The unbalanced conditions which have characterized the world economic situation since the end of the war still prevail. In many countries there remains a striking discrepancy between demand and productive capacity, and an even greater discrepancy between need for imports and capacity to pay for them. Until effective measures are taken to meet these closely related problems, there can be little hope of achieving the expansion of world trade on a multilateral basis, which is one of the Fund’s objectives.
Even before the war, international economic relations had become excessively restrictive. In many instances the maintenance of a precarious balance in international payments depended largely upon the support of high tariffs, import restrictions, and exchange controls. The war added the even greater difficulties arising from destruction and disruption, the loss of overseas resources, and the rupture of long-established trade connections. Moreover, in many countries, the urgency of the international payments problem was overshadowed by the inadequacy of postwar production to meet greatly increased needs. Nearly everywhere, the problem was accentuated by monetary policies which encouraged relatively excessive consumption and investment.
The difficulties of the postwar period are greater than foreseen at the time of the Bretton Woods Conference. That is all the more reason for the Fund and its members to make special efforts to ensure that these times of change and adjustment are marked by progress toward the purposes for which the Fund was established. In many countries directly affected by the war, great efforts have been made to restore and to increase productive capacity. Foreign aid generously given has made it possible for them, by supplementing their own resources with imports, to undertake large-scale reconstruction and development. In other countries substantial progress has been made without much external assistance. The effects of these measures on production and trade are now beginning to be clearly seen.
The immediate task of the postwar period was to restore production and productive efficiency in the countries whose economies were devastated and disrupted by the war. The most urgent task today is to establish better trade and payments relations. The resources made available through increased production and disinflated home demand must now be used to increase exports to earn the means to pay for imports. This has to be done on the basis of efficiency and economy in providing export goods at competitive prices.
Expansion of international trade on a multilateral basis can contribute to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all countries. In fact, however, dependence on bilateral trade and inconvertible currencies is far greater now than before the war. Unless positive steps are taken to secure a better balance in international payments, such restrictions may be intensified as foreign aid declines, resulting in a shrinkage and further distortion of world trade.
Progress in Production
In the immediate postwar period, the restoration of both internal stability and external balance was hampered in many countries by the temporary inadequacy of production. The years since the end of the war have seen some notable achievements in the expansion of output. The progress noted in last year’s Annual Report was generally continued in 1948 and in the first half of 1949.
In most European countries, wartime damage to basic productive equipment has been repaired, and the working stocks required for a smoothly operating economy have been largely restored. The effects of the extensive postwar programs of investment are gradually becoming apparent. In nearly all of Europe industrial production is now considerably above the 1937 level. Agricultural production, on the other hand, in parts of Europe and the Middle East is still below that of prewar years, and the difficulties thus created are especially acute where there has been a rapid growth of population.
In some areas which labor under unusual difficulties, even the preliminary task of restoring production and productive efficiency has only begun. The economies of Germany and Japan, for example, were to a large extent undermined and destroyed by the war; and though rapid progress has been made in Western Germany in the last twelve months, production is still well below prewar. A large part of the Far East has been troubled by civil conflict, and the economic consequences of these disturbances affect the whole world.
Not only in the areas disrupted by the war is an expanding volume of production essential for a better balanced world economy. The maintenance and expansion of production in the areas not disrupted by the war are no less important. Most of the countries whose production was actively stimulated by wartime demands have since been able to maintain a high level of economic activity. In the United States and Canada, in particular, industrial employment and production in 1948 were at record peacetime levels. In the first half of 1949, however, some falling off in industrial production in the United States has been apparent. The effects are already being felt by other countries.
As productive efficiency reaches and exceeds the prewar level, the pace of any further expansion of production is likely to be slower, depending on the maintenance of investment and the wider application of the most efficient techniques. In any event, it becomes less and less possible to expect a further increase in production by itself to solve the major problems of internal and external balance. Where the emphasis in production has hitherto been directed primarily toward restoring consumption standards and expanding productive facilities, it should now in greater part be directed toward increasing exports. Countries must reduce their dependence on extraordinary external assistance by devoting more resources to the production of goods which can be offered at competitive prices in those markets where the means of paying for their imports can be earned.
The Inflation Problem
Inflation has created economic difficulties everywhere, but its effects have been most serious in Europe, the Middle East, and the Far East. In these regions, the consequences of inflation have been superimposed upon inadequate production and have, therefore, had a more serious effect in limiting exports and in increasing the demand for imports.
