Economic Aspects of the Cold War, 1962-1975

US objectives during the Cold War were to prevent Soviet attacks on the United States and its allies and to prevent the spread of communism as a political and economic system to other countries, whether by force or by threat, subversion, persuasion, or bribery. The principal instrument to prevent attack was an extensive build-up of defensive and retaliatory military forces, combined with political and military alliances that extended US protection to other countries in exchange for their engagement and support. The principal instruments for preventing the spread of communism by non-military means involved building an international economic system conducive to economic prosperity; engaging in persuasion, providing incentives, and occasionally imposing economic sanctions; and, not least, promoting a robust US economy that could serve as a stimulant to others and as a beacon for the benefits of a free, enterprise-based, market-oriented economy.

brought forth some perceived new communist threat. Fidel Castro's Cuba became increasingly communist from 1960. The Soviet Union sent funds and advisers to the leftist Prime Minister Lumumba of the Congo immediately following abrupt abandonment of its colony by Belgium, threatening the break-up of that newly independent country, and leading President Kennedy to take countervailing measures. The Soviet Union under Nikita Khrushchev tried once again to isolate Berlin in 1961, and a wall was built to prevent increasing migration of East Germans into more appealing West Berlin, thence into western Europe. The Soviet Union tried, with Cuban encouragement, to place missiles in Cuba in 1962, leading to the Cuban missile crisis. In 1962 China, still (erroneously) considered by many Americans to be a surrogate of the USSR, attacked Indian troops in areas claimed by India. In 1964 indigenous communist groups were disciplined enough to emerge successfully from anarchy in the Dominican Republic, prompting President Lyndon Johnson to send in US marines to re-establish order and an interim government. In 1965 communists in Indonesia staged a coup, possibly with the support of President Sukarno, threatening to take the world's fourth most populous country into the communist "orbit"; it was brutally suppressed by Indonesia's army. In 1967 Syria, with Soviet encouragement and support, promoted terrorist raids in Israel, leading ultimately to the Six Days War in June. In 1968 Soviet troops marched into Czechoslovakia, suppressing the "Prague Spring" and ushering in the Brezhnev Doctrine. In 1971 a left-wing president, S.
Allende was contentiously elected in Chile. Even as late as 1975, communists made a serious run at taking over Portugal after the death of Salazar, its dictator for over 30 years, and immediately thereafter in Angola, newly liberated from Portugal.
And of course the conflict in Vietnam ran right through the entire period. So while the communists had few successes between 1960 (Cuba) and 1975 (Vietnam), they were vigorously pursuing opportunities around the world, always with encouragement and often with material support from the Soviet Union. President Richard Nixon could say to his senior officials in 1971 "the impressive thing about the Communist leaders is their total absolute conviction that they're going to win, and their determination to do everything to win." 2 These continuing episodes provide a backdrop for the efforts by leaders in the United States, Western Europe, Canada, and Japan to attempt to assure economic prosperity, both through national policy and through international cooperation. The main components of the strategy were already laid down in the late 1940s, with Marshall Plan aid to Europe, trade liberalization through the General Agreement on Tariffs and Trade (GATT), and President Harry Truman's "Point Four," calling for aid to developing countries.
Private US investment abroad typically followed, although it was not a reliable instrument of policy. The International Monetary Fund and the World Bank, created in 1946, were also important features of the international economic architecture. The United States, with the sometimes reluctant cooperation of others, tried also to penalize countries within or too close to the Soviet orbit.

World Economic Performance
The 1960s was a decade of high global economic growth, perhaps the highest decadal growth in history. US growth was interrupted by recessions -declines in total production --in 1960-61, 1970-71, and 1975. The rest of the world continued to grow during the first two US downturns, but global output declined following the nearly four-fold increase in world oil prices in 1974, resuming in 1976. Inflation increased in the major economies in the late 1960s, but remained modest compared with the acceleration of inflation associated with the two sharp oil price increases of 1974 and 1979-1980. Continental western Europe and Japan, in particular, experienced extraordinary growth in the 1960s and early 1970s. This performance was no doubt influenced, in the case of Europe, by the formation of the European Economic Community in 1958 and the trade liberalization that ensued within Europe, as well as by the global trade liberalization brought about by successive GATT rounds of negotiation. In particular, imports of merchandise into the United States, the world's largest national economy, grew by 170 percent during the 1960s, from $15 billion in 1960 to $40 billion in 1970. Both the fact and the prospect of selling into the large US market stimulated growth-enhancing investment in Europe, Japan, and elsewhere.
