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J O IN T C O M M IT T E E P R IN T

STUDY PAPER NO. 16
IN T E R N A T I O N A L E F F E C T S O F U .S .
E C O N O M IC P O L IC Y
BY

Edward M. Bernstein

MATERIALS PREPARED IN CONNECTION WITH THE

STUDY OF EMPLOYMENT, GROWTH, AND
PRICE LEVELS
FOR CONSIDERATION BY THE

JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES

JANUARY 25, 1960

Printed for the use of the Joint Economic Committee
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1960

49762

ForsalebytheSuperintendentof Documents, U.S. Government PrintingOffice
Washington25, D.O, • Price30cents

JOINT ECONOMIC COMMITTEE
(Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.)
PAUL H. DOUGLAS, Illinois, Chairman
WRIGHT PATMAN, Texas, Vice Chairman
SENATE

HOUSE OF REPRESENTATIVES

JOHN SPARKMAN, Alabama
J. WILLIAM FULBRIGHT, Arkansas
JOSEPH 0. O’MAHONEY, Wyoming
JOHN F. KENNEDY, Massachusetts
PRESCOTT BUSH, Connecticut
JOHN MARSHALL BUTLER, Maryland
JACOB K. JAVITS, New York

RICHARD BOLLING, Missouri
HALE BOGGS, Louisiana
HENRY S. REUSS, Wisconsin
FRANK M. COFFIN, Maine
THOMAS B. CURTIS, Missouri
CLARENCE E. KILBURN, New York
WILLIAM B. WIDNALL, New Jersey

S t u d y o f E m p l o y m e n t , G r o w t h , a n d P r ic e L e v e l s
(Pursuant to S. Con. Res. 13, 86th Cong., 1st sess.)
Otto Eckstein, Technical Director
John W. Lehman, Administrative Officer
James W. Knowles, Special Economic Counsel

This is part of a series of papers being prepared for con
sideration by the Joint Economic Committee in connection
with their “Study of Employment, Growth, and Price Levels.”
The committee and the committee staif neither approve nor
disapprove of the findings of the individual authors.

LETTERS OF TRANSMITTAL
J a n u a r y 21, 1960.

To Members of the Joint Economic Committee:

Submitted herewith for the consideration of the members of the
Joint Economic Committee and others is study paper No. 16 “ Inter
national Effects of U.S. Economic Policy.”
This is among the number of subjects which the Joint Economic
Committee requested individual scholars to examine and report
on in connection with the committee's “ Study of Employment,
Growth, and Price Levels.”
The findings are entirely those of the authors, and the committee and
the committee staff indicate neither approval nor disapproval by this
publication.
P a u l H . D o u g la s ,

Chairman, Joint Economic Committee.
J a n u a ry 8,

Hon.

Paul

1960.

D o u g la s ,

Chairmanr Joint Economic Committee,
U.S. Senate, Washington, D.C.
D e a r S e n a t o r D o u g l a s : Transmitted herewith is one of the
series of papers prepared for the “ Study of Employment, Growth,
and Price Levels” by outside consultants and members of the staff.
The author of this paper is Edward M. Bernstein, formerly Assistant
to the Secretary of the Treasury and Director of Research, Interna
tional Monetary Fund, presently, economic consultant, Washington,
D.C.
All papers are presented as prepared by the authors, for considera
tion by the committee and staff.

O tto E

c k s t e in ,

Technical Directory
Study of Employment, Growth, and Price Levels.

ST U D Y

PAPER

NO.

16, “ IN TE R N A T IO N A L

EFFECTS

OF U.S.

ECONOMIC POLICY,” B Y E D W A R D M. BERNSTEIN
Page

Chapter I. Summary and conclusions___________________________________
The United States and the world economy______________________
Trade and investment__________________________________________
Aid and Government expenditures abroad______________________
Economic policy and international objectives___________________
Chapter II. The United States in the world economy___________________
Role of the United States______________________________________
United States and world trade__________________________________
Importance of other areas______________________________________
Service transactions____________________________________________
Investment, aid, and Government expenditures_________________
U.S. payments and transfers____________________________________
Chapter III. Fluctuations in prices and production______________________
Fluctuations in prices__________________________________________
Fluctuations in production and employment____________________
Stabilizing effect of the world economy_________________________
Responsibility of individual countries___________________________
Chapter IV. Economic growth and world payments_____________________
Growth in the United States and other regions__________________
Capital, technology and growth________________________________
Increase in trade and investment_______________________________
Payments effects of economic growth___________________________
Chapter V. International trade policy___________________________________
U.S. reciprocal trade policy_____________________________________
Restrictions and discriminations________________________________
Regional preferences and multilateral trade_____________________
Future trade policy____________________________________________
Chapter VI. Food and raw materials problems__________________________
Surplus disposal program_______________________________________
Agricultural import policy______________________________________
Long-term position of primary products________________________
Fluctuations in prices of primary products______________________
Stabilization of prices and export receipts_______________________
Chapter VII. U.S. private foreign investment___________________________
Direct investment______________________________________________
Portfolio investment and other private credit___________________
International Bank for Reconstruction and Development_______
Cyclical fluctuations in capital flow_____________________________
Restraint on foreign investment________________________________
Chapter VIII. U.S. aid and Government expenditures__________________
International payments through Government account__________
U.S. military expenditures and military grants__________________
Economic aid and Government loans___________________________
Exports and aid_______________________________________________
Chapter IX . The problem of monetary reserves_________________________
Geographic distribution of monetary reserves___________________
Reserve position of the United States___________________________
U.S. monetary policy and reserves______________________________
Monetary reserves and the IM F _______________________________
Problem of the reserve centers__________________________________
Chapter X . Economic policy and international objectives_______________
Economics and foreign policy___________________________________
Objectives of foreign economic policy___________________________
U.S. resources and free world strength__________________________
A new aid policy_____________ _____ ___________________________

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V m

CONTENTS

C harts
Page

Chart 2-1. U.S. balance of payments, 1958_____________________________
Chart 6-1. Relative prices of raw materials, 1958 adjusted for U.S. whole
sale prices____________________________________________________________
Chart 6-2. Prices of three primary products____________________________
Chart 7-1. U.S. direct investment abroad and investment in plant and
equipment in manufacturing__________________________________________
Chart 7-2. New issues of U.S. corporate and foreign securities__________
Chart 7-3. Remittances from private foreign investment and net private
foreign investment, 1951-59__________________________________________
Chart 9-1. Gold sales and increase in foreign dollar balances____________

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81

T ables
Table 2-1. U.S. dollar receipts of the rest of the world, 1950-58_________
Table 2-2. U.S. exports as share of world total (selected years and 195058)__________________________________________________________________
Table 2-3. U.S. imports as share of world total (selected years and 195058)__________________________________________________________________
Table 2-4. Geographic distribution of U.S. imports, 1957 and 1958_______
Table 2-5. World imports, by countries and regions, 1958_______________
Table 3-1. Wholesale prices in selected countries, 1946-59______________
Table 3-2. Imports of leading industrial countries, 1957 and 1958_______
Table 4-1. Percentage increase in gross national product, adjusted for
prices________________________________________________________________
Table 4-2. Value of world trade, 1948-59________________________________
Table 4-3. Share of countries and groups of countries in world exports,
1951-58______________________________________________________________
Table 4-4. GNP and imports, 1951-58__________________________________
Table 5-1. U.S. imports and weighted average rate of duty, 1931-38 and
1946-58______________________________________________________________
Table 6-1. Government surplus crop holdings___________________________
Table 6-2. Agricultural exports, fiscal years 1955-59____________________
Table 6-3. Estimates of world exportable production of green coffee, 195051 to 1959-60________________________________________________________
Table 7-1. U.S. net private capital outflow, 1946-58____________________
Table 7-2. U.S. direct investment, new funds, 1946-59__________________
Table 7-3. New funds going into direct investment, by geographic regions,
1956-58______________________________________________________________
Table 7-4. Distribution of U.S. direct investment by industry and area,
end of 1958__________________________________________________________
Table 7-5. New foreign security issues in the United States by areas,
1951-58______________________________________________________________
Table 7-6. U.S. private foreign investment, except direct investment, end
of 1958_______________________________________________________________
Table 8-1. International receipts, payments, and transfers, U.S. Govern
ment, 1958___________________________________________________________
Table 8-2. Principal foreign expenditures and transfers of U.S. Govern
ment, 1946-58_______________________________________________________
Table 8-3. U.S. military expenditures abroad, by regions, 1946-58_______
Table 8-4. U.S. military grants, by regions, 1946-58____________________
Table 8-5. Economic grants of the U.S. Government, by regions, 1946-58-.
Table 8-6. U.S. Government net capital outflow, 1946-58_______________
Table 8-7. U.S. Government credits and claims, by regions, end of 1958__
Table 8-8. Interest and principal payments on credits of U.S. Govern
ment, 1946-58_______________________________________________________
Table 9-1. Official gold and foreign exchange reserves of countries and
regions_______________________________________________________________
Table 9-2. Principal constituents in the U.S. Reserve position, 1950-59___
Table 9-3. Ratio of gross monetary reserves to imports, 1951-58------------

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STUDY PAPER NO. 16
IN TER N ATIO N A L EFFECTS OF U .S. E C O N O M IC
POLICY
C h a p t e r I. S u m m a ry a n d C o n c l u s i o n s

In the past 9 years, a revolutionary change has taken place in the
world economy. The large surplus in the U.S. balance of payments,
which generated the fear of a persistent dollar shortage, has given way
to a U.S. deficit. In the meantime, Western Europe has emerged as a
surplus region in its international payments. No doubt, the payments
position of the United States will be restored. It is essential, however,
that this should be done promptly and without depressing the economy
of the United States or inducing a contraction in world trade.
Beyond the immediate problem of our balance of payments, there
is the broader question of the policies that this country should follow
in order to achieve its international economic and political objectives.
Our present policies were established during and immediately after the
war to encourage the quick revival of international trade and invest
ment and to facilitate the rapid reconstruction of Europe. The fact
that these policies were successful is gratifying. It should not be
assumed, however, that because they were suitable for the 1940’s and
1950’s they are all still appropriate for the 1960’s. Some of our foreign
economic policies must be reconsidered, particularly as they refer to
the amount, the kind, and the direction of aid to our friends and
allies abroad.
The United States and the world economy

The countries outside the Communist bloc constitute a world
economy because they trade with each other on a competitive basis,
the prices of commodities are closely related in these countries, and
considerable capital flows among them in private investment. It has
become customary to regard the United States as a giant dominating
the world economy, determining through the state of its domestic
business the level of world trade, the prices of primary products, and
ultimately the progress and prosperity of all other countries. As
recent experience shows, it is a mistake to think of the world economy
as a helpless adjunct to the highly dynamic and volatile economy of
the United States. Unfortunately, this widely held view tends to
induce a passive attitude in some other countries toward their own
responsibilities on international economic policy.
In the early postwar years, the rest of the world was unusually
dependent upon exports from this country, paid for to a considerable
extent by U.S. aid. This was an unusual situation that did not last
long. With the recovery of production in Europe and Japan, our
share of world exports has declined and in recent years has been about
17 percent of the world total. In the meantime, the U.S. share of

IN T E R N A T IO N A L

EFFECTS

U .S .

E C O N O M IC

P O L IC Y

world imports has risen and is now about 14 percent of the world total.
The United States is the largest exporting and importing country
in the world; but its share in world trad& is only one and a half times
that of the United Kingdom alone and less than half that of continental
Western Europe together.
Through international trade and investment, the world economy is
to some extent affected by economic conditions in all countries. It
follows that each country absorbs some instability of prices and pro
duction that originates elsewhere. At the same time, the world
economy helps to absorb some of the forces that lead to instability
of prices and production in individual countries. So long as booms
and recessions are mild and financial j>olicies are restrained, the world
economy acts as a stabilizing force, minimizing the tendencies toward
excessive fluctuations in prices and production in individual countries.
The world economy cannot, however, prevent the spread of persistent
inflation or deep depression if the great trading countries do not take
positive action to maintain monetary and economic stability.
The inflation of prices in the postwar period was to a much smaller
extent the consequence of close international ties than of independent
national policies that generated excessive demand and resulted in
upward pressures on prices and wages. To some extent, countries
with sound financial policies and close trade ties with the United
States, such as Canada, may have found their prices drawn to the
level in this country. In nearly all other countries, postwar financial
policies were at least as inflationary as those of the United States.
The large resources we placed at the disposal of some of these countries
enabled them to minimize the inflationary forces originating in their
economy, but required us to absorb some of their excessive demand in
our own economy.
Although this is less common than in the past, there is a morbid
fear of the recurrence of a deep and prolonged depression in this
country. Cyclical fluctuations in production and employment are
generally greater in the United States than in other industrial coun
tries, although such fluctuations have been quite moderate in the
postwar period and are likely to continue to be limited in amplitude
and duration. The assumption that a recession in the United States
must lead to worldwide dollar payments difficulties has proved to be
unfounded. In the recession of 1958, the decline in imports was
considerably less in the United States than in Europe or Canada,
even though the recession was milder abroad.
An expanding world economy, in which international trade and
investment grow steadily, contributes to economic progress in all
countries. While the growth in international trade and investment
is affected by independent factors, it is primarily the consequence of
higher output and incomes in the great trading countries. The
growth of production in the United States, particularly before 1953,
was somewhat greater than the longrun average. Most other high
income countries in Europe and the British Commonwealth have had
about the same or a slightly higher rate of growth. The lag in
economic progress has been largely confined to the underdeveloped
countries. Clearly, these regions need help to accelerate their
introduction of modern methods of production.
In considering these and other international economic problems, the
essential point that must be emphasized about the world economy is

IN T E R N A T IO N A L

EFFECTS

U .S .

E C O N O M IC

P O L IC Y

the common interest that all countries have in making it function
effectively. The United States, with its great output, its large
exports and imports, its considerable private investment and enormous
Government aid, has a tremendous impact on the world economy.
For this reason, the United States bears a great responsibility of
leadership in setting its policies on world trade, international invest
ment, and foreign aid. It is a mistake, however, to underestimate
the importance of other high income countries, in Europe and other
regions, whose aggregate impact on international trade is much
greater than that of the United States and whose capacity to provide
capital and aid has greatly increased in recent years.
Trade and investment

In the long run, no aspect of U.S. policy is of greater economic
importance to more countries than our trade policy. Since 1934,
under the authority granted by the Trade Agreements Act and later
legislation, the very high duties imposed by the Hawley-Smoot tariff
have been substantially reduced. About 40 percent of our imports
are duty free and the average rate of duty collected on dutiable
imports is now less than 12 percent. There are still burdensome
tariffs on many manufactured goods and quantitative restrictions on
some farm products and raw materials. Despite this, it is fair to say
that not in a century has the United States had so liberal a trade
policy. The $15 billion of U.S. imports in 1959 is concrete evidence
of this.
Now that world trade has become more competitive, there is bound
to be frequent complaint that imports are threatening this or that
domestic industry. There is even greater danger that our payments
deficit will be used to justify protectionist measures in one form or
another. Our payments difficulties do not arise from an inability to
compete in world trade and we have no reason for restricting imports.
Our policy should be to lower still further our barriers to trade while
pressing for the removal of trade discriminations imposed by other
countries against us. The conditions that necessitated dollar dis
criminations in the postwar transitional period have long since passed
and the retention of these measures cannot be justified.
Unfortunately, a new type of discrimination may inadvertently arise
from the creation of closed trading groups in Europe. Two separate
groups—the Common Market and the Free Trade Association—
have been formed to establish a new system of trade preferences
within parts of Europe by eliminating tariffs on trade among their
members while retaining them against imports from all other countries.
For political reasons, it would be regrettable if the European countries
were divided into blocs inside one or the other trade group or outside
both. For economic reasons, it would be regrettable if these trade
groups were to become instruments for renewed discrimination against
other countries.
There is a heavy responsibility on the new European trade groups
to follow policies that will avoid serious harm to the world economy.
A generally low level of tariffs and nondiscriminatory use of quantita
tive restrictions would let these countries benefit from the heightened
competition within a wider trade area without imposing too severe
a handicap on other countries. It would be a serious setback for
the world economy if a narrow economic parochialism were to arise

IN T E R N A T IO N A L

EFFECTS

U .S .

E C O N O M IC

P O L IC Y

in Europe. The best assurance that this great trading area is not
going to hinder the expansion of world trade on a multilateral basis
would be prompt action to remove all discriminations against dollar
trade and to establish complete convertibility of their currencies in
accordance with their obligations as members of the International
Monetary Fund.
While we must be concerned with our own trade interests, it would
be unfortunate if we were to appear indifferent to the trade problems
of the low-income countries. One serious difficulty arises from the
large fluctuations in the prices of primary products in world markets.
Much can be done to minimize such fluctuations or their effects on
international payments without elaborate machinery for supporting
prices. Another difficulty is the discrimination that low-income coun
tries now face in exporting manufactured goods to the United States,
Europe and some sterling area countries. In a world exporting about
$45 billion of manufactured goods annually, there can be no great
hardship in absorbing the modest amount of manufactures exported
by the underdeveloped countries and Japan.
One of the striking features of the U.S. balance of payments in
recent years is the resumption of private foreign investment on a
large scale. In the 3 years from 1956 to 1958, the net outflow of
private U.S. capital to the rest of the world averaged about $3 billion
a year—most of it in the form of direct investment by U.S. business
firms. There has also been a substantial increase in new issues of
foreign securities sold in this country, largely bonds of Canada and
the World Bank, but also of countries in Western Europe and some
British Commonwealth countries. The underdeveloped countries,
however, are still unable to raise capital in the United States through
the issue of dollar bonds.
The World Bank is not a U.S. institution, although this country
is the largest subscriber to its capital. While some of the resources
for the Bank’s loans come from the 20 percent of the original capital
paid in by its members, much the greater part comes from the issue
of its own securities or the sale of the obligations it has acquired.
The World Bank is thus an intermediary for channeling private
capital into international investment in countries that cannot sell
their own securities abroad. It is worth noting that the World Bank
has long taken the view that other countries have the capacity and
the responsibility to provide capital for international investment.
About 40 percent of its loans are in currencies other than the U.S.
dollar and even some of the dollar funds come from other countries.
Because of the payments deficit, it has been suggested that the
United States should discourage the outflow of private capital by
restricting credit. This would be unfortunate, for the effects would
be felt not only in foreign investment, but in domestic business and in
imports. Over the longer period, private foreign investment is not a
cause of weakness in the U.S. balance of payments. Remitted earn
ings from foreign investment are about equal to the new funds going
into private foreign investment. In dealing with our payments prob
lem, the United States should avoid penalizing countries that pay their
way through their exports and our private foreign investment.

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EFFECTS

U .S .

E C O N O M IC

P O L IC Y

Aid and Government expenditures abroad

The growth in our international commercial transactions and foreign
investment has been about on the scale that would be expected in a
world economy which is prosperous and growing at a rapid rate.
What is unique in the U.S. balance of payments is the enormous foreign
expenditure of the Government, nearly all for military purposes, and
the large transfers and payments it makes for military and economic
aid. In 1958, these foreign transfers and payments amounted to over
$9 billion—about 45 percent as much as the total of all private pay
ments for imports of goods and services and the net outflow of U.S.
private capital.
By far the greater part of U.S. Government expenditures abroad are
in connection with defense—that is, our own military expenditures
abroad and military grants. In 1951, Europe accounted for about 52
percent of total U.S. expenditures of $2.7 billion for these purposes.
In 1958, it accounted for about 57 percent of total expenditures of
nearly $6 billion for these purposes. It is not possible to separate the
interests of the United States and other countries in the common de
fense. What can be said is that the allocation of common defense
costs on the basis of economic conditions that prevailed in 1951 is
unrealistic in 1960.
The total of U.S. economic aid to all countries is not very large and
it has been substantially less in recent years than it was under the
Marshall plan. Very little of the U.S. economic aid now goes to
Europe. Even so, the amount available for all of the underdeveloped
countries—about $2.2 billion in 1958—can hardly be regarded as
adequate for their pressing needs. Some aid to the underdeveloped
countries is available from other countries. A case can be made for a
substantial increase in the help given to low-income countries. This
help clearly can and should come in greater part from other countries.
The balance of payments of the United States will show a deficit of
about $4 billion in 1959 and $3 billion or more in 1960. Although the
outflow of gold in recent months has been relatively moderate, the
payments problem cannot be ignored. The overall balance of pay
ments of the United States has been in deficit almost steadily since
1950. From a country with a large and persistent surplus, we have
become a country with a large and persistent deficit. This is not due
to our inability to export on an adequate scale, although competition
in world markets has become much keener in recent years. Our pay
ments deficit is primarily due to our continuing large Government
expenditures in Europe and for Europe, despite the complete recovery
of Europe’s capacity to produce and export.
Since 1950, the gold reserves of the United States have fallen by
about $5 billion and short-term dollar liabilities to foreign banks and
official institutions have increased by about $8 billion. In the mean
time, the reserves of the European countries, with some notable excep
tions, have increased even more remarkably. While there is no im
mediate threat to our reserve position—for this country still has
nearly $19.5 billion in gold and is a net creditor of about $2 billion in
the International Monetary Fund— the United States cannot permit
the continued weakening of its reserve position without losing the
freedom it has long had in formulating domestic monetary policy.

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EFFECTS

U .S .

