great leap forward in productivity. Their unions did not demand that this productivity increase be matched by wage increases, and thus the products of their factories became more competitive in world markets.

During World War II and in subsequent years, we have poured more than $90 billion of inflationary money into our economy. As a result of this inflation we have more than one worthless, printing press dollar for every good one. After the war when consumer goods became available, there were $2 coming to the marketplace to buy, a dollar's worth of goods. Since the market couldn't tell the good dollar from the bad dollar, the price of goods was bid up until a dollar's worth of goods was selling at $2-in fact a little more, because the dollar is now worth only about 46 cents.

The price of labor went up with-in fact a little faster than-the price of goods; and as a result, today American workers and factories are no longer competitive in world markets.

BASIC SOLUTION TO BALANCE-OF-PAYMENTS PROBLEM

We need to take two steps to attack the balance-of-payments problem at its base. First, we must drastically reduce our foreign aid program and the small part of it which might be continued should require that the dollars be spent in the United States. This would at least insure that there were no export of jobs through our foreign aid giveaway program.

We need also to put an end to Federal deficits in order to reassure the foreigners that we have put a stop to monetary inflation in the United States. This will give them confidence that we will be able to avoid devaluing the dollar and lessen their likelihood of calling for gold. It is an absolute certainty that if we continue monetary inflation in this country, sooner or later we shall have to devalue the dollar.

We need also to readjust the exchange rate of the dollar as between the currencies of the major industrial countries of the free world. The present exchange rates of the dollar were set by the Monetary Fund soon after World War II, long before anyone foresaw the rapid improvement in productivity in industrial Europe. The present exchange rate is unrealistic. Studies indicate that the dollar is overpriced by about 25 percent in world markets.

We see the real consequences of this when we turn our attention again to the basic exchange equation:

GOODS

GOLD

DOLLARS

GOODS

When foreigners exchange goods and services to us for our dollars, normally they would exchange those dollars for other goods and serv ices from us. It just so happens, however, that one of the goods which we offer the world is gold. Through the process of inflation the prices of our other goods and services have essentially doubled, but the price of gold remains at $35 an ounce as it was fixed in 1934. Thus today gold is the cheapest commodity we offer the world. It is not surpris ing, therefore, that foreigners who get dollars, prefer to keep part of those dollars to exchange for gold. Of course, as we have seen, they don't actually have to exchange them for gold as long as the world has confidence that we will honor our obligation to furnish gold upon mand. If we do not remove this distortion by an appropriate adjust ment in the exchange rate, we will be forced eventually to devalue the dollar.

de

If the exchange rate were adjusted to be realistic, then our products would become competitive in world markets and we would earn back the dollars which foreigners obtain from us through trade, tourism, capital flow, and gifts.

It is clear that we cannot afford to continue our massive foreign aid program. Our taxpayers already are burdened with a Government debt which is about $100 billion larger than that of all the other countries of the free world together. If we continue our profligate giving. we shall hasten if not actually precipitate a world liquidity crisis. This will have dire consequence both for us and the free world. First of all, it would certainly disrupt the U.S. economy and result in the most severe setback our economy has seen since the 1930's. This would shake the confidence of the rest of the free world in the free enterprise

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system. Other peoples would be skeptical of an economic system plagued with such difficult problems.

In the postwar years the dollar has become an important reserve currency. In a sense, we have become the bankers of the world. In the face of this circumstance there will be serious consequences if respect for the dollar is lost. We will lose more than our position as world banker; we will forfeit our leadership, politically, and ideologically as well.

Mr. PASSMAN. Thank you very much, sir.

In how many countries does the Dow Chemical Co. operate?

Mr. LLOYD. We have wholly or partially owned subsidiaries in 15 countries.

Mr. PASSMAN. Dow is one of the largest chemical companies in the world?

Mr. LLOYD. The fourth largest.

Mr. PASSMAN. You are head of the business research section of that company?

Mr. LLOYD. That is right.

Mr. PASSMAN. We want to thank you again, most sincerely, for coming here and giving us this valuable and factual information.

Mr. HARNISCHFEGER. Is it not a fact we do not permit our citizens to buy their own gold, putting the American citizen at a disadvantage to the foreigner?

Mr. LLOYD. The foreigners can take our dollars to a central bank and demand gold for them.

Mr. HARNISCHFEGER. If you want to rectify this position, you have to permit the American to do the same as the foreigner. Mr. PASSMAN. Thank you again, gentlemen.

REPORT OF NAM'S GOVERNMENT ECONOMY COMMITTEE ON FOREIGN

ASSISTANCE

We shall insert in the record, at this point, a report from the National Association of Manufacturers.

(The statements referred to follow :)

EXCERPTS FROM "THE FEDERAL BUDGET FOR 1964"-A REPORT OF NAM'S GOVERNMENT ECONOMY COMMITTEE ON FOREIGN ASSISTANCE

FOREIGN ASSISTANCE

Foreign aid is in two forms: military assistance, and economic and financial programs. The bulk of it is financed and administered through an administrative account called Funds Appropriated to the President:1

1 Grants of commodities for famine relief (between $200 and $300 million are carried in the appropriations of the Department of Agriculture; very small amounts are also carried in the Departments of Commerce and State).

21-178-63-pt. 4-99

NOTE. It should be noted that under the Agency for International Development trust funds, there is an additional $953,000,000 of new obligational authority for foreign assistance, and $574,000,000 of expenditures This is 30 percent above 1963 spending from these trust funds; and the 1963 expenditures were 20 percent above those for 1962.

Source: The budget, pp. 151–152.

