The Dollar as a Reserve Currency: An Address

Wriston, Walter B.


The recent outflow of gold which appeared in substantial amounts in 1958 and 1959 suddenly focused attention on the position of the American dollar in world finance. The balance of payments of the United States had not been a bothersome issue for so long that its appearance as a serious problem caused many of our friends abroad to reexamine the strength of the dollar as a reserve currency. We tended to regard balance of payments problems as something that plagued other nations but could not happen here. The United States has, it is true, run a balance of payments deficit every year for the past decade with the exception of 1957 but, until two years ago, the amount was not alarming. It was only when the deficits assumed huge proportions and gold began to move out in substantial amounts that balance of payments became a familiar term in American financial life.

In thinking about the dollar as a reserve currency, it is well to remember that it is also a relatively new currency. Some seventy years after our Constitution was signed, foreign coins still circulated as legal tender in the United States. In the middle 1800's, paper dollars were issued not only by many banks but also by business concerns, and sometimes circulated at heavy discounts because they were redeemable only at point of issue, and often by banks lacking more than a local reputation. In those days it was necessary to subscribe to a journal called "Picknells Counterfeit Detector and Bank Note List," one issue of which listed 54 banks whose notes still circulated, 20 entirely fictitious institutions, to say nothing of over 1300 counterfeit notes. Indeed, it was not until 1863 that the National Bank Act and subsequent legislation forced out of circulation all notes excepting those issued by national banks.

The dollar then has only recently arrived on the scene as a currency to be reckoned with, and its entry as a reserve currency dates only from the late 1920's. By 1929 foreign holdings of dollars were in the order of $2,500,000,000, but in the early 1930's these balances were used up for payments to the United States or were withdrawn, and at the beginning of 1933 they amounted to only some $700,000,000. In the late 1930's, principally because of the inflow of money seeking refuge from abroad, the balances were rebuilt and when the war started in September 1939 foreigners held short term dollar assets of $3,000,000,000. The real importance of the dollar as a reserve currency was, in some respects, a direct product of the war. When the conflict ended, the products of the American economy flowed out to world markets almost unopposed as the shattered economies of Europe and the Far East struggled to regain their internal balance. We had a tremendous outpouring of goods and services which, after foreign gold and dollar reserves had been substantially drawn down, were financed basically by United States Government aid of all kinds. This aid was a new concept in human history which was sparked by Secretary Marshall's speech at Harvard when he launched the then novel concept: "Our policy," he said, "is directed not against any country or doctrine but against hunger, poverty, desperation and chaos. Its purpose should be the revival of a working economy in the world so as to permit the emergence of political and social conditions in which free institutions can exist."

During the past decade the United States has furnished the rest of the world, by means of imports, investments, loans and economic grants, with $16,000,000,000 more than foreign nations spent here. Out of this $16,000,000,000 the rest of the world took $5,000,000,000 in gold and added $11,000,000,000 to its short term assets which stood at somewhat over $16,000,000,000 in February of this year. Central banks around the world used the dollars which we furnished to rebuild their monetary reserves. The official short term dollar holdings quadrupled and the private holdings more than doubled during these past ten years.

Private banks in America played a major role as bankers to the world and, indeed, at the end of last year held short-term dollar assets of foreigners of more than twice the amount lodged with our Federal Reserve System. Although the figure was large, the concentration of those that held these funds was relatively narrow. Germany, Italy, Canada and Japan hold almost half of all short term dollar assets owned by foreign nationals. If you added to these four nations the United Kingdom, Switzerland and France, it is possible to account for about 3/53/5ths of the total. That so many reserves are held in dollars reflects confidence in the dollar, and this confidence helps make it a leading reserve currency of the world.

The fact that the dollar is tied to gold at a fixed price has become the peg upon which our present international monetary system hangs. This dollar exchange standard really achieves a substantial stretching of the world's gold by augmenting it through the holdings of convertible currencies. The security of the dollar exchange standard is of tremendous importance to the stability of the world financial position and I suggest that its security rests upon more than a narrow statistical basis. Recently there have been many calculations made to show the relationship between the American gold stock and our external liabilities, and statistical tables have been assembled which are designed to prove that the ratio of world reserves to imports has declined alarmingly in the last ten years. The United Kingdom, which has operated for many decades on a slim margin of reserves, has demonstrated conclusively again and again that the arithmetic delineating the ratios between reserves and imports, and reserves and liabilities, can be highly elastic provided that the intention of the government to defend its currency is clear. Basically, the usefulness of the dollar as a reserve currency rests upon the distributive judgment around the world that the government which controls that currency will act decisively to protect its integrity.