E C O N O M IC

P O L IC Y

The United States needs gold reserves that are large enough to enable
the monetary authorities to follow a bold fiscal and credit policy in
time of recession.
Economic policy and international objectives

The international economic policies of the United States are not
only of great importance for our own well-being and for that of the
world economy, but they are inevitably an important constituent of
foreign policy. In a world in which our security and that of our
friends depends upon strength, it would be unwise to fail to use our
economic power to achieve the objectives of our diplomacy. Never
theless, in all matters affecting the world economy it is important to
bear in mind that the United States is not and cannot be the sole
determinant of international economic policy. This is a responsibility
we must share with all other countries, each assuming a part of the
common burden.
Our basic policy must be to strengthen the world economy through
the expansion of world trade on a multilateral basis, freed from restric
tions and discriminations. To supplement this trade policy, the
United States must also encourage the international flow of private
capital. The use of aid is an essential part of our foreign economic
policy. In one form or another we have provided enormous resources
for our friends and allies throughout the postwar period. In the
beginning, this aid was primarily for the purpose of facilitating the
economic recovery of Europe; more recently it has been for the purpose
of strengthening the defense of Europe. The basic objectives of this
phase of our aid policy have been achieved.
Our foreign aid policy is virtually the same now as in 1951. In the
meantime, the world has become radically different. Our interest in
maintaining a strong and dynamic economy in Europe is in no way
diminished; our concern with the defense of Europe is as great now
as ever. Fortunately, Europe is capable ot meeting all of its economic
needs and far more of its defense needs out of its own production.
Our policy must now be directed toward restoring our own payments
position and accelerating the development of the low-income countries.
The most effective way to restore the payments position of the United
States, with a minimum of adverse effects on the world economy, is to
reduce sharply the transfers and expenditures of the U.S. Govern
ment in Europe and on behalf of Europe.
There is another step that should be taken to bring our foreign
economic policy into conformity with the current world situation*—
that is, to facilitate the more rapid development of the low-income
countries. Without diminishing the security of this country and its
friends and allies, it is now possible to devote far more resources to
the investment needs of the low-income countries. The increase in
U.S. aid to the underdeveloped countries can come from a reduction in
our expenditures for Europe. Furthermore, some of the European
countries, and high-income countries in other regions as well, are now
in a position to provide much more resources to help in the develop
ment of the low-income countries.
The problems of the world economy are continuing ones. As some
old ones are solved, new ones will arise. The United States and its
friends and allies must intensify their efforts to create a prosperous
and growing world economy in whose benefits the low-income countries

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EFFECTS

U .S .

E C O N O M IC

P O L IC Y

will have a better prospect of sharing. To achieve these objectives,
we must modify the policy of the 1940’s and 1950’s so that they are
better suited to meeting the problems of the 1960’s. This country
and the great trading countries of Europe and other regions have de
layed too long in making this change. We must now act promptly
and together, in our interest and in the interest of the world economy,
to revise trade and aid policies so that they will be capable of meeting
the needs of our time.
C h a p te r

II.

T h e U n ite d

S ta te s

in t h e

W o r ld

E conom y

The world economy, as used in this study, comprises the countries
outside the Communist bloc. These countries constitute a world
economy because they trade with each other on a competitive basis,
prices of international commodities are closely related in these coun
tries, considerable capital flows among them in private investment,
and vast resources are made available by some countries to others
through governmental agencies and through international financial
institutions. The international economic and financial policies of the
countries in the world economy are linked in some degree through
membership in the International Monetary Fund, the International
Bank for Reconstruction and Development (World Bank) and the
General Agreement on Tariffs and Trade (GATT).
It follows from these close relationships in trade and finance that
economic conditions in each country affect to some extent economic
conditions in all other countries. The effect of any country on the
world economy depends upon the relative magnitude of its role in inter
national trade (including services) and international investment (in
cluding Government loans and grants). The impact of the world
economy on any one country depends upon the relative importance
of international trade to its total production and of the inflow of foreign
capital, private and public, to its domestic investment.
Role of the United States

There is a widely held view that the world economy is a passive
adjunct to the domestic economy of the United States. Prosperity
in the world economy is presumed to be impossible without a founda
tion of prosperity in the United States, and even a minor recession
in this country is presumed to be quickly and forcefully transmitted
into a recession in the world economy. This is a greatly exaggerated
view of the effect of economic conditions in the United States on the
rest of the world. To regard the United States as the sole or prime
determinant of prosperity or recession in the great industrial countries
and in the underdeveloped areas is quite unrealistic for the time in
which we live. It is a vestige of the great degression of the 1930’s
and the unusual circumstances that prevailed in the reconstruction
period of 1945-50.
It will be helpful to consider the reasons why the world economy was
so dependent on the United States in the great depression of the 1930’s,
a period when the role of this country in international trade and invest
ment was relatively much smaller than it is now. The world economy
of the 1930’s was organized on a gold standard basis, with fluctuations
in exchange rates limited by the cost of shipping gold. While all of
the principal currencies had been depreciated, voluntarily or invol

IN T E R N A T IO N A L

EFFECTS

U .S .

E C O N O M IC

P O L IC Y

untarily, between 1931 and 1936, the great trading countries were
still committed to a policy of avoiding a further decline in the gold
value of their money. Furthermore, the stability of the gold value of
the principal currencies had to be supported by gold reserves that
appeared uncomfortably small in a period of great uncertainty and
after the usefulness of the gold exchange standard had been seriously
undermined by the depreciation of sterling and the U.S. dollar.
In this sensitive environment, the U.S. dollar receipts of the rest of
the world fell very considerably because of the decline in U.S. import
demand, new barriers to imports raised by the Hawley-Smoot tariff,
and the virtual cessation of U.S. foreign investment. Under these
abnormal conditions, if several countries with fixed exchange rates
were to attempt to encourage a considerable expansion in their
economy through private and public investment, they would have
found their efforts frustrated by the low level of economic activity
in the United States and their reserve position threatened by large
and persistent deficits with this country. In fact, the much greater
decline in economic activity in the United States during the depression
made it impossible for countries to succeed in restoring their balance
of payments by reducing their own imports without intensifying the
depression in the rest of the world. Furthermore, the pressure on
reserves from trade deficits might have been intensified by capital
flight. It is this situation of the 1930’s that is properly defined as one
of dollar scarcity.
A recurrence of a dollar scarcity in this sense is most unlikely. In
the first place, the peculiar conditions that generated centers of de
flation in the world economy in the 1920,s and 1930's were fortunately
avoided after World War II.1 A much better recovery in production
and trade was made in the 1940,s and 1950’s than in the 1920’s. In
the second place, the United States would not itself tolerate the degree
of depression that was permitted to emerge prior to 1933 and to per
sist in lesser degree until 1941. In the third place, the international
institutions created after World War II, and particularly the Inter
national Monetary Fund and the World Bank, are intended to avoid
a collapse of international payments that would spread depression
from a great industrial center to the world economy as a whole.
The so-called dollar scarcity from 1945 to 1950 is an entirely differ
ent phenomenon. To regard it as in any sense similar to the dollar
scarcity of the 1930's can only cause confusion and encourage restrict
ive measures dangerous to the United States, the dollar countries, and
the world economy. In the early postwar period, a large number of
countries decided to maintain a level of investment that was far in
excess of their own savings and that could not be covered by normal
capital inflow from abroad. Because the goods to sustain such a level
of investment could be procured quicldy, easily, and relatively cheaply
in the United States, the enormous postwar payments deficits were
very largely, although not exclusively, with this country. The actual
basis for the postwar payments problem was a widespread but tempo
rary shortage of real resources for reconstruction. These deficits were
necessary and desirable, and the proper policy was to provide the
i The conditions that resulted in centers of deflation in the world economy in the 1920’s were (a) the over
valuation of sterling, (6) the undervaluation of the French franc, (c) reparations, inflation and economic
stagnation in Germany, (d) agricultural depression in the United States, (e) very protectionist tariffs in
the United States, and (/) a lack of sufficient gold and foreign exchange reserves to avoid the spread and
intensification of depression and deflation.

IN T E R N A T I O N A L

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U .S .

E C O N O M IC

P O L IC Y

deficit countries with additional resources, as was done through the
Marshall plan and in other ways.
Throughout the postwar period the world economy has been secur
ing a large and expanding flow of U.S. dollars arising from U.S. im
ports, U.S. private foreign investment, and loans, grants and expendi
tures of the U.S. Government. In recent years, these dollar receipts
have been on such a scale that no country, avoiding inflation and
having an appropriate exchange rate, would have had difficulty in
maintaining a high level of employment without risking a balance of
payments problem. It is true that for some countries, particularly
the underdeveloped countries, this would have necessitated a level of
home investment that could not be regarded as adequate. This is an
important problem for the world economy, but it does not arise from
conditions generated by the United States.
T a b l e 2 - 1 .— U.S. dollar receipts of the rest of the world, 1950-58
[In billion dollars]

Year

Dollar
receipts 1

1950 ..........................
1951.............................
1952-.-........................
1953.............................
1954...... .......................

Adjusted for
U.S. export
prices2

18.0
21.3
23.5
23.9
23.0

20.4
21.1
23 5
23.9
23.4

Year

1955.............................
1956.............................
1957.............................
1958.............................

Dollar
receipts 1

Adjusted for
U.S. export
prices2

24.2
28.4
29.8
29.6

24.2
27.6
27.9
27.9

1Imports of goods and services, U.S. grants and net Government capital, and net private capital.
On basis of 1950-55 export prices of the United States.

Source: Balance of Payments Statistical Supplement, Survey of Current Business and International
Financial Statistics.

A proper evaluation of the international effects of the economic
policies of the United States must start with recognition of the fact
that this country has a great impact on the world economy—greater
than that of any other country. At the same time, it must be recog
nized that all other countries, and particularly the great industrial
countries of Western Europe, have a considerable impact on the
world economy. That is because their participation in international
trade, investment and aid, although smaller than that of the United
States, is large and with their remarkable economic recovery could
be larger. The maintenance of a balanced, strong, and expanding
world economy is an international responsibility, not simply a
responsibility of the United States.
United States and world trade

The United States is the largest participant in world trade. In
1958, its exports of $16.3 billion, excluding military aid shipments,
constituted about 17.3 percent of the world total excluding the Com
munist bloc. The ratio fell somewhat in 1959, but not by much.
While U.S. exports are a far smaller proportion of the world total
than in the period from 1946 to 1949, when other great trading coun
tries had not yet recovered their capacity to produce and export,
they have been a fairly constant proportion of a steadily growing
volume of world trade since 1950. It is interesting to note that the
U.S. share of world exports is now somewhat greater than in 1928 and
much greater than in 1938.
5 9 7 6 2 — 6 0 --------2

IN T E R N A T IO N A L

able

2 -2 .—

Year

EFFECTS

U .S .

E C O N O M IC

P O L IC Y

U.S. exports as share of world total (selected years and 1960-68)

World ex
ports 1
(billion
dollars)

1928...............
1938...............
1948...............
1950...............
1951...............
1952...............

33.2
22.1
56.5
57.1
76.2
72.5

U.S. ex
ports i
(billion
dollars)

U.S. share
(percent)

5.2
3.1
12.7
10.1
14.1
13.3

15.6
14.0
22.5
17.7
18.5
18.3

Year

1953
1954
1955
1956
1957
1958

.........
.........
___

World ex
ports i
(billion
dollars)
71.8
75.7
83.5
92.4
99.6
94.5

U.S. ex
ports i
(billion
dollars)
12.3
12.9
14.3
17.3
19.3
16.3

U.S. share
(percent)

17.1
17.0
17.1
18.7
19.4
17.2

1 Exports are valued f.o.b. After 1950, U.S. shipments under military grants are not included in the data
on world exports and U.S. exports.
Source: International Financial Statistics.

U.S. exports are an important part of the available resources of the
countries that import these goods. They must, however, be paid for;
and the principal means of paying for these goods is through exports
to the United States—that is, U.S. imports. In 1958, the United
States accounted for 14 percent of total world imports, excluding the
Communist bloc. In 1959, the U.S. share of world imports will rise
to well over 15 percent. The U.S. share of world imports has been
fairly stable since 1950, allowance being made for cyclical fluctuations.
It is, however, considerably higher than in 1928 and very much higher
than in 1938.
^
T a b l e 2 - 3 . — U.S. imports as share of world total {selected years and 1950-58)

Year

1928...............
1938...............
1948...............
1950...............
1951...............
1952...............

World ex
ports i
(billion
dollars)
36.1
24.9
63.2
59.7
81.1
78.8

U.S. ex
ports 1
(billion
dollars)

U.S. share
(percent)

4.4
2.2
8.1
9.6
11.9
11.7

12.2
8.8
12.8
16.1
14.7
14.8

Year

1953...............
1954 .............
1955...............
1956...............
1957...............
1958 ..............

World im
ports i
(billion
dollars)
73.4
77.2
88.0
96.8
106.7
99.1

U.S. im
ports 1
(billion
dollars)
11.8
11.0
12.4
13.8
14.3
14.0

U.S. share
(percent)

16.1
14.2
14.1
14.3
13.4
14.1

1 Imports are valued c.i.f. After 1950, U.S. shipments under military grants are not included in world
imports.
Source: International Financial Statistics.

A large volume of world trade is an important factor in maintaining
a high level of activity in the world economy. In each country exports
are one of the determinants of the level of economic activity. That is
to say, the income generated by exports creates demand for home goods
and for imports. In this respect, exports resemble domestic invest
ment and expenditures on consumer durable goods, for the income
generated in these sensitive sectors of the economy also creates demand
for home goods and for imports. These are not the only factors that
determine the level of economic activity. They are, however, the
principal factors originating in the private sector of the economy.
Beyond that, each country must keep its international payments in
balance over an extended period; and even in short periods the excess
of aggregate payments over receipts must be kept within manageable
limits. For this reason, the amount of export receipts may be a limit
ing factor in the expansion of economic activity that a country is able
to undertake. Export receipts are not an absolute limit, for there are

IN T E R N A T IO N A L

EFFECTS

U .S .

E C O N O M IC

P O L IC Y

foreign exchange receipts from current services and from capital
inflow. Furthermore, countries can for a time and to some extent
draw down their own monetary reserves or secure exchange credit from
the great reserve centers (the United States and the United Kingdom
and other countries) or the International Monetary Fund.
In the United States, we tend to underestimate the importance of
exports as a direct and indirect determinant of the level of economic
activity. In a country in which gross private domestic investment
is over $75 billion a year, commercial exports of $16.3 billion may
seem a realtively small factor in the economy. Furthermore, with
gold reserves of over $19 billion, the United States has hitherto been
able to disregard the balance of payments effects of its economic pol
icies. In almost all other countries, exports are far larger relative to
private domestic investment than in the United States; and in many
of them a decline in exports has a similar effect in checking economic
activity as a decline in investment in the United States. Until re
cently, the inadequate level of gold and foreign exchange reserves in
some great trading countries made it necessary at times to restrict
aggregate demand merely because their balance of payments became
adverse.
The impact of economic conditions in the United States on the world
economy differs from country to country. As for other countries,
U.S. trade is to a considerable extent determined by propinquity.
The Western Hemisphere—Canada and Latin America—is the source
of about one-half of U.S. imports; and the United States is the market
for nearly 60 percent of Canada’s exports and just under 50 percent
of Latin America’s exports. The United States buys about 23 percent
of its imports from Western Europe, but this country is only about
7.5 percent of the export market of these countries as a group. Out
side of these two regions, the United States imports on a significant
scale from Japan, the Philippines, and some sterling area countries.
T able

2 -4.— Geographic distribution of U.S. imports, 1957 and 1958

Country or area

Millions of dollars
1957

Percent of
U.S. imports
(1958)

1958

Percent of
country’s
exports1
(1958)

Canada____________________________________
Latin America______________________________

2,907
3,769

2,688
3,595

20.9
28.0

59.4
144.0

Cuba........- ....................................................
Mexico_________________________________
Brazil.............................. .............................
Colombia________________ ________ ______
Venezuela_____________________________
Other Latin America_______ ____________

482
430
700
384
1,173
600

528
457
572
333
1,214
491

4.1
3.6
4.5
2.6
9.5
3.8

68.0
78.0
42.0
69.0
44.0

Western Europe.... ............................................ .

3,051

3,271

25.5

17.0

United Kingdom............................. ............
Belgium..................... ......................... .........
France______________________ _____ _____
Germany_____________ _________________
Italy............................................................
Other Western Europe________ __________

766
270
256
607
246
906

870
270
302
636
276
917

6.8
2.1
2.4
5.0
2.1
7.1

8.8
9.4
5.9
7.3
9.7

Other sterling area.._______________ _________
Japan______________________________ ______
Philippines...........................................................
Best of the world___________________________

1,232
601
262
1,160

1,232
671
274
1,118

9.6
5.2
2.1
8.7

i 9.0
124.0
156.0

^Approximate, except for Canada and individual countries in Western Europe.
Source: Direction of International Trade, May 1959 and International Financial Statistics, August 1959.

IN T E R N A T IO N A L

EFFECTS

U .S .

E C O N O M IC

P O L IC Y

Even countries which are not themselves directly dependent on
exports to the United States are indirectly affected by a sharp change
in the U.S. demand for imports. In a world economy trading without
discriminations, a decline in the export receipts of the trading partners
of the United States would lead to a decline in their imports, not only
from the United States but from the rest of the world. Furthermore,
countries that find their markets in the United States impaired will
become more intensive competitors in other markets in which they
do not customarily trade on a large scale. Finally, for countries
exporting basic commodities, a decline in demand in any major market
will result in a fall in the prices of these commodities in all world
markets. Thus, the impact of the United States as a great importing
country is felt directly by its suppliers and indirectly by the entire
world economy.
Importance of other areas

As the United States accounts for only 14 percent of total world
imports (excluding the Soviet bloc), it follows that other countries
and groups of countries also exercise a major impact on the world
economy. In 1958, for example, the United Kingdom imported 10.5
percent of all the goods sold in world trade. Other European countries,
such as Germany and France, absorbed 7.3 and 5.6 percent of total
world imports. Canada, with its very large per capita imports,
accounted for 5.7 percent of the world total, and the Benelux countries,
with their equally large per capita imports, together took 6.7 percent
of world imports.
Despite its high income and output, the United States is relatively
less important in world trade than other regions of smaller income
and output. Among the geographic areas, contine ital Europe
accounted for 34 percent of total world imports in 1958. Among the
currency groups, the sterling area accounted for nearly 25 percent
of total world imports in 1958. Even the United States, Canada,
and Latin America together, which are much less closely related to
each other than are the countries of Europe or the sterling area,
either as a trading or currency bloc, absorbed only 28 percent of total
world imports in 1958. As a practical matter, the most important
region in world trade and, therefore, in its impact on the world
economy is industrial Europe which, with the United Kingdom, buys
neaily 45 percent of total world imports.
T

able

2 -5 .—

World imports, by countries and regions, 1958

Million Percent of
total
dollars1
United States______________
Canada____________________
Latin America____
....
Western Europe2.............. ....
European related areas______
United Kingdom__________ _
Australia, New Zealand, and
South Africa_____________

Million Percent of
total
dollars1

13,986
5,790
8,437
34,312
4,996
10,583

13.9
5.8
8.4
34.1
4.9
10.5

Other independent sterling
area countries____________
United Kingdom related
areas_____________ _______
Japan_____________________
Rest of the world___________

5,580

5.5

4,362
3,033
5,081

4.3
3.0
5.1

4,567

4.5

World total____ ______

100,727

100.0

* Imports c.i.f. Includes shipments under military aid grants.
2 Continental Europe outside the Communist bloc.

Source: International Financial Statistics.

IN T E R N A T IO N A L

EFFECTS

U .S .

E C O N O M IC

P O L IC Y

It may be said the European countries trade mainly with each other,
so that their impact on the world economy is much less than would be
indicated by their large imports. It is, of course, true that nearly
50 percent of Europe’s trade is within the region, including the United
Kingdom. This trade has an impact on the economy of each partici
pant and should not be discounted merely because it is within Europe.
In fact, however, Europe is an enormous buyer of goods from other
regions. Continental Europe, excluding the United Kingdom, im
ported about $16 billion of goods from overseas countries; and Western
Europe, including the United Kingdom, imported about $23 billion
of goods from overseas countries. Thus, Europe’s extra-European
trade is considerably larger than that of the United States with the
world as a whole.
In fact, it is generally recognized that the role of Europe, and several
great trading countries outside of Europe, is enormously important in
the world economy. The point is made, however, that economic
fluctuations in the United States are of greater amplitude than in
other countries and that as a consequence the United States causes
greater instability in world trade than other countries do. Economic
fluctuations are ordinarily of greater amplitude in the United States,
but it is not evident that U.S. imports vary more than those of other
countries. This, at least, has been the experience of recent years as
will be seen in the next chapter.
The point is also made that because of its enormous industrial out
put, the United States is of dominant importance in the determination
of the prices of primary products. While the gross national product
of the United States (at official exchange rates) is about 1.8 times that
of Western Europe (including the United Kingdom) the volume of
their manufacturing output is not substantially less than ours. In
the United States in 1957, income originating in manufacturing was
equal to 31 percent of national income; and manufacturing employed
about 26 percent of those in civilian occupations. In the United
Kingdom, for example, manufacturing employed nearly 40 percent of
those in civilian occupations and probably accounted for about 45
percent of national income. Western Europe is a larger importer and
consumer of many industrial raw materials than the United States.
It is doubtful, therefore, that the United States has more effect on
the prices of most raw materials than the industrial countries of
Europe, taken together.
Service transactions

The U.S. economy is a very large consumer of services provided by
the rest of the world, particularly by Western Europe. Excluding
the transactions of the U.S. Government and transfers of income of
international investment in this country, the United States paid over
$4.1 billion in 1958 for services from the rest of the world in private
transactions. The greater part of these dollar payments were for
transportation ($1,599 million), travel and tourism ($1,460 million),
miscellaneous services ($549 million) and private remittances to family
and friends abroad ($525 million). Payments for such services
amounted to nearly one-third as much as U.S. merchandise imports.
Nearly one-half of total U.S. payments for services to the private
economy and for private remittances were made to Western Europe.

IN T E R N A T IO N A L

EFFECTS

U .S .