Though the fundamental forces of inflation had their origin in the war, the effects of inflation became more apparent after the war. The public, long deprived of the goods to which it had been accustomed, had expectations far beyond the capacity of war-depleted economies; and large-scale investments to restore and increase productive capacity further limited the supply of goods available for consumers. Public expenditure was expanded on an unprecedented scale, and in many countries the extension of credit to finance investment was much too generous.
The price structure did not at once reveal the effects of these inflationary forces. In many countries, of course, prices and costs rose rapidly. But elsewhere price movements were checked by price controls and rationing, and the real inflationary situation was often disguised by subsidies at a heavy cost to the budget. The effects on prices of the tendency toward excessive private and public expenditure could be temporarily repressed by such measures, but a difficult problem of accumulated spending power was left for the future.
In the past two years there has been progress in dealing with inflation in many countries, both in Europe and elsewhere. Increased production, the completion of the more urgent reconstruction tasks, and, in many instances, an import surplus have helped to establish more satisfactory relations between supply and demand. In the past year, prices have been relatively stable in many countries, and in some there has been a modest decline. Even where prices have continued to rise, this has probably been due more to the spending of the savings of the past than to new inflation. The widespread relaxation of rationing is a striking indication of the progress made.
Many countries are now in a relatively good position to prevent new inflation. The necessity of budgetary and credit policies which would restrain inflation has been increasingly recognized, and these policies have, at least in part, been put into effect. The rapid increases in the money supply so characteristic of previous years have been halted. Indeed, in some countries budgetary surpluses and the local currency proceeds from foreign aid have made possible a small reduction in the money supply. The pressure of excess liquidity on prices and costs is still apparent, however, so that the inflationary danger is by no means over.
The inflation problem in Western Europe cannot be regarded as finally solved as long as many countries are dependent on a large import surplus financed with foreign aid. Inflation may recur unless home consumption and investment relative to output are restrained as extraordinary foreign assistance is reduced. And it is still urgent to cast off the burden of high costs and prices, left by past inflation, which seriously weakens the competitive position of many countries in the markets of the less inflated surplus countries.
The Volume and Pattern of World Trade
The development of a satisfactory balance in international payments has presented much more serious difficulties. The volume of world trade in 1948 was probably somewhat greater than in 1938, though still smaller than in 1937; and much of it was dependent upon extraordinary financing. Even so, the volume of trade is still well below the reasonable requirements of a world with growing population and production. The restoration of the prewar volume and pattern of trade is not a good standard for measuring progress toward a balanced world economy. For the first years after the war, however, recovery may be provisionally measured in this way.
In 1948 the dollar value of the exports of all countries, although not the volume, was about 12 per cent greater than in 1947 and 60 per cent greater than in 1946. There has also been since 1947 a significant readjustment of the shares of different regions in the total. In 1938 the United States and Canada together supplied about 18 per cent, and the Western Hemisphere as a whole about 27 per cent, of total exports. By 1946 these shares had about doubled, being respectively 36 and 51 and these proportions were not significantly different in 1947. In 1948, however, as exports from other regions expanded, the share of the United States and Canada fell to just under 30 per cent and that of the Western Hemisphere to 42 per cent. United States exports were, indeed, $2.7 billion less in 1948 than in 1947. There was, of course, a movement in the opposite direction in the shares of other regions in world exports. By 1946 the share of Europe, including the United Kingdom, which had been 50 per cent of the total in 1938, had fallen to 32 per cent. In 1948 it recovered to 37 per cent. The shares of the Middle East and the Far East together in these three years were 16, 10, and 13 per cent. This broad classification, of course, does not reveal the wide differences in the recovery of individual countries.
As might be expected, changes in the distribution of world trade have been less striking on the side of imports. Of the total dollar value of imports in 1938, Europe accounted for about 57 per cent. Since the war, with greatly reduced nontrade earnings and a smaller share of exports, Europe’s proportion of world imports has fallen to around 46 per cent. The share of world imports going to the Middle East and Far East has been about 14 to 15 per cent of the total, slightly less than in 1938. Even these reduced shares could not have been maintained without aid from abroad and the use of declining exchange reserves.
Intra-European trade in 1948, though still only 69 per cent of the 1938 volume, was 25 per cent greater than in 1947. The volume of trade among the countries of Western Europe other than Germany and Austria was practically the same as before the war, but had not expanded to compensate for the gap left by the decline of trade with Germany and Austria. The trade of Eastern European countries with Western Europe, though greater in 1948 than in 1947, was 42 per cent of the 1938 volume, and if Eastern European trade with Germany and Austria were excluded, it would still be only 63 per cent. With their complementary production, the expansion of East-West European trade would strengthen the payments position of Europe as a whole.
