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IT IS a new thing for Americans to be concerned with our balance of payments. We are accustomed to thinking of ourselves as a nation with almost limitless productive resources--a nation capable of turning out goods and services sufficient for our own needs and for a sizable foreign demand, without undue monetary strain. After all, didn't World War II demonstrate that the United States, with a very small proportion of the world's population, could produce much of the material needed to win a world war, maintain high living standards at home, and afterwards provide an unprecedented amount of assistance to war-torn countries elsewhere?
All this is true. But time moves swiftly.
Our resources did in fact make it possible for us to act quickly after World War II in easing the "balance of payments" problems of others. The destruction and economic dislocation of the war had wiped out much of Western Europe's monetary reserves. Export earnings had greatly diminished. The United States recognized that the war-devastated countries had little ability to pay for imports of food, materials and equipment--the foundations on which swift and effective rehabilitation had to be built.
It was clear that capital was required in the underdeveloped areas of the world also. During the war and afterwards, people in many formerly isolated areas were brought into abrupt contact with both the institutions and the advanced technology of the West. Not only were old customs and allegiances weakened; there was an urge, stronger than any ties with the past, to achieve the conditions making for improved standards of living. For this, too, capital was needed.
It was against this background of rehabilitation needs in Western Europe and the thrust toward economic advancement elsewhere that the United States supported the International Bank for Reconstruction and Development and the International Monetary Fund, devised the Greek-Turkey aid program and the European Recovery Program, and has continued during the postwar period to participate actively in broad programs of aid and foreign loans. As a result of all of these efforts the balance of payments problems of many countries have been reduced to manageable proportions; indeed, in some cases, they have been eliminated. What is new in our present situation is the realization that we now have a balance of payments problem of our own.
This recognition has been forced on us by the sudden and substantial increases in the deficits occurring in our balance of payments during 1958 and 1959. Deficits had occurred earlier. But it is the sharp recent uptrend which has caused concern--and rightly so. The events of the postwar period have made the United States dollar the major reserve currency of the world. Never before has it been so important to us and to our friends abroad that the balance of payments should be in a healthy equilibrium so that the dollar can continue to be a strong currency fully justifying the confidence of our own and other countries.
In brief, one can say that if excess drawings on reserves are to be avoided over a period of time, total outpayments must equal total inpayments (both on current and capital account). In this respect, there is a certain analogy between the situation of a nation and of a region within a nation or of an individual. Mr. Micawber, in one of his more reflective moods, remarked that a person who persistently ran a deficit in his monetary affairs was doomed to misery. Not dissimilarly, a community which does not currently "earn its way" in transactions with the rest of the country will soon feel the adverse effects of the deficit in its balance of payments. Both the individual and the community can borrow to offset the deficit in their current account, and this is constructive if the borrowed funds are wisely used, and it can continue for a long time. But neither can expect for very long to solve the problem of deficit by borrowing for consumption or by using up reserves. However, it is not wise to push these analogies very far, because there are two important differences between the balance of payments of an individual or a part of a nation, and of the nation itself. These differences are the separate monetary systems of nations and the problem of transferring funds from one country to another to which this gives rise.
The mechanism of adjustments by which a balance of payments tends toward equilibrium is a complex subject on which many books have been written. But before turning to an examination of the United States balance of payments, it may be useful to summarize some general conclusions:
(1) Large deficits or surpluses in the balance of payments should not persist.
(2) The reason for this is that large one-way movements of gold or large increases in foreign short-term holdings of a given currency will not continue indefinitely.
(3) While there is a tendency toward equilibrium in the balance of payments, the rapidity and effectiveness with which a country moves from unbalance back to balance varies from case to case.
(4) Over a period of time, net movement of capital into or out of a country is made possible by appropriate shifts in the current account of the balance of payments. The ways and means of bringing about these shifts comprise the balance of payments "problem."
(5) There need not--and generally will not--be a balance in any single year; that is, some movement of short-term funds or gold is normal. But how much movement is normal and sustainable and how much is abnormal and unsustainable cannot be laid down by rule.
