Economic Advisory Work for Governments

Author(s): E. W. Kemmerer
Source: The American Economic Review , Mar., 1927, Vol. 17, No. 1 (Mar., 1927), pp. 1-12
Published by: American Economic Association

Stable URL: https://www.jstor.org/stable/1813680

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 The
American Economic Review
VOL. XVII. MARCH, 1927 No. 1

ECONOMIC ADVISORY WORK FOR GOVERNMENTS

Presidential address delivered at the Thirty-Ninth Annual Meeting of the

American Economic Association, St. Louis, Missouri,
December 29, 1926

Usually the selection of a subject for the presidential address is

a matter of much concern on the part of the President of the Asso-
ciation. The occasion offers an excellent opportunity to an economist
to deliver an epoch-making message to the economic world; but un-
fortunately I have no epoch-making message to deliver. At the
suggestion of some of my colleagues in the Association, and at the
cost of giving the address a more personal tone than it usually has,
I have decided to base my remarks on the somewhat unique experience
I have had during recent years as an economic adviser to foreign
governments and to tell you some of the conclusions which that ex-
perience seems to justify.
As to the extent of the experience, I will merely say that by the
end of the present academic year it will have been my privilege to
have served either alone or in connection with special financial com-
missions, in an advisory capacity to ten different countries on five
different continents. The countries covered, in chronological order,
are the Philippines, Mexico, Guatemala, Colombia, Germany, Union
of South Africa, Chile, Poland, Ecuador and Bolivia.
I shall consider the subject under the following rubrics: Why
foreign governments choose American economists as advisers; the
field of work usually covered; the method of work which has been
found to give the best results; the attitude of the governments and
the public toward foreign advisers; the extent to which the advice
given is followed; and the type of economic fallacies which most
obstruct the work of foreign advisers.
When one considers the strength of nlational pride in most countries,
the political ambitions of party leaders, and the opportunities offered
by financial legislation for political prestige; and when one further
considers the power of vested economic interests in most countries,
and the influence in political and economic life of blood relationship
and personal friendship, particularly in Latin countries, he will realize
what great obstacles must be overcome by a government that will

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 2 E. W. Kemmerer [March

deliberately say: "The solution of our own financial problems has

proved to be an impossible task for our own people unaided. We
should therefore employ foreign advisers, place before them the most
intimate facts of our economic and financial life and follow their
advice." Such a decision on the part of any government and any
people is difficult to make. It is possible only under the pressure of
strong motives.
There are certain very obvious advantages in resolving to employ
foreign expert advisers. The resolution to look abroad for expert
advice opens up to any country a wide field of choice. It has the
world from which to pick instead of being limited to a small number
of its own nationals. Most of the countries above mentioned-
Germany and Poland are notable exceptions-are economically new
countries with small populations in which there has been little develop-
ment of scientific economics. Then again the foreign economist can
view the problems with absolute objectivity. He is disinterested.
He has no political ambitions, and is therefore free from local political
bias. He probably has no investments or business connections in
the country, and he is therefore free from the bias of business interests.
As a rule he has no relatives and few if any personal friends in the
country whose interests are likely to warp his judgment. He goes
abroad a free man without commitments and without local prejudices.
It is chiefly for this reason that the public places so much confidence
in the foreign economist, not because it believes that he has greater
economic knowledge than its own nationals. As a matter of fact, if
identically the same advice were given by their own economists it would
have nothing like the chance of being adopted that it has when given by
foreigners.
In this field, of course, as in any other, there is a certain prestige
that comes to a foreign adviser from any successes he may have had
in other countries. The old adage, "Nothing succeeds like success,"
is here applicable.
In the selection of foreign advisers there are three reasons that
argue for American, although the force of each reason is very differ-
ent in different countries.
The first reason is the well-founded belief, in many countries, that
the United States is not looking for political aggrandizement and
is less likely than most great powers to exploit the services of her
nationals, who advise other governments, a.s a means of extending her
political power. This consideration is particularly applicable in cases
of European countries and the Orient. It was undoubtedly a factor
in the selection of Professor Jenks to go to China in 1904; in the
selection of Mr. Dawes as chairman of the Dawes Committee for

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1927] Economic Advisory Work for Governments 3