E C O N O M IC

P O L IC Y

This is not surprising, as the Western European countries occupy a
major role in world shipping and in the provisions of insurance and
other financial services related to world trade. More than half of the
personal remittances abroad from the United States are to Western
Europe. Although Canada and Latin America are of great importance
in U.S. travel and tourism, aggregate U.S. expenditures for travel and
tourism are still larger in Western Europe.
The role of the United States as a supplier of services in interna
tional transactions is probably much smaller than that of Western
Europe. Our receipts from services to the rest of the world, excluding
transactions of foreign governments and transfers of income of our
international investment, amounted to slightly more than $3.6 billion
in 1958. Apart from personal remittances, this was about as much as
U.S. payments for services from the rest of the world. Many of the
services we supply are directly related to trade with the United States.
This is especially true for shipping and for miscellaneous services
such as insurance and finance in connection with U.S. imports and
exports.
In the supply of such ancillary services for world trade, the Western
European countries have a long tradition, worldwide connections and
certain economic advantages. Relative to their trade, the United
Kingdom, Norway, Netherlands, Denmark and other European coun
tries supply a far larger proportion of the worlds shipping than the
United States, particularly transport between ports other than their
own. In their own balance of payments, gross transportation re
ceipts range from 15 percent of exports for the United Kingdom to
about 80 percent for Norway. In the United States, the comparable
figure is about 10 percent.
Investment, aid, and Government expenditures
U.S. private foreign investment in recent years has averaged close
to $3 billion a year net. It has exceeded by far the total of private
investment of all other countries, including the traditional capital
exporting countries of Western Europe. The resources derived from
private U.S. investment enable the recipient countries to maintain a
higher level of home investment or foreign investment than would
otherwise be within their means. In 1958, about half of the net out
flow of U.S. private capital was to Canada and Western Europe. The
rest is divided among Latin America, the sterling area, other countries,
and international institutions.
Apart from private foreign investment, the U.S. Government pro
vides very large resources to the rest of the world through loans and
grants. In 1958, the capital outflow on Government account was
over $1.6 billion gross and nearly $1 billion net. The funds are made
available through a number of Government agencies and for a variety
of purposes, ranging from dollar loans for ordinary procurement to
sales of surplus agricultural products on credit repayable in local
currencies. Unlike private capital, very little of the U.S. Govern
ment loans goes to Western Europe or other high income regions. New
credits to Western Europe are about offset by repayments on prior
loans. The net increase in U.S. Government loans is largely to Latin
America and other underdeveloped regions.
The U.S. Government also provides aid in two forms: grants of
military supplies and services and economic grants. From 1956 to
1958, these grants averaged $4.2 billion a year, with little change from

IN T E R N A T IO N A L

EFFECTS

U .S .

E C O N O M IC

P O L IC Y

year to year. Military aid has been about $2.5 billion a year, and
economic aid just over $1.6 billion a year. About 60 percent of the
military aid goes to Europe. Most of the remainder goes to a few
countries in Asia. In recent years about one-fifth of the economic aid
has gone to Western Europe, generally the lower income countries in
this region. A considerable, but smaller amount has gone to the lowincome countries in the sterling area. Relatively little has gone to
Latin America. The greater part of economic aid has gone to the
underdeveloped countries in Asia and Africa.
The U.S. Government also pays vast sums for its current expendi
tures abroad. In 1958, all U.S. Government payments, except in
terest paid on the public debt, amounted to about $3.8 billion. Some
of this expenditure was for the maintenance of our diplomatic and
other civil establishments abroad and for pensions, social security and
similar obligations to persons now residing abroad. Over $3.4 billion
of U.S. Government expenditures abroad were for military purposes,
more than half of it in Western Europe. These expenditures are thus
part of a pattern for sharing the cost of common defense and their
purpose is as urgent for Western Europe as it is for the United States.
U.S. payments and transfers

Through its imports of goods and services, its private capital out
flow, Government aid in the form of loans and grants, and Government
expenditures abroad, the United States makes available an enormous
flow of resources, in dollars and in kind, to the rest of the world. Of
course, this country receives goods and services for its current pay
ments, acquires valuable capital assets for its private foreign invest
ment, and achieves vital national objectives with its Government
loans, grants, and other Government expenditures. The total foreign
payments and transfers of the United States, private and govern
mental, have increased from just over $3 billion in 1938 to $18 billion
in 1948 and nearly $30 billion in 1958.
This vast sum is far more than enough to enable the world economy
to grow without any limitations arising from the availability of U.S.
dollars in international payments. In fact, as the payments of this
country have considerably exceeded its receipts over the past 10 years,
other countries have been able to add substantially to their gold and
dollar reserves. This is particularly true of some countries in Western
Europe. With their much larger reserves, they have the means to
exercise a greater degree of freedom in formulating domestic policies
designed to maintain monetary stability and to facilitate economic
growth. Furthermore, they have the means to participate on a greater
scale in international investment and in providing aid to the under
developed regions.
It must not be assumed from the magnitude of the flow of U.S.
dollars in world payments that the underdeveloped countries have all
been making satisfactory economic progress. Clearly, they have not.
Their difficulty in attaining a better rate of growth does not arise from
the inadequacy of the dollar receipts of the world economy. Their
real problem is not one of dollar payments or even the balance of pay
ments, but of a shortage of capital. The resources available to them
from their own savings and from capital inflow and grants are far less
than they can usefully invest in their economic development. This
is one of the problems with which the United States and other highincome countries must be concerned.

IN T E R N A T IO N A L

EFFECTS

U .S .

E C O N O M IC

P O L IC Y

Chart 2-1
U.S. BALANCE OF PAYMENTS 1958

Payments

Billion
dollars

Economic
Aid
Receipts

Services

Military
Grant s
Military
Expend.
Private
Capital

Military
Export s
Services

Export s

Import s

Deficit
Dollars
Gold

IN T E R N A T I O N A L

EFFECTS

U .S .

E C O N O M IC

P O L IC Y

As a practical matter, the United States cannot increase the aggre
gate amount of its payments and transfers abroad until its foreign
exchange receipts are increased. As our payments exceed our receipts
and our reserves have been considerably reduced, it is actually neces
sary to raise our receipts relative to our payments. For this reason,
an increase in U.S. loans and grants to the underdeveloped countries
must be accompanied by a reduction in aid to and Government expen
ditures in the high-income countries. Furthermore, with the re
markable growth in output in other industrial countries, with their
greater strength in international trade and payments, with the large
increase in their gold and U.S. dollar reserves, these high-income
countries can now assume a larger part of the common task of provid
ing the underdeveloped countries with resources for development.
C h a p te r

III.

F l u c t u a t i o n s in P r i c e s a n d P r o d u c t i o n

Because of the close trade and investment relations within the world
economy, economic conditions in each country affect and are affected
by economic conditions in other countries. Thus, the behavior of
prices, production and employment in each country depends not only
upon its own policies, but upon the policies of other countries. As a
practical matter, for most countries and under usual conditions, inter
national causes of economic instability are of far less importance than
domestic causes. In particular, the postwar inflation of prices in
nearly all countries was caused primarily by their own financial poli
cies. Similarly, in most large industrial countries fluctuations in pro
duction and employment are likely to originate primarily from changes
in home demand, although in some industrial countries fluctuations in
exports are of considerable importance. In countries producing pri
mary products, however, fluctuations in the demand for their exports
are of considerable importance in inducing fluctuations in prices and
economic activity in their domestic economy. Even so, the inflation
in most raw materials exporting countries has been largely the con
sequence of their own policies.
The tendency to regard international factors as a disturbing element
in the national economy is especially great in times of deep depression
and of great inflation. Under ordinary conditions, the world economy
is much more likely to facilitate than to impede the maintenance of
economic stability. When a country has a moderate boom originat
ing in its own economy, it can minimize the inflationary impact of
the excessive home demand through an import surplus. Similarly,
when a country has a moderate recession originating in its own econ
omy, it can minimize the unemployment impact of the deficient home
demand through an export surplus. While this does transmit in
stability to other countries the effect on them is small because it is
absorbed by many countries in a large world economy. It does indi
cate, however, that the world economy cannot function properly
unless the great trading countries avoid persistent inflation and
prolonged depression.
Fluctuations in prices

It is an essential characteristic of a world economy that prices of
international trade goods are closely linked in the principal markets.
The close relationship of price behavior among ^countries isjby no

INTERNATIONAL EFFECTS OF U .S . ECONOMIC POLICY

means lim ited to the prices o f international trade goods. In general,
the w hole level o f prices in one cou n try cannot for v ery long rise or
fall m uch m ore or m uch less than in other countries w ithout causing
serious difficulties that will require corrective measures to restore the
proper relation o f its price level to that o f other countries.
Suppose, for example, that the dom estic policies o f a cou n try result
in a rise in prices substantially greater than in m ost other countries.
W ith its higher price level, exporters will find difficulty in m aintaining
their custom ary level o f sales abroad. Similarly, there will b e a
greater dem and for im ports w hich w ill be relatively cheaper than hom e
products. A s the rise in hom e prices will have been accom panied b y
measures tending to expand m on ey incom es, im ports will increase and
exports decrease because o f the greater absorption o f goods at hom e.
Thus, the balance o f paym ents will turn adverse. A s no cou n try can
sustain a large and persistent balance o f paym ents deficit, measures
will have to be taken to restore the paym ents position. I f the rise in
prices has n ot been large and has n ot yet acted on produ ction costs,
it m a y be possible to restore the proper relation o f dom estic to w orld
prices b y stopping the inflation. H ow ever, if the rise in prices has
been large and has affected production costs, it m a y be necessary to
devalue the currency in order to restore prices to the w orld level.
In som e countries, a fear o f the balance o f paym ents effects o f in
flation m a y act as a restraint on dom estic policies. On the other
hand, if the great trading countries persist in m aintaining inflationary
policies, th ey m a y im pose a rise in prices on other countries, even those
w hose financial policies are m oderate. N o cou n try w ith fixed ex
change rates can resist w orldw ide pressure tow ard higher prices; for
such a cou ntry w ould find its own exports increasing and its im ports
decreasing. D om estic dem and w ould tend to b ecom e excessive as
su pply is depleted b y the export surplus and the rise in export and
im port prices w ould encourage a rise in hom e prices. Furtherm ore,
the inflow o f m onetary reserves w ould increase the lending pow er o f
banks and induce an expansion of credit. A cou n try m a y offset the
effects o f a small, although continued, balance o f paym ents surplus;
it cannot resist the price-raising effects of a large and persistent balance
o f paym ents surplus.
Th is danger is greater in th eory than in practice. Unless a cou n try
is virtually alone in avoiding inflationary policies it will find that the
excessive foreign dem and is largely absorbed b y other countries; and
if enough countries m aintain appropriate financial policies, the inter
national spread o f inflation m ust be lim ited. N evertheless, it is true
that a cou n try like Canada, whose external trade is large relative to
the national produ ct, m ust feel enorm ous pressure to h ave its price
level con form to foreign price levels— particularly that o f the U nited
States. W ith fixed exchange rates for the Canadian dollar, this w ould
in v olv e accepting alm ost the same degree o f inflation that prevails in
the U nited States. O f course, if prices rise in C anada to abou t the
same extent as in the U nited States, it does n ot necessarily m ean that
a rise in Canadian prices has been forced on it b y the U nited States.
So long as financial policies in the tw o countries are abou t the same,
price levels in the tw o countries will tend to m ove together, supported
b y their close econ om ic relations b u t caused fundam entally by the
sim ilarity o f policies.

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

T h e pressure o f the w orld econ om y on dom estic prices is alm ost
overw helm ing for a cou n try depending upon the export o f a few pri
m ary produ cts if the prices o f these produ cts rise considerably in w orld
m arkets. W ith fixed exchange rates, it w ould be im possible for such a
cou n try to avoid a general rise in dom estic prices and it w ould be un
desirable, from a social poin t o f view , to attem pt it. F o r if dom estic
prices were unchanged, it w ould m ean that the entire benefit from the
b etter terms o f trade w ould go to exporters. A rise in dom estic prices
is thus one w a y o f diffusing through the w hole econ om y the benefits o f
higher export prices. W ith the high postw ar prices for raw materials
in dollars and sterling, it was n ot possible fo r underdeveloped countries
to avoid a rise in their price levels. T h e m inim um rise in dom estic
prices w ould have had to be at least as m uch as the rise in im port
prices. T h e m axim um rise in dom estic prices should have been n o
m ore than the rise in export prices. A ctu a lly, prices in the under
d eveloped countries rose m uch m ore because o f their ow n inflationary
policies.
T a b le

3-1.— Wholsesale prices in selected countries, 1946-59
[1938=100]

Year

1946............................
1947............................
1948...........................
1949.......................—
1950............................
1951................ ..........
1952......... .................
1953............................
1954................ ..........
1955............................
1956............................
1957............................
1958............................
1959 1.........................

United
States
154
189
204
194
202
225
218
215
216
217
224
230
233
234

Canada

136
160
190
194
207
235
222
216
213
215
221
223
223
226

Brazil

330
348
370
389
400
481
544
626
789
933
1,137
1,304
1,493
2,074

Switzer United
Kingdom
land
168
175
182
173
170
191
186
179
180
181
185
188
182
179

173
189
217
228
269
317
323
317
317
327
339
349
352
355

Aus
tralia
141
149
169
190
222
275
314
322
319
328
341
345
338
341

France

648
989
1,712
1,917
2,070
2,645
2,778
2,651
2,605
2,601
2,714
2,870
3,199
3,345

India

279
311
384
398
419
459
404
412
392
360
404
428
437
454

1 Estimated for 1959.
Source: Statistics Division, International Monetary Fund.

T h e rise in prices in the postw ar period has been enorm ous, although
there are great differences am ong countries in the extent to w hich th ey
have been able to m aintain the purchasing p ow er o f their m on ey.
T h e accom panyin g table shows the m ovem ent o f prices since 1945 on
a prewar base for a num ber o f countries. W ith the exception o f
Switzerland, it is im possible to say that an y considerable part o f their
inflation has been im posed on any o f these countries b y the w orld
econ om y. In the case o f Canada, it is possible that the rise in prices
w ould have been som ew hat less in an environm ent in w hich U .S.
prices did n ot rise as m uch as th ey did. F o r other countries, it is
n ot inappropriate to say that their inflation was m ain ly hom em ade
and n ot im ported— least o f all, im ported from the U nited States.
W h atever international transmission o f inflation there%was in the
postw ar period was m uch m ore to than from the U nited States. T h e
evidence o f this is n ot m erely the relatively smaller rise o f prices in
this coun try, although that is significant. T h e U nited States, in
fact, m ade a very great con tribu tion (as did Canada and a few other
countries) to m oderating the inflation abroad, particularly in E u rop e.

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

It did this b y p rovid in g substantial am ounts o f its ow n good s to m eet
the excessive dem and abroad at a tim e when its ow n econ om y was
under pressure. Th is export surplus, financed in part b y U .S. aid,
was a fa ctor in intensifying the inflation in this country.
I t used to be fashionable to say that the w orld is on a dollar standard
rather than a gold standard. Presum ably this means that b y ch oice
or circum stance, the value o f m on ey in all other countries m ust con
form to the value o f the dollar— that is, the U .S. price level is the
price level for the w orld. So lon g as the U nited States provides
leadership in m on etary p olicy that other countries are prepared to
follow , there is an element o f truth in this con cept. D efinitely, it
does n ot mean that the U nited States can lead oth er countries into
an unwanted inflation. E ven the U nited States does n ot have
sufficient gold reserves to persist in financial policies that w ould
u ltim ately im pose a significant degree o f inflation on the w orld
econ om y unless m ost other countries adopt inflationary policies o f
their own.
F lu c tu a tio n s in p r o d u c tio n a n d e m p lo y m e n t

The level o f econ om ic a ctivity in every cou n try is affected to som e
extent b y econ om ic conditions in other countries, principally those
to w hich it exports a significant part o f its ou tput. Thus, when
econ om ic a ctivity is expanding in other countries, as indicated b y the
increase in w orld im ports, excluding those o f the U nited States, there
is a stimulus to econ om ic a ctivity in this cou n try. F or our export
industries find a greater dem and for their products, em ploym ent and
incom es increase in the export industries, and dem and throughout
the U .S. econ om y reflects to some extent the prosperity o f the export
industries. C onversely, when econ om ic a ctiv ity is declining in other
countries, as indicated b y the decrease in w orld im ports, excluding
those o f the U nited States, our export industries are affected adversely
and the decrease in exports is transm itted in part to the rest o f the
U .S. econom y.
T h e im pact o f exports on the econ om y o f any cou n try is o f greater
or less significance, depending upon the relative im portance o f its
export industries. In a cou n try like the U nited States, total exports
(including m ilitary aid goods) are abou t 4 percent o f the gross national
p rod u ct— som ew hat m ore if services are included. This is n o t a negli
gible part o f our output, particularly as exports are o f considerable
im portance in some sectors o f the econom y. F luctuations in our
exports ordinarily have far less effect on the level o f econ om ic a ctiv ity
in the U nited States than fluctuations in gross private dom estic invest
m ent or in expenditures on consum er durable goods. T h a t is because
private investm ent in the U nited States is m ore than fou r times as
large and expenditures on consum er durable goods abou t tw o and a
half times as large as exports. Furtherm ore, even proportion ately,
cyclical fluctuations in expenditure in these sensitive sectors o f our
econ om y are m uch larger than fluctuations in our exports.
In m ost o f the great trading countries, exports are o f far greater
significance than in the U nited States. In Canada, for exam ple, ex
ports in recent years have am ounted to abou t 16 percent o f the gross
national p rod u ct and abou t tw o-thirds o f gross p rivate dom estic invest
m ent. In the U nited K in gdom , exports are abou t the same propor
tion of the gross national p rod u ct as in C anada, b u t are som ew hat

INTERNATIONAL EFFECTS OF U .S . ECONOMIC POLICY

larger relative to gross private dom estic investm ent. A m on g the
industrial countries, the significance o f exports as a determ inant o f
econom ic a ctivity is especially great in som e o f the W estern E uropean
countries, such as N etherlands and B elgium , where th ey are abou t
one-third o f the gross national p rod u ct and about one and a half times
as large as gross private dom estic investm ent. In such countries, a
considerable change in exports m a}r be a m ajor factor affecting the
level o f econ om ic activity.
T h e significance o f exports for the state of the econ om y is even
greater in som e raw materials exporting countries because fluctuations
m their export receipts tend to be v ery m uch greater than in the
industrial countries. T he effects o f a decrease in export receipts are
quick ly transm itted to the econ om y as a whole. W hen export receipts
fall, incom es decline in the export sector, hom e dem and becom es less,
investm ent is reduced, and the econ om y is depressed. E ven though
the dem and for im ports m a y fall under these conditions, this m a y n ot
be enough to avoid serious balance o f paym ents difficulties and to
com pel further steps to restrict the econ om v. The special problem s
arising from the large fluctuations in the prices o f prim ary produ cts
are considered in chapter V I.
I t is frequen tly said that cyclical fluctuations in the U nited States
are the cause o f serious difficulties in the econ om y o f other cou n
tries m ore dependent on exports. C yclical fluctuations are som ew hat
greater in the U nited States than in other large industrial countries.
This is a natural consequence o f the structure o f our econ om y in which
the role o f private investm ent and consum er durable goods is so m uch
greater than in other countries. T here is no w ay in w hich fluctuations
in the level o f econ om ic a ctivity in the U nited States can be avoided,
although th ey can be m oderated. I f recessions in this cou n try rem ain
m ild and short, as they have been throughout the postw ar period, the
effect on the econ om y o f other industrial countries, although n o t
necessarily on raw materials exporting countries, should n o t be serious.
In som e discussions o f this problem , the assum ption is m ade that a
recession in this country, even a m ild one, m ust result in a substantial
fall in U .S. im ports and thus tend to spread recession to other cou n
tries. T h e evidence for this assum ption is largely drawn from the
experience in the U .S. recessions o f 1937 and 1949. In the calendar
year 1938, a recession year, U .S. im ports fell b y over 30 percent from
the level o f 1937, a relatively prosperous year. This decline in U .S.
im ports was large, b u t the recession o f 1938 was n o t m ild. In the
calendar year 1949, a recession year, U.S. im ports fell b y a bou t
7 percent from the level o f 1948. This was a m ild recession and the
fall in total im ports was n ot large. T h e decline was concentrated,
how ever, on im ports from E u rope and the sterling area. T h e reason
for this was n ot so m uch the recession in the U nited States as the
w idely held expectation o f devaluation o f E uropean currencies w hich
induced im porters to postpon e their norm al purchases abroad.
T h e recessions o f 1954 and 1958 are better evidence o f the response
o f U .S. im ports to a decline in business a ctivity. In 1954, U .S.
im ports were 6 percent below the level o f 1953; in 1958, th ey were
ju st over 2 percent below the level o f 1957. I f a com parison were
m ade b y quarters, the proportionate decline from the peak o f pros
p erity to the low point o f recession w ould be m uch greater. Q uarterly
com parisons, however, are less meaningful than com parisons for a

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

full year w hich give a better idea o f the m agnitude o f the problem
created b y a fall in U .S. im ports. A s a m atter o f fact, except for
G erm any, the decline in U .S. im ports in 1958 was far less than the
decline in other leading industrial countries, nearly all o f w hich either
had a m u ch m ilder recession than the U nited States or virtu ally no
recession at all.
T a b le

3-2.— Imports of leading industrial countries, 1957 and 1958
Country

United States___
Canada...............
United Kingdom.
France..... ...........
Germany............
Italy....................
Netherlands.......
Belgium..............
Japan..................

