IX

THE GREAT DEBATE

WHEN ONE WRITER PORTRAYED the Lithuanian state as a banker, an industrialist, a merchant, a navigator, and a hotelkeeper,¹ he called attention to a notable feature of the country’s life, namely, the government participation in management and production, regulatory measures, and substantial investments of capital in major industries. Notwithstanding such widespread involvement, the Nationalist regime eschewed a planned economy. Instead, it stimulated private initiative to expand manufacturing and trade. Indeed, many observers characterized the government’s economic philosophy as intrinsically liberal.

Problems with Classical Economic Liberalism

IN NO SECTOR of the nation’s economy was governmental interference shunned more than in industry and trade, especially the latter. “Trade,” complained a reformer, “will probably be the only branch of the economy which manages its affairs according to obsolete liberal principles, conforming neither to the spirit of the times nor to the over-all needs of the national economy.”² The critic had not intended to convey the impression that the government was indifferent to industrial growth, for such was not the case. He did find fault, however, with the allegedly excessive freedoms of the businessman who could commence almost any transactions he pleased, choose for his firm any site he preferred, and get along without any requirements of professional competence. Such benevolent disengagement on the part of the Kaunas authorities resulted in industrial deficiencies which in 1939-1940 were subjected to mounting criticism by some of the nation’s economists.³

The developments with which the economic specialists were concerned included the sluggish rate of industrialization and some ills accompanying production. Aside from lack of experience and administrative imperfections at the cabinet level, the nation’s economists blamed the government for its failure to rationalize the progress of industrial growth. In this sense government noninterference in industry was in line with its lackadaisical housing and agricultural policies.

The chief method the government adopted to bolster industrial expansion was a policy of protectionism. Secured from foreign competitors by high tariffs, infant firms rapidly increased in number. With outworn machinery purchased abroad and a readily available labor force at home, manufacturers supplied consumers with high-cost, low-quality goods, accumulating handsome returns for themselves. Instead of showing improvement, the situation deteriorated. The public continued to overpay, the lucrative firms continued to multiply, and industry began to suffer from overinvestment and overproduction. A number of these ill-managed, uneconomical concerns operated below their capacity, not infrequently as few as three or four days a week. The proliferation of these infant firms did not result in the desired rate of economic growth.

Movement Toward a Planned Economy

BY AND LARGE, the Nationalists did not question the primacy of free enterprise. They reserved for possible government intervention only those projects in the national economy which were beyond the resources of private investors. By 1939-1940 the relationship between the government and the economy had been subjected to severe criticism from many influential quarters. Large segments of the population were alienated from the government by the convergence of deep-seated difficulties, such as the failures of land reform, the problems concerning urban and rural labor, the inequality of wages and its social and political consequences, the slow pace of economic growth, and lastly the start of World War II and the subsequent disorganization of foreign trade. As problems spread, the number of acceptable policy alternatives dwindled, until gradually both the politicians and the economists began to concentrate their attention upon economic rationalization as the only solution. A decade earlier, liberal politics had been discredited; now the liberal economy was threatened. Indeed, the very term became all but synonymous with obsolescence. More acceptable terms such as “rational,” “guided,” or “planned” economy gained in currency.

The Catholics, the Populists, and a group of economists affiliated with the journal Tautos Ūkis (National Economy) surged into the forefront of those advocating far-reaching governmental intervention in the economy. But the Nationalists were reluctant to make bold innovations. The attitude of the cooperative workers appears to have been equivocal. To the extent that rationalization meant the imposition of restrictions on private enterprise, the cooperationists were all for it. On the other hand, the cooperative press refrained from taking a side in the debate concerning the need for governmental intervention in the economy. The extent of rationalization, both in the torrent of recommendations adopted or considered and in the administration’s policies, remains subject to dispute; yet the trend toward the regulatory state was unmistakable. Most of the leading parties and pressure groups leaned in the direction of a planned economy. Only some older Nationalists were less inclined to go along with this particular cause.

