Surprising Scapegoat

March 1, 1965

The deficit in our balance of payments, and our continued loss of gold, are the direct result of our government’s own fiscal and monetary policies, and of nothing else. As long as the Federal government continues these inflationary policies, the dollar crisis will continue. But if the government returns to monetary discipline, and stops trying to push down interest rates or to “pump more purchasing power into the economy,” none of the tax penalties, quotas, and controls that the President proposed in his balance-of-payments message of Feb. 10 will be needed.

Let us recall some of the policies that have led to the present dollar crisis. The government has been inflating the money supply for 30 years. Since the end of 1939 the supply of money has been more than quadrupled. For 1966 the President is deliberately planning to run the 30th deficit in 36 years.

Since the end of 1957 the deficit in our balance of payments has reached a total of $25 billion, an annual rate of $3.5 billion a year. During this period the government authorities have professed to be greatly concerned about that deficit. Yet during these same seven years they have increased the active money supply (demand deposits plus currency outside banks) by 17 percent, and the total money supply (including time deposits) by 48 percent.

During this period, also, the government has handed out some $28 billion, or $4 billion a year, in foreign aid. It is instructive to notice that this aid alone exceeds the cumulative balance-of-payments deficit of $25 billion and its annual average of $3.5 billion in the same period.

INVESTMENT VILLAIN

But the government ignores all this and looks outside of itself to “the private sector” to find the villain that is causing the balance-of-payments deficit. And the scapegoat it picks is private foreign investment. This is not only arbitrary but surprising, because private foreign investment is the one outlay of money that is made with the very purpose of eventually bringing in more money than is laid out.

In the six years 1958 to 1963, for example, the aggregate net outflow of $20.9 billion for new foreign investment was offset by $19.4 billion of income from previous investment. Even Secretary Dillon has conceded that “in the long run the outflow of American capital to foreign countries is more than balanced by the inflow of income earned by that capital.” So the government’s attempt to discourage America’s foreign investment is at best shortsighted.

END CHEAP MONEY

Instead of trying to make up nearly all of our $3 billion deficit by penalizing our $6.5 billion investment abroad, why didn’t the government pitch on some other major item in the total of nearly $35 billion that we annually spend or give abroad? Since we are abandoning all liberal trade principles anyway, why not put prohibitive duties on luxuries, on perfumes, and liquor and foreign sports cars, and crack down on foreign pleasure travel?

Or if foreign investment really is the culprit, why not simply let interest rates go up here to levels where they would keep investment at home and even attract foreign investment? The cure is not more government interference with markets, but less.

Unless the President, the Congress, and the Federal Reserve curb deficit spending, slash foreign aid, stop pushing down interest rates, short-term or long-term, and stop printing more paper money, the extended tax and other penalty measures that the President has asked for against foreign investment will be simply futile. In the long run they will neither halt the balance-of-payments deficit nor stanch the outflow of gold. On the contrary, the misgivings that the stricter controls themselves arouse may increase both.

But if the government authorities adopt a self-imposed monetary discipline, if they stop the deficits, cut the foreign giveaway, stop flooding the market with more paper dollars, and allow interest rates to rise to free-market levels, the deficit in the balance of payments will stop overnight, and the elaborate tax penalties, quotas, surveillance, and “voluntary” controls of foreign investment will be entirely unnecessary.