The USSR and its Warsaw Pact allies were also growing rapidly during this period. There are serious measurement problems for any growing economy whose structure of production is changing rapidly, and those problems become acute for an economy, such as the Soviet Union, where resource allocation occurs on the basis of quantitative targets rather than through market-determined prices. 2 H.R. Haldeman, The Haldeman Diaries: Inside the Nixon White House, NewYork: Putnam, 1994, entry Moreover, official Soviet growth figures are known to have an upward bias, due partly to some double counting, partly to the exclusion of the (slower growing) service sector. For all these reasons, considerable disagreement surrounds estimates of Soviet growth rates during this period. Thus official Soviet figures, which undoubtedly influenced the perceptions and the self-confidence of Soviet leaders, show growth of 10.1 percent a year during the 1950s, declining to a still high 7.0 percent during the 1960s and to 5.3 percent during the 1970s. America's Central Intelligence Agency, in contrast, basing its analysis on work by Abram Bergson and other American scholars, estimated Soviet growth rates at 6.0, 5.1, and 3.7 percent, respectively, during these three periods. 3 On either measure, the USSR in the early 1960s was on a roll, reflected in Soviet Premier Nikita Khrushchev's frequent exuberant boasts. Growth gradually declined on both measures, and the USSR had increasing difficulty in maintaining its economic growth, and particularly its growth of oil production, the major source of hard currency export earnings as well as a critical input into the Soviet economy and military machine. Inability to innovate, or even to absorb foreign innovations, loss of discipline among Soviet workers, and failure to maintain installed equipment and to scrap obsolete equipment have all been given as explanations for the gradual but steady decline in economic growth.
Foreign trade did not fit comfortably into national central planning. In 1949 the Soviet Union formed the Council for Mutual Economic Cooperation (Comecon) with its eastern European satellites, and over time developed a concept of the "socialist division of labor." But it was never received enthusiastically by many of Comecon's members, there was no effective mechanism for multilateral trade or for balancing trade over time, and trade was not thoroughly integrated into the five-year planning process. As a consequence, trade within Comecon was limited (compared for example, to that within western Europe), although the Soviet Union was the major source of oil for east European countries and Cuba. Trade with non-communist countries, sometimes occurring within the framework of barter agreements (e.g. with India), sometimes carried on in "hard" currency (mainly US dollars), was even more limited -partly because of the unfavorable treatment of Soviet exports, to be discussed further below, for September 13, 1971. 3 Paul R. Gregory and Robert C. Stuart, Russian and Soviet Economic Performance and Structure, 6 th edition, Reading, MA: Addison-Wesley, 1998, p.225. partly because of the cumbersome and awkward institutional arrangements for trade within the Soviet Union.
Trade with non-communist countries gradually increased during the 1960s and especially after Germany's Ostpolitik and the promulgation of detente in the 1970s. Exports by industrialized countries to the Comecon countries, partly on the basis of credits, grew from $2. 8 billion in 1960 to $8.7 billion in 1970 to $34 billion in 1975 to $58 billion in 1980, before a cutback in the early 1980s following the Soviet invasion of Afghanistan. 4 The share of market-oriented countries in total Comecon imports grew from 27 percent in 1960 to 34 percent in 1970 to 46 percent in 1975. World trade grew modestly more rapidly than total Comecon trade, but trade within Comecon grew more slowly (see Chart 1). The main earner of hard currency for the Soviet Union was exports of oil, whose price rose gradually in the early 1970s and sharply in 1974, thus improving its export earnings and its terms of trade. Prices of oil exports to other Comecon countries were raised only gradually, thus implying a subsidy to those countries, but oil exports over allotment were priced at world prices and payable in dollars, a practice that did not please the Soviet Union's fraternal allies. Table 1 provides estimates of annual average growth rates in GDP, by decade, for the USSR, eastern Europe, the USA, western Europe, and Japan. Several points are noteworthy. First, the USSR grew faster than the USA to 1970, raising Soviet GDP on one estimate from 35 percent of the US level in 1950 to 44 percent in 1975, before declining to 34 percent in 1990. 5 Second, economic growth declined over time in all countries, but especially sharply in the Soviet Union and eastern Europe, less markedly in the United States. Third, these measures are for total output, not consumption or standards of living. In the Soviet Union 15-17 percent of GDP was devoted to equipping and supporting the military, and an even larger and growing portion was devoted to investment, which by all accounts was used very inefficiently.
