Rapprochement With Realpolitik

Chapter 4 (Part 2 of 4) of the book

The Discovery of First Principles, Volume 3

Edward J. Dodson

Challenges to the Interventionist Perspective

We should not be surprised that among those eager to take on the new Keynesian orthodoxy was Harry Gunnison Brown. In 1947, Lucas Brothers published the second edition of Brown's Basic Principles of Economics, which anticipated and countered much of the theoretical argument advanced by Paul Samuelson the following year. Two articles from Brown's pen subsequently appeared in the American Journal of Economics and Sociology detailing in less technical fashion his refutation of Hansen's assertions. He set the stage by writing that a decline in total spending need not lead to a recession if the prices for goods and services, as well as that for access to natural resource-laden lands and locations, all fell proportionately and at the same rate of speed. The problem, however, is that the vested interests of those who control one, two or all three factors of production (i.e., land, labor and capital) are contradictory. Even in periods where currency wages are stable and the prices of goods are falling due to expanded supply, individuals may delay spending in anticipation of further price declines. Once a general contraction is underway, not only does total spending decline but the velocity of circulation of currency falls. Inevitably, the "[d]emand for labor must and will decline, unemployment must result and production will be cut down."[67]

What Harry Gunnison Brown understood -- and what neither Keynesians nor Neo-classical adherents grasped is that the price mechanism works less well as a market clearing device the degree to which factor owners are protected from competitive forces. Those who exchange their labor for currency wages and are employed by others may have some limited protection by virtue of their membership in unions or other closed shop arrangements. Some owners of capital goods may have even more protection under laws that guarantee minimum prices or government purchases. For the holder of deeds to natural resource-laden lands and locations, the protection (what allows the landed to simply withdraw supply from the market until nominal prices for land are once again rising faster than the general rate of price increases) is the failure by government to collect the full annual rental value of such holdings. What legitimately belongs to the community as a whole (or each member thereof proportionately) is allowed to be privately appropriated. Those with the largest personal fortunes are under no pressure to generate cash flow from their landholdings; therefore, they can and do hold land off the market for decades and longer.

With these institutional arrangements as givens, Brown suggests the appropriate monetary stimulus is to continue to make credit broadly available, inasmuch as there is a tendency on the part of those who do not need to spend their financial reserves on consumption to invest in already existing collectibles (such as art work or antiques), in precious metals and gems or in natural resource-laden lands and locations.

In the social democracies, and particularly in the United States, the responsibility to fill the gap in the available pool of financial reserves rests with the central bank under its powers to set reserve requirements for member banks and the annual interest rate at which they may borrow. Also, as lenders of last resort, central banks have a crucial role in determining whether commerce expands or contracts. This Brown cited as a material flaw in the system. His assault on Keynes, on the other hand, is made on the basis of the assertion by Keynes that owners of capital goods will withhold them from production when returns on investment fall below acceptable levels. What corporate heads will first attempt is to regain higher spreads by replacing workers with machines and by redesigning production processes to be more efficient. If this does not work, they may pursue a program of asset liquidation or relocation to where the cost of production is significantly lower. Individual investors but few corporate management groups have the luxury of simply withdrawing financial reserves until market conditions improve. Corporate managements have demonstrated again and again a propensity to borrow and hold off paying creditors in the face of declining revenue, then seek protection under bankruptcy law. Always there is the hope and expectation that demand and profitability will return before shareholder equity (including their own) is dissipated. Or, as has been the case all too often, they will attempt to keep from other investors information about declining profits until they are able to liquidate their own interests in the company.

Keynes introduced the term liquidity preference to describe hoarding of financial reserves, which struck Brown as an unnecessary use of yet another technical term in a science already made overly complex by obscure language. More importantly, Brown observed that hoarding was only important in an ancillary way -- when the central bank failed to keep the cost of borrowing low enough to allow producers to profitably continue in operation during periods of falling prices. As one would expect, Brown reminded Keynesians that tax policy needed to be consistent with the societal objectives of stimulating investment in capital goods and job-creating activities:

[I]f a general property tax takes nearly half of [the average net marginal productivity of capital] and if a high progressive income tax plus, perhaps, an excess profits tax takes much or most of the remainder in those years when yield is high, while leaving the owner to suffer loss in bad years, ...the considerations as to hoarding ... would be entirely applicable. But, ... this fact need not bring business depression, provided there is a monetary policy calculated to maintain a stable price level.

If, however, some of the "liquidity preference" theorists are convinced that hoarding brought about by a low rate of return consequent to such taxation would tend to depression, they have open to them a very simple remedy. ...Let them point out ... that a tax appropriating more or, even, practically all of the annual rental value of land would not reduce by one iota the net per cent return on capital to those who save and make capital construction possible. Let them emphasize ... that the extra revenue thus gained would make possible a large reduction in the taxation of capital, thus leaving to the investors in capital those larger per cent returns for the lack of which these "liquidity preference" theorists believe potential investors refrain from investing and thereby help to precipitate business depression.[68]

Brown might have added that not all businesses have choices in the means of raising required financial resources, but corporations can issue additional shares of stock, float bonds or approach banks for operational loans. Issuing more shares may cause the value per share to fall but has the virtue of not requiring a specific dividend payment. Thus, during periods of economic contraction, there are always companies acquiring the assets of faltering competitors and attempting to gain market share in anticipation of the eventual expansion. As with farmers, the businesses most likely to find themselves in serious financial trouble during a downturn are those highly leveraged with debt and where assets have been pledged as collateral for loans. Recognizing the complexity of the market and the very different financial circumstances experienced by business owners, Brown takes Keynesians to task for failing to show where in history the propensity to hoard, or liquidity preference, were primary causes of recession or even of deepening a recession unless governments and central banks had already clamped down on the availability of credit by forcing up interest rates beyond the point where continued borrowing made reasonable sense.