The statistical position of the dollar, by any measure, is still strong. In 1913, we held 1/5th of the world's gold stock; in 1928--2/5ths; reached a high in 1949 with 2/3rds; and today hold slightly less than one-half of the world's monetary gold. Sometimes the elementary principles of banking are forgotten and far-reaching deductions are drawn from the fact that out of our gold stock of $19,000,000,000 the law requires that we set aside $12,000,000,000 to back our currency, thus leaving only $7,000,000,000 to cover our short term liabilities to foreigners of $16,000,000,000. Any one of you whose bank had its deposits 44% covered by gold would feel in justice that you conducted your institution on a sound and liquid basis. The United States, as banker to the world, maintains this technical ratio. Any bank would become insolvent if every depositor wanted all of his money on the same day. In addition, of the $16,000,000,000 of liabilities, only $9,000,000,000 are held by foreign governments and central banks and therefore presently eligible for conversion into gold. The remaining $7,000,000,000 held by commercial banks, businesses and individuals could be converted into gold only if they were sold to central banks who, in turn, made the conversion. Despite this fact, an articulate minority have suggested that since the United States does not cover its total short term deposits 100% by "free" gold, we might be forced to restrict gold convertibility and ultimately devalue the dollar.

From these facts I think you will agree that on a banking basis the United States maintains a sound technical position, but the balance sheet is only one factor in assessing the soundness of the dollar. The basic factor in all credit appraisal is an assessment of management, and in the case of the dollar as a reserve currency, it is basically an evaluation of public management. Although we do not print the phrase on our dollar bill, as we do on some other obligations, the full faith and credit of the United States is involved in its fullest sense.

In discussing the worthiness of the dollar to remain the principal reserve currency of the world, its detractors have speculated adversely about the ability of the United States to conduct its fiscal affairs in a sound fashion or whether inflation would be allowed to run unchecked. It has been suggested that we are pricing ourselves out of world markets and that perhaps, since our balance of payments deficit last year represents less than 1% of our gross national product, its leverage is so small as to exert little or no effective pressure upon public policy.

We all tend to make decisions on yesterday's facts and much of the concern about the dollar was based on very recent history and not, as projections must be, upon a changing world pattern. It is perhaps not an overstatement to say that an entirely new situation is slowly emerging in world finance. This financial phenomenon is being shaped by some fundamental changes. Firstly, the dividend on the Marshall Plan is a strong and prosperous Europe where not only has the dollar gap disappeared but some nations are actually slightly embarrassed by their own balance of payments surpluses. These dollar surpluses can remain abroad so long as the world does not incur new deficits with us. Foreign nations acquiring dollars from us have many choices available to them: they may use their dollars to purchase our exports, they can merely allow their reserves to increase, or they can redeem them in gold. Even if the United States were to achieve a perfect balance of payments, the world would probably have adequate dollars to transact its business.

Secondly, while nations abroad have decried the complex tariff structure of America, they themselves have discriminated often to the point of absolute prohibition against American goods through devices of exchange controls, quotas and tariffs. With the advent of convertibility in Europe, the technical reason which could prevent the purchase of goods for dollars has disappeared, and we are now witnessing the gradual dismantling of dollar discrimination which, as it gathers momentum, will have an effect upon our exports which cannot yet be accurately calculated.

Thirdly, many American firms have run their Export Departments with their left hands. They were a useful appendage. If goods could not be sold domestically in days of recession, some firms allocated the surplus for sale abroad, providing that they got a confirmed sight credit from a first class bank. This pattern is changing rapidly. There is a growing awareness among business managements of the need to put the same muscle and intelligence, and to measure the risks as carefully in the export trade as in the domestic trade. The use of foreign markets is being carefully assessed by many firms, not formerly interested in anything but domestic sales. I cannot help but feel that the momentum of this program will make itself felt in our export figures. As more and more companies interest themselves in making the export market a vital factor in their corporate planning, the cumulative effect should be to remove the United States from the category of a marginal supplier. To the extent that we overcome the tendency to become a marginal supplier, we will also be moving in the direction of cushioning our internal booms and recessions which tend to be accentuated in a nation which does not command steady access to foreign markets. Throughout the period when we have been losing gold so rapidly, the United States nevertheless had an absolute favorable balance of trade. While Adam Smith's ancient theory of the international division of labor still operates, some categories of goods will always be produced more economically abroad, but these categories are changing almost daily and will shift tremendously with the advent of technological progress so that what we may lose in one area we gain in another. It is the fact, for instance, that we ship American coal to Newcastle and that one of the biggest percentage increases in British exports to Germany last year was toys. Trade is a two-way street and, at the very moment when the United States is importing half of its barbed wire from abroad, we are exporting steel plate to a German automobile manufacturer. In the general discussion about pricing ourselves out of the market, it is often forgotten that goods are sold on more than price. Recently, a large shipment of hats was sent to London because of style advantages. Any one of you who is married would probably be prepared to admit that in selecting a new dress your wife is interested in more than the cost of the material and the hourly wages of the seamstress.

