THE United States emerged from the Second World War as the strongest power, militarily and politically, the largest exporter and importer of goods and services, and the most important source of public and private capital. After an all-too-optimistic period of one-sided disarmament, this country was obliged to face up to the realities of the cold war and to give a lead to the free world in building an unprecedented arsenal of nuclear deterrence. At the same time, the mounting aspirations of the developing areas for political and economic independence confronted this country with a rising tide of demands. Within little more than a decade the United States found itself the fulcrum of the forces of change in a tumultuous world, the West's chief protagonist in the cold war and competitive coexistence, and the largest purveyor of military and economic, especially financial, assistance.

These facts are well known but their consequences--the scale of our involvement and the full weight of the resulting burden--have only recently begun to emerge clearly. At first, the realization of our new range of responsibilities was perhaps tempered by a wishful impression that we could control the rhythm of developments without placing an undue strain upon our resources. More recently, however, the pressures have multiplied as the Communist bloc has spread its activities over the entire globe and as the self-assertion of the poorer countries has brought in its wake a flood of new demands. As a result, the role of economics in world affairs has become more crucial; and by the same token the importance of the financial instrument of foreign policy has emerged with unprecedented clarity.

After many years of vast expenditure we are now face to face with a twin set of limitations, one old and one new. The battle of the budget has always meant an annual confrontation of the question of what we can afford for arms and for foreign assistance. But only now is there also a need to pay close attention to that portion of our expenditure which is to be spent abroad; for over the past decade an excess of international payments over receipts has diminished our stock of gold and increased our foreign indebtedness to a point where, rightly or wrongly, the strength of the dollar has been called in question.

This is a new situation, one that poses new policy questions. The excess of payments--commonly known as the balance of payments problem or, as some have it, the dollar crisis--is a financial issue, yet the deficit does not simply stem from financial improvidence. Even a cursory view makes it evident that payments which are primarily motivated by our relations with our allies and the less developed areas bear a large, if not a lion's share, of responsibility. In fact, in replenishing the depleted reserves of our allies and friends the deficit has served a deliberate objective of our postwar economic policy--until recently when the rapid piling-up of foreign liabilities made it painfully evident that the flow had got somewhat out of control. Clearly, this deficit and its implications are not just a financial matter but a corollary of much broader economic and political developments. For this reason it will not do to discuss this issue on a technical level alone. What is at stake is the place of the dollar in world finance; and this, in turn, reflects the American position in the world economy and cannot be dissociated from the role of the United States in a rapidly changing world.

This wide spectrum of issues calls for a comprehensive approach. The overriding need is to formulate a general policy that takes account of the interrelationship of diverse problems which, perhaps in happier days, could be treated in isolation. To accomplish this, we need to reappraise the balance and consistency among various policies and in the use of various tools. In particular, the financial instrument has been coming to the fore, partly because finance is now so pervasive a factor, partly because it now bulks so large.

The growing need for financial resources--both dollars spent at home and dollars flowing abroad--has aggravated the ever-present problem of scarcity. In economic terms this means a quest for better allocation and better utilization. In political terms it suggests the need for a set of priorities and an awareness of the consequences of denying those with a low rating. In international terms this problem calls for more collaboration and perhaps a better division of labor among the relatively developed countries. It also implies a special place for finance in policy formulation. As finance cuts across virtually all issues its various strands need to be gathered together in a consistent manner; and for the same reason financial policy deserves to be recognized as an integral part of general policy.


In order to see the extent of the American involvement, it may be useful to sketch the background of the present policy dilemma that arises from too many demands upon limited American resources. The Second World War appears as the watershed between an era of non-involvement and the road to closer international collaboration. But it is well to recognize that the new American sense of mission was primarily directed to a rather narrow field, one that was closely related to the experiences of the Great Depression: international stability, the restoration of multilateral trade, and the free exchange of the world's major currencies--convertibility.

Notwithstanding the support of economic development by the United States in bilateral and international programs, many political leaders in the developing countries have never rid themselves of the notion that rapid economic betterment stands a poor second in the priorities of American foreign policy. This is regrettable because it is precisely the issue of development that has been building up such a strong head of steam in the awakening non-Western world. And it is the Russians and the Chinese Communists who have been able to pose as the real champions of rapid economic growth made possible by large-scale industrialization; they point to their domestic record of achievement as evidence. This has indeed become a major issue of "competitive coexistence."