Europe in 1923; in the selection of Dr. Milspaugh by Persia in 1922;

and in the decision this year of Poland to have an all-American
Financial Commission. On the other hand, the unjustified popular
belief so widely found in Latin American countries that the United
States is seeking by every means in its power to extend its sovereignty
over the entire western hemisphere, has on more than one occasion
been responsible for the appointment of European advisers by Latin
American countries. This popular fear, however, of political ag-
gression on the part of the United States, among South American
countries, seem.s to be declining at the present time; and although
military advisers to Latin American countries are more likely to be
Europeans than Americans, financial and economic advisers have for
many years been predominantly Americans. Within the last ten
years no less than ten Latin American countries have had American
financial advisers.
A second reason that has exercised a strong influence in favor of
American financial advisers is found in the remarkable economic pro-
gress that the United States has made during recent years, a progress
that has expressed itself in the increasing efficiency and the rapid
expansion of our industries, in the growth of our foreign trade both
absolutely and in proportion to the foreign trade of most of our
principal comnpetitors, in rising wages and declining interest rates.
This progress has likewise found expression in the successful manage-
ment of our national government finances with the government's enviable
record of being the only important country in the world to maintain
the gold standard during the years immediately following the war,
and with its record of seven years of surplus in the national budget,
of a steady and large reduction of the public debt during the last
seven years, and of declining rates of national taxes. Regardless of
the reasons for this progress, and irrespective of the extent to which it
is a reflection of the merits of our people, or, as some foreigners main-
tain, of our selfishness, or is largely a result of circumstances over
which we have had little control and therefore for which we deserve
neither credit nor blame; regardless of all this, the facts remain that
the United States has made great economic progress in recent years,
and that at the present time the masses of our people probably enjoy
greater prosperity and more comforts of life than do those of any
other nation. Economically advanced countries which are passing
through periods of financial and business depression as an aftermath
of the war, and economically backward countries with rich but un-
developed natural resources, very naturally seek economic advice from
the nationals of the country which seems to them in recent times to
have been economically and financially the most successful.

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 4 E. W. Kemm,erer [March

There is a third reason favorable to the appointment of American

advisers, and one that undoubtedly has had much weight in the
appointment of most American advisory commissions. It is the desire
on the part of the foreign governments through setting their financial
houses in order, and through making thereby a favorable impression
upon American bankers and investors, to facilitate the borrowing of
money by the government in the American market and to encourage
the flow of American capital to their shores for private enterprises.
Since the war the great bulk of the foreign loans floated throughout the
world have been floated directly or indirectly in the American market;
and this situation is likely to continue for some years to come. A
large part of the world today is zealously seeking foreign capital.
The United States is the principal source of such capital. A country
that appoints American financial advisers and follows their advice
in reorganizing its finances, along what American investors consider
to be the most successful modern lines, increases its chances of
appealing to the American investor and of obtaining from him capital
on favorable terms. This may be selfishness; but, if honestly carried
out, it is enlightened selfishness.
These then are the three principal reasons why governments in
seeking foreign financial advisers so often choose Americans: (1) the
belief that the United States is comparatively free from ambitions of
political aggrandizement, particularly in Europe and in the Orient;
(2) the economic and financial prosperity of the United States in
recent years; and (3) the desire to attract American capital.
Next will be considered the field of work usually covered by the
commissions with which I have been associated, a field which I believe
is fairly typical of that covered by otlher financial advisory commissions.
This field generally comprehends the subject of currency reform and
usually involves the establishment of the gold standard. In nine of the
ten countries for which I shall have acted in an advisory capacity by
the end of the present academic year, one of the problems will have been
the establishment of the gold standard, and in the tenth country,
namely Mexico in 1917, one of the principal problems was the re-
forming of a gold standard which was so defective at the time that
strictly speaking it was not entitled to the name "gold standard."
In six of the ten countries, either an entirely new general banking
law, or a thorough revision of the existing general banking law was
required. All but one of the ten countries wished either the creation
of a new central bank of issue or extensive reforms in an existing
central bank. All but three required a thoroughgoing revision of
their systems of accounting, audit and fiscal control, and five of the
countries needed new organic budget laws. Eight required extensive

