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FpREIGN TRADE AND DOMESTIC EMPLOYMENT
Ralph Et Flanderg
United Nations Forum
Constitution Hall, Washington, D. C
March 19, 19^5
Aside from the maintenance of world peace, the subject under discussion tonight is the most important one to which the citizens of
this country can turn their attention*

As a matter of fact, it is not

a separate question from that of world peace, but has important connections with it; so that proper action on our part on these internal
questions will have a large and favorable effect on our relationships
with the rest of the world* ,and of other countries with each other*
I do not opoalt- as an expert*

In various capacities I find myself

surrounded by experts and am the grateful recipient of their instruction and advice*

Without them, I could not come to conclusions satis-

factory to myself.

This is in spite of the fact that all of them do

not agree with each other all of the time. My conclusions must be
drawn as a simple American citizen on the basis of the best information
and advice which I can get.

It is on this basis that our representa-

tives in the Congress have to come to their conclusions.

It is on

this basis that the whole citizenship of the country can most wisely
determine its attitudes and thus influence the legislators whom it has
chosen.
Not as an expert, then, but as one who listens to them and ponders
on their outgivings, I approach the subject which Is before us this
evening*
It is desirable to clear away some of the dead wood which encumbers this subject and prevents us from reaching the heart of it*

One

fcf the mistaken ideas, in my belief, is that it is impossible to reach




a high peacetime level of employment In this country without a largely
expanded foreign trade*

A recent document of the United States

Chamber of Commerce puts it thus!

tt

It appears impossible to consume

at home all the production necessary to provide and sustain the
desired employment*lf

This is not so*. We can consume In this country

very much more than we have ever produced and enough to keep our
nation on a high level of employment and production*

We must not

allow circumstances which prevent an expansion of exports to serve as
an alibi f^r

inability to maintain prosperous employment, produc-

tion, and consumption at home*
Another over-stressed argument for freer and greatly expanded
foreign trade Is that it leads toward a more peaceful world.

There is

a large measure of truth in this assertion, but it is not the whole
story*

We must not forget that up until the First world War, we had

world trade on what was, in comparison with our own times, a free
trade basis*

In spite of that, the most terrible conflict in the

history of the world broke out and has continued to this day with only
a few years of uneasy truce in the interim between the First and
Second World Wars.

There are, in short, dangerous international

rivalries possible in active competition between nations in free
markets.

It can only be said that those dangers are measurably less

than is the case where powerful nations seek to set aside certain areas
of the earth as their ovm commercial preserves in which other nations
are treated as trespassers, with penalties exacted for their trespasses*
Reverting to the relation between the volume of export trade and
the amount of domestic employment, it is easy to see the line of thoug&t
which has led to placing too much importance on the relationship between



them*

We look, for instance^ at a great industry like that engaged in

making automobiles, in which a considerable part of the product is
shipped abroad.

We at once assume that, if that export market were

non-existent, a corresponding number of men would be out of employment.

It is easier to make this assumption than to raise the question

in our own minds as to what it is that prevents some millions of
families in this country who have no automobiles and would like them,
from being able to purchase them.

Further expansion of the export

market for automobiles is evidently not a direct answer to this
domestic problem, although, under proper conditions, it would assist
in answering it.
Another situation which leads to hasty assumptions is that to be
bound in industries or occupations which have in the past enjoyed a
large export market and which, for some reason, have been cut off
from it without corresponding increased access to domestic markets*
A case in point is the plight of the cotton farmer.

By measures

which seem to me to have been most unwise, his distress during the
depression was relieved by price maintenance devices which made him
unable to sell abroad in competition with new cotton-growing regions.
These regions were thus given a strong stimulus to expand their operations and output, and they were quick to seize it.

It would now seem

difficult for the American cotton farmer, on a TO rid-wide competitive
basis, to regain any large part of the former export market, unless
by radical mechanization.

It thus appears that a new large body of

unemployment or under-omployment has developed from a lack of foreign
trade in this particular commodity.

