The Press THURSDAY, JULY 25, 1963. Strengthening The Dollar

Press, Volume CII, Issue 30192, 25 July 1963, Page 12

The Press THURSDAY, JULY 25, 1963. Strengthening The Dollar

President Kennedy’s request to Congress for a penalty tex on Americans who buy long-term foreign stocks and bonds has dramatically drawn attention to the United States’ persistent balance-of-payments problem. Both in 1959 and 1960 the deficit was 3900 million dollars; it was reduced to 2500 m. dollars in 1961; and last year—against predictions that it would fall to less than 1500 m. dollars—the deficit was reduced to 2200 m. dollars. This year, the deficit has been running at an annual rate of 3300 m. dollars. The deficit arises not from trade, which consistently shows a surplus, but from such causes as overseas spending on defence, loans to underdeveloped countries, investment abroad by American business, and so on. Foreign central banks, holding far more dollars than they want, have caused a steady drain on the United States gold reserves. As one of the world’s two leading currencies, an ailing dollar is a matter of grave concern to other countries besides the United States. Particularly from European countries have come demands that the United States should do something to strengthen the dollar. A recent report of the Bank for International Settlement was quite explicit in calling for vigorous action. The United States current account, the report declared, must be improved by a relative improvement in costs and prices, and if unemployment prevented this from being achieved by deflation it must be achieved with the help of an incomes policy; Government spending abroad must either be cut down or financed by long-term borrowing abroad; and the net outflow of private capital must be checked by an increase in interest rates which would make the market -more attractive to both domestic and foreign capital.

This is bitter medicine indeed. It hardly needs to be said that to follow this advice in full would disrupt the economies and the politics—of many countries. The United States could solve its payments problem

overnight by severely cutting overseas aid and spend ing—but at what political cost? It could take drastic measures to prevent the outflow of investment capital—but the dangers in this course are being emphasised in the criticism of President Kennedy’s relatively mil penalty tax proposal. To its very great credit, the United States has not sought to shed its problems by loading them on ethers. However when overseas central banks say they cannot guarantee to continue to finance the American deficit—the result, in their opinion, of overspending in the cold war—the Americans can very reasonably reply that the European countries now enjoying prosperity should begin to share some of the American burdens by giving aid to the poorer countries and by increasing their defence spending. The United States Government is seeking practical answers in both the domestic and the overseas fields. The Administration has sought to keep credit plentiful to stimulate business activity while maintaining a stable level of short-term rates to reduce the outflow of dollars. When the domestic economy appeared strong enough to stand a dose of tighter credit, the Federal Reserve Board recently raised its basic lending rate from 3 to 3) per cent. In the international field, the Administration is seeking the cooperation of other countries, especially those holding the strong currencies in Europe. Their interest was cogently stated by the “New York “Times” when it said that if Europe wants to prevent drastic solutions for the dollar problem that could create difficulties all over the free world, it could help “by ridding itself of con“trols over capita] invest- “ ments, thereby putting “ more funds into the blood- “ stream of free trade. It “could relax its trade barriers and step up aid to “the developing areas. It “ could co-ordinate move- “ ments in interest rates. “ And it could make its “surplus funds available to “ the United States, Britain, "or other nations suffering “ balance-of-payments difficulties