The Myth of A Dollar Famine

August 18, 1947

Mr. Dalton’s defenders claim that he was unaware of the fact that not only Britain but Canada, Argentina, Spain, and other countries also were suffering from serious dollar shortages....The [British] Government defense is that the whole world is in the grip of a dollar famine that is rapidly becoming so severe that it will produce deflation and unemployment everywhere unless the United States acts quickly to relieve it.”

These sentences from a London dispatch to The New York Times give an accurate reflection, not merely of the views of the British, but of outside nations in general. Their plight, as they see it, is not their fault, but ours. It is not Britain or Europe, but the United States, that must “act quickly.” It is we who must contribute still more loans or gifts to make up whatever deficit in its trade balance the outside world succeeds in bringing about.

It is of the first importance, if the world is to apply correct remedies for the present crisis, that it separate the sense from the nonsense in these allegation of a world dollar famine. In one sense, of course, Britain (or France, or Mexico, or the Argentine) is correct in attributing its troubles to a “dollar shortage.” In the same sense, an American would be correct in saying that the reason he could not pay his grocery bill or buy himself a new car is that he was suffering from a dollar shortage. But such a description does not explain anything. The real question we must answer, either for the foreign nation or the individual citizen, is what causes the dollar shortage.

Now for Britain or Europe or Latin America to describe its plight as a “dollar shortage” is really a way of implying that the situation is somehow our fault. We are being blamed for not supplying enough dollars. The real trouble, however, is that Britain and Europe and Latin America wish to buy more from the United States than they sell to it. They wish to get from us more than they give. They wish to buy more than they can afford to pay for. They are consuming more than they are producing. The only permanent remedy is for them to increase their production or reduce their consumption. As long as they do neither they can only keep up the one-sided trade with us with the proceeds of our loans or gifts. We are in fact supplying the outside world with $1,000,000,000 worth of goods and services every month in excess of what we get in return.

In brief, the trouble at bottom is not a shortage of dollars but a shortage of goods and services to exchange for dollars. To talk of a shortage of dollars in any absolute sense is absurd. In the last two years the United States has contributed to the outside world cash and goods estimated at nearly $17,000,000,000. The gold and dollars now held by the outside world are estimated to reach the unprecedented total of more than $20,000,000,000. Why, in the face of this, does Europe complain more loudly than ever of a “dollar famine”? Why has the world’s trade become so unbalanced? The whole answer would be complex; but the chief responsibility must be placed upon government controls. Most of the governments of the world today, by forcing commodity prices below the levels that supply and demand would bring about, are creating artificial bottlenecks and shortages. When they draw on us for the deficiency, they cause shortages and higher prices even here.

But the gravest case of arbitrary price fixing is the overvaluation that nearly all countries place on their own currencies. They will not accept the verdict of the open market as to what those currencies are really worth. They will not even allow that open market to operate. By keeping their currencies artificially high, they make imports from America relatively cheap in terms of their own currencies at the same time that they make the prices of their exports prohibitively high in terms of dollars. It is this that is chiefly causing the chronic unbalance of trade.

What the world is suffering from today is not a dollar crisis. It is a sterling crisis, a franc crisis, a guilder crisis, a peso crisis. It staggers from crisis to crisis because it will not allow free markets to function.