Even more important than his opposition to proposals ostensibly based on the Keynesian model, Brown was becoming extremely dismayed by what he believed to be the abandonment of scientific method on the part of economists. Classical political economy, as studied and written on by Henry George and his predecessors, was already a lost art. It now seemed to Brown that mathematical models were replacing the gathering of evidence and development of statistical proof that formerly gave credibility to market theories. "Could it possibly be," he wondered, "that the younger generation of economists have given their time so completely to the study of bizarre theoretical systems which, though temporarily of the "new look" variety, may soon be -- and perhaps already are -- "on the way out", while giving inadequate attention to some of the most fundamental principles and most significant problems of economics, that they must be regarded as in considerable degree a "lost generation?"[69] To what extent was Keynes to blame for this destruction in economic reasoning? In 1978, Elizabeth and Harry Johnson looked closely at the career of John Maynard Keynes and concluded he had almost always acted opportunistically to gain short-term political acceptance of his proposals. Others in the profession had even more reason to ride on the coattails of someone who in death assumed intellectual powers of mythical proportions. There was, we are reminded, a receptive audience for interventionist proposals that neither attacked existing privilege in the realm of property nor demanded a fair field with no favors in markets:

The General Theory represents the apotheosis of opportunism... Mass unemployment had lasted so long that it appeared to the average man to be the natural state of affairs, which economics was powerless to explain and political processes powerless to alter; a new theory of its causes that promised an easy cure was thus virtually certain to sell, provided its author had impeccable professional credentials.[70]

Keynes and Hansen were also blessed with magnetic personalities. Others were drawn to them and to their ideas because of their accessibility. Many of us have had the good fortune to have spent time in the company of such individuals. And, as Adolf Berle observed, when the person is also a teacher by profession, the potential impact of such associations can be powerful:

When the teacher can admit students to some sense of collaboration, as working on a problem when the work may influence action, the results are immensely productive. The student, under those circumstances, then ceases to be merely a student; he hopes also to participate in influencing events.[71]

In the face of this challenge, some other members of the old school besides Harry Gunnison Brown held out, confident that real world events would reveal the fallacies of Keynesian conventions. Not long after The General Theory was published, John R. Hicks (of Souls College, Oxford) observed that many of the economists whose ideas Keynes challenged found "it hard to remember that they believed in their unregenerate days the things Mr. Keynes sa[id] they believed."[72] To the extent Keynes was responding to Pigou's theory on unemployment, for example, he was challenging ideas held by Pigou and hardly anyone else. At the University of Chicago, Jacob Viner (1892-1970) predicted that Keynesian intervention would result in an endless cycle of more currency being printed by the central banks and the demand by workers for higher nominal wages to protect their purchasing power. Milton Friedman, who had studied under Viner, offered his first detailed responses to Keynesian interventionists in 1948.[73] If wages were indeed sufficiently rigid to cause higher unemployment in periods of declining demand than would otherwise be the case, then, argued Friedman, the only rational public policy solution was to be found in a controlled monetary (i.e., currency and credit) expansion. Not that doing so would accomplish more than a softening of recessions:

[I]t is not at all clear that [fluctuations in the government contribution to the income stream] would, without additional institutional modifications, necessarily lead either to reasonably full employment or to a reasonable degree of stability. Rigidities in prices are likely to make this proposal, and indeed most if not all other proposals for attaining cyclical stability, inconsistent with reasonably full employment; and, when combined with lags in other types of response, to render extremely uncertain their effectiveness in stabilizing economic activity. ...

...The brute fact is that a rational economic program for a free enterprise system (and perhaps even for a collectivist system) must have flexibility of prices (including wages) as one of its cornerstones.[74]

To understand Friedman's rationale more completely, one must necessarily appreciate his particular view of the economic machine. Fortunately, he provides just such an explanation in succinct form:

To describe the forces at work, let us suppose that the economy is initially in a position of reasonably full employment with a balanced actual budget and is subjected to a disturbance producing a decline in aggregate money demand that would be permanent if no other changes occurred. The initial effect of the decline in aggregate demand will be a decline in sales and the piling up of inventories in at least some parts of the economy, followed shortly by unemployment and price declines caused by the attempt to reduce inventories to the desired level. The lengthening of the list of unemployed will increase government transfer payments; the loss of income by the unemployed will reduce government tax receipts. The deficit created in this way is a net contribution by the government to the income stream which directly offsets some of the decline in aggregate demand, thereby preventing unemployment from becoming as large as it otherwise would and serving as a shock absorber while more fundamental correctives come into play.

These more fundamental correctives, aside from changes in relative prices and interest rates, are (1) a decline in the general level of prices which affects (a) the real value of the community's assets and (b) the government contribution to the income stream, and (2) an increase in the stock of money.[75]

Although trained as an economist, his interest in socio-political issues and his outspokenness brought Milton Friedman into the public eye as a personality. He espoused a decidedly individualist socio-political value system and a deep concern that interventionism not impose undue constraints on political freedom. The strongest argument for his proposal, he suggested, was that "it largely eliminates the uncertainty and undesirable political implications of discretionary action by governmental authorities..."[76] Perhaps the time had long since disappeared when Jefferson's rejoinder against the Nationalists continued to ring clear in the hearts and minds of most U.S. citizens. The economic historian in Friedman looked back with some degree of nostalgia and in romanticized fashion on the degree to which the market seemed to thrive under laissez-faire. In absolute terms, the conditions under which a large portion of the propertyless lived and worked remained terrible in the Old World and worsened in the New World as the nineteenth century came to a close. Friedman gives no consideration to the view that any comprehensive doctrine of human rights requires that individuals be protected under law from exploitation by unscrupulous agrarian and industrial landlords. His standard for measuring societal success rested on the production of wealth, which he saw as having been enormously stimulated when government intervened least. To the extent the powers of government were not applied to promote monopolistic interests Friedman was correct. Absent government protections, private efforts to secure and maintain monopolies generally fall apart over the longer term. Philosophically, Friedman is among those who see freedom of action as an inherent good without regard for whether specific actions fall into the realm of license and, therefore, outside the limits to liberty. He does not advocate that society endure criminal license, but his exploration into economic history and moral philosophy ignores the degree to which laissez-faire in Britain rested on socio-political privilege and economic license.