1957
1958
im ports1
imports1
(million
(million
U.S. dollars) U.S. dollars)
14,297
6,346
11,398
6,174
7,499
3,674
4,106
3,432
4,284

13,986
5,790
10,583
5,604
7,361
3,169
3,625
3,129

Percent
decline
2.2
8.8

7.2
9.2
1.9
13.7
11.7

8.8

29.2

1 Imports, c.i.f.
Source: International Financial Statistics, December 1959, pp. 24-27.

W hile som e raw materials exporting countries are nearly always
affected to som e extent b y a recession in the U nited States, a slight
fall in U.S. im ports o f the m agnitude o f 1958 or 1954 is o f no conse
quence to the great industrial countries. I f their own m onetary
reserves are adequate, there is no reason w h y there should be any
noticeable effect on their econom y from a decline in U .S. im ports
which is less than one-fifth o f 1 percent o f their gross national product.
W ith their present m onetary reserves they can m aintain policies de
signed to support dom estic dem and in the face o f such a small reduc
tion in their exports to the U nited States. In fact, it is n ot too m uch
to say that fluctuations in econom ic activity in the great industrial
countries in the postw ar period have been prim arily caused b y d o
m estic factors, including hom e-induced balance o f paym ents difficul
ties, rather than the m ild recessions in the U nited States.
Stabilizing effect of the world economy
A lthough m any discussions o f international econom ic problem s
emphasize the m anner in w hich w orld trade and paym ents transm it
instability from cou ntry to country, the fact is that under ordinary
conditions the w orld econ om y is a helpful factor in m aintaining
stability o f prices, production, and em ploym ent in the gjreat trading
countries. In a dynam ic econ om y, som e fluctuation in econom ic
a ctivity is inevitable. I t is inconceivable that the various sensitive
sectors o f the econ om y can all grow at a constant rate year after year.
A lthough m uch can be done b y a cou n try through its ow n fiscal and
credit policies to minimize cyclical fluctuations, they cannot be
avoided. Furtherm ore, a w orld econom y that is functioning properly
will tend to dam pen the am plitude o f cyclical fluctuations in any one
country, provided other countries are n ot experiencing similar fluc
tuations at the same time.
Suppose, for exam ple, that a cou ntry has a b oom so that the de
m and for resources for dom estic investm ent increases m ore rapidly

INTERNATIONAL EFFECTS OF U .S . ECONOMIC POLICY

than the availability o f dom estic savings, adjusted for the norm al
inflow or outflow o f capital. I f there were no w ay to acquire supple
m entary resources from abroad, the excessive hom e dem and w ould
cause a rise in prices; and if the pressure o f excessive dem and becam e
large and persisted, it w ould lead to a higher level o f costs. Thus,
periods o f prosperity w ould be accom panied b y a considerable rise in
prices and an inflationary pattern o f behavior. In a w orld econ om y,
how ever, it is possible for a cou n try to have an im port surplus and in
this w a y to acquire the additional resources that enable it to m aintain
hom e investm ent and hold dow n the pressure o f excess dem and.
Similarly, w hen a coun try has a fall in hom e investm ent, the w orld
econ om y absorbs part o f the effect o f the decline in aggregate dem and
and m inimizes the im pact o f the recession on p rodu ction and em
ploym ent. F or in a recession w hich is confined to one or a few cou n
tries, im ports fall relative to exports and the net increase in exports
enables the cou n try to m aintain p roduction and em ploym en t at a
higher level than w ould otherwise be possible. O bviously, the w orld
econ om y can n ot absorb any considerable part o f the decline in aggre
gate dem and accom pan yin g a severe or a prolonged depression in a
great industrial cou n try like the U nited States. T h e w orld econ om y
can, h ow ever, absorb som e o f the effect o f a m ild recession in the
U nited States and a m uch greater part o f the effect o f a m oderate
recession in other industrial countries whose foreign trade is con
siderably larger relative to the dom estic econom y.
T h e stabilizing effect o f the w orld econ om y depends u pon the fa ct
that it is a broad stream o f econ om ic activity, with trade o f m ore than
$100 billion a year, from w hich individual countries can draw rela
tively m ore in the w a y o f im ports in tim e of boom and into w hich th ey
can p our relatively m ore in the w a y o f exports in tim e o f recession,
w ithout seriously affecting the econ om y o f other countries. Thus
each great trading cou n try absorbs in small part som e of the instability,
originating in the cou n try w ith inflationary or deflationary tendencies
and it can do this w ithout adverse effects on its own econ om y because
its share in providin g m ore exports or taking m ore im ports is so small.
On the other hand, the aggregate benefit to the cou n try having in
flationary or deflationary tendencies from the contribu tion to stability
m ade b y all other countries in the w orld econ om y m a y be quite
significant.
A stu dy o f the N ational Bureau o f E con om ic R esearch confirms the
fact that since 1880, a period o f p rosperity or recession, confined to the
U nited States, has generally been accom panied b y a stabilizing change
in the relation o f U .S. exports to im ports— that is, the balance o f
trade.2 A lthough the postw ar period was one o f considerable
instability in w orld paym ents, there is evidence that even betw een
1947 and 1957, the trade balance o f the U nited States declined when
there was an accelerated grow th in the gross national p rod u ct and rose
when there was a slowing dow n in the grow th o f the gross national
p rod u ct.
O bviously, the changes in the U .S. trade balance are
ordinarily small relative to changes in the gross national prod u ct, so
that com pensating changes in exports and im ports are generally
n ot decisive in determ ining the level o f econom ic a ctivity.
* Ilse Mintz, “ Trade Balances During Business Cycles: U.S. and Britain Since 1880.”
of Economic Research, 1959, Occasional Paper 67.

National Bureau

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

In 1956 and 1957, how ever, the large increase in U .S. exports o f
good s and services, caused b y the Suez difficulties, cam e at a time
when gross private dom estic investm ent was falling considerably.
F rom the last quarter o f 1955 to the first quarter o f 1957, expenditures
in this sensitive sector fell b y $5.6 billion a year, seasonally adjusted.
W hile gross private dom estic investm ent was declining, U .S. exports
o f goods and services rose b y $6.7 billion a year, seasonally adjusted,
and net exports rose b y over $5 billion a year. T hus, the increase in
net exports o f goods and services offset alm ost fu lly the decline in
hom e investm ent and was an im portant factor in prolonging the
expansion phase o f the cycle in 1956 and 1957.
D a ta are n ot as readily available to determ ine the extent to w hich
the w orld econ om y ordinarily acts as an offsetting factor to fluctuations
in dom estic econ om ic a ctivity in other countries. In the U nited
K in gd om , the prosperity and recession phases o f business cycles have
tended to be accom panied b y an increase o f net exports in periods o f
prosperity and a decrease in periods o f recession. This behavior o f
the British trade balance is consistent with either o f tw o explanations.
It is possible that fluctuations in exports were a cause o f cyclical
fluctuations in hom e investm ent. A lternatively, it is possible that
fluctuations in hom e investm ent induced corresponding changes in
British exports. In any case, its close econ om ic ties w ith the raw
materials exporting countries o f the sterling area m ake it difficult fo r
the U nited K in gd om to avoid som e o f the effects o f their large fluctua
tions in trade.
I t should be noted that the w orld econ om y acts as a stabilizing
fa ctor to offset econ om ic fluctuations originating in a cou n try on ly if
it can finance an im port surplus in a period o f excessive hom e dem and
and is willing to finance an export surplus in a period o f deficient h om e
dem and. In brief, to secure the stabilizing benefits o f a w orld
econ om y, a cou n try m ust p a y out reserves in a period o f prosperity
and accum ulate reserves in a period o f recession. I t follow s from
this that the w orld econ om y can be m ore helpful in contributing to
general stability o f prices, produ ction , and em ploym en t if it is
generously provided with m on etary reserves and these reserves are
w idely distributed.
T h e p oin t is som etim es m ade that the w orld econ om y functions
m ost effectively when the great trading countries m aintain fixed
parities and lim it fluctuations in exchange rates. I t is a fa ct that a
fixed parity, appropriate to the international econ om ic position o f a
cou n try, does result in greater responsiveness b y a cou n try to econ om ic
con ditions in the w orld econ om y and, correspondingly, greater
responsiveness b y the w orld econ om y to econ om ic conditions in such
a cou n try. Nevertheless, a fixed p arity will n ot p reven t a cou n try
from becom in g partially isolated from the w orld econ om y if that parity
is m aintained through restrictions and controls. Furtherm ore, a
cou n try h igh ly dependent on international trade and investm ent
cannot avoid an im pact from econom ic instability in other countries
m erely b y letting exchange rates fluctuate in terms o f its ow n currency.
R e s p o n s ib ility o j in d iv id u a l c o u n tr ie s

T here is n o conflict betw een the role o f the w orld econ om y as an
absorber o f fluctuations in individual countries and as a universal
transm itter o f fluctuations from individual countries.
E con om ic

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

forces d o m ove from cou ntry to cou n try through w orld trade and p a y
m ents. I f the disturbing forces are m oderate and d o n ot last long,
they are largely absorbed b y other countries; and if the disturbing
forces are soon brought to an end in the cou n try or countries o f origin,
the w orld econ om y will have contributed to the restoration o f stability.
On the other hand, if the disturbing forces are large and prolonged,
th ey cannot be absorbed b y other countries and th ey will spread
instability from cou ntry to cou ntry, on occasion even becom in g m ore
severe in the process. T h e w orld econ om y does n ot o f itself create
instability nor can it bring it to an end. E con om ic instability
originates in econ om ic conditions and econom ic policies in individual
countries and it can be stopped on ly b y national policies designed to
restore and m aintain stability.
T h e contribu tion that the w orld econ om y can m ake tow ard the
m aintenance o f stability in a ny cou n try is lim ited. Clearly, no cou n try
w ith relatively large and persistent inflationary tendencies can sus
tain the balance o f paym ents deficits that w ould in evita bly result
from its excessive hom e dem and. In time, its reserves w ould be de
pleted and its access to foreign credits w ould be cu t off. Unless it
brings the inflation to an end it w ould be com pelled to take other
measures to restrict its im ports and these measures w ould force the
inflationary pressures inward on the dom estic econ om y. N o r can the
w orld econ om y sustain the persistent drain on reserves if a great
industrial cou ntry, such as the U nited States, were to have a severe
and protracted depression. T o p rotect their reserves, and to m ini
m ize the im pact o f the depression on their ow n econ om y, other
countries w ould be com pelled to im pose discrim inatory restrictions
on im ports from that cou n try and such restrictions w ould force the
depression b a ck to the dom estic econ om y o f the cou n try with deep
depression.

The functioning of the world economy, therefore, depends upon a
common policy to avoid persistent inflation and deep depression. If
a country fails to conform to such a policy it will in time be isolated
from the world economy, either by restrictive measures it imposes
itself or by restrictive measures imposed by other countries. If many
countries depart for long from a policy of reasonable stability, the
world economy will be unable to function in a normal way. Under
such conditions, individual countries and groups of countries will be
induced to take measures designed to protect themselves from per
sistent inflation or from deep depression that is imposed on them by
other countries unable to maintain the policies necessary for their
own economic stability. This is what happened during the world
wide depression of the 1930’s. It probably would have happened in
the 1950’s if the great trading countries had not begun to take effec
tive measures to halt the worldwide inflation.
W hile the w orld econ om y w orks best when all countries pursue a
com m on p o licy to m inim ize and to terminate q u ick ly the forces that
disturb dom estic stability, the responsibility o f leadership fo r such a
p o licy rests particularity on the great industrial countries. T heir
h ighly dyn am ic econom ies are m ore likely to b ecom e the source o f
recurrent recessions and depressions that spread to oth er countries.
T h e y alone have the reserves that perm it them to continue inflation
ary policies that persist year after year and that ultim ately com pel
oth er countries to con form to their rising level o f prices. W hile the
49762— 60------ 3

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

U nited States is n ot and has n ot been the p oin t o f origin fo r econ om ic
instability in the postw ar period, its greater role in international trade
and paym ents gives it greater pow er in setting standards to w hich
other countries u ltim ately find it necessary to conform .
C h a p t e r IV . E c o n o m ic G r o w t h a n d W o r l d P a y m e n ts

A n expanding w orld econom y, in w hich w orld trade and interna
tional investm ent grow steadily, contributes to econ om ic progress in
the industrial countries as well as the underdeveloped countries.
W h ile the grow th in w orld trade and international investm ent are
affected b y independent factors, it is itself to a considerable extent
the result o f increased prod u ction and higher levels o f incom e in the
great industrial countries. Policies that contribute to grow th in the
national econ om y create an environm ent that encourages grow th in
the w orld econ om y. There m ay, nevertheless, be countries and
regions whose econ om ic grow th lags and the acceleration o f their
grow th w ould facilitate the continued grow th in the w orld econ om y.
Growth in the United States and other regions
T h e postw ar period has been one o f exceptionally rapid grow th
throughout m ost o f the world. T h e rem arkable increase in p rod u c
tion that has been achieved in the w orld econ om y is in part due to an
environm ent favorable to econ om ic grow th. T h e postw ar period
began w ith an enorm ous dem and for goods o f all kinds. In m a n y
parts o f the w orld, how ever, p roductive ca p acity had been im paired
b y wartim e destruction, and b y the inability to continue investm ent
and m aintenance during the war. In the U nited States, Canada, and
som e other countries, how ever, industrial ca p acity had been expanded
to m eet wartim e needs; and this ca p acity was available fo r m eeting
the enorm ous postw ar dem and at hom e and for facilitating recon
stru ction and developm ent abroad.
A s the period from 1940 to 1946 was one o f w ar a ctiv ity and p ost
w ar adjustm ent, the recent grow th in U .S. ou tp u t is better m easured
from 1947. In the 12 years since then, the gross national p rod u ct at
con stan t prices has risen b y nearly 50 percent— an annual rate o f
increase o f 3.5 percent. T h e increase from 1947 to 1953, how ever,
was at abou t tw ice the rate from 1953 to 1959. E v e n if allowance is
m ade fo r the fa ct that 1947 is a m ore favorable base fo r m easurem ent
than 1953 and that 1959 is a less favorable terminal date fo r com par
ison than 1953, it is clear that the rate o f grow th has been substantially
less in the recent period than in the earlier period. M u ch the same
evidence is shown b y the index o f industrial produ ction . F o r the 12
years from 1947 to 1959, industrial p rodu ction (using the revised data
o f the Federal R eserve B oard) increased b y over 60 percent— an annual
rate o f increase o f slightly m ore than 4 percent. In industrial p ro
duction, also, the increase from 1947 to 1953 was at a bou t tw ice the
rate from 1953 to 1959.
T h e reasons for the rapid grow th in ou tp u t and p rod u ctiv ity in the
U nited States in the postw ar period are com plex. T h e favorable
econ om ic environm ent has already been noted. Tech n ical inn ova
tions were o f great im portan ce; and the skills o f labor and m anagem ent
were u n dou btedly better applied. A ccord in g to a stu d y o f the
N ational B ureau o f E con om ic R esearch, investm ent in “ tangible

INTERNATIONAL EFFECTS OF U .S . ECONOMIC POLICY

capital was pushed up at an extraordinarily high rate— faster than in
a n y preceding period o f similar length.” 3 A nother poin t that m ust
b e emphasized is that the pattern o f produ ction and use o f the national
p rod u ct has shifted in a m anner that puts greater w eight on high
p rod u ctivity (high incom e) ou tp ut than in the prewar period. This
shift o f production to high incom e ou tp u t is apparent in the declining
role o f agricultural em ploym ent (low -incom e output) in the econ om y.
A similar shift has taken place in m anufacturing, w ith a m uch greater
proportion o f the workers em ployed in the higher w age durable goods
industries.
T h e grow th in ou tput in the U nited States was n o t as large as in
m ost other high-incom e countries. In the 10-year period from 1948
to 1958, the gross national produ ct, adjusted for the rise in prices,
increased b y a bou t 65 percent in Canada. A s in the case o f the
U nited States, the increase in ou tp u t was at a greater rate in the first
quinquennium than in the second. T h e greater grow th in ou tp u t in
Canada is p artly explained b y the larger increase in the lab or force.
C anada is in a lon g w ave o f rapid grow th, a characteristic o f the
econ om y o f Australia, N ew Zealand, and certain other countries w ith
rapid population grow th and a changing pattern o f ou tput.
U ntil recently, there has been a widespread ten dency to under
estimate the dyn am ic character o f the econ om y o f the W estern
E uropean countries. W hile ou tp u t per capita is considerably low er
in W estern E urope than in the U nited States, its grow th has n o t been
significantly less than in the U nited States— the periods o f postw ar
disruption aside— over the last 75 years. M o re recently, since 1953,
the rate o f grow th in total ou tp u t has been substantially greater in
W estern E u rop e than in the U nited States.
F rom 1948 to 1953, the grow th in ou tp u t in the W estern E uropean
countries was uneven. Som e countries, like Germ any, France, and
Ita ly had a large increase in ou tput, abou t as m uch as the U nited
States and C anada, but th ey started from a rather low level. Others,
like the U nited K in gd om , N etherlands, and B elgium had a smaller
increase in ou tp u t, considerably less than the U nited States and
C anada. F rom 1953 to 1958, how ever, W estern E u rope has had a
rem arkably large and generally sustained grow th in ou tput. T h e
w eighted average increase in gross output, adjusted for prices, for all
the W estern E uropean countries was 23.8 percent from 1953 to 1958,
abou t 1.8 times the rate o f grow th o f U .S. ou tp u t.4
T h e com parative record on industrial production is equally favorable
fo r W estern E urope. T h e average increase from 1948 to 1953 for all
o f W estern E u rope was slightly greater than for the U nited States.
T h e W estern E uropean countries were better able to m aintain their
industrial grow th between 1953 and 1958. E ven abstracting from
the U .S. recession, b y taking the industrial produ ction index o f June
1959, and using the recen tly revised index, it appears that industrial
produ ction increased nearly one and a half tim es as m uch in W estern
E u rope as in the U nited States since 1953.
« Solomon Fabricant, “ Basic Facts on Productivity Change,” p. 37. National Bureau of Economic
Research, 1959, Occasional Paper 63.
4The gross national product in current money terms should be deflated by a price index reflecting the
prices of the constituent output. Such an index is available for the United States, but not in all other coun
tries. In the United States, the index of consumer prices rose by the same percentage as the index for de
flating the gross national product from 1947 to 1954, but by somewhat less from 1954 to 1958. A correction of
the money value of the gross national product by the index of the cost of living is the simplest but not the
most accurate adjustment that can be made for comparing the growth in real output in different countries.

INTERNATIONAL EFFECTS OF U .S . ECONOMIC POLICY
T a b l e 4 -1

Percentage increase in gross national product, adjusted for prices 1
Increase
from 1948
to 1953

Country

United States___________
Canada________________
Belgium_______________
France___ . ____________
Germany...........................

26
35
3
33
239

Increase
from 1953
to 1958
13
19
17
23
40

Country

Italy___________________
Netherlands____________
United Kingdom________
Japan__________________

Increase
from 1948
to 1953
34
19
10

Increase
from 1953
to 1958
24
26
13
40

Percentage increase in industrial production
Country

United States *_________
Canada________________
Belgium________________
France_________________
Germany—........................

Increase
from 1948
to 1953
34
27
15
27
* 39

Increase
from 1953
to 1958
421
<27
11
50
51

Country

Italy___________________
Netherlands____________
United Kingdom________
Japan__________________

Increase
from 1948
to 1953
61
43
20

Increase
from 1953
to 1958
41
26
16
*81

1 Adjusted by cost-of-living index.

2 Since 1950.

* Revised index. For mining and manufacturing, the increase was 32 percent from 1948 to 1953 and
19 percent from 1953 to June 1959.
* To June 1959.
* Manufacturing.
Source: U.N. Monthly Bulletin of Statistics, I.M .F., International Financial Statistics, and Federal
Reserve Bulletin, December 1959.