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1927] Economic Advisory WVork for Governments 5

reforms in their tax laws and their systems of tax administration,

and five required drastic revisions in their systems of customs adminis-
tration. In eight countries questions of foreign loans and of a
foreign loan policy were involved. Reforms in the administration of
go-vernment railways were called for in the cases of four countries,
and reforms in the administration of government industrial monopolies
in the case of two countries. This brief summary will afford a rough
idea of the type of work usually covered and therefore likewise of the
fields of economic specialization from which the members of these
foreign advisory commissions are usually chosen.
There are, broadly speaking, two types of advisers. The differences
between them can perhaps be best indicated by an analogy drawn from
the medical profession. One type is the general practitioner type
which diagnoses the disease, prescribes the medicine, and then under-
takes to take care of the patient until he has rea,sonably recovered.
Such advisers, like Dr. Zimmerman in Austria, Jeremiah Smith in
Hungary, Dr. Milspaugh in Persia, Mr. Hord in Ecuador, and Dr.
Cumberland in Peru and Hayti, must enter the field of administration
and must therefore accept fairly long-time appointments. The second
type is the diagnostician or consultant type which merely diagnoses
the difficulties, prescribes remedies, and then goes away, either leaving
to the nationals of the country itself the full responsibility of
administering the treatment, or perhaps recommending the appoint-
ment of advisers of the general practitioner type to help carry out
the treatment recommended. This second type of commission advises
but does little in the line of administration; and therefore its period
of service is short, usually three to six months instead of several
years as in the case of the general practitioner type. Aside from
my position in the Philippines from 1903 to 1906, all of the advisory
work with which I have been associated has been of the second, or
consultant type.
For commissions of this type it has been my experience that the
following practices in organizing and presenting the work have given
the best results.
The men chosen for the respective expert positions should first
of all be men of thorough scientific training. The problems with
which they will be confronted will, in the main, be new problems or old
problems in a very different setting from those with which they will
have been familiar. Such problems do not submnit themselves readily
to rule of thumb or routine methods. Their solution requires scien-
tific imagination in the application of sound economic theory to
unsound and often very strange economic practices. The "brass
tacks" economics of the self-satisfied practical business man of which

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 6 E. W. Kemmerer [MIarch

one hears so much nowadays, has too much glitter and too little grip
to be of much use in work of this kind.
In making up a financial commission I always try to obtain at
least two men who can qualify as experts in each of the commission's
major fields of work. This is merely an application of the principle
of "safety first," because every man, no matter how well qualified
he may be in his own special field, is certain to make blunders from
time to time; and in work of this kind where one's blunders are apt
to be crystallized into law, affecting the welfare of millions of people,
blunders are likely to be very costly. The critical examination of
all the work of an expert by another expert in the same field whose
name must be signed to the work in question is valuable insurance
against costly blunders. Both men may occasionally make foolish
mistakes; but the probability that both will make the same mistake
at the same time is small. Most economists have a major field of
work and a related nminor field which is a close second to the major
field in their interest. Each subject covered by a commission is
therefore usually entrusted to a sub-committee of two men, the chair-
man of the sub-committee being the man who makes this subject his
major interest and who is primarily responsible for the recom-
mendations that will be made concerning it by the whole commission,
and the other member being a man who has his major interest in
another field but whose minor interest is in this particular field.'
Each expert, assisted by the other member of hiis sub-committee,
reports on the progress of his major work daily to the whole com-
mission, and the sub-committee finally submits its completed recom-
mendations to the whole commission. Each report is then read
critically by all the members of the commission, usually from four to
six in number, and by the secretaries who are likewise usually econo-
mists. The report when finally submitted to the government bears
the signatures of the entire commission including the secretaries.
There is often much difference of opinion during the early stages of
the preparation of the different reports and while they are under
consideration by the commission as a whole; but it has always been
possible to iron out the differences and in no case has there been a
minority report.
During the process of the preparation of the reports the members
of the commission are continually in touch with the Finance Minister,
"For example, in our present Ecuador and Bolivian commissions the sub-committee
on customs administration consists of Mr. Robert Vorfeld, an expert of the
United States Tariff Commission and a man of wide training and experience
in the field of customs administration, and Mr. Joseph Byrne, our commission's
expert in accounting and fiscal control who is also an expert in the field of
customs administration, and who was for some time Collector General of Customs
in Peru.