In the decades of Friedman's early life, Roosevelt and Truman had taken advantage of crisis circumstances to interject government oversight (and frequent subsidy) into virtually every arena of private enterprise and relations. A sizeable number of individuals unable to secure power in the private sector were now creating opportunities to build bureaucratic empires within government. There was no mystery in the fact that the current crop of government officials had become beneficiaries of expanding regulatory and administrative powers. Scores of the nation's college educated and technically trained individuals began looking to government for career opportunities and had no difficulty embracing interventionism as the new conventional wisdom. As the institutional safety net took form under Truman, the tremendous increases in after-tax corporate profits (doubling in the five years between 1945-50) as well as the rising real incomes of many among the 61.4 million employed workers seemed a ready reserve to pay for anything government might come up with.

While criticism from the corridors of the University of Chicago might have been expected, interventionism of the kind practiced by Truman and the U.S. Congress also came under gentle reprobation in 1952 from John Kenneth Galbraith, then on the faculty of Harvard University after nearly ten years of government service. In American Capitalism, Galbraith argued that both conservatives and liberals continued to operate under ideologically-based assumptions about economics that had little to do with the real world. For reasons that were farther removed from a fundamental analysis than he understood, Galbraith argued optimistically that in those very industries where governmental concern was raised by consolidation and monopolistic competition, the position of workers and consumers had become much improved over the competitive model yearned for by neo-classical economists. The modern structure of commerce, with intermediary wholesalers and nationwide (or international) retail firms selling to the ultimate consumer, shifted a tremendous amount of power from producer/seller to distributor/seller. Thus, in periods of heavy demand, producer/sellers could not -- as the neo-classical economists had long declared -- increase prices to their primary customers. Their own longevity depended on the ability of key customers to hold on to market share even when fewer consumers had the money to spend. The producer/seller of the mid-twentieth century was now under rather constant pressure to protect profit margins not by increasing prices but by reducing costs. The experience of the twentieth century had also challenged the veracity of Say's Law; rising unemployment quickly resulted in the disappearance of consumer confidence, so that some goods could not be sold at any price and simply sat in warehouses until confidence returned. Galbraith might have explained that the reason price never really served to clear markets and prevent unemployment was the propensity of the landed to withdraw supply until the return of the upward spiral in speculative prices. Investors with sufficient financial reserves to wait years for a turnaround were also in an excellent position to profit from the greed and mistakes of others. As real estate developers defaulted on construction or permanent mortgage loans, lending institutions acquired large portfolios of half-completed or largely empty properties, as well as many still undeveloped parcels of land. Few had the capacity to complete construction and absorb negative cash flows while waiting for recessions to end. At this point in every recessionary period properties were sold at prices that seldom recovered even the cost of materials and labor.

Banks have always added fuel to the fire of land speculation; and, when land values have been driven up beyond the ability of producers to absorb the cost and still earn a reasonable return on their investment of labor and capital goods, they have walked away leaving the banks with nonperforming assets. The larger the percentage of a banking institution's loan portfolio that is collateralized by speculative land values, the more likely that institution will end up closing its doors in the depths of a future recession. Ignoring these specific underlying structural problems of what he described as capitalism, Galbraith argued that a rough sort of equilibrium had been reached, where employment opportunities were broadly available at increasing wages and where profits accrued to the efficiently managed business. The ascendancy of countervailing power argued against both conservative and liberal fears:

To minimize the exercise of private power, and especially the opportunity for its misuse, was to remove most of the justification for exercise of government authority over the economy. It is unnecessary for government to control the exercise of private power if it does not exist in any harmful form. And since the efficiency of the economic system is already at a maximum without government interference, it must be presumed that any intervention of government would reduce efficiency. In a state of bliss, there is no need for a Ministry of Bliss.[77]

...Given the existence of private market power in the economy, the growth of countervailing power strengthens the capacity of the economy for autonomous self-regulation and thereby lessens the amount of over-all government control or planning that is required or sought.[78]

There were, Galbraith pointed out, still far too many examples where countervailing power had not developed. Producers of agricultural products, for example, were many and at the mercy of global market conditions. Moreover, they exerted minimal influence over their own suppliers, who could more easily shift to other forms of production as the demand for tractors or fertilizers fell. Farm workers, in their turn, remained isolated and unorganized, with virtually no ability to negotiate for higher wages and better working conditions. Galbraith cited other types of producers similarly ill-positioned to take advantage of what countervailing power offered as a remedy to nineteenth century style industrial relationships. Even where countervailing power had reached a mature stage, Galbraith acknowledged, inflation could rapidly upset the new equilibrium.

If only Galbraith had possessed a clear understanding of why prices rise. The neo-classical economists predicted that over time wages would rise and fall as the demand for labor rose and fell, corresponding to periods of expansion and contraction. Countervailing power ultimately fails as a stabilizing factor because those who control natural resource-laden lands and locations (or enjoy other forms of government-sanctioned economic license) are better able to withdraw supply when others are unwilling or unable to pay the asking price. In his own analysis of socio-political realities, Galbraith went on to make the interesting observation that inflation "rewards equally the man who produces and the man who holds resources out of production for their appreciation in money value."[79] He may have been thinking of capital goods as well as natural resource lands, but the opportunity for such unearned gains is far greater where nature is concerned than when one holds out of use assets that sitting in warehouses lose their functional utility in a relatively short period of time. Galbraith also surprises by not advocating taxation at a high rate on the unearned increases in value associated with hoarding. Would this not force these very resources back into production? His primary concern was that a prolonged inflation would invite further intervention on the part of the Federal government, a process already rapidly taking shape as a consequence of U.S. involvement in the Korean War.