Actually, the decrease of cotton

exports will tend, if we are wise in our policies, to be compensated
by an increase in other exports more urgently needed by other- nations,



thus maintaining employment as a whole, but not necessarily in the
southeast•
It is true that these depression policies may merely have hastened
a orocess which, in the long run, was inevitable. But that only points
up more clearly the fact that, in the absence of domestic readjustment,
too complete and simple a faith in the values of foreign trade in
supporting domestic employment would have led in the lon^ run to
disaster, as it actually did in the short run*

As a result of such

policies, and as an inevitable result of the disturbance in world
trade bv the war, we find ourselves in a mass of unbalances in our
economy, and these unbalances lead to unemployment.
we have to decide is simply this:

The real question

shall we balance our economy and

make the necessary internal readjustments about the largest practical
measure of internal trade, or shall we include in our plans a
measure of foreign trade?

large

Our economy can be balanced and high em-

ployment and production assured if we take either course. YiThich shall
we t ake ?
It is fortunate that we can take either course.

Not all countries

can do so. One of the reasons which makes it possible for us to
develop on our internal resources is the fact that we can feed ourselves and clothe ourselves from the products of our own s'oil. Great
Britain cannot do this.

To support anything like-her present popula-

tion within her own island realm, she must import vast quantities of
food and fiber. She must pay for these in exports.
large world trade to support her population.

She must have a

Should this world trade

disappear, her population must be reduced by malnutrition, birthcontrol, or emigration.
Great Britain*




That is how serious, foreign trade is with

5
Lot us first consider, in our case, operation under the smallest
convenient volume of foreign trade.

Perhaps "convenient11 is not the

word. We want to USG some word that expresses the intention of being
practical and not foolish. We could, for instance, get along without
tea, coffee, and bananas. No one would want to do that. We could
conceivably raise tea, coffee, and bananas under glass. That would be
so expensive as to divert manpower and resources from activities which
would produce far greater returns in desirable consumption.

It would

bo foolish in view of the fact that we can obtain these things at
reasonable expense from abroad.
Let us base this proposed national economy on desired imports.
These would include particularly the tropical and subtropical products
just mentioned, together with metals which we do not produce or of
which we have a short supply, such as antimony, tin, and manganese.
There would doubtless be a demand also for silk. There are a good
many other things, particularly raw materials, about which there would
be general agreement as to the desirability of importing them.
As is well-known, it is fundamental to a sound foreign trade
that we pay for imported goods and services with exported goods and
services. While this balance of trade is much more complicated than
this sixfcple statement indicates, that nevertheless is a fundamental.
What shall we export to pay for these desired inrports?
We would normally export those things vihich we can produce better
or more cheaply than can be done in other nations, since these are

the

products we have to offer in trade which have the highest values in
our customers1 eyes and for which, therefore, we can expect to receive
the most in return. As examples of this type of export in which we
have an advantage, we can mention certain typos of industrial equipment,




6
and also durable consumer goods• Among durable consumer goods, the
most important single item is automobiles•
Our advantage with durable consumer goods comes from a highly
developed technology of production based upon our enormous home market
or well-paid consumers.

I am using the phrase

f
f

well-paid consumers"

not to mean that they are paid as much as they ought to be, but simply
that, in comparison with the v/hole of the rest of the world, they are
well paid on almost any basis of comparison*
This enormous home market enables us to make durable consumer
goods on Iarge«-scal3 production which, in turn, enables us to introduce economies in manufacture imoossible elsewhere*

Durable consumer

goods are particularly susceptible to the development of such economies
in manufacture; and as a result, we are able in the durable consumer
goods field to pay higher wages than anywhere else in the world and,
at the same time, to offor better goods at lower prices*
Our superiority in many kinds of production equipment is a
corollary to this same situation.

High production methods are both

dependent upon and stimulate development of high production machinery
and equipment*

Their value is recognized the world over*

Here, then,

we have iihports desired by us and exports desired by others vjhich complement each other as a basis for a balanced economy on a minimum
desirable basis of foreign trade.
Two things, of course, are understood in this assumed type of
economy*

One is that it is not necessary to exchange goods and ser*

vices bilaterally with other nations*

It may bo done trilaterally or

multilaterally, in which cases it presumes as healthy an exchange
situation between other nations as between ourselves and thorn. This
is one of the ways in which wo find ourselves concerned with foreign



trade in gonaral as distinguished from that in which we are immediately

7
exporters and Importers•

The foreign trade of the whole vo rid is our

concern, even with a minimum dependence upon it on our part*
A second point which must be observed is that our internal economy
is affected by the extent and nature of the external trade vhich we
choose to dopond upon.

