Views on the dollar shortage controversy

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Home<br>Research Highlights<br>Views on the dollar shortage controversy

Research Highlights Podcast

July 2, 2026

Views on the dollar shortage controversy

Harris Dellas and George Tavlas discuss the postwar dollar shortage debate between Charles Kindleberger and Milton Friedman.

Tyler Smith

Source: Usconsulate, Public domain

In the fifteen years following the end of World War II, Western Europe's capital account surpluses were not sufficient to finance its trade deficit with the United States. Charles Kindleberger of MIT, who helped assemble the Marshall Plan, defined this gap as the "dollar shortage" and argued that it was a structural problem rooted in Europe's lagging productivity, one that could only be fixed by sustained US lending. Milton Friedman disagreed, treating the shortage as a simple consequence of overvalued fixed exchange rates that floating currencies would correct. The argument continued through scores of books and articles written by many other economists into the late 1950s, until Europe's productivity caught up, and the debate faded.

In a paper in the Journal of Economic Perspectives, authors Harris Dellas and George S. Tavlas revisit the controversy and explain why it still matters. They find that Kindleberger anticipated much of what is now called the intertemporal approach to the current account, and they trace how two recent episodes of dollar shortages echo and depart from the original.

Dellas and Tavlas recently spoke with Tyler Smith about the paper.

The edited highlights of that conversation are below, and the full interview can be heard using the podcast player.

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Tyler Smith: What was the postwar dollar shortage?

George Tavlas: The dollar shortage that Harris and I have written about took place in the 1940s and 1950s. It concerned the economic relationships at that time between the United States and Europe. The war destroyed Europe's productive capacity and left the United States as the world's major undamaged economy. Europe desperately needed US goods in order to improve its living standards and to rebuild its depleted capital stock. Its dependence on US exports was persistent because, at the end of the war, there weren't any good substitutes for US exportables. In order to pay for its imports of US goods, Europe had to do one of three things: export its own goods to the United States to earn dollars or gold, which was the other major reserve; borrow dollars from the United States; or use its existing stock of dollar and gold reserves. The destruction caused by World War II left Europe unable to produce many goods for export. It was unable to borrow, and its stocks of both gold and dollars were essentially nonexistent. So, the dollar shortage dominated discussions on international monetary policy during the 15 years following World War II. Because the shortage stood in the way of Europe's reconstruction, it had negative impacts on global trade, and that provided a justification for protectionism on goods and on capital.

Smith: It seems like this debate has been settled for over 60 years. Why revisit it today?

Harris Dellas: Dollar shortage debates have resurfaced in the last ten years or so in two different contexts. One is actually quite similar to the old context of the '40s and '50s, and it concerns less developed countries. In many cases, those countries have fixed-exchange-rate regimes and capital controls, and they often run into balance-of-payments problems—that is, situations where their holdings of foreign reserves are not sufficient to finance their current account deficits. So, this is very similar to the experience of the '40s. But there is one fundamental difference. The old dollar shortage actually had very little to do with the dollar. It came down to the fact that the United States simply was the country those economies were trading with. They needed American goods, and they had to pay with dollars. But it could have been a dollar shortage even if the US dollar had not been the international reserve currency at the time. The modern dollar shortages, by contrast, arise exclusively because the dollar is the international reserve currency. If you're an African country and you want to import goods from Vietnam, you need dollars. There are similarities in the sense that in both cases it is the inability of countries to borrow in order to finance imports. But the difference is that back then they could have borrowed in anything—it didn't matter, the international reserve function was not important. Now they have to use dollars. That's one context in which the dollar...