The concentration of power in the hands of central governments also troubled members of the Remnant, many of whom were struggling to put individualism back on the socio-political agenda. Frank Chodorov, for one, responded by declaring that far too much in the way of individual sovereignty had been taken away as a result of the assumption by government of the power to tax. More specifically, he wrote that no greater amount of power had been assumed by the U.S. government than under the Sixteenth Amendment to the Constitution. Chodorov added his voice to those who condemned the income tax as a direct assault on the right by producers to the fruits of their labor (and their capital goods). Although I am in general agreement with Chodorov, I believe a case exists for confiscating some earned income when conditions of extreme need exist on the part of many others (e.g., as when entire communities are destroyed by natural disaster). However, our moral sense of right and wrong ought to direct us not to confiscate any of an individual's income until he or she has a sizeable reserve of savings established to weather possible periods of unemployment. Tax laws, at minimum, ought to exempt income set aside in a savings plan until this fund reaches an amount sufficient to cover two or three years of living expenses. With the help of economists and their wealth of data on the cost of living, setting up such a national program ought to be rather easy. This proposal is incremental in nature, a compromise to moral principle. Yet, those suffering most under existing arrangements deserve remedial assistance now, while the work goes on politically to secure full justice. Chodorov held strictly to the purity of principle and offered no advice on the transition out from under the complex set of injustices which the laws of society sanctioned. Once departed from his formal association with the Henry George School, his writing shifted in emphasis and away from George's moral principles. In condemning the taxation of production and exchange, Chodorov attempted to focus attention on the familiar and convince others that such taxes placed the revenue stream of the U.S. government on a socialist footing. "The income tax," wrote Chodorov, "unashamedly proclaims the doctrine of collectivized wealth. The State may take whatever it needs, as a matter of right; that which it does not take is a concession. It has first claim on all the earnings of all the people."[80]

A few years later, John Kenneth Galbraith summarized what in the minds of economists was becoming the new ethos of tax policy. The ability to pay ought to be a strong governing principle of taxation, but all should pay something. In practice, virtually every source of income or asset value -- with the glaring exception of the societally-created values accruing to nature -- were coming to be viewed as legitimate objects of taxation:

Taxes are no longer, simply, the collective discomfort by which needed services are paid for. The goal of tax policy is no longer to see that taxes are paid by those who can best afford them or benefit most from the services. Taxes must now be considered in relation to consumer spending and business investment, of which they are the principal device for encouragement or restraint.[81]

...In drawing up a formula for improving economic performance in time of threatening depression, the arguments are much, much stronger on the side of cutting taxes at the bottom of the income bracket than at the top. ...For the same or similar reasons, an increase in sales taxes or a reduction in corporation taxes is difficult to defend.[82]

Viewed outside of the full context of either just or efficient tax policy, Galbraith's sympathy for the low and moderate income wage earner is certainly commendable. There are, however, a modest number of individuals who hold title to very valuable locations or natural resource-laden lands but engage in no productive activity thereon. As a result, their income is sometimes much lower than it could be. At the same time, they must be recognized as standing in the way of allowing others the opportunity to produce goods and services where they have failed to or chosen not to. Keynes observed the consequences of hoarding and, rather than recommending public policy changes to remove the cause, argued the case for periodic interventions by government as a sort of purchaser of last resort.


Within the ranks of the Remnant, an endless stream of commentary appeared after 1948 describing Truman, his advisers and their mainstream Republican counterparts as determined architects of the national security state. In the establishment view, much was being accomplished in the name of efficiency and modernization. In addition to creating a new Department of Defense and a separate Air Force, all three branches of the military were brought under the direction of a Chairman of the Joint Chiefs of Staff. Forrestal then worked with Clark Clifford to establish a National Security Council to advise the President. Intelligence gathering next received Truman's attention. On the recommendation of his military advisers (who wanted intelligence gathering to become the special prerogative of the military), he had shut down the Office of Strategic Services shortly after the war. Within months, however, he came to realize his mistake. Legislation was drafted and signed early in 1946 to authorize establishment of a Central Intelligence Group. Admiral Sidney Souers was appointed to a six-month term as Director, succeeded in June by Lieutenant General Hoyt S. Vandenberg, an Army Air Force aviator with an outstanding war record but no experience in the realm of intelligence gathering. Legislation passed in 1947 created the Central Intelligence Agency (CIA) and gave the National Security Council broad powers to use CIA personnel for covert operations. In one of the many ironies that abound in the postwar history of the U.S. foreign policy establishment, Clark Clifford, who played such a considerable part in the creation of the CIA and National Security Council, eventually reached the conclusion that the CIA's covert activities had made it a danger to the liberty of U.S. citizens:

A great nation must have the capability to defend its own interests, and this includes a first-rate intelligence service. I believed that a limited number of covert programs, tightly controlled by the President and the [National Security Council], would be a necessary part of our foreign policy. But over the years, covert activities became so numerous and widespread that, in effect, they became a self-sustaining part of American foreign operations. The CIA became a government within a government, which could evade oversight of its activities by drawing the cloak of secrecy around itself.[83]

As the leaders of the United States and the Soviet Union squared off for their forty-five year struggle for control of the hearts, minds, labor, natural resources and production of the world's peoples, the national security state became in the minds of some the necessary framework for defending the Democracy from both external threats and internal subversions. Stalin's intentions seemed perfectly clear. Those who held power in the United States were determined to maintain the upper hand, militarily and economically. What they feared most was the possibility that war might break out accidentally or as a result of a U.S. or Soviet miscalculation. Intelligence gathering, therefore, became one of the most important weapons in making sure the Cold War remained just that; and, incidentally, that the financiers, industrialists, lawyers and possessors of old money could continue their quests for personal power and enrichment without interruption. At first, U.S. intelligence efforts were extremely limited because of the closed nature of Soviet society. From the ranks of refugees who poured into West Germany and elsewhere from behind the Iron Curtain, the CIA gradually recruited and trained a group of agents, mostly Ukrainians and Byelorussians, to penetrate the Soviet Union and gather military intelligence. They accomplished very little and many very caught, never to be heard from again. More valuable was the information gained debriefing German military personnel released from detention in the Soviet Union. Only when sophisticated technologies became available and high level Soviet defections began did the United States begin to build an accurate profile of the Soviet military capability and the designs of the nation's political leaders.

