Information about Western Hemisphere Hemisferio Occidental

II The Residual Dollar Problem

International Monetary Fund
Published Date:
September 1953
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Information about Western Hemisphere Hemisferio Occidental
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The persistent tendency toward a surplus in the United States balance of payments has been one of the main preoccupations in the field of international finance since the end of World War II. According to the official U.S. balance of payments statistics, the surplus had disappeared in the second half of 1952, when the United States had a small deficit with the rest of the world in respect of commodities (excluding specially financed military-end items), services, private donations, and U.S. private capital movements. It is particularly noteworthy that the regions which had been the main recipients of U.S. aid in the postwar period—the United Kingdom, the countries on the continent of Europe, and their dependencies—showed a small surplus with the United States (Table IV).

Table IV.Payments Balances 1 of Selected Regions with the United States(In millions of U.S. dollars)






United Kingdom3+138-29-360+26+38+156
Other Western Europe-113-668-691-6354+1564-124
U.K. dependencies3+170+293+188+230+121+236
Other Western
European dependencies+29+27–14+51+60+58
Rest of sterling area3+ 147+ 169-314-287-77-128
Latin America–14+42–674–81–47+328
All other countries+232+20+37–9+102+98
All areas+ 1,037–332–1,892–916+154+478
Errors and omissions-85-337-199-549-47+26
Source: U.S. Department of Commerce, Balance of Payments of the United States, 1949-1951, and Survey of Current Business, June 1953.

On account of goods and services (excluding military-end-use items financed through grants under U.S. military aid programs), private donations, and movements of U.S. private capital.

Semiannual rate.

Balances for sterling area countries exclude “special category” imports bought for cash; these are included instead in other areas. These imports amounted to $39 million in the second half of 1950, $47 million in the first half and $66 million in the second half of 1951, $78 million in the first half and $79 million in the second half of 1952, and $31 million (semiannual rate of $62 million) in the first quarter of 1953.

Finland, Spain, and Yugoslavia are included in All Other Countries in 1950 and 1951, and with Other Western Europe in 1952 and 1953.

Source: U.S. Department of Commerce, Balance of Payments of the United States, 1949-1951, and Survey of Current Business, June 1953.

On account of goods and services (excluding military-end-use items financed through grants under U.S. military aid programs), private donations, and movements of U.S. private capital.

Semiannual rate.

Balances for sterling area countries exclude “special category” imports bought for cash; these are included instead in other areas. These imports amounted to $39 million in the second half of 1950, $47 million in the first half and $66 million in the second half of 1951, $78 million in the first half and $79 million in the second half of 1952, and $31 million (semiannual rate of $62 million) in the first quarter of 1953.

Finland, Spain, and Yugoslavia are included in All Other Countries in 1950 and 1951, and with Other Western Europe in 1952 and 1953.

There had been a similar situation two years before, in the second half of 1950. The deficit in the U.S. balance of payments with all countries, measured as in Table IV, was indeed much larger then than in the second half of 1952. But a large part of the difference was due to substantial private, and to some extent speculative, capital movements from the United States to Canada in 1950, which had little bearing on the general problem of balance in world payments. The surpluses which other areas had with the United States in the latter half of 1950 proved to be transient, related particularly to the different timing of responses in different parts of the world to the outbreak of Korean hostilities. Although there are still important temporary elements in the current balance of the United States, the improvement in 1952 appeared in some respects to be more securely based than that of 1950; in the second half of 1952, there were no such movements of U.S. private capital as occurred in 1950, and there have been only minor fluctuations in U.S. imports in recent quarters.

Temporary Elements in the Current Balance

The approximate balance achieved at the end of 1952, however important as a stage in the adaptation of the world economy to postwar conditions, cannot be taken as indicating that there is no need for further concern about the problem of the balance of payments of the rest of the world with the United States. Some of the elements that have helped to establish this balance are more or less temporary. It cannot be expected that the continued operation of the same forces that have produced the improvements observed in 1952 will by itself suffice to ensure the ultimate disappearance of the dollar problem. Ever since the end of World War II, structural adjustments have been going on in the pattern of international trade. These adjustments are in response to continuous changes in the underlying conditions of world supply and demand, as well as to such sharp interruptions in the normal order of development as have been imposed by the disruption caused by the war and the subsequent deep political cleavages that have cut off much of the traditional flow of trade in both the West and the East. Adaptation to all these changes is still far from complete. Thought has to be given to further measures which will carry it further, and thus, in a more fundamental way, finally eliminate the dollar problem.

