But some 400,000 people were also displaced, and many remain in shelters and temporary quarters.  What will happen to them?  There are many aspects to this tragedy, but here I would like to look ahead to the rebuilding efforts in the severely damaged, and in some cases destroyed, cities and towns of northern Honshu.

The Japanese government, quite understandably, has already begun spending massively on rescue and recovery, and it is inevitable in these political times that it will continue to spend tens of billions of dollars more trying to rebuild what was lost, mostly in urban areas.  Despite my own market-anarchist leanings, I do believe there are better and worse ways for the government to do this.

But first it’s important to understand what a city is.

A City as a Spontaneous Order

Jane Jacobs, one of my heroes, defined a city as “a settlement that consistently generates its economic growth from its own local economy.”  In other words, a living city is an economic engine and an incubator of ideas.  It consists of the dynamic interaction between the social and the built environment; between the social networks that are constantly changing in unpredictable ways, and the buildings, streets, parks, and plazas they occupy and that also change, only much more slowly.  But which came first, the complex, emergent social order of the city or the intricate physical environment?  Neither.  They evolved together through countless interactions over time.

Look at a typical block in any halfway-decent city.  Each of the buildings probably went up at different times, some many decades apart, serving many diverse uses.  These uses have also undoubtedly changed.  An office building is converted into apartments, a former loft now houses an architectural firm, and so on.  Nothing stays the same because the people who use those buildings (and the streets, sidewalks, and the rest) don’t stay the same.  Families, groups of friends, coworkers, and myriad other social networks change and are changed by this evolving built environment.

Now look at a failing block.  One characteristic common to all such blocks is sameness.  Buildings are all the same age, either very old or very new, or the same size, usually very large.  The street could be any other street, without character or sense of place.  It’s overcrowded during the day and deserted at night.  This sameness is often the result of large-scale construction.  Things built at the same time grow old at the same rate. Jacobs argued that some old, worn-down buildings usefully provide people who have novel ideas but not much money a place to experiment. But where all the buildings are of the same vintage, blight is likely sooner or later.

The lesson is that you can no more construct or reconstruct a city than you can a family or a thriving neighborhood or a successful business district.  Even if you could rebuild every house, office building, restaurant, grocery store, or health spa exactly as they were before a disaster (natural or manmade), you would not be able to recreate the social order, the community, that lived in them and that shaped their evolution.  At best what you would get instead is a Disneyland district that may look good from a distance but up close has little intricacy, spontaneity, or life.

Lessons from the Kobe Earthquake

After the 1995 earthquake that leveled parts of Kobe, Japan (6,400 dead, 15,000 injured, and $150 billion in infrastructural and economic damage), the government apparently tried to rebuild quickly.  In a certain sense it was successful, and the before-and-after photos of some of the damaged areas are astonishing.  But here is what the Financial Times reported some years after the reconstruction was begun:

Take Nagata-ku, one of the most seriously damaged areas of the city, where [Yasuzo] Tanaka’s company is based. Its population is still well below the 130,000 that lived there in 1995 and only one-third of today’s residents were there before the earthquake. “The neighbourhood has changed beyond recognition,” Tanaka says. “Many people went to live in public housing that the government built far away from Nagata-ku after the earthquake. These people were not guaranteed public housing in Nagata-ku so they stayed where they already had a place to live. The buildings have become cleaner but there is no sense of community.

Part of the problem, he says, is the characterless, concrete condominiums built by the city, which replaced the crowded-together wooden houses that once dominated the area. “We asked the city to stop building condos,” he says.

Italo Calvino perhaps said it best when he divided cities into “those that through the years and the changes continue to give their form to desires, and those in which desires either erase the city or are erased by it.”  Kobe may have gone from the former to the latter.

Some Ideas

I can’t offer a detailed proposal here, but I do have a few basic ideas that I’ve drawn from several sources, most notably from Harvard urban economist, Edward Glaeser.

The ideal solution, of course, would be to let private resources and resourcefulness drive the recovery, as was largely the case, for example, in the rebuilding of San Francisco after the Great Earthquake and Fire of 1906, which had to rely almost entirely on private insurance and local initiative.  Until the advent of big government, this is way cities did it, and did it well.  But if it’s a given that the Japanese government will do something, here’s how it might do the least harm.

1. First, accept that an area which has been wiped out or severely damaged will never, ever be the same.  Also, basing reconstruction on any pre-disaster plans is problematic because the context has completely changed.  Just because a new school was “on the drawing board” before the earthquake doesn’t mean that it should now go to the top of the list.

2. After clearing away the rubble and debris, rebuild roads and highways, where feasible, at or near their former location, along with other basic infrastructure.

3. Some property owners who are able to identify their property should obviously be allowed to reclaim it.  Elsewhere, property has been destroyed, in some cases swept away in floodwaters.  Local government may initially control the area, but then sell the property to developers on the condition that they give first priority to former area residents and businesses.  Once, say, some percentage of the latter has bought back in, they should be free to sell on the open market.

4. Estimate the monetary value of the property lost.  Divide this by the known residents and business owners who were there at the time of the quake.  If $10 billion worth of damage was done and the area was populated by 100,000 persons, the government would write a check for $100,000 for each of those owners.  Part of this would come from the sale of land to developers.