Within only months after the Second World War ended, a Soviet Vice-Consul in Istanbul, Konstantin Volkov, made contact with the British in a desperate but unsuccessful attempt to defect. Although Stalin's state police made certain that the ultimate price was paid by any whose loyalty wavered, some individuals accepted the risk. Even the death of Stalin in 1953 did not dissuade at least one high ranking Soviet military officer[84] from selling state secrets to the CIA. Far more detailed information came from another Soviet officer[85] who had become sufficiently disillusioned with his government and state socialism to provide the social democracies with Soviet state secrets. On each side, the institutionalized desire for political and military intelligence created a market for idealists and opportunists alike. "There is a case for the traitor," Rebecca West suggested. "Men must be capable of imagining and executing and insisting on social change, if they are to reform or even maintain civilization, and capable too of furnishing the rebellion which is sometimes necessary if society is not to perish of immobility. Therefore all men should have a drop of treason in their veins, if the nations are not to go soft like so many sleepy pears."[86] The Cold War took to new heights of moral relativism the argument that the end justifies the means.

If many other countries were experiencing near-convulsion in a political sense, the United States continued on its path of combining material prosperity for an expanding majority with the creation of a permanent military-industrial-intelligence complex. During Truman's second term, the emergence of the national security state continued but at a rate slowed somewhat by Truman's commitment to limited government and a balanced budget. From the periphery of mainstream power, John Foster Dulles, waiting impatiently to become the Republican party's Secretary of State, entered the U.S. Senate as Robert F. Wagner's replacement (Wagner resigning in mid-1949 because of ill-health). Dulles then ran for the seat in 1950 but was rejected by the voters. Nevertheless, during his brief tenure in the Senate, Dulles was enlisted by Senator Vandenberg to work on a redraft of the North Atlantic Treaty Organization bill. Then, in an effort to re-establish the bipartisan nature of foreign policy decisions, Truman reluctantly agreed to bring Dulles into the State Department as a consultant. The other Dulles brother, Allen, continued to remain close to the U.S. intelligence community even though officially leaving the OSS in 1946. He awaited the call he was certain would come to direct the new and growing CIA.

Within the Truman administration, Clark Clifford was instrumental in convincing Truman to commit the United States to a program of technical assistance to developing countries. Over the objections of Robert Lovett and Paul Nitze (who had succeeded George F. Kennan as Director of Policy Planning), Truman in 1950 obtained legislation from the Congress to establish the Technical Cooperation Administration (TCA) within the State Department. Henry G. Bennett became TCA's first director. In the spirit of bi-partisanship, Nelson Rockefeller was invited to chair an advisory board.

These were also the years when Dwight D. Eisenhower was being courted by the nation's internationalist business community. He became increasingly close to Henry Wriston, president of Brown University and, after 1951, president of the Council on Foreign Relations. In 1948 Wriston appointed Eisenhower chairman of a CFR study group on European affairs. Out of this work came a powerfully worded letter to Truman in favor of military assistance to Western Europe. In January of 1951, Eisenhower accepted Truman's offer to become Supreme Commander for the Allied Powers in Europe.

War at the Periphery

At Yalta and before, the Soviets had ostensibly agreed to joint trusteeship over the Korean peninsula. Logistical constraints made this a practical impossibility for the U.S. and British, allowing the Soviets to disarm the Japanese and establish control north of the 38th parallel. A communist regime was then established in the north. In the south, the dominant political faction was ultra-nationalist and totalitarian. Its leader, Syngman Rhee, demanded Korean independence and an end to foreign occupation but had no intention of establishing democratic institutions. In September of 1947, the U.S. Joint Chiefs of Staff (of which Eisenhower was still a member) reported to Secretary of State Marshall on the military and political situation in Korea:

At the present time, the occupation of Korea is requiring very large expenditures for the primary purpose of preventing disease and disorder which might endanger our occupation forces with little, if any, lasting benefit to the security of the United States.

Authoritative reports from Korea indicate that continued lack of progress toward a free and independent Korea, unless offset by an elaborate program of economic, political and cultural rehabilitation, in all probability will result in such conditions, including violent disorder, as to make the position of United States occupation forces untenable. ...[87]

Faced with these rapidly deteriorating conditions and Soviet intransigence, the U.S. proposed that national elections be held under United Nations supervision. The Soviets opposed this step but did not exercise their veto against establishing a U.N. Temporary Commission on Korea. In May of 1948 elections were held in the south, with Syngman Rhee emerging, first, as chairman of a constitutional committee, and then in July as President of the new Republic of Korea. Korean citizens elected representatives to a National Assembly, who in turn elected the President. Syngman Rhee's rise to power in South Korea was assisted by the United States military. He was one in a long string of U.S. educated Asians who established connections in Washington and were thought of as friendly to U.S. interests, although never embracing the idea of democracy for their own peoples. Once in the office of President, Rhee actively called for the withdrawal of the U.S. presence. Not surprisingly, his support came not from the peasants but from the ancient agrarian landlords and foreign investors. Once he gained power, reformers and political opponents were imprisoned and many executed. His admirers in the U.S. ignored (as many of the same people had done for so long where Chiang Kai-shek was concerned) his wanton disregard for human rights. John Foster Dulles, for example, held Rhee in the highest regard as a "Christian gentleman" joined with Americans in "the great design of human freedom." Increasingly, the operative conventional wisdom within the U.S. leadership group equated communism with enslavement and any other form of government -- even the worst dictatorships -- with the free world, as if the peoples of these societies in some manner enjoyed an undefined beneficence simply because communists did not sit in the halls of government or run their police states. In the north, the Soviets countered by establishing a separate Democratic People's Republic of Korea. Both the U.S. and the Soviet Union then proceeded to withdraw their armies of occupation. Despite Truman's concerns over Rhee's disdain for democratic principles, Truman succumbed to the pressure of choosing between the lesser of two evils and committed the United States to economic assistance and military support.