Despite the net drop of $100 million in the $3,750 million 1964 expenditures over those for 1963, the overall picture of foreign assistance is an enlarging one. The more than a billion rise in requested obligational authority will sooner or later lead to increased spending. The surest way to assure a continuing lowering of expenditures is to reduce the level of spending authority.

The level of our foreign commitment should be reduced. There has been con tinuing and mounting attention in the Congress itself and in the press over recent years on the costliness and questionable effectiveness of the economic aid programs, including the charge of careless decisions and management. And the General Accounting Office has made critical findings in the military assistance programs. Surely at a time when it is apparent to all that our own economic defense needs reinvigoration, when every assist that expenditure control can give tax rate reform should be sought, when our overall international balance of payments continues to drain our gold supply, when confidence in our dollar has a somewhat tenuous place in international financial circles, when minimizing the deficit would help curb the potential inflation in the push of wage and fringe costs surely at such a time some heed should be paid to criticisms by our own people of these foreign-assistance outlays.

Military assistance

It may appear encouraging to find a $300 million reduction in 1964 expenditures for military assistance, but this is due to the high level of supplies and equipment being delivered in 1963. It will be noted that the requested obligational authority for 1964 is above the 1963 figure, which indicates expansive planning. Further more, the budget explains a change of intent which carries implications of more rather than less spending, since the potential for "local development" is limitless: '

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"Emphasis in military assistance is *** shifting to the less developed nations. where more attention is being placed on building up units trained and equipped to maintain internal security and to contribute constructively to local development."

This suggests that the nature of the assistance may also be shifting from "military" to "economic"-where the increasingly larger outlays are occurring in the trust as well as the administrative funds.

That there may be room for cost curtailment in the military aspects of the assistance program is indicated by reports of the General Accounting Office. Sav ings of nearly $50 million were recently possible by a cancellation of requisitions for materials and supplies not required by the recipient country and by a reduc tion of requirements programed. Furthermore, unclassified parts of the GAO's secret reports indicate such unnecessary and costly factors as "premature de livery of equipment *** excesses and deficiencies in spare parts stocks of recipi ent countries*** ineffective maintenance and use of delivered equipment deficiencies in the U.S. Army management of spare parts for military assistance equipment."

2 P. 68.

"Report for Improving Government Operations," Comptroller General of the United States, March 1962, p. 99. Op. cit., pp. 79-81.

GAO reports on this situation portend savings running into several hundred million. It is believed that a determined management effort could achieve a 20percent, or $290 million, reduction in the 1964 spending for this 60-country program of U.S. military assistance.

Foreign aid and private enterprise

The recent experience of our own country indicates that it is not the expenditure of public funds which bring economic development and growth. It is the investment of private initiative, time, and capital. Throughout our history it has been the private sector which has generated the astonishing performance of the American economy. The most fundamental contribution which this country could make to other countries is a release of the capital investment potential now being held back by the structure of our tax rates on income. Venture capital, placed where both the risk and the profit were greatest, led this country when it was a developing economy to its economic achievements; and the same volatile materialism can benefit the development of today's emerging economies The kind of funds most likely to aid any economy-our own or others-are private, not public investments, voluntary, not involuntary capital creation. With a release of such funds through tax reform, the natural proclivity of venture capital to seek the most profitable level, will make for a kind of American aid that public funds cannot offer.

This in itself is a reason for taking meaningful steps to reduce the level of U.S. Government aid to other governments. There is a need to wean developing economies away from U.S. relief dollars, to encourage those economies to take steps which will entice private investments. The foreign aid program is an impediment to this, since it advances Government enterprise. Giving aid to other governments primarily strengthens their political rather than the economic structures. Thus there is little opportunity and litle incentive for private enterprise to participate in or contribute to long-range economic buildup in developing nations.

On this situation the Wall Street Journal editorializes as follows:'

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"*** we get the curious upshot of a supposedly free enterprise nation taking scores of billions of tax dollars from private individuals and businesses and using them to foster statist and socialistic institutions abroad. That policy cannot possibly serve the interests of foreign economic development, of the United States, or of freedom in the world."

The Morgan Guaranty Survey writing, specifically of our billion dollar involvement with the Alliance for Progress, has this to say:

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"By default-that is, by failing to insist that a major role be assigned to private enterprise-U.S. leadership in the Alliance has encouraged the strong bias toward Government enterprise * * *

"*** By not insisting vigorously enough on the place of private capital in the Alliance framework and by not stressing sufficiently the creation of a receptive climate for investment-including foreign investment, toward which nationalism in many Latin American countries is becoming increasingly hostile-the United States has helped obscure the Alliance's basic purpose of calling forth a flow of private funds many times the amount of government-to-government aid." An official study group emphasizes the same thing. The March 20, 1963, report of the Committee to Strengthen the Security of the Free World, under the chairmanship of Gen. Lucius D. Clay, expressed convictions, with regard to the Alliance for Progress, which had "worldwide appreciation." For example: “*** care must be taken even now to assure that U.S. assistance does not exceed amounts that can be usefully absorbed without encouraging even less effort and discipline on the part of government to the south.

"Latin America must be encouraged to see its essential choice between totalitarian, inefficient, state-controlled economies and societies on the one hand and an economically and politically freer system on the other, realizing that a society must begin to accumulate wealth before it can provide an improved standard of living for its members."

If we are to set an example for the so-called developing nations, and aid them with sound advice as well as what material assistance we can afford, we ought to stop helping them start off on the wrong foot. The President's budget says '

"Mar. 15, 1963.

February 1963. 7P. 71.

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