THE TERMS OF REFERENCE of this report1 were to ascertain the causes of the imbalance of international payments from which the world has recently been suffering. Since “causes” include policy decisions, which may be criticized from various points of view, it has been thought better in this first approach to limit the enquiry to ascertaining the changes that have in fact occurred in the pattern of international payments. In most of the report this has been narrowed to the differences between the pattern as it existed in the period 1950-mid 1952, or in 1950–51, and the pattern of 1936–38.


THE TERMS OF REFERENCE of this report1 were to ascertain the causes of the imbalance of international payments from which the world has recently been suffering. Since “causes” include policy decisions, which may be criticized from various points of view, it has been thought better in this first approach to limit the enquiry to ascertaining the changes that have in fact occurred in the pattern of international payments. In most of the report this has been narrowed to the differences between the pattern as it existed in the period 1950-mid 1952, or in 1950–51, and the pattern of 1936–38.

THE TERMS OF REFERENCE of this report1 were to ascertain the causes of the imbalance of international payments from which the world has recently been suffering. Since “causes” include policy decisions, which may be criticized from various points of view, it has been thought better in this first approach to limit the enquiry to ascertaining the changes that have in fact occurred in the pattern of international payments. In most of the report this has been narrowed to the differences between the pattern as it existed in the period 1950-mid 1952, or in 1950–51, and the pattern of 1936–38.

It must not be taken to be implied that none of the changes revealed would have taken place if World War II had not occurred. Nor is it implied that any of the changes that have taken place are undesirable. Furthermore, the report must not be taken necessarily to imply any pointers for future policy. For instance, if it appears that a particular factor has been responsible for a big dislocation, it does not follow that a remedy should be found by operating on that factor; the best remedy may lie in introducing offsetting forces by operating on other factors. The relevance of the report for policy consists only in the contribution it may make to a better understanding of the quantitative importance of the various forces that have been at work.

It will be observed that gold plays rather a large part in the analysis of the changes in pattern that have occurred. The author of this report came to his work with no preconception on this matter. Indeed, it was only halfway through his work that the full significance of the changed position of gold was borne in upon him; from this point forward there was no choice but to place emphasis on gold, since there was no other way of describing the larger changes of pattern that have taken place.

The report is necessarily confined to major items of change. It could also be used as a framework for consideration of the smaller items and of policy development.


In any investigation into the causes of an imbalance of payments, it is proper to give first consideration to gold, which has for centuries been the principal medium of international settlement.

Under the forces of supply and demand, gold came to have a certain value in relation to goods, which enabled it to function smoothly as a medium of reserve and settlement. This value varied somewhat from time to time under the influence of new discoveries or the exhaustion of existing sources. If gold was becoming more abundant and reserves accumulating, the authorities felt able to have an easy credit policy; this would tend to make prices move upward and the goods value of an ounce of gold downward. Conversely, if on the whole reserves were tight, a deflationary policy would prevail, prices would tend downward, and the goods value of an ounce of gold upward. Thus the goods value of an ounce of gold, and thereby the goods value of the world’s monetary gold stock, tended to be adjusted upward or downward so as to enable that monetary stock to do the work required of it. This work was to provide sufficient reserves, by and large, to enable the authorities to feel that they had enough to cover normal expected fluctuations in their balances. Individual countries might always get into trouble, but if the majority of countries felt short, then the deflationary process got to work and adjusted the situation.

After World War I, the gold situation aroused anxiety. It was feared that the annual supply of newly mined gold would be so low as to entail protracted deflation. The acute deflation which followed the spring of 1920 had caused serious unemployment and financial troubles, and the authorities were anxious that a strongly downward trend of prices should not continue indefinitely. Professor Cassel, a leading authority at that time, estimated on the basis of a historical survey that the monetary gold stocks ought to rise at the rate of 3 per cent per annum compound interest to maintain stable prices. Actually, in the period from 1924 to 1929 they grew at the rate of 2¼ per cent per annum; at the same time the volume of world trade increased at 5.7 per cent (average), while its aggregate value increased at only 3.9 per cent.2 The gold shortage did cause embarrassment; for instance, in 1927 the Federal Reserve System deliberately eased credit in the United States in order to promote a moderate outflow of gold to help other nations. (Its action was subsequently criticized as inappropriate to the domestic situation.) Whether the world gold shortage was in part responsible for the world slump of 1929 remains an unsettled question.

The events of 1929–33, in all other respects disastrous, had one good by-product. The devaluation of the dollar, the pound, and other currencies in terms of gold, the great fall of prices even in terms of the devalued currencies, and the unhappy shrinkage in world trade greatly increased world liquidity. In 1924 the monetary gold supply constituted 32 per cent of the annual value of the world’s export trade; in 1933 it constituted about 100 per cent;3 gold held outside the United States alone constituted 60 per cent of the annual value of world trade, including that of the United States.4 Furthermore, the stocks of gold in central banks and treasuries increased at the rate of 6.3 per cent compound interest between January 1, 1933 and December 31, 1938. The increment of gold supply alone was enough to finance 6.3 per cent of world trade.

Unhappily, this easement was largely neutralized by an enormous flow of capital to the United States, partly in quest of the high yields then obtainable on U.S. stocks and partly driven across the Atlantic by growing political tension in Europe. This flow of capital had to be financed by gold, and reserves outside the United States were depleted. In 1951 the world’s gold outside the United States would suffice to carry only 17 per cent of the world’s annual export trade. Between the end of 1945 and the end of 1951 the world’s monetary gold stock grew at the rate of only 1.1 per cent per annum.

There were three causes of this great change, of which the first mentioned was also one cause of the other two. (1) By 1950–51, the value of the dollar in terms of goods entering international trade had fallen to about four ninths of its 1937–38 value;5 but the dollar price of gold remained the same. Consequently, the goods value of an ounce of gold had fallen to about four ninths. (2) By 1950–51 the volume of world trade had risen by about one third;6 but gold production outside the United States and the U.S.S.R. had fallen from US$928 million to US$762 million. (By contrast, between 1936 and 1940 the production of gold rose by one third.) (3) An amount of gold equal to more than half the gold output in the period 1946–51 ($2,667 million out of $4,790 million) has gone into private hoards.

In the past, gold shortage has tended to cause deflation. It has had no such effect recently. In the five years after World War II there were strong basic forces making for inflation, e. g., the need for reconstruction. Monetary considerations would not have been strong enough to outweigh these forces, any more than they are during war itself. Further-more, opinion has moved strongly against extreme deflation as an appropriate remedy. It is widely held that deflation should not and, indeed, could not be pushed to the point of causing substantial wage reductions or massive unemployment. And finally, in relation to the gold supply deflation would be of no value in securing an adjustment unless adopted by the United States. The amount of gold that the various nations consider from time to time that they need to hold as a reserve against fluctuation depends on the gold value, which in this period has meant the dollar value, of their foreign trade. If the amount of gold available is fixed, gold can be brought into a better relation to the requirements for it only by a reduction in the gold value of trade. If the dollar price of gold is fixed, a reduction in the gold value of trade will occur only if the dollar value of trade is reduced; that is, if the goods value of the dollar is appreciated. This would mean deflation in the United States itself. Deflations elsewhere would serve only to alter the values of local currencies. To reduce the dollar value of world trade to anything like its prewar level would require a large reduction of U. S. wages. This may be ruled out as not only quite impracticable, but also undesirable. Consequently, it may be affirmed that a readjustment of the value of gold stocks and accessions to requirements for them will not take place by the traditional route of deflation.

But the matter does not rest there. Ruling out one mode of adjustment does not solve the problem. Each nation, finding itself short of reserves, bethinks itself of an alternative remedy, and finds it in direct import restriction. But while the evils of deflation were grave and there is no case for returning to it, it did at least solve the problem of inadequate reserves; by reducing the value of trade as expressed in gold it restored liquidity. Import restriction, on the other hand, although it may temporarily ease the problem of a particular nation and indeed be necessary for it, has no tendency to solve the general problem. In this connection it is entirely beggar-my-neighbor. The total amount of gold being fixed and annual accessions of trifling quantity, what one nation gains by way of replenishment to its reserve, some other loses. It might be argued that if all the nations other than the United States were to push their restrictions so far as to induce an outward flow of gold from the United States, that would be a genuine easement. But to restore their reserves to their prewar relation to trade, they would have to get all the gold out of Fort Knox, and long before that happened the United States would feel herself short. The plain fact of the matter is that, at the present valuation of gold in terms of goods, not all the gold in the world (including that in Fort Knox) is sufficient to provide nations with adequate reserves.

The dollar imbalance is such a prominent evil, and attracts so much attention, that this more fundamental cause of trouble is likely to be overlooked. Many restrictions are due to the dollar shortage, but by no means all. It may safely be said that when the dollar imbalance is remedied the other evil will remain, unless a specific cure is found, and will continue to give rise to restrictionism.

