ECONOMIC

CHAPTER 6The International Economy in 1973INTERNATIONAL TRADE AND INVESTMENT grew at a nearrecord rate during 1973, despite the strains placed on the internationaleconomy by massive capital flows, large fluctuations in exchange rates, andstrong price pressures due to crop failures, capacity limitations, and cutbacksin oil production by the major producers. The existing internationalmonetary and trading system proved resilient enough to enable governmentsto cope with the difficulties they experienced in managing their economies,without having to take measures that would have seriously disruptedinternational trade and investment flows. While individual governmentsadopted different policy instruments, including external measures, in seekingto stabilize their economies, potential policy conflicts were minimized bymutual accommodation. The common effort to arrive at pragmatic solutionsto joint problems undoubtedly strengthened the international economicsystem.As indicated elsewhere in this report, the major problem faced by theUnited States as well as the other major industrial nations during 1973 wasinflation. In most economies, demand at the beginning of the year was fastapproaching or was already in excess of the capacity to produce more goods.Demand pressures were intensified when large speculative capital flows ledto excessive increases in the money supply in a number of countries. Superimposedon this generally inflationary environment were particularly largeimbalances between demand and supply in particular sectors. Capacity limitationswere especially severe in the processing of raw materials, like petroleumand steel. Moreover crop failures in many parts of the world putpressures on agricultural supplies in the United States and elsewhere, andin the latter part of the year the major oil producers in the Middle East cutback the oil they were supplying to the rest of the world.General inflation combined with particularly large increases in the pricesof basic foods and processed materials to create tremendous political pressuresin most countries for government actions to reduce price increases. Amongthe policy measures governments took in response to such pressures wereprice controls and export controls. The latter measure had the unfortunateside effect of shifting the inflationary pressures to other countries. Neverthelessin most cases governments recognized the limits of beggar-my-neighbor181