Economic Reform Policy by Envoy Dodge (Dodge Line)/Text of Dodge's Statement

by the General Headquarters of the United States Army Forces, Pacific

March 7th, 1949

Text of Dodge's Statement

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The statement issued by Joseph M. Dodge, Economic Adviser to General MacArthur, at a press conference yesterday follows in full:

On a New Currency

There is no reason for any assumptions to arise from the fact that at one time I worked on the original plans for a German financial rehabilitation which included drastic currency devaluation, since put into effect.

My presence in Japan does not indicate that any plans have been made for similar monetary devaluation for Japan.

Whatever the problems may be here they will be approached and considered by everyone concerned solely on the basis of local conditions and the fundamental requirements for achieving and effective financial and economic stabilization under the conditions relating to Japan alone.

I will state my personal conviction that, as a matter of principle, a currency devaluation should be avoided if any way can be found to do so. This will largely depend on the course of events. Principally, it will depend upon the sincerity and effectiveness with which the Japanese Government and the Japanese people meet the difficult problems connected with halting inflationary trends and achieving an actual financial and economic stabilization.

On Foreign Exchange Rate

There exists a general desire for the early establishment of a single rate of exchange on foreign trade transactions. The urge to accomplish this is easily understood and there is an official objective to do so as soon as practicable.

While it is not too difficult matter to compute a rate based on present circumstances that is not all there is to the problem. There are other factors which should be considered.

It is one thing to establish a single official rate and another to defend it after it has been established. No one should want a rate which jiggles violently up and down.

Today the dollar rate is almost the sole consideration and concern because the present pattern of imports is overwhelmingly in dollars. However, that is not the historical patter of Japanese foreign trade, and may not and probably should not be the pattern of the longer term future. Thus the ultimate patter of Japanese trade is a factor also deserving of consideration.

Finally it should be remembered that the primary objective must be the accomplishment of a rate which will stimulate exports without unduly penalizing imports, and that an effective economic stabilization is closely related to achieving a sound and satisfactory result.

On Inflation and Stabilization

Real stability and progress have to be based on a sound fiscal and monetary approach to the nation's problems. An effective stabilization requires relating all policy decisions to the Government budget as a primary instrument of financial policy.

It is government which turns on the spigots of inflation and government which must turn them off. Inflation must first be sterilized at the source. This means that all economic and political decisions must be directly related to cost and the production needs of the economy.

It is not easy for a government to reduce its own spending in terms of subsidies, investments, and other general expenses. Nevertheless, it has to be done and awkward decisions cannot be set aside. Government expenditures have to be limited to the resources from available taxes. Reduction of taxes is the end result of reduction in government expenditures.

Also it must not be overlooked that government investments and expenditure are rarely as productive as private investments and expenditures of the same amount. In a shortage economy every resource, whether money, labor or material, drawn off for unnecessary or non-productive purposes tends to add to inflationary pressures. Therefore the questions of absolute need, priority of need and the effective use of the funds absorbed by taxation and spent by the government have equal importance with the principle of their being covered by the revenues actually received.

To meet the problem it will be necessary for the Japanese Government to assume and exercise the power and find the means to discharge its responsibilities to the nation, to the United States, and to the Allied Powers. Restrictions on private consumption and expenditure cannot be advocated by the State and then most widely ignored by the State. The average man cannot be induced to practice thrift unless his government sets the example. No government can expect from its people virtues which it does not itself practice.

Some salutary anti-inflation readjustments and developments are not only necessary but desirable for the longer run good of the Japanese economy. It cannot afford to waste any existing elements of strength and supporting the unrealistic distortions and dislocations of an inflationary trend. A postponed readjustment inevitably will be extremely serious and of much longer duration.

Everyone complains about the high price effects of inflation but wants to keep on getting his own slice of government funds. Inflation is always considered bad for other people but individuals want to keep for themselves whatever personal benefits they mistakenly believe arise from it. Increased subsidies, increased wages and increased government expenditures go hand in hand with higher prices to consumers and higher taxes. That is why wage stabilization is a fundamental factor in general stabilization. But while it must be remembered that wages increase by arithmetical progression, prices increase by geometrical progression. The consumer is always the loser.