Thus the high growth in output was not always reflected in equally high growth in consumption. After the Hungarian revolt of 1956, in which workers conspicuously participated, Nikita Krushchev worried that the standard of life of ordinary Soviet citizens was not improving sufficiently, and therefore tried to cut down on military spending, and redirected resources into consumer goods, particularly food production. Without formally reversing this emphasis on agriculture, Leonid Brezhnev increased military spending in the mid-1960s. However, Soviet standards of living increased respectably during the 1960s.
Fourth, a division of GDP by population yields output per capita, which showed Soviet "productivity" growing from 30 percent of the US level in 1950 to 38 percent in 1975, and declining to 30 percent by 1990. These figures are based on purchasing power parity calculations for the Soviet Union, which have always been problematic and contentious because of the absence of meaningful prices for Soviet-produced goods and services; it is now believed that they over-state the quality of Soviet goods and services, hence of Soviet GDP and output per capita. Finally, post-1991 work by Russian economists has judgmentally lowered growth rates during the Soviet period even below those estimated by the CIA, from which the growth rates reported in Table 1 have been adapted. 6 But Soviet leaders in the 1960s and early 1970s may not have been aware of this weaker performance, since production in sectors in which they were especially interested, such as steel, cement, and oil were continuing to grow rapidly, and indeed by 1975 had overtaken that of the United States.
In any case, during the period covered by this chapter the Soviet economy was performing reasonably well, although market-oriented economies in Europe and Japan were growing even more rapidly, and in the case of Europe from a significantly higher base. Soviet leaders had reason to be confident in their economy -serious weaknesses showed up later --but also to be concerned about the 6 Gregory and Stuart, Russian Economic Performance, p.227.
long-term prospects of communism as a method for organizing production compared with market capitalism.
Economic and Other Policies within the United States President John F. Kennedy was convinced that US policy toward the USSR, and toward the world, must be based on a robust US economy. On the basis of its lack-luster performance in the late 1950s, he campaigned in 1960 that he would "get the economy moving again." To that end, he proposed significant trade liberalization. To stimulate growth and domestic demand, he proposed an investment tax credit, and eventually a significant reduction in income taxes, which was finally legislated in 1964. As expected, During this period the United States also expanded its expenditures on "international affairs," mainly foreign assistance, but also including the Peace Corps and the US Information Agency. In addition, Federal government expenditures on higher education increased under the National Defense Education Act, as did the space program, both launched in 1958. Kennedy promised in 1961, following the manned earth orbit by Russian Yuri Gagarin, to land a man on the moon "before the decade is out" -an achievement accomplished in July 1969. Kennedy wanted to re-establish the United States as being on the frontiers of technology in the eyes both of Americans and around the world -not least in the Soviet Union. NASA's expenditures rose from nothing in 1958 to a peak of $5.1 billion in 1965 before receding to below $3 billion in 1974-1975. 7 These government expenditures did not impose severe strains on the US economy except during the years of the rapid military buildup in Vietnam in the late 1960s..

Trade and Financial Policy toward Communist Countries
The use of economic sanctions was an on-going feature of US foreign economic policy. In the context of the Cold War, specific sanctions were used against North Korea, China, Cuba, and North Vietnam. But they were also used against the thoroughly anti-communist Trujillo regime of the Dominican This is not the occasion to evaluate the effectiveness of the sanctions, or the rewards. Suffice it to say that one detailed analysis found a mixed picture. Many of the sanctions were judged to have negligible effect on their stated objectives, such as the long-lasting embargo on Cuba, which arguably contributed to keeping Castro in power for more than four decades. But others, such as the cut-off of critical agricultural credits to Nasser's Egypt, arguably encouraged that country to pull back from its foreign interventions. 9 By the mid 1960s the time seemed ripe to improve relations with the USSR -what later was Détente also involved increased East-West trade. Trade Act of 1974, including the Jackson-Vanik amendment (and a parallel piece of legislation that restricted -but did not prohibit -Export-Import Bank loans to the Soviet Union). The USSR backed out of the 1972 trade agreement, and Soviet goods never received mfn treatment.