T h e econom ic problem s o f Japan in the postw ar period were m uch
the same as those o f som e European countries. Its productive
cap acity had been seriously im paired b y war destruction and the
w artim e deficiency in investm ent and m aintenance o f capital equip
m ent. I t required aid from abroad and self-denial to rebuild its
prod u ctive capacity. T h e recovery that has been m ade is note
w orth y. T h e rate o f econom ic grow th in Japan has been rem arkable.
B etw een 1953 and 1958, the gross national produ ct, adjusted for price
changes, has increased abou t 40 percent. M anufacturing production
has risen b y 81 percent from 1953 to 1958.
T h e situation in the less developed regions differs w idely from coun
try to country. In Latin Am erica, the early postw ar period was
generally one o f rapid grow th. T he availability o f gold and dollar
reserves accum ulated during the war and the g ood prices fo r their
export products enabled these countries to m aintain a high level o f
investm ent. M o re recently, the sharp decline in reserves in several
L atin Am erican countries and the fall in the prices o f prim ary products
has placed great pressure on their econom y. D espite som e increase
in the flow o f foreign capital, m any o f these countries have found it
necessary to undertake severe restriction o f private and public invest
m ent in order to halt the inflation. Nevertheless, the technical ad
vance in L atin Am erica and the stronger econ om y they have already
developed, indicates that if foreign capital is available, m any o f these
countries will accelerate their econom ic growth.
T h e situation is less favorable in the Far East, the M id dle East,
and A frica. T h e level o f incom e in these regions is far low er than in
L atin A m erica. W hile m an y o f these countries accum ulated substan
tial reserves during the war, these reserves w,ere used up in the early

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

postw ar period. Their own savings are distressingly small and the
flow o f capital from abroad has been lim ited. A n enorm ous effort is
being m ade in som e of these countries, such as India, to accelerate
econ om ic developm ent. In the Philippines, an excellent re covery was
m ade from the wartim e destruction, b u t difficulty has been experienced
in gettin g a sustained rate o f grow th. T h rou gh ou t these under
developed regions, there is an eagerness for econom ic progress that
offers great hope for the future. One, but b y no means the on ly,
difficulty that confronts them is a lack o f capital.
C a p it a l, te c h n o lo g y a n d g r o w th

One o f the striking facts about the w orld econ om y is the wide
difference in incom es, even am ong the industrially advanced countries,
and the persistence o f the enorm ous gap in the incom es o f the welldeveloped countries and the underdeveloped countries. T h ere can be
no d ou b t that a m ore rapid rise in p rod u ctivity in the low -in com e
countries w ould be beneficial to the U nited States and to the w orld
econ om y generally. A rise in incom es in other countries m akes them
better m arkets for our export goods and m ore efficient suppliers o f
our im port g o o d s ; and it widens the opportunities for A m erican capital
and enterprise seeking investm ent abroad.
D ifferences in technical m ethods o f produ ction are o f great im port
ance in accounting for differences in incom e and ou tp ut in the devel
oped and underdeveloped countries. T h e y are o f relatively little
significance in accounting for differences in incom e am ong the advanced
industrial countries. N o cou n try has a m on o p o ly on technical inn ova
tion. T h e w hole world has been contributing to the agricultural and
the industrial revolution for centuries. T h e m acliinem akers o f the
U nited States, the U nited K in gd om , and G erm any are eager to sell
their produ cts and are ready to help design the plants that will use
their m achines. E very underdeveloped cou n try thus has free access
to the m ethods o f produ ction used in the great industrial countries.
T here is one great advantage that the advanced countries do have
in techn ology. T he developm ent o f new m ethods o f prod u ction is
directed to a very considerable extent tow ard raising efficiency on the
basis o f the cost relationships that prevail in the U nited States and
W estern E urope. A new invention in the U nited States is lik ely to
be m ore adaptable to C anada than to the Philippines. A new inven
tion in the U nited K in gd om is likely to be m ore adaptable to France
than to India. In that sense, the underdeveloped countries are at a
disadvantage in applying the newest m ethods o f prod u ction . Large
sums are n ot invested in research and engineering to develop new
m ethods o f produ ction particularly applicable to then* econom ies.
There remains, how ever, a wide range of well-established produ ction
m ethods applicable to their agriculture and industry that the under
developed countries can, and will in time, apply.
T h e relation o f capital to p rod u ctivity is far m ore com plex than is
generally assumed in simple grow th m odels; and it is quite different
in the great industrial countries than in the underdeveloped countries.
T h e am ount o f capital used per w orker is higher in the U nited States
and C anada than in the U nited K in gd om , G erm any, and France.
A n d, o f course, the am ount o f capital used per w orker is m uch higher
in these W estern E uropean countries than in the underdeveloped
countries o f L atin A m erica, Asia, and A frica. N o one can d en y this

INTERNATIONAL EFFECTS OF U .S . ECONOMIC POLICY

correlation ; b u t it is im portant to understand its significance. Is it
true that the p rod u ctiv ity o f a B ritish w orker cou ld be raised to
A m erican standards in the same industry b y increasing investm ent
per w orker to the same level? T he ou tp u t per w orker in autom obiles
in the U nited States is abou t fou r times that in the U nited K in gd om .
I f an increase in investm ent per worker, to m atch the U.S. ratio,
w ould raise ou tp u t per w orker to the U .S. level, the B ritish autom obile
industry w ould find it highly profitable to do so.
T h e p oin t m a y be m ade that although the U nited K in gd om cou ld
provid e capital for one or a few industries on the scale prevailing in
the U nited States, it cou ld n ot p rovid e the w hole econ om y w ith capital
on such a scale. T his seems to be irrelevant in explaining the differ
ences in investm ent in any industry. T h e U nited K in gd om has been
exporting capital in large am ounts for m an y generations. I f the
investm ent o f such capital at hom e could have increased p ro d u ctiv ity
substantially, for exam ple b y investing on the same scale as in the
U nited States, the profitability o f hom e investm ent w ould have been
so great as to preclude the export of so m uch capital in the past. I f
differences in p rod u ctiv ity betw een the U nited States and W estern
E u rope were prim arily due to differences in the availability o f capital
this w ould be p rom p tly reflected in higher interest rates in E urope.
T h e problem is essentially different in the underdeveloped countries.
T heir m ethods o f p rodu ction do n ot m atch the technical efficiency o f
the m ore advanced countries. Furtherm ore, unlike W estern E urope,
th ey do n ot have the capital to a pply m odern m ethods o f p rodu ction .
There is m uch that m ust be done b y the underdeveloped countries to
create a spirit favorable to econ om ic progress. T h e degree o f in n ova
tion necesssary for establishing m odern m ethods o f p rodu ction w ould
seem to indicate that technical assistance is needed for this purpose.
E qu a lly im portant, far larger am ounts of capital for investm ent are
essential if the process o f econ om ic grow th is to be accelerated in the
under developed coun tries.
E con om ic grow th in W estern E urope will p rob a b ly continue at a
slightly higher rate than in the U nited States. I t is difficult to see
h ow such large differences in ou tp ut per w orker can persist in countries
as well supplied w ith capital and as well advanced in technical kn ow l
edge as W estern E urope. T h e process will be hastened b y the fa ct
that all over E urope, industrial ou tp u t is shifting tow ard the p rod u c
tion o f durable goods— the high-incom e industries. B etw een 1950 and
1957, the proportion o f durable goods to total exports o f m anufactures
o f the eight leading industrial countries o f W estern E u rope rose from
28 to 33.6 percent. A similar change is taking place in the pattern
o f consum ption. In the U nited K in gdom , for example, expenditure
on consum er durable goods was 4 percent o f total consum er expendi
tures in 1948, 6.1 percent in 1953, 7.7 percent in 1958, and a bou t 9.3
percent in the second quarter of 1959.
T h e task o f accelerating econ om ic grow th is m uch m ore difficult in
the underdeveloped countries than in the advanced industrial cou n
tries; b u t when the process is started and th ey acquire the m om entum
o f progress, the rate of econ om ic grow th, b u t n ot the absolute increase
in output, will in tim e m atch ana ultim ately exceed that o f the m ore
advanced countries. A broad view o f history, coverin g the period o f
the industrial revolution, w ould seem to show that the spread o f tech

INTERNATIONAL EFFECTS OF U .S . ECONOMIC POLICY

nical know ledge, labor skills, capital, and enterprise will u ltim ately
diminish the large differences in p rodu ctive efficiency that em erged at
earlier stages in the developm ent of the great industrial countries o f
today.
Increase in trade and investment
T h e great depression of the 1930's and the accom panying policies o f
p rotection and restriction resulted in a 10-year halt in econ om ic
grow th and a severe decline in w orld trade. T h e dollar value o f w orld
trade, as measured b y exports, was $33.2 billion in 1928. T en years
later, in 1938, the value o f w orld trade was $22.1 billion, a decline o f
alm ost one-third in dollar terms. I f these dollar figures are corrected
for low er U .S. wholesale prices, the adjusted level o f w orld trade fell
b y nearly 20 percent. On a volum e basis, the decline was p rob a b ly
less, for raw materials are a large constituent o f w orld trade, and the
prices o f farm prod u cts and minerals fell abou t twice as m u ch as the
overall index o f wholesale prices in this country.
T h e postw ar period began with m any o f the great industrial cou n
tries o f E u rope still producing below or little above the prew ar level.
A s their hom e needs for reconstruction were exceptionally great, th ey
were unable to supply export good s to w orld m arkets on the cu stom ary
scale. N evertheless, in 1947, the value o f w orld trade, as measured
b y exports, was $48.5 billion, in real terms about 15 percent a bove
the 1938 level. T h e U nited States, how ever, was o f extraordinary
im portance as a source o f supply for exports o f m anufactured goods,
foodstuffs, and raw materials, m uch o f it financed b y U .S. aid. T h e
U .S. share o f w orld exports in 1947 was 32 percent, con crete evidence
o f the unusual dependence o f the w orld econ om y on the U nited States
in the early postw ar years.
W ith the recovery o f p rodu ction in the great trading countries, the
level o f w orld trade began to rise rapidly. E xcep t for a slight decline
in 1952 and a som ewhat greater decline in 1958, the level o f w orld
trade has grow n steadily. In m id-1959, the value o f w orld trade,
excluding the C om m unist countries, was running at an annual rate
in excess o f $100 billion a year, measured b y exports. F o r m u ch o f
the postw ar period, the rate o f increase in the volum e o f w orld trade
has exceeded the rate o f grow th o f output. This reflects n ot on ly the
greater availability o f supplies o f export goods in the great trading
countries, b u t the gradual reduction in the severe trade restrictions
that were m aintained in the early postw ar period.
T a b l e 4 - 2 .—

Value of world trade, 1948-59
[In billion dollars]

Year
1948.............................
1949...... ......... ............
1950.............................
1951.............................
1952.............................
1953.............................

Exports 1
53.9
55.0
57.2
77.2
74.4
75.3

Imports 1
60.1
59.9
59.9
82.1
80.7
77.0

Year
1954.............................
1955.............................
1956.............................
1957............................
1958.............................
1959 (3d quarter)------

i Exports f.o.b., imports c.i.f. Include military aid shipments.
Source: International Financial Statistics, January 1960, pp. 24-25.

Exports *
78.0
84.8
94.1
101.0
96.1
100.8

Imports 1
80.0
89.5
98.8
108.2
100.7
105.6

INTERNATIONAL EFFECTS OF U .S . ECONOMIC POLICY

T h e extent to w hich the grow th in w orld trade depended upon the
increase in prod u ction in the great trading countries is indicated b y
the rapid increase in the exports o f W estern E u rope and Japan.
Betw een 1951 and 1958, the exports of G erm any and Japan rose from
$4.8 billion to $11.7 billion and their share in the m uch higher level
o f w orld exports doubled. T h rou gh ou t this period, the exports o f the
U nited States, the U nited K in gd om , and other industrial countries
rose about in p rop ortion to the rise in w orld trade. On the other
hand, the share o f the predom inantly raw m aterials exporting cou n
tries fell from 38 percent in 1951 to 31 percent in 1958.
T a b le

4-3.— Share of countries and groups of countries in ivorld exports, 1951-58
[Percent of total]

Year

1951...............................................
1952...............................................
1953...............................................
1954...............................................
1955...............................................
1956...............................................
1957...............................................
1958...............................................

United
States 1

United
Kingdom

19.4
20.4
21.0
19.4
18.4
20.3
20.7
18.6

Germany
and Japan

9.6
10.0
9.8
9.7
9.7
9.6
9.3
9.4

6.4
7.3
7.8
9.1
9.8
10.8
11.5
12.4

Other in
dustrial
countries
26.4
27.4
26.8
27.1
28.1
27.1
27.3
27.4

All other
countries

38.2
34.9
34.6
34.7
34.0
32.2
31.2
31.2

i Includes special category exports (military supplies).
Source: U.N. Monthly Bulletin of Statistics, August 1959, pp. 96ff.

T h e recovery o f private international investm ent in the postw ar
period was m uch slower than the recovery o f w orld trade. T h e p oliti
cal uncertainties, the great dem and for capital in the large industrial
countries, and the lack o f know ledge o f investm ent opportunities all
tended to keep private foreign investm ent exceptionally low . W h at
ever resources the U nited States cou ld spare until 1950 were largely
used b y the G overnm ent to facilitate econom ic recovery in E urope.
In the early postw ar years m an y w ar-torn European countries had to
continue to liquidate som e o f their earlier foreign investm ents.
T h e revival o f private foreign investm ent began on a noticeable
scale abou t 1950. F o r the next 5 years, U .S. net private foreign in
vestm ent averaged abou t $1 billion a year. Since 1956, there has been
a rem arkable expansion in private long-term foreign investm ent. In
the U nited States, this increase has been prim arily in new funds going
into direct investm ent. N ew issues o f securities have also increased
substantially; and other long-term capital outflow is m uch higher.
N ew funds (excluding reinvested earnings) going into all form s o f
private long-term investm ent from the U nited States, have averaged
about $2.5 billion annually since 1956. A n increase o f this m agnitude
m ust be regarded as opening a new phase o f private foreign investm ent.
T h e increase in long-term private foreign investm ent in recent years
is b y n o means confined to the U nited States. In all o f the principal
capital exporting countries o f E u rope there has been an increase in
long-term private foreign investm ent since 1956. Furtherm ore, the
flow o f private foreign investm ent has been supplem ented b y con
siderable capital ou tflow through governm ental agencies o f the United
States and other countries, and through the W orld B ank.

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

T h e revival o f private foreign investm ent has been one o f the factors
contributing to the rapid grow th in w orld trade. A t the same time,
it has also depended on the grow th o f w orld trade. Unless there is a
g ood prospect that the capital im porting countries will be able to
increase their exports, and thus earn the foreign exchange required
fo r m eeting the obligations on foreign capital, private foreign invest
m ent cannot be increased very m uch. W ith the rapid grow th in
w orld trade in recent years, w ith the high level o f ou tp u t and savings
in the great industrial countries, there is a good prospect that private
foreign investm ent will continue to expand. U nder present conditions,
how ever, any considerable increase in the next few years w ould have
to com e from the traditional capital exporting countries o f E urope.
Fortunately, w ith their large surplus in international paym ents and
their m uch stronger i*eserve position, the countries o f W estern E urope
are able to undertake foreign investm ent on a larger scale.
Payments effects of economic growth
T h e grow th in ou tp u t in any cou n try is beneficial to the w orld
econ om y as a whole. F or an increase in ou tput is an increase in real
incom e. An increase in ou tp u t means larger supplies o f good s in
world export markets, m atched b y a larger dem and for good s in w orld
im port m arkets and supported b y a higher level of real incom e. W hile
the initial im pact o f econ om ic grow th is on the cou n try in w hich it
takes place, other countries are affected through the resulting increase
in exports and im ports. T h e benefits derived b y other countries are
ob viou sly greater the m ore the increase in ou tput in a cou n try affects
its supply o f export goods, its dem and for im port goods and the level
of its foreign investm ent.
Som e econom ists have held that a tendency on the part o f p rod u c
tivity in the U nited States to increase m ore rapidly than in the rest o f
the w orld has caused a persistent dollar paym ents problem — what
cam e to be called the w orld dollar shortage. T h e premise on which
this proposition was based is mistaken and the conclusion is alm ost
certainly wrong. T h e evidence is that econom ic grow th in the U nited
States is n ot m ore rapid than in m any other countries, exception being
m ade for the disruption in war and early postw ar periods. T h e fact
that fo r the past 10 years the U nited States has had an overall deficit
in its international paym ents— on private current, private capital and
U .S. G overnm ent account— w ould seem to indicate that the con cept
o f a persistent dollar paym ents problem is an illusion. T h a t is n ot
to deny, how ever, that problem s o f adjustm ent do arise from econom ic
grow th.
A general increase in p rod u ctivity in the U nited States, in the
export industries as well as in dom estic industries, is likely to have
the m ost beneficial effect on the w orld econ om y while creating a
m inim um need for difficult adjustm ents in other countries. F or
under conditions o f m on etary stability, m on ey incom es in the U nited
States tend to rise to the same extent as the increase in p rod u ctivity.
A lthough ou tp ut per w orker is increased, w ith an equivalent rise in
wages m on ey costs o f p rodu ction will be unchanged. T h e supplies
o f export goods that U .S. producers offer in w orld m arkets will be
larger at the same level o f prices. I f other industrial countries have
n ot had a similar increase in p rod u ctivity, their share in w orld m arkets

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

fo r the export specialties o f the U nited States w ould b e som ew hat
smaller. B u t as incom es are higher, U .S. dem and for im ports and
U .S. foreign investm ent w ould also rise, abou t as m uch as U .S. exports.
T h e rest o f the w orld w ould therefore find its aggregate exports and
capital inflow increased to about the same extent as its im ports.
Som e countries m ight find difficulty in com petin g with the larger
supplies of U .S. exports; b u t other countries w ould find a m ore fa v o r
able m arket for their exports to the U nited States and p rob ab ly better
prices for these exports. F or the w orld econ om y as a whole, there
w ould be a net gain in w ell-being as a result o f the general increase in
p rod u ctivity in the U nited States, because it w ould lead to a larger
volu m e o f w orld trade, an im provem ent in the terms o f trade, and
an increase in U .S. foreign investm ent.
I t is possible to show that if the increase in p rod u ctivity in the
U nited States were concentrated in a few export industries, so that
prices for such exports fall, the specific effects on certain countries
cou ld b e serious for a time. I f the U nited K in gd om , for example,
com petes with the U nited States in exporting certain products to
third countries, then a relative fall in U .S. prices for such exports
cou ld lead to paym ents difficulties for the U nited K in gdom . Its
exports o f these products w ould decline, exports o f other products
w ould n ot necessarily increase, and aggregate export receipts o f the
U nited K in gd om w ould tend to fall. O f course, wage p olicy or ex
change p olicy cou ld be adjusted to act on the U nited K in g d o m ’s
com petitive position in such a w ay that the decline in its exports o f
those goods for w hich A m erican p rod u ctivity has increased m ost
w ou ld be offset b y the increase in its exports o f other goods. B u t
the need for such an adjustm ent in p olicy indicates the existence o f a
paym ents problem . A s Professor R obertson has said:
Under no system of monetary policy can things be very pleasant for a country
which finds the productivity of other countries in competitive goods increasing
faster than its own.5
Similarly, if the increase in p rod u ctivity is concentrated in im portcom petin g industries, b y reducing the need for such products or
creating substitutes for such products, the effect on the countries
supplying such goods can be serious. In recent years, som e o f the
m ost im portant U.S. im ports o f the 1920’s and 1930’s have lost
relative and even absolute ground in the A m erican m arket. Silk is
a prim e example for it was a leading im port less than a generation
ago. I t has now been largely displaced in the consum ption pattern
b y such artificial fibers as rayon and nylon. R u bb er is another
exam ple. T h e paym ents position o f countries that depend u pon such
exports is obviou sly weakened b y im provem ents in p rod u ctivity that
diminish the dem and for their products.
W hile it is possible to show that the specific effects o f certain types
o f increase in p rod u ctivity in the U nited States can be adverse for
som e countries for som e tim e, there can be no d ou b t o f the beneficial
general effects o f an increase in U .S. p rod u ctivity. A n increase in
p ro d u ctiv ity — m ore particularly in total p rod u ction — is m erely the
counterpart o f an increase in real incom es. A n increase in incom es
means an increase in dem and for im ports as well as for hom e goods.
s“ The International Gold Problem/' Oxford University Press, 1932, p. 46.

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

Unless the specific effects o f an increase in U .S. p rod u ctivity are
severely adverse to the paym ents position o f countries in a k ey posi
tion in w orld trade and paym ents, the general effects are certain to
lead to a strengthening o f the dollar paym ents position o f the rest
o f the world. Indeed, the greater the increase in U .S. p rod u ctivity,
the w ider the field over w hich the increase has taken place, and the
m ore sustained the increase in p rod u ctivity proves to be, the m ore
likely it is that the general effects will be favorable to the paym ents
position o f the rest o f the w orld as a group.
A s a practical m atter, the steady technological im provem ents that
affect the econ om y as a w hole are o f greater im portance than the
m ore spectacular, but rarer, technological im provem ents that affect
specific in d u stries.R D esp ite considerable differences in the rate o f
grow th o f p rod u ctivity in particular industries, these are over
shadow ed b y the far m ore im portant grow th o f the U .S. econ om y as
a whole. This grow th in U .S. output and in real incom e has been
quickly translated into a grow th in U .S. im ports. Since 1950, the
value o f U .S. im ports has risen b y nearly 70 percent and the volum e
has increased b y nearly 35 percent. T h e very close relationship
betw een U .S. incom es and U .S. im ports is apparent from the con
com itan t grow th in the gross national p rod u ct and in im ports in the
past 10 years. Furtherm ore, the revival o f private foreign invest
m ent is p artly due to the expansion in ou tput and incom e. Far
from being a cause o f w orld paym ents difficulties, the grow th in U .S.
ou tp ut has facilitated the establishment o f a strong pattern o f w orld
paym ents.
T a b le 4-4.— GNP and imports, 1951-58

Year
1951 .......
1952
1953...............
1954 ..............

GNP
329.0
347.0
365.4
363.1

of
Imports 1 Percent
GNP
11.9
11.7

11.8
11.0

3.6
3.4
3.2
3.0

Year
1955...............
1956...............
1957...............
1958...............

GNP
397.5
419.2
442.5
441.7

Imports 1 Percent of
GNP
12.4
13.8
14.3
14.0

3.1
3.3
3.2
3.2

i Imports c.i.f.
Source: Business Statistics, 1959 edition, and International Financial Statistics.
Interestingly enough, the m ore rapid grow th in p ro d u ctiv ity in the
great industrial countries o f W estern E u rope since 1951 has had the
expected effects on the U .S. balance o f paym ents. W h atever diffi
cu lty the U nited States m a y be having in m aintaining its previous
relative position in w orld trade is n ot due to the higher relative prices
o f our export goods, b u t to the ability o f the W estern E uropean cou n
tries to offer far larger supplies than form erly at the same relative
prices as the U nited States. E ven so, the paym ents position o f the
U nited States w ould n ot be adversely affected b y the greater increase
in p roduction and exports in W estern E urope, if these countries w ould
increase their im ports and foreign investm ent to an equivalent extent.
This balance o f paym ents difficulty apart, and fo r w hich an appropri
ate rem edy can be found, the U nited States clearly benefits from the
grow th in E uropean p rod u ctivity and w ould benefit from the grow th
in ou tp u t in the underdeveloped countries.