Inflation burns the economic candle at both ends. The off end belongs to those who are being stripped of the value of their earnings and savings by rising prices. The near end belongs to those who are spending the values extracted from the public. They are spending other people's money.

Political and economic liberation has not increased the supply of goods and services as much as it has the demand for them. The facts are that the spending power in existence is too large for the supply of goods and services left over after satisfying the requirements of the government, exports, capital programs and war termination costs.

Under present conditions if the people are to have or to consume more it can only come from reducing these requirements or as a gift from the United States. Therefore, any relaxation in favor of the domestic economy must be offset by a tightening up somewhere else and every consideration in favor of the domestic economy must be accompanied by offsetting proposals of retrenchment.

There should be a general recognition that an increasing part of the national output will be needed for years ahead to replace the free goods now coming from the United States, which cannot come forever.

If this is to be accomplished, there must be less of thinking solely in terms of how much U.S. aid will be forthcoming and more thinking of increased production, decreased costs and greater exports. To substantially increase exports will require continued limitations on domestic consumption and an emphasis on the needs of the export consumer rather than that of the domestic consumer. While the domestic need for consumer and capital goods is real and apparent, internal rehabilitation and expansion necessarily falls into second place behind the need for a priority of exports. The objective must be to achieve self-support so as to warrant continuation of U.S. aid and ultimately create the conditions favorable for foreign credits.

It should be understood clearly that the U.S. Government is rightly concerned that lasting benefits to the Japanese economy and itself must result from grants of aid or credits.

These are the simple propositions governing economic policy. These are hard truths and not pleasant to hear but they are no more inexorable than the facts themselves.

The problem cannot be met by any form of monetary miracle or fiscal policy alone. They can be met only by increased production at less cost, sound fiscal and monetary policies, increased exports and a continued domestic self-denial.

In Conclusion

Finally I urge every Japanese citizen to understand and remember these simple facts:

First: The hundreds of millions of dollars of aid received each year by Japan from the United States comes from the taxes imposed on business enterprises of the United States. In turn these taxes have been paid from the wages of American workers and the American citizen does not like to pay taxes any more than does the Japanese citizen.

Second: These dollars, or their equivalent in good being received by Japan (which are so necessary right now to its economic life and rehabilitation) actually are only a temporary substitute for and supplement to the production and exports which Japan must provide for itself. Japan has met the requirements of its own livelihood and progress in the past and must prepare to do so again, as quickly as possible.

There can be no permanent substitute from the resources of another nation for the efforts required from the Japanese Government and the Japanese people to meet their own problems. To live as a self-supporting and not a dependent nation Japan must accumulate capital by savings and economy, it must supplement its limited internal resources with materials and products only available from other sources and it must be able to pay for them from expanding exports.

To put it briefly, the national deficit cannot be allowed to increase as production expands.

We have seen a rising production index, accompanied by a large and progressive increase in the amount of U.S. aid. The excess of imports has increased and the gap between imports and exports has substantially widened. The time must come when this national trend is completely reversed.

If individual enterprise continuously has to be subsidized to provide saleable exports, then increasing volume suggests only correspondingly increased deficits.

To meet this problem the way has to be found to convert the dollar of imported materials into more, and not less, than a dollar of exports.

It is the height of folly to point with pride at an increasing production index or increasing exports which may actually represent only increased U.S. aid, increased subsidies and increased deficits. Too much attention is being given merely to raising the totals of production and exports without regard to cast or net results. Too little attention is being given to the need for creating the greatest possible net production and using imported raw materials so as to create the greatest possible amount of net exports.

It is for these fundamental reasons that every individual citizen has to make it a personal as well as national goal to produce more and to save more.

There is no other way for the individual or the nation to have more.