There are big problems with this, of course.  First, what about renters, children, and dependents, or people who just moved in versus those who’ve lived there for generations, or large- versus small-property owners, or rich versus poor?  Second, why should the government do anything, especially if some people bought flood or earthquake insurance while others chose not to?

The answer to both of these sets of questions is that, whether we like it or not, the Japanese government will do something, probably something much bigger, more expensive, and more intrusive.  The goal then is to minimize the degree of government intervention.  Writing people a check, while an extremely blunt instrument, will probably in the long run save a lot more money and intrusions than if the government tries to rebuild the damaged cities and towns.  Moreover, the interaction between social and built environments just won’t be there, at least for a very long time, perhaps never.

It’s true that some will get much more than they deserve while others will get far less, but that would be the case with anything else the government would do.  It would probably be worse.

And this has the advantage of better enabling real communities to emerge in the damaged areas if the check holders decide to buy back into them, singly or in groups.  I think private resources and resourcefulness would stand a better chance than a more interventionist policy.  The refugees who don’t buy into existing places will then be able to go back to damaged areas and begin the process of rebuilding, slowly, over time, the way living cities have always evolved.

No one person or group of experts needs to or should rebuild Japan if the goal is to reestablish settlements that are genuine engines of economic growth and incubators of ideas.  Again, this is certainly not ideal, but the likely alternative, building Disneyland cities, would set Japan back for decades.

What else might affect the economy? The answer is obvious, but its implications are frightening. War and peace influence the economy.

Look back at FDR and the Great Depression. What finally resolved that economic crisis? World War II.

Here is where Obama is likely to prevail. With strong Republican support in Congress for challenging Iran’s ambition to become a nuclear power, he can spend much of 2011 and 2012 orchestrating a showdown with the mullahs. This will help him politically because the opposition party will be urging him on. And as tensions rise and we accelerate preparations for war, the economy will improve.

I am not suggesting, of course, that the president incite a war to get reelected. [Excuse me?] But the nation will rally around Obama because Iran is the greatest threat to the world in the young century. If he can confront this threat and contain Iran’s nuclear ambitions, he will have made the world safer and may be regarded as one of the most successful presidents in history.

Aside from the lack of evidence for his charges against Iran and aside from the fact that war would kill many innocent people, could ignite the Middle East, and raise oil prices (always good for an economy), the money spent on the war would have to be withdrawn from somewhere else. Broder commits Bastiat’s broken-window fallacy in the worst possible way. War is the ultimate breaking of windows.

As for World War II ending the Depression, let’s get real. To be sure, war can put people to work and have factories operating around the clock. But the point isn’t to put people to work and have factories running overtime; it’s to have people and factories making things consumers — not politicians and generals — want. That doesn’t happen with war spending. Consumers experienced privation not prosperity during World War II: rationing of everyday goods and other hardships. They experienced privation in the 1930s also. So in what sense did the war end the Depression? Only in the sense of a rise in economic aggregates like GDP and unemployment. (This assumes the statistics were accurate, a bad assumption.) But aggregates hide important facts. A person making bombs and another making cars are both employed for the purposes of government statistics. Yet one is working to enhance living standards and one is making something that will blow up. Don’t be fooled by aggregates.

War is not the way to prosperity. Is it really necessary to tell people that?

The worst effects of pervasive joblessness—on family, politics, society—take time to incubate, and they show themselves only slowly. But ultimately, they leave deep marks that endure long after boom times have returned. Some of these marks are just now becoming visible, and even if the economy magically and fully recovers tomorrow, new ones will continue to appear. The longer our economic slump lasts, the deeper they’ll be.

If it persists much longer, this era of high joblessness will likely change the life course and character of a generation of young adults—and quite possibly those of the children behind them as well. It will leave an indelible imprint on many blue-collar white men—and on white culture. It could change the nature of modern marriage, and also cripple marriage as an institution in many communities. It may already be plunging many inner cities into a kind of despair and dysfunction not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years.

The powers that be say government must “stimulate” the economy through new spending or the system will be moribund for the foreseeable future. That means activist government, government that forces up wages (to give us “purchasing power”), government that taxes the “rich” and “gives to the poor.” Indeed, the editorial pages of the mainstream New York Times and the Washington Post provide a cornucopia of such utterings.

However, there is an alternative, one that will lead to economic recovery, more wealth, and higher living standards. To put it another way, we don’t have to live the way we are living right now.

This is a bold statement, I realize. Some even may think it arrogant. I prefer to call it the truth. We don’t need to live with the current economic regime because Ludwig von Mises, Murray N. Rothbard, and F.A. Hayek prepared a roadmap out of the doldrums that is guaranteed to be effective.

The key to understanding the current downturn is to know why it happened. Yes, everyone knows about the housing meltdown and the financial collapse of Wall Street, but the central issue is that government policies drove the economy to throw vast amounts of money into what in hindsight are understood to have been massive malinvestments. Our economy has not faltered because of a sudden lack of “aggregate demand,” but rather because the government tried to block the liquidation of those malinvested assets in order to “save jobs.”

Wasting Resources

Here is the issue in a nutshell. By keeping derelict firms like General Motors afloat, not to mention spending billions on worthless “stimulus” projects and “green jobs,” the government also is drawing resources away from the very sectors of the economy that have real strength. Thus the government weakens the profitable firms in order to prop up politically connected companies that have almost no chance to be truly productive and profitable again.

