Retrospectives: The Great Dollar-Shortage Debate

The dollar shortage debate—Paul Samuelson called it “the big open question of our time”—dominated international macroeconomics in the 15 years following the end of World War II. There were two main views regarding its cause: financial frictions that limited capital flows to Western Europe (Kindleberger); and overvalued fixed exchange rates versus the US dollar (Friedman). According to Kindleberger the dollar shortage was attenuated by two real factors that contributed to current account deficits: a large technological gap between the United States and Europe; and European impatience to improve living standards. Kindleberger believed that the current account deficit would prove chronic because of the persistence of the productivity gap, a view that was challenged by Bloomfield who argued that it would dissipate through income growth in Europe. We argue that Kindelberger’s analytical framework is closely connected to the modern intertemporal approach to current account determination; and, also, that the international reserve function of the US dollar—the Triffin dilemma—did not play a role in the dollar shortage.