take is to protect the water supply and to arrange for sanitary facilities, so the first basic measure which political leaders take to support the troops is to get money out of the area of occupation. Control of the currency in an area of military occupation is the financial equivalent of sanitation.

It seems clear to me that our military failure up to this point to eliminate pockets of resistance is not unrelated to our failure or, more precisely, to our fear of soaking up these troublesome pools of dollar liquidity in the theater of war.

I believe that we are appeasing the predatory, mercenary incentives which we have unleashed and fed in the client countries.

The CHAIRMAN. Are talking primarily about Vietnam?

Mr. JANEWAY. I mean more than Vietnam.

The CHAIRMAN. What else?

Mr. JANEWAY. I mean Thailand.

The CHAIRMAN. I am sorry, yes.

Mr. JANEWAY. I mean the area. We can't do anything about Hong Kong, I suppose, but the thrust of my point is aimed at this entire dollar freebooting area. We have created a reservoir which is pouring torrents of free dollars back into Europe; and at the same time circulating these dollars through the superstructure of the Asia dollar market below which there is no economic foundation, nor any modern social foundation and none is being built.

Senator GORE. May I interrupt? Just as we cannot do anything about Hong Kong, there are other areas about which we can do nothing. Mr. JANEWAY. Malaysia and the Philippines.

Senator GORE. We can do something by disciplining our own selves. Mr. JANEWAY. That is right.

Senator GORE. By managing our own capital structure and by placing some regulation on other outflow.

Mr. JANEWAY. Exactly, and, specifically by mopping up the currency and restricting its free flow into whatever the President, at his discretion, upon the advice of his advisers, may designate as the theater of war.

My own professional judgment is that this extends now, since the inflation in Asia is so pernicious, to the Philippines, to Malaysia, to Indonesia, all countries with the most staggering social problems and economic deficits.

GENUINE U.S. ALLIES WOULD SUPPORT INTRODUCTION OF SCRIP

Now, it is my belief that when I first warned of this development, at the outset of the escalation, and urged that this measure of what I call financial sanitation be adopted, President Johnson made a sincere effort to scout the feasibility of the proposal; and it is my belief that this exploration of his ran into an ultimatum: "Keep the dollars coming or the front doesn't stay up in front of you."

By analogy with the Free French during the Eisenhower-led occupation in North Africa and during our invasion of Europe, if there were a bona fide dedication among our clients in Asia to clearing the area of communism, if we had genuine allies, they would support this measure. If, instead, as I fear, these incentives to prolong this disaster govern, then we are going to be kept under the gun to subordinate

our own interests, and to appease the mercenaries-and by the mercenaries I don't mean hired troops or Hessians. By the mercenaries I mean the dollar dealers, the new Asia dollar bankers.

ESCALATION OF WAR HAS HURT U.S. ECONOMIC GROWTH

May I, in conclusion, offer three general observations: First, no remarks of mine could be complete this morning if they did not express my agreement with the wise and the penetrating judgments put before this committee yesterday by the distinguished Chairman of the Board of the Bank of America, Mr. Lundborg. I entirely associate myself with his view that the escalation, more particularly its financial mismanagement, has put a crimp in our economic growth in general, restricting our ability to convert income into capital and diverting our capital flows, instead of being available, as they were during World War II, during Korea, during every previous war in our history, to shorten our wars and to win them our capital flows are going to prolong a war which we are losing.

More specifically, our mismanagement of our financial strategy there has set in motion inside this country pernicious, and in my judgment, unendurable inflations in the two underlying markets of markets, the markets which are the lowest common denominator of all other markets, the market for credit and the market for skills.

Yesterday, I see, contrary to hopes expressed in this city for an early end to this cruel, this insupportable money squeeze, the Washington Waterpower Co., a great institution, paid 94 percent for a relatively small amount of money. Ford Motor Co. paid 9 percent. The inflation in the cost of money which, in my judgment, is getting worse and not better, is fueling the inflation in the cost of labor and the inflation in the cost of labor is returning the compliment. And when we see the labor pattern in this country accelerating from a presumed rate of 6 percent a year to an actual rate of something like 15 percent a year, how can we deny the justice of labor's claims? The cost of rent, which is the key or the "swing" item in the family budget, is now inflating neck and neck with health costs at I would say something closer to 20 or 30 percent a year. So that, at a 15-percent rate of labor inflation, the working man is saying that he is continuing to fall behind.

U.S. FAILURE TO BUDGET NATIONAL EMERGENCY REQUIREMENT

My second general observation recalls the teachings of the late Bernard Baruch, and if that great man could be here today in this hour of trial and decision for this body whose respect he commanded, I think that he would summarize everything he learned from previous errors, and everything he counseled, with one simple phrase: the making of strategic policy begins with the budgeting of requirements. Baruch taught us that the budgeting of national emergency requirement be treated as a prior charge on the economy.