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

C h a p t e r V . I n te r n a t io n a l T rad e P olicy
N o aspect o f U .S. econ om ic p olicy is of greater im portance to m ore
countries over a longer period than U .S. trade p olicy. T h e terms on
w hich the U nited States perm its the exports o f other countries to com e
into this cou n try affects the level and pattern o f ou tp u t abroad, the
level o f prices and incom es in those countries, and their ca p acity to
undertake investm ent for developm ent. T h e $15 billion o f goods that
flow into this cou n try from all parts o f the w orld are b y far the largest
source o f dollars w ith w hich other countries p a y fo r the vast am ount
o f U .S. exports and the very considerable am ount o f other com m ercial
transactions. E ven U .S. private foreign investm ent could n o t co n
tinue on the present scale, if there were n ot the assurance that the
means to rem it dividends and interest could be earned from the dollar
exports o f other countries.
U.S. reciprocal trade policy
U ntil 1933, the trade p olicy of the U nited States was one o f increas
ing protectionism . D espite occasional measures that reduced som e
tariff rates for brief periods at various times from the C ivil W ar to the
First W orld W ar, the general effect o f the successive tariff acts was
to raise the level o f protection . T h e trend tow ard protectionism was
especially m arked from 1921 to 1933. T h e F ord n ey -M cC u m ber A ct
o f 1922 raised tariff rates on a wide range of industrial products. A s a
p ractical m atter, the p rod u ctive ca p acity o f the U nited States in
m anufacturing and agriculture had been greatly increased during the
war. The com petitive position o f the U nited States was especially
strong in com parison w ith the industrial countries o f E urope. N ever
theless, at the very tim e that the w orld econ om y began to recover
from the destructive effects o f the First W orld W ar, the U nited States
raised its barriers to w orld trade. T h e rise in U .S. tariffs was one of
several factors that k ept w orld trade from m aking the recovery neces
sary to establish a well-balanced w orld econ om y.
In 1930, the H aw ley-S m oot A c t raised tariffs to the highest level
in the history of this cou n try. C om ing as it did, at a tim e when a
w orldw ide depression had already begun, when the basic weakness in
the paym ents position o f several o f the great trading countries had
b ecom e evident, the new tariff act was boun d to h ave disastrous
effects on w orld trade. T h e degree o f restriction im posed b y the
H aw ley-S m oot A ct is amazing. P ractically the o n ly good s that
escaped its deadening effects on trade were certain raw m aterials and
foodstuffs n ot produced in the U nited States. These duty-free im
ports continued to com e in on a relatively large scale— diminishing,
o f course, as the level of ou tp u t and incom es in the U nited States de
clined and raw materials prices fell during the great depression. F or
other goods, tariff rates were virtually prohibitive.
T h e basis for the present trade p olicy o f the U nited States is the
T rade A greem ents A c t o f June 12, 1934. This act em pow ered the
President to enter into agreements w ith other countries for the recipro
cal reduction o f tariffs. U nder this act, the U nited States u n dertook
to reduce or to bind tariff rates on agreed im port products, p rovided
the cou n try to w hich this benefit was granted u n dertook to reduce or
bind tariff rates on agreed export products o f the U nited States. As
this cou n try has follow ed a p olicy o f m ost-favored-n ation treatm ent,
the low er tariff rates agreed w ith any other cou n try Was m ade gen

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

erally applicable, with certain m inor exceptions. T h e usual p roce
dure was to negotiate for a reduction in the tariff rates w ith the prin
cipal suppliers of an im port p rod u ct and to secure in return a redu c
tion in tariff rates that w ould facilitate U .S. exports to an am ount
abou t equal to the expected increase in U .S. im ports.
T h e original act lim ited the reduction in the tariff rate on any duti
able article to 50 percent o f the rate in the Tariff A c t o f 1930 (the
H aw ley-S m oot tariff). T h e T rade Agreem ents A c t has been suc
cessively extended to the present w ith additional powers to reduce
tariffs on w hich reductions had already been m ade. B y E xecutive
Order in 1947, the President required that all new trade agreements
reserve for the U nited States the right to w ithdraw or m o d ify a con
cession if, as a result, im ports increase so as to cause or threaten to
cause serious in ju ry to a dom estic industry producing like or directly
com petitive products. T h e Tariff Com m ission is charged w ith
determ ining whether these conditions exist. Provisions substantially
in accord w ith this E xecutive order were included in the escape clause
o f the General Agreem ent on Tariffs and T rade (G A T T ). In 1951,
the T rade Agreem ents E xtension A c t m ade m an datory the inclusion
o f an escape clause in all future trade agreements and the addition of
such a clause to all existing agreements “ as soon as p ra ctica ble.”
T h e effect o f the reciprocal trade agreements, including the m ulti
lateral agreements negotiated through G A T T , has been to reduce
substantially the prohibitive level o f U .S. tariffs. F rom the highest
average ratio o f duties collected to the value o f dutiable im ports, 59.1
percent in 1932, the weighted average d u ty collected on dutiable im
ports fell to less than 40 percent before W orld W ar II, to 26.3 percent
in 1946, im m ediately after the war, and to 12.5 percent in 1951.
Since then, the weighted average d u ty collected on dutiable im ports
has rem ained virtually unchanged. In the m eantim e, o f course, there
has been a revolu tionary increase in U .S. exports and U .S. im ports.
T a b le 5-1.— U.S. imports and weighted average rate of duty, 1931-SS and 1946-58

Year
1931...............................................
1932...............................................
1933...............................................
1934 i.............................................
1935...............................................
1936...............................................
1937...............................................
1938...............................................
1946...............................................
1947...............................................
1948...............................................
1949...............................................
1950...............................................
1951...............................................
1952...............................................
1953...............................................
1954...............................................
1955...............................................
1956...............................................
1957...............................................
1958...............................................

Imports (millions of dollars)
Duty free

Dutiable

1,392
886
904
991
1,206
1,385
1,765
1,183
2,935
3,455
4,174
3,883
4,767
5,993
6,257
5,920
5,668
6,030
6,220
6,012

5,335

11st agreement with Cuba, effective Sept. 12, 1934.

Source: U.S. Tariff Commission.

697
440
529
645
833
1,039
1,245
767
1,890
2,212
2,918
2,708
3,976
4,824
4,491
4,859
4,572
5,304
6,270
6,909
7,399

Total
2,088
1,325
1,433
1,636
2,039
2,424
3,010
1,950
4,825
5,666
7,092
6,592
8,743
10,817
10,747
10,779
10,240
11,334
12,490
12,921
12,734

Duty-free
imports as
percent of
total imports

Duties col
lected as per
cent of duti
able imports

66.6
66.8

53.2
59.1
53.6
46.7
42.9
39.3
37.8
39.3
26.4
20.1
14.3
13.8
13.3
12.5
12.8
12.3

63.1
60.6
59.1
57.1
58.6
60.7
60.8
61.0
58.9
58.9
54.5
55.4
58.2
54.9
55.4
53.2
49.8
46.5
41.9

12.2
12.6
11.7
11.0

11.3

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

T h e decline in the w eighted average d u ty collected on dutiable
im ports is n o t due solely to the reductions in tariff rates m ade under
the trade agreements program . M a n y im ports are su bject to a spe
cific d u ty o f so m uch per unit or per pound, or to a com pou n d ad
valorem d u ty and specific d u ty o f such percent o f value plus so m uch
per unit or per poun d. T h e rise in prices and its effect on the im pa ct
o f specific duties has alm ost as m uch effect in reducing the w eighted
average d u ty on dutiable im ports as the redu ction in duties under
the T rade A greem ents A ct. W ith the considerable rise in incom es
in the U nited States in the postw ar period and the decline in tariff
rates, there has been a relatively larger increase in the dem and fo r
im ported goods w ith low tariff rates and this has con tribu ted to a
decline in the ratio o f duty-free im ports and a fall in the w eighted
average d u ty on all dutiable im ports.
Restrictions and discriminations
T h e stated purpose o f the T rade Agreem ents A c t is to increase U .S.
trade b y reducing U .S. tariffs in return for a reduction in the tariffs
o f other countries. W hile the act does n o t specifically require an
equivalence in the export and im port effects o f the reciprocal redu c
tion in tariffs, there is no d ou b t that this was the intent o f the act.
Furtherm ore, the negotiators for the U nited States have tried to
secure an approxim ate equivalence betw een the im p ort effects o f the
concessions granted b y the U nited States and the export effects o f
the concessions granted b y other countries. O bviously, the im por
tance o f any tariff concession m ade b y other countries to the U nited
States depends u pon the right o f U.S. exports to enter a cou n try and
to com pete w ith the exports o f all other countries. W h en quantita
tive restrictions on im ports are im posed b y a cou n try, and particu
larly w hen such restrictions are im posed on a discrim inatory basis,
th e benefits that the U nited States was to get from the trade agree
m ent are w h olly or p artly negated.
A lm ost coincidentally w ith our reciprocal trade p olicy, the U nited
States attem pted to secure international agreem ent to lim it the use
o f quantitative restrictions on trade. In the T ripartite D eclaration
o f 1936, the G overnm ents o f the U nited States, the U nited K in gd om ,
and France announced their agreem ent on the need fo r the expansion
o f international trade and the relaxation and ultim ate abolition o f
exchange controls and quantitative restrictions on im ports. B elgium ,
the N etherlands, and Switzerland later affirmed their adherence to
these principles. D u ring the war, the U nited States continued to
urge this p olicy. T h e countries that signed the m aster lend-lease
agreem ent undertook to establish in the postw ar period a system o f
m ultilateral trade, w ithout restrictions and discrim inations. This
agreem ent foreshadow ed m any o f the im portant postw ar arrangements
on trade.
T h e articles o f agreem ent o f the International M on eta ry Fund,
drafted at B retton W ood s in 1944, recognized that in the early postw ar
period it w ould be im possible for m an y countries, w ith their depleted
foreign exchange resources and their extraordinary im port needs, to
a void restrictions and discrim inations in their trade and paym ents.
F or this reason it was agreed that—
in the postwar transitional period members may, notwithstanding the provisions
of any other articles of this agreement, maintain and adapt to changing circum
stances, restrictions on payments and transfers for current international trans
actions.

INTERNATIONAL EFFECTS OF U .S . ECONOMIC POLICY

T h e balance o f paym ents purpose o f this provision was em phasized
b y the requirem ent that—
members shall withdraw restrictions maintained or imposed under this section as
soon as they are satisfied that they will be able, in the absence of such restrictions,
to settle their balance of payments in a manner which will not unduly encumber
their access to the resources of the Fund.
T h e General Agreem ent on Tariffs and Trade (G A T T ) is a m ulti
lateral agreem ent for the reduction o f tariffs and for the application
o f fair practices in international trade. I t is, in a sense, a single
agreem ent am ong 37 countries em bodyin g the principles o f the recip
rocal trade p olicy. A s the U nited States extends the benefits o f any
reduction in tariffs to all other countries, w ith certain exceptions, it
is advantageous to this cou ntry to have a general agreem ent under
w hich tariff concessions m ade reciprocally b y other countries are
autom atically extended to the U nited States. T h e G A T T contains
provisions restricting the use o f quotas and other quantitative im port
controls for protective purposes. W here such measures are used for
balance o f paym ents reasons, they are su bject to the same general
lim itations that apply to the use o f exchange restrictions under the
Fund agreement. In effect, im port restrictions and discrim inations
for balance o f paym ents purposes are governed b y the International
M on eta ry Fund.
T h e conditions that necessitated a postw ar transitional period, in
which countries could continue exchange restrictions and discrim ina
tions in connection w ith trade and other current international trans
actions, have passed. T h e great trading countries o f W estern E urope
have increased their p roduction, resum ed their appropriate position
in world trade, and have accum ulated very considerable reserves o f
gold and U .S. dollars. I t is im possible to say w ith justification that
they cannot settle their balance o f paym ents, w ithout restrictions and
discriminations, except b y burdening their reserves or their access to
the resources o f the Fund. There are, o f course, som e countries still
confronted with paym ents difficulties. These difficulties are n ot post
war transitional problem s. T h ey are largely the m anifestation in
actual or suppressed paym ents deficits o f inflationary pressures arising
from investm ent program s for which real resources, from dom estic
savings and from capital inflow, are inadequate. Such pressures m a y
be expected to recur from tim e to tim e in individual countries.
T h e annual exchange restrictions reports o f the International
M on eta ry Fund have recounted year after year the steady progress
that has been m ade in liberalizing the conditions governing interna
tional trade and paym ents. E ven when regulations have rem ained
virtually unchanged, their practical significance has often been
radically m odified b y the action o f the exchange authorities in per
m itting, under general or special license, transactions that were
form erly rigidly restricted. N evertheless, a n ot insignificant degree
o f restriction and discrim ination against dollar trade still exists in
countries whose paym ents position does n o t require such action.
H ow ever small these restrictions and discrim inations m a y still be,
the U nited States and other m em bers o f the Fund have a right to ask
that they be term inated. So long as other great trading countries
continue their restrictions and discrim inations against dollar trade,
the recip rocity envisaged under the various U .S. trade agreem ents
and the General Agreem ent on Tariffs and T rade is n ot fully granted
to this coim try or to other countries w ith convertible currencies.

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

The w orld has m oved a long w ay since balance o f paym ents deficits
were m easured in billions and every cou ntry was desperate for dollars.
A t no time since 1914 has the w orld ’s dollar paym ents position been
so strong or its prospects so prom ising. On O ctober 25, 1959, the
E xecutive D irectors o f the International M on eta ry F und noted
officially these favorable developm ents and decided that:
Under these circumstances, the Fund considers that there is no longer any
balance of payments justification for discrimination by members whose current
receipts are largely in externally convertible currencies. However, the Fund
recognizes that where such discriminatory restrictions have been long maintained,
a reasonable amount of time may be needed fully to eliminate them. But this
time should be short and members will be expected to proceed with all feasible
speed in eliminating discrimination against member countries, including that
arising from bilateralism.
This is a w elcom e step in achieving one o f the prim ary o b jectives o f
the M on eta ry Fund. There can be no justification for continuing to
invoke in any form the postw ar transitional arrangements or for further
delay in establishing the convertibility o f the currencies o f the great
trading coim tries o f W estern E urope in accordance w ith the provisions
o f the Fund agreement. These currencies are de facto convertible to
nonresident holders. Th e reluctance to make these currencies con
vertible im der the terms o f the Fund agreement stems from a feeling
that such a step, once taken, is irrevocable. There are indications o f a
general recognition that the continuation o f such a shadow y status is
n o longer required and is n ot in the spirit o f the Fund agreement.
In the near future, it m ay be expected that a considerable num ber o f
the W estern E uropean coim tries will m ake their currencies fully co n
vertible, de jure, in accordance with the Fund agreement.
R e g io n a l p r e fe r e n c e s a n d m u ltila te r a l tra d e

T h e trade p olicy o f the U nited States has generally, b u t n o t invar
iably, been opposed to preferential arrangements. I t is true that the
U nited States has preferential trade agreements with C uba and the
Philippines; but these are the consequence o f a special historical
situation. Their political desirability is doubtfu l and their econom ic
usefulness to this cou ntry is, at best, negligible. These preferential
arrangements have ham pered C uba and the Philippines in establishing
a desirable degree o f p rotection for their ow n econom ic developm ent.
T h e preferential arrangements were also a handicap to other countries
seeking dollar markets for their ow n exports particularly in the early
postw ar period. T h e preferential arrangements w ith the Philippines
have been m odified and will in time be terminated. I t is believed
that C uba will also seek a m odification in the present preferential
arrangements w ith the U nited States.
T h e U nited States has, how ever, recognized one exception to its
p olicy o f unrestricted m ultilateral trade on a nondiscrim inatory (and
therefore nonpreferen tial) basis. W here a group o f countries wish to
establish a custom s union, a com plete tariff-free trading arrangement
am ong themselves, the U nited States has taken the view that the
resulting discrim ination m ay be justified b y the broader interests o f
the participating countries. This is u n doubtedly still the p olicy o f
the U nited States. W ith the exception o f discrim inations m aintained
imder the postw ar transitional arrangements, a custom s union is the
on ly type o f preference, i.e. (discrim ination), that m ay be entered
into under the provisions o f the General A greem ent on Tariffs and
Trade.

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

In the early postw ar period, the U nited States encouraged the
countries o f W estern E urope, through the Organization for E uropean
E con om ic C ooperation, to grant certain trade preferences to each
other in w hich the U nited States did n ot share. The preferences took
the form o f reducing or rem oving quantitative restrictions on im ports
from countries in the O E E C while the same restrictions continued to
be im posed on im ports from the U nited States and other countries, a
p olicy that was sanctioned at that time b y the postw ar transitional
provisions o f the Fund agreement. T h e program was considered
desirable, politically as a means o f fostering closer collaboration within
E urope, econom ically as a partial step toward m ultilateral trade
am ong countries having paym ents difficulties. It should be n oted
that the preferences under the trade liberalization program o f the
O E E C were regarded as tem porary in the sense that similar reductions
in quantitative restrictions were to be extended to im ports from other
countries as soon as the paym ents position o f any O E E C coim try
im proved. T h e U nited States never agreed that a m em ber o f the
O E E C could retain restrictions against dollar im ports m erely as a
means o f giving preference to the exports o f other O E E C countries.
Six countries in W estern E urope have n ow entered into an agree
m ent to form a C om m on M ark et.6 U nder this agreem ent, the
participating countries will gradually reduce and ultim ately eliminate
tariff barriers against each other. T h ey will, in time, have the same
tariffs against all good s im ported from outside the C om m on M arket.
In the m eantim e, seven other countries in W estern E urope, having
failed for the time being to reach agreement with the C om m on M arket
countries, have form ed a Free Trade A ssociation.7 U nder the treaty,
these seven countries w ould ultim ately eliminate all tariffs on trade
am ong themselves, b u t each cou n try w ould retain its ow n tariffs
against im ports from outside the free trade area. In principle, these
arrangements are a custom s union authorized b y the General A gree
m ent on Tariffs and Trade and toward which the traditional p olicy o f
the U nited States is n ot unfriendly. F or political reasons, it would be
regrettable if the O E E C countries divided into three exclusive
groups— those inside one custom s union or another and those outside
b oth. F or econ om ic reasons, it w ould be regrettable if these custom s
unions were operated in a m anner that w ould stifle m ultilateral trade
and result in harsh discrim ination against other countries.
T h e problem s created b y the establishm ent o f one or tw o large
preferential trade areas are far m ore com plex than those arising from
the association o f tw o or three countries in a custom s union. T h e
m em bers o f the C om m on M ark et and Free Trade A ssociation, exclud
ing overseas countries associated with them, account for 43 percent o f
total w orld im ports. This is an enorm ous segm ent o f the w orld
econ om y to be set aside as one to which other countries could export
on ly under serious handicaps. I t w ould be tragic if after the heroic
and largely successful efforts to expand w orld trade on a nondiscrim in atory basis, these new and enorm ous custom s unions were to becom e
the instruments for legalizing and perpetuating onerous discrim ina
tions on the other half o f the w orld econom y, including prim arily the

• The Common Market countries comprise France, Germany, Italy, Netherlands, Belgium, and Luxem
bourg. Other European countries could presumably become associated with the Common Market.
i The countries of the Free Trade Association area comprise the United Kingdom, Sweden, Norway, Den
mark, Switzerland, Portugal, and Austria. This free trade area would also be open to association by other
European countries.
49762—60------ 4

INTERNATIONAL EFFECTS OF U .S . ECONOMIC POLICY

U nited States, C anada, Latin Am erica, and other countries in Asia
and A frica.
T here is a h eav y responsibility on the C om m on M arket and Free
T rad e A ssociation to follow policies that will avoid serious harm to the
w orld econ om y. A generally low level o f tariffs writhin the custom s
unions will let these countries benefit from the heightened com petition
within w ider trading areas w ithout im posing too severe a handicap
on the countries outside these areas. Furtherm ore, under the F und
agreem ent and the General A greem ent on Tariffs and T rade, there
is a prior obligation to rem ove quantitative restrictions against im
ports from outside the custom s unions before increasing the preferences
that these countries extend to each other. A b o v e all it will be difficult
to safeguard the trading interests of other countries unless the mem bers
o f the custom s unions m ake their currencies convertible in accordance
w ith the Fund agreement. C on vertibility w ould provide a m inim um
assurance that if quantitative restrictions becom e necessary in one
cou n try they w ould n ot also be im posed b y surplus countries in a
custom s union solely to facilitate the restoration o f the balance o f
paym ents o f a deficit cou ntry.
In the trade negotiations with the W estern E uropean countries,
through the reciprocal trade agreements and through the General
A greem ent on Tariffs and Trade, the U nited States has granted
valuable concessions in the form o f easier (lower tariff) entry into
the U .S. m arket. In turn, we have been granted valuable tariff
concessions b y these countries w hich were intended to give us easier
en try into their markets. T h e value o f the concessions w e have given
rem ain unchanged— in fact, th ey have grown m ore valuable as the
U .S. econ om y has grow n. T h e concessions we have received will
becom e m uch less valuable through the form ation o f the new custom s
unions after our concessions were granted. A tariff reduction b y
B elgium , for example, w hich was valuable to the U nited States when
Germ an exports paid the same tariff, is m uch less valuable (or m a y
b e entirely w ithout value) when Germ an exports can enter the Belgian
m arket at a low er tariff than the same U .S. exports and u ltim ately
w ith ou t any tariff. T h e U nited States and other countries that have
given tariff concessions to W estern E u rope are entitled to k n ow that
the reciprocal concessions to them are n ot going to be negated in the
new trade arrangements that are being m ade in E urope.
Future trade policy
D espite the delay that the U nited States has experienced in securing
the full benefit o f the trade arrangements it has m ade w ith other
countries, bilaterally and m ultilaterally, the reciprocal trade p o licy
has been successful in attaining its ob jectives. T h e exports o f the
U nited States have increased enorm ously and the U .S. share o f w orld
exports is considerably larger than it was before the war. Our im ports
have also increased enorm ously, b u t that is an essential part o f the
process o f expanding w orld trade and our ow n trade. A s the dis
crim inations against our exports are rem oved— and the U nited States
m ust insist on this— our trade will u n dou btedly increase further.
A n d as the w orld econ om y grows, w orld trade will grow if it is facil
itated b y m ore liberal trade policies in this cou n try and abroad.
T h e U nited States has g ood reason to carry further the reciprocal
reduction in tariffs that has been the p o licy o f this cou n try for the

