"The Elephant in the Boat?": The United States and the World Economy

Although the weight of the United States in the world economy is less overwhelming than in earlier years, economic events, economic policies, and economic ideology in this country continue to have a substantial impact on the rest of the world, as was demonstrated again in the year just ended.

The most important event, from the viewpoint of other countries, was the steep and sustained climb in American interest rates, which contributed to but was not the sole cause of a dramatic appreciation of the dollar in foreign exchange markets. The corresponding depreciation of other currencies posed serious policy problems for a number of countries and gave rise to numerous complaints in the spring and summer of 1981.

The economic policy mainly responsible was the monetary policy of the Federal Reserve, carried out with the general, if occasionally backsliding, support of the Reagan Administration. With the Federal Reserve's growth targets for the money supply much below the growth of GNP (gross national product) in current dollars, the immediate reconciliation between money growth and GNP growth came through an escalation of interest rates to levels not seen in living memory. Later, GNP growth slowed as the economy slid into recession. The Federal Reserve's objective, about which there is virtually no dispute here or abroad, is to reduce the rate of inflation, with the impact on the rest of the world a by-product of the pursuit of this domestic objective. But coming as it did when the economies of most other industrial countries were already in a sluggish condition, still reeling from the effects of the oil shock of 1979-80, the U.S. impact was far from welcome.