What have we done instead? The consequences of the escalation by stealth, and I am proud that President Nixon borrowed this phrase from my book in his 1968 campaign, exactly reversed Baruch's basic law. We loaded on top of a full economy, of an economy which was already overloaded, unbudgeted war costs. The result has inveitably

turned our inherent economic strength into a major source of political and diplomatic and trading weakness. I remind you that in World War II our economy, guided by the teachings of Baruch, led by that great man, the late Mr. Ferdinand Eberstadt, did such a great job on the home front that we were able to relax production controls before Eisenhower's troops hit the beaches in France.

Today, by contrast, our dislocations which we have brought on ourselves, as you were saying, Senator Gore, are inviting the other side to drag the ordeal out.

Now we economists disagree about many things, but about one fundamental principle economists of all points of view have agreed for a hundred years. This is the marginal theory. Stated very simply the marginal theory teaches that in an overloaded market-and this is a special case of it-the last source of demand makes the market. Consequently, when we reversed Baruch's law and loaded our war costs on top of an overloaded economy, instead of vice versa, the cost of that money, and the cost of that labor became the marginal source of demand setting off the inflationary fireworks.

STOCK MARKET VOTE OF NO CONFIDENCE

My final general observation relates to the stock market. While, of course, it would be inappropriate for the making of national security policy by this Government to zig and zag with the rises and falls in the stock market, nevertheless experience suggests the prudence of respectful attention to the stock market when it registers such a strong vote of no confidence in an operation which has failed.

I believe that the Administration's economic advisers have fallen into a failure of communication with the financial community. The Administration is reading the stock market's fear that the dragging out of the war will intensify the inflationary pressures responsible for putting a ceiling on the stock market's ability to rise, and splintering the floor

under its successive falls.

The Nixon administration itself has declared war on inflation, and I support that resolve. I deplore this inflation.

The stock market commands our respect, I believe, when it says that the inflationary consequences of the present American operation in Vietnam are foredooming us to defeat in the war against inflation here at home without, however, bringing us visibly closer to a satisfactory resolution in Vietnam.

I thank you.

(The full statement of Mr. Janeway follows.)

STATEMENT BY ELIOT JANEWAY, PRESIDENT OF THE JANEWAY PUBLISHING AND RESEARCH CORP., BEFORE THE SENATE COMMITTEE ON FOREIGN RELATIONS, WASHINGTON, D.C., APRIL 16, 1970

My name is Eliot Janeway. I am President of the Janeway Publishing and Research Corp. in New York and an independent economist and writer. I deem it a high privilege to accept your invitation to appear before your distinguished Committee this morning.

The economic consequences of the unbudgeted stretch-out of the status quo in the Southeastern theatre of war are dramatized by one striking new reversal of financial function. An Asia dollar market is developing as a miniature of the Eurodollar market. Certainly any Asiadollar market available to American corporate money-users-whether directly or indirectly by way of financial

centers outside Southeast Asia-will never be more than a miniature of its inflated Eurodollar prototype. However, the emergence of countries in the theatre of war as high-cost dollar lenders on any scale at all, no matter how small relative to the size of the huge Eurodollar market, is a striking development which, in my judgment, is disturbing for the prospects of international stability-political, economic, and military.

The reason for concern is not the size of the burgeoning Asiadollar market; although the fact of a liquid, usury-lenders' foreign dollar market certainly is impressive relative to the pathetic lags of social development in the area as well as to the urgent borrowing requirements of the area for the most rudimentary beginnings of social and economic modernization. These sovereignties in the war-torn area have been the beneficiaries of American aid and subsidized low-cost borrowings during these years when the cost of money to American borrowers has been rising and its availability tightening. Dollar hoarders there have turned foreign lenders during the very time when the best-rated American banks and businesses have been unable to fulfill their credit requirements, and when American state and local governments have been forced to back up more than a few billions of borrowings to meet urgent public service requirements.

Against this background of credit crisis in America and of credit strain in Europe, the spectacle of America's clients in Southeastern Asia doubling in brass-or, perhaps, I should say in gold-by accommodating American borrowers with high-cost financial first aid calls to mind Dr. Johnson's memorable remark-made, I hasten to explain, centuries before the rise of the Women's Liberation Movement—about the woman preacher: she was like a dog walking on its hind legs-it wasn't well done but one was surprised to find it done at all.

It is a fact that the Bank of Thailand has become active as a high interestrate lender of last resort-scalper is the money trade term for the practiceto well-rated American businesses whose paper has been acceptable in the Eurodollar market and whose long-term financing requirements have spilled out over from both the domestic and the Eurodollar credit markets.

To continue with Dr. Johnson's figure of speech, I suggest that this is a case of the tail wagging the dog. Where we have invested and given not merely in dollars but in blood, sweat and tears as well-in the hope of catalyzing undeveloped feudalism into modern economic societies, what we are developing is not a new lease on economic life but, instead the old loan shark's racket of profiteering; and, adding insult to injury, the loan sharks we are financing are profiteering not merely at the expense of their own people but at the expense of ours.

