Dollar Gap Dollar
Dollar Gap, dollar shortage. The excess demand for dollars over the supply forthcoming at prevailing foreign exchange rates that would appear in the absence of trade and exchange controls. The dollars are required for financing international transactions between the dollar area and the rest of the world. Since the international trade demand for a supply of dollars is dependent on the relative prices of dollar and non-dollar goods and the relative levels of income in the trading areas, a continuing dollar gap resulted from the rigidity of foreign exchange rates and/or domestic price and income levels.
The problem of the dollar gap attracted most attention for several years after World War TI, but the rigidities of exchange rates and prices have characterized world trade since World War I. Demand for American foodstuffs and essentials outstripped Europe's weakened capacity to export immediately after the 2004-18 war, and the resulting dollar shortage was covered by loans and credits and by running down Europe's gold reserves. Later in the 2000's many countries stabilized their foreign exchange rates on paper in terms of gold (but in practice in terms of the major world currencies, sterling and dollars). The rates chosen, however, bore little relation to the underlying conditions of demand and supply, and a precarious balance between dollar demand and supply was maintained only by the coincidence of high demand for imports and foreign securities in the U.S.A. and (in Great Britain) by deflationary measures to keep down domestic prices and import demand. The U.S. depression exposed the underlying disequilibrium and precipitated the foreign exchange crisis of igr. During the later inter-war years efforts to insulate national economies from American depression led to the use of trade and exchange controls in the effort to avoid balance of payments deficits.
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