For most sterling area countries, exports to other parts of the sterling area have expanded more rapidly than exports to the Western Hemisphere. In 1948 United Kingdom exports to the sterling area were larger both in volume (150 per cent of 1938) and as a proportion of total exports than in either 1947 or 1938. The expansion of trade within the sterling area has helped reduce its dependence on imports from the Western Hemisphere; the need to provide increased exports within the sterling area has, however, increased the difficulty of expanding dollar exports. The reduced dependence in 1948 on imports from the Western Hemisphere was, moreover, only in part offset by increased supplies from within the sterling area. The volume of United Kingdom imports, for example, from the sterling area was lower in 1948 than in prewar years, though it accounted for 37 per cent of total United Kingdom imports, contrasted with 31 per cent in 1938.
One factor adversely affecting the volume of trade and its distribution has been the greatly reduced role of some important trading countries in world trade. Four years after the war, Germany and Japan are still unable to participate on a scale commensurate with their productive capacity. Their reintegration in the world economy would reopen accustomed sources of imports and markets for exports. Although the exports of some countries may be adversely affected by this competition, for the world as a whole there would be substantial gains from the further expansion of trade.
The growth in the volume of world trade since the end of the war has contributed to the moderate progress that has been made toward a better balance in international payments. The shifts in the regional distribution of trade have generally been along the lines necessary to solve the payments problem. Some of the changes in the pattern of trade in the past two years have been the result of desirable adjustments to world price-cost relations. In other cases, they have been the result of more rigid trade and payments restrictions and discriminations. The gradual disappearance of the sellers’ market, particularly in the Western Hemisphere, now emphasizes the immediate importance of having such adjustments in world trade as will conform to competitive price and cost conditions and thus contribute to meeting the widespread payments difficulties.
The Payments Problem
The present international payments problem manifests itself in several forms. Some countries have large deficits financed through extraordinary assistance. In others an uncertain balance is maintained at a relatively low level of exports and imports. And there are still others with a great export capacity that have difficulty in making dollar payments, partly because of their excessive import demand, partly because some of their exports are not paid for in convertible currencies.
Although some countries still have to give special attention to financing deficits in currencies other than the U.S. dollar, the much more urgent problem is dollar payments. In 1947 the United States surplus which required financing (use of U.S. Government grants and credits, aid from UNRRA, financing by the Fund and the International Bank, and drawings on reserves) was $11.3 billion; in 1948 it was still about $6.7 billion. The surplus with Europe was $6.1 billion in 1947 and $3.4 billion in 1948; with the Middle East and Far East together, the surplus was $1.2 billion in 1947 and $800 million in 1948. The deficit of Latin America with the United States was substantially reduced in 1948, largely, however, because steps necessary to restrict imports were taken. For Canada, the U.S. dollar position was much easier in 1948 than in 1947, reserves being restored to a more normal level. Relatively large U.S. dollar payments were made by other regions to Canada and many Latin American countries. This is indicative of the wider scope of the U.S. dollar payments problem.
To the large postwar deficits sustained by the rest of the world on trade account with Western Hemisphere countries have been added considerable deficits on nontrade account, particularly with the United States. The foreign exchange receipts of Europe, particularly those which accrued in the form of income from foreign investments, have been seriously diminished. For most European countries, however, the loss of net receipts from nontrade account has been less significant than the increase in their imports relative to their exports. Except for the United Kingdom and, possibly, France, the deterioration in their payments position has been quantitatively larger on trade account than on nontrade account.
The dollar payments problem may be met in part by the diminution of the present extraordinary dependence on dollar imports. The greater part of the solution should, however, come from expanding dollar receipts. For a few countries there may still be a modest improvement in their service accounts, particularly from shipping and the tourist trade. But for most deficit countries, net payments on nontrade account must be expected to increase when debt obligations to the United States and Canada have to be met. Whatever the cause of the deterioration in balances of payments, trade adjustments must be the principal means of restoration for nearly all deficit countries.
Some countries may earn more dollars from their trade with regions outside the Western Hemisphere; but at best this could solve for a few countries only a small part of their dollar payments problem. In any event, for dollars to be earned in this way presupposes an expansion of United States imports from other regions. Even if the most liberal estimates are made for indirect dollar earnings in other regions, the gap left to be filled by the expansion of exports of the deficit countries to the Western Hemisphere will still be so large as to justify its being regarded as the crux of the dollar payments problem.