East-West economic competition in the underdeveloped world is one of the major causes of greater American involvement abroad. It spells a broader geographic involvement, for the gospel of economic development is spreading like wildfire. True, this would have been the case even without Communist interference, but the pitch of expectations would not have risen so high nor so fast without backing by those who cultivate frustration as an instrument of policy. Competitive coexistence also means a deeper involvement because the time for gradualism is running out in an atmosphere of relentlessly rising pressures. And this in turn means a faster rate of involvement, for the rhythm of events has been speeded by Communist needling of nationalistic anti-Western sentiments; by the same token it has increasingly placed the tactical advantage of initiative in the hands of the Communist bloc.

Thus competitive coexistence pursued by the Kremlin with increasing vigor has meant a rising level of American involvement. For, in addition to the economic task, the military involvement has also grown in magnitude and complexity. Providing simultaneously for a strategic deterrent and for the ever-present danger of brushfire conflicts has required mounting resources, while at the same time the emergence of economic assistance as a major instrument of policy has extended our foreign policy interests to ever broader areas of the world economy.

This means that the nature of our involvement has also been shifting. Our relationship to Europe is no more, as it was after the war, that of guardian to ward. The United States is no longer the depository of most of the world's gold and hard exchange, the single pivot of international financial policy on which the welfare of most other countries seemed to depend to an extraordinary degree. Europe, now our largest customer, is also becoming a formidable competitor. And, as Western Europe moves to resume its old position as a prime exporter of capital, it can become either a competitor or a partner in many ventures.

As the need for development capital elsewhere in the world rises there are calls for a greater European contribution. While some countries, notably Western Germany and Italy, can certainly afford more, France and Britain are already giving nearly as much non-military assistance per head of population as we, and rather more than we in terms of per capita national income.[i] Even with a rising contribution from Europe, the mounting magnitude of requirements makes it likely that the United States will have to remain the largest supplier of capital, a role it can reject only at great political peril. Quite naturally, the demands of the less developed areas will continue to bear most heavily upon the United States as the main protagonist of the free world and the nation to which the Communists primarily address their political and economic challenge. Even if we can look forward to having more active partners in the development task we cannot hope to escape the main responsibility. And finally, if we really want to be and remain the standard bearer of the capitalist system, we cannot escape the economic consequences of this prominent role.


Seen in this broad perspective, the American balance-of-payments problem takes on a significance far surpassing the pre-dominantly technical terms in which it has generally been discussed. It is already becoming evident that a number of remedies that are commonly applied to conventional balance-of-payments difficulties are not available to the United States on account of our international responsibilities; these we can share with others but we cannot reduce them below a point which is compatible with our position of world leadership. And since our problems are really those of the entire Western community of nations, it would be futile to try to solve the balance-of-payments problem without tackling the underlying issues of trade and aid by a truly comprehensive collaboration among all interested parties.

Our balance-of-payments problem has been amply discussed elsewhere.[ii] The basic fact is that our foreign payments have exceeded receipts, on an average by about $3.5 billion a year over the last three years, of which about one-half has been taken out by foreign countries in the form of gold and the rest has been accumulated as dollar claims. The total of our dollar liabilities now exceeds our gold stock and there is much talk about the consequences of any large-scale attempt to convert these claims into gold. This is unlikely, and the real problem is not any immediate danger but the fact that no end to the deficit is yet in sight. True, our trade position has been improving greatly in recent months, but the resulting export surplus still falls far short of covering the outflow for military and economic assistance. While it may be futile to attribute the responsibility for the deficit to any one specific group of items, it is relevant to note that the sum of all private transactions--trade, services and investment--continues to yield a surplus, while government transactions--military expenditures, grants, loans minus repayments--by far exceed the surplus on private account. This does not mean that a reduction of such payments would automatically eliminate the deficit, because it may well be offset by a decline of receipts in the private sector, for example, through smaller exports. But it is evident that the deficit is intimately linked to government policy and to the purposes and needs of that policy.

This, then, is the crux of the matter. We have been pursuing deficit policies in order to further the overriding objectives of our foreign policy. And as long as the pressures of the cold war and competitive coexistence and a growing sense of responsibility for world economic development continue, we cannot be optimistic about our ability to eliminate this deficit in short order. The problem is how we can contrive to do what general policy demands without arousing the spectre of bankruptcy which overanxious observers profess to see around the corner.