For all his faults, President Ronald Reagan did not try to “reflate” the economy during the recession of 1982, and after the unprofitable malinvestments were liquidated, what emerged was an economy based on solid foundations of advanced technologies and telecommunications. Unfortunately, the present administration seems hell bent on following the advice of Paul Krugman, who recommends we embrace the chimera of inflation.

This means, I’m afraid, that the gloom and doom in The Atlantic is becoming outright prophecy. It does not have to be this way, but those in charge of the government have decided that they will pursue the Keynesian mirage no matter where it leads, and it is leading us to disaster.

[W]hat is the mechanism by which about $70 billion in extra spending (the amount of the total package now spent) reduces the rate of increase in unemployment and output in a $14 trillion economy? If my advanced arithmetic is correct this is ½ of 1 percent of the GDP. What kind of Super Multiplier is that?…Just a couple (or so) weeks ago President Obama said that not enough of the stimulus had been spent yet and so it was too early to expect results. But mirabile visu! The Almost Recovery has appeared. (It seems more like political opportunism instead.)

There’s lots more. No has done more to expose the analytical nonsense about the recession and remedial policies than Rizzo at ThinkMarkets.

During 1933, Roosevelt’s first year in office, GDP increased about 17 percent. What would have accounted for that?

Not FDR’s 1933 decision to seize privately owned gold and devalue the dollar from $20 per ounce of gold to $35. This increased the value of gold held by the U.S. Treasury and entitled it to print an additional $3 billion of greenbacks. The Thomas Amendment to the Agricultural Adjustment Act (AAA) authorized the Treasury to print $3 billion more. Nonetheless, the total amount of currency held by the public didn’t increase until 1934. The Fed wasn’t very active during this period.

The most sweeping pieces of legislation passed in 1933—the climax of the Hundred Days—were the National Industrial Recovery Act (NIRA) and the Agricultural Adjustment Act, but both promoted contraction, not expansion. The NIRA authorized FDR to establish cartels fixing wages, prices, and output. The AAA aimed to reduce agricultural acreage.

Recovery Preceded Policy

It’s not clear how any of FDR’s 1933 policies could have accounted for a 17 percent increase in GDP, even if they promoted expansion, because they wouldn’t have had time to ripple through the economy. It seems more likely that FDR had the good fortune to come into office near the bottom of the Depression, and enough adjustments in wages, prices, and other factors had occurred that the economy was ready to recover. The economy had recovered from previous panics, crashes, and depressions without a big-government program. Undoubtedly FDR’s sunny personality and formidable communications skills helped give people confidence they could achieve a turnaround.

From 1933 to 1937 GDP increased about 60 percent. This was the biggest GDP expansion of the New Deal—and it occurred without federal spending and deficits that would qualify as Keynesian stimulus. Krugman wrote, “[T]he New Deal didn’t pursue Keynesian policies. . . . [F]iscal policy was only modestly expansionary.” Other economists, such as Price V. Fishback, agree that New Deal budget deficits probably didn’t contribute to recovery—Fishback calls FDR’s deficits “tiny.”

Since the NIRA and AAA promoted contraction, the Supreme Court gave the economy a boost in 1935 by striking them down. Ironically, FDR viewed the anti-New Deal justices as the “Four Horsemen of Reaction.”

Raising Labor Costs

It has often been said that the depression-within-a-depression of 1938 happened because FDR foolishly cut federal budget deficits, but that couldn’t have been the case since the dramatic 1933–1937 expansion occurred without meaningful deficit stimulus. Other factors help explain that depression, starting with the newly centralized Federal Reserve Board’s decision in July 1936 to increase minimum required bank reserves 50 percent and its decision in January 1937 to increase bank reserves another 33.3 percent. Suddenly, less money was available for lending, and interest rates went up—a double whammy for employers. The Social Security excise tax on payroll began to be collected in 1937, making it more expensive for employers to hire people. The undistributed profits tax became a big issue in 1937. The Supreme Court upheld the Wagner Act in 1937, setting off the rapid unionization of mass-production industries, which led to an 11 percent increase in wage costs during that depression year—and a resulting surge in unemployment.

The problem with the New Deal wasn’t expansion. The problem was the persistence of high unemployment despite expansion. Many economists point to New Deal laws such as the NIRA, the Wagner Act, and the Social Security payroll tax (there weren’t yet any Social Security benefits), which made it more expensive for employers to hire people. Whenever anything becomes more expensive, there’s likely to be less demand for it.

Uncertain Tax Environment

In addition, the succession of New Deal tax increases—1933, 1934, 1935, and 1936—reduced private funds available for hiring. And the constant tax changes made it hard for investors to estimate their potential risks and returns, so they remained on the sidelines. Investors, like everybody else, need predictable rules. No wonder investment was at historic lows during the 1930s. Without investment it was very difficult to create new jobs.

When FDR came into office he had Congress and the nation at his feet. He was hailed as a conquering hero. With his rhetorical acumen and political genius, he might have begun by forming coalitions to undo his predecessor Herbert Hoover’s biggest disasters: the 1930 Smoot-Hawley Tariff that throttled trade and the 1932 revenue act that doubled many taxes. Ending rather than embracing Hoover’s disasters would have been change that people could believe in! If, furthermore, FDR had avoided his own misguided policies, the expansion probably would have been more robust, and without the blunders of 1937, it might have lasted longer—and most important, it would have enabled the private sector to create millions more jobs.