Importing a limited amount and variety of

products moans that we must obtain the more internally.

We might conr

coivably decide to raise all of our wool, leather, and sugar.

Some of

our agricultural production would shrink with reduced exports; other
yx^oducts would be enormously expanded by a complete dopendonce upon
them*

A new internal balance would have to be struck. We might decide

also to rely entirely on synthetic rubber and to continue our domestic
production of vegetable oils.

These represent decisions in the ex-

treme range of practicality in the field of minimum foreign trade.
Whatever conclusions we come to will require some shift in our own
production to balance ourselves internally^
Let us next consider a maximum of world trade, doing away with
import duties entirely.

Th's would require a still greater readjust-

ment of our internal economy.

Large sections of our agricultural

production would bo diminished.

This would include at an early date •

wool, sugar beets and cane, and a part, at loast, of our present
shrunken cotton production, except as we made up for our higher cost
of production by complete mochanization.
try Y/ould go*

Much of our textiles indus-

Possibly bcots &nd shoes would bo largely mado abroad

if successors to tho Bata factory should spring up.
There has been some suggestion that we have a duty to the rest
of the world to share our prosperity v/ith them, by making large reduct.ions or eliminations in tariffs and widely openin0 our markets to



them, even though our own home employment and production may be injured

8
thereby.

This is sometimes argued from the longer-range point of view

that ultimately and after a period of hardship, this will work to our
advantage.
This approach to the problem of international trade assumes that
in an international economy, one party gains and the
instead of both parties gaining.

other loses,

It is the international parallel to

domestic policies which assume that social ^.ains are to be made primarily by redistributing wealth, taking from A to give to B, rather
than by encouraging or permitting A!s wealth to produce more for the
enjoyment not only of A, but of B, C, D, and E, clear down through the
alphabet.

Proper foreign trade policies can lead to a vast increase

in world wealth production, to the benefit of all concerned, lust the
same as proper internal policies can best be based on the production
of additional wealth to distribute rather than on the redistribution
of editing output. It is a false premise that we must suffer or even
share, if we are to assist in raising the standard of living the world
over.

We can reap advantage in the process as well as in the result.

Of course, few propose to go to the extremes of a self-contained
economy on the one hand or of absolutely free trade on the other. The
extremes are obviously absurd,
mean,

T

Vhat we should do is to find the golden

It will lie somewhere in an expansion o p our foreign commerce

well above the limitations just described as being the minimum that
are practicable.
Looking again at the extreme of a completely isolated nation vfcich.
if it wants bananas, coffee and tea, grows them with artificial hsat
under glass, we do &et a picture of the substantial benefits to be
derived from an expanded foreign trade. While foreign trade will not
necessarily increase the volume of employment, as has already been




9
employment.

That is to say, it will improve the

quality aid quantity

of the goods and services available to the worker in exchange for his
work.
Instead of digging coal, building greenhouses, and putting
infinite toil and capital expenditure into the endeavor to provide
ourselves with bananas, tea and coffee, we have only .to make the
things which we can make to the best advantage, sell them in world
trade, and take out of world trade bananas, coffee and tea from the
countries which are best adapted to produce them*

By working at our

best and taking products of courtries which produce at their best,
the hours of work and the dollars of investment we put into our
economy are ^reatlv multiplied in the volume, value and distribution
of the consumer goods and services we ultimately receive•
We must, therefore, find ways of expanding our foreign trade to
give us this maximum of advantage for each hour of our work and each
dollar ofour capital expenditure, with the minimum practicable upset
in our pattern of agricultural and industrial production in this
country.
In the foregoing discussion, vvhen we have been considering the
effect of foreign trade on the yolume of employment, we naturally
talk about exports. On the other hand, when we discuss the effect of
foreign trade on the value of employment - that is to say, on increasing the amount or value of goods and services consumed by the
worker - then we direct our attention to importsf
The value of the employment to be gained, rather than the volume
of the employment, is the largest and moat desircble result we can
hope to get from foreign trade. Direction of attention toward imports
rather than ecports is correspondingly important.. It is also importani



in that it throws the spotlight on the weakness in all our foreign

10
trade thinking up until this time. Business, labor, and legislators
may have given lip-service to a balanced foreign trade, but in the
actual development and support of tariffs and foreign trade policies,
they have worked with might and main to see to it that this country
exports more than it imports*