Suggestions have been made in the past for supplementing an insufficient supply of gold by some gold substitute. One such was the bancor proposed in the British Treasury plan (1943). This plan for bancor contains the following proposal: “Subsequently, after the elapse of the transitional period, quotas should be revised annually in accordance with the running average of each country’s actual volume of trade in the three preceding years, rising to a five year average when figures for five postwar years are available.” Another proposal was that of the Genoa Conference (1922), that central banks should hold the gold convertible currencies of other nations in lieu of gold. The dollar would be a thoroughly acceptable currency for this purpose, but in present conditions it is as hard to obtain as the gold in Fort Knox. It was partly in consequence of the views propounded at Genoa that sterling came to be widely held as an alternative reserve; the holding of sterling has been adventitiously increased in consequence of the British methods of financing trade during World War II. Although sterling held outside the sterling area is not gold convertible, it has been playing a useful part as a means of international settlement in lieu of gold. The Bank of England report for 1951 states that £463 million was transferred during the course of the year to finance trade both parties to which were outside the sterling and dollar countries; this may be as much as about 6 per cent of the total of such trade. EPU units of account also represent an attempt to fill the lacuna caused by the lack of an adequate gold supply.

While these ad hoc expedients may serve a useful purpose for the time being, there is no doubt that in due course it will be desirable to devise a radical cure for the gold shortage.

The changed relation of the value of newly mined gold to the value of world trade has also played a part of first rate importance in relation to the dollar imbalance, which will be discussed in the next section.

The Dollar

Of all the particular imbalances in the international payments pattern, that between the dollar and other currencies is the greatest. Unfortunately, it is extremely difficult to measure the amount of imbalance existing. Over and above the realized deficit, the continued existence of which has been made possible only through the provision of generous aid by the United States, there is, so to speak, a latent deficit consisting of the value of all the goods and services which the citizens of various countries would wish to buy from the United States at their existing prices, if only they were not prevented by discriminatory import restrictions from doing so. There is, however, an offsetting factor. It is probable that the aid so generously provided by the United States has led to the purchase of a certain number of goods from the United States, which would not have been purchased in the ordinary course of commerce even in the absence of import restrictions. This aid, in one form or another, grant or credit, has amounted to about $5 billion per annum since the war. Even if only one fifth of this was spent on dollar goods that would not have been purchased in the absence of such aid, this would make an important difference to the size of the realized deficit. We are thus in ignorance of two important quantities, namely, the value of the dollar goods that would have been purchased had there been no discriminatory restrictions, and the value of the dollar goods that were purchased owing to aid granted but that would not have been purchased in the ordinary course of commerce. Ignorance of these two important quantities should lead to a suspension of judgment. It means that we cannot know in advance what measures would be adequate to rectify the situation and must proceed somewhat cautiously by trial and error.

There is a difficulty also in regard to the visible deficit. This was exceedingly heavy in the years from 1945 to 1949. In 1950 there was a spectacular improvement, followed by a relapse, but not to the previous position. The year 1950 was favorable to the rest of the world, partly because the United States was building inventories after the recession of 1949 and partly because the outbreak of the Korean war led to heavy U.S. purchasing abroad. This same purchasing and other events connected with the Korean war set off inflationary tendencies, which were inadequately controlled in certain countries, and led to heavy purchasing from the United States in 1951. It may be held that these conflicting tendencies to some extent offset one another, and that the average of the two years may be taken as a fair indication of the dimensions of our problem. The earlier years were affected by the fact that the productive capacity of the rest of the world had not recovered from the dislocations of war and that inflationary pressures were much stronger than they have been more recently. Thus we may have some measure of confidence that there will not be a relapse into the bad deficits prior to 1950, but at the same time we can only accept the figures for 1950 to mid-1952 with caution.

These figures suggest that, as a rough approximation, the imbalance may be thought of as a problem of $2 billion (see Table 1, columns 2 and 4). Such a figure has little meaning considered by itself. It is therefore desirable to consider the U.S. trade figures against the background of U. S. and world production indices. U. S. production has soared greatly by comparison with the rest of the world (Table 2). While the increase in U. S. productivity is a notable example to the world, it is important not to let exaggerated ideas of the rate of increase suggest that it must lead to recurrent crises of imbalance and the need for successive drastic devaluations. The increase of total U. S. production between 1937–38 and 1951 has been due in greater part to the increase of numbers employed than to the increase of output per man; the former is not likely to be repeated and the latter should be capable of being looked after by upward adjustments of U. S. wages from time to time.

Table 1.

U. S. Balance of Payments1

(In millions of U. S. dollars)

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In this table and in all subsequent presentations, items flowing under military aid are excluded. The amounts shown under military aid have recently been running close to the “special category” items which the U. S. Department of Commerce does not show by country of destination for security reasons. (In Table 3, below, special category items, instead of military aid items, are excluded, to obtain comparability with other figures in that table.) It may be assumed that, as long as world conditions remain as they are, these exports will be financed by special methods. It would be misleading to include them in an assessment of the economic disequilibrium. They averaged $1,225 million a year in the two and a half years, 1950–first half of 1952.

Private donations are included in the balance on goods and services. Although not the payment for a service, it seems sensible to include them, since for several decades they have shown little change from year to year. This is a reversion to the older practice of the Department of Commerce, which used to include them in the current account.

“Exports”, as defined by the Department of Commerce, include the value of gold transferred from U. S. mines to Fort Knox. Although this appears to be an intrusive item, it has not been thought necessary to exclude it.

Table 2.

Indices of Industrial Production and U.S. Exports and Imports, 1948–51

(1937–38 = 100)

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Since agricultural exports are important, the following combined index (1937–38 = 100) of U.S. industrial and agricultural production is of interest:

This is an arithmetic average of (1) an index weighting industry and agriculture according to the numbers employed in 1936–38 and (2) an index weighting industry and agriculture according to the numbers employed in 1950–51. The increase in agricultural production in the outside world appears to have been about 15 per cent.

Excluding “special category” items.

For description of this item, see text.

The figures in Table 2 are volume figures, except for the last line, entitled the “level” of U. S. imports. A very important feature in the whole situation has been the deterioration in the U. S. terms of trade. This has caused her surplus on trade account to be considerably less than it would otherwise have been. The “level” of imports is designed to show this; to obtain it, the volume of imports has been multiplied by a coefficient representing the quantity of U.S. exports required to buy one unit of imports (1937–38 = 1). Tables 2 and 3 show that, contrary to general belief, the value of U.S. imports had by 1950–51 risen fractionally more than the value of her exports. The volume of her exports expanded more than the volume of her imports, but her worsened terms of trade offset this.

Table 3.

U.S. Balance of Trade, by Regions1

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See Table 1, footnote 1.

The minus figures indicate a negative trade balance.

It will be noticed that the volume of U.S. exports expanded roughly in line with her production, while the volume of imports accorded more with world production. At first sight it would seem that each area had sent forth exports in proportion to its ability to produce generally. Yet the United States was able to buy all she needed, while the rest of the world had to restrict purchases. Such views have to be seriously modified when we proceed to the broad regional pattern. Volume figures by regions are not available. It has already been stated that between 1937–38 and 1950–51 world trade expanded by about one third in volume, while the dollar prices of world traded goods rose about 2¼ times, so that the dollar value of world trade rose approximately 3 times.

While global U.S. trade expanded more than in proportion to world trade (and world production), this was due entirely to a great growth of trade within the Western Hemisphere, which seems to have drawn closer together in this period. Despite all the aid given, U.S. exports to non-America (including, of course, the goods sent gratis7) did not expand more in value than world exports generally.

It is next necessary, for understanding, to compare the U.S. postwar balance with those in earlier periods. As shown in Table 4, the visible surplus of exports in the 1950–52 period is similar percentagewise to the surplus in earlier periods. There was, however, a sizable change on the side of “services”, which were on balance negative in the prewar period and subsequently positive (Table 5). Transportation constitutes the largest item of change; U.S. receipts on transportation account were, however, particularly great in 1951, and it is thought that this figure will not be repeated.

Table 4.

U.S. Balance of Payments on Goods and Services

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Why a surplus which was not, percentagewise, so much greater than those accruing in earlier periods has caused so much more embarrassment, clearly calls for explanation. It is true that, expressed in dollars, the surplus was very much larger, but so are all other magnitudes in the pattern of world trade.

During the twenties the surplus was wholly covered by the investment of U.S. capital abroad. This would seem to have been a healthy pattern for a rich and expanding country. It is true that some of the investments then made were ill-advised, but this was not surprising, considering that the United States was making her first experiments in foreign investment on a large scale. It was confidently expected that she would in due course develop sounder methods. Unfortunately, since that time conditions in the outside world have sadly deteriorated. The world slump, political insecurity, World War II, even greater political insecurity thereafter, have not offered an attractive field for foreign investment.