Influencing this trend in Lithuania were the examples provided by neighboring Germany and the Soviet Union. Notwithstanding their dissimilar forms of government, both produced the impression that, unlike the liberal democracies, which valued individual interests, they stressed the welfare of the whole.⁴

In contrast with liberal beliefs, social and political theorists argued for a new relationship between the individual and the state. They insisted that the modern state had the duty and obligation to protect the welfare of the individual and to guarantee every national at least a minimal means of subsistence.⁵ Just how the state could best respond to this dictate was but a tactical point. What mattered was the principle of intercession on the part of the state for the individual’s material welfare. The backers of the regulatory state now emphasized comprehensive planning with a view to the public good. The likelihood that the “invisible hand” of the classical economists would not actually harmonize individual self-interest with the general well-being was becoming increasingly obvious to the reformers. One adherent to these new theories in individual and state relations interpreted the essential character of a regulated economy as follows:

The ideas of “guided economy” are vigorously assailing all positions, and it is now possible to assert positively that a planned economy is neither a bluff nor an episodic phenomenon derived from the economic crisis [of 1929-1933] but a fact of economic policy of epochal significance. . . . Mindful of vital national interests and prone to afford all its citizens the most comfortable means of living and promoting cultural growth, the state cannot be impeded by the interests of a privileged individual. . . . With a view to the common good it dictates concrete objectives to the national economy and adopts appropriate economic policies in order to accomplish these objectives. [The state assumes such prerogatives] because it is responsible for the nation’s welfare, for the nation’s history. It sees to it that all have work and bread, that all are able to take part in the nation’s cultural activities, that all are able to provide their children with a decent education, that medical care be accessible to all, and so on. And this criterion is the only just criterion to determine the fairness of any law.⁶

While the course toward rationalization was plain, the claim that the existing structure of the economy already embodied its essential characteristics, that planned economy was a “fact,” must be dismissed as premature.

The Flax Debate

THE 1939-1940 DISPUTES concerning government intervention in the economy were not confined to specialists and civil servants. On the contrary, they attracted the attention of all citizens interested in the nation’s economy. Many felt the need of government intervention for the benefit of all, but few polemicists knew either what constituted the general welfare or how much government action would be necessary and sufficient to attain it. The organization of the flax industry illustrates this point. For most purposes, the flax industry can be viewed as a microcosm of the entire economy, and its specific problems and solutions exemplify the general conditions.

In 1939, because of inadequacies in organizing the production and marketing of a valuable export crop, flax, that industry became a candidate for exhaustive reforms. Three groups proposed changes: the Jewish dealers, who had been in the trade for many years; the Lithuanian middlemen, who had only recently shown interest in the industry; and the cooperationists, who persisted in their efforts to drive private merchants out of business and to consolidate all transactions in their own hands. Past efforts by the cooperatives had repeatedly failed to encompass the whole of the flax trade because of vigorous opposition from private business interests. Their renewed campaign to secure monopolistic rights in marketing and export again threatened private businessmen with loss of income. Having advised the Jewish merchants to invest their capital elsewhere, and seeing no pressing need for Lithuanian capital, the representatives of the powerful Central Union of Agricultural Cooperative Societies resolved on May 26, 1939, to disregard “the calculations of some businessmen.” Instead, they proposed to solve the flax difficulty in a way most advantageous to the producers themselves.⁷ Convinced that private firms accumulated profits for a “handful of millionaires” at the expense of “masses of poverty-stricken people,” they concurred in reiterating the widely accepted view that the public interest would be served best if individual initiative were circumscribed.⁸