By the early months of 1950, the North Koreans were amassing troops along the 38th parallel. Communist guerrilla forces were also infiltrating the south. Finally, on June 24, they opened a full-scale invasion of the south. The U.N. Security Council condemned the attack and called on the North Koreans to withdraw. While the forces of the North steadily penetrated the South, threatening Seoul and forcing Rhee's government to withdraw, Truman (without any dissent expressed by his advisers and the military) ordered Douglas MacArthur to provide air and naval support to the South Koreans. Days later MacArthur received authority to commit U.S. ground forces as well to a rear-guard action until a counterattack could be mounted. By August the United States-led U.N. force in South Korea numbered some sixty-five thousand troops. On September 15, U.S. Marines landed at Inchon and by month end had liberated Seoul. MacArthur had authority to move into North Korea and did so. U.N. forces took the northern capital, Pyongyang, on October 19. The war then took on a new character when Chinese troops entered the fighting in the North. They began to retake the Korean peninsula from the vastly outnumbered army under MacArthur's command. The decision now facing the West was whether to risk broadening the war by direct retaliation against the Chinese bases of operation. Behind the Chinese, everyone recognized, stood the Soviets and their newly-developed nuclear capability.

Fearful that the United States was on the verge of escalating the conflict, the British prime minister, Clement Attlee, made an emergency visit to Washington to discuss matters with Truman and to gain assurance that the United States would not act unilaterally to widen the war. Truman, Acheson, Marshall -- virtually all the leading figures in the Administration, the Congress, the intelligence community and the military -- accepted (and some relished) the necessity for the United States to build and maintain the strongest and most well-prepared armed forces in history to ward off the new Sino-Soviet threat. John Foster Dulles had come to this view earlier than most. With war raging in Korea but before Chinese intervention, Dulles made public his views in his book War or Peace. From his perspective, the probability of another global war eventually erupting was all too strong:

If we look about the world, we see warning signals that the past forecast reliably the coming of war.

There exists a great power -- Russia -- under the control of a despotic group fanatical in their acceptance of a creed that teaches world domination and that would deny those personal freedoms which constitute our most cherished political and religious heritage.

Already Soviet Communism has extended its control over more than 700,000,000 people, or about one-third of the human race. This has happened in thirty-three years. Never before have so few gained so much so fast. Such great successes usually make men lose their heads and go on more recklessly.

The Soviet leaders have great military power. They control the world's greatest pool of dependable manpower, and they now have atomic weapons.

Over against the Soviet Union stand other great powers, amongst them the United States. We, too, are maintaining a great military establishment and are intensively pushing the accumulation of atom bombs. We have decided to go ahead with the manufacture of hydrogen bombs.

An armament race is in full swing, and United Nations efforts to check that race have so far proved fruitless.

Communists have always assumed that Communism and Capitalism would become locked in a death struggle. Many people in the United States today are making that same assumption. That in turn makes war more likely and impels political leaders more and more to be guided by military judgments about winning a future war rather than by political judgments about winning peace. All of that makes for increasing tension and ultimate explosion.

If history is any guide, war will come out of this situation.

There should be no illusion about the reality of the danger. It is immense.

Future generations will look back with amazement if war is averted. It will be an achievement without precedent. Yet that is our task.[89]

Dulles warned that peace could not be achieved either by isolationism or U.S. domination over other nations and peoples. The oppressed and disadvantaged were beginning to demand their rightful share of liberty and economic well-being. "Peace is a condition of community, of diversity, and of change,"[90] concluded Dulles. And, he should have added that peace is dependent upon the outcome of broadly-supported democratic struggles against entrenched privilege (whether such privilege was of the private or statist variety). Although this did not occur to him, Dulles was quick to note what he saw as the demonstrated importance of the United Nations as a catalyst for rebuilding a new world on the ashes of the old:

Complicated formulas for balancing the political interests of European powers gave way to the broad principle that in case of doubt it is better to give the peoples themselves the chance to work out their own destiny. They may make mistakes, and they probably will; but at least the mistakes will be their own rather than mistakes made for them by others.[91]

In the atmosphere of the times, one should not be surprised that Dulles went on to downplay the role played by adventurers, empire-builders and monopolists in bringing the distant periphery into the grip of the core powers, whether of the Old or New World. He seemed to truly believe that modernization represented an obligation imposed on the northern European and European-American as the possessors of advanced knowledge in the creation of well-functioning civilizations. Dulles went so far as to credit the gradual and inevitable emergence of the Christian moral sense of right with a general realization that the sovereignty of all people to live free of external domination was unalienable. Only when all people lived free from the threat of being subdued or enslaved would the potential for a "world organization ... universal in its scope and in its interests"[92] be realized. In his mind, the United States represented the ideal of what might one day exist broadly in the world. However, when Dulles writes, "The United States is a union of sovereign States which came about when our thirteen States sought collective security,"[93] he reduces the history of the European in North America to an absurd level of simplicity. Yet, his expressed vision of what ought to be was certainly on the right path. People in possession of liberty and equality of opportunity within their own society have little reason to be ethnocentric, isolationist or fearful of open and honest relations with others. For the time being, however, ancient rivalries continued and ethnic nationalism interfered with any union of sovereign states even remotely close to the U.S., Canadian or Australian experiments. All that Dulles could suggest was that sincere people needed to keep trying, to work to make the United Nations a forum for open discussion rather than an instrument for reward and punishment. At the same time, he pondered what he saw among his own countrymen as a loss of spirit. He longed for a time and circumstances that, in fact, never existed:

Our nation was founded as an experiment in human liberty. Its institutions reflected the belief of our founders that men had their origin and destiny in God; that they were endowed by Him with inalienable rights and had duties prescribed by moral law, and that human institutions ought primarily to help men develop their God-given possibilities. We believed that if we built on that spiritual foundation we should be showing men everywhere the way to a better and more abundant life.