The first and probably the most important qualification to be noted in interpreting the record of the last year is an account of the increase in purchases of goods and services in Europe and the Far East by agencies of the U.S. Government. These expenditures have included expenditures on stockpiles of strategic materials, amounting in 1952 to around $800 million, and increasing amounts expended directly for the U.S. armed forces. There have also been military offshore purchases of commodities which were then donated by the United States as part of its military aid, and considerable amounts for the construction of air fields and other military installations. Total purchases by the U.S. Government abroad in 1952 under these various headings amounted to $2.5 billion—or enough to pay for one sixth of all U.S. exports—against $1.5 billion in 1951. While, for the immediate future, payments of this kind may be expected to continue—and some of them may even increase—a considerable reduction must be anticipated for the somewhat longer run. A high level of offshore purchases is obviously no permanent substitute for a high rate of commercial imports.

A second relevant consideration is the degree of restriction on imports from the dollar area still imposed by countries with inconvertible currencies. The “dollar gap,” as measured by balance of payments statistics, does not, of course, include the potential demand for dollar commodities that would be released by the removal of these restrictions. There is no way of measuring the size of this suppressed demand; it ought, however, to be considered in estimating the magnitude of the changes required to make possible a convertible world. There is perhaps some tendency to overestimate the present extent of this suppressed demand. The actual restrictive effects of nominally severe import restrictions imposed in an emergency situation are likely to diminish if disinflationary policies adopted either at the same time or at a later date relieve the pressure of total demand. In this connection it may be noted that the restrictions on imports imposed by the United Kingdom late in 1951 and early in 1952 did not lead to any general reduction of the inventories of imported goods. The level of demand appeared to have fallen more or less in line with the reduction in permitted supply, so that on balance there was probably little increase in repressed demand. Also, the restrictions placed on dollar imports by a few countries that are attempting, by general import restrictions, to correct over-all balance of payments deficits are not so much an aspect of the dollar problem as a reflection of the particular difficulties of the countries concerned. Their dollar restrictions will tend to disappear as these countries approach a solution of their over-all problems. Furthermore, a number of other indications, including a tendency for the premiums on dollars usable for free imports to fall and for the price differentials paid for soft currency cotton to contract, suggest that in many European countries the potential demand for dollar imports held back by restrictions on dollar imports is no longer as large as it used to be. On the other hand, some important demands are certainly now being satisfied by non-dollar goods that would be transferred to dollar markets if there were no restrictions on dollar trade, quite apart from any speculative demands that might arise after restrictions had been removed, if the general public were not convinced that the change in policy was lasting.

Some of the reduction in the demand for dollar goods has no doubt been due to reduced activity in certain industries in Europe and elsewhere. It should not be taken for granted, however, that the revival of industrial activity will completely reverse this trend. The generally favorable supply situation for raw cotton may check any revival of the demand for U.S. cotton which fell in response to the decline in the output of cotton textiles. If Western European coal output increases, the decline in European imports of U.S. coal should be permanent.

Solutions of the Residual Dollar Problem

The world’s residual dollar problem as a whole is wider than the issues arising from the balance of payments difficulties of other countries with the United States. But in relation to dollar earnings and dollar payments, commercial relations with the United States have overwhelming importance. It will therefore be found, as a practical matter, that any measure which is to make a substantial contribution to the solution of the residual dollar problem will either diminish the total value of U.S. exports of goods and services, increase the total value of U.S. imports of goods and services, or make provision by international capital movements for the continuance of a U.S. surplus on commodity and services account.

In earlier Fund Reports, attention has been repeatedly directed to several fields of policy, action in which would produce appropriate results under one or more of these headings. It is still of great importance that in these fields—for example, the maintenance of a high level of activity and employment in the United States, and the combating of inflation, particularly in Europe—there should now be no retrogression. The secular trend toward rapid expansion in the U.S. economy may be expected to continue; but under present circumstances, further action in these particular fields of policy is not likely to afford much additional help in solving the dollar problem as a whole. U.S. activity has been very high during the past year, and, indeed, apart from the minor recession in 1949, it has been continuously high in the postwar period.

Effective control of inflation has always been an essential condition for the achievement of balance of payments equilibrium, and inflation has by no means ceased to be a problem. In the modern world, there are many forces, both economic and social, that seem likely for many years to come to foster a climate of opinion in which it will always be easy to generate new inflationary forces. There are some countries of major importance for world trade where the control of inflation is still an immediate urgent task. Many countries, however, have already been able to show substantial improvements in both their internal and their external balances, as a result of the adoption during the last year or two of disinflationary monetary and fiscal policies; and in some of them, some relaxation of their restrictive credit policies has been found to be appropriate. Special care must still be taken to ensure that there is no retrogression in this field. Each country always has a clear and direct responsibility for the maintenance of such policies as will, by preserving domestic stability, diminish the danger of serious disturbances in its international economic relations. Nothing that is said about dependence on other countries should be interpreted as an invitation to evade that responsibility.

Direct Dollar Earnings

To prevent any deterioration in the present position, a high level of employment in the United States and the maintenance of proper monetary and fiscal policies in Europe are still of the utmost importance. The significance of an expansion of international capital investment has also been frequently emphasized in this context. The expanding world demand for raw materials which may be anticipated during the next few decades is one of the factors that justify long-range international investment programs. However, for further advances from the present world payments position in the not too distant future, attention has to be directed increasingly to measures which would more directly facilitate the expansion of dollar earnings by the countries which maintain discriminatory restrictions. Something may be expected from the growth of tourist expenditures in these countries, but the problem that demands most careful attention is that of expanding dollar earnings from their sales of export goods.

European countries have made important efforts in the last few years to expand their sales in Western Hemisphere markets, and the advances made have been notable. Exports in 1952 from the OEEC countries of Europe to the United States were twice those of 1949. But there is a limit to further progress along this line as long as U.S. policies with respect to imports of manufactures and of foodstuffs remain unchanged. As U.S. economic aid recedes, the close relationship in practice between the problems of restrictions on imports from the United States and of U.S. restrictions on imports from other parts of the world becomes increasingly clear. It is also evident that, in the solution of these twin problems, freedom of action for the United States is greater than for other parts of the world.

If there were substantial modifications in U.S. commercial policy—such as tariff reductions, the simplification of tariff classifications and customs procedures, liberalization of agricultural quotas and of shipping policy, repeal of “Buy American” legislation, and modification of other practices that at present discourage efforts to expand beyond modest limits the markets in the United States for certain imports—the payments position of the non-dollar world would be substantially strengthened, and the prospects for reducing or eventually eliminating restrictions on imports from the United States would be greatly improved. In earlier days, questions of this sort could be considered merely in terms of tariffs, and the road toward a higher level of world trade appeared to lie through a series of bilateral or multilateral tariff reductions. In the world of today, quotas, exchange restrictions, and other impediments to the movement of goods play a role which is at least as important as that of tariffs. Therefore, if it is to be successful, international action has to operate on a wider front. On this wider front there may be less justification for the rather narrow concept of quid pro quo negotiations that used to be considered appropriate. The countries whose currencies are in strong demand would find that a large part of any increase in the amount of their currencies made available through either expanding imports or a larger export of capital would quickly return in the shape of increased demand for their own products. This is most strikingly true of the United States, whose goods are in brisk demand everywhere and whose exports are bound to be purchased in greater quantities if more dollars become available to countries abroad. But it applies to some extent also to other major trading countries. The decision of the United Kingdom in March 1953 to reliberalize, in part, its imports from other OEEC countries not only helps the exports of these other European countries; it may also stimulate a greater demand on their part for U.K. exports.

It is, perhaps, natural that it is in the countries which have recently been applying with considerable success policies which indicate their sense of responsibility for maintaining domestic stability that there is now a disposition to insist even more strongly than in the past upon the complementary part to be played in the establishment of a stable world payments system by the liberalization of the commercial policies of countries whose balances of payments are strong, and in particular of the United States. It is probably true, as has been frequently stated, that even the adoption by the United States of complete free trade would not by itself provide more than a partial solution of the dollar problem. The efforts that are still necessary on the part of other countries are, however, likely to be more resolute and determined if their present fears that the entry of competitive goods into U.S. markets will be impeded can be allayed. As a practical matter, progress toward the Fund’s objectives will be slow unless some significant forward step is taken in each of the relevant policy fields. The fact that no step will by itself provide a complete solution is no reason for not pushing forward with it.

In the United States too, there has been a growing recognition during the last year or two of the essential character of the world payments problem, and of the relation of U.S. commercial policy to that problem. A series of public statements has indicated an increasing interest in measures leading to a substantial liberalization of U.S. commercial policy. The U.S. Government has made clear that it is fully aware of the importance of its economic and financial foreign policies in relation to the present world payments situation. The President of the United States has requested the Congress to create a joint commission to undertake a thorough re-examination of the whole foreign economic policy. In making this request, the President said in part: “An inquiry of this nature is imperative. The economic policy of this Nation exercises such a profound influence on the entire free world that we must consider carefully each step we take. Changes in foreign economic policy—even those which at first have relatively slight consequences within this country—may either strengthen our allies or plunge them into a downward spiral of trade and payment restrictions, lower production, and declining living standards. . . . Through increasing two-way international trade and stimulating in every practical way the flow of private investment abroad we can strengthen the free world, including ourselves, in natural and healthy ways———Both we and our friends abroad earnestly desire to see regular trade and investment replace grant assistance.” There can be little doubt that the outcome of this re-examination will considerably influence the pace of further movement toward the establishment of a freely operating multilateral system of payments.

Dollar Earnings from Other Countries

Even the most thorough-going revision of commercial policy by the United States would leave some part of Europe’s dollar requirements to be financed by multilateral receipts. An expansion of European exports to third markets in replacement of U.S. exports would make an important contribution to closing the Western European dollar gap and thus to establishing a more satisfactory equilibrium in world trade.

The supply of U.S. dollars available to the rest of the world as a result of increased U.S. imports has, since the end of the war, greatly exceeded the prewar supply, although at the same time, partly owing to the disruption caused by the war, the demand for U.S. goods has also greatly exceeded the prewar demand. The largest share in the increase of available U.S. dollars has accrued to other Western Hemisphere countries, a fact which suggests these countries as offering the greatest opportunities for indirect dollar earnings by European exporters. Currently, the United States is buying more than half its imports in Canada and the Latin American republics, an amount which in dollar terms is six times, and in real terms about three times, its prewar imports from these countries. To five of the larger countries, where no problem is presented by currency inconvertibility—Canada, Colombia, Cuba, Mexico, and Venezuela—the United States in 1952 exported manufactures to the value of approximately $3.5 billion, while European exports to these countries were about one third that value. If European exporters had the same share as before the war of the markets of Canada and the Latin American dollar countries, Europe’s exports to these areas would be greater by almost $1 billion. European exporters cannot, of course, be expected to supplant U.S. exports in other Western Hemisphere countries, but the scope for additional dollar earnings of this kind may be considerable.

To suggest that, in the present circumstances of the world, the emergence of a stable pattern of multilateral trade would be hastened if third countries were to transfer some of their demand from U.S. to European goods is not at all to imply that such third countries should adapt their buying habits to suit the convenience of European countries which otherwise find it difficult to balance their international accounts. If there is to be any movement in the direction indicated, European producers must adapt their production so as to satisfy at competitive prices the changing demands of their customers in the countries where they wish to earn dollars. The success of their efforts will depend upon a high level of productive and marketing efficiency and ability to make prompt deliveries. If the development programs now being pressed forward nearly everywhere are successful, however, average income levels in countries now usually described as underdeveloped will rise. These countries will produce for themselves many of the goods which in the past they have been accustomed to import. But rising import levels will bring new demands, which could provide new sales outlets for European producers if their production programs are sufficiently flexible.

Developments in Primary Production

Further progress toward a balanced world payments position is also likely to be facilitated by certain trends in primary production which have already begun to make their influence felt, and which should do something to reduce dependence on the dollar area, and particularly on the United States, for essential imports.

Since the end of World War II there has been a substantial recovery in Europe of both agricultural and nonagricultural primary production. By 1951-52, gross agricultural production in western and southern Europe was estimated at slightly more than 10 per cent above the prewar level, a rate of recovery which corresponded closely to the rate of population increase. Output of grain in the OEEC countries in 1952-53 is estimated at some 14 per cent above the prewar level. A substantial part of the increase in cereal output has been in Turkey. Before the war, Turkey’s annual exportable surplus of bread grains was approximately 100,000 tons. For the current season, a surplus of around 2 million tons is reported to be in prospect. This is larger than the amount that was available in some years before the war for export from the Danubian area. Coal production in western Europe is still less than in some prewar years, though there has been considerable progress since the period immediately after the end of the war, and plans are in hand for improving the productive capacity of European coal mines.

In cotton there has been a steady trend toward replacement of U.S. imports. Production in the major exporting countries outside the United States in 1952-53 was 70 per cent greater than in 1947-48, an increase equal to more than half the annual average for U.S. cotton exports in the years since the war.

Primary production may be stimulated further if producers receive adequate incentives, and if development programs are worked out with proper regard to world conditions of supply and demand. For example, in Australia and Argentina the prices paid to wheat producers have been considerably lower than the world price, and there has been a tendency for their share of world trade in wheat to fall. Recently, producers in these two countries have been paid prices more in line with the world market price, and it is possible that their share in world trade in wheat will be permanently raised from the low levels of the last two years.

As the development plans of the less developed countries are put into operation, there is reason to expect further expansion of primary production for export. World supplies of certain staple foodstuffs, such as rice, are still inadequate. The Commonwealth Economic Conference of December 1952 emphasized the importance of the development of basic essentials, and affirmed the principle that development in the sterling area countries should be concentrated on projects which, directly or indirectly, contribute to the improvement of the sterling area’s balance of payments with the rest of the world. Elsewhere, too, there has been a growing realization of the excessive burden of costs imposed if development makes inadequate provision for expanded production of staple foods and raw materials.

Maintenance of a High Level of Activity

The policies required to reduce still further the magnitude of the dollar problem thus demand appropriate action by the United States, by the other industrial countries, and by the countries that are still in the early stages of development. If action of adequate scope is taken in time, the current dollar situation may gradually improve further in the next few years, even in the face of any decline in U.S. Government expenditure abroad.

While there is ground for cautious optimism with respect to the attainment and maintenance of a rough balance in payments between the United States and the rest of the world, one cannot but be seriously concerned about its precarious character. For many countries the balance would be disturbed by any considerable weakening of the prices of their staple exports. The possibility of a decline in U.S. activity has also caused concern. Even a rather small decline would be likely to cause a much more than proportionate contraction of the supply of dollars provided through U.S. imports, and thus lead to a rapid intensification of the dollar shortage. It will be recalled that the recession of 1937-38 reduced the value of U.S. imports by almost one third.

It should not be assumed that an easing of political tensions which permitted a substantial reduction of defense expenditure would necessarily be followed by any serious contraction of economic activity as a whole in the United States. The U.S. economy has shown a degree of adaptability sufficient to take full advantage of the opportunities for the higher real levels of production and consumption that a relaxation of rearmament pressures would permit. Moreover, there is today a much wider awareness than before World War II of the importance of avoiding recession and, if a recession should occur, of dealing effectively with it. The content of possible anti-recession measures is still sharply debated, but there seems to be general agreement that the maintenance of high levels of production and employment is a major objective of public policy in the United States.

The greater the success of U.S. policy in maintaining domestic stability, the better the prospects for continued progress toward the establishment of a stable multilateral international trading system. However, any sharp downturn would at once bring back the dollar problem in its full severity, despite any action taken by other countries in the meantime to strengthen their positions. Few countries would be willing to attempt to avoid substantial balance of payments deficits by action that threatened to create large-scale unemployment and a serious decline in domestic activity, and it would be difficult to avoid a serious setback to the movement toward an orderly system of free multilateral trade and payments.

With a view to avoiding any such retrogressive movement, it is in the interest of each country to stabilize its domestic economy to the greatest extent possible. National action directed toward domestic stability would have an important stabilizing effect on each country’s demand for imports.

It cannot be hoped, however, that domestic activity in all countries will always proceed without a ripple along a smoothly rising trend, and even minor fluctuations in national income or expenditure may have severe effects upon imports. It has often been suggested that a supplementary means of defense against these fluctuations should be sought in multilateral commodity arrangements designed to stabilize the level of commodity prices and also the level of trade. There have been wide differences of opinion about both the principles involved and the techniques to be applied in such arrangements. Their realization is, in any event, likely to encounter many difficulties, and a decision on any specific proposal is no doubt best made by reference to the circumstances of the particular case.

If there is a recession in demand, it will always be necessary to fall back upon the temporary use of reserves to supplement current export earnings. These reserves may be either a country’s own reserves, or the reserves held in common by members in the International Monetary Fund. Effective action in such an emergency is one of the principal purposes for which the Fund was established. One of the Fund’s most important functions is to assist its members to mitigate the impact of a sharp decline in their foreign exchange earnings upon their ability to maintain a needed volume of imports and a high level of employment.

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