The Myth of Dollar Shortage

December 20, 1948

Over the last two years this column has constantly returned to the theme that the so-called world dollar shortage is a myth; that it is merely another name for the effort of most countries to live beyond their means; and that the alleged shortage results directly from the insistence of foreign countries on maintaining an excessive valuation for their currencies by the totalitarian device of exchange control. This was the burden of my columns of Aug. 18 and Sept. 22, 1947, of May 10 and Aug. 16, 1948, and those in the last two weeks from Peru.

Yet there is hardly a finance minister in the world who acknowledges this truth publicly. The International Monetary Fund admits it only in a timid, left-handed, and inconsistent way. Those in charge of our ECA do not even seem to know that they are using American dollars mainly to prolong and subsidize the very system of exchange control and the very overvaluations that impede world recovery and lead toward further chaos in world trade. And the professors of economic theory, from whom one might hope for intellectual leadership in these matters, pile up a thousand subtleties, qualifications, and distinctions and end by understanding everything, in fact, but the main point.

It is consoling, in all this, to find a few honorable exceptions. Here, Ludwig von Mises has always seen the matter clearly. So has Wilhelm Röpke in Switzerland. In October a year ago Roy Harrod of Oxford had the courage to declare in his pamphlet “Are These Hardships Necessary?” that the “dollar famine” is “one of the most absurd phrases ever coined,” and that: “This allegation of a world ‘dollar shortage’ is surely one of the most brazen pieces of collective effrontery that has ever been uttered.”

And now, by his contribution “Dollar Shortage?” to a symposium published by the Harvard University Press,^* we must add the name of Gottfried Haberler. Dr. Haberler is the author of “The Theory of International Trade.” He is an economist of world reputation and was appointed by the League of Nations to make a study of business cycles, first published in 1936.

Some readers may recall that in a column entitled “Dollar Shortage Forever” on Aug. 16, I tried to explain why the dollar-shortage theory of the distinguished London Economist was nonsense. I am happy to find this judgment confirmed by Dr. Haberler. He quotes this from The Economist of as long ago as Dec. 4, 1943:

“It may be, in fact, that the [dollar] problem . . . should be looked upon as the result of a set of economic circumstances never contemplated by the textbooks—namely, the existence of a country [the U. S.] which, all policy apart, needs so little from the rest of the world, while the rest of the world requires so much from it, that an equilibrium of accounts can be brought about by no means available to a free or even a tolerably free market.”

Dr. Haberler calls this doctrine “entirely fallacious.” “Evidently,” he continues, “even in the land of Adam Smith, Ricardo, Marshall, and Keynes it is necessary to point out again and again that trade is governed by comparative not by absolute cost!” The theory that the United States will out-compete and undersell the rest of the world all along the line, he observes, is “high praise for the productive power of capitalism and free enterprise. But the economics is unacceptable nonetheless!”

Regarding the failure of the shortlived sterling convertibility experiment in the summer of 1947, he points out that: “In a state of repressed inflation with a fancy exchange rate, convertibility could not work. . . . Far from disproving the classical theory of international trade, the failure of convertibility could have been deduced in advance from the most elementary principles of classical or even preclassical (Sir Thomas Gresham, 1519–1579) economics.”

^*Foreign Economic Policy for the United States. Edited by Seymour E. Harris (490 pages. $6).