Eisenhower and the Cold War Economy

6 Foreign Economic Policy

Foreign Economic Policy When Eisenhower took office in January 1953, he set specific goals for American foreign economic policy: reinforcing the US commitment to liberal trade policies , which had slipped during the second Truman administration; increasing American private investment overseas; and promoting free currency convertibility of Cold War allies in Western Europe and Japan. If these policies were successful, he believed, expenditures for foreign military and economic assistance (foreign aid, broadly defined) could be reduced rapidly. Even if success was not quick in coming, Eisenhower anticipated that foreign aid, especially foreign economic assistance, could be scaled back significantly. Expenditures for the European Recovery Program, or Marshall Plan, were already in a steep decline by 1953. Economic aid to Europe, either European Recovery Program or later Mutual Security Act assistance, had declined from its postwar peak in 1949 of $3.7 billion to about $1.0 billion in 1953. The Marshall Plan was deemed a success at the time, but the new administration viewed its reliance on large grants of economic aid as a necessary, temporary expediency not as a blueprint for a permanent aid policy. Furthermore, the nature of the United States’ program had changed remarkably in just a few years because of the rapid decline of Marshall Plan economic aid to Western Europe and the militarization of the Cold War. Mutual Security Act military aid expenditures had surged since 1950 from about $0.5 billion to more than $4.5 billion in 1953. Very few areas outside Europe were recipients of foreign economic assistance grants, and the amounts were low, just $0.3 billion in 1952 and $0.4 billion in 1953. So when Eisenhower and others spoke of foreign economic assistance in 1953, they were c h a p t e r 6 184 m i c r o e c o n o m i c p o l i c i e s speaking about rapidly declining European economic assistance. In contrast, military aid (predominantly grants for military equipment) to Europe—and increasingly Asia—which increased dramatically in the final years of the Truman administration, would continue to receive extensive support.1 But the new administration promised it would scrutinize expenditures carefully.2 Economic assistance, made up primarily of loans and technical aid, would have a small role. Assistance in the form of credits (loans) by the Export-Import Bank of the United States (Eximbank) to finance the purchase of American exports would be continued, although administration officials also wanted to reduce Eximbank’s activities (and costs). Its role in financing of large overseas development projects would hopefully be taken over by the International Bank for Reconstruction and Development (IBRD, or World Bank), the multilateral, international organization created after the end of World War II for such purposes . In turn, then, Eximbank could focus on much lower levels of shorter-term lending. Eisenhower believed in the value of trade liberalization, both to American prosperity at home but, just as importantly, to the creation of economic conditions overseas that would facilitate US Cold War strategy. He was, however, quite willing to compromise in pursuit of those long-term objectives—as in other elements of his economic policy. He had a keen sense of the political, ideological, and economic flexibility he needed to pursue his trade liberalization goals during a decade characterized by increasing protectionist agitation.3 Other issues also arose that required new thinking. The immediate postwar “dollar gap”—the inability of the United States’ Cold War trading partners to earn dollars—had largely ended in Western Europe and eventually eased in Japan but continued to be a factor in much of the noncommunist, developing world. Now, the new administration had to address the policy implications of a persistent American balance of payments deficit. The difficulties increased dramatically when this deficit ballooned after 1957. But the administration was attentive to long-run problems that might threaten the gold-backed, dollar-based, fixed-rate exchange system established at Bretton Woods. Addressing these problems reinforced Eisenhower’s commitment to conservative domestic macroeconomic policy. In a nutshell, Eisenhower’s view of foreign aid, export credit, trade liberalization , and the defense of the dollar reflected his fiscal conservatism and his goal of promoting free economic institutions. Eisenhower’s foreign economic policy goals were all quickly challenged; major shifts in the international economic and f o r e i g n...