The Dollar's Defeat

The United States has had a deficit in its international payments in every year since 1950--- except 1957.

This has been true regardless of the concept of the deficit employed and has been reflected in rather consistent gold losses throughout the period.

But prior to 1958, little was heard of the American deficit. Instead, economists were writing of a 'dollar shortage' when, in fact, 1958 proved to be the first year of the 'dollar glut'.

The rapid reversal in the U.S. balance of payments position is amply illustrated by some relevant statistics.

In the eight years from 1950-1957, the United States had a cumulative 'basic deficit' (current account plus long-term capital movements) of $12.3 billion, or about $1.5 billion per year on average.

This 'basic deficit' was the net result of an average $2 billion surplus on current account ad a $3.5 billion deficit (an average) in the long-term capital and government aid accounts, reflecting American private investment abroad and aid to other countries.

But the $12.3 billion in deficits from 1950 to 1`957, only $1.7 billion (14 percent) was financed by U.S. gold sales.

Instead, the bulk of the deficit was financed by the acquisition of U.S. short-term liabilities by foreign institutions, which totaled $5.4 billion.

The remainder, of course, was accounted for by private short-term capital flows.

The period beginning with 1958 presents a remarkably different picture, both as to the size of the deficit and the method of its financing.

The 'basic deficit' for 1958 was $3.7 billion, and for 1958 and 1959 combined, was $7.9 billion; roughly two-thirds as large as for the entire eight-year period preceding.

The direct causes of this rapid deterioration in the balance of payments, and subsequent maintenance of payments.

First, U.S. exports, facing new competition from the rebuilt European industries, fell by $3.2 billion between while imports hardly declined at all.

Thus the current account balance declined from a $5.5 billion surplus in 1957 to $0.2 billion in 1959.

Second, with convertibility restored to European currencies in 1958, short-term capital, including U.S. capital, was free to move in search of a higher interest rates or to speculate against a possible devaluation of the dollar.

The result of this freedom began to be felt by 1960, when after two years of large ($3+billion) deficits, some $2 billion of short-term capital flowed out of the United States just as the current account was beginning to improve.

Since 1960, the current account has continued to improve relatively consistently, but long-term capital outflows have risen to offset a part of this improvement.

Short-term capital movements have been consistently negative, but fluctuating in magnitude.

With respect to the financing of the U.S. deficit, a sharp contrast between the 190-1957 and 1958-1964 periods is found in the percentage financed by gold.

In 1958, the United States lost $2.3 billion in gold, over half of the 'basic deficit'. From 1958 to 1964, the U.S. gold stock declined a total of $6.5 billion, or approximately one-third of the cumulative 'over-all deficit' for the period.

The remainder of this deficit has been financed by increases in U.S. short-term liabilities to foreigners. By the end of 1964, those liabilities totaled over $27 billion.