The 30-called "favorable balance of

trade" was the end and aim of American policy*

I am sure we as a

nation are better informed than we used to be, and it should be
evident that if we continuously send out more than we receive, we
aro thereby impoverishing ourselves and no lasting good can come of
It.

Without losing sight of the importance of exports, this recog-

nition that the most favorable effect to be gotten from foreign trade
lies in the value rather than the amount of employment will, in the
long run, help us to focus our attention on the more difficult but
more important question of imports*
We are to be called on in the post-war period for very large
capital loans abroad, both for reconstruction and for industrial
development in other parts of the world*

Those loans in their tan-

gible form will appear, in a la* ge measure, as exports of capital
goods*

For these, we cannot expect immediate balancing imports*

But the import question still remains important, since ultimately
the interest and amortization payments will have to be received in
that form*
There arc many reasons why the present is the most propitious
time to make a cha nje in our foreign trade policy*

We can come to

a new internal balance to moot a nsw external trade much more easily
from tho fact that vie have to make ^roat changes in any case in
shifting from war to peace production.

This is a far more favorable

time for re-aligning our foreign trade than would be the case if the



endeavor wore made during; a time when the country was running on a

11
In another respect the time is propitious•

Needed tariff re-

ductidns can xnoro easily be nado from the political standpoint in
periods of prosperity than in periods of depression.

If the level

of employment is high, the workman has less fear that foreign imports
will decrease his employment, and the manufacturer has less fear that
they will unfavorably affect his market*

Furthermore, what adjust-

ments have to be made on the new basis are then more easily made than
at any other time.
Proposals of this scope and to this end should be the over-all
considerations in determining detailed tariff policy*

It is

with

these over-all considerations that I am concerned hero this evening*
It is my belief that a determination of policy with regard to them is
the first requisite for getting down to detailed proposals.
Wo would be over-optimistic to assume that the freer world trade
will tnaot with no obstacles in boir.£ inaugurated at the earliest possible momont.

A croat obstacle is to be found in the necessitous

situations in which the ravaged nations of Europe find themselves. As
has been said, thov are going to require a heavy volume of financing
to bring, themselves back into a productive capacity which con take its
place in world trade.

Some of this financing will come u~dor the head

of relief and can properly be made as a gift to the peoples of these
nations.

Other financing will be for rc-eqaipment of trade and indus-

trv and for replenishing exhausted working capital.

Such advances,

being for production purposes, should bo made as amortizing loans on
easy terms.
In addition to these distress loans, there will bo opportunities
for others more nearly of the peacetime type made for profitable
investment.

Tho volume of these and the mechanism for mobilizing

tho necessary financial resources requires special




12
large-scale provisions which did not exist and were not so urgentlyneeded in the pre-war wtrld*
We are particularly interested, in this country, in productive
capital requirements, since one of the fields in which we have the
greatest comparative advantage, as was explained earlier, is that
of productive equipment*

We will want to broaden our markets for

this to the fullest extent the world over and will want to assure
ourselves we are paid for these capital goods which we export*

The

need being so much greater than the available funds, we must extend
credit and take bonds or other paper in paymentf

But we must also

be prepared to receive back the interest and amortization repayments
in the form of gold (for which we will have little real use) or in
the form of desired imports•

Unless we permit these Imports, labor

and capital cannot, in the long run, receive payment for the goods
produced and exported*
There will be, temporarily, otner restraints to the ideal
pattern of world trade we are seeking to establish*

Of these, the

principal one is the necessity for import control which will be
laid upon nations whose capital equipment or internal economy has
been devastated by the war*