We realized that vision. There developed here an area of spiritual, intellectual, and economic vigor the like of which the world had never seen. It was no exclusive preserve; indeed, world mission was a central theme. Millions were welcomed from other lands, to share equally the opportunities of the founders and their heirs. We put our experiment on public exhibition so that all might see and follow if they would. Through missionary activities and the establishment of schools and colleges, American ideals were carried throughout the world. We gave aid and comfort to those elsewhere who sought to follow in our way and to develop societies of greater human freedom. ...

These conditions prevailed for one hundred years and more. Then, as our material power waxed, our spiritual power seemed to wane. We appeared to be less concerned with conducting a great experiment for the benefit of mankind and to be more concerned with piling up for ourselves material advantages. ...[94]

There was nothing wrong in his appeal for a return to the spiritual power the nation possessed in its infancy, so long as the current generations were presented with an accurate assessment of which principles were captured and which were compromised in the government actually settled on by the Founding Fathers and Framers of the U.S. Constitution. Truman proved himself little different from Dulles when he wrote that Thomas Jefferson's presidency "restored liberalism in government" and that Andrew Jackson "staged a revolution against the forces of reaction."[95] There is, of course, a degree of truth in what Truman writes, but not enough truth to suggest they were in any sense true to Paine's principles of cooperative individualism, embedded in which was a full measure of equality of opportunity. The first generations of leaders were no different in responding to the attractions of high office and power; they, too, became captured by the socio-political arrangements and institutions they were charged to work within. Those institutions and arrangements had become shrouded in so much tradition and ritual over the ensuing century and a half that few were able to overcome their nurturing and schooling to develop the intellectual integrity required for truly objective, critical analysis. John Foster Dulles, even more so than Truman, falls into the category of those who could not rise above a value system directed by a narrow and self-righteous view of the American System. I.F. Stone writes of Dulles:

His is the kind of cant which has robbed Christianity of vitality. I do not want to hear Dulles say in Amsterdam that man is created in the image of God. I want to hear him say it in Atlanta, Georgia, when one of those images, done in charcoal, has been strung up to a tree. I do not want to hear him deplore materialism as long as he devotes his life as a lawyer to defending the rights of a few to monopolize its blessings. The man who keeps Mammon for a client shouldn't talk so much about God.[96]

Indeed. Yet, Dulles was hardly unique in his inability to acknowledge even to himself the degree to which privilege dominated the socio-political arrangements and institutions of his nation. He failed to make the connection between near-universal access to land and the relatively broad equality of opportunity recognized by Tocqueville as still in evidence as late as the 1830s. If Dulles had ever read Thomas Paine -- or Henry George or Frederick Jackson Turner or Charles Beard -- he showed no signs that their observations penetrated his faith in the status quo. Carroll Quigley, one of the first historians to critically evaluate CFR influence[97] over U.S. foreign policy, concluded that personal ambition rather than ethics drove Dulles eventually to distance himself from Wall Street influences.

Truman and Acheson found Dulles a troublesome member of their foreign policy team. They nevertheless made the best use of his Republican Party credentials by assigning him the task of preparing and negotiating a treaty of peace with the Japanese. Red-baiters were anxious to blame Truman and Acheson for the communist victory over Chiang Kai-shek; and, now, the U.S. was facing war with China over who would control the Korean peninsula. Mao Tse-tung's motivations for committing his troops to the war in Korea were far more straightforward than those of his counterparts in the social democracies. By virtue of his victory over Chiang Kai-shek, Mao unleashed the fury of his peasant armies against everything and everyone associated with colonialism, imperialism and China's past socio-political arrangements. As had the Bolsheviks in Russia, the Chinese communists orchestrated a brutal collectivization of the land of China. Several million farmers, most of whom were only small freeholders providing for their own subsistence, were murdered and their land confiscated. Despite all that had to be accomplished to rid China of its traditional hierarchy and establish in himself a cult of personality, Mao still found time to encourage Kim Il-sung's ambition to unite all Koreans under a communist regime.

Neither Mao nor Stalin (who supplied Kim with arms and materials) had initially thought the United States would intervene in what they viewed as a class war. To avoid the possibility of a more direct Soviet entanglement, Stalin removed all Soviet military advisers from Korea. However, once MacArthur's forces were in the North and threatening the very existence of Kim's regime, Stalin agreed to the intervention of Chinese troops. When it finally happened, MacArthur was clearly surprised by the large number of Chinese with whom the U.N. force became engaged. His own negative views of Chinese military preparedness blinded him to the exposed position his troops experienced as a result of his battle plans. Equally damaging to the military effort was the fear in Washington and London of an expanded war, which prevented MacArthur from disrupting the Chinese build-up. Yet MacArthur was determined to use his existing forces to push the Chinese back across the Yalu River before winter weather set in.

Dean Acheson admitted later that there had been so much uncertainty in Washington that clear, strategic thinking failed to materialize. MacArthur's troops advanced until overwhelmed by Chinese counterattacks and forced into a general retreat. MacArthur, unwilling to accept responsibility for underestimating his enemy, placed the blame elsewhere and called for more men and arms. In a bold and foolish move, MacArthur went public with his interpretation of what was happening and what needed to be done. Angered almost beyond tolerance but as yet unwilling to directly confront MacArthur, Truman issued a directive to all field commanders against any further direct communications to the media. In addition to mere manpower, another advantage enjoyed by the Chinese was intelligence about MacArthur's plans, relayed via Moscow by Kim Philby (serving at the time as first secretary of the British Embassy to the U.S.) and other Soviet agents working within the British Secret Intelligence Service (SIS). The Chinese knew, for example, that MacArthur had been ordered not to destroy any targets in Manchuria or Russia. On November 26, the Chinese commander, Lin Piao, threw everything he had -- 300,000 troops -- at the advancing U.N. forces. MacArthur refused to accept the reality of the situation, and for four days stuck with the original offensive plan. Only when the desperation of the situation became overwhelmingly clear did MacArthur give in, allowing his troops to disengage and withdraw in the best manner possible. For awhile it seemed the Chinese would drive the U.N. forces out of Korea altogether. To his credit and that of his field officers, MacArthur managed to bring his forces together with only moderate casualties while those imposed on the Chinese were enormous. Back in Washington, the accusations flew back and forth across the isle between Democrats and Republicans. MacArthur, Truman and Acheson were attacked and defended. In the meantime, General Matthew Ridgway took command of the ground troops in Korea following the accidental death of General Walton H. Walker. Ridgway's force now consisted of some 365,000 troops but faced almost half a million Chinese and North Koreans.

