Wrong Dollar Solution

December 5, 1960

It is the view of the Administration that the recent gold and dollar outflow has been caused by “a deficit in the American balance of payments.” Consequently the remedies that the Administration is proposing—such as reducing the expenditures of our troops and their families abroad, or getting other nations to assume a greater share of the foreign-aid burden—are directly designed to reduce this “deficit.” But the diagnosis is mistaken and the proposed cure does not go to the heart of the problem.

“A deficit in the balance of payments” means the excess of our total payments to foreigners (for imports, tourism, long-term investments, etc.) over total receipts from foreigners (from exports, etc.). This excess is defined as and measured by our loss of gold and liquid dollar assets.

A fallacy occurs when it is tacitly assumed, as in most current discussion, that everything else in the “balance” (commercial imports, exports, etc.) is the result of intentional decisions by Americans or foreigners, while only the movement of gold and dollars is not intentional but merely the passive and unavoidable result of the other decisions. This is not true. The decision of foreigners to use their dollar credits (whether they got them from exports to us or from foreign aid) to buy goods from us, or to leave them here as dollar deposits, or to demand gold for them, is just as intentional as any other decision.

WHICH IS ‘CAUSE’?

It is not correct, therefore, to call the “deficit in our balance of payments” the cause of the gold or dollar outflow. The causation may be the other way round. A run on our gold would “cause” an increase in the balance-of- payments “deficit.” In fact, our loss of gold and dollars, and a deficit in the balance of payments, turn out to be simply two names for the same thing.

Our problem is only partly the result of our foreign- aid program. If our payments were otherwise in balance, and we gave away some $4 billion a year in foreign aid, then, if foreigners elected to take all this in the form of gold and dollars, we would have a deficit of $4 billion a year in our balance of payments. But this is unlikely to happen. If the rest of the world uses $3 billion of this to buy more goods from us, our resulting deficit is only $1 billion. Similarly, even if we pay $2 billion a year for our troops to spend abroad, some of the dollars they spend are likely to be used by foreigners to buy American goods, so reducing our net deficit.

TO RESTORE CONFIDENCE

Even if we were to cut down on our foreign troops or cut our foreign aid entirely, therefore, it does not follow that we would reduce our balance-of-payments deficit by the same amount. For we would not then be giving the rest of the world the added dollars to buy our goods. Of course our foreign-aid program does intensify our dollar problem. If our prices are not kept competitive, foreigners will use their dollar aid to drain our gold rather than to buy our goods. And if our foreign-aid program increases inflation here (by adding to budget deficits, for example), it works to undermine faith in the dollar.

The determining factor is, at bottom, the world’s faith in the dollar—faith that we do not intend to inflate or devalue, faith that our gold supply is great enough in comparison with the foreign claims on it to meet all demands. It is precisely this faith that we have been shaking. While the Eisenhower Administration busies itself belatedly with a fringe problem, the Federal Reserve has failed to take the measures necessary to assure foreigners that we have set our face against cheap money and inflation. And the President-elect, according to a report in The Wall Street Journal, “is preparing a series of possible moves to counter” feared unemployment in January, including “increased and faster Federal spending, more loans to small businesses at lower interest rates, and lower interest-rate ceilings on government-guaranteed housing loans. . . . Mr. Kennedy is fully prepared to set aside hopes for a balanced budget in favor of Federal stimulation of the economy.”

These plans to spend and inflate are the exact opposite of the assurance the world needs regarding the integrity of the dollar.