A Strategy for U.S. Balance of Payments Policy — Summary

Gottfried Haberler and Thomas D. Willett’s 1971 Special Analysis is a coauthored policy essay on the late Bretton Woods order. Its scope is strategic: it reassesses the U.S. balance-of-payments deficit, the dollar’s reserve-currency role, and the reforms needed to prevent adjustment failure from producing controls, unemployment, or monetary crisis. The argument begins from a paradox: after the 1967–68 dollar alarm, larger later deficits did not provoke panic. The reason, they argue, is that the system had tacitly shifted into a dollar standard.

To put it bluntly, it is now fairly generally realized that in a sense the world is on the dollar standard and that the dollar is de facto inconvertible into gold, at least for large sums.

This is the paper’s first major conceptual move: the dollar’s weakness had become a source of systemic stability because gold conversion on a large scale was no longer credible. The authors do not celebrate this as an ideal order, but treat it as the institutional fact from which policy must start.

The point of no return has been definitely passed.

The second section distinguishes the liquidity problem from the adjustment problem. Haberler and Willett argue that reserves, swaps, Roosa bonds, and SDRs can finance deficits, but cannot solve the underlying mechanism by which countries correct imbalances.

The smoother and quicker the adjustment, the less international liquidity is needed.

From this follows their policy hierarchy. Internal demand management and exchange-rate adjustment work through prices; controls distort markets and create bureaucracy. Their market-liberal premise is explicit:

Controls, on the other hand, constitute more or less serious deviations from the market system.

The thesis, then, is not that the balance of payments is irrelevant, but that the United States should not sacrifice domestic macroeconomic objectives to it. If fighting inflation requires some unemployment, that is acceptable; but unemployment should not be increased merely to satisfy external balance.

Be that as it may, we feel strongly that whenever a serious dilemma or conflict between the requirements of external and internal equilibrium arises, domestic policy objectives should take precedence over balance-of-payments considerations.

Because the dollar is the intervention and reserve currency, the United States cannot effectively devalue or float unilaterally: other countries would follow the dollar. This apparent constraint becomes the basis of the paper’s most famous recommendation.

A passive attitude towards the balance of payments can be described as a "policy of benign neglect."

“Benign neglect” means that U.S. macro-policy should pursue price stability, employment, and growth, while surplus countries choose among accumulating dollars, expanding domestically, appreciating or floating their currencies, or reducing trade barriers. The burden of adjustment thus shifts from U.S. controls to foreign policy choice. The authors insist this is not nationalist indifference but a recognition of system structure:

By solving their own balance-of-payments problems, our trading partners also solve ours.

The third section broadens the argument to international monetary reform. SDRs are acknowledged as historically important and useful in discouraging gold speculation, but the authors criticize the opportunity cost: policy energy went into liquidity while adjustment remained unresolved.

The task of improving the balance-of-payments adjustment mechanism remains to be accomplished.

Their reform proposal is deliberately modest. They do not call for universal floating, but for rules allowing deficit and surplus countries to use exchange-rate flexibility earlier and more smoothly. The adjustable peg, they argue, encourages destabilizing speculation because large delayed parity changes create one-way bets. Wider use of floating, crawling pegs, or managed flexibility would reduce pressure for trade restrictions and unnecessary deflation.

The postscript, written after the closing of the gold window, emphasizes that the paper anticipated the practical end of gold convertibility and defended passive U.S. policy only alongside anti-inflation policy. Its relevance lies in clarifying the asymmetry of a reserve-currency system: the United States gains room for domestic policy, but the world needs better adjustment mechanisms to avoid controls and conflict.