The Western Hemisphere now offers a larger market for imports than before the war. It has, however, become a much larger supplier of its own import requirements, and other regions have maintained only slightly more than half of their prewar shares in Western Hemisphere import markets. Of the nearly $5 billion of imports of Western Hemisphere countries in 1938, about 31 per cent came from Europe and 14 per cent from the Middle East and the Far East. Of their aggregate imports of $12 billion in 1946, only 14 per cent came from Europe and 9 per cent from the Middle East and the Far East. By 1948, of their aggregate imports of $18 billion, 16 per cent came from Europe and 9 per cent from the Middle East and the Far East. The principal aim of the deficit countries should be to increase their exports to the Western Hemisphere, and particularly to the United States. This would help them meet their own dollar payments problem. It would also help to meet the dollar payments problem of other countries in the Western Hemisphere that are compelled by the difficulty of getting supplies from other regions to depend on the United States for an undue proportion of their imports.
Any quantitative estimate of the increase in exports to the Western Hemisphere which will be necessary to meet the dollar payments problem of other regions would inevitably be rough and arbitrary. If Europe’s 1948 deficit with the Western Hemisphere had had to be eliminated by increased exports to the Western Hemisphere, these exports would have had to be 2.8 times as large as they were. Similarly, if the 1948 deficit of the Middle East and Far East with the Western Hemisphere had had to be eliminated in the same way, their exports to the Western Hemisphere would have had to be about 1.6 times as large. Clearly, a quick expansion of exports to the Western Hemisphere on such a scale cannot be expected. There will, therefore, remain a residual that may have to be met by shifting or restricting imports.
In several Latin American countries, the current payments position still requires a cautious import policy, and it is important that their foreign exchange resources should be used in ways which will favor the development of their economies. It will be easier for them to increase their imports from countries outside the Western Hemisphere if at the same time they can expand their exports.
A satisfactory solution to the dollar payments problem will require further increases in the volume of world trade, in the proportion of total imports that go to the Western Hemisphere, and in the proportion of total exports supplied by other regions. The questions which are now of immediate importance are whether the pattern of trade is to be changed mainly by increasing the exports of the deficit countries or by reducing their imports from the surplus countries; and whether the necessary shifts are to be made on the basis of relative efficiency and economy or by restrictions and discriminations. It is in the general interest that international payments should be restored by the expansion of exports on the basis of relative prices and costs rather than by the contraction of imports through restrictions and discriminations.
The Role of the Deficit Countries
The primary responsibility for restoring the international payments position of the deficit countries rests with themselves. Until their domestic economies are adjusted to make more of their output available for export, so as to reduce their dependence on an excess of imports, their payments difficulties will continue. The starting point for any policy designed to improve their position is the gradual reduction of the present proportion of investment and consumption compared with their own output. The establishment of a better pattern of international payments is in part a problem of monetary policy, involving limitation of domestic demand, and especially of demand for investment, although, of course, investment which will improve the balance of payments should be continued. Inflation is not compatible with a satisfactory international balance of payments.
In their own and in the general interest, it would be preferable for the deficit countries to make the greater part of the adjustment which is necessary by expanding exports to the dollar region. The difficulties to be overcome in increasing such exports involve every aspect of production, marketing, and prices. The necessary increase will not be forthcoming unless home demand is limited by avoiding inflation, unless production is shifted to goods which offer prospects for export sales in the Western Hemisphere, and unless facilities are provided to market and service these goods. Above all, if exports are to be increased on a large enough scale, the goods will have to be offered at prices competitive with both domestic output and other imports in the markets of Western Hemisphere countries.
Any considerable increase of exports to the Western Hemisphere is likely to require the opening up of new demands. For exports to the United States, this means at least that the export prices of the deficit countries must be competitive with United States domestic prices, taking the tariff also into account. For exports to other Western Hemisphere countries, it means that the export prices of the deficit countries must be competitive with export prices from alternative sources of supply, and especially from the United States. Even had prices in the United States and in some other markets not declined recently, the maintenance of the present level of export prices and costs in the deficit countries would have made unlikely the necessary improvement in their competitive position. The shift from a sellers’ market means that importing countries now have a wider range from which to select the commodities they wish and the source from which they draw their supplies. Further progress in reducing dollar deficits through larger exports is not likely unless export prices to Western Hemisphere markets are reduced.