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1927] Economic Advisory Work for Governments 7

with other leading officials of the government in their respective fields

of work, and with the best informed professional and business men.
Conferences are usually held with leading men in the different cities
of the country and these men often come long distances to give the
mnembers of the commission information and advice. Usually there
are one or two of the country's best lawyers attached to the com-
mission to give it legal advice. At the present time in Ecuador two
of the country's leading lawyers are giving the commission their entire
time. The commission is also usually furnished with a native staff
of accountants, statisticians, draughtsmen, translators, interpreters
and clerical assistants. The time available for the work is so short
that the work is of necessity conducted very intensively.
The expression "Commission's Report" previously used is misleading.
With three exceptions, none of the commisisons with whlich I lhave
been associated has presented any general report. It has been found
more effective to submit specific memoranda on specific subjects.
These memoranda do not take the form of the usual government
report but rather of definite projects of law drafted in a form ready
to be enacted by the legislature, or definite administrative orders
ready to be issued by the executive authority. These projects, how-
ever, are followed by a brief discussion of their underlying philosophy
and by a running comment interpreting and explaining in simple
language the various articles of the projects and attempting to make
clear their "why's and wherefore's" to the ordinary intelligent citizen.
This explanatory discussion bears in Spanish the significant title of
"exposicion de motivos." It provides the supporters of the project
in Congress, in the public press and elsewhere with argumentative
material for its defense. Usually the different projects with their
accompanying expositions of motives are published in pamphlet form,
both in English and the language of the country, and distributed free
of charge to interested parties at home and abroad.
The advantage of this method of presentation over that represented
by a general report is that the foreign commission itself takes the
initiative and assumes the offensive instead of letting someone else
decide upon the form which the bill embodying the commission's recom-
mendations is to take when presented to the legislature. On points
of difference, the burden of proof is thus placed upon those who oppose
the commission's recommendations. This is a great advantage, par-
ticularly when the commission is supported by strong public opinion,
as it usually is.
A question frequently asked with reference to the work of foreign
financial advisers is: Do governments usually follow the advice
given? This is not an easy question to answer, and a correct answer

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 8 E. W. Kemmerer [March

would require a thorough study of the work of many financial advisers

and of the subsequent history of the countries which they advised.
It is my own experience, however, and I believe that this experience
would be corroborated by most others who have worked in this field,
that a substantial part of the advice given is usually adopted and
that in a large proportion of the cases the major part of the recom-
mendations are followed.
Both the government and a large proportion of the non-official
thinking people of a country must be in a very receptive mood for
foreign advice before the government resorts to the appointment of a
commission of foreign advisers. In practically all of the commissions
with which I have been associated, the reception given to the commission
has been very sincere and cordial on the part of almost all classes in
the country. The attitude of the great bulk of the business and
professional public, the farmers and the newspaper men, and of
laboring men, except the extreme radicals, has almost invariably been
strongly favorable to the commission from the beginning of its work
to the end. Opposition is most likely to come from the extreme left
and the extreme right, namely from the radical socialists on the one
side and from a few dyed-in-the-wool reactionary bankers and business
men on the other. The former want only revolutionary reforms, and
the latter in their self-satisfied smugness, oppose almost all reforms
that are worth while. A government, which is responsible for the
appointment of a commission of foreign advisers, most naturally wants
to justify its action by taking advantage of the commission's advice.
It is a rare thing for the recommendations of a foreign advisorv com-
mission to become the football of party politics. More likely are they
to become a patriotic rallying ground, as they were in Colombia in
1923 and as they give prospects of being in Ecuador today, for the
genuinely public-spirited elements of all parties.
In this connection the fact should be noted in passing that some
kinds of financial reform are much more likely to arouse opposition
than others. Tax reforms, for example, are particularly likely to
meet early and vigorous opposition, and the proportion of recom-
mendations in this field that is finally adopted is usually smaller than
in any other field. This statement would probably also be applicable
to the United States.
Financial reforms are of course only begun when the laws em-
bodying them are placed on the statute books. The great problem is
the problem of administration; and the most difficult phase of adminis-
tration is the development of a thoroughly qualified personnel for the
more responsible positions. It is the policy of our commission in
every country to recommend that very high grade men be appointed

