dollar gap

History

The dollar shortage was suffered mainly by European states after World War II, and its period is dated 1944 to 1960. War-ravaged Europe and Japan could not produce enough for their own people, let alone export, and the resulting problems included inflation, debt, mostly owed to the United States, trade deficits, balance-of-payments deficits and depleted gold and dollar supplies. By 1947 the United States had accumulated 70% of the world's gold reserves, the United Kingdom had gone from the world's greatest creditor to its greatest debtor, and countries had sold most of their gold, dollar reserves and foreign investments to pay for the war, so what reserves remained were running out. Between 1946 and 1951 the United States accumulated trade surpluses, forcing Europe to finance imports from the United States without being able to balance them with exports. This shortcoming was addressed by creating dollars and paying them to other states, one of the goals of the Marshall Plan, and by clearinghouses such as the European Payments Union.

Related topics

The Marshall Plan, or European Recovery Program, was an American initiative enacted in 1948 that transferred US$13.3 billion to 17 European countries; a larger amount went to the major industrial powers because their resuscitation was considered essential for general European revival. The OEEC created the European Payments Union, whose members signed the agreement on 1 July 1950. It accounted for trades without transferring money until the end of the month, shifting Europe from bilateral trading out of necessity to multilateral trade, and it forced liberalization by mandating the elimination of discriminatory trade measures. Operating from July 1950 to December 1958, it was replaced by the European Monetary Agreement; by its close, convertibility of currency became possible without government permissions in European countries, and trade levels more than doubled during its existence. The dollar gap is a phenomenon within the Bretton Woods framework of convertibility: the conference of 1 to 22 July 1944 required countries to guarantee convertibility of their currencies into US dollars, with the dollar convertible into gold for foreign governments and central banks. The United States, controlling two-thirds of the world's gold, insisted the system rest on both gold and the dollar, and this convertibility framework is what made a dollar shortage a general payments constraint.

Distinctions

Whereas the dollar gap was a scarcity of dollars abroad, the Triffin dilemma identified by Robert Triffin in 1960 was the opposite risk: halting US balance-of-payments deficits would remove the main source of reserve growth, while continued deficits, a dollar glut, would erode confidence in the dollar as reserve currency. The dollar shortage debate dominated international macroeconomics in the fifteen years following the end of World War II and was called by Paul Samuelson 'the big open question of our time'; Charles Kindleberger identified the shortage with the balance-of-payments deficit and linked persistent trade imbalances to income elasticities of savings and investment and to the persistence of US technological superiority. The historical use of the term by Kindleberger in 1950 and Triffin in 1957 refers to the chief structural monetary problem of the early postwar period, a global scarcity of gold and dollar assets; the same label was later applied by analogy to the 2007-09 dollar funding shortage in global banking, showing the concept's extension beyond 1944-1960.

Examples

The postwar 'dollar gap' abroad had become a 'dollar glut' by 1960: continuous US balance-of-payments deficits during the 1950s supplied world liquidity while building up dollar reserves in European and Japanese central banks, and US gold reserves dipped dangerously low as those dollars were redeemed for gold. The Bretton Woods system became operational in 1958 with the elimination of exchange controls for current-account transactions; although the United States continued to run current-account surpluses, heavy US investment in Europe produced an overall balance-of-payments deficit and gold outflows intensified. This was the mechanism by which the dollar gap turned into a dollar glut.