Chapter IV. The Myth of a “Dollar Famine”

THIS brings us to the question of the much discussed “dollar shortage.” This phrase has become extremely fashionable in Europe. It has even been accepted at its face value by many Americans.

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 allegations 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-way trade with us with the proceeds of our loans or gifts. We have in fact been 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 $17,000,000,000.¹ The gold and dollars now held by the outside world are estimated to reach the unprecedented total of more than $20,000,000,000.²

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.

Nearly every currency in the world (with a few exceptions like the Swiss franc) is overvalued in terms of the dollar. It is precisely this overvaluation which brings about the so-called dollar scarcity. For it not only encourages other countries to increase their buying from us at the same time as it discourages our buying from them, but it leads to a demand for the dollar as a direct investment because it can be bought at bargain prices. This is the situation which the British encountered when they made the pound for a short time freely convertible into dollars. Nearly everybody who had the right to get dollars asked for them—not necessarily because he wanted American goods instead of British goods, but because pounds were worth less and dollars more than the official rate of exchange between them.

This situation would long ago have corrected itself if it had been left free to do so. When Europe’s imports exceeded its exports, the demand for dollars would have raised the price of dollars in European currencies. This would have made American goods more expensive for European buyers at the same time as it made European goods cheaper for Americans. The balance of trade would have been automatically restored.

Moreover, if importers and exporters were free to buy and sell exchange at the rates that supply and demand warranted, all currencies would be freely convertible at a price. In the black market all currencies are in fact convertible at a price. Britain, for example, could convert its “soft” into “hard” currencies at will at prevailing market rates. It is only because people are not allowed to pay or ask the real market rates that the conversion does not take place.

Why is this simple solution to the dollar and foreign-trade problem not adopted? Because under the Bretton Woods agreements (Article IV, Sections 3 and 4) each member of the International Monetary Fund is not merely permitted but compelled to forbid currency transactions within its own borders at other than the official rates. There can be no solution of the world unbalance of trade and of the so-called “world dollar famine” until this provision is revised to permit the restoration of free world markets in foreign exchange. Not until such free world markets exist can we tell what the real “needs” of Europe are. We might find, indeed, that the restoration of free markets in exchange, especially if combined with the restoration of free markets in commodities, would make virtually the whole “Marshall plan” unnecessary.

It is important to keep in mind that the “dollar shortage” is not a complaint merely of European nations that have been ravaged by the war. It is an almost world-wide complaint. It is raised in Canada, Australia, Sweden, Mexico, the Argentine. It exists, in fact, in every country whose currency unit is overvalued compared with the dollar, and where people are not free to deal in that currency unit at its real value.

It is often argued that Britain or France or some other country cannot afford to let its currency fall to the value that a free market would put on it, because this would bring it fewer dollars for the same volume of exports. This argument, however, is based on the tacit assumption that the exported goods—from Britain, say—enjoy a monopoly in the United States, so that Americans are forced to buy them at no matter what price in dollars. There are not many British goods to which this applies—not many which do not face a competitive market here and may not already have priced themselves out of this market. Even where a monopoly situation exists, moreover, the greater number of dollars secured by the pegged sterling rate can easily be more than offset by a more than proportionate shrinkage in the volume of British export sales.

Sometimes the matter is argued from the other end. It is said that England or France cannot afford to let their currencies decline to the free market price because American goods would cost them more in pounds and in francs. It is forgotten that these higher prices might discourage excessive imports from the United States. Even more important, it is forgotten that this whole system of a chronically unbalanced trade can be kept going only by fresh loans from America. Only the continuance of American loans, in brief, has continued to make an overvalued pound or franc possible.

Under a gold standard, when a currency rose or fell beyond a very narrow range in relation to other currencies, shipments of gold corrected the disequilibrium in trade and restored a balance between the supply of and demand for the currency. Sometimes this happened through a rather complicated chain of causation. If a country had an excess of imports because its prices were too high in relation to world prices, it lost gold (because the value of its currency unit in the foreign exchange market fell to a point where it paid to demand gold in exchange for it). As it lost gold, the contraction in the reserve bases for its money and credit caused a rise in interest rates in that country. This rise in interest rates discouraged borrowing, induced some paying off of existing loans, and so reduced the outstanding volume of money and credit. This contraction of money and credit lowered prices in that country and so brought it into line with world prices and restored or reversed the balance of imports and exports.

Without the gold standard and the free movement of goods this correction in the trade balance can only be made by wide fluctuations in the prices of paper currencies. Where fixed exchange rates make this correction impossible, it is impossible in turn to correct the trade disequilibrium. The countries that refuse to correct their price levels or exchange rates thereupon attribute their troubles to a “shortage of dollars.”

When nations are on a gold standard a fixed rate of exchange is both possible and desirable. When each currency is anchored to gold, all currencies are necessarily anchored to each other. Each currency unit can then be expressed as a precise ratio of another. It can be freely and safely converted into it. But when each country is on its own paper standard its currency can have no fixed value in relation to other currencies. It can be given the appearance of such a fixed value only by making it a crime to buy or sell it at any other rate. But this attempt to maintain by coercion the appearance of stability where no stability exists merely makes the economic consequences incomparably worse. And this crucial and central factor in the whole world economic crisis is treated in most discussions of that crisis as if it simply did not exist.

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¹New York Times, May 25, 1947.

²National City Bank Monthly Letter, July, 1947.