Let us now examine the balance of payments of the United States.
Table I gives a summary of our balance of payments since 1946; and Table II gives greater detail for the years since 1950. In the 14 years shown in Table I, the total payments of the United States increased greatly, from about $13 billion in 1946 to more than $28 billion in 1959. The current account was in surplus every year before 1959, but there were wide fluctuations in the surplus; and in 1959 there was a small deficit for the first time since World War II.
Notwithstanding the surpluses on current account, there was an over-all deficit (as measured by recorded foreign gains of gold and liquid dollar balances in transactions with the United States) beginning in 1949 and running every year since then except in 1957. This deficit averaged $1.3 billion, 1950-57, and was $3.4 billion in 1958 and about $3.7 billion in 1959.
In every year shown in Table II, total United States payments exceeded total receipts. Consequently, in every year except 1957 (when the balance of payments and receipts was very close), foreigners increased their gold and liquid dollar assets. In six of the ten years foreigners gained both gold and dollars. In three years the United States gained gold, but foreigners' gains in dollars exceeded U. S. gold gains. In 1957 alone, U. S. gains in gold exceeded increases in foreign dollar holdings.
How does it happen that the United States has had a current account surplus year after year and still has an over-all deficit in the balance of payments? Table II supplies the answer.
|TABLE I. UNITED STATES BALANCE OF PAYMENTS, 1946-591|
|(In billions of dollars)|
|Total||Foreign||on Unrecorded||Gold||and Services|
|Gains by||U. S.||U.S.|
|Source: U.S. Department of Commerce. (Detailed figures may not add to|
|totals because of rounding.)|
|1Excludes grant-financed U.S. military supplies and services.
2Public and private U.S. capital outflow and remittances are entered net in U.S. payments; foreign payments in United States include foreign long-term investment here.
3Includes military expenditures shown separately in Table II.
4Includes subscriptions to the International Monetary Fund and the International Bank amounting to $0.3 billion in 1946 and $3.1 billion in 1947.
5Less than $50 million.
6Excludes $1,375 million subscription to International Monetary Fund.
First, the net outflow of United States private capital was large throughout the period, and in 1956-58 averaged $3 billion. In 1959 it decreased to $2.3 billion. Second, United States Government non-military loans and grants (minus repayments) averaged $2.5 billion during the 10 years, and would have been close to that level in 1959 except for some exceptional repayments received. Third, the surplus of exports of goods and services over imports of goods and services fell short of covering these capital outflows. As Table II indicates, we normally include in imports of goods and services not only merchandise brought into the United States and payments for services performed for us here by foreigners, but also various payments abroad such as our tourist expenditures and our military expenditures in various countries for services and goods used to support our troops stationed there. These military expenditures were determined by national defense considerations rather than by economic forces of demand and supply; they increased steadily from $576 million in 1950 and exceeded $3 billion a year in 1957-59.
If we add together military expenditures abroad, net private capital outflows and net Government non-military loans and grants, we find that they averaged $6.3 billion in the years 1950-57. They amounted to almost $9 billion in 1958. They were greater than the excess of United States exports of goods and services over imports of goods and services (excluding from our imports in this calculation our military expenditures abroad). In 1959, although they were smaller ($7.5 billion) because of special debt prepayments to the United States Government and the reduction of private capital outflow, they still exceeded the export surplus which dropped sharply for the second consecutive year. Consequently, foreigners again greatly increased their holdings of liquid dollars although they converted a smaller portion of these dollars into gold in 1959.
Two principal facts emerge concerning the balance of payments of the United States. We have been running an over-all deficit for ten years and it has become relatively large in the last two years. This over-all deficit results from a net outflow of public and private capital larger than the surplus on current account--and it should be kept in mind that military expenditures abroad are included in the current account.