Some observers seem to think employers are less willing than employees to seek federal help, so the actual case is revealing. The National Industrial Recovery Act (soon shortened to NRA) became law under President Franklin Roosevelt in 1933 and dramatically altered America’s traditional free-market system. Under the NRA, a majority of firms in any industry had government approval backed by force to determine how much a factory could expand, what wages had to be paid, the number of hours to be worked, and the prices of products. Whether or not a businessman helped write the code for his industry, he was bound by the terms and subject to a fine or jail term if he violated them.

Evil Price-Cutting

Why were Roosevelt and certain New Dealers so eager for higher wages and prices without an increase in productivity and with less competition? They believed that if people earned more, they could buy more, and that would stimulate recovery from the Great Depression. In this high-wage theory the efficient, innovative, and price-cutting businessman was evil because he was believed to contribute to lower wages and therefore diminishing purchasing power. He was a violator of “fair competition.” His gain was not just the loss of his competitors but of the whole country. By encouraging codes of “fair competition,” the NRA was giving all existing businesses a chance to make profits, to pay high wages, and to survive the price-cutter.

Many businessmen liked the idea of raising their prices and sending to jail any competitor who wanted to charge lower prices. But such a move discouraged inventors and entrepreneurs from experimenting with ways to make products cheaper and better. The NRA in effect carved up markets among existing producers, fixed prices and wages, and assumed all industry was stagnant and unchanging. In automobiles, however, Henry Ford had experimented with assembly-line production and had cut the price of American cars from about $3,000 to $300. Under the NRA he was not allowed to innovate further. So Ford refused to sign the code and jack up his car prices, as his competitors at General Motors and Chrysler were doing. “I do not think that this country is ready to be treated like Russia for awhile,” Ford wrote in his notebook. “There is a lot of that pioneer spirit here yet.”

Ford was told his company would receive no government contracts until he signed—and with the large increase in government agencies during the 1930s, that meant a huge loss of business. For example, the government rejected a Ford agency bid on 500 trucks for the Civilian Conservation Corps that was $169,000 below the next best offer. “We have got to eliminate the purchase of Ford cars [by the government because the company has not] gone along with the general [NRA] agreement,” Roosevelt said at a press conference.

Ford’s assertion of freedom and independence gave hope to those who wanted to return to competition.

When Hugh Johnson, the head of the NRA, was asked what would happen to those “who won’t go along with the new code,” he threatened, “They’ll get a sock in the nose.” Although Johnson refrained from applying his fist to Ford’s nose, he did use the arm of the law to jail many men who refused to jeopardize their businesses by complying with NRA codes. In York, Pennsylvania, for example, Fred Perkins, who produced storage batteries to help light farms, went to jail for paying his employees less than what had been written into the NRA code by the storage-battery businessmen. Perkins’s employees were outraged that their boss was in jail, and they met with him to receive instructions on how to continue the business in his absence. As J.B. Jones, one of Perkins’s employees, said, “We asked him for work and he gave it to us at a time when we were in distress. The wages he was paying were fair.”

A more dramatic jailing was that of 49-year-old Jacob Maged of Jersey City, New Jersey. Maged had been pressing pants for 22 years, and his low prices and quality work had kept him competitive with larger tailor shops in the better parts of town. The NRA Cleaners and Dyers Code demanded that he charge 40 cents to press a suit. Maged, despite repeated warnings, insisted on charging his customers only 35 cents. “You can’t tell me how to run my business,” he insisted.

Not only was Maged thrown in jail, he was also slapped with a $100 fine. “We think that this is the only way to enforce the NRA,” said Abraham Traube, a director of the NRA code authority for the Cleaners and Dyers Board of Trade. “If we did the same thing in New York City we would soon get the whole industry in line.” Many editorialists, however, sided with Maged. “It didn’t matter,” the Washington Post said, “if Maged had to charge less than the bright and shiny tailor shop up the street if he wanted to continue to exist. The law said he couldn’t.” “For a parallel,” the New York Herald Tribune said, “it is necessary to go to the Fascist or Communist states of Europe.”

Embarrassing Questions

No merchants wanted to pay fines or go to jail, but the more than 500 NRA codes often imposed such quirky regulations that it was hard for many to comply. Finally, in 1935, the Schechter brothers, who sold kosher chickens in Brooklyn, took their case to the Supreme Court to challenge the constitutionality of the NRA. Justice George Sutherland asked so many embarrassing questions about the NRA chicken code that the audience actually broke into laughter at some of the exchanges. By a 9-0 vote the NRA was found unconstitutional.

The defeat of the NRA was a cause for celebration. “The Constitution has been re-established,” rejoiced Senator William Borah of Idaho. “Impulsively adopted . . . ,” journalist Frank Kent said, “it [the NRA] was fastened on the people by the most blatant ballyhoo ever promoted by a Government, and it ends in a horrible mess.” President Roosevelt disagreed and said the Supreme Court was taking the country backward with a “horse and buggy” interpretation of the clause in the Constitution that gives Congress the power to regulate commerce. Roosevelt’s desire to continue his experiments in central planning and government intervention would keep the Great Depression going for many years more. When we freed up the American economy after World War II, however, we encouraged competition, innovation, and the creation of new jobs. The Great Depression was over at last.

Here, in a mere seven words, is the fallacy Frédéric Bastiat identified in the nineteenth century and Henry Hazlitt re-identified in the twentieth. It consists in neglecting “what is not seen” and is best illustrated by Bastiat’s broken-window fable. (See page 26 for its application to war.) Let’s see how USA Today and its news sources fell for it.

