Dollar Deficits and Postwar Economic Growth

Abstract

T HREE years ago, Seymour Harris wrote that we must solve the problem as a condition for appropriate policies for growth, employment, aid, and defense; and several contributors to his book The Dollar in Crisis called for devaluation of the as the proper and indeed the only appropriate solution to the dollar problem. But economic growth in the postwar period has been universally high by historical standards. It has been especially high in the industrial countries of Continental Europe and Japan, both in comparison with the United States and in comparison with their own past. Real GNP in the six members of the European Economic Community, for example, rose 70 per cent between 1950 and 1960 -an average annual increase of no less than 512 per cent. Japan's growth was even higher. And even postwar United States growth was substantially higher than historical trends until the late fifties. In a year in which the international payments system is under close collective scrutiny by the major industrial countries, it is worth asking what role, if any, international monetary arrangements played in stimulating this growth. Dollar deficits may in fact have made a substantial contribution, and devaluation of the dollar, far from furthering free world growth, could well slow it significantly. Undoubtedly, no single factor can claim credit for postwar growth. The war-induced disturbance to old patterns of behavior and disillusionment with the prewar, static, competitive view of the world clearly fostered receptivity to rapid change in Europe and Japan. Psychological and economic momentum, gathered during the quick restoration of output to prewar levels, contributed to the sense that rapid growth was both possible and desirable. To these intangible factors were added powerful government incentives to business investment and extensive public investment. But surelv one imDortant element in the rapid postwar expansion was the presence of high export demand for European and Japanese goodsan export demand so high that additional output could always be sold profitably as soon as it became available. High demand was due in part to the continuing growth in total world demand. But it was also due to the possibility of substituting European and Japanese manufactured goods for American goods which had sometimes been the only goods available right after the war -in home markets, in third country markets, and even in the United States market. This substitution (in the context of growing markets) proceeded on a grand scale. The share of world exports of manufactures supplied by the six members of the European Economic Community, for example, rose steadily from 33 per cent in 1951 to 46 per cent in 1961 (Japan's rise was from 4 to 7 per cent), while the United States share fell sharply during the same period. United States imports of finished manufactures rose 250 per cent from 1950 to 1960, compared with a rise in United States industrial production of only 45 per cent. European and Japanese goods could be sold easily abroad because the currency devaluations of 1949 and other postwar currency changes made them cheap relative to goods, or very profitable to export at going market prices. Crude comparisons suggest the goods and services of Western Europe had declined in price by 24 per cent relative to the prices of American goods and services between 1938 and 1953.1 In 1950, the total purchasing power of the at official exchange rates was over 30 per cent higher in many European countries than it was in the United States.2 As might be expected, the of the in Europe was considerably greater for local services than for goods which move in international trade. Some products, notably produc-