In December 1939 the collective interests scored initial gains when the Council of Ministers, under the influence of Catholics and Populists, decided to reserve the entire flax trade for a cooperative concern especially established for that purpose. However, adjusting the radical cabinet action to a course more in keeping with the Nationalist regime’s view of the organization of economy, the influential Finance Minister Ernestas Galvanauskas subsequently authorized a private firm to buy flax. On April 30, 1940, he publicly explained why he had done so, arguing that the exclusive privileges requested by the cooperative societies were advantageous to the national economy in some ways but detrimental in others. Accordingly, he crystallized the problem by reserving the export of flax to a cooperative firm operating under government supervision, and by authorizing both the cooperatives and private businessmen to purchase flax from the producers. In this manner, the Minister believed, competition in domestic trade would be preserved.⁹ However, the Finance Minister’s qualification of the earlier cabinet ruling caused the cooperationists to protest bitterly. They denounced the solution as an inadmissible subordination of the general welfare to individual pursuits. On May 4 the convention of the Chamber of Agriculture, an institution with cooperative preferences, blamed the Ministry of Finance for “sacrificing the interests of all farmers to a small group of persons” and unanimously appealed to the government to eliminate all private firms from the flax trade.¹⁰

Increasing Emphasis on Cooperative Action

THE CONTROVERSY and resolution of the problems in the flax industry were typical of cooperationist thinking and action. The agrarian interests, especially through the Populist press and, to a lesser extent, through the Catholic media, promoted their cause against the private sector. Ultimately, the government would have to step in as a conciliator. More often than not the cooperative side would acquire greater gains than its private rivals, but they were usually not as extensive as it expected. The cooperative expansionists maintained that they did not intend to put an end to individual initiative. They merely refused “to feed the private interest” any longer.¹¹ In short, they advocated a secondary role in the nation’s economy for the individual businessman.

Cooperative aspirations were profusely supported by the Populists, whose Lietuvos Žinios (News of Lithuania) fully supported the cooperative planners for displaying a willingness to commence a new venture.¹² Of all the major political parties and pressure groups, the Populists, together with the economists and commentators affiliated with them, were most identified with the cooperatives’ objectives. The Catholics did not fall far behind the Populists. However, Catholic writers were more moderate than the Populists; they emphasized not so much the diminution of private enterprise as its conformity with national objectives.

Support for private businessmen issued from two sources. These were the Nationalists in general¹³ who were disinclined to deviate appreciably from their conservative course, and the Ministry of Finance in particular. Ernestas Galvanauskas, who consented to head that Ministry in November 1939, asked for and received discretionary powers in shaping the nation’s fiscal, industrial, and trade policies. For years an influential figure in economic and political quarters, his views and the measures he initiated were partly responsible for balancing public and private concerns.

Minister Galvanauskas is believed to have favored a guided economy, including the government’s obligation to outline national goals and its right to oversee the implementation of these goals. He spurned the extreme possibilities of either a liberal economy or an economy completely managed by the government. For the purpose of having profitable commercial intercourse with such powerful neighbors as Germany and the Soviet Union, the Minister of Finance stressed the need for several centralized firms with exclusive rights to trade in certain specified areas. Yet he also stated positively that at home competition would not be denied.¹⁴

The agrarian interests in general and the cooperative lobby in particular expressed their views with self-righteous oversimplification. Their argument that total harmony existed between rural cooperative interests and the general well-being was untenable. Spokesmen for collective action insisted that all they cared about was the good of the country while private businessmen looked only to profits.

Another position they advanced was that rural cooperative aims coincided with purely Lithuanian interests. This proved to be a well-timed and well-directed argument. The displacement of Jewish middlemen by Lithuanians was a prospect entertained by both cooperative workers and private businessmen. The cooperationists gave prominence to their own Lithuanian character, and they scored so high in popular esteem that on one occasion Finance Minister Galvanauskas thought it advisable to caution them against transforming cooperation into something beyond the reach of critical examination.¹⁵