In the thirties the U.S. surplus was paid for by a flow of gold to that country. It is important to emphasize that not merely was the surplus paid for in gold, but it was paid for in gold four times over. The average annual surplus from 1933 through 1938 was $267 million; the average annual flow of gold to the United States during the same period was $1,140 million. This was due to a flow of capital to the United States, which, while justified and reasonable from the point of view of the individuals responsible for it, may be regarded as “perverse” from the point of view of a balanced world. This large flow of gold imposed a strain on other countries and caused their reserves in total to fall, on the average, by $151 million per annum. Had they had to pay in gold for only the actual U.S. surplus on goods and services, they could have done this and still had their own collective reserves rise at the comfortable rate of 3.4 per cent per annum compound interest. They could clearly have paid for a considerably larger U.S. surplus and still remained reasonably comfortable.

Table 5.

Change in U.S. Balance of Payments on Services

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The minus figures indicate a negative services balance, and the plus figures, a positive balance.

The balance might alternatively be considered as a percentage of imports or of the mean of exports and imports. In this case, the alternative methods would yield approximately the same figures, since exports rose to 403 per cent of the 1936–38 average, and imports to 422. See Table 3.

It is desirable to consider what the pattern of international payments would have been in 1950–52 had the large change between the value of new gold accessions and the gold value of world trade not occurred. Since the accessions in the late thirties included some gold from hoards, it is fairer to take production figures for these years, in order to make a comparison. In 1936–38 gold production outside the United States and the U.S.S.R. was $892.3 million (annual average). Suppose that this had increased by 1950–51, in line with world production and trade generally, by one third, viz., to $1,189.7 million. That this is not a fanciful hypothesis is indicated by the fact that by 1940 production had already increased to $1,094 million, and that important new gold discoveries have since been made. From this total subtract 5 per cent, which is the Bank for International Settlements’ estimate of absorption by the industrial arts.8The remainder is $1,130.2 million. Finally, assume that the dollar price was raised 2¼ times, viz., in line with the rise in the dollar prices of goods entering international trade.9 This would give an annual value of $2,549.9 million for new gold production outside the United States and the U.S.S.R. available for monetary use.10 This may be compared with the actual annual U.S. surplus on goods and services account, from 1950 through the first half of 1952, of $2,462 million. It appears that, if new gold supplies had borne their prewar relation to the value of world trade, the rest of the world would have been able to pay for its deficit in 1950–52 without aid;11 but the position would have been unsatisfactory and indeed somewhat strained, as the rest of the world would not have been able to add to its reserves. But if the outflow from the United States of private long-term capital of $851 million per annum is brought into the reckoning, the rest of the world could, as well as paying its deficit with the United States out of its own resources, have added to its gold reserves and/or reduced restrictions on dollar imports.

It should be emphasized that the foregoing paragraph implies no value judgment. It is a mere historical accident that, for some time, the United States has produced a smaller proportion, and the rest of the world a larger proportion, of the medium which has for centuries been used as money. There is no moral obligation upon the United States to add more than she wishes to her gold reserves. We are concerned solely with the fact that there has been a change of great magnitude involving a disturbance in the prewar pattern and the need for adjustment. Other disturbances have also occurred, of which the worsening in the U.S. terms of trade has already been cited. There have been various shifts in the supply and demand for various particular categories of goods—such as grain and industrial equipment. It may safely be said that none of the shifts in individual categories of commodity trade (which are shown in Table D, Col. 4, page 40) are of comparable order of importance to the change in the gold situation. Its effects therefore should be observed carefully. The rest of the world will have to find acceptable goods to send to the United States in lieu of gold, or, alternatively, to buy correspondingly less from the United States.

It could be argued that the United States, by increasing her importation of other commodities (or the prices she has paid for them), has in fact made good the loss to the world resulting from the diminished flow of gold to her. But it has already been noted that this increase lay wholly in her imports from the Western Hemisphere. The dollar value of U.S. imports from non-America increased slightly less than in proportion to the growth of world production and trade. Thus non-America has not had an increased flow of dollars (other than by aid) which could fill the gap in the means of settling with the United States created by the great shrinkage of gold. The possibility of non-America capturing some of the additional U.S. dollars made available to Canada and Latin America by increased U.S. importation is discussed below.

Both before and since World War II, the deficit of the OEEC countries in trade with the United States was greater than that of the whole world including OEEC Europe (see Table 3). This was partly offset by contra items on services account (Table 6). It follows that if, owing to the shrinkage, to a trifling quantity, of the supply of newly mined gold available as money, the rest of the world will have to learn to live in balance with the United States (instead of having a running deficit of the order of 15 per cent), the main burden of adjustment must fall on OEEC Europe. Before the war OEEC Europe, by having surpluses with gold-producing countries or by obtaining gold in multilateral exchange, was able to pay her heavy direct deficit to the United States in gold. This was a natural pattern, since Europe has a number of requirements she can best meet in the United States, while her manufactured products are more suitable for sale in third party markets. This makes the adjustment now required more difficult. If the deficit of the world with the United States had been fairly evenly distributed among the various regions, being about 15 per cent everywhere, no doubt its elimination would have presented a difficult problem, especially at a time when the world has become much more dependent on certain U.S. supplies and desirous of others; but it is much more difficult for a particular region (Europe) to eliminate a deficit as large as about 40 per cent. One has to cut more deeply into the established pattern of interchange.

Table 6.

U.S. Balance of Payments on Goods and Services, by Regions, 1950–51

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Excluding military aid.

The minus figures indicate a negative balance.

It should be noted that the U.K. development differs somewhat from that of Europe as a whole. The rather poor showing of her exports to the United States in 1950–51 (see Table 3) was due partly to a real loss of entrepôt exports and partly to a mere statistical change by which the U.S. Department of Commerce, from whose returns all these figures are derived, altered its method of classification; in 1936, and to some extent also in 1937 and 1938, it showed as coming from the United Kingdom goods whose actual origin was elsewhere, while in 1950–51 they are shown by their countries of origin. This means that the true U.K. deficit on visible trade account in respect of her own products was, in 1936–38, substantially greater than 65.1 per cent, and that makes her present problem of adjustment correspondingly more difficult.

The very small rise in the value of U.K. imports from the United States, which represents a large curtailment in the volume of those imports, was due to austerity and import restriction. As her initial percentagewise bilateral deficit with the United States was larger than that of continental Europe, it was needful for her to make more strenuous efforts to move toward bilateral balance.

When services are taken into account the distribution of the U.S. surplus is seen to be modified somewhat. Information is lacking for a regional subdivision of the prewar services balance. Data are, however, available for the OEEC countries in 1937. The subsequent reduction of Europe’s favorable balance on services account expressed as a percentage is seen to have some importance as an aggravating factor.

Table 6 indicates that Canada and the Latin American group of countries as a whole, as well as Europe, have had dollar imbalances of substantial proportions, after “services” have been brought into the reckoning. However, the greater part of the outflow of U.S. private capital (see Table 1, col. 3) went to Canada and Latin America. The flow to regions beyond the Western Hemisphere was not of sizable amount.

The movement of capital is too variable for a tabulation covering only two years to be meaningful. It may be noted that the flow of private capital from the United States of Canada in 1950–51 was equal to 23 per cent of U. S. exports to Canada and so almost completely offset the U. S. surplus (25 per cent) on goods and services account. Thus whether Canada proves to have a chronic imbalance against the U. S. dollar will depend on her power to attract a regular flow of capital of this order of magnitude.

The capital flowing to the Latin American group of countries as a whole was smaller in these years, and there was a sizable over-all deficit. The problems, however, of this group are markedly different from that of the European group. It has been seen (Table 3) that in 1950–51 the dollar earnings on trade account of the Latin American group were 574 per cent of the 1936–38 average, while those of the European group were only 260 per cent. Moreover, the Latin American group had a much better bilateral balance than Europe had with the United States before the war. While it may be natural and proper for the Latin American countries to have greatly increased requirements for imports from the United States on account of their capital and general expansion, a moderate curtailment of imports which have risen (in dollar value) nearly six times should not be excessively difficult. It may well be that the true recipe for the imbalance of the Latin American group as a whole lies in the curbing of inflationary tendencies in certain of its members. For the most part, the European problem is of quite a different nature.

Before proceeding to a more detailed scrutiny of the imbalance revealed in Tables 17, it may be well to make an observation on the effect of inflation upon external balances. If the aggregate purchasing power released within a nation exceeds its supply potential, not only will there be a tendency for internal prices to rise, or—to the extent that these are subjected to control—for waiting lists and bottlenecks to develop, but also there may be a tendency toward excess spending on external account. The external deficit is then a symptom of aggregate internal over-spending. There is no doubt that internal inflations, which were widespread after the war, tended to cause external deficits; to the extent that these inflations were stronger in countries outside the United States than in the United States, there is a ready explanation of the deficit of the rest of the world with the United States. It is probable that in the late forties, when the aggregate world deficit with the United States was running between $5 billion and $10 billion, inflations in other countries could be reckoned as the principal cause of the imbalance.

Table 7.

U. S. Balance of Payments on Goods and Services with OEEC Countries and Rest of World

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The minus figures indicate a negative balance.