From Washington came the decision, dictated in great measure by pressure from Britain and other U.N. participants, that South Korea's defenses be strengthened while the governments attempted to negotiate a settlement. Ridgway responded with a new offensive that drove the Chinese back across the 38th parallel. Seoul was again liberated and returned to the South Koreans, and Ridgway set about establishing strong defensive positions all along the front. The end result was stalemate. The cost in terms of people's lives was staggering. "Before the guns fell silent in Korea," writes William Manchester, "an estimated 5,000,000 people, including 54,246 GIs, would have died, pointlessly."[98] Whether the death of so many was pointless is, of course, subject to much debate. Despite the military intervention of the United States (through the United Nations), the people of all of Korea came to live under one of two indigenous totalitarian regimes -- one communist, by name, the other nationalist. There was no opportunity in Korea for MacArthur's presence to influence civilian affairs. His role was military, and his mind drifted back and forth from the immediate battle at hand to the larger struggle between the Democracy and communism's Chinese and Soviet protagonists. On the battlefield, General Ridgway's success in halting the Chinese advance and putting together a forward-moving defensive action made MacArthur's presence in Korea less and less necessary. MacArthur finally stepped beyond his role as military commander once too often when, on March 15, 1951, he publicly criticized the conduct of the campaign and then issued a statement in defiance of orders he had received from the Chiefs of Staff. On April 5, the Republican leader in the House of Representatives, Joseph W. Martin of Massachusetts, released a letter received from MacArthur openly challenging Truman's directives and those of the Joint Chiefs. Truman had reached the end of his patience with MacArthur. The time had come for his removal, as he later wrote in his memoirs:

If there is one basic element in our Constitution, it is civilian control of the military. Policies are to be made by the elected political officials, not by generals or admirals. Yet time and time again General MacArthur had shown that he was unwilling to accept the policies of the administration. By his repeated public statements he was not only confusing our allies as to the true course of our policies but, in fact, was also setting his policy against the President's.

I have always had, and I have to this day, the greatest respect for General MacArthur, the soldier. ...I had hoped, and I had tried to convince him, that the policy he was asked to follow was right. He had disagreed. He had been openly critical. Now, at last, his actions had frustrated a political course decided upon, in conjunction with its allies, by the government he was sworn to serve. If I allowed him to defy the civil authorities in this manner, I myself would be violating my oath to uphold and defend the Constitution.[99]

Dean Acheson was even less forgiving of MacArthur for the general's single-minded intransigence. "As one looks back in calmness," he later wrote, "it seems impossible to overestimate the damage that General MacArthur's willful insubordination and incredibly bad judgement did to the United States in the world and to the Truman Administration in the United States."[100] William Manchester counters in his biography of MacArthur that the military mistakes and loss of men were far less devastating than Acheson charged. The Chinese proved unable in the final analysis to fully take advantage of their prior knowledge of MacArthur's tactical maneuvers. Without doubt, however, many leaders around the globe feared MacArthur would pull them into a shooting war with the Chinese and Soviets.

Truman called a press conference at 1 a.m. on April 11 and announced that MacArthur was being relieved of command and recalled to the United States. MacArthur received the word shortly thereafter. The public reaction was spontaneous and uniform in its attack on Truman. "Not until the death of President Kennedy," writes William Manchester, "would the nation experience so profound a simultaneous experience."[101] The Japanese, many of whom viewed MacArthur as their liberator, mourned his departure. Something like thirty million people listened to his address before the Congress of the United States upon his return. Truman reportedly called the speech "a hundred percent bullshit."[102] Another perspective comes from Henry Regnery, who, in 1951, published ex-communist Freda Utley's book on the foreign policy of the United States in Asia, The China Story:

The China Story was published not long after President Truman's dismissal of General MacArthur, which put the whole question of American policy in the Far East at the center of public discussion. The Korean War, which was grinding toward its inconclusive end, had demonstrated that the administration in Washington was quite prepared to sacrifice American lives in what Truman called a "police action," but that beyond the restoration of an uncertain status quo it had no policy or ultimate objective. For pointing out this embarrassing fact, MacArthur was abruptly relieved of his command.[103]

More balanced, I believe, is the conclusion reached by Theodore H. White based on his long experience covering events in Asia as a journalist. "MacArthur understood the politics of Asia," writes White. "What he could not understand were the politics of America, and above all, the politics of the Presidency. He was convinced that the military and the political executives were co-proprietors of American history, equal partners in the great adventures of war."[104] MacArthur's career-long shortcoming was his demonstrated intolerance of those who disagreed with him. He somehow failed to recognize just how dramatically changed was the political environment in which the military now had to function. He viewed reluctance to fully commit the nation's forces to the struggle against communism as appeasement, the consequences of such policies having been taught by France and Britain. And yet, when he subsequently testified before a congressional committee probing U.S. policy decision on Asia, the Joint Chiefs of Staff effectively countered MacArthur's sweeping generalities with detailed analyses of the limits to U.S. power to effectively intervene.

General Matthew B. Ridgway succeeded MacArthur as Supreme Commander of the United Nations forces in Korea. By June, and with rising casualties, he pushed the Chinese back across the 38th parallel and strengthened his defensive positions even as he moved northward. Ridgway was then directed by Truman to attempt to negotiate a cease-fire and armistice. On July 2 the Koreans responded that they were ready to meet. The fighting nevertheless continued.

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