Dollar Dilemma O.E.C.D. MEMBERS ASKED FOR HELP

Press, Volume C, Issue 29684, 30 November 1961, Page 16

Dollar Dilemma O.E.C.D. MEMBERS ASKED FOR HELP

fßv "LYNCEVS" of the "Beonomiet") (From th« “Economist” Intelligence Unit)

London, November 21. When the United States recently called on its European partners in the new Organisation for Economic Co-operation and Development to set the ambitious target of 50 per cent, increase in the collective national product by 1970. it met a distinctly restrained response. The target was broadly accepted—one can hardly turn down such statements in intent—but it was hedge! with qualifications. The base year in the calculation was put back to 1960, rather than 1961; it was made clear that the target was collective, and in no way binding on individual countries. Emphasis was •'laced on the importance of development aid, though this was hardly relevant. Putting more effort into help for poorer countries would itself .ncrease economic growth in the West. More emphasis still was placed on the importance of price stability and of maintaining equilibrium in external payments. Here is the heart of the difficulty. Reservations were expressed most strongly by Mr Selwyn Lloyd. Britain's Chancellor of the Exchequer. In Britain, for some time, economic growth has been held back by the weakness of the balance of payments, and the British Treasury is clearly reluctant to undertake any commitment for rapid expansion before it can see the core of the payments problem being solved. It is not the deficit countries, Britain feels, that can take the lead in economic expansion. Payments Problem This defensive attitude is in the sharpest contrast to the policy of the United States Administration, which finds itself faced with very much the same problem. The United States balance of payments, too, is relatively weak. There have been some important underlying improvements in the last two years; but as in Britain, the swings have been around an average that is itself unsatisfactory. President Kennedy is firmly committed to defending the dollar at its present gold price of 35 dollars .an ounce. Soon after taking office, he pledged the whole United States gold stock to that defence, and also implied that the United States was prepared to draw on the International Monetary Fund for this purpose—an affirmation that sent the Fund scurrying to mobilise the necessary resources to* meet this once undreamed-oi contingency. But while the American Administration is firmly committed to maintaining exchange stability, it is committed equally deeply to speeding up the rate of economic growth. This commitment, moreover, inevitably has a much wider response than the purely financial one. It formed a prominent part of Mr Kennedy’s election platform. The economists whom he has brought into the Government have a strong faith in it—to slow down the economy in order to meet the supposed requirements of sound finance would be for them a mark of professional failure. Unemployment The urgency of maintaining a rapid rate of economic expansion in the United States is increased by the obstinate behaviour of unemployment in recent months and years. In spite of the strong recovery registered by industrial production, the rate of unemployment remains near 7 per cent; and officials fear that on present trends it will still be 5 per cent, at the seasonal low point next summer. Clearly there is a big margin of unused capacity in American resources. This is another way of saying that there Is scope, without inflationary danger, for a further stimulus to domestic demand. That stimulus would, of course manifest itself through a Budget deficit; and this is where the International complications arise. For better or worse, Mr Douglas Dillon, the Secretary of the Treasury, has persuaded the President that in order to maintain the confidence of foreign bankers—and of Wall Street—in the dollar, it is necessary to assuage their fears about "inflationary budgeting." So the Administration has played down, the Budget deficit expected in the current fiscal year ending in June, which is expected to be about 7 billion dollars and it has promised in advance that the Budget for the 1963 fiscal year will be balanced. This is indeed giving hostages to fortune. If the pace of economic recovery continues to be , strong, then it may indeed be right to budget for an actual surplus in 1962-63: but if it flags, the reverse may be desirable. And now President Kennedy has tied his bands in advance. Renewed Preacare One may sympathise ’with the Administration in its dilemma, which itself explains why the President is «o anxious for a collective Atlantic move to foster growth. There U no doubt that the dollar is again coming under pressure in world exchange markets. The first indications were provided at the meeting of the International Monetary Fund in September. When it became clear that France and other Continental countries were adopting a tough line on new credit facilities to the I.M.F. and irould grant these credits tSms and conditions, it was

inevitable that bankers should take a new and more critical look at the prospects e* the United States balance of payments. And what they saw was a likely deterioration. Mr Dillon himself gave warning of it in Vienna. As a direct result of the combination of recession in the United States and boom elsewhere, the United States trade balance soared to almost record heights in 196061. Now that business recovery is quickening in the United States, and that expansion in Europe is slowing down, a reversal of this trend must be expected. The figures of the United States balance of payments for the third quarter confirm that this reversal has already set in. Imports, which were sharply reduced last winter, have now bounded upward, and in spite of a small rise in exports, the trade surplus narrowed at an annual rate of 4.2 billion dollars in the third quarter, compared with more than 8 billion dollars in the first. At this level the surplus is not large enough to cover the large military expenditures. overseas grants and capital outflows from the United States; and there was a net monetary deficit <of 800 million dollars in the third quarter—equivalent to an annual rate of a little more than 3 billion dollars. The bulk of this deficit was settled by a building-up of dollar balances, rather than a drawing down of the United States gold stock This was partly the result of co-operation by foreign central banks. But this is short term relief. The United States gold stock of 17 j billion dollars remains ample to defend the dollar; but the American Administration must show the courage of its own convictions.