Dollar Shortage and the Marshall Plan (1947) - dummies

Dollar Shortage and the Marshall Plan (1947)

By Ayse Evrensel

In the immediate aftermath of the Bretton Woods Conference, the problem of a dollar shortage emerged. During the late 1940s, the U.S. was running large current account surpluses, and its gold reserves were growing. At the same time, especially Western European countries were running large deficits.

If the U.S. were to support the rebuilding efforts in war-torn countries, it was necessary to reverse this flow and make more dollars available for other countries’ use. The U.S. had to reverse the process and run current account deficits.

Even though the IMF and the IBRD were introduced to finance current account imbalances and reconstruction, respectively, it became apparent soon after the Bretton Woods Conference that these multilateral organizations didn’t have sufficient funds to do the job. By 1947, the IMF and the IBRD were admitting that they didn’t have enough funds (dollars) to fulfill their functions.

Therefore, in 1947, the U.S. introduced the European Recovery Program, also known as the Marshall Plan, which provided large grants to European countries. Between 1947 and 1958, the U.S. tried to encourage the outflow of dollars to improve liquidity around the world. Not only the Western European countries, but also the strategically relevant Mediterranean countries (such as Greece and Turkey) and other developing countries, received grants from the U.S.

In the late 1940s, the Cold War had already started, and it was important for the U.S. to suppress the Soviet Union’s political influence. Not surprisingly, starting in 1950, large current account surpluses in the U.S. changed to large deficits.

The Bretton Woods system gave the U.S. a special place as the engine of stability. The U.S. was engaged in trade with developing countries, resulting in trade surplus. Then the U.S. sent these surplus dollars to Europe to be used in rebuilding their economies so that they could sell their goods to the U.S. In turn, European countries’ export earnings from the U.S. allowed them to trade with developing countries.

To support Western European countries’ economic recovery, the U.S. did not retaliate against the protectionist trade practices of these countries. It seemed that the U.S. was the coordinator of these trade flows for the good of all parties involved.

However, the successful working of this scheme depended upon the ability of the U.S. to keep having current account surpluses and using them in providing financial aid to Europe and Japan. During the 1950s, the system started showing signs of destabilization.