The report begins by focusing on one company: “The phone at Dale Yeager’s Pennsylvania firm has been ringing off the hook in recent weeks, thanks to a trio named Ivan, Frances and Charley.” Those, of course, were destructive hurricanes that hit the southeastern United States late last summer. Thanks to an angry Mother Nature, “Yeager’s expertise in corporate emergency preparedness analysis and training” was much in demand.

The newspaper notes that many other businesses were seeing similar boosts: “Although natural disasters spread destruction and economic pain to a wide variety of businesses, for some, it can mean a burst in activity and revenue.”

No surprise there. Devastation will surely be followed by recovery efforts. That’s what people do.

But the newspaper steps on shaky ground when it attempts to generalize, guided by sources it refers to as “economists.” “For that reason, economists tallying the numbers expect the hurricanes will be neutral in their effect on the U.S. economy, or may even give it a slight boost, particularly because of an expected reconstruction boom in the already red-hot construction industry.”

One of those economists is Steve Cochrane, an economic consultant in Pennsylvania. As he sees it: “It’s a perverse thing . . . there’s real pain. But from an economic point of view, it is a plus.” USA Today says Cochrane estimates that “in Florida, the state hit hardest by the storms, 20,000 jobs will be created that otherwise would not have been.” Most of those jobs will be in construction, with others created in insurance, business services, utilities, and retailing.

Another consulting economist predicted that the expected slight dip in GDP will be outweighed by the construction boom. USA Today then listed other examples of benefits from the storms: increased sales of bottled water, juices, and walkie-talkies; more work for locksmiths; and new clients for business planners.

The key phrase in the story is “tallying the numbers.” That refers to the visible economic activity in the wake of the hurricanes. The fallacy lies in ignoring what you can’t tally numbers on: the goods and services not bought, the investments not made, the projects not undertaken because people must repair the storm damage.

The bottom line is this: Before the storm season people possessed intact homes and businesses and their money; their insurance companies’ cash was invested in productive enterprises. After the storm season people possessed destroyed or damaged homes and businesses, which they had to spend their money to replace or fix. Their insurance companies had to liquidate investments to pay the claims. That money would have been spent or invested to produce additional things. Instead, it will be used simply to put things back the way they were the day before the storms.

How that can be good for society generally defies explanation.

* * *

The “Star Trek” television series and movies attracted huge followings for their stories of adventure and heroism in other worlds. Gardner Goldsmith suggests that you not learn your economics from them.

All around the country bicycle trails are being built on abandoned railroad beds. There’s only one problem: sometimes the landowners object. Kirk Teska has the details.

Productivity increases are apparent everywhere throughout the economy, except for one of the fastest growing parts: the licensed professions. Lewis Andrews investigates.

Ambrose Bierce is best known for the Devil’s Dictionary, his cynical redefinition of the English vocabulary. Less well known is Bierce’s demolition of socialism. Daniel Hager does his part to fix that.

As noted, Bastiat’s “broken window” fallacy is widely committed by those who see silver linings in storms and earthquakes. As Thomas Woods points out, looking for an economic stimulus from war is the same fallacy writ large.

Our columnists spent the last month searching for the most arresting topics: Richard Ebeling relives the Great Chinese Inflation. Lawrence Reed says beware democracy. Thomas Szasz dissects “therapeutic jurisprudence.” Stephen Davies celebrates the life of Richard Cobden. Russell Roberts suggests a reason why we don’t have more freedom. And, stumbling across the argument that taxing and regulating charities would bring social benefits, your editor bellows, “It Just Ain’t So!”

Books reviewed this issue scrutinize the creation of Iraq, the history of violence, and teachers unions.

—Sheldon Richman

$115 billion worth of foreign aid has produced neither friends nor a genuine European prosperity—while it has placed American weapons in hands which may someday aim them at us.

Last March 19, President Eisenhower formally asked Congress for $4,860,000,000 for the Mutual Security Program. This is a big figure, right on the face of it; but it looms even larger when you consider that this recommended foreign aid appropriation—virtually $5 billion—is almost twice the $2.7 billion for the current fiscal year.

If the President’s request is approved, it will bring the total of American foreign aid since World War II to the fantastic sum of almost $55 billion. But even this mountain of dollars is dwarfed by the total we have doled out to other nations since 1940—approximately $115 billion, averaging more than $2,000 per taxpaying family in the U. S.—money which these families otherwise might have used for better food, shelter, clothing, health, education, religion, savings, or anything else of their own free choice.

Nevertheless, this $115 billion sacrifice—or even two, three, or four times that much—might have been totally justified, had it been made voluntarily in the form of private gifts and investments and especially if the money spent had been successful in guaranteeing American security in a conflict-torn world.

Pleas for More Aid

Since our foreign aid program has been going full blast for almost ten years now, it is quite possible to analyze not only its motives and methods but also its objectives, and—very important—to what extent they have been achieved.

Taking first things first, what has been the motive of Uncle Sam’s giant give-away program? It is often portrayed as a Christian compassion for the “downtrodden” or “unfortunate” nations of the world—especially for our noble World War II allies. Such a portrayal appeals strongly to millions of kind-hearted Americans and has been voiced by many proponents of foreign aid, including Secretary Marshall. On May 13, 1947, he declared in an overseas broadcast: “There has been much of misunderstanding regarding our program of aid to Greece. There has been much of distortion and misrepresentation of our purpose. We are answering the call of a valiant ally who has suffered much . . . It is as simple as that.”