It is no accident that most thoughtful discussions of the deficit produce a list of policies we should not adopt and the various avenues of exploration usually reach a dead-end. A good many theoretically available measures are self-defeating because they would backfire upon a country which looms so large in the world economy and is so closely linked with its welfare. If we were to place restrictions on our imports, our exports would be reduced by countries which could no longer afford to buy American exports so freely. If we were to reduce foreign aid, there is a good chance that our exports would also suffer, since most of this aid goes to buy American goods anyway. If we "tie" our foreign aid to American purchases, we may gain in the short-run, but some countries would lose; if they in turn were to cut their purchases of American goods our dollar savings would be reduced. In its final months the Eisenhower Administration took actions which promise some stemming of the dollar outflow but with little assurance that the eventual saving would really be very large. It is significant that President Kennedy seemed to acknowledge the long-range nature of the problem in his balance-of-payments message to Congress; and the measures he listed address themselves to the positive rather than to the restrictive elements of a solution.

Once we realize that there are so many measures we cannot take alone without harmful effects, it follows logically that we must act jointly with like-minded partners. In other words, the common problems call for joint action. This line of thought appears even more compelling if we bear in mind that the dollar is not just one currency among many but, with gold, the most important medium of international exchange and reserves. It is literally true that the strength of the dollar is not a matter of concern for the United States alone but for the rest of the world as well. Hence whatever ails the dollar calls for a truly international cure.

Only an unduly narrow view of the problem--and, ironically, one that runs counter to our own professed multilateral views--could have singled out bilateral remedies for our deficit, even though the Anderson mission to Germany sought it from the one country where the largest surpluses have occurred. Thus our demand on Germany for a greater contribution to lighten our balance-of-payments burden would seem to have been ill-conceived, even if the timing and the implementation had been better. It may have appeared natural enough simply from the foreign exchange angle, but the Germans had a point if they retorted that this involved more than a disbursement of dollars. In their search for defensive arguments they may have sensed better than the American Administration the complexity of this problem, for it is one that really encompasses the entire Western community and cuts across the entire range of its problems--military, political, economic and financial.

Once more we are driven to conclude that discovering a solution to our balance-of-payments problem means finding a more genuinely international approach to all the underlying issues. If they can be successfully disentangled, the chances are that the deficit problem can also be resolved, for the American balance-of-payments is a composite expression of all real and monetary resource flows and a function of the operational efficiency of the international monetary system.

This approach also offers a better perspective on the various plans for international monetary reform that have recently been widely discussed.[iii] These schemes have the virtue of not confining themselves to spot remedies designed merely to mitigate or postpone the pressures upon the American balance-of-payments. They acknowledge the fact that our dollar deficit increases the world's reserves, but also that the dollar's function as a reserve currency depends on the continued confidence in its stability and security. Yet they fail to recognize that a partial solution--and this goes for a monetary scheme as for any other--cannot succeed unless the underlying economic and political problems are tackled simultaneously.

Moreover, the special role of the dollar in international finance involves another issue that is singularly our own. In the wake of its economic and political ascendancy the United States has become a primary financial center. This country, therefore, needs to think twice whether the internationalization of the world's reserves (particularly of dollar reserves) that some of these schemes envisage would be a desirable solution if it were to jeopardize our new and still untested place in the financial world.


Right now, in the present irksome phase of worrying over "deficits," "burdens" and other discouraging symptoms of our world-wide involvement, we tend to overlook their positive counterpart. Even if we were capable of sloughing off the onerous responsibilities that are now looming so large in public awareness, it is doubtful that we would want to discard the related benefits. For the United States to be such a large factor in the world economy involves much that is economically valuable. The growing magnitude of American trade is one piece of evidence--not only exports but imports as well, which can be considered undesirable only from a very narrow viewpoint. Similarly, our emergence as a primary center of world finance is both a reflection of the dollar's growing role and a valuable opportunity for the future. It is surely not accidental that the westward gravitation of international finance from the old-world centers has run parallel to a similar shift in trade and in relative weight in world affairs.