Stronger Government Sanctions

THE PROCESS of rationalization and direction-from-above embraced ever wider areas of national life. Nationalist Lithuania had for so long undervalued individual rights and emphasized obligations that it did not hesitate to invade and to suspend individual freedoms for the sake of “a weighty social obligation”¹⁶ to rid the country of social and economic ills. The way was now clear to increasing interference in the citizens’ everyday affairs. As problems multiplied, so did the scope of public encroachment on the private domain. Many believed that only the community made it possible for an individual to exist, therefore every member owed a debt to society. As if in repayment of a loan, the individual was put under obligation to live a life beneficial to the entire community. If he proved to be indifferent to the duties of a citizen, it was incumbent upon the state to take corrective action. Hence the state needed greater powers.¹⁷ The particular kinds of sanction thought proper for the government to exercise included its right to introduce compulsory insurance in agriculture, to proscribe the parcellation of farms, to remove owners who had mismanaged their farms, to eliminate private businessmen from certain occupations, to compel idlers to work, to prohibit the export of labor, to adopt drastic measures to stop labor migration into towns, and to aid women by imposing punishment upon drunkard husbands. Government actions of this nature received much attention. They had the consent of the majority of those actively engaged in determining social and economic policies. However, there was less interest in defining the proper limits of public authority.

Council of National Economy

A MOVE in the direction of planning took place on April 17, 1939. The government announced the creation of the Council of National Economy, an advisory body on all social and economic matters, consisting of representatives from business, government, and academic institutions. This prestigious body was instructed to draft a comprehensive plan designed to step up the rate of economic growth.¹⁸

For a group meant to assume the dominant role in planning the nation’s economy, the Council proved to be a noteworthy failure. Reportedly, it had envisaged an increase in its membership and the formation of a number of commissions to investigate specific problems. But before it produced a plan of any kind, the Council went into summer recess and did not reconvene until half a year later.¹⁹

An Economic General Staff

THOUGH THE COUNCIL underwent a gradual eclipse, the realization that a higher rate of growth could be brought about only by means of vigorous and coherent direction from above survived, and was embodied in a law enacted on May 11, 1940. Designed both to expedite economic development and to parry any disruptions the war might bring, the new legislation incorporated the Finance Minister’s thinking and invested him with extraordinary powers. In effect, Ernestas Galvanauskas was made the head of the nation’s economic apparatus. To quote Prime Minister Antanas Merkys, the action made the Ministry of Finance like “an economic general staff.”²⁰ The Finance Minister was authorized to establish export and import firms and to exercise supervision over foreign trade in general; to intervene decisively in industry and trade by prescribing the volume of production, by ordering plants to procure the necessary raw materials and means of production, by distributing labor, by instructing industrial firms to share available commodities, raw materials, and fuel, and by determining prices, wages, and the terms of sales and purchases; and he was further authorized to take any other measures necessary to increase the nation’s productive capacity.²¹

Before the bill became law it underwent critical examination in the Seimas. It was also discussed at the dairy industry convention in April 1940 and at the conventions of the Chamber of Agriculture and the Chamber of Commerce, Industry and the Crafts in May 1940. Major opposition to it arose from agrarian interests, which were apprehensive lest the proposed enactment confer upon the Minister of Finance far-reaching powers, set too low a value upon agriculture and unduly stimulate finance, industry, and trade.²² This fear, which was not totally unjustified, exposed to view the rivalry between the rural cooperative interests and their political representatives, such as the Ministry of Agriculture, and the urban financial, industrial, and commercial establishments, with the Ministry of Finance as their spokesman. A definitive victory for either side would have had a critical effect on the future structure of the economy, and both groups were fully aware of the consequences. In general, the cooperationists and their supporters detected a trend inimical to their pursuits, and they were thoroughly annoyed by their inability to supplant private businessmen.²³

The elevation of the Ministry of Finance into a central authority with appropriate executive powers was an example of the kind of emergency measure which the lawmakers were prepared to endorse while still shunning more radical solutions, such as an economy planned and administered by the government. The last important piece of legislation in independent Lithuania maintained restricted economic pluralism within the fabric of a guided economy. Whether or not these reforms would have been adequate to correct accumulated difficulties must remain conjectural. The Soviet annexation of Lithuania intervened to cut short her independent experiments.