Inconsistent Pretense

But only two months before, on March 12, President Truman, in urging the Greek loan, had rested his appeal frankly on the argument that “the very existence of the Greek state” was being “threatened by the terrorist activities of several thousand armed men, led by communists.”

Thus, according to President Truman, the real objective was to “buy” allies in our struggle against Soviet communism. Explaining the purpose of our foreign aid in 1951, Assistant Secretary of State George C. McGhee frankly asserted his opinion that: “The United States cannot afford to allow the forces of neutralism and anti-Western sentiment to gain any further ground, nor to allow these forces to be captured and exploited by internal communism.” And the objective in 1951 is precisely the objective in 1956, as countless recent official acts and statements testify.

It should be plain by now that the primary motive is by no means a compassionate concern for other nations. It should likewise be clear that the ultimate objective is not the economic recovery of war-ravished Europe nor the industrialization of impoverished Asia—as is often alleged—but one thing only: the gaining of anticommunist allies.

A Test of U. S. Motives

Anyone who entertains a lingering doubt about this should ask himself: Why were U.S. officials so perturbed when Russia offered to pay for the monster dam at Aswan on the Upper Nile? Would not this have greatly helped the Egyptians, and saved millions of American dollars for other worthy foreign aid projects?

Or, why were State Department spokesmen so agitated this past winter when Khrushchev and Bulganin toured Asia with big promises of Russian aid? Surely, if concern for vitalizing the stagnant Asian economy had been uppermost, then our government should have said: “Wonderful! Now the Soviets are joining us in the great task of lifting the Asians out of poverty!” But no, Washington was frightened, and considered this Russian overture as reason number one for hiking our 1956 foreign aid appropriation to the staggering total of $5 billion dollars.

Having observed this technique for gaining allies, we must ask: Do we think it in keeping with the principles on which this country was founded to stoop to the crude stratagem of “buying” friends? Is there anything in all Judeo-Christian tradition which would even remotely sanction the attempt to gain friendship by crossing a palm with silver?

Bribery and Blackmail

The only principled way to win a friend—whether person or nation—is to take a sincere interest in his well-being, apart from any immediate gain for oneself. Attempting to “buy” national friends is, by definition, sheer bribery—a gift bestowed with the purpose of influencing action in favor of the donor. And it leads, almost inevitably, to blackmail. The bribed nation is tempted to say: “Give me more, or I’ll switch to the other side.” And whether or not a recipient country attempts blackmail, it is apt to feel a deep-seated suspicion and resentment.

Senator Mike Mansfield, back from an extensive trip in Southeast Asia, declared last February in the Senate:

The argument which is often made to the effect that we must outbid the Russians in offers of aid to Southeast Asia reflects very little credit on us or on the nations of that area . . . The decent, the self-respecting, the independent in Southeast Asia will resent the implication that they can be bought.

That this is no mere platitude is abundantly verified by current history—and it applies to Europe as well as Asia. Recent events point to the harsh and stunning fact that foreign aid simply has not worked! Again and again, the record indicates that American dollars have been singularly ineffective in winning friends for the competitive market system and for the people of the United States. Consider some instances:

France. Since the end of World War II, we have given approximately $12 billion in aid, economic and military, to France—more than to any other nation except England. But French resentment of the U.S. is unmistakable. So is the growing French response to communism—displayed in the recent National Elections when over five million Frenchmen voted communist, seating 150 communists in the French assembly.

This winter, when an American reporter asked 25 French citizens what they thought of the giveaway program, nearly all said it made no difference to them; they didn’t get any of it. Some remarked, “It made billionaires out of French millionaires.”

Greece. Henry Gemmill, reporting from Athens in the Wall Street Journal of January 26, 1956, wrote: “Today the sentiment of the populace toward the U.S. government ranges from mild exasperation to violent opposition . . . Politicians such as Progressive Party leader Spyridon Markenzinis are making speeches depicting the Greek government as a toy in the hands of ‘our great friends.’ University students have marched through the streets shouting, ‘Out with the Americans . . . . ‘”

This anti-American attitude revealed its intensity last February, when one out of every two Greek voters cast his ballot for the communist-backed “popular front.” That’s how much friendship the U. S. got for the $2.8 billion it had poured into Greece.

Italy. Even stanch advocates of foreign aid concede that communism remains a potent force in Italy. And this, despite American billions, teamed up with an utterly earnest, all-out fight for survival waged by the Catholic church in its home territory—a struggle in which priests delivered anti-communist talks from soap boxes, and even derobed and turned cloak-and-dagger men, joining Italian communist cells in order to undermine them.

Still the Red lure persists, and repeated reports—as for example, from southern Italy where huge sums have been spent for development—have shown more persons becoming communists than anticommunists.

Yugoslavia. Looking back a few years, we can remind ourselves that the Yugoslavian government exuded no noticeable gratitude in return for the millions of dollars of supplies poured into that country by UNRRA. More recently, since 1950, Yugoslavia has received from us some $500,000,000 in economic aid, and about the same in military aid. And yet Yugoslav officials openly declare they have no intention that our aid should help curtail their admittedly communistic regime.