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1927] Economic Advisory Work for Governments 9

to the more responsible positions; such for example as that of Manager

of the Central Bank, Superintendent of Banks, Comptroller General,
and Collector General of Customs. The recommendation is always
made that such officials be given large responsibilities and power and
pay commensurate with these responsibilities. While in all countries
there are likely to be men of sufficient capacity to perform well the
duties of such offices, and while such men are usually available if the
tenure of office is made reasonably permanent, and if reasonable
salaries are paid, none the less, in most countries, these men lack the
experience and the special training needed for the beginning of sucl
work. As a result it is usually desirable for the government to appoint
specialized experienced foreigners to these positions, or as advisers
to the nationals who hold them, for a period of two or three years in
order to organize the offices along modern lines and to train a strong
national personnel. It is remarkable how willing and anxious most
governments are to appoint at good salaries foreign experts for this
pioneer work. It is likewise remarkable how difficult it is to find high
grade men with the necessary expert training, tact, judgment and
knowledge of foreign language to fill these important positions.
Within the limits of a brief address for an occasion like this, it is
impracticable to discuss the subject matter of the many types of
financial reforms that usually fall within the field of work of such
foreign advisory commissions. It may be useful, however, to teachers
of economics, and writers on economic subjects, to say a few words
concerning certain wide-spread popular economic fallacies which are
responsible for much of the unsound financial legislation one finds in
economically new countries and which commissions of foreign advisers
are compelled to devote much of their time to combatting. The fact
that such elementary economic fallacies are so widely accepted by
intelligent people all over the world is a proof that there is still a
need of wide-spread and sound instruction in the fundamental
principles of economics.
One of the most common and most vicious of these fallacies is the
confusion between money and capital. Countries which employ foreign
financial advisers are usually countries which are on a depreciated and
depreciating paper money basis, with the result that the public does
not keep money on deposit in the banks to any extent, nor hold much
of it in its possession. It rather passes the money on quickly to avoid
the loss of further depreciation while in its possession. This gives
the money of such a country an abnormally high rate of turnover and
thus enables a given volume of currency to perform an abnormally
large amount of money work. Furthermore, in all such countries one
finds abnormally high nominal interest rates. Two and three per cent

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 10 E. W. Kemmerer [Mlarch

a month have been common rates in some of these countries, as for

example in Guatemala in 1919, in Germany in 1923, and in Poland
in 1925 and early 1926. These high rates are explainable in part by
the scarcity of capital but in greater part by the risks connected with
investments, risks of loss through non-payment of the principal, and
risks of loss through receiving payment of principal and interest in a
much less valuable currency than the one in which the investment was
made. This situation gives rise to the following course of reasoning,
the fallacies of which will be evident.
"There is a great scarcity of money in the country, the proof of
which is to be found (1) in the smallness of the per capita circulation
as compared with that of other countries, or with that of pre-war
days in the country itself; (2) in the smallness of the bank deposits
and the scarcity of money in the pockets of the people, and (3) in the
abnormally high interest rates prevailing in the country. High interest
rates make local costs of production abnormally high both on the farm
and in the factory, and these high costs stifle production, weaken the
country's capacity to compete with other countries in foreign markets,
and thus reduce exports making the balance of trade unfavorable and
thereby defeating all hope of stabilizing the currency. Without a
stable currency the balancing of the budget is difficult if not im-
possible. The conclusion is that the government must issue tempo-
rarily more paper money to relieve the scarcity until interest rates,
and therefore costs of production, are brought down." To avoid
inflation from these proposed new issues of paper money it is frequently
suggested that they be backed by one hundred per cent of their value
in government bonds. This reasoning may suggest to teachers of
economics some problems for the classroom.
Closely related to this fallacy, growing out of the confusion between
money and capital is a second one which is the be'te noire of all currency
reformers. It is the time-honored balance of trade fallacy which is
supposed to have been killed by Ricardo a century ago but which still
enjoys a vigorous existence in every country of the world. Here it
is assumed that gold moves in international trade for some other
reason and in response to some other fundamental economic laws than
do other commodities, and that a country with a so-called unfavorable
balance of trade cannot possibly maintain a gold standard currency.
The advocates of this doctrine talk about paying balance of inter-
national indebtedness in gold as if every other item in the balance sheet
of international payments were fixed by some unmovable forces and
gold were the only variable or buffer to absorb the shocks. It is the
residual payer par excellence. They take the position that no matter
how scarce and valuable gold may become at home it must be exported

