of currency and credit without diminishing purchasing power; that is, how to ensure there would be just enough money chasing an increasing quantity of goods and services. Keynes answered with the recommendation to impose a system of progressive taxation on incomes and inheritances. The wealthy would finally be called upon to contribute to a societal fund for stable economic growth. To the extent such taxation absorbed income and assets accumulated as a result of successful rent-seeking privilege, the effects would be beneficial. Keynes did not make this connection, however. What we ended with is the principle of taxing people on their ability to pay without regard to how income is received or assets acquired.

In the U.S., war had in fact allowed the State to convert the need for revenue into progressively higher tax rates on income. Truman's commitment to use government power to remedy societal imbalances could only be achieved, in the minds of his advisers, if the income tax remained progressive and was used for wealth redistribution as well as to generate revenue. By the late 1940s and the ascendancy of Keynesian thinking, Truman had little difficulty finding support for his program within the economics community.

Rexford Tugwell, Lauchlin Currie and Marriner Eccles remained active and vocal proponents of various forms of interventionism. Currie had anticipated Keynes on substantive issues relating to monetary policy and was instrumental in introducing Keynesian concepts to Alvin Hansen and others at Harvard. Paul Samuelson, who studied under Hansen, then brought the Keynesian revolution to other professors and undergraduates with the first edition in 1948 of his economics text.[66] Their efforts were given a considerable boost by Simon Kuznets (1901-1985) and his work to develop a statistical model of the economy -- the National Accounts system. These economists and others who firmly believed in the interventionist agenda of Liberalism were strong supporters of the Employment Act of 1946, which they hoped would result in a commitment by government to take whatever actions might be necessary to maintain full employment in the nation. Although the Congress retreated from adopting such an automatic (and, to many, socialistic) formula for executive power, the legislation allowed Truman to appoint his first Council of Economic Advisers, chaired by Edwin G. Nourse (1883-1974) of the Brookings Institution. Nourse was joined by Leon H. Keyserling, general counsel to the National Housing Agency and a graduate of the Harvard law school, and John Davidson Clark of the University of Nebraska.

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