Egypt. Since the start of our program in 1951, the United States has spent some $60,000,000 in economic and technical aid to the land of the Pharaohs. Yet relatively few Egyptians are aware of the American dollars circulating in their land. Meanwhile, Egypt has turned to the Soviet bloc to make cotton-for-arms barter deals, and Premier Nasser has fiercely opposed any Arab state’s joining a Western defense alliance.

England. Here is where we have doled out more billions than anywhere else. Yet from the start of our aid-to-Britain campaign, many there have viewed us as a scheming Shylock overeager for his pound of flesh. Typical was this observation from the dignified London Economist, after the special postwar British loan of $3,750,000,000: “If the purpose of the American Congress which decides American policy is, as it often seems to be, deliberately to wound and afflict the British people, it has certainly succeeded. It is aggravating to find that our reward for losing a quarter of our national wealth in the common cause is to pay tribute for half a century to those who have been enriched by the war.”

More examples could be cited. These should suffice. The record is abundant with proof: Dollars simply do not buy friends.

European Recovery

“But,” a proponent of foreign aid may argue, “our aid has brought European economic recovery, and now it will help build up the backward countries of Asia and the Middle East; and this is the surest way to stave off communism.”

While there is some question as to just how much Europe has recovered, and how much is due to dollar aid, this argument remains the big weapon in the arsenal of those favoring more foreign spending.

If the primary goal in Western Europe had been speeding her economic recovery, rather than wooing her with dollars, the first step might have been to analyze just why her postwar recuperation had been so slow. Henry Hazlitt makes such an analysis in Will Dollars Save the World? With clear reasoning and detailed documentation he shows that what Europe needed most was not capital but capitalism—more freedom from both internal and external interference with the market operation.

Why was it, at the start of the Marshall Plan, that European countries appeared to need U. S. dollars so urgently? Because, ordinarily, heavy sums were being spent on armaments, on subsidies to nationalized industries running a deficit, on food subsidies, and on increasing pensions, family allowances, and other forms of social security.

Inflationary Policies

Rather than cut back on some of these government expenditures, which fiscal soundness would have required, they issued more currency; and the volume of money in circulation rose enormously. At the same time, these governments tended to hold down interest rates, so they could borrow cheaper and encourage business borrowing

a policy which further increased pressure for higher prices. ‘ Yet, though these governments themselves had created the inflation, they refused to take the blame for the accompanying price rises, but instead charged it to “speculators” and “hoarders” and to the rapacity of producers and sellers.

Rather than check the inflation itself, they determined to hold prices under control by fixing ceiling prices on almost everything. This, in turn, threw their economies out of kilter. As is ordinarily the practice in price regulation, they put the severest controls on necessities—and cut the profit margin on such items down to the bone. Since manufacturers could make so little profit making necessities, more and more turned to production of luxuries, which were uncontrolled.

In turn, more and more workers were drawn from the necessity to the luxury industries. The result? An apparent labor shortage, and even worse, a scarcity of necessities—food, shelter, clothing. Without going any further, it is plain that such a situation spells Trouble.

Under such a circumstance, we could have done far more for these European countries by showing them the errors of their regulated economies, and instructing them in the merits of the free market, than by shoving American dollars into their pockets.

German Recovery.

During the first few years after the war, West German recovery was comparatively protracted. In 1947 millions of Germans were starving. As the late Dr. Walter Eucken, professor of economics at Freiburg University and heir to the German liberal tradition, observed in 1947:

Germany today is suffering acutely from an overdose of planning. The Nazis laid the basis for German economic planning—for armaments and warfare. To our surprise the Allies left things largely as they were . . . .

But Germany had come to the end of the socialist trail, and increasing numbers began to feel that at least a slight return toward capitalist incentives might increase production. Then the

Marxian-oriented Social Democratic Party was routed by a new political combine under Konrad Adenauer, which opposed the Fair Deal controls enforced by the American, British, and French military governments. Germany started to edge a little toward a free economy, gradually taking controls off more and more commodities. The result was startling. German productivity lunged forward.

Upsurge in Production

Even a small dose of Markwirtschaft (the market economy) had a pronounced effect. By 1953 West Germany’s industrial production, on a per capita basis, was above the level of 1938, when the economy was operating under a full head of steam in preparation for war.

Meanwhile, East Germany, by comparison, remains in pathetic poverty. What has caused the difference? It is true that West Germany did receive generous aid in U. S. dollars. But more than one competent observer has concluded that West Germany’s heartening resurgence has been due not so much to an influx of free U. S. commodities as to the Germans’ own hard work and a sounder policy—a noticeable movement toward Markwirtschaft. A more complete adoption of the free market would have produced even more abundance, and could have generated far more prosperity than the shot-in-the-arm dollar aid.

But, even though Germany still clings to a considerable measure of socialism, it enjoys more market freedom—and hence more productivity—than most other European nations.

What about Military Aid?

Still, foreign aid advocates may say, “You talk as if all our aid were economic, while much of it is military—arms shipped to our allies as a deterrent to Soviet aggression.”

True, much of our help has been military. And it is probable that substantial amounts designated for economic use actually have served to buttress foreign military establishments. Even if we did not ship a single gun or plane, but only money or food—and even if we specified that these gifts be used only for nonmilitary purposes—every American dollar spent for economic recovery simply frees the equivalent in local currency for some “marginal use,” such as building a military organization.