Such a nation, for a considerable

period, must see to it that its supply of foreign exchange is allowed to go only for imports which lead most directly toward the
revival of production and profitable employment•

It will be folly

for such nations to allow complete freedom of international trade
which, for Instance, permits the importation of luxury goods or any
other commodities not directly related to their most serious requirements*
As a somewhat parallel case, we have the situation of China



15
which, with limited

available exports and the possibility of limited

loans, must carefully control its imports to see that they are those
which will best minister in the long run to the raising of the
standard of living of the mass of the population of that countryf
Here again, they will wisely decide to restrict the importation of
consumer goods which would be for the benefit of a minute fraction of
her population;

and instead, concentrate on wisely chosen capital

goods which may have an effect, in a few years, which will be felt
favorably, throughout the whole hundreds of millions of that populous
country*
These deep-seated dislocations resulting from the war are going
to make it necessary to set up special means for taking care of them»
Such special means would best be devised to serve usefully as
regular procedures for

peacetime use after the immediate post-war

problems have been served*

Technicians of forty^&Seriations have

sought for this solution and came to an agreement at Brett on Woods
last July*

This agreement of the technicians has been the subject

of prolonged and careful study by the Committee for Economic Development, through its Research Committee, of which I have the honor to
be Chairman*

The report of that Committee is released for publication

tomorrow morning*

The following personal comments are in line with

that report*
The International Bank set up under the Bretton Woods agreement
takes care of the question of international capital loans* The
solution offered has met with general approval in this country*
Subscriptions to the capital of this Bank are to be made by all of
the cooperating nations, and the revival and expansion of world
production and trade becomes thus an international responsibility,



Ik
as it should be*

Also as it should be, this country makes a major

part of the financial investment

and carries a major part of the

responsibility*
The Bank as set up does not meet all the financial necessities
for the revival of world trade*

For real revival, there is required

.also provision for orderly adjustment of foreign exchange and the
arrival, through orderly adjustment, at a practicable measure of
stability*

This cannot be left to chance and circumstance or the

danger of competitive depreciation*

With the trade of the world so

largely carried on for the next few years under the abnormal circumstances which we have been describing, it will be difficult to
hold the trade of each of the subscribing nations in a balance to
permit a stable exchange*

It will be still more difficult to deter-

mine at any given moment, such as at the end of the European war
if that takes place at a given moment, just what the peacetime
exchange rate should be t
To take care of this problem, a Stabilization Fund has been
proposed*

This problem, while related to the Bank, is of such a

special sort and requires such special and independent treatment
that the responsibility for it should be located where it has been
placed;

that is, in a separate Fund*

For the first time, and by

the necessities of the situation, foreign exchange would be studied
and, so far as possible, controlled and compensated for by a
responsible body working for the interests of all*

This body to be

fully effective, must work .in the open, with its data and research
results publicly known and its operations fully revealed*
Its normal function would be to bring the network of foreign
exchanges to their normal balance at the earliest practicable moment,



15
and the framework of orderly change provided for in the agreement is
suited to this process* As the exchanges approach a normal, the
normal function of the Fund itself comes into normal operation. For
longer or shorter periods, Importing nations are deficient in the
currencies of the countries from which they wish to buy*

Exporting

nations are faced with the inability of their-customers to pay for
exports*

Exchange demands will therefore

carefully determined normal*

rise and fall about a

The Fund is planned at times to furnish

currencies to purchasing nations, and at other times, purchasing
nations are to return those currencies to the Fundt These dislocations thus compensated for may be daily, weekly, or seasonal
compensations•

They may conceivably be safely and normally compen-

sated for on a cyclical basis.
There is, however, one contingency which neither the Bank nor
the Fund wm
specific

boon oot up to take care of • The Bank provides for

capital loans for specific purposes»

The Fund provides

for what are, in essence, temporary loans to meet temporary unbalances » During the pernod of arriving at a reasonably balanced
exchange situation, loans of a character not provided for will
become necessary*

These loans are likely to be rather large and

will be general stabilization loans rather than for specific capital
purposes or to meet temporary unbalances in the exchange*
such loans out of the Fund is to misuse the Fund and

