The Freeman 1972 - The Ludwig von Mises Institute

8 THE FREEMAN Januaryruns as follows: The rapid 'worseningof the U.S. international balance-of-paymentdeficit was theproverbial straw that broke thesystem's back. From a small surplusof $2.7 billion in 1969,achieved mainly through variousgovernment manipulations thatamounted to window dressing, the1970 payments deficit soared to anall-time record deficit of some$10.7 billion, on official settlementbasis, i.e., official settlements betweengovernments only. Then, inMay, 1971, the U.S. Commerce Departmentannounced that the firstquarter 1971 deficit had grown toa record $5.4 billion. 4 And finally,private sources estimated that in1971, up through mid-August, some$22 billion more dollars flowed outof the country than came in.These new payment deficitswere added to the accumulated unpaiddeficits of the U.S. for manyyears. U.S. dollars and short-termclaims to dollars in foreign handsamounted to $43 billion at the endof 1970. After deducting U.S.short-term claims on foreignersour net obligations exceeded $32billion, plus the current deficitsmentioned above. And while theU.S. gold stock stood at $11 billion,the lowest level since World WarII, it became obvious that the U.S.4 Federal Reserve Bulletin, Sept., 1971,p. A75.could not meet its foreign obligationsin gold. 5Dr. Arthur F. Burns, Chairmanof the Federal Reserve Board,probably reflected the official positionof the U.S. government when,on May 20, 1971, he blamed foreigngovernments for the precarioussituation. He urged them torelease their restraints on importsand American investments, and tohelp us with our foreign militaryoperating expenses. Raising ourinterest rates, he asserted, was notthe right way to improve the ailingdollar. He advocated more U.S.borrowing from the Eurodollarmarket through Treasury certificatesand, in order to become morecompetitive in world markets, an"incomes policy" that would restrainthe cost-push momentum ofAmerican labor. 6 Less than threemonths later President Nixon announceda 90-day price and wagefreeze, to be followed by some governmentcontrol thereafter, and a10 per cent surtax on imports tostem the floodgoods.of cheap foreignIINafional Balance of Payment llAcademic theories basically concurredwith Dr. Burns' explanationalthough some offered differentsolutions, such as a crawling5 Ibid., p. 94.6 The Commercial and FinancialChronicle, June 9, 1971, p. 16.