But inasmuch as our total economic-military aid program has been so ineffective in winning allies, what assurance have we that these guns won’t someday be pointed at us? The weapons themselves are neutral. If we have failed ideologically, failed to win friendship—and there are indications we have—then these weapons may eventually explode right in our own faces.

Three Conclusions

So, in evaluating almost ten years of U. S. aid to Europe, we find:

(1) It has not produced any noticeable goodwill or loyalty for America.

(2) European recovery is highly uneven, and is most marked in West Germany where a move toward a freer economy caused an outstanding upsurge in production.

(3) There is no guarantee that U. S. military aid will not be used against,-rather than for us.

Considering this record of dubious achievement, it is hard to understand the unrestrained enthusiasm some apparently well-informed Americans entertain for our foreign aid program—an enthusiasm which prompts them to say, in the spring of 1956: “U. S. dollars have done such a good job in Europe, now let’s really pour them into Asia!”

Aid for India

But I say, the vast U. S. tax-away-and-give-away program has flopped in Europe, and what reason have we to believe it will click in Asia and the Mid-East? After all, we are not newcomers in India, and what has our record been there? Since 1950 we have dumped some $500 million in India’s copious lap, only to see her sympathies turn more and more toward the Kremlin, while her newspapers either take American gifts for granted or ignore them altogether. Meanwhile, this past winter and spring Russia finally has come to India’s aid, offering actual business deals[]loans not gifts—and in the process is winning friends.

Some Indians are perceptive enough to urge their government not to accept any more U. S. dollars. This past winter, J. J. Singh, president of the India League of America, asked India to refuse further aid from the United States. He said: “This creates expectancies in the U. S. which India is rightly not willing to meet. That, in its turn, creates disappointment and bitterness in America, thus worsening relations.”

Before we brashly promise the Asians that our dollars will bring a vital productivity to lands steeped in centuries-old traditions which fight individual initiative and free enterprise, we should consider carefully the reasons for Asian poverty.

India seems destined to receive many American billions in coming years. Presumably proponents of dollar aid to India believe it needs American capital, and that this capital must be bestowed through the instrument of the U. S. government. But, according to Dr. Ludwig von Mises:

India lacks capital because it never adopted the pro-capitalist philosophy of the West and therefore did not remove the traditional institutional obstacles to free enterprise and big-scale capital accumulation. Capitalism came to India as an alien imported ideology that never took root in the minds of the people. Foreign, mostly British, capital built railroads and factories. The natives looked askance not only upon the activities of their alien capitalists but no less upon those of their countrymen who cooperated in the capitalist ventures.

Today the situation is this: Thanks to new methods of therapeutics, developed by the capitalist nations and imported to India by the British, the average length of life has been prolonged and the population is rapidly increasing. As the foreign capitalists have either already been virtually expropriated or have to face expropriation in the near future, there can no longer be any question of new investment of foreign capital. On the other hand the accumulation of domestic capital is prevented by the manifest hostility of the government apparatus and the ruling party.

This was true in 1952 when Dr. Mises wrote it, and even more so in 1956. Throughout these four years India has turned increasingly socialist—nationalizing industries, controlling private companies with an intricate maze of regulations, allowing the State to confiscate private property, and enacting labor laws which make it extremely difficult to fire anyone, no matter how incompetent.

All these restrictions discourage both native and foreign industry and investment, and create the very poverty which India seeks to eradicate. As long as India continues her ill-advised march toward socialism, no amount of American billions can bring her prosperity. Our dollars will only serve temporarily to camouflage her mistake, and delay the hour when India must awaken to the free market ideas which alone can eliminate her vast army of unemployed and greatly increase the productivity of individual Hindu and Moslem.

Why Not Try Voluntarism?

Why, then, extend further foreign aid? Additional billions will fail to accomplish their purpose. More than that, the whole concept the idea that one nation must tax its citizenry and pour the booty into the coffers of less prosperous countries—is statist and socialist, utterly contrary to the ideals of a free society.

No government—the United States or any other—should be allowed to take the property of individuals by force, and hand out such savings to the governments or the peoples of other nations. Such an action is dictatorial and authoritarian.

The individual alone should decide whether he wants to give or lend his property to other individuals in other countries. This voluntary system of international exchange proved potent when tried—it helped to build America and other great nations as well. At this day and hour, a return to the practice of voluntary individual giving, lending, and trading would not be retrogression, but dynamic and urgently-needed progress. []

Turning the Tables

Not long ago, Congressman Ralph W. Gwinn of New York appeared on a television round table program with M. Foure, the French Foreign Minister, and Congressman James G. Donovan of New York.

As one explanation of his opposition to foreign aid, Gwinn cited how the United States, over the past few years, had given billions to England for the express purpose of helping the British Conservative Party stay in power. Then he asked his listeners to use their imagination and conceive what their own reaction would be if the tables had been turned—if, for example, instead of the United States sending billions to Britain as a means of influencing the English political scene, Britain had been exporting equivalent sums in order to shape our own political destiny. Congressman Gwinn said:

“Imagine how mad we nearly all would be if Great Britain had for years sent $3 billion or $4 billion to help entrench Harry Truman and the New Deal Party in power, and keep the Republicans out. The Republicans would have been hopping mad and, while the New Deal Party would no doubt have taken the money and said nice things about Great Britain for foreign consumption, it would have been furious that Great Britain would presume to be able to buy New Deal friendship.”