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1927] Economic Advisory Worle for Governments 11

abroad with a resulting danger of a breakdown of the gold standard

if the country's trade balance becomes unfavorable.
Two years ago I found this fallacy very common in the greatest
gold-producing country of the world, the Union of South Africa, whose
annual gold production is about three times the amount of the country's
entire normal gold circulation. None the less, one of the arguments
against a return to the gold standard most widely urged in South
Africa at the time was the argument that the country had an un-
favorable balance of trade and that a return to the gold standard at
that time would denude her of her gold currency. The conclusion of
such reasoning usually i.s that the wise policy is to stimulate exports
by bounties, by exemption of export industries from taxation, by loans
of government funds to exporters at low rates of interest, and by
every other possible means, and, per contra,, to discourage imports by
prohibitions, by levying heavy import duties and by taxes and other
restrictions on the consumption of foreign goods; these processes of
stimulating exports and of impeding imports to be continued until the
balance of trade shall become strongly favorable. After a favorable
balance of trade has been obtained and retained for a long enough
time to make certain that it will continue indefinitely, then and only
then it is argued, will it be safe to return to the gold standard. In
every country which it has been my privilege to assist in getting back
to the gold standard, the balance of trade argument in one form or
another has been urged as a reason for delay in returning to gold
payments. It is needless to say that countries which act upon this
philosophy are not likely to get back to the gold standard very soon.
A third wide-spread economic fallacy is that of making a fetish out
of a gold reserve. It is a phase of modern mercantilism; and I am
inclined to believe that, in spite of all of our modern books and articles
on economics and in spite of the great popularity of economics in our
colleges of which we are so proud, the great bulk of the world's business
men, bankers, legislators, public admninistrators and politicians are
still fundamentally mercantilists in their working economic philosophy.
The particular fallacy here in mind is the belief that a gold reserve
functions by serving as a so-called "backing" for a paper currency
and that in so doing, by inspiring confidence in the paper currency, it
maintains its gold value. It is a crude cost of production theory.
According to it the redemption of the currency in gold is not necessary
to maintain the parity. The gold does not have to be paid out. It
is sufficient that the public shall know that it is being held in reserve,
and the gold value of the paper currency in some way is supposed to
vary with the percentage of the dead reserve which backs it.
This philosophy continues to be widely accepted, although recent

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 12 E. W. Kemmerer [March

monetary history is full of examples of fiduciary currencies that have

maintained high gold values although "backed" by little or no reserves,
of others that lhave risen rapidly in gold value while the reserves have
been static or declining, and of still others that have declined greatly
in gold value although supported by enormous dead gold reserves,
the reserves sometimes reaching nearly one hundred per cent of the gold
value of the circulation they were supposed to back.
A large part of the world's financial administrators and bankers
are still ignorant of the fundamental economic fact that a gold reserve
is essentially a regulator fund, not a "backing" fund, and that it
functions chiefly only in being used and to the extent that it is used
to adjust the supply of currency and circulating bank credit to the
changing demands of trade, contracting the circulating media in times
of relative redundancy and expanding it in times of relative scarcity.
The world movement towards a return to the gold standard would be
greatly hastened if this elementary principal could only be understood
by those in authority, and if the present policy of treating a gold
reserve as something sacred to be looked upon but not to be used
could be abandoned.
The above are merely a few samples of the kind of widely accepted
economic fallacies that are impeding the progress of the world toward
financial sanation. They all involve a failure to understand funda-
mental economic principles. There is only one way of effectively over-
coming such obstacles and that is by the wide-spread dissemination of
sound economic doctrine. In economically new countries where
accurate and wide-spread statistics are unavailable, and where the basis
of financial reforms must be crude self-evident facts and basic economic
principles, the best preparation for those who would formulate policies
of financial reform is thorough and vigorous training in fundamental
principles. Skill in making exact quantitative measurements is always
valuable; but it counts for less on the world's economic frontiers than
it does in economically more advanced places. Here the microtome is
sometimes useful; but most pioneer work must still be done by the axe.
E. W. KEMMERER.
Princeton University.

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