The depression of 1929–32 focused attention on the tremendous effect that fluctuations in the U.S. economy could in certain circumstances exercise on the economies of other countries. Against these depressive forces from abroad even the newly discovered remedy of income creation by the government to counteract declines originating in the private sector found only restricted applicability, as in open economies national expansionary policies will soon endanger the balance of payments. Thus the trouble with declines in exports to the United States was not only that they reduced incomes elsewhere, tending to lead to a cumulative decline in world income, but also that they reduced the “supply of dollars”—the term was aptly introduced in 19431—and thus limited the ability of governments abroad to combat imported deflation by domestic reflation even where they were willing to follow a policy of this nature.
The anxieties created by this experience loomed large in the consideration of international economic problems in the 1940’s. Much effort went into devising arrangements for additional supplies of dollars in case too few dollars should be forthcoming through U.S. imports, and stand-by measures to allocate a supply of dollars that might still prove insufficient. Thus, the provison of additional dollars in the event of a depression in the United States was one of the important motivations in the establishment of the International Monetary Fund (1944); and the “scarce currency” clause was inserted in the Fund Agreement in order to provide for the rationing of a dollar supply that might prove inadequate. The first group of experts which the United Nations assembled on full employment also directed its attention to the problem of the dollar supply. By their failure to give adequate attention to the strong elements of inflation in the postwar world, the experts could come up with a simple solution to the problem: the United States should make available in every year at least as many dollars as in the year before; insofar as these dollars did not come naturally from imports of goods and services, the U.S. Government should put them up as a “deposit” with the Fund, to be available for use by other countries to the extent that they were hit by the decline in U.S. imports.2 A successor group of experts, instructed to produce “alternative practical ways” of dealing with the problem of reducing the international impact of recessions, reported two years later. Estimating that a postwar recession of 1937–38 intensity would reduce the supply of dollars by $10 billion over two years (the figure has frequently been misquoted as $10 billion a year), the group concluded that the resulting drain on the Fund would soon exhaust its gold and dollar holdings of about $3 billion. As a remedy the experts suggested more liberal drawing policies of the Fund and an increase in its size.3
In addition to the consideration given at the international level, the fear of U.S. depressions constituted a powerful argument in national economic policies for continued trade discrimination and currency inconvertibility as permanent features of the postwar world, rather than as transitional devices to cope with a postwar readjustment program. The experience of 1949 appeared to vindicate those who feared that too rigid a link to the U.S. economy involved countries in excessive risks. A recession in the United States that reduced real gross national product by only 1 per cent (on an annual basis) was accompanied by a severe payments crisis and the devaluation of some 20 currencies within a few days. The events appeared to justify Professor Robertson’s quip that when the United States sneezes, the rest of the world catches pneumonia.
Not many years have passed since these reports were filed or since the experience of 1949. But there has been a considerable change in sentiment. The 1953–54 recession has come and gone without ruffling the concurrent European boom. Increasingly, the 1949 experience tends to be interpreted in terms of the straw that broke the camel’s back. May it be assumed, then, that the economy of the outside world is now reasonably immune from fluctuations in the U.S. economy? Or that appropriate tools of international policy are available to offset serious international effects of any future decline in the United States?
A look at Chart 1 will enable us to understand the decrease in anxiety over the past half decade and to appraise the extent to which concern is still justified.
Chart 1.U.S. Supply of Dollars to Rest of World Deflated by Index (1948 or 1954 = 100) of U.S. Export Prices1
1 Dollar figures deflated by U.S. export price index to adjust the supply of dollars to changes in purchasing power over U.S. goods. The adjustment is not large for most postwar years. From 1948 to 1954, the index moved as follows: 100, 93, 90,103,102,102,100.
For 1955 figures, see text footnote 5.
1. In every year since 1948 the supply of dollars on account of goods and services alone has been larger in real terms (i.e., in purchasing power over U.S. exports) than it was in 1927–29. Apart from one jump of about 30 per cent in 1950, it has been remarkably stable. There was no decline in 1949 (a small decline in goods being offset by a rising trend in services).
2. An entirely new aspect of the postwar period is that from a third to a fourth of the supply of dollars has come from the U.S. Government.4 While the composition of this item has changed over the years, as purchases abroad increased and grants and loans decreased, the total has been very stable, ranging between $5.0 billion and $5.4 billion in the last five years.
3. Movements of U.S. private capital are the most volatile element in the supply of dollars, both absolutely and relatively, although they have not accounted for more than 8 per cent of the total dollar supply in any recent year.