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

past 25 years. A lth ou gh tariff rates h ave been substantially reduced
fo r m an y im port goods, som e tariff rates are still proh ibitively high.
T h e fa ct is that when the d u ty is 30 percent or m ore ad valorem , it is
virtu ally im possible for other countries to sell even m oderate am ounts
o f such goods in this m arket. A tabulation m ade b y the Tariff C om
m ission showed that about 95 percent o f the dutiable goods im ported
into the U nited States paid duties o f 30 percent or less; the rem aining
5 percent o f the dutiable im ports paid duties o f m ore than 30 percent.
Such high duties, som e ranging to 50 percent or m ore, still apply to
som e articles in nearly all o f the 15 tariff schedules. T h e grant of
additional authority to negotiate tariff reductions is essential for the
further expansion o f U .S. trade.
N ow that w orld trade has becom e m ore com petitive, there is boun d
to be m ore frequent com plaint that im ports are threatening this or
that dom estic industry. I t w ould be a tragic reversal o f our trade
p olicy if the national interest were sacrificed to retain or extend p ro
tection for the benefit o f any small group o f producers. There is
already adequate provision in our legislation to avoid tariff conces
sions that w ould imperil a dom estic industry. Furtherm ore, there is
provision under the escape clause for action b y the President to raise
existing duties if the Tariff Com m ission finds that as a result o f a
tariff concession, im ports have increased to an extent w hich m a y cause
or threaten serious inju ry to a dom estic industry. In general, this
difficult provision o f the law has w orked reasonably well, despite o cca
sional cases in w hich undesirable restrictive action was taken b y the
President.
There is a danger that our balance o f paym ents deficit will encour
age measures to m eet this problem b y im posing trade restrictions in
one form or another. Our present paym ents difficulties do n o t arise
from a deficiency o f com m ercial exports or from an excess o f com m er
cial im ports. T h e y are due to other factors considered later in this
report. T h e p olicy recently adopted b y the D evelopm en t L oan Fund,
requiring the expenditure of new loans on goods prod u ced in the
U nited States, is of m inor significance for our paym ents problem
while constituting a m ajor departure from our liberal trade p olicy.
It weakens our position in seeking to term inate trade restrictions and
discrim inations when we tie the use o f loans for developm ent to goods
exported from this country. A wider participation b y all high-incom e
countries in aid for developm ent is of great im portance to the w orld
econom y. T h e value o f the aid should n ot be im paired b y restricting
its use in the m ost econom ical w a y for the purpose intended.
N o form o f p rotection is so destructive o f trade as quantitative
restrictions. T his cou n try, m ore than any other, has reason to avoid
the use o f such p rotective measures. T h e y invite discrim ination in
im ports which can be and has been used w ith particular effectiveness
against our goods. There is a fallacious plausibility to the argument
that it w ould p rovide certainty to foreign as well as dom estic pro
ducers to assign fixed lim its to our im ports. This is a sure m ethod o f
stifling the grow th o f w orld trade, inviting retaliation, and perpetuat
ing discrim ination against U .S. exports. F o r this reason it is u n fortu
nate that in a few instances the u n ited States has adopted quotas or
tariff quotas to lim it im ports o f som e goods. I t is far better for this
cou n try to face the com petition of im ports, particularly when dom estic
producers have the advantage o f a tariff, than to adop t im port quotas

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

that suppress com petition and arbitrarily allocate segments o f the
m arket to dom estic and foreign producers.
T here is one aspect of the trade problem that the U nited States
and other great industrial countries m ust face with fairness. In the
ordinary course of their econom ic developm ent, som e low -incom e
countries will achieve a suffiicent degree o f technical efficiency to en
able them to p roduce industrial products for export in world m arkets.
Because they are underdeveloped countries, their wages are lo w ; b e
cause their industrial econ om y is young, their exports o f m anufactures
are concentrated 011 a few products. Japan has been in this position
for m an y yea rs; other low -incom e countries are reaching this stage o f
econom ic developm ent. N oth in g w ould be m ore tragic than to h ave
the great industrial countries penalize the m anufactured exports o f
the low -incom e countries. It w ould be disheartening if such an a tti
tude on the part of the U nited States and W estern E u rope were to
condem n these countries to continue an excessive dependence on ex
ports of raw materials or to set tlie-m apart as “ p oor relations” in
the w orld econ om y suitable on ly for exporting m anufactured goods to
each other. In a w orld exporting about $45 billion o f m anufactured
goods, in which exports o f such goods are rising far m ore rapidly than
w orld trade, there should be 110 great difficulty in absorbing the m odest
am ount of m anufactured goods that are exported b y the underde
veloped countries and Japan.
W ith its w ell-rounded econom y, producing a w ide variety o f agri
cultural and industrial goods with the m ost efficient techniques in the
w orld, it w ould be unfortunate if the U nited States were to turn dow n
the blind alley o f protectionism . T h e U nited States is better pre
pared to face the widening com petition in w orld trade than any other
cou n try. Our p olicy is decisive in determ ining whether w orld trade
should continue to expand at a rapid rate, contributing to econ om ic
grow th, or should stagnate behind barricades that destroy w orld trade
and inhibit econ om ic progress. Other countries, too, have an obliga
tion to encourage the grow th in w orld trade b y rem oving the restric
tions and discrim inations they have im posed under transitional
arrangements that m a y otherwise assume a dangerous character o f
perm anence.
C h a pte r V I. F ood

and

R a w M a t e r ia l s P ro blem s

T h e problem s concerned w ith international trade in prim ary p rod
ucts are extrem ely com plex. T h ey arise from two difficulties. First,
the su pp ly o f certain prim ary products, especially agricultural co m
m odities, is relatively insensitive to price for extended periods, so
that a persistent tendency for production to increase m ore rapidly
than dem and is n ot easily corrected even b y a large fall in prices.
S econd, the dem and for prim ary products, especially industrial raw
materials, varies considerably for cyclical and other reasons, so that
the prices o f such com m odities fluctuate w idely over short periods.
M o s t food and raw materials exporting countries, including the
U nited States, are confronted with these problem s.
T h e problem s d o n ot all arise from the difficult su pp ly and dem and
conditions that distinguish prim ary products. These natural diffi
culties are accentuated b y the fact that international trade in agri
cultural products is controlled and restricted far m ore than trade in

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

industrial products. T h e great industrial countries o f W estern
E urope, w hich are net im porters o f foodstuffs, nevertheless p rovid e a
high degree o f protection for their dom estic production. In p ractic
ally all o f these countries, the price paid to dom estic producers o f
wheat and other foodstuffs is a political rather than an econ om ic price.
T h e U nited States, too, maintains a very high level o f protection foi
a num ber o f agricultural products.
Surplus disposal program
T h e U nited States has a com prehensive program for supporting
agricultural prices. Consum ers and producers in all parts o f the
w orld are to som e degree affected b y the price supports we establish
and the production these prices call forth. A s a result o f this program ,
the G overnm ent o f the U nited States has acquired vast holdings o f
wheat, corn, cotton , and other agricultural products. A t the end o f
O ctober 1959, the acquisition value o f these surplus holdings, b o th
those held in inven tory and those held as security for loans, was over
$9.2 billion. A n y practical m odification o f the support program is
n ot likely to reduce dom estic production o f the m ajor export crops to
the level o f hom e consum ption and com m ercial export. T h e problem
o f agricultural surpluses m a y becom e less a cu te; it is certain to persist.
T a b le 6-1. — Government surplus crop holdings

[Millions of dollars, acquisition value]
Year end
1949...............................................
1950...............................................
1951...............................................
1952...............................................
1953...............................................
1954...............................................
1957...............................................
1959 i........................................... -

Wheat
1,016
1,005
679
1,093
2,110
2,767
2,864
2,698
2,504
3,058
3,461

Corn
611
867
667
593
972
1,239
1,584
2,049
2,175
2,351
2,363

Upland
cotton

Other

931

21
86

194
1,293
1,458
2,380
1,724
912
1,093
1,498

1,008
967
627
829
1,498
1,733
2,712
1,752
1,621
2,214
1,904

Total
3,566
2,860
2,059
2,609
5,873
7,197
8,690
8,223
7,212
8,716
9,226

i Oct. 31, 1959.
Source: U.S. Department of Agriculture.
T h e corollary to an agricultural program that results in the accum u
lation o f such huge surpluses is a program to dispose o f them . Since
dom estic low -cost disposal schemes w ould further dem oralize the
dom estic price structure— that is, increase the disparity betw een
dom estic m arket and support prices— export has becom e the dom inant
ou tlet for surplus stocks. Since 1954, th ey have been exported to an
increasing extent under P u b lic L aw 480. Thus, legislation provides
in title I for sales against p aym ent in local currencies, in title I I for
gratis shipm ents in cases o f em ergency or fam ine, and in title I I I for
donations through private charities and barter transactions. B arter
transactions have been o f varyin g b u t dim inishing significance because
o f the opposition o f dom estic producers o f the materials received in
barter and because o f a justified fear that barter transactions m a y
sim ply replace dollar sales. T here are also substantial agricultural
exports under the m utual security and other econ om ic aid program s.
Agricultural exports under all G overn m en t program s am ounted to
nearly $6.7 billion from 1955 to 1959. In the case o f w heat, abou t

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

65 percent o f U .S. exports were under G overn m en t program s in the
past 5 years.

T a b le 6 -2 .— Agricultural exports, fiscal years 1955-59
[In million dollars]
Dollar sales............................... ...................................
Government programs................................................
Public Law 480, title I 1........................................
Public Law 480, title II 2......................................
Donations through private charities..................._
Barter.--------------------------------- ----------------Public Law 655 and economic aid____________
Total.................................................................. -

1955

1956

1957

1958

2,278

2,128
1,368
439
91
185
298
355
3,496

2,768
1,960
912
88
165
401
394
4,728

2,756
1,246
654
92
173
100
227
4,002

866

73
83
135
125
451
3,144

1959
2,460
1,259
729
56
132
132

210

3,719

1 Local currency sales.
Famine and emergency relief.
Source: U.S. Department of Agriculture.

In principle, agricultural exports under Governm ent program s are
intended to facilitate exports that w ould n ot otherwise enter into ordi
nary com m ercial trade. In fact, there is no w ay to p u t m ore wheat,
fo r example, in the hands o f consumers in im porting countries through
G overnm ent program s w ithout diminishing to some extent the dem and
fo r wheat for im port through com m ercial channels. I t m ay be that
donations through private charities and shipments for fam ine and
em ergency relief are exports that w ould n ot otherwise be sold. T h e
case is p robably different for barter, foreign aid, and local currency
sales o f agricultural exports. A considerable part o f such exports
w ould undoubtedly have been provided through com m ercial sales o f
the U nited States and o f other countries if they were n ot m ade avail
able through U.S. G overnm ent disposal programs.
T h e problem o f persistent agricultural surpluses in the U nited States
and other high-incom e countries and chronic shortages in low -incom e
countries presents a serious dilemma. There is no d oubt that w orld
consum ption o f agricultural products can be increased to a consider
able extent b y m aking such goods available at what is equivalent to
bargain prices. T he net increase in the consum ption o f agricultural
products, however, w ould be considerably less than the am ount m ade
available through aid. T he com m ercial exports o f the U nited States
and o f other countries are certainly less as a consequence o f our sur
plus disposal program . T h e adverse effect on some agricultural ex
porting countries is serious; the effect o f terminating the program
m ight be even worse for some o f the countries now receiving such aid.
F or there can be little d ou b t that to m any low -incom e countries aid
in the form o f agricultural products represents a considerable accretion
o f resources for developm ent, and these resources m ight n ot be avail
able to them except in this form .
T he best solution to this problem w ould seem to be to broaden the
scope o f the program for m eeting such supplem entary needs for agri
cultural produ cts and to have other countries share in the cost o f m ain
taining such a program . There is n o reason w h y Canada, Australia,
Argentina, and other agricultural exporting countries should n ot par
ticipate w ith the U nited States in an international program for sup-

INTERNATIONAL EFFECTS OF U .S . ECONOMIC POLICY

p lyin g the low -incom e countries with larger am ounts o f agricultural
p roducts than th ey are able to p a y for with free exchange at w orld
m arket prices. N or is there any reason w h y the whole burden o f the
cost o f aid to such countries in this form should be borne b y the cou n
tries that happen to be exporters o f such products. Th e high-incom e
countries o f E urope could reasonably be asked to m eet some part
o f the cost o f such a program . T h e U .S. contribution to the program
m ight v ery well be abou t the same as its supply o f surplus agri
cultural products.
Agricultural import policy
T he U nited States is a m ajor exporter o f agricultural produ cts. Its
longrun interest is to see that international trade in agricultural p rod
ucts is n ot unduly restricted. Unless the U nited States is itself w illing
to allow agricultural im ports to com e into this cou n try on a reasonable
basis, it is difficult to see h ow the w orldw ide trend tow ard exaggerated
agricultural protection can be halted and ultim ately reversed. I t is
understandable that the U nited States should lim it net im ports o f
certain basic agricultural com m odities for which it maintains price
supports and o f w hich it is a very large n et exporter. Otherwise, the
U nited States w ould be confronted w ith the task o f absorbing the
agricultural surpluses o f other countries at the price-supported levels
o f the U nited States.
T h e problem is quite different for agricultural com m odities that this
cou n try cannot produ ce in adequate am ount for hom e dem and, except
at prices far above levels prevailing in other countries, and o f w hich it
is actually or poten tially a considerable im porter. F o r such m a jor
agricultural com m odities, a m oderate differential in fa v or o f dom estic
producers could be m aintained through tariffs or p rodu ction paym ents.
On the other hand, the exclusion or severe lim itation o f m inor agri
cultural im ports through quotas or tariff quotas is unreasonable and
contrary to the broader interests o f A m erican agriculture. A fairly
satisfactory solution for the protection o f dom estic producers o f w ool
and sugar has been w orked out. F or certain other agricultural im
ports, our present p olicy is too restrictive.
F or a long tim e the U nited States protected dom estic p rodu ction o f
w ool b y tariffs that were exorbitant and that did n ot succeed in m ain
taining dom estic output. T h e a ttem pt to provide an adequate return
to dom estic producers through support prices and high tariffs on ly
resulted in accum ulating surpluses while cutting dow n dom estic con
sum ption o f w ool. A new and practical approach was adopted in the
N ation al W o o l A c t o f 1954. U nder this program , w oolgrow ers sell
their p rod u ct at the m arket price and collect, from the G overnm ent,
all or part o f the difference betw een that price and the “ incentive
p rice” which is designed to induce a national crop o f 300 m illion
pounds o f w ool. A ctu ally it has n ot been possible to reach this level
o f dom estic p roduction. T h e cost o f the incentive plan in recent years
has been about $60 million a year. This is far less than the cost o f a
price-support program and it has the incalculable advantage o f per
m itting consumers to b u y w oolen goods w ith ou t the p enalty o f a
prohibitive price on the raw material.
T h e U nited States also has a well-established im port program fo r
sugar. T h e Secretary o f A griculture determines annually the su pply
o f sugar that will be necessary to m eet the dom estic dem and. This

INTERNATIONAL EFFECTS OF U .S.

ECONOMIC POLICY

supply is then allocated to m ainland producers o f beet and o f cane, to
offshore producers in H awaii, Puerto R ico, and the Virgin Islands, and
to perferred foreign areas— the Philippines and C uba. T h e preferred
position o f C uba and the Philippines is tha result o f historical ties
with this country, and their econ om y has been oriented to the export
o f sugar to the U nited States. W hile the Sugar A ct has w orked
reasonably well, it has certain deficiencies with respect to these cou n
tries. T h e Philippine share o f the U .S. sugar m arket is fixed at an
absolute quota. I t cannot share in the slow b u t steady grow th o f
the U.S. market. T h e C uban share o f the U .S. sugar m arket is set
b y law at a percentage o f the total, b u t this share has been reduced
b y legislation. Furtherm ore, the proportion o f their quotas which
these countries can ship to the U nited States in the form o f refined
sugar is severely lim ited— a measure that restricts the expansion o f
their ow n refining industry.
T h e agricultural im port p olicy o f the U nited States is reasonably
satisfactory for m a jor agricultural com m odities, particularly those o f
a noncom petitive character. On the other hand, it is exceptionally
restrictive for som e m inor products o f relatively little im portance to
the U .S. econ om y b u t o f considerable im portance to individual cou n
tries w hich specialize in the export o f these products. W h at is es
pecially disturbing in the great reliance the U nited States places on
restricting im ports o f agricultural and related produ cts through
quotas, tariff quotas, and embargoes.
T h e Tariff C om m ission has listed (in T .C . 29172) the considerable
num ber o f com m odities, ranging from cattle and fish to dairy products
and nuts on im ports o f which quotas, tariff quotas, or absolute em
bargoes are im posed. In addition, under section 22 o f the A gricultural
A djustm ent A ct, quotas and em bargoes are placed on m an y varieties
o f cheese, butter substitutes, including butter oil, cotton o f various
types and cotton waste, and wheat and rye grain and flour. B eyon d
that, there is an extensive list o f fresh fruits and vegetables and p ro c
essed agricultural com m odities on which the ad valorem equivalent
o f the tariff is 30 percent to 50 percent or m ore. F o r m an y such
products, the degree o f im port protection is far greater than is p rovided
fo r m anufactured goods. A m ore generous im port p o licy w ould
create difficult problem s o f adjustm ent, b u t w ith help in other form s
th ey can be m et. Our wider agricultural interests w ould b e served
b y the reduction o f restrictions on agricultural im ports in this cou n try
and in other countries.
Long-term position of primary products
T h e countries that depend on exports o f fo o d and raw materials
h ave had great difficulty in m aintaining a satisfactory level o f exports
in recent years. A part, b u t n ot all, o f their paym ents difficulties
h ave arisen from the deterioration in their export m arkets, generally
since 1951 and m ore particularly since 1957. T here are indications
that with the econ om ic recovery in the U nited States in 1958 and
the m ore recent recovery in other industrial countries in 1959, the
m arkets for som e prim ary products already have or will soon show a
cyclical im provem ent. This should be helpful for the near future;
it w ould n ot, how ever, solve the longer range problem s confron tin g
som e o f the countries that export prim ary products.

INTERNATIONAL EFFECTS OF U .S . ECONOMIC POLICY

It lias been noted that the share o f the nonindustrial countries in
w orld trade has been declining. T h e basic cause o f this phenom enon
is that the dem and for foodstuffs and raw materials in the industrial
countries does n ot rise p roportionately w ith the increase in their
incom e and output. On the other hand, the supply o f prim ary
products increases with the grow th in population and the im prove
m ent in techn ology in the raw materials exporting countries. This
tendency toward im balance o f supply and dem and was m asked for a
tim e b y the great shortages o f foodstuffs and raw materials in the
early postw ar period. T he restoration o f production in areas severely
affected b y wartim e destruction has on ce again em phasized this
tendency tow ard chronic surplus for som e foodstuffs and raw materials.
As incom es rise in the high-incom e countries, the proportion o f
personal incom e spent on food declines. Furtherm ore, the decline is
greatest in the consum ption o f such staples as cereals, sugar, fats and
oils, and n ot inconsiderable for coffee and tea. On the other hand,
the dem and for m eat, dairy products, fruits, and similar foods does
rise alm ost in proportion to the rise in personal incom es. In the
low -incom e countries, the dem and for fo o d tends to increase m ore
nearly w ith the rise in incom e, bu t their increase in incom e is m uch
too siow to keep pace w ith the grow ing supplies o f staple foodstuffs.
E ven for coffee, consum ed to a considerable extent b y high-incom e
countries, it is extrem ely difficult for dem and to keep up w ith the
recent expansion o f supply. U ntil 1954, the su pply o f coffee was
short relative to dem and and prices tended to rise. In 1954, the
average price o f coffee in U .S. m arkets was 78.3 cents a pound.
Since this period o f shortage, the su pply o f coffee has increased enor
m ously, partly in response to higher prices, bu t largely as a conse
quence o f the opening o f new sources o f supply and o f a steady
im provem ent in efficiency in grow ing coffee. In 1959-60, the export
able supply, as estim ated b y the U .S. Foreign Agricultural Service, is
expected to be 50 percent a bove the average o f the first half o f this
decade. D em an d has also increased, b u t n ot on a scale com parable
to the supply. A s a consequence, coffee prices have declined v ery
sharply, especially since 1957.
T a b le 6-3.— Estimates of world exportable production of green coffee, 1950-51 to

1959-60

[In thousand bags]
Region
North America.............................
Brazil............................................
Other South America.................
Africa............................................
Asia and Oceania.........................
World total.........................

Average,
1950-51 to
1954-55
4,927
14,730
6,548
5,656
728
32,589

1956-57
5,830
11,700
6,985
8,390
1,737
34,642

1957-58
7.000
20,800
8,230
8,885
1,440
46,355

1958-59
6,270
26,000
8,215
9,565
1,327
51,377

1959-60
7,545
30,000
8,555
10,053
1,360
57,313

Source: Foreign Crops and Markets, U.S. Department of Agriculture, Sept. 24, 1959.
This problem is b y no means confined to foodstuffs. T h e increase
in industrial produ ction in the past 10 years m a y have been at a rate
unm atched in recent history. N evertheless, the dem and for industrial

INTERNATIONAL EFFECTS OF U .S . ECONOMIC POLICY

raw m aterials has n ot increased in proportion to the increase in o u t
p ut and has n ot k ept pace with the considerably smaller increase in
the su pply o f industrial raw materials. T h e decline in the raw m ate
rial con ten t o f industrial ou tp u t has been n oted for a long time. A
new analysis o f this problem is contained in an article on “ T h e D e
m and for Industrial M aterials, 1950-57,” in the E co n o m ic R eview for
Septem ber 1959, published b y the N ational Institute o f E co n o m ic and
Social Research in the U nited K ingdom .
There are tw o reasons fo r the decline in the raw m aterial con ten t o f
industrial production . T h e first is technological: the developm ent
o f synthetic materials, technological changes in the use o f raw m ate
rials, and the displacem ent o f less highly fabricated b y m ore h igh ly
fabricated raw materials. T h e second reason for the failure o f the
dem and for raw materials to grow in proportion w ith industrial p ro
d u ction is the changing pattern o f production. G enerally speaking,
the raw material con ten t o f nondurable manufactures, such as textiles,
m anufactured foodstuffs, etc., is considerably higher than the raw
m aterial content o f durable m anufactures; and in the postw ar period
durable goods ou tp u t has risen relative to nondurable goods. Further
m ore, durable goods are becom in g m ore intricate in their fabrication,
so that the labor and capital content o f ou tp u t has grow n m uch m ore
than the raw m aterial content.
T h e recurrence o f a chronic surplus in the supply o f m a n y prim ary
produ cts m a y bring back som e o f the econ om ic difficulties that were
experienced b y the raw materials exporting countries in the 1930’s.
There is some indication that after a period o f very favorable terms o f
trade for prim ary products in the postw ar period, the prices o f the
m a jor raw m aterials have fallen below their prewar relationship to
prices in the U nited States and to about their 1953 relationship for
som e im portant foodstuffs. T h e accom panying chart shows the
average prices o f four metals, four fibers, four foodstuffs and ru bber
fo r 1958 on 1937 and 1953 bases, adjusted for the rise in wholesale
prices in the U nited States.8 R ecen tly, the prices o f prim ary p rod
ucts have risen slightly w ith recovery o f produ ction in the U nited
States and E urope. A dow nw ard pressure on prices o f prim ary
products, cyclical fluctuations apart, still seems evident.
T h e best w a y to deal w ith the problem s created b y the chronic
surplus o f prim ary products is to encourage a lesser dependence am ong
the underdeveloped countries on such ou tp u t as a field o f em ploym ent
and as a source o f export receipts. M ore and m ore o f their grow ing
lab or force m ust in tim e be shifted to m anufacturing: for their ow n
use, for export to each other, and for export to advanced industrial
countries. This does n ot diminish the im portance o f h avin g these
countries continue to produce and export food s and raw materials, for
w orld dem and will grow although not at the same rate as incom e and
industrial produ ction . I t is even m ore im portant for the under
developed countries to im prove p rodu ctive efficiency in agriculture
and m ining, for higher incom es from the p rodu ction o f prim ary p rod
ucts is possible on ly through greater ou tp u t per worker.