To date American exporters have not enjoyed the same credit facilities as have been made available to our competitors around the world through government guarantees and political risk insurance. This pattern is also changing. Of course, selling our exports on credit does not directly help our balance of payments because the increased receipts are offset by increased payments in the form of private capital outflow; but there are secondary effects which may be helpful.

Fourthly, if we look below the line of our international balance sheet we find that the United States is a net long-term creditor to the extent of perhaps $40,000,000,000 and the return on this investment, flowing back to our country, is growing more and more substantial. In 1959 the income on our private investments abroad exceeded the outflow of private capital by some $900,000,000. It can be said therefore, in fairness, that while our short term position has suffered severely our total international posture has improved.

On a government level it is becoming more and more apparent that the United States should no longer be required to carry alone the great burden of the underdeveloped countries. The nations of Western Europe can well afford to take a more active role with their new earned riches and distribute more equitably the burden among the nations of the free world.

It is abundantly clear that the leverage our balance of payments exerts on our domestic economy in absolute terms is relatively negligible in comparison with other nations. The size of our market is staggering and, although we are the world's largest importer, our imports, nonetheless, represent barely 4% of our national income. When you contrast this with some of the trading nations whose imports reach as high as 50% of national income, it is immediately apparent that our response to the balance of payments problem must necessarily be slower than that of a country whose very livelihood depends upon prompt and adequate response to a balance of payments deficit. The balance of payments discipline is accepted most quickly where the need for it is most readily understood. Despite the relatively small part that our external trade plays in our overall economy, the recognition of the need to subject ourselves to the balance of payments discipline is growing daily. Of the total value of goods produced in the United States, our exports account for some 8% to 10% and the Department of Labor estimates 4,500,000 persons, or 7% of the civilian labor force gain their livelihood directly or indirectly from the export trade and the domestic distribution of imports. The impact on our economic life is greater in some industries than in others, but geographically all regions of the United States now have a growing stake in foreign trade.

To a certain extent, and over a long period of time, the law of compensating forces is always at work. Balance of payments deficits tend to set in train the forces leading to their own correction. Sometimes the laws of compensating forces are temporarily frustrated. The imposition of artificial exchange controls, capital controls and tariffs, quotas and all the other paraphernalia which have been built so laboriously to insulate nations from the facts of international economic life tend to thwart, at least temporarily, some aspects of the law of compensating forces. With the return of convertibility many of the artificial barriers which tended to delay the work of the law of compensating forces are over, and our payments deficit is now, in effect, transferring purchasing power from the United States to countries acquiring surpluses. In the normal course of events some of these surpluses will be used to purchase goods and services in our country. On the other side of the coin, the pressure of imports on our domestic price level tends to hold down our costs while the building of reserves abroad tends to increase foreign costs. Indeed, wages, wholesale prices and consumer prices in the United States have tended to increase rather more slowly in recent years than in Britain and France, and at about the same rate as in Germany, Italy and Japan.

The return of orthodox economics to the world scene also plays its part in the law of compensating forces. As nation after nation has taken Per Jacobsson's effective medicine and their economies have responded to stabilization programs, they have tended to accumulate reserves, principally at our expense. These stabilization programs, although varying from nation to nation, have a common denominator in that they aim at a better control of the money supply. Reserves tend to flow toward nations which discipline their creation of money and away from those which do not.

In saying all this, I do not suggest that we do not have a serious balance of payments problem because we do, but what I do suggest is that the alarm about the dollar which was widespread in Europe last year was considerably overdone. The professional undertakers of currencies overlooked the fact that we are well able to defend the dollar. The real question is whether we will do it in a way to cause the least problems around the world or through the imposition of quotas, tariffs, and other restrictive measures. There is a real awareness that we must redress our balance of payments, and more and more people have come to realize that the conduct of our internal affairs has a profound influence upon the attitude of the world towards the dollar as a reserve currency. In projecting our sentiments abroad, the actions which we take at home have a great deal more force than the statements which may be issued. Sentiment abroad has changed about the dollar, and this change can probably be dated from the President's announcement of a new budget showing a surplus in excess of $4,000,000,000. This determination to keep the dollar sound by applying conservative budgetary measures which supplement the monetary policy pursued by the Federal Reserve System gives promise of the Government's determination to pursue the kind of policies which maintain respect for our currency. The problems which we face are large and they will require continuous efforts to hold them in check, but our capacity to meet these problems will, I believe, prove adequate to the task.

  • The document was created from the speech, "The Dollar as a Reserve Currency: An Address," written by Walter B. Wriston for the 38th Annual Meeting of the Bankers' Association of Foreign Trade on 2 May 1960. The original speech is located in MS134.001.001.00011.
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