The United States today is indeed the largest and the most flexible capital market of the world. In many transactions American funds have been progressively linked with other national or international participants. One postwar feature of particular importance has been the catalytic effect of international institutions in promoting a new form of collaboration between international public funds and American and foreign private capital. American foreign finance has been intimately connected with the function of the dollar as a medium of exchange and a vehicle of capital transfers.

In the light of these expanding activities and their invigorating effects at home and abroad it hardly seems appropriate to be overly concerned with the balance-of-payments effect of capital flows--even to the point of toying with the idea of subjecting them to controls, a temptation the Kennedy Administration has wisely resisted; we must also recognize the advantages of our possessing a financial apparatus that can serve as an instrument of future growth. Similarly, while foreign investment may lead to competition with domestic industry at certain points, it is also an instrument of economic interaction and an opportunity for benefits that can be expected to accrue to a primary financial center in many tangible and intangible ways. Conversely, policies that would block these channels for the sake of short-term considerations may cripple a process of evolution that has hardly run its course. In other words, what is at stake is the future of the United States as a financial center.

Policy formulation must take account of the increasing role of American finance in the international order. As a continent-sized economy like that of the United States increases its weight in international trade and investment, political consequences are bound to follow, no matter whether intended or not. By the same token, the greater American weight in international affairs is reflected in a more prominent place in the world economy. And if our financial policies are not made consistent with this broader context, they may endanger rather than further the over-all pattern of international policy of which they ought to form an integral part. Financial policy is not only a branch of general policy that deals with the use of financial instruments; it must also concern itself with the effects of general policy on the nation's financial capabilities and institutions.

In attempting to plan the best use of our financial resources to support the broad objectives of national policy, we must look at the various alternatives open to us and at the indirect and often seemingly remote effects of each policy decision. It is only through examining these multiple and complex interactions that we can formulate a consistent financial policy. In the future, if we are to use our limited resources with tolerable effectiveness, we must first arrive at a clear and unified view of the problem.

The point of departure in seeking such a unified approach is to understand the new and unaccustomed fact of the central position of the United States in world affairs, the largest trader, the biggest capital market and the holder of the strongest--still the strongest--currency. These unrivaled capabilities and our exposed position as the foremost Western protagonist in the cold war and competitive coexistence are responsible for unprecedented demands on the nation's foreign finance. While the American capital market has been responding with unexpected vigor, considering the novelty of the situation and the handicap of earlier defaults, much of the pressure is felt most urgently in the public domain. And since policy decisions are apt to affect all economic operations, the making of financial policy has to be raised above the piecemeal approach that has generally prevailed over the past two decades.

Because the demands are so great and the challenge to optimum performance with limited means so critical under ubiquitous Communist pressure, the United States cannot "go it alone." In the field of foreign aid this has already been recognized and it has led to demands for a more equitable sharing of the burden with the rejuvenated economies of Europe. Yet, a broader collaboration than a mere sharing of costs is required for a common task of such immense magnitude. This will demand a greater effort on our part as well. Financial policy on the national level now must be made consistent with our need for international coöperation; and, conversely, international collaboration must be harmonized with the bedrock requirements of national policy. The United States, while still prominent, is no longer so predominant in economic terms and is now more dependent on coöperation with its peers; long and hard thought will therefore have to be given to the essential adaptations that will be needed in both the foreign and domestic fields of economic policy.

[i] See the author's discussion of this issue in "Sharing the Burden?" Challenge, March 1960.

[ii] See, e.g., Robert B. Anderson, "The Balance of Payments Problem," and Richard N. Gardner, "Strategy for the Dollar," Foreign Affairs, April 1960.

[iii] See Robert Triffin, "Gold and the Dollar Crisis" (Yale University Press, 1960); Edward M. Bernstein, "International Effects of U.S. Economic Policy," Study Paper No. 16, Study on Employment, Growth, and Price Levels, Joint Economic Committee, 86th Congress, 2nd Session; and, by the same author, "The Adequacy of United States' Gold Reserves." Paper presented to the American Economic Association in St. Louis, December 30, 1960, to be published in The American Economic Review, Papers and Proceedings, May 1961.

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  • HENRY G. AUBREY, Research Fellow, Council on Foreign Relations, 1960-61; Visiting Professor, Graduate Faculty, New School for Social Research; author of "U.S. Imports and World Trade" and other works
  • More By Henry G. Aubrey