But after these facts are established, we still have the question of why there is currently a "problem" connected with our balance of payments. After all, the economy of the United States is very large, the gross national product is currently running around $500 billion per year, and our total merchandise exports are little more than 3 percent of G.N.P. Why need we be concerned about so small a segment of our total economic activity?
Or can it not be argued that, with a gold reserve of more than $19 billion, and with foreigners continuing to show a willingness to hold increasing amounts of dollar deposits, even a relatively
|TABLE II. UNITED STATES BALANCE OF PAYMENTS, 1950-591|
|(In millions of dollars)|
|U.S. PAYMENTS, TOTAL||17,526||19,858||19,843||19,685||19,876||21,944||25,846||27,374||27,079||28,5003|
|Military expend. abroad||576||1,270||1,957||2,535||2,603||2,823||2,955||3,165||3,416||3,200|
|Remit. & pensions||523||457||545||617||615||585||665||702||707||800|
|Private capital (net)||1,265||1,068||1,158||369||1,619||1,211||2,990||3,175||2,844||2,300|
|Government loans4||156||156||420||218||-93||310||629||958||966||} 1,9003|
|Government grants (net)||3,484||3,035||1,960||1,837||1,647||1,901||1,733||1,616||1,611|
|U.S. RECEIPTS, TOTAL||13,954||19,045||18,246||17,287||18,193||20,349||24,235||27,094||23,223||23,900|
|Investment in U.S.||53||182||141||206||244||346||530||361||24||500|
|Errors and Omissions||-30||470||505||296||167||446||643||748||441||900|
|Increase in Foreign Gold|
|and Liquid Dollar Assets||3,602||343||1,092||2,102||1,516||1,149||968||-468||3,415||3,7003|
|Source: U.S. Department of Commerce.||n.a. = not available.|
|1Excludes grant-financed U.S. military supplies and services.
3Excludes $1,375 million subscription to International Monetary Fund, of which $344 million was paid in gold.
4Including other capital.
5Including military transactions for cash and credit.
large deficit in the balance of payments should cause no trouble?
Finally, even if it has to be concluded that the deficit was too large, wouldn't it be simple enough merely to cut back on imports or to decrease the outflow of capital and take care of the deficit in this way?
It would be comforting to reason the balance of payments problem out of existence by those arguments. Unfortunately, however, none of them can be accepted. The United States must be able to sustain an increasing amount of international payments and obligations as the years go by for several reasons.
First, merchandise imports have become increasingly essential to the United States. As our economy grows, our demand for imports will also grow. It is, of course, evident that our capacity to pay for imports is basically dependent on the foreign exchange earnings which we receive from our exports of goods and services.
Secondly, as a great power with far-flung responsibilities and with world-wide financial and economic interests, both public and private, the United States to a surprising extent must depend on a reasonable equilibrium in its balance of payments to carry out its responsibilities and to accomplish its political and economic aims. We make military expenditures abroad, we carry on private investment in foreign countries, and we extend grants and loans with public funds, not as a matter of chance and relative indifference but because these activities are important to us and to the rest of the free world. We can carry out these activities on a large and continuing scale only if we have a reasonable equilibrium in our balance of payments.
Moreover, this equilibrium should in large part be achieved through a surplus on current account of substantial size chiefly by an expansion of exports. Large and continuing outflows of gold and long-continued and substantial increase in foreign holdings of United States dollar balances cannot be relied on as the way to deal with the balance of payments deficit of the United States.
It has long been a truism of international economics that a capital-surplus country which is to transfer savings to capital-deficit areas over a period of years must do so primarily by means of a surplus in the current account. Within reasonable limits the United States can export long-term capital and solve the transfer problem by an offsetting inflow of short-term funds. This has happened since the war on a large scale as Table II shows. In fact, since 1949 foreign holdings of short-term dollar balances and other liquid dollar assets have increased from $6.4 billion to approximately $18 billion.