While the United States wholesale price index for manufactures was about 175 (1937 = 100) in May 1949, the indexes of export prices in dollars of the principal Western European countries exporting manufactured goods ranged around 210. The difficulty of exporting manufactures on an adequate scale to the United States is apparent from these figures. In other Western Hemisphere markets, where exports of European manufactures have to meet the competition of United States producers, relative export prices were perhaps less unfavorable to Europe, although not far different. Comparison of the costs of producing export goods in the Middle East and Far East with Western Hemisphere prices for raw materials also shows the great difficulty to be overcome in expanding exports from those regions.
These high export prices impose a serious handicap on deficit countries as they endeavor to expand their exports to the Western Hemisphere. There may be some scope for price reduction by a lowering of profit margins, although these possibilities are necessarily limited. The ultimate limit to price reduction is set by production costs. A reduction in costs through greater efficiency is at best a slow process, although the investment already undertaken and in prospect may offer hope in this direction. Many cost elements are notoriously rigid, and any general deflationary program for lowering costs and prices would encounter formidable resistance. Where a price reduction of the magnitude indicated above is necessary to expand exports, it would in many cases seem possible only through an adjustment in the exchange rate.
Countries with dollar payments difficulties are faced with the question whether an exchange rate adjustment can help solve their problem. The immediate purpose of an exchange adjustment is to increase substantially the foreign exchange receipts and particularly the dollar receipts from exports. If this is to be achieved, the exchange rate adjustment must make possible a reduction in their dollar export prices and the demand for their products must be such that this reduction will make an adequate addition to sales. In some cases, it would also be important that the increased profitability of exporting would encourage a larger production of exportable commodities.
For exchange adjustment to be successful, it is essential that the expected benefits should not be dissipated by an offsetting rise in local prices and costs. It must, therefore, have public support and be accompanied by appropriate fiscal and credit policies. If the public recognizes that an expansion of exports is necessary to maintain the flow of imports, and is prepared to accept higher import prices without insisting on corresponding changes in incomes, exchange adjustments in the deficit countries should involve only a relatively small rise in the cost of living. If, however, the public is insistent on offsetting by higher incomes even a moderate rise in the cost of living, the result will be the almost complete dissipation of the benefits of exchange adjustment. Even if an exchange adjustment is accomplished without a significant rise in prices and costs, it would be futile if the greater demand abroad were not matched by an equivalent supply of exports. Unless home demand is restrained, the expansion of exports, which alone can justify an exchange adjustment, will not be achieved.
Even when the parity of a country’s currency does not seriously impair its total exports, the existence of inflation and inappropriate exchange rates elsewhere may hamper its efforts to direct a greater part of its exports to Western Hemisphere markets. The inflated prices in non-dollar markets are one of the major reasons why exporters in Europe, the Middle East, and the Far East do not offer their exports in larger part to Western Hemisphere countries. This difficulty can be overcome only as the general pattern of exchange rates is adjusted to relative prices and demand. Every country with a payments problem—and this includes both surplus and deficit countries—has a direct interest in the establishment of exchange rates in other countries that will encourage a pattern of trade conducive to a better balance in international payments.
The Role of the Surplus Countries
The restoration of international payments is not exclusively the responsibility of the deficit countries. It is no less important for the attainment of this objective that surplus countries should keep their economies operating at a high level and minimize the trade barriers that restrain imports. Indeed, the surplus countries have a positive interest of their own in finding a solution for the international payments problem. It would not be enough for them merely to refrain from action which might hamper the efforts of the deficit countries. Even the best conceived and the most vigorously executed plans for expanding the exports of other countries would necessarily fail if substantial increases in imports by surplus countries were now to be prevented by a large or persistent decline in business activity or by restrictive import policies.
The decline in the level of business activity in the United States from the extremely high postwar peak has added a new element to the payments problem. If this recession should prove to be no more than the end of the postwar restocking boom, it may help to establish a more satisfactory structure of prices on which to resume production and employment at a high level. However, even the decline that has already occurred is beginning to intensify the dollar payments problem and may threaten further restrictions and discriminations. If the decline in United States business activity, and hence in United States imports, should persist and intensify, it would be a serious setback to the deficit countries in their efforts to increase dollar earnings. It would necessitate a reduction of imports from the United States, which for many countries would be serious and for some critical, and would inevitably delay for an extended time the establishment of a world economy trading on a multilateral basis. Many countries might find it necessary to offset their reduced imports from the United States by discriminatory arrangements for larger imports from other areas.