To make

lay it open

to the dangers of exhausting its supply of scarce currencies• To
make such loans by the Bank appears to go beyond the provisions
under which It would be chartered*

This gap in the Bretton Woods

agreement needs to be filled.
There is one unwise method of filling this gap«



This would be

by making such general stabilization loans from the Fund,

To do so

16
Justifies the weightiest criticisms of this Fund, which have
centered in the fear that the principal demands ur>on this pool of
currencies will arise not from short-lived unbalances of trade, but
from the very serious distortions in production and international
trade relations caused by the war*
The Monetary Fund, it is held, will inevitably be put to the
necessity of having to "finance unstable conditions'1 in many countries for an indeterminate period? its stronger currencies will
quickly be drained awar^ and replaced by weak currencies which few
firms engaged in international commerce will need or want; that is,
the managers of the Fund, in spite of some safeguards, will in fact
be powerless to prevent the use of this pool of money for what would
bo in effect stabilization, reconstruction, and "general purpose"
loans to war-stricken countries*
Consequently, it is held, the prime intended function of the
Fund, to deal with currency transactions and to correct temporary
currency imbalances, would be perverted; not necessarily through
mismanagement, but because of the underlying economic necessities
of the post-war period in many war-torn nations*

This result, it is

anticipated, may lead to early breakdown and future serious international monetary, economic, and political difficulties.
It should be accepted as3 a fundamental principle in this countryfs
dealings in this field that, in so far as possible, loans should be
truly loans, currency transactions should be currency transactions,
and gifts should be gifts. Lack of clarity as between intent end
method at this point will produce in the future, as It has in the
past, misunderstanding, recrimination, and bitterness between countries*
If a gift cannot be made as a gift, it should not mask behind the



17
facade of a loan*

Likewise, if a loan cannot be made as a loan,

it should not mask behind the facade of a currency transaction*
S3 nee it is certain that many countries after the war will need
stabilization, reconstruction, and general purpose loans, provision
should be made for them*

Thev shovld be thrown expressly within

the -orovineo of the Bank's management, where normal credit-extending
considerations could be expected to govorn evew transaction. The
International Monetary Fund could then be constantly maintained to
servo its special purpose, to deal with temporary imbalances of
international trade*

The Pundfs managers could refer to the Bank

any demands that would tend to transform it from its primo and true
function into a long-term loaning agency*
This change in policy can be effected in either one of two ways*
The reallv sound way would be to gain an extension of the Bsnk!s
powers to that end.

Would it not be easy to gain acceptance of

this extension from the present forty-four signatories of the Bratton
Woods proposal without calling a second conference?
radical change•

It is not a

In actuality, it can be .considered as little more

than a mere clarification of an obscure phrase*
In that obscure phrase lies tho second method of putting the
Monetary Fund on a more satisfactory working basis. The phrase in
question is to be found under the verv broad terms given in a crucial
article which reads:

"Loans made or guaranteed by the Bank shall,

except in special circumstances, be for the purpose of specific projects of reconstruction and development."
This second alternative proposes to remedy the weakness in the
operations of the Fund by an interpretation that tho type of loan
referred to can and may be construed as a "special circumstance.!f



18
Bv such interpretation and administration, the Bank takes on the
functions which should be assigned to it, and the Fund is left only
with those responsibilities which it can properly undertake.
It wo\>ld appear from a recent and little-noted news release that
the Treasure might be willing to accept the administrative solution.
T M s is, however, definitely the less desirable of the two and should
be adopted only if there are serious difficulties in the way of the
more thorough-going solution. The better course would not seem to
be impossible if skilful negotiations to that end were undertaken.
The wide discussion which the Bretton Woods agreement has had
sets the pattern for action and interaction between the Government
and the people whose servant it is. These post-war settlements are
going to be difficult in any case. We will finally have to accept
something less than perfect; but in spite of that fact, if we all
leave our minds open to wise and constructive discussion, we shall
find ourselves in the end solidly behind a Government which has
negotiated the best possible solutions in the light of both the common
and the particular interests of our own nation and the nations of
the world.