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.
INTERVENTIONIST POLICIES AND
THE NATIONAL SECURITY STATE
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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