Excluding military aid.

In the fifties, inflations in most parts of the world have abated considerably, although the events following the Korean outbreak caused some revival of them in certain countries. It may be that some part of the dollar imbalance that has remained has been due to local inflations; continuing vigilance is certainly necessary. But it cannot be argued that because there is external imbalance there must be internal inflation, except by some fanciful definition of inflation, which would involve arguing in a circle. Without in the least derogating from the importance of inflation as a persistent cause of imbalance in the postwar years, it may be advisable now to concentrate attention on a quite different cause that has operated to create a major European dollar imbalance, namely, the shrinkage in the value of newly mined gold—to which the shrinkage of invisible income from the United States must be added as a minor cause. Even if Europe had not suffered from any internal inflations, she would still have been under the necessity of finding a new method for paying for some 35 per cent of her normal imports from the United States—or, alternatively, of dispensing with all or part of them. It is clear that such a change-over cannot be effected without great strain and dislocation. The need for making it has no connection with internal inflations and will continue to exist when they have been completely removed. It may be regarded as the hard core of the dollar problem. And it is probable that it constitutes the main part of the dollar problem as it now presents itself.

Europe’s Dollar Problem

There are three ways in which Europe can redress her U. S. dollar position; namely, (1) an increase of exports of goods and services to the United States, (2) a decrease of imports of goods and services from the United States, and (3) a capture of dollars in third party markets, in lieu of the gold formerly won there. In a world of fully multilateral trading relations, the third method would be expected to make the largest contribution. The third party markets can provide U.S. dollars to Europe either through a rise of their sales to the United States or through the substitution of European exports for U.S. exports to those markets. Each of these must be considered in turn.

Europe has made considerable and, to some extent, successful efforts to expand direct sales to the United States. It is in the sphere of finished manufactures principally that one could hope for an expansion of exports by an organized “export drive” or currency devaluation, other categories of goods depending more on the level of U.S. production and national income. The achievement of OEEC countries in 1950–51 is shown by the data in Table 8. Although these index numbers are subject to a margin of error, it can hardly be great enough to invalidate the broad relations displayed. The quantum figure is clearly satisfactory; an 87 per cent expansion may be reckoned as large. But the total value figure is less satisfactory; the OEEC countries kept their dollar prices down in these years. (It is interesting to compare the unit value index of 171 with the unit value index—189—of U.S. exports of finished manufactures in the same period.12) The total dollar proceeds of these European sales to the United States rose less than those of other countries because the prices of European goods rose less. The Belgian data in Table 8, however, show a somewhat different pattern.

Table 8 may be interpreted in one of two ways, each of which has an unsatisfactory moral. On the one hand, it may be that the OEEC group has made a mistake in policy in charging such low prices (a process which the devaluations of 1949 assisted), and would have gained more in total dollar receipts if it had sustained its selling prices at a higher level. This, if true, would be unsatisfactory, as all efforts in Europe are now addressed to paring down export prices by higher efficiency of output, and it will be unfortunate if these efforts merely lead to a loss of total dollar receipts. On the other hand, it may be that the OEEC group has been quite right in keeping prices down, and that it would have lost its markets in the United States rapidly, had it failed to do so. But this is also unsatisfactory. For what it must mean, taken in relation to Table 8, is that the kind of manufactures which the OEEC countries are able to furnish to the United States, and which may consist largely of articles that differ from other U. S. imports of finished manufactures, find less easy access or sale in the United States than the manufactures drawn from other countries. Further consideration of this point would require an analysis article by article

Table 8.

Indices of Exports of Finished Manufactures to the United States, 1950–51 Average1

(1936–38 = 100)

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These figures exclude such items as wood pulp, newsprint, and sacking. Each figure is the arithmetic average of the two figures for 1950 and 1951.

Source: Federal Reserve Bank of New York, Pattern of United States Import Trade Since 1923; Some New Index Series and Their Application (New York, 1952).

Total OEEC exports to the United States have risen less since 1936–38 (160 per cent) than exports of finished manufactures (221 per cent). Exports of crude foodstuffs fell 23.2 per cent in volume, materials rose only 19.3 per cent, manufactured foodstuffs fell 11 per cent, while beverages rose 55 per cent.

It is in place here to consider the more general question of the expansibility of U. S. imports. The Federal Reserve Bank of New York has made an analysis of the elasticity of demand for imports in the United States.13 While its methods and conclusions will no doubt be criticized from various points of view, its broad conclusion will probably be accepted; namely, that all categories other than finished manufactures depend more on the level of production and national income in the United States than on their relative prices. On the other hand, for finished manufactures the report finds responsiveness to price. Thus, while the rest of the world may expect an upward trend of total U. S. imports—and the findings of the President’s Materials Policy Commission14 suggest an acceleration in the more remote future—it is only in the sphere of finished manufactures that it would be possible to obtain a quick expansion by such methods as price competition.

The Reserve Bank study gives various figures for the “price elasticity” of U. S. demand for finished manufactures from the OEEC countries, of which 2.5 may be chosen as representative. It may well be that this is too optimistic since it depends on observations in the depression years; no such responsiveness was found in the twenties. If the figure of 2.5 is applied to OEEC exports of finished manufactures to the United States in 1950–51 ($641 million per annum), and if a reduction of 30 per cent in the average of prices charged is assumed, the value of U. S. imports of these goods from Europe would rise by only $144 million.15 This increase, based on two extremely optimistic assumptions, would still not make an important contribution to closing the European dollar gap. It is probably not legitimate to apply the Reserve Bank’s elasticity coefficient to U. S. imports of manufactures from all quarters ($1,195 million per annum). Even if this could be done, it would still yield an increase in U. S. imports of only $269 million.

Although these calculations are highly precarious in detail, the broad inference is safe; namely, that the contribution to closing the $2 billion gap that can be achieved by foreign exporters’ stimulating sales to the U. S. market by price concessions, including devaluations, is small.

It does not follow that these figures show the limit of the possibility of increased sales to the U. S. market. If sales could be increased by methods other than price concessions, or by methods in which price concessions played only a minor role—e.g., by more diligent study of the needs of the U. S. market, the offer of more prompt delivery, and better servicing—larger increases of proceeds might be possible.

Finally, a word should be said about the U. S. tariff. Given the elasticity of demand, a larger rectification of the balance could be gained by a given percentage average reduction of the tariff than by an equal percentage devaluation by all other countries. Assuming once again the Reserve Bank’s coefficient of 2.5, an average tariff cut of 10 per cent of the value of finished manufactures would increase U. S. imports of those manufactures by double the amount that would result from an effective devaluation of 10 per cent by all other countries.

The upshot of these considerations is that the $2 billion gap is not likely to be greatly reduced in the near future by an increase of U. S. imports. Over a longer term, prospects are more hopeful, owing to the prospective rise of U. S. production and gross national income. Consequently, if the dollar gap is to be closed in the near future, it will mean a large curtailment of U. S. exports. For Europe this will mean either a curtailment of direct imports from the United States or a displacement of U. S. exports by equivalent European commodities, as a result of keen competition in third party markets.

The figures for European imports (Table 9) show, on the whole, that continental Europe has used aid for what it was intended. The great increases since 1938 in imports of electrical and industrial machinery and chemicals are examples. These figures suggest that when programs of industrial expansion fostered by U. S. aid come to an end, the European deficit will fall substantially. On the other hand, the notable increases in imports of agricultural products by continental Europe were due to a shift in the balance of world supplies, which will be discussed later. Coal imports should end.

Table 9.

European Imports from the United States, 1950–51 Average

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Prewar imports were negligible.

The much stricter curtailment of imports practiced by the United Kingdom in contrast to continental Europe is shown clearly by Table 9. It is worth observing that, if the OEEC group as a whole had followed the U.K. policy and not allowed its prewar dollar imports to rise by more than 42 per cent, its dollar imports in 1950–51 would have been $1,704 million per annum less than they were in fact, and there would have been no realized dollar deficit on account of the OEEC group. This is not intended to imply that the continental countries ought to have done this.

The question of the “latent” dollar deficit has been raised earlier (see pp. 5–6). On the one side, there are the goods that would be imported from the United States in the absence of restrictions; on the other, there are those imports from the United States which have been stimulated by U. S. aid and would not have flowed under ordinary commercial motives. The figures suggest that the United Kingdom has a “latent” deficit. With continental Europe it may be the other way round. Imports of machinery, etc., may have been stimulated beyond normal by the European Recovery Program; the large increase in the imports of textile manufactures into continental Europe, although not quantitatively very important, may be taken as a pointer. It is hard to believe that, if the authorities were denying their citizens many urgently needed dollar goods by import restrictions, they would have allowed so large an increase of dollar textile manufactures.

