Dollar Shortage Forever

August 16, 1948

This title over a recent article in the London Economist raised for a fleeting instant the hope that that distinguished journal had at last recognized the elementary truth that the [so-called] world “dollar shortage” will continue just as long as governments refuse to permit their citizens to pay the world market price for dollars. But, alas, the article merely embraced every hoary mercantilist fallacy from Colbert to Keynes.

The Economist believes, for example, that the spectacular successes of the free market in the nineteenth century occurred “only because there was in the world a natural equilibrium.” This is nonsense. Equilibrium between supply and demand, between exports and imports, is brought about not by nature but by prices—by free prices in free markets.

“The continental United States,” continues The Economist, “unlike the tiny British Isles, can produce all the food and most of the raw materials it needs. . . . America does not, as Britain did even in the days of its ascendancy, inevitably buy as much abroad as it sells there.... It seems overwhelmingly probable that the dollar shortage will last for a generation to come.”

One hardly knows where to take hold of anything so wrong. We are not economically self-contained. We depend on foreign sources for our sugar, coffee, tea, cocoa, wool, natural rubber, and other items too numerous to mention. And in any case we must inevitably buy as much abroad as we sell there, for the simple reason that the only alternative is to give our goods away. To “lend” foreign countries the dollars to “buy” our goods, and never to get repaid, is just a disguised way of giving. This is not lack of equilibrium, but lack of sense.

The “dollar shortage” of which Europe and the rest of the world today complain is not the result of some singular self-containment on the part of the United States. It is the result solely of overvalued currencies under exchange control. When a government overvalues its paper money and then calls out the police to prevent its own citizens from buying or selling their own or foreign money at the rates at which they want to buy and sell, it systematically strangles its foreign trade. Exchange control, overvalued currencies—and the whole system of import and export licenses, bilateralism, quotas, allocations, price controls, and government planning that goes with it—have finally jammed up practically everything but government subsidized trade, not only between Europe and the United States but even inside Europe itself.

And now—under government sponsorship, of course—we are about to teach British businessmen their business. On the theory that they wouldn’t do it for themselves, our government is going to prod them into becoming more efficient and giving us tougher competition for world markets. One defect of this plan is that it is entirely irrelevant to the problem we are trying to solve. That problem is the trade deficit. Even if we succeeded in increasing British production by our patronage, it would not cure the British trade deficit. On the contrary, with an overvalued pound, increasing British production would increases the British trade deficit, Britain would have to import more raw materials for its industries; and British consumers, with more income in pounds, would want to buy more British products as well as more food, tobacco, refrigerators, and automobiles from us, or whatever else their bureaucrats would let them have.

A correction of the British (or French or Dutch or Norwegian) trade balance could be forced practically overnight, however, by simply allowing exchange rates to find their own market levels. This would discourage imports and encourage exports; it would make all currencies automatically convertible in any amount desired; and the “dollar shortage,” in the sense in which the phrase is now used, would disappear. Any nation will have a trade deficit as long as it insists on overvaluing its currency. The world dollar shortage will last as long as world exchange control. And the American taxpayer will continue to foot the bill.