The Jackson-Vanik amendment is an example of the ability of a determined Congress to thwart an American president's foreign policy. More generally, presidents must constantly ascertain whether they have at least the acquiescence of Congress in the actions they wish to pursue, and active support when additional funds are required.

The Yom Kipper war between Israel and Egypt of October 1973 led to an Arab oil embargo on the
United States and a nearly four-fold increase in oil prices in 1974. This relieved the hard currency shortage of the oil-exporting Soviet Union and diminished its eagerness to receive mfn treatment from the United States.

Trade and Financial Policies toward Allies
The economic dimension of cold war policy was not confined to penalizing communist countries, or rewarding those who resisted the embrace of the Soviet Union. There was a more affirmative agenda.
As often, its roots go back to the late 1940s. But the young president Kennedy became an articulate  American economy, screw up foreign policy by gutting aid or pulling troops out, or go protectionist just so we can continue to pay out gold to the French at $35 an ounce." 11 .
One mechanism for supporting countries in financial trouble, especially if the trouble was due to currency speculation on a change in the official exchange rate, was to provide short-term credit to the country's monetary authorities to permit them to ride out the speculation until it reversed. Thus a mechanism was put in place to provide such credits, partly by the US Treasury's Exchange Stabilization Fund, partly through "swap" lines extended by the Federal Reserve System to other central banks. Through these mechanisms the United States provided short-term credits to Canada (1962, 1968), Italy (1963-64, 1975, Britain (many times), and France (1968,1969). If the short-term credits could not be repaid quickly from reversals of speculative capital flows, they could be repaid by drawing on the IMF, another cooperative arrangement, for longer term credit.
Britain's budget and balance of payments were so heavily burdened that Prime Minister Harold Wilson considered not only pulling British troops east of Suez back into Britain, which was ultimately done, but also cutting significantly the British Army on the Rhine. Doing so would have increased pressure in the United States also to reduce its forces in Germany and elsewhere in NATO, actions that were already being pressed hard in the US Senate by Senator Mike Mansfield (D-Montana), during a period of intense fighting in South Vietnam. In addition to short-term financial support to Britain, the United States, itself facing financial pressure, launched in 1967 a tripartite burden-sharing discussion with Britain and Germany, during which financial arrangements were worked out (mainly through assured German purchases in Britain and, secondarily, in the United States) to ease the pressure in both countries to reduce troop levels in Germany.
The leading Western countries, joined by all members of the IMF, also agreed on a major reform of the international monetary system by creating a new, international money (for monetary authorities), the SDR, or as the financial journalists dubbed it, "paper gold," since it was to replace gradually the international monetary role of gold and ease the demand for dollars by central banks. The SDR was seen at the time as a major step forward toward international monetary cooperation, although it subsequently failed to live up to expectations.
Britain's balance of payments problems were eased following a 14 percent devaluation of the Thus in the early 1970s two key features of the Bretton Woods system were abandoned: gold convertibility of the dollar and fixed exchange rates among major currencies (many other countries around the world maintained fixed exchange rates with respect to the dollar, the French franc, the British pound, or some other currency). This traumatic period of financial turmoil prompted serious discussions of reform of the international monetary system, which in some respects had not matured even in the early 21 st century, but those issues lie outside a discussion of the Cold War, except insofar as they affected western cohesion and prosperity. Despite occasional monetary turmoil, the western economies generally performed well, as noted above.

Economic Policies toward Developing Countries
The United States pursued an active policy toward the third world, or "developing countries," as they were designated in UN jargon -as did Canada and west European countries, joined by Japan as it became richer. Soviet interventions in developing countries, especially in the Middle East and Africa, mainly in the form of grants of military equipment and training and resident technical advisers, more rarely as financial assistance, were a source of frustration and irritation to successive American administrations during the 1960s and 1970s. The US government tried to counter these measures, both by pre-emption and by direct response.
The program that captured most imagination in the United States and indeed in many developing countries was the Peace Corps, created in 1961 by President Kennedy to mobilize the energy, enthusiasm, and idealism of young adults, as he thought the communist countries (especially Cuba) were able to do.