While restriction is the method available for quick action to curtail U. S. imports, an alternative method at longer term is to stimulate the production in third party countries of commodities now imported from the United States. If Europe is to become dollar solvent in the near future, she will either have to curtail greatly her direct dollar imports, by comparison with 1950–51, or capture dollars by displacing U. S. exports from third party markets. It has already been indicated that it is not likely that additional dollars will be available in sufficient quantities by an increase of third party sales to the United States, although this may be the ultimate solution over a longish term of years. Consequently, if sufficient dollars are to be captured in third party markets at an early date, it must be principally by a displacement of U. S. exports. It is important to emphasize this point, because the achievement of equilibrium is sometimes represented in a rather different light. Mr. A. Maffry, for instance, writes in an authoritative article16 with reference to the advantages of the restoration of international equilibrium, including the dismantling of restrictions and the convertibility of currencies, “for the United States it would mean lifting the burden of various forms of assistance to foreign countries and giving much greater freedom to American exporters in seeking foreign markets.” The former point is of course correct. But the latter suggests that there would be an easement and a possibility of expansion for U. S. exporters. The reverse is the case unless equilibrium is achieved wholly by an increase of U. S. imports. It is quite true that when equilibrium was achieved, there would be no need for restrictions and inconvertibilities. But the essence of the equilibrium is that Europe should have balanced her accounts, and that means—apart again from a sufficient increase of U. S. imports—that, by whatever method of price competition, sales pushing, or market study, Europeans should have established themselves securely in a large part of the markets that the United States now enjoys. The United States would be debarred from these markets just as much after the equilibrium was established as now. The difference would be that, instead of being debarred by legal restriction, she would be debarred by prices that were so low or sales campaigns that were so aggressive that she would be unable to compete against them. The legal restriction of imports is merely a hit-and-miss way of moving toward that pattern of trade which believers in economic freedom wish to see eventually sustained by keen competition.

A question sometimes raised is why there has not already been a more decided movement toward a new equilibrium pattern. Seven years is represented as being a long period, and Europe has had much assistance. In this connection it is important to remember that OEEC Europe has had a double problem, the dollar problem and the problem of her over-all balance of payments. Of the first mentioned the most important ingredient is the changed position of gold, though significant contributions have also been made by the decline of invisible receipts and abnormal importations into continental Europe of U. S. machinery, chemicals, and cotton. The problem of her over-all balance has different causes and is of larger dimensions. There has been considerable misunderstanding about the relation between the dollar imbalance and the over-all imbalance.

The dollar problem presents itself as the more urgent, since immediate gold or dollar payments are required. The most quickly working method of coping with it is the direct restriction of dollar imports; an export drive to the dollar area may also yield fairly quick results, and this has been vigorously pursued. A more slowly working method of curtailing dollar imports is the stimulation of alternative sources of supply. These methods tend toward securing a bilateral balance; but the most satisfactory method—which should in the long run, and when a true equilibrium in the international pattern of payments is achieved, yield the best result—is the capture of dollars in third party markets. This third, most fundamental, and most beneficial method can be brought into play only after the problem of the over-all balance has been thoroughly cured. For as long as the third party countries are in surplus with Europe, they can pay the European countries in their own coin. (Exception must be made for certain special areas which do in fact yield dollars.) Thus the dollar problem of Europe is closely tied up with her over-all balance of payments problem.

The over-all balance of payments problem has arisen from the fact that Europe has had to increase her exports greatly in order to pay for the same imports that she was getting previously. This has been due to the loss of income on invisible account, most notably investment income, and the deterioration in her terms of trade.

In Table 10, an attempt is made to set out in quantitative terms the increased burden on certain European countries due to these two causes. It is fair to add that other European countries do not appear to have had large losses of investment income from abroad, so that the increased burdens upon them have not been so great as those borne by the countries cited. In this table, the values of invisible items accruing in 1948 and in 1950–51 have been reduced to allow for the rise in the prices of imports since 1938. The values of the different items, as thus established, have been subtracted from the values of the corresponding items in 1938 and the differences expressed as percentages of the exports of the different countries in 1938. This table thus answers the question, what expansion of its exports, from those in 1938, each country would have to make to replace precisely the loss of buying power of its invisible earnings; in other words, by what amount each country would have to increase its exports so as to be able to buy that quantum of imports which the invisible items, present in 1938 but since lost, were then able to buy. Further, a figure is added showing by what percentage exports would have to be expanded to allow for the worsened terms of trade. It should be emphasized that the final figures make no allowance for any increased requirements for imports; they merely state what the expansion of exports would have to be in order to buy precisely the same quantum of imports that was bought before. Thus no allowance is made for the need to expand exports in order to obtain imports for a larger population or for higher productivity. Furthermore, there is no implication in the table that trade balanced in 1938; the table only shows what increase of exports was required to make good the specific losses listed, not what increase of exports might be required to the extent that trade was out of balance in 1938.

Table 10.

Estimates of Increases in Exports Essential to Offset Loss of Income on Invisible Account, Selected Countries1

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For description of the data, see text.

The figures relate to trade and services between metropolitan France and the non-franc area.

For the worse year, 1951, this figure is 85.6.

This deterioration has involved very heavy burdens indeed. It has not been easy for countries, already great exporters and also burdened with internal tasks of postwar reconstruction, to expand exports by 50 or 60 per cent before even beginning to pay for such extra imports as might be needed, including those very necessary imports which have constituted the raw materials of the extra exports.

The causes of the deterioration in the terms of trade cannot be fully explored here. For the United Kingdom, the prices of imported food rose only 15 per cent against the prices of all her exports, but the prices of imported materials doubled against her export prices. This has probably been due to the large increase in manufacturing activity in a number of countries impinging upon supplies of raw materials that are insufficiently elastic. Note must be made of the great increase in the manufacturing activity of the United States, entailing a corresponding increase in the demand for materials; the production of the United States is so high that a doubling of it makes a large impression on world requirements for materials. The first effect of this has been a severe deterioration in the United States’ own terms of trade, which has already been noted as being a factor of easement of major importance tending to reduce the world’s dollar imbalance. But while this easement has allowed many countries to import more dollar goods than would otherwise have been possible, it has not extended its beneficial effect in this respect to Europe, but has on the contrary increased Europe’s difficulties. For Europe shares with the United States the role of being an importer of these materials; the upsurge of production in the United States has had the effect of worsening Europe’s terms of trade and thus adding to the problems that beset her.

To return to the question of “seven long years.” By 1948 the United Kingdom had reconstructed her industry and raised her exports 38 per cent above their 1938 level; by this means and a restriction of imports she achieved an over-all balance, her dollar deficit being offset by an over-balance with other regions. This was not a sufficient recovery, since it was needful for the United Kingdom to have an over-all over-balance, both to make overseas investments and to reduce her ex-war indebtedness. A special difficulty has confronted the United Kingdom throughout the period in the task of earning dollars in third party markets; namely, the existence of large ex-war sterling balances which could be used by these third parties to pay for British surpluses. It was indeed needful to reduce these balances, but the rate at which they have been paid off has been governed by the fortuitous accrual of trade surpluses with particular countries rather than by any predetermined plan. In fact, sterling balances outside the sterling area were reduced from £1,306 million at the end of 1947 to £842 million at mid-1952. The recovery of continental Europe, and especially of Germany, had not proceeded so far by 1948, but she was on the upward grade and was to be greatly assisted by ERP.

Unhappily, after 1948 another evil befell. The terms of trade once more moved heavily against the OEEC countries (see Table 10). The worst year was 1951. In that year British terms of trade (prices of imports in terms of exports) had risen 16.8 per cent above the 1948 level. Since British imports were $9,792 million, f.o.b., the extra amount of exports required of Britain as a consequence of the worsening in the terms of trade was equal to $1,640 million. Britain had to export over $1.6 billion worth of goods to the world at large merely to balance and offset the extra claims upon her for goods consequent on the worsening in her terms of trade. This event removed her, to the extent of $1.6 billion, from that crucial point at which she would begin to earn dollars in multilateral exchange. According to a publication of the OEEC,17 the European terms of trade (export prices of imports) rose 10 per cent between 1948 and 1951. The imports of Europe as a whole (including the United Kingdom) in 1951 were $33,673 million, c.i.f. Reducing to f.o.b. and applying 10 per cent it appears that Europe as a whole would have to send out $3,031 million extra goods merely to offset the worsening in her terms of trade.18 She would have to find additional markets for all these exports before she could begin to earn dollars in multilateral exchange.

