What Is Behind the Dollar’s Problems?

WHY has all this happened to America’s balance of payments? Why has such a huge deficit developed in twenty years?

As noted previously, the simple answer is that the United States has habitually spent more overseas than it has earned.

But does this mean that in the past it sold fewer products abroad than it bought? No, until very recently the United States consistently showed a surplus in its trading of goods with other countries.

Then why does it have such a huge deficit? Because the United States spends, or gives away, its dollars for other things not included in the buying and selling of goods in world trade.

In this regard, a very significant item is foreign economic aid. Thousands of millions of dollars have been given away to other countries since World War II. Then, too, when Americans go overseas for vacations, they spend dollars in other countries. They spend much more than do foreigners who come to the United States for their vacations, leaving a deficit in this account.

There are other areas that contribute to the dollar outflow. Many retired Americans live in other countries. They receive pensions and spend the money in the country where they live. Also, American businesses spend money on plants and equipment they want to operate in other lands. In addition, Americans purchase foreign securities as investments.

The Biggest Culprit

However, the biggest single item that drains away America’s dollars is none of these. What is it then? Industry Week of May 3, 1971, said: “The biggest cause of the trade deficit . . . is military spending overseas.”

Military spending includes the money to buy war equipment in other countries and salaries for military personnel who spend the dollars overseas. It also means paying for the supplying and maintenance of foreign military forces allied with the United States.

Regarding such military spending, the New York Times commented: “During the decade of the 1960’s, the net United States balance of payments deficit on military expenditures amounted to $32 billion. As former Secretary of the Treasury Henry H. Fowler has emphasized, such an outflow cannot be tolerated in the next decade.”

Another aspect of such military spending is that nothing of real value is produced. Wars and preparations for war are destructive of a nation’s (taxpayers’) wealth. When two opposing countries build planes and tanks for war, nothing has been produced that contributes any lasting economic benefit. When those weapons are used to destroy buildings, factories, cities and lands, how much wealth is produced? Are the cost, and use, of all that making the nations richer or poorer? You know the answer.

True, war making means that machines of war have to be produced. That does create jobs. But those jobs are not producing economic wealth, anything of real value for mankind. Have land, homes, trees, parks, schools or hospitals been improved? If the money used in war production were used for these things, then there would be real and lasting economic benefits.

From the long-range viewpoint, therefore, war spending by all nations does not increase their wealth, but takes away from it. And in the case of the United States, huge military spending overseas is the prime reason she is going broke on her international accounts.

Ominous Development

Lately there has been another ominous development from America’s standpoint. The large surpluses she once had in her commercial transactions with other nations are disappearing.

In recent times imports have been rising at a faster rate than exports. Other countries are now able to produce many of the goods that the United States alone produced efficiently a few decades ago. And many of these other countries produce them at a much lower cost.

Due to inflation, prices of American products have been rising rapidly. This makes them more costly in world trade. Foreigners would rather buy from other nations that produce items of equal quality, but lower in price.

American consumers are also adding to the problem. Because of high-priced American-made goods, they are buying more and more foreign-made products. This year two in five shoes sold in the United States are imports. Six in ten television sets are now imported, as are nine out of ten radios. Foreign-made automobiles, such as Germany’s Volkswagen and Japan’s Toyota and Datsun, are pouring into the country, cutting into local production.

So foreign-made goods are gobbling up markets everywhere. They are hurting United States sales to other countries as well as its sales internally. If the trend continues, America would soon run a deficit even if it eliminated all overseas military spending.

Imbalance Leads to Crisis

The deficits in the United States balance of payments kept building up over the years. However, by political pressure or otherwise, American officials were able to talk other nations out of converting their dollars into gold. They warned that any ‘run’ on its gold would produce a crisis for all the nations of the Fund, since they are closely linked together.

Yet, there comes a time when even a kind banker has little or no choice. He must say to a borrower: ‘No More!’ That happened in the spring of 1971. This drastic action was triggered by a situation that arose during 1970 and early 1971.

In 1970 the United States suffered from a recession. Among the various things done to try to get out of this recession was the lowering of interest rates. This usually stimulates business, as it makes money cheaper to borrow. Those who want to buy cars, build homes, or expand businesses are more likely to borrow and use money when interest rates are lower.

However, with lower interest rates, those with money to invest get a lower return. So, many took their money out of American investments and put it into European investments where interest rates were higher.

In the spring of 1971, dollars poured into Europe. Not only were investors seeking higher interest rates, but because of the dollar’s weakness, speculators wanted to get rid of dollars and buy the stronger European money, especially the German mark. They felt that these stronger currencies would go up in value and they would make a profit.

However, when such money pours into a country, that nation has more to spend and lend, which heats up inflation. So while the American deficits over the years were bad enough, this flood of dollars into Europe, particularly Germany, was the last straw. The central banks of various European countries suddenly said: ‘No More!’ They temporarily refused to accept any more dollars. They then allowed their money to ‘float’ upward in the financial markets.

This meant that they would not stick to the Monetary Fund’s agreement to allow their currencies to fluctuate only 1 percent. They allowed their money to seek its own level according to supply and demand. Since the demand for dollars was weak and the demand for European currencies strong, the value of those currencies rose several percentage points.

For all practical purposes that was a devaluing of the dollar. Since America would not do it herself, the other nations did it for her by revaluing their money upward. The result was the same. Now it costs more dollars to buy the same foreign products and services.