Economic Miracles in the 1950s

Europe had recovered its prewar productive capacity by 1950; Japan, by 1952. Their economies grew rapidly over the following decade. As a result, international financial accounts gradually moved toward balance. The dollar shortage had been eliminated.

The System Works

The dollar-gold exchange standard, based on fixed exchange rates and overseen by the IMF, could finally be realized.

Problems on the Horizon

After 1950, the United States began to register balance of payments deficits. At first, the deficits were welcomed, because the United States enjoyed:

• A strong trade balance
• Ample gold reserves
• A small outflow of private capital
  
  

The U.S. government believed that the deficits demonstrated US leadership in providing expanding markets and finance. The US balance of payments deficits provided $7 billion of an $8.5 billion increase in world liquidity during the 1950s. The increase in liquidity enabled the international economy to grow at a record rate.

How long could the United States afford huge deficits without harming its own economy?

And if the United States reduced its deficits, who would provide additional liquidity to allow the world economy to continue growing?