Let the Dollar Drift?

August 26, 1963

The 290-page report of the Brookings Institution on “The United States Balance of Payments in 1968” can only tend further to undermine confidence in the dollar. Its diagnosis of the disease is false. Its analysis of causes constantly puts the cart before the horse. Its forecasts are mere guesses. Its proposed remedies would aggravate the disease. If persisted in they would destroy the dollar as an international currency.

We cannot, unfortunately, dismiss this report as merely reflecting the opinions of a private institution, or even merely the opinions of its particular authors. For the institution was explicitly asked by Walter Heller, acting on behalf of the Council of Economic Advisers and the Treasury, to make this report. The American taxpayers paid for it. Though it is called an “independent” study, it comes to the same conclusions on leading economic problems as the Council of Economic Advisers, and often in the same phraseology. It is, in brief, a quasi-official document. That is why it is so disturbing.

CRYSTAL GAZING

The report rests on basic misunderstandings. It predicts “substantial improvement in the U.S. balance of payments by 1968” and even suggests that “the basic deficit will be eliminated by 1968, and that there will be pressures toward a basic surplus.” The truth is that everything depends on what the government does. If it were to stop the budget deficits, stop printing more money through the Federal Reserve, stop holding down interest rates, it could halt the balance-of-payments deficit overnight. What it will be doing five years from now nobody knows, and therefore nobody knows, what the balance of payments will be in 1968. But it doesn’t take a year, a big staff, and 290 pages to find that out.

The report, like the reports of the Council of Economic Advisers, is based throughout on ultra-Keynesian assumptions. It talks as if solving the balance-of-payments problem were an alternative to achieving sound prosperity, growth, and long-run employment, instead of being, as it is, a necessary means of achieving these goals. It believes that it is huge government spending and cheap money that create jobs. The effect of excessive wage rates on increasing unemployment is never mentioned. On the contrary, the report suggests (in true Keynesian style) that any reduction in money wage rates increases unemployment—though it inconsistently recommends that a country with a balance-of-payments deficit might wisely prevent “the general level of its money wage rates from increasing as fast as output per man-hour.”

FOR WORLD INFLATION

The report’s implied cure for our economic ills, in brief, is unrestrained inflation. Of course it never uses that phrase candidly. It recommends “expansionary fiscal policy” and “lowering of interest rates” (which is Keynesian for budget deficits and monetary inflation), and deplores the “undesirable constraints” that balance-of-payment worries put on these policies. It says “the classical means of improving the balance of payments” are “deflationary measures” that “cut employment and real incomes.” It even pretends that efforts to improve the net balance of payments would require “very substantial declines in total production and income.”

So the report’s remedy for the dollar problem is not for our government to halt its inflation, but for everybody to embark on a world inflation so that nobody will run short of money. This, of course, is not said in these blunt words. We are to set up a new “international monetary system” which “must provide enough liquidity.” (“Liquidity” is Keynesianese for cash.) “Substantial amounts [of credit] should be obtainable automatically by deficit countries” (i.e., us). These countries must be given “enough time” to “restore equilibrium.” The report does not say what happens if they use the time and credit to continue their inflationary spree. The legal requirement for a 25 percent gold reserve is “irrational.” It “long ago ceased to serve any useful purpose” and “should be abolished.”

I have only one question. Is this report likely to restore international confidence in the dollar?