This program sent volunteers (only expenses were covered by government) to developing countries to work in towns and villages on anything that could be helpful, mainly teaching and public health. Starting from nothing, the program grew to over 10,000 volunteers by 1964, in 46 countries. 12 It reached a peak expenditure of $110 million in 1968, before declining as Nixon showed less interest in it. The volunteers were abroad neither as diplomats nor intelligence agents, but to do good in ways developed largely by each individual; to expose young Americans to different and much less privileged parts of the world; and to expose people in developing countries to idealistic Americans, unencumbered by the exigent requirements of US government policy. By all accounts the program was highly successful, both in recipient countries (the demand for volunteers greatly exceeded the supply) and for many of the Americans, some of whose later careers were decisively shaped by their Peace Corps experience. Kennedy also altered the guidelines of the US Information Agency, which spread information about the United States around the world, from providing doctrinaire material on the merits of capitalism to providing a more realistic and pluralistic account of life in the United States; and USIA's budget was nearly doubled over the decade 1960-1970. Kennedy also built on earlier legislation in creating a "Food for Peace" program, whereby American agricultural products were exported to developing countries not only in humanitarian emergencies (e.g. due to drought) but more generally to alleviate malnutrition on an on-going basis and (through use of the local-currency proceeds from sale of products) to contribute to development projects through the budget of the recipient country. This program grew sharply from $350 million in 1960 to over $1.6 billion in 1965 before stabilizing between $1-2 billion annually. It had the advantage of appealing greatly to US farmers, who under US agricultural support programs were producing surpluses of several products that periodically became fiscally burdensome. It had the disadvantage, as was later discovered, of diverting the attention of recipient governments away from improving their indigenous agricultural production and productivity, and sometimes depressing the incomes of their farmers. But it was typically appreciated by recipient governments, and it created a source of US leverage insofar the threat of cutting food aid could occasionally be used to alter undesired behavior, as noted above in the case of Egypt and perhaps most dramatically in the case of India. as it was called, was first embraced by Australia, Europe, and Canada , and only later by a more reluctant Japan and United States. President Johnson accepted GSP for the United States only in 1967, but it required legislation, so was not legally adopted until the Trade Act of 1974, and could not be implemented until 1976. Neither the European nor the US scheme, which differed in important detail, was nearly as generous as advocates had in mind; but they arguably encouraged some private investment in developing countries to take advantage of the tariff preferences.
The Soviet Union also purchased products from its client states, most notably sugar from Cuba, which could not be sold to the United States because of its embargo, or to Europe because of its agricultural protection. But Soviet trade was all undertaken by a monopoly trading ministry, so sales were subject to government-to-government negotiation, and had to fit into the requirements of the five-year economic plan or else was regarded as outright aid.
The real "battleground" of the Cold War after the early 1960s was thus competition for influence in developing countries, through trade, financial and technical aid, military assistance in the form of equipment and training. Both the USSR and the USA also had programs for bringing students to their respective universities. Soviet ambassador to the United States Anatoly Dobrynin could lament, in his memoirs published many years later, that "détente was to a certain extent buried in the fields of Soviet-American rivalry in the Third World." 14

Summary
From the perspective of Soviet leaders, the Soviet Union in the mid-1970s was doing very well in its economic competition with the United States. Its aggregate productioin had risen slowly but steadily relative to US production, and output of products of special interest, such as steel, had come to exceed US production. The major hard currency exports of the Soviet Union, crude oil and gold, had enjoyed substantial increases in price on the world market. At the same time, the "capitalist" world economy was in turmoil, experiencing in 1975 its worst recession since the 1930s. The Bretton Woods system of financial cooperation was in disarray, and the onset of "stagflation" created serious dilemmas of policy in most 13 Statistical Abstract 1978, Table 1508. 14 Anatoly Dobrynin, In Confidence: Moscow's Ambassador to America's Six Cold War Presidents, 1962-1986, New York: Times Books, 1995 market-oriented economies. In short, communists could confidently expect the ultimate victory of communism against the ailing capitalist system.
This self-satisfaction neglected the fundamental recuperative capacities of market capitalism.
Incentives for adaptation, innovation, and private initiative remained strong. To take only one example, the integrated circuit, introduced in the early 1970s, was to revolutionize computation, communication, and much else, including military applications. While the communist system could dictate heavy investment in traditional products, it did so inefficiently and inflexibly, without extensive innovation. It could not adapte well to changes in technology and to changes in the composition of demand. By the mid-1980s, Soviet President Mikael Gorbachev would declare, "We cannot go on like this," and inaugurated his ultimately unsuccessful economic reforms of the Soviet system of communism.