On the whole this has not been an undesirable development. Foreigners have been prepared to hold dollars, especially in view of the status of the dollar as a reserve currency and the reassurance of a large U. S. gold reserve. These dollar balances have comprised a considerable part of the foreign exchange reserves of other countries, and are an important means of economizing the gold reserves of the free world. However, at least in the intermediate term the amount of foreign liquid dollar holdings which can with confidence be maintained is not unlimited. The increase in such balances under the impact of over-all balance of payments deficits of the size of those of 1958 and 1959 would certainly threaten to reach that limit if so rapid a build-up continued much longer.
The same considerations serve as limiting factors on gold outflows. The United States gold reserve is large, exceeding $19 billion. But it should be large in order to provide a cushion against various contingencies and to secure our short-term liabilities. It seems to me that substantial changes in that reserve can be viewed with equanimity only if they are likely to be of relatively short duration and not persistently in one direction. It does not seem that the proper function of our gold reserve is to be heavily drawn down on a large scale over a period of years to transfer capital to the rest of the world.
Over-all deficits in the balance of payments of the United States in 1958 and 1959 clearly were too large to be safely sustained for very long. Moreover, the circumstances which have led to a persistent balance of payments deficit for ten years and a sharp worsening of that deficit in the past two years have certain qualities of persistence which must be given serious consideration. What seems to have occurred is a coincidence of several developments.
There has been a reëmergence of the competitive strength of the other industrial countries. This is not a surprising development. The political, economic and defense policies of the United States since the war have been aimed at this rehabilitation of the other industrial countries, most of which had suffered tremendous damage.
The success of these policies has been outstanding, and is shown in the statistics. Between 1952 and 1958 Germany's share of total world exports of manufactured goods increased from 12 percent to 18.6 percent, and Japan's from 3.8 percent to 6 percent; while the share of the United States declined from 26.2 percent to 23.2 percent. The United States share of total world exports was 17.3 percent in 1958, which is about the same as the figures for 1950, 1953 and 1955, but below the figures for 1951, 1952 and 1956, which ranged from 18.2 to 18.6 percent, and much below the peak of 19.6 percent in 1957 which was due to very special factors.
Detailed analyses have been made by the Department of Commerce of changes in our share of major world export markets. On the whole, these analyses have been encouraging because they showed that serious reductions in our share of export markets have been confined to comparatively few classes of goods, especially motor vehicles and steel. Nevertheless, the aggregate losses in these classes have been substantial and they have occurred at a time when the need is to expand our current account surplus rather than to allow that surplus to shrink.
Another development has been the continuous increase in our merchandise imports. In 1955 imports were $11.5 billion, while in 1959 they reached slightly more than $15 billion. In the same five years, exports increased by about $2 billion. As our economy grows, there is reason to expect a rising trend in imports.
Unofficial estimates for 1960 are for an increase in our exports; and while our imports are also expected to expand, the improvement in the current account will reduce the year's over-all deficit in the balance of payments below the 1958-59 level. This, of course, is all to the good. But the deficit will still be large--probably substantially larger than the 1950-57 average. Moreover, in a year of boom conditions abroad, when foreign demand for our exports should be high, it seems particularly unsatisfactory that the deficit be so large.
The conclusion is quite clear: We have a balance of payments problem. The essence of it is how to bring our total international transactions into a reasonable equilibrium which will enable the United States to carry out its responsibilities in the world without provoking large and persistent gold outflows or excessive increases in foreign holdings of dollar balances. However, I do not feel we are confronted with an emergency. We have time to find a proper solution and I am confident we will.
Our solution must be found along lines consistent with our international economic policy, which emphasizes the expansion of world trade on a multilateral basis and a continuing attack on barriers to trade. In terms both of our own economic interest and our responsibility as a leader in the free world, we must set ourselves resolutely against any temptation to solve the balance of payments problem by restrictive action. Of course, any country can tackle its balance of payments problem by deliberately cutting imports or by imposing restrictions on capital outflows. But the kind of balance which would result from such measures would be based on contraction and not expansion. It would push us back into the beggar-my-neighbor policies which were so disastrous in the great depression of the 1930s. It would mean an abdication of our role of leadership.
Within the framework of broad and established United States foreign economic policy, we must pursue our task from many sides. Our balance of payments problem is not simple in its causes and we are going to find that the solution will not be simple. I suggest that this many-sided attack can proceed along several lines.
We may expect that to some extent corrective forces are at work and will continue to be at work. Our balance of payments deficit itself results in the transfer of purchasing power to surplus countries and there will be a tendency for this increased purchasing power to have an expansionary effect on total economic activity in those countries. Some of this increased activity should be reflected in increased purchases in the United States. In addition, import competition is undoubtedly exerting an influence on product design and prices in the United States.
However, we cannot comfortably relax, hoping that "automatic" correction of our balance of payment deficit will solve the problem. We must take the actions on the domestic front which will not only help preserve the value of the dollar but let the nations of the world who have such a real interest in how well we manage our affairs know that we intend to do everything to keep the dollar stable. We must maintain sound fiscal policies with a budget surplus in times of prosperity, as the most recent budget submitted by the President proposes. We must have flexibility and freedom from artificial restrictions in the management of our debt so that the world will know that we can handle it in the least inflationary manner. Our monetary policy must be keyed to the containment of the strong demand for capital which otherwise might break through as a major inflationary pressure. And certainly we must do all in our power to maintain the proper relationships between wages, prices and productivity so essential to our competitiveness in world markets.
These domestic actions, coupled with a foreign exchange policy which would leave no one at home or abroad with any doubt concerning our intent or capacity to maintain the dollar as a fully convertible currency at the existing official price for gold, should bring about two good results.
Producers in the United States will be assisted in competing abroad. There has been much concern of late as to the competitive position of our goods in world markets. An examination of price and wage trends and of changes in our share of world trade (especially in manufactures) does not provide clear evidence that the United States has priced itself out of world markets. However, there are examples which can be cited on the other side; and there is ample indication of intensified competition in world markets and of increased world capacity to produce goods for export. What we can conclude is that the United States has little margin of competitive superiority. This means that we cannot risk any erosion in the stability of United States prices if American producers are to succeed in expanding their exports.
Foreigners will have no reason to lose confidence in the dollar as a reserve currency. Confidence in a currency, particularly so far as concerns persons outside of the country, is not something which is won by promises or pleas. Confidence is based on evidence and expectation that the purchasing power of the currency is--and will be--dependable.
American producers must seek foreign markets on an increasingly intensive scale if our exports are to expand to the extent called for to correct our balance of payments deficit. It will not be enough to maintain our exports at their 1959 level of about $16 billion. They should increase at least by some billions of dollars if the United States is to maintain a net outflow of capital and to make military expenditures abroad in the amounts of recent years. For some time following 1946, other countries--and especially other industrial countries--undertook export drives of great intensity, and they have shown that even in the United States market, so long thought to be a "hard nut to crack," there is great room for success. The time has come to mount our own export drives; no American producer who has a product susceptible of export should fail to explore the possibility of expanding foreign sales. The Government is examining the facilities available to American exporters, in comparison with those enjoyed by their foreign competitors, to determine whether or not improvement is needed, particularly in the field of export credit and export insurance. The Administration also is working to improve the fact-finding facilities of our foreign service and the services of Washington agencies in analyzing foreign trade information so as to enable more American businesses, large or small, to participate in export sales.
But we cannot rely solely on government action to increase our exports on the substantial scale which is going to be needed. This requires the united effort of all American industry, labor and agriculture--the whole American economy.
Developments in the other industrial countries may help us in our task. Europe is in the middle of a very substantial boom and some of this surge of economic activity is likely to be reflected in the demand for American goods. Moreover, in Europe and in other parts of the world we can expect that during 1960 most of the task of dismantling discrimination against American goods will be completed. The timing of this action is fortunate, because it coincides with our own need to leave no opportunity lost to expand our export business.
At the annual meeting of the International Monetary Fund in Washington in September 1959, I suggested the need to look at the world payments situation as a whole and not exclusively at the balance of payments of the United States.
In 1958 and 1959 (basing the latter on figures for the first nine months at an annual rate) acquisition of gold and liquid dollars by Western Europe was roughly $3 ¾ billion in each year.[i] For the two years taken together, about half of this amount was obtained through direct transactions with the United States. For the same period, Canada lost gold and dollars in transactions with the United States, but more than offset this by gains in transactions with other areas. The rest of the world was in balance in 1958, when large receipts from the United States were offset by payments to Western Europe and Canada. But it gained heavily in 1959 when net receipts from the United States exceeded losses to Western Europe and Canada by over $800 million. This net gain in 1959 for the rest of the world in considerable part reflects the gain of over $450 million by Japan.
This broad picture of the structure of world payments indicates to thinking persons that two developments seem necessary if the United States is to eliminate its own deficit through an enlargement of exports. First, in the long run there should be a more than cyclical expansion in the imports of Western Europe both from the United States and from the rest of the world, particularly by the countries grouped in the Common Market. Second, there should be an enhanced flow of capital from the European industrial areas to the less developed areas.
It is my firm conclusion that we can bring our balance of payments into reasonable equilibrium. But the task is formidable.
Competition in world markets is sharp and there is no reason to assume that it will become milder. The manufacturers in the other industrial countries have reached the point in their technological advance where they are at little if any disadvantage in competing with the best which American technology can offer. It will require good will on an international scale, persistent and sober efforts by governments, and enlightened as well as energetic action by business and labor to bring about, over time, a better balance in the world's payments system.
The recent change in the Development Loan Fund policy, putting primary emphasis on financing the procurement of United States capital goods, should be interpreted in the light of the need to move on many fronts in seeking to bring our balance of payments into reasonable equilibrium. I would certainly oppose any limitations on the freedom of United States private capital to go abroad or for our capital market to extend credits to foreign borrowers under terms which seem reasonable to lender and borrower. When a foreign borrower approaches private lenders in the United States he should not be told that the proceeds of any loan would have to be spent on United States goods. However, the United States, through the Development Loan Fund, makes public funds available on long term to underdeveloped countries on a basis unequaled by any other industrial country. The terms offered by the D.L.F., including repayment in local currency, represent very substantial and generous United States public assistance. It is important, for the reasons put forth throughout this discussion, for the United States to continue to be in a position to provide capital on a large scale to underdeveloped countries. I have also made clear that we can do so as a practical matter only if we solve our balance of payments problem.
Moreover, other industrial countries also are recognizing the importance of their providing increased amounts of public financing on a long-term basis to underdeveloped areas. They are now in position to do this and may be encouraged in this direction by the realization that D.L.F. dollars are not generally available for financing portions of their exports to underdeveloped countries. In like manner, they may be encouraged to give long-term loans for capital export items which heretofore, in some cases, have been financed with short-term credits that are more appropriate to the financing of consumer items.
I have made the point that we must achieve a reasonable equilibrium in our balance of payments, and must do so in a constructive way, not only for reasons of self-interest but because of the broad and vital requirements imposed on us by the role of leadership which we have assumed and which we must fulfill. The United States finds itself in an international financial position which is at least as much the consequence of the long course of world development as it is of our deliberate choice. We have become the leading reserve banker in the free world and the dollar has become the principal reserve currency. Moreover, we and the countries associated with us are committed to the progressive and sound expansion of production and world trade.
The conclusions to be drawn are clear and evident. There is a discipline from which we cannot escape. It is our continuing task to maintain the purchasing power of our currency and to merit unfaltering world confidence in the dollar. Our fiscal and monetary policies, our approach to the question of the proper relationship between wages, prices and productivity, and the consequent competitive vigor of our industry and agriculture are all essential components of the solution to our balance of payments problem. In that solution the other countries of the free world have a stake scarcely less vital than our own. I am confident that with prudence and understanding the right solutions will be found.
[i] The figure is adjusted to exclude transactions between I.M.F. and member countries in gold and dollars.