The decrease in United States imports and the consequent decrease in incomes in other Western Hemisphere countries increase the difficulty of expanding exports to that region. For the deficit countries, this emphasizes the urgency for their taking bold measures to improve their dollar position. For the United States, the need is to avoid such a reduction in demand as will threaten an enduring and large contraction of world trade and necessitate over wide areas greater restrictions and new discriminations against imports from that country.
Apart from maintaining a high level of demand, the surplus countries can help expand exports by the deficit countries by lowering trade barriers and simplifying customs procedures. A reduction of tariffs, moreover, would have the advantage of reducing import prices without diminishing the exchange receipts which the deficit countries would receive for each unit of their exports. Much has already been done to reduce tariffs through cooperative action. But it is of great importance that no new tariff barriers should obstruct the efforts made by deficit countries to improve their payments position, and, wherever possible, further reductions in tariffs should be undertaken. If the payments position of deficit countries is likely to be improved by exchange depreciation, the improvement would be enhanced by a reduction of tariffs by surplus countries. While reduction of tariffs in other Western Hemisphere countries would not change the competitive position of deficit countries relative to the United States, it would help secure for them the maximum benefits from any reduction in their export prices. The process of tariff reduction, however, is always slow, and it will not be realistic to count on it as a solution to the immediate dollar problem.
In the establishment of a better balance in international payments, an important part must be played by international investment. An adequate flow of capital, particularly to under-developed countries, can have a generally beneficial effect in expanding world trade. It can help the deficit countries to increase their exports in the favorable environment of a larger volume of world trade. The assurance of fair treatment to foreign investors is a basic condition for the revival of international investment. The greatest encouragement to the resumption of a satisfactory flow of international capital would be an indication that the deficit countries themselves are taking effective steps to place their international payments in order.
In the years since the end of the war, much has been accomplished to increase production and trade. Despite this, dollar payments difficulties persist and many countries remain dependent on foreign aid. Even with this help, the payments position of some countries is so precarious that a moderate decline in their U.S. dollar receipts threatens their capacity to maintain essential imports. Under such conditions, even mild economic disturbances, at home or abroad, seem to call for drastic measures to meet an emergency situation.
Further measures of restriction and discrimination offer no permanently satisfactory solution to payments difficulties. Nevertheless, at a time like this it is natural that countries should think first of the effectiveness of measures to protect their critical dollar position. The deficit countries cannot be asked to forego even extreme measures which are necessary to prevent a breakdown in their dollar payments. But they can reasonably be asked at the same time to adopt positive measures which will increase their ability to meet their payments problems. Measures of restriction and discrimination, even if intended to be temporary, may foster the formation of exclusive economic blocs which might seriously threaten the strength and independence of the weaker economies, without assurance that they could offer their members a satisfactory way out of their difficulties.
A constructive solution to the payments problem requires the deficit countries to do all that they can to make more of their output available for export and to offer these exports at prices which will call forth much greater demand in dollar markets. The world is now tending to divide into high-price markets of countries dealing mainly in inconvertible currencies and low-price markets of countries dealing mainly in convertible currencies. The dollar payments problem will persist at least as long as these price differences continue. Prolonged dependence on restrictions and discrimination would be likely to divide the world economy into economic blocs, each with its own price structure, each tending increasingly to insulate itself from the rest of the world by the necessity of protecting its own inconvertible currency system by trade restrictions and exchange controls.
The task of increasing dollar exports cannot be delayed in the hope that it can be quickly completed by some extraordinary effort at the eleventh hour. The magnitude of the dollar payments problem requires that every constructive means should be used to meet it. For the creditor countries, this means maintaining high levels of national income, reducing the barriers to trade, and facilitating the flow of international capital. For the deficit countries, it means the reduction of their export prices to a competitive level, in order to meet as much as possible of their payments problem through the expansion of trade on a multilateral basis.
Neither surplus nor deficit countries can afford to neglect to do their part to meet this problem. Even if creditor countries do less than they should, this would not relieve the deficit countries from the necessity of doing all that they can to relieve the situation. Their people will be the principal sufferers if they should find it necessary to impose further restrictions on essential imports. In their own interest they cannot afford to forego any suitable instrument, including any necessary exchange adjustment, that could expand their dollar exports and thus provide their people with imports. The risks and difficulties in adopting appropriate measures are undeniable; but with public understanding and support, the risks can be assumed, and the difficulties can be overcome. The deficit countries will then have done all in their power to deal with the payments problem.