»The 4 metals are copper, lead, zinc, and tin; the 4 fibers are wool, cotton, hemp, and jute; the 4 food
stuffs are coffee, sugar, cacao, and copra; the rubber is natural rubber.

INTERNATIONAL EFFECTS OF U .S . ECONOMIC POLICY

Chart 6-1
RELATIVE PRICES OF RAW MATERIALS, 1958
ADJUSTED FOR U.S. WHOLESALE PRICES

INTERNATIONAL EFFECTS OF U .S . ECONOMIC POLICY

Fluctuations in prices of primary products
T h e dem and for prim ary products fluctuates considerably with
business conditions. In a period o f econom ic expansion, the dem and
rises, partly for use in current output, partly for additions to stocks in
processed and sem iprocessed form . In a period o f contraction, the
dem and falls, partly because industrial p rodu ction declines, partly
because stocks are drawn dow n. These cyclical fluctuations in d e
m and cause relatively large fluctuations in p rice— particularly for
agricultural raw materials. T o som e extent, the ou tp u t o f minerals
is varied to m eet changing conditions in w orld m arkets. T h e ou tp u t
o f agricultural products cannot be varied, how ever, so that they co n
tinue to be produced and exported even under very unfavorable
m arket conditions.
T h e accom panying chart shows the decline in the prices o f som e o f
the principal raw materials and foodstuffs in the recession o f 1957-58
and their subsequent rise in the recovery o f 1958-59. There is little
d ou b t that the cyclical decline was unusually large in the recent reces
sion. One reason was that the dow nw ard trend, reflecting the im bal
ance between longrun supply and dem and conditions, was accentuated
b y the recession. A nother reason was that the recession in the U nited
States was accom panied b y a decline or halt in econ om ic expansion in
nearly all of the leading industrial countries. T h e recovery that began
in the U nited States and Canada early in 1958 and in E urope m ore
recently has halted the general decline in the prices o f prim ary p ro d
ucts. In the expansion phase o f this cycle, prices will rise to som e
extent and for som e tim e; but for m ost com m odities they are unlikely
to return to the levels that prevailed in 1956 and 1957.

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

T h e extent to w hich the fall in the prices o f prim ary produ cts in
recent years reflects the disparity between supply and dem and can be
seen from the data on production and consum ption o f the principal
nonferrous m etals from 1951 to 1958. U ntil 1958, there was a ten d
en cy for p rodu ction to grow rather steadily. On the other hand,
consum ption o f these metals rose rapidly from 1951 to 1955, bu t
show ed relatively little increase thereafter. This was especially true
for U.S. consum ption. W orld prices o f nonferrous m etals reflected
the fa ct that industrial ou tput in the U nited States rose very little
from 1956 until the end o f 1958 and that industrial expansion slowed
dow n in some other countries in 1958. M ore rapid grow th in the
great industrial countries will do m uch to m itigate the problem s o f the
countries producing and exporting nonferrous metals.
T h e longer run problem is m uch m ore difficult for countries export
ing foodstuffs and agricultural raw materials. Th e disparity o f su pply
and dem and for som e agricultural com m odities is quite large and
agricultural producers have m uch less flexibility in dealing w ith supply
problem s than producers o f minerals. Som e agricultural crops are
perennials, so that there is a huge investm ent in trees that will con
tinue to produce for m an y years. E ven the produ ction o f annuals
cannot be quickly reduced in countries where ou tp ut com es from
m any sm all- and m edium -sized p roduction units and alternative
opportunities for em ploym ent are scarce. Our ow n experience with
agricultural controls indicates how difficult it is to eliminate surplus
p roduction, even in a coun try in which the agricultural labor force
decreases slow ly and em ploym ent in other fields continues to expand.
T h e im balance o f basic supply and dem and tends to exaggerate the
im pact o f recession on the prices o f prim ary products. It m ay be
that the decline in these prices from 1956 to 1958 was som ewhat
greater than is likely to occu r in another recession, after som e adjust
m ent has been m ade in the relation o f su pply to dem and. There can
be no doubt, how ever, that even under better balanced longrun
conditions, the large cyclical fluctuations in the prices o f prim ary
products are certain to cause considerable hardship to the under
developed countries. R eal incom e, o f course, falls w ith the decline
in the prices and the volum e o f exports o f prim ary products. Further
m ore, the econ om y m a y be com pelled to restrict im ports to the low er
level o f export receipts.
T h e im pact o f the recent cyclical decline in prices on the foreign
exchange receipts o f low -incom e countries exporting prim ary products
has been serious. T ota l w orld exports declined b y abou t 5 percent
from 1957 to 1958. T h e U nited States was the on ly industrial
cou n try showing any significant decline in exports in 1958. F or the
rest o f the world, the decline was concentrated in countries depending
h eavily upon exports o f prim ary products, although n ot all are low incom e countries. In L atin A m erica, the decline in export receipts
was 33 percent in B olivia, 15 percent in Chile, 13 percent in C uba,
and 12 percent in Peru. In the independent sterling area, excluding
the oil-producing countries, the decline in export receipts was 25
percent in Australia, 16 percent in Pakistan, 15 percent in Burm a, and
14 percent in M alaya. As som e o f these countries had a sharp decline
in exports in 1957, the fall in their export receipts from 1956 to 1958
was even greater— nearly 30 percent in Chile and 22 percent in B urm a.

INTERNATIONAL EFFECTS OF U .S. ECONOMIC POLICY

Stabilization of prices and export receipts
T h e large fluctuations in the prices o f prim ary p rodu cts m ake it
inevitable that produ cing countries should seek som e means o f
achieving a greater degree o f price stability. A s show n in the U .N .
Survey for 1958, price fluctuations in the postw ar years have been
on ly slightly less pronounced than in earlier periods. E con om ic
fluctuations in the great industrial countries, com m on ly regarded as
the m ain cause o f cyclical price m ovem ents, have been com paratively
m ild in the postw ar years. P olitical developm ents w hich resulted
in m a jor dem and fluctuations have been largely responsible fo r som e
o f the wider postw ar swings in prices. Countries exporting prim ary
p rodu cts are concerned to see greater stability o f prices in inter
national markets, p artly to stabilize hom e incom es b u t principally to
a void the large and disruptive fluctuations in their foreign exchange
receipts that seem to recur w ith excessive frequency.
A s a practical m atter, there is relatively little that the countries
exporting prim ary p roducts can d o b y themselves to m inim ize the large
fluctuations in the volum e and prices o f their exports. T h e y need,
at least, the passive cooperation of the principal im porting countries
and preferably the U nited States. W hile this cou n try undertakes a
far-reaching program o f agricultural price supports for dom estic
producers and, on som e occasions has used the program o f strategic
stockpiling to support dom estic production and avoid m arket disturb
ances, it has generally been reluctant to participate in international
com m od ity agreements designed to reduce price fluctuations on w orld
m arkets. N evertheless, the U nited States has been a m em ber o f b oth
the International W h eat and the International Sugar Agreem ents
since their inception in 1949 and 1953 respectively.
A lthou gh it is understandable that the U nited States should be
reluctant to encourage an extension o f international arrangem ents for
the m arketing o f prim ary products, if their ob je ctiv e is to support
untenable prices, the fa ct is that such com m od ity agreem ents have
been useful to som e extent. This is true o f the sugar and w heat
agreem ents; it is even m ore true o f the International T in A greem ent
w hich cam e into force in 1956 and o f w h ich the U nited States is n o t a
m em ber. M ore recently, the L atin Am erican coffee producers, w ith
the participation o f A frican producers, have entered into a 1-year
agreem ent to regulate coffee exports. T h e greater part o f the burden
o f restricting exports will fall on L atin A m erica and particularly B razil.
T h e problem s o f the raw materials exporting countries are difficult
and th ey are urgent. T here is no basis for assuming that the problem s
will in tim e solve themselves. N o d ou bt, prices w ould ultim ately
reach a level that w ould force a balance o f supply and dem an d; b u t
such prices could in volve a disastrous fall in real incom e and serious
balance o f paym ents difficulties for som e countries. T h e great
industrial countries have a responsibility to help in the orderly m arket
ing o f prim ary p roducts. Their ob jective should be n ot the tem porary
m aintenance o f higher prices, b u t the achievem ent o f a b etter balance
o f prod u ction and consum ption at prices n ot too far below current
levels. F or the U nited States, the responsibility is particularly great
in coffee as we are b y far the largest consum ing cou n try and 80 percent
o f the exportable produ ction com es from Latin Am erica. I t is w orth
n oting th at where com m od ity m arketing agreements have had
m oderate ob jectives th ey have been reasonably successful.

INTERNATIONAL EFFECTS OF U .S . ECONOMIC POLICY

T h e problem s in volved in the orderly m arketing o f prim ary produ cts
are extrem ely com plex and their solution will have to be approached
gradually. In the m eantim e, it w ould b e desirable to give the raw
m aterials exporting countries som e assurance that the sharp fluctua
tions in their export receipts will n ot im pose on them the need for
equally sharp fluctuations in their im ports. Their ow n reserves are
generally m uch too small to enable the countries exporting prim ary
p rod u cts to draw on them to m aintain an appropriate level o f im ports
in tim e o f recession. E ven with their increased quotas in the In ter
national M on eta ry Fund, it is d oubtfu l whether th ey can secure
sufficient aid to offset the effects o f a sharp b u t tem porary decline
in the prices o f prim ary products.
Proposals have been m ade at various times to p rovid e special
facilities to help finance the large cyclical fluctuations in the balance o f
paym ents o f underdeveloped countries. I t w ould be desirable to
stu dy the feasibility o f establishing an E xports R eceipts Stabilization
F u n d to provide loans to offset cyclical fluctuations in the foreign
exchange receipts o f countries exporting prim ary products. A s such
operations are closely related to those already con d u cted b y the
International M on eta ry Fund, the proposed institution m ight b e m ade
a subsidiary o f the I M F .
C h a pt e r V I I . U .S. P r iv a t e F o r e ig n I n v estm en t
One o f the striking features o f the U .S. balance o f paym ents in re
cent years is the resum ption o f private foreign investm ent on a large
scale. In the 3 years from 1956 to 1958, the net ou tflow o f private
U .S. capital to the rest o f the w orld averaged about $3 billion a year.
In real terms, allowing for the rise in prices, U.S. net private foreign
investm ent is som ew hat greater than in 1927 and 1928, the peak years
o f the interwar period. Th e high level o f U .S. private foreign invest
m ent is a reflection o f the strength and grow th o f the w orld econ om y
to w hich it has contributed. A t the same time, the increase in U .S.
private foreign investm ent has added to the strain, for the tim e being,
on the U .S. balance o f paym ents.
This cou n try becam e a m ajor source o f private capital for inter
national investm ent for the first time in the 1920,s. In the decade
from 1921 to 1930, n et U .S. private foreign investm ent am ounted to
nearly $9 billion. B y far the greater part o f this investm ent was fo r
the purchase o f new foreign security issues. T h e resources m ade avail
able through such foreign investm ent were an im portan t source o f
dollar exchange throughout the 1920's. F rom 1921 to 1930, net pri
vate capital outflow was nearly one-fifth as m uch as U .S. paym ents
for im ports o f goods and services. Th e precarious balance in w orld
paym ents in the 1920's was heavily dependent on U .S. private foreign
investm ent.
T h e great depression and the widespread paym ents difficulties o f
the 1930's were a severe b low to foreign investm ent. T h e resulting
defaults created an insuperable and largely unwarranted prejudice
against foreign investm ent. T h e collapse o f international investm ent
was itself a m ajor factor in prolonging the depression. Far from con
tinuing even on a smaller scale, foreign investm ent becam e negative—
w ith capital flow ing b ack from the natural capital im porting cou n
tries to the natural capital exporting countries. U .S. private investors

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

w ithdrew approxim ately $1.5 billion in long-term capital from the rest
of the w orld betw een 1931 and 1940. T h e reflux o f capital from the
underdeveloped countries to W estern E urope was m uch smaller but
p rob a b ly n ot inconsiderable.
D uring the Second W orld W ar, the G overnm ent o f the U nited
States recognized that the restoration o f private foreign investm ent
w ould be of enorm ous im portance to the reconstruction and develop
m ent of the postw ar w orld. I t was for this reason that this cou n try
p roposed the establishm ent o f the W orld Bank, one purpose o f which
is to prom ote private foreign investm ent. T h e W orld B an k has been
o f inestimable value in raising private funds in this cou n try and abroad
fo r foreign investm ent and in creating an atm osphere o f confidence for
private foreign investors. Nevertheless, the postw ar revival o f pri
vate foreign investm ent has been a slow process.
T a b le

7-1.— U.S. net private capital outflow, 1946-58
[In million dollars]

Year

1946...........................................
1947...........................................
1948...........................................
1949...........................................
1950...........................................
1951...........................................
1952...........................................
1953...........................................
1954...........................................
1955...........................................
1956...........................................
1957...........................................
1958...........................................

Total

413
987
906
553
1,265
1,068
1,158
369
1,619
1,211
2,990
3,175
2,844

Direct in
vestment,
net

New secu
rity issues

Redemp
tion of old
issues

230
749
721
660
621
528
850
721
664
779
1,859
2,058
1,094

85
396
150
118
254
491
286
270
309
128
453
597
955

-308
-295
-6 2
-103
-301
-113
-6 6
-139
-124
-190
-174
-179
-8 5

Other long Short-term,
term, net
net

96
-5 2
-1 9
65
542
59
—6
-316
135
303
324
441
574

310
189
116
-187
149
103
94
-167
635
191
563
624
341

Source: Balance of Payments, Statistical Supplement, and Survey of Current Business.

P rivate foreign investm ent becam e o f significance again in 1947
and 1948. Aggregate private foreign investm ent, how ever, did n o t
begin to exceed $1 billion a year net until 1950. Since then, it has
rem ained above this level in every year except 1953. In 1956 private
foreign investm ent began to rise on an enormous scale, particularly
direct foreign investm ent. In the 3 years from 1956 to 1958, U .S.
net private foreign investm ent averaged $3 billion a year. I t should
be noted that these figures do n ot include retained earnings w hich are
reinvested in subsidiaries abroad. W hile it is unlikely that U.S.
private foreign investm ent in 1959 will be on the same scale as in the
3 preceding years, it will, nevertheless, rem ain quite substantial.
In the first 3 quarters o f 1959, net new funds going into U .S. private
foreign investm ent am ounted to nearly $1.6 billion and will p robably
exceed $2 billion for the year.
Direct investment
T he greater part o f U.S. private foreign investm ent is direct invest
m ent. In the 3 years from 1956 to 1958, business firms in the U nited
States invested over $5 billion in new funds in m anufacturing, trade,
and the resource industries abroad. In addition, over $3 billion o f
earnings were retained b y subsidiaries and reinvested in expanding
their operations abroad. T h e am ount o f new funds going into foreign
direct investm ent was unusually large in 1956 and 1957 because o f

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

new ventures in the oil and mining industries in Latin America and
in Canada which were completed in these years. It is probable that
in 1959 and in the next few years, U.S. direct investment will be more
on the order of $1.3 billion a year in new funds and another $1 billion
in reinvested earnings.
T a b le

7-2.— U.S. direct investmentf new funds, 1946-59
[In million dollars]

Year

Amount

1946 ................. - .......................................
1947............................................................
1948............................................................
1949.............................................................
1950 ...........................................................
1951.—........................................................
1952 ...........................................................

230
849
721
660
621
528
850

Amount

1953 .......................................... ..............
1954........................................................
1955__________ _______________ ____
1956.............. ................. ...........................
1957...........................................................
1958___________ ______ _______________
1959 (estimated)_____________________

721
664
779
1,859
2,058
1,094
1,300

Source: Balance of Payments, Statistical Supplement and Survey of Current Business, December 1959.

T h e geographic distribution o f U .S. direct investm ent shows a
h eavy concentration in Canada, Latin A m erica, and W estern E urope.
These regions accoun ted for over 80 percent o f the total value o f all
U.S. direct investm ents at the end of 1958. N early 90 percent o f the
new funds that w ent into direct investm ent from 1956 to 1958 was
invested in these areas. Outside these regions, U.S. direct invest
m ent is relatively small and virtually negligible in the underdeveloped
countries except those in the oil-producing regions. E ven in Latin
Am erica, a very substantial part of the U.S. direct investm ent is in
oil produ ction and mining. U.S. direct investm ent in m anufacturing
is largely concentrated in C anada, W estern E urope, and som e o f the
high-incom e countries in the C om m onw ealth. It is w orth noting,
h ow ever, that B razil ranks third am ong all countries in the total value
o f U.S. direct investm ents in m anufacturing, being exceeded on ly
b y Canada and the U nited K in gdom .
T a b le

7-3.— New funds going into direct investment, by geographic regions, 1956-58
[In million dollars]
Region

1956

1957

1958

1959
(3 quarters)

Western Europe_________________________ __
Canada____________________________________
Latin America_____________________________
All other countries__________________________

486
542
592
239

254
584
1,090
130

173
398
325
198

320
307
288
93

Total............................................ ..............

1,859

2,058

1,094

1,008

Source: Balance of Payments, Statistical Supplement, and Survey of Current Business, September and
December 1959.

T h e criticism is som etim es m ade that U.S. com panies are n o t in
terested in investing in m anufacturing in the underdeveloped countries,
but are prim arily interested in the exploitation o f natural resources,
i s a description o f the distribution o f U .S. direct investm ent b y in
dustry in the underdeveloped countries, this statem ent is correct.
I t is deficient in om itting the reasons for the relatively small am ount
o f U .S. direct investm ent in m anufacturing in these countries. U .S.
49762— 60------ 5

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

industry is interested in m aking investm ents abroad in any field w hich
offers the p rospect for a reasonable profit. T h e fact is that the under
developed countries do not, at this time, provide an attractive m arket
for U .S. direct investm ent in manufacturing.
T able 7-4.— Distribution of U.S. direct investments by industry and areaf end of 1958
[In million dollars]
Region

Total

Mining
and
smelting

Petro
leum

Manu
factur
ing

Public
utilities

Trade

Others

Canada ___________________
Latin America_______________
United Kingdom_____________
Other Western Europe_______
All others___________________

8.929
8,730
2,058
2,324
5,034

996
1,327
3
48
482

2,154
3,005
400
85G
3,286

3,512
1,740
1,313
995
925

351
1,175
26
32
313

472
600
176
220
292

847
883
140
173
353

All areas_______________

27,075

2,856

9,681

8,485

1,897

1,760

2,396

Source: Survey of Current Business, August 1959

T h e Census o f 1950 showed that 50 percent o f the total direct
investm ent was undertaken b y 25 com panies. T o a considerable
extent this reflects the im portant role o f the m a jor integrated co m
panies in the p rodu ction and m arketing o f oil. E ven in m anufacturing,
how ever, the greater part o f the foreign direct investm ent has been
undertaken b y large corporations. I t is characteristic o f these corpora
tions that they engage in large-scale production. Their technical
m ethods are not easily adapted to small producing units. Unless the
local dem and for the ou tput o f a subsidiary is large enough, the U .S.
com pa n y will prefer to m eet the dem and b y exporting from^the U nited
States or from another coun try in which it operates.
T h e high-incom e countries, already industrialized, are the m ost
profitable m arket for U .S. firms ready to undertake direct investm ent
in m anufacturing. B ecause o f p ropinquity and ease o f interchange
o f technical knowledge, Canada provides an especially attractive en
viron m en t for U .S. investm ent in m anufacturing. T o a lesser extent
this is true o f som e countries in W estern E u rope and the C om m on
w ealth. A recent stu dy o f U .S. investm ent in m anufacturing in the
U nited K in gd om shows the im portance o f large firms. In 1956, som e
300 U .S. m anufacturing firms in the U nited K in gd om em ployed about
350,000 people and had sales o f abou t $2,380 m illion. A few o f these
firms were gigantic in size, b u t nearly all were relatively large.9
T h e critical im portance o f the size o f the m arket in attractin g U .S.
direct investm ent in m anufacturing is evident from a co u n try -b y cou n try com parison in Latin Am erica. T h e on ly countries in this
region in which the value o f total U .S. direct investm ent in m anu
facturing exceeded $100 million at the end o f 1958 were Brazil, M ex ico,
A rgentina, and Venezuela. These are the countries w ith the largest
internal m arkets. I t is notew orthy that m ore than 40 percent o f total
U .S. direct investm ent in m anufacturing in Latin A m erica was con
centrated in Brazil, which is the largest m arket in this region. A s the
underdeveloped countries make progress in raising their incom es and
consum ption standards, there can be little d ou b t that th ey will attract
a larger am ount o f U .S. direct investm ent in m anufacturing.
•John H. Dunning, 44American Investment in British Manufacturing Industