DEVALUATION AND THE BRITISH DOLLAR GAP IN THE POSTWAR PERIOD (1946-55)*

Abstract

THE STUDY IS devoted to (1) an analysis of the adverse international economic factors which made solution of the dollar gap difficult during the period 1946-55 and (2) a determination of whether, by the end of 1955, a decade after the end of World II, Britain had succeeded in creating an international economic position which would aid in closing that gap. Britain's international financial position and the drains which aggravated her dollar shortage are examined. The interacting forces reflected in the balance-of-payments data, particularly the impact on the dollar accounts, are analyzed. Several features of the balance of payments during the period 1946-55 (i.e., trade, invisibles, the balances with the rest of the sterling area and with the dollar area) are studied, in order that conclusions might be drawn on whether the over-all situation tended to create an international position conducive to closing the dollar gap. Since devaluation was directed toward correcting the dollar gap, its impact on Britain's international position is considered. The developments in exports, imports, and prices are compared with the theoretical expectations. After examining Britain's difficulties in balancing her international accounts, the major impediments to the creation of an international economic position conducive to solving the dollar gap, and the results of devaluation, the future of sterling is considered. Long-range problems of inflation, sterling liabilities, low-level reserves, imports and exports, defense expenditures, energy for an expanding economy, and convertibility of the pound sterling are discussed. Developments favorable to Britain's international economic position during the decade are reviewed. These include scientific and technical achievements, progressive steps toward convertibility, increasing investment at home and abroad, application of domestic monetary and fiscal measures, and ability to contribute to underdeveloped areas. These factors are described as important in assess-