There has been controversy, which cannot be settled here, concerning how far this further worsening, superimposed upon the worsening that had already occurred by 1948, was due to occur in any case, how far it was due to the devaluation of currencies in 1949, and how far to the Korean outbreak. Reference to the simultaneous deterioration in the U. S. terms of trade is not decisive, since her imports are more pricesensitive than those of Europe and were naturally more affected by her own post-Korea stockpiling. Whatever may have been the cause, the fact remains that a new heavy task was imposed on Europe19 which had to be carried through prior to her beginning to earn dollars in quantity in multilateral exchange. Three years is by no means a long period to assign for its achievement

A burden of this magnitude is much heavier for European countries, which have to devote a large proportion of resources to export, than for such a country as the United States, whose exports, although large, bear a much smaller proportion to national income. Reference may be made to the British case by way of example. By 1950–51 the volume of her exports had risen 80 per cent above the 1937–38 volume. This alone does not truly represent the magnitude of the strain. Food, drink, and tobacco have not shown a great increase, and coal, for special reasons that are well known, has lagged; her manufactured exports have been more than double their prewar level. This figure has to be taken in relation to the fact that even in 1937–38 an abnormally large proportion of her resources were devoted to exports. An analysis of the employment of British manufacturing capacity in 194820 shows that 25.5 per cent of such employment was devoted to exports and only 37.5 per cent to the provision of all the numerous consumers’ goods that her population of 50 million people required. Since 1948 the volume of her exports has increased more than in proportion to total production while consumption has barely risen; by a rough calculation it appears that in 1950–51 the proportion of manufacturing capacity devoted to exports was about 27.5 per cent, and that devoted to home consumption was about 32.5 per cent.

It is desirable to add a rider concerning devaluation, not so much by way of historical retrospect as of warning concerning the future, and not so much by way of analysis of what happened as of what might have been expected to happen. Devaluation may be accepted when it is an ex post recognition that internal costs and prices have got out of line with those abroad; using it experimentally to improve an adverse balance is a much more doubtful matter. Devaluation is both inappropriate and dangerous when a country is suffering from internal inflationary pressure—inappropriate because the correct remedy is to remove the pressure, a process which may itself suffice to correct the external imbalance, and dangerous because it adds fuel to the flames of internal inflation. In the old days devaluation was regarded as a form of currency debauchery; this was a healthy view of it. Devaluation is more likely to improve the balance of trade when applied to a small country only; much less likely when applied to a large region. Most important of all, devaluation is less likely to improve the balance of a country whose demand for imports is inelastic. The European demand for imports was inelastic in 1949, both because imports consisted largely of food, materials, and specialized capital goods, and because the demand for unnecessary imports had already been pruned away by administrative restrictions. It was hoped that the devaluations would make it easier for European producers to offer competitive prices vis-à-vis U. S. producers. This was only a minor aspect of its probable effect. The major effect for a group of countries whose demand for imports was very inelastic was likely to be to turn the terms of trade against them. But this very process would postpone the day when they would begin to be able to capture dollars in third party markets. There was no force in devaluation tending to make dollar prices in world markets fall; and they did not fall. The dollar prices of some European imports fell temporarily because they were protected by contracts. But the intended effect of devaluation was to make the dollar prices of European manufactures fall. If it did not produce this effect, owing to a quick marking up of internal costs, it would be rendered nugatory and had better not have taken place. The combined effect of stable dollar prices for imports from all sources—not from dollar sources only—and lower dollar prices for exports to all sources would be to create a large gap before an over-all balance could be achieved. The maximum stimulus that devaluation could give to European exports to the U. S. market would, in any case, be only in terms of $100–200 million. The obstacle which devaluation was likely to plant in the way of Europe’s earning dollars in third party markets was of the order of $2–3 billion. This point is of central importance in the problem that still lies ahead of Europe. It was also hoped that devaluation would tend to encourage the production of raw materials and foodstuffs in non-dollar regions; this was likely to be a long-run effect. If the hope is eventually realized, this will be of advantage.

In regard to what Europe has been able to achieve in a seven-year period, the burden of post-Korea rearmament must be mentioned. This directly limits her power to expand certain acceptable types of exports. These tasks taken together suggest that, despite the lapse of seven years, further patience would not be misplaced.

If Europe had to achieve dollar solvency without further curtailing dollar imports, it seems that she would have to displace U. S. exports to third party markets by her own, to the value of between $1 billion and $1½ billion. This would have to be primarily by the export of semifinished or finished manufactures. In 1951 the value of U. S. exports of these categories to all countries other than the OEEC countries lay between $7 billion and $7½ billion. In the same year the OEEC exports of these categories outside the United States and the OEEC countries themselves were also between $7 billion and $7½ billion. Thus it seems that, in order to capture sufficient dollars in third party markets, the OEEC countries would have to capture the proceeds of about one sixth of all these U. S. exports. In order to do this by price competition, they would have to displace considerably more than one sixth of the U. S. exports, for the third party countries could pay for part of the increased European exports in European currencies, owing to their lower unit prices, and would have to pay dollars only for the remainder. (See below.) Furthermore, there are no doubt many lines in which displacement is not truly feasible, so that a still larger proportionate displacement would have to occur in the lines in which European competition was practicable.

In recent years there has been a gulf between the thought of some writers concerned with international equilibrium and those concerned with the theory and practice of the home market. The international experts have tended to assume “perfect competition,” while home market experts have explained that “imperfect competition” is all-pervasive in the field of manufactures. By the doctrines of imperfect competition a price concession, even if large, is not likely to capture the whole of a rival’s market but only the fringe of it; the capture of a large part of it may be possible only as the end result of a long process. Students of industrial organization have reached similar conclusions. When the conditions for an expansion of sales, and particularly for an encroachment on rivals’ markets, are studied, it is taken as quite axiomatic that a combination of methods has to be employed simultaneously. Long and careful market research may be needed; also a well thought out campaign of aggressive salesmanship; also means of giving desired customers assurance of the continuity of supply; a concession on price is merely one item, and sometimes a less important item, in the whole campaign. It would also be treated as axiomatic that, in most cases, for a firm to expect to make an encroachment by a price concession alone, without having brought to bear all other considered methods of sales pushing, would involve it in a mere loss of money. Transferring this from the internal to the international sphere, it means that the attempt of a nation to improve its balance by price concessions alone is likely to worsen its balance. Yet a sudden devaluation—and devaluations in practice have to be fairly sudden—or the depreciation of a currency owing to some new force operating in a “free market” are analogous to price concessions offered alone and without the necessary ancillary measures.

It is convenient to give a hypothetical example of the limitations of price concessions in themselves. Suppose that European and U. S. producers share, half and half, the third party markets for a finished manufacture, and that Europe desires to capture the dollars representing 16 per cent of the U. S. sales. If this could be done by a small price concession—combined with a careful selling campaign—the result would be satisfactory. A large concession is likely to be needed to obtain a quick result—let us suppose 20 per cent. If a 20 per cent price concession captures as much as 45 per cent—a formidable onslaught—of the American market, the desired result would be achieved; the third party market would be able to pay for the first extra 25 per cent of the European article out of the European currency released by the 20 per cent price concession itself; only for the next 20 per cent would it have to surrender U. S. dollars. (Since the European price is down by one fifth, this 20 per cent of U. S. sales would bring in 16 per cent of the U. S. dollars previously used to buy the exports from the United States.) But if the 20 per cent price concession only displaced one quarter of the U. S. sales, Europe would have won no dollars at all. This illustrates that it may be impossible in the literal sense of the word to capture a large quantity of dollars by displacing U. S. exports by large price concessions—such as might be facilitated by sizable devaluations.

A wise man may think it unlikely that Europe will in fact displace so large a proportion of U. S. exports to third party markets in the near future, whatever method be adopted. There is no reason to despair of the eventual establishment of a multilateral pattern. This is more likely to be achieved gradually. If Europe makes strenuous and unremitting efforts to capture third party markets, she may displace some dollar exports in the near future, but is more likely, at best, to succeed in capturing a lion’s share of the new dollars that become available later owing to the secular rise of U. S. imports. But this can bring home enough dollars only over a rather long period. Until this is achieved, Europe, if she is to maintain solvency, will need to have discriminatory restrictions on dollar imports, save to the extent that alternative sources of supply of commodities now obtained from the United States become available.

The foregoing argument has suggested that it would not be easy for Europe to capture sufficient dollars in third party markets even if the rest of the world were in dollar balance. But it is not. A number of non-European countries have some way to go before they achieve their own dollar balance. For those countries a more plentiful supply of imports from Europe might be welcome because they would be substitutes for dollar expenditure and would enable those countries to get into better dollar balance; but they would not at that stage be requited by dollars for Europe. Some of the countries in question are in over-all imbalance. This position would have to be corrected before Europe could hope to earn dollars by a vigorous export drive to them.

It is important to emphasize that, in the fairly near future, the alternative to rather stringent discriminatory import restriction in Europe is a displacement of U. S. goods of large value from markets elsewhere. This form of statement may suggest methods of international cooperation. Planners may argue that the matter is a simple one: the United States has only to agree to withdraw from certain overseas markets that Europe could supply. Such a solution would no doubt be impractical and unacceptable; it would violate the principle of competition and give no guarantee that the United States and Europe respectively supplied the goods which each was economically best fitted to produce. On the other hand, the ideal of competition may be pushed too far as though it were an end in itself. International trade should not be regarded in terms of a football game, in which each side is exhorted to do its utmost to outwit the other. If it were a principle of high U. S. policy that it is better that the reduction of U. S. exports should be carried out on a rather wide front, rather than solely in Europe, help might be given in small ways.

