Bator, Francis M.
October 1968
Foreign Affairs;Oct68, Vol. 47 Issue 1, p51
This article argues that the leading cause of the trouble in international money as of October 1968 has been the deficit in balance of payments, that is, the flow of unwanted deficit dollars into the hands of foreign central banks. What then should be our strategy? We should not just sit still. At home, we must use fiscal and monetary means better than during the past two years to match the growth of total demand with the growth of potential output. As a matter of international politics, the strategy of living with the deficit while reforming the rules is defensible only if the deficit is not the consequence of poor domestic management. Our domestic performance directly affects our ability to enlist the cooperation of the surplus countries in the short-term measures that are necessary to hold our visible deficit to manageable size. It also affects our bargaining power in the negotiations about long-term reform. We should maintain our existing controls on various balance-of-payments components, improving their efficiency where possible. For the time being, they are a necessary evil. We should keep urging the surplus countries to dismantle any restrictions on imports, to encourage capital exports, and, if they have let total demand fall behind potential output, to use their fiscal and monetary instruments to accelerate growth at home. The right sort of exhortation is not useless in these matters.


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