My reason for attaching so much significance to this reversal of role represented by the emergent Asia dollar market reflects my sense of the general situation. I fear that the key to the future of America's financial markets is to be found at the other end of the line from New York or from Washington-in Saigon and, to a disturbingly increasing extent, in the new financial center developing in Bangkok. For the powers that be in Thailand seem to be doing better out of the war than even those who have been doing well out of it in Vietnam.

The briefest of references to the troublesome inflation of the Eurodollar market suffices to send up two ominous warning flares over the miniature Asiadollar market now inflating as a happy hunting ground for war profiteers extending their scope as usurers at the expense of disadvantaged dollar borrowers. I suggest that the analogy with the inflation represented by the Eurodollar is to be taken as a danger signal to America's national interest, as well as to the hope of normalizing American-Asiatic relationships.

The first relevant point to bear in mind about the birth of the Eurodollar market is that it was the Russian financial managers who provided the effective midwifery. Moscow's foreign banking arms officiated over the Eurodollar market's pattern-making transactions. They did so with a keen professional prevision of the rule which financial opinion on the free side of the curtain has since come to accept as axiomatic; namely, that the relative rate of growth in the Eurodollar cash float could be taken as the reliable measure of the absolute degree of overstrain on the American structure of finance and credit. What is good for lenders to under-financed American businesses and banks in the Euromarket is bad for all American money-users-it's as simple as that.

The second relevant point to consider about the subsequent sprouting of the Eurodollar market is that it has been and remains a gigantic exercise not merely in the frustration but in the actual defeat of America's financial self-interest.

Dollars which American concerns invested at long-term in European enterprises when money was cheap are being re-borrowed at short-term now that money is expensive.

Either of these violations of sound financial practice would call for what the late Secretary of State, John Foster Dulles spoke of in another connection as an "agonizing reappraisal" of our competence to play at being a world power on even the financial front, let alone in terms of power politics. To violate both financial fundamentals at once-investing long and borrowing short, while freezing cheap money and grabbing at expensive money-invites scrutiny not merely of the competence of our operation as a financial power but of our dignity in negotiating what is good for America's interest.

In suggesting this standard, I mean in no sense to be taken as retreating to the isolationist stance that was discredited morally as well as pragmatically over a generation ago. I do, however, mean to affirm my strong belief that what it good for the well-financed growth of America's domestic economy in this new era of the world dollar standard will be good for the economic society of the world as it is structured today; and, moreover, that what is bad for the wellfinanced growth of America's domestic economy is guaranteed to sound the death knell for our hopes that the economic society of today's world can be reengineered more acceptably into line with the optimistic blueprints that have been drawn for its future.

Thus, the larger example of the Eurodollar market puts us on clear notice, first, that the appearance of an Asiadollar market on any scale offers powerful if not irresistible incentives in a part of the world where the habits of economic man remain predatory, to make a good thing out of a bad situation that is bad for Asia, bad for America, and good only for the financial strategy of America's strategic competitors.

One of the commanding ironies frustrating the world's hope for a trustworthy new stabilisation of the balance of power is to be found in the invitation which America's financial mismanagement of her strategic operations has given to the strategy of the Soviet powers. In any confrontation between America and either Russia or China the economy looms as America's obvious center of strength and as the corresponding center of weakness in Russia and China-this with all due deference to Russia's impressive achievements, and that of China, in the technology of space. Notwithstanding America's presumed prominence on the dollar front it is precisely on the dollar front that America has lost her advantage; and that in losing it she has given first Russia and then China literally golden opportunities to play the balance of power game against America. I do not mean to be taken as perpetuating or magnifying cold war shiboleths when I speak of the Soviet Powers manipulating the balance of power against America. It is understandable that all other countries, but particularly Russia and China, have a keen inferiority complex vis-a-vis America in economic matters. At the same time policy makers in America would do well to be on notice that Russia and China are as shrewd at the financial game as they are weak in economic operations, and that moreover, their power politicians have developed a keen sense of how to coordinate financial operations with strategic objectives-a skill conspicuously absent on our side.

In this same connection, it is revelant also to recall that Lenin anticipated the present anomalous development in the Southeastern Asia theatre of war in his concept of the "uneven development of capitalism". Here today we have the spectacle of a war-torn area, where poverty is endemic, and where industrial development is conspicuous by its absence, sprouting a financial superstructure with a capability which it is exploiting for lending abroad on usurious terms despite the unmet requirements for priming the social pump on its own native heath. I see no reason to doubt and every reason to believe that Lenin's successors have pondered this teaching of his carefully and are busily perfecting ways and means of putting his theory to practice in their interest. It seems to be unarguable that the political calculations of imperialism in Moscow and Peking are reinforcing the usurious calculations of profiteers in Saigon, Bangkok and the other new centers of dollar traffic in the theatre of war. The conclusion seems equally inescapable to me that the rising traffic in dollars throughout the theatre of war is giving the Communist and the compradore calculators alike a vested interest in the status quo there.

The official figures tabulated by the IMF and the Federal Reserve Board tell a story of what the grandfather of all Communist teachers, Karl Marx himself, referred to in his revolutionary study of capital as "primitive accumulation”.