Strategy for the Dollar

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THE most important new influence on American policy to emerge during the past year came from the most unexpected quarter. For more than a decade we had been worrying about the "dollar shortage"--the supposedly persistent tendency of the United States to run a surplus in its balance of payments. But some time last summer we woke up to the startling fact that the United States was running a large payments deficit.

During the years 1958 and 1959 the excess of our foreign payments over receipts totalled some $7 billion. This deficit was financed by a $4 billion increase in foreign holdings of dollars and a $3 billion reduction in the United States stock of gold. As these lines are written, we continue to run a deficit, though at a somewhat reduced rate, and later this year foreign holdings of dollars will surpass our holdings of gold for the first time in American history.

There is no question about the ability of the United States to close the deficit in its balance of payments. We could strike a balance by drastically curtailing foreign military spending and economic aid, restricting our imports and our private foreign investment, or painfully deflating our domestic economy. But these measures would solve our balance of payments problem at the cost of our security and prosperity and that of the entire free world.

The real question is not whether we can reduce our deficit but how much we ought to reduce it and how we can make this reduction without sacrificing policies which are vital for the achievement of our national aims.

In the first excited reaction to the turnabout in our payments position we seemed in some danger of upsetting vital foreign policy programs. The Administration started to "tie" our foreign aid spending to purchases in the United States. It was reported to be contemplating a drastic reduction in our military establishment abroad and deep cuts in aid to less developed countries. It was under heavy pressure to modify its moderately liberal trade policy. Except for the decision to put a "Buy American" label on Development Loan Fund spending, however, we weathered the first winter of concern with the payments deficit without overturning any important elements in our present foreign policy...