4. Such fluctuations as did occur in the three groups showed some tendency to cancel out. As a result, the total supply of dollars on private and government account has not only been high—about $20 billion or 80 per cent in real terms above the late 1920’s—but also very stable. In each of the two recession years, 1949 and 1954, the supply increased.5
There would be little justification, however, on the basis of these facts to write off as solved the problem of the stability of the supply of dollars. In the first place, careful analysis has shown that while any recession-induced declines in the value of U.S. imports have been very small, at least in terms of annual data, there is no evidence to suggest that fluctuations in U.S. imports are now less closely associated with the U.S. business cycle than they were before the war. The declines in imports in the two postwar recessions do not seem to deviate much from the scatter of prewar recessions, the nature of which may be summarized in this approximate rule: when U.S. activity falls, the volume of imports declines by about the same percentage as the index of industrial production, and the value of imports declines about 1½ times as much.6 The observed stability of imports has been a reflection of stability in the U.S. economy. There is no ground for believing that a U.S. depression would not have a strongly adverse effect on the supply of dollars.
Moreover, should a depression cut substantially into dollar earnings of foreign countries, too much hope should not be pinned on “countercyclical lending” to prevent a cumulative decline in world trade. This is not primarily because the resources that could become available through the International Monetary Fund, together with countries’ own reserves, could not finance a substantial deficit of the rest of the world with the United States. The main reasons are that many, especially underdeveloped, countries might be unable to maintain income in the face of a sharp fall in exports, and that countries generally may be unwilling to indebt themselves heavily in order to keep up imports in a period of considerable uncertainty. Just as easy money will not by itself pull a country out of a depression, so the availability of even abundant international credit or reserves cannot be relied upon to avoid a sharp fall in world trade if a serious depression were allowed to develop in the United States.
If we may count on this not happening, and if accordingly we scale down the scope of our worries from the $5 billion problem to that of a decline in the supply of dollars in the order of $1 billion, we should not primarily concentrate attention on trade. There is at least an equally serious problem in the continuity of the export of U.S. capital; and the large fraction of the dollar supply accounted for by government payments makes the total supply at least as sensitive to political decisions as to minor cyclical fluctuations. Within the category of trade questions, attention needs to be paid also to problems other than cyclical variations in demand for imports. In a period when that demand is tolerably stable, variations in U.S. agricultural surplus policy, or in U.S. tariff policy, may be the chief elements of instability emanating from the U.S. economy.
Mr. Polak, Deputy Director of the Research Department, is a graduate of the University of Amsterdam. He was formerly a member of the League of Nations Secretariat, Economist at the Netherlands Embassy in Washington, and Economic Adviser at UNRRA. He is the author of An International Economic System, and of several other books and numerous articles in economic journals.
This paper is reprinted, with permission, from The Employment Act, Past and Future: A Tenth Anniversary Symposium (National Planning Association, Washington, 1956).
Hal B. Lary and Associates, The United States in the World Economy (U.S. Department of Commerce, Bureau of Foreign and Domestic Commerce, Economic Series No. 23, Washington, 1943).
United Nations, National and International Measures for Full Employment (Lake Success, December 1949). This report is often referred to as the “Kaldor Report.”
United Nations, Measures for International Economic Stability (New York, November 1951). This report has been particularly associated with the chairman of the group, Professor James W. Angell.
A similar chart published in a 1953 Report of the International Monetary Fund to the United Nations (”The Adequacy of Monetary Reserves,” Staff Papers, Vol. III, No. 2, October 1953, p. 216) did not include official loans and grants in the dollar supply although it did include them in some of the tables. Recent changes in the type of U.S. Government foreign expenditure have made the dividing line between official grants of economic aid and official purchases of services, such as offshore procurement, military expenditure, etc., much less clear-cut than it used to be; for this reason all government payments abroad (but not the delivery of military end-items under military aid) have been included here in the dollar supply.
Data for 1955 that have become available since this paper was originally published show the total supply in that year at $21.8 billion, composed as follows: merchandise imports, $11.3 billion; private services and donations, $3.6 billion; U.S. private capital, $1.1 billion; government services, etc., $3.2 billion; and government loans and grants, $2.6 billion (all figures at 1954 prices). According to slightly revised figures for 1953 and 1954, the total dollar supply in those years is now estimated at $19.8 billion and $20.4 billion, respectively, against $19.6 billion and $20.0 billion as shown in the chart.
Herbert K. Zassenhaus, “Direct Effects of a United States Recession on Imports: Expectations and Events,” The Review of Economics and Statistics, Vol. XXXVII (August 1955), pp. 231–55. Industrial production declined by 6 per cent in the 1949 recession and by 7 per cent in the recession of 1953–54. This was accompanied by declines in the value of imports of 7 per cent and 9 per cent, respectively (International Monetary Fund, Annual Report, 1955, p. 26).