Similar considerations arise in connection with the Point Four policy of the United States. This is conceived in statesmanlike terms to raise standards of production in underdeveloped countries. It could also be made to subserve, quite in accordance with its general aim, a better balance of international payments. It may often happen that a given project could be achieved more economically by European than by American equipment; it may be in the best interests of an underdeveloped country that a project should be carried out in the most economical, rather than in the most perfect, way. American consultants would naturally tend to supply know-how implying American methods, both from normal and proper patriotic motives and, possibly, from ignorance of alternative methods. It would therefore be a way in which the United States could greatly assist recovery, if she authorized a liberal employment of European consultants and technicians on such schemes. This argument applies a fortiori to development projects sponsored by international agencies.

There is also a moral on the plane of international monetary and commercial policy. On the supposition that the disturbance to the previous economic pattern caused by World War II is too great for an adjustment to be achieved readily under conditions of completely free trade, and that the dollar must temporarily be regarded as a currency in short supply, we may ask what kind of discriminatory restrictions best accord with the international ideal. It should be emphasized that we are concerned only with discriminations during such a transitional period as may be deemed of reasonable length for securing the necessary changes in the structural pattern of production and trade. It might well be argued that, ideally, if the currency of one particular country is in short supply, discriminations against its use should be adopted universally, so as to impose roughly equal sacrifice on each country. At the opposite extreme is what is apt to happen in practice, namely, a tendency toward a bilateral balance of each country with the United States. Those countries whose natural pattern of trade is to be in strong deficit with the dollar are driven to impose violent discriminatory restrictions, while those tending rather to balance or to surplus impose no restrictions. This is all wrong. Ideally the restrictions should exert equal pressure all round, those countries tending to surplus conserving the dollars won and handing them over to the strong deficit countries, so as to enable them to reduce the violence of their restrictions. That would conform to the principle of multilateralism and give the best distribution among the different nations of the quantum of dollar goods that the world as a whole is able to buy. What has here been described as the “ideal” pattern of restrictions, if restrictions cannot be avoided, is no doubt quite impossible in practice. It should not, however, be too much to expect that international policy might be used to mitigate the tendency to bilateralism somewhat, by encouraging nations which have mild discriminatory restrictions to retain them, as long as there are other nations which through no fault of their own are having to impose more severe ones.


It was shown earlier in this paper that the over-all trading surplus of the United States in 1950–52 was not substantially greater than the surpluses which obtained in the twenties and the thirties; that the somewhat greater surplus on goods and services account has been due to a net increase of services; and that the main reason why this surplus causes embarrassment now, whereas it did not before, is the reduction in the value of newly mined gold available to pay for it. This embarrassment is concentrated upon Europe. It cannot be claimed, however, that this is the whole story. There is also a latent demand for dollar goods of unknown amount which is held in check by restrictions. Furthermore, the severe worsening in the U.S. terms of trade would have tended to cause that country to move into an adverse balance, were it not for a great increase in the demand for her exports. This has arisen largely because that country has been in the forefront of progressiveness, going far ahead beyond her neighbors and beyond previous records to supply the latest needs and desires of producers and consumers. It is beyond the scope of this report to attempt an analysis, article by article; some general observations must suffice.

To illustrate this matter, U.S. exports for 1950–51 have been tabulated countrywise and commoditywise (Tables C and D, pp. 39 and 40), and the changes in comparison with the record of 1936–38 have been further compared with the general movement of world trade between these two periods. In each table; column 1 shows actual exports in 1936–38; column 2 shows actual exports in 1950–51; column 3 shows the exports of 1936–38 multiplied by 3, this figure having been chosen as representing the increase of world trade expressed in dollars; and column 4 shows which exports have increased at a rate more rapid than that of the increase of world trade. It is not implied that there is anything abnormal or unnatural in such increases; in a thirteen-year period many changes in the pattern of trade are normally to be expected.

Countrywise the result of the broad regional analysis is confirmed. Apart from the Western Hemisphere, the only countries of substantial abnormal increase are India, Italy, and Germany. The restrictive character of the U. K. policy stands out very strongly.

The commodity pattern may not represent so much what producers or consumers would have wished, if free, to buy in the United States at current prices, but rather what governments think they ought to have. The commodity groups of substantial abnormal increase are seen to be grain, industrial machinery, chemical products, textile fibers and manufactures other than raw cotton, vehicles, and coal, in that order.

The increased dependence of the rest of the world on U. S. grain is a factor of major importance. The increase of exports above the trend is seen to be no less than $556 million. The initiating cause of this large shift was probably the partial severance of alternative suppliers from their markets owing to shipping difficulties during the war. The United Kingdom depended largely on supplies from North America, and this factor continued to operate in Western Europe during a period after the liberation. Expansionist (and inflationary) influences have drawn workers from the land to the towns in certain other overseas countries, and this movement has sometimes also been favored by official policy. Meanwhile in the United States agricultural productivity has increased greatly, and a support price policy has given encouragement to output.

The high export of industrial machinery is the consequence of enlarged investment programs in many lands. The United Kingdom has developed an increase of exports of machinery, which has been nearly as great in proportion as that of the United States. It was more difficult for the United Kingdom to make a proportionate expansion, since machinery exports constitute a far greater proportion of her factory output and of her national income than they do in the United States; delivery dates have been chronically bad owing to the difficulty of expanding capacity sufficiently quickly and to other calls upon existing capacity. Germany, meanwhile, has suffered from delayed recovery. There is reason to hope, therefore, that with the passage of time Europe may be able to meet a larger proportion of the world’s increased demands in this category, and this may be a substantial factor of easement in the dollar situation.

The increase of U. S. textiles is notable.21 The United States appears to have had a distinct price advantage against Europe; at the same time she has been markedly progressive in design and style. This expansion in a field where no special factors were working in her favor may be taken as symptomatic of her generally superior efficiency and energy. There is, however, from the point of view of the rest of the world, a more cheerful aspect of this phenomenon. We are in ignorance of how much larger the demand for U.S. exports would be if it were not confined by governmental restrictions. The great increase of U.S. textile exports suggests that the suppressed demand for dollar goods may not be so great as some fear, for governments would hardly allow great increases of dollar textile imports, for which other sources of supply have been available, if they were at the same time suppressing many urgent needs for dollar goods.

Summary and Conclusion

The figures for the period 1950-mid 1952 suggest that the world’s dollar imbalance may be thought of in round terms as having been a $2 billion per annum problem. If this period is compared with 1936–38, it is found that the value of U.S. imports (excluding gold) had risen as much as that of U.S. exports, including in the latter those sent out gratis other than “military aid” proper. The volume of U.S. exports rose more than the volume of U.S. imports, but this was offset by the worsened terms of trade for the United States. U.S. trade rose in dollar value about a third more than world trade; this was due entirely to more active trade between the United States and the rest of the Western Hemisphere; U.S. trade with non-America (including gratis exports as above) did not rise more than world trade generally.

The U.S. surplus on trade account in the period 1950-mid 1952, considered as a percentage of her exports, was of the same order of magnitude as that in the periods 1933–38 and 1924–29. But a moderate deficit on “services” account had changed to a moderate surplus, transportation being the largest factor of change. In the twenties the surplus on goods and services together was covered by overseas investment by the United States; in the thirties it was covered by the payment of gold to the United States; in the fifties it has been covered by “aid”. Actually, the gold shipped to the United States in 1933–38 was four times the value of the U. S. surplus, owing to capital movement. The rest of the world could have paid the bare surplus of the United States in this period in newly mined gold and at the same time added comfortably to its reserves.

If the pattern of trade in the period 1950-mid 1952 is compared with that in the thirties, the greatest single item of difference is seen to be the shrinkage in the goods value of newly mined gold available for central banks and treasuries. This was due to the fixity of its dollar price, to reduced output, and to the disappearance into private hoards of amounts equal to more than half the new output.

The first section of this report (pages 2–5) argues, against an historical background, that the great decrease in liquidity for purposes of international settlement, which is due to the changed relation of the value of gold stocks and accessions to the value of world trade, has caused and is likely to continue to cause a chronic tendency to import restrictionism. If the value of newly mined gold becoming available for money outside the United States and the U.S.S.R. had borne the same relation to the value of world trade as it did in the thirties, the rest of the world could have paid for the whole realized surplus of the United States on goods and services account in 1950-mid 1952 without loss of reserves and without aid (other than military items).

This is not to be taken to imply that it is desirable for the United States to continue to import any given value of gold. As things are, the rest of the world has either to find acceptable goods to ship to the United States in lieu of the gold previously shipped, in order to pay for some 15 to 20 per cent of U. S. exports, or, to the extent that it fails, to reduce its imports from the United States by that amount.

Both in 1936–38 and in 1950-mid 1952, the deficit of OEEC Europe with the United States in bilateral trade was greater than that of the whole world including OEEC Europe. In the former period, the OEEC deficit was somewhat reduced by invisible items; in the latter period, less so. Thus the main part of the readjustment required by the gold change has to be made by OEEC Europe. This concentration of the need for readjustment upon one region makes its achievement more difficult, since it involves cutting more deeply into the former pattern of trade. The bilateral deficit of Europe with the United States of about 38 per cent (approximately $1.3 billion) might have been greater in the absence of restrictions.

While the gold change has made the dollar crisis more intense for OEEC Europe than elsewhere, that region has had, simultaneously, another postwar trading problem of greater quantitative importance. Loss of invisible income and worsened terms of trade have made it necessary for Europe greatly to increase its exports to the rest of the world as a whole in order to buy the same imports as before. For such countries as the United Kingdom and France, the increase of exports required has been some 60 per cent. (In the worst year, 1951, this figure rose to 85 per cent for the United Kingdom.) This has meant a strain upon the manufacturing capacity of those countries and set off inflationary pressures, which in parts of the period had other causes also.

The most important of the various causes for the worsened terms of trade is probably the great increase in manufacturing output throughout the world, and notably in the United States, which entailed increased requirements for materials and a rise in their relative prices. In searching for differences in the pattern of trade in the period 1950-mid 1952, compared with that of 1936–38, it is well first to multiply figures for the latter by 3. The index of world dollar prices had risen to 225 and the volume of world trade by about one third (2¼ X 1⅓ = 3).

In the attempt to close the dollar gap, OEEC Europe has had some success in increasing exports of manufactures to the United States. The United Kingdom has cut imports severely by direct restriction; continental Europe has restricted in some lines, while purchasing fairly freely, as intended by ERP, in others. An alternative method of curtailing dollar imports is to invest outside the dollar area in the production of commodities now bought from the United States.

If a true multilateral equilibrium of trade is to be reached, it is probable that OEEC Europe should not close the main part of the dollar gap by either of the methods mentioned in the preceding paragraph, but by the capture of dollars in multilateral trade. It is important to observe that not much progress can be made along this, the most fruitful, line, until OEEC Europe has secured a firm over-all balance with the non-dollar world, for until that point is reached, she can be paid by third parties for the most part in her own currencies. Thus the establishment of an over-all balance is a prior condition for the best solution of the dollar imbalance. From this point of view, the further deterioration in the European terms of trade between 1948 and 1951 was unfortunate.

It has been suggested that it should not, eventually, be more difficult for Europe to settle her accounts with the United States, since in the thirties also she had to have an over-balance with the non-dollar world wherewith to buy the gold to remit to the United States. It is further suggested that, since the United States has increased the value of her imports more than three times, there are additional dollars available for Europe to capture in third party markets in lieu of the gold formerly bought there. But there is a big difference. It has been seen that the United States has increased her purchases outside the Western Hemisphere less than three times (see Table 3); it is only in Canada and Latin America that she has provided additional dollars. But the gold previously came mainly from the sterling area, with which Europe had well-established trading relations. While Europe was involved in postwar difficulties, the United States was able to meet demands in Canada and Latin America arising from and supported by their additional dollar earnings. It was clearly much easier for Europe to have a large over-balance outside the Western Hemisphere, which could be earned and paid for by newly mined gold, than to establish an equivalent overbalance with Canada and Latin America by displacing U. S. exporters. For this process to go forward it would be necessary that the Western Hemisphere countries should not, themselves, be in over-all imbalance.

Meanwhile, all these developments have to proceed against the back-ground of increased world demand for U. S. exports. The balance of grain supplies has shifted; there has been an abnormal increase in the world demand for industrial equipment, and other countries have not been able to increase supplies as quickly as the United States; meanwhile, all along the line the United States has shown marked progressiveness and efficiency, of which her abnormal increase in the export of textile manufactures is a notable manifestation. These trends make the task set for Europe of capturing dollars by displacing U. S. exports in third party markets more difficult.

Local inflations, both in Europe and elsewhere, played an important part in creating a dollar imbalance in the postwar quinquennium. Their importance in the over-all picture has now diminished considerably, but continued vigilance is necessary to prevent recurrence.

For the world-wide dollar imbalance, the prevention of inflation in the various countries is an essential remedy. For the special problem of Europe, it is not a sufficient one. The secular growth of U. S. imports will provide an easement for this, both because it will allow a rise—although not a relatively large one—in direct European exports to the United States and because it will provide additional dollars around the world for Europe to earn, if she can generate and maintain continuing competitive pressure. How far Europe can go beyond this and win additional dollars in third party markets by displacing existing U. S. exports must remain a doubtful question. But if she cannot do this on a rather considerable scale, then in the near future she will have to curtail U. S. imports in order to be in balance. This may be achieved in part and in due course by investment in the production outside the United States of commodities now bought from that country. There being no other source of U. S. dollars, it does not appear probable that direct discriminatory restriction of dollar imports can be avoided by Europe in the near future. The question of an expansion of U. S. capital investment abroad has not been considered.

Study of the large size of the postwar maladjustments, notably those connected with the displacement of gold and with the need for Europe in her general trade to export so much more in order to pay for the same imports as before, has a twofold moral. (1) We need not think that seven years, complicated as they have been by the Korean outbreak, the post-Korea inflations, and the rearmament programs, constitute a long period for the attainment of balance, even taking into account the generous aid provided; nor need we therefore despair of the eventual achievement of an equilibrium in which discriminations and restrictions are no longer necessary. (2) On the other hand, the large size of the adjustment still to be made must make us skeptical of the possibility of the quick demise of various protective devices.

Table A.


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Data are from (1) U.S. Department of Commerce: Foreign Commerce and Navigation of the United States for the Calendar Year 1940 (Washington, 1942); Business Information Service, International Trade Statistics Series, February 1951; and Quarterly Summary of Foreign Commerce of the United States, January–December 1951; and (2) Direction of International Trade, January–December 1950 (United Nations, International Monetary Fund, International Bank for Reconstruction and Development).

What imports would have been in 1950–51 if they had increased in the same proportion as world trade, i.e., column (1) multiplied by 3.

Including Korea and Taiwan, 1936–38.

Table B.

U.S. Imports by Areas and Commodities

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For sources of data, see Table A, footnote 1.

What imports would have been in 1950-51 if they had increased in the same proportion as world trade, i.e., column (1) multiplied by 3.

Table C.

U.S. General Exports by Countries1

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“Special category” items are omitted.

Data are from U.S. Department of Commerce: Business Information Service, International Trade Statistics Series, February 1951; and Quarterly Summary of Foreign Commerce of the United States, January–December 1951.

What exports would have been in 1950–51 if they had increased in the same proportion as world trade, i.e., column (1) multiplied by 3.

The 1936 and 1937 data include the Canal Zone.

Table D.

U.S. Exports by Areas and Commodities

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For sources of data, see Table A, footnote 1.

What exports would have been in 1950–51 if they had increased in the same proportion as world trade, i.e., column (1) multiplied by 3.

“Special category” items are omitted.

“Special category” items, type 1, are omitted.

Described in source as “not strictly comparable with data for later years.” (This presumably refers to classification.)

Table E.

Improvement (+) or Deterioration (—) Between 1936–38 and 1950–51 In regions’ Balances of Visible Trade with United States1

(In millions of U.S. dollars)

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The 1936–38 and 1950–51 data are annual averages.

Column (1) is simply the existing (1950–51) surplus (+) or deficit (—) of each region with the United States minus the surplus (+) or deficit (—) in 1936–38. Thus, if a region had a deficit of $400 million per annum in 1936–38 and one of $300 million per annum in 1950–51, column (1) would be +$100 million, the reduction of the deficit constituting an improvement of that amount.

If each region had increased both its imports and its exports threefold in dollars, the deficit or surplus would likewise have been increased threefold. Column (2) is the actual surplus (+) or deficit (—) in 1950–51 minus three times the surplus (+) or deficit (–) in 1936–38 (i.e., Table B, col. 4 minus Table D, col. 4). Thus column (2) shows how matters actually were in 1950–51 compared with how they would have been if regions had simply increased threefold both their exports to and their imports from the United States. Column (2) may be regarded as a true index of the shift of the pattern of trade to date.

Table F.

U.S. Exports, Including Re-exports, to OEEC Countries1

(In millions of U.S. dollars)

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Data are from U.S. Department of Commerce: International Reference Service, Vol. VI, No. 5 (February 1949) and Vol. VII, No. 60 (July 1950); Business Information Service, International Trade Statistics Series, May 1952; Foreign Commerce and Navigation of the United States for the Calendar Year 1938 (Washington, 1940); and data supplied by the Office of International Trade.

Includes Aegean Islands.

Excludes “special category” items.

Table G.

U.S. Domestic Exports to OEEC Countries, by Commodity Groups and Major Commodities1

(In millions of U.S. dollars)

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For sources of data, see Table F, footnote 1.

Textile fibers and manufactures, excluding raw cotton.

Includes “special category” items.

Includes “special category” items, and service equipment.

Excludes “special category” items, and includes service equipment.