The Dollar And The Policy Mix: 1971 [antikvár]

THE DOLLAR AND THE POLICY MIX: 1971 THE DEFICIT AND THE DOLLAR A decade ago Professor Rueff characterized the American balance-of-payments deficit as a "deficit without tears." He meant that the United States could buy expensive-to-make (European) resources with cheap-to-print dollars. The international use of the dollar granted what General de Gaulle called an "exorbitant privilege," an automatic access to credit analogous to free emergency overdraft facilities, adding an extra dimension to American power. Other countries had adopted the dollar because it had become the unit of account, the currency of settlement, the intervention currency, the dominant vehicle currency, and a major reserve asset of the international monetary system. Unlike the United States, other countries had to earn reserves by running balance-of-payments surpluses. In the 1960s the United States did shed some tears over the deficit, but they were largely of the crocodile variety. In 1970 and early 1971 the deficit has been much larger than usual and a source of great embarrassment to the United States. Its tears have showered the Bundesbank with liquidity, although some of the problem has been eased, apparently, by forward operations and mopping-up special sales of short-term securities by the Treasury. The short-run weakness of the dollar hides its long-run strength, which is based on the dominating power of the American economy. But the temporary difficulties of the short run represent hurdles that have to be jumped, and the weakness of the dollar today could cause very important long-run changes in the international monetary system. Is the deficit a menace to the dollar.? Fritz Machlup could anatomize the word "menace" and find twenty-five meanings for it. It could be a menace to the gold stock in the short run. If the gold window is shut, the deficit might threaten the role of the United States as the world's financial leader. The rest of the world could conceivably set up its own system and exclude the United States, or the system could break up into "optimum-currency areas." If, on the other hand, the deficit increases and foreign countries swallow or spend the dollars, the resulting increased world money supply would aggravate world inflation and threaten confidence in currencies, including the dollar. If the European countries one by one changed their exchange rates, they would sacrifice some of the financial integration that has been a major contribution of the dollar, upsetting the stability of expectations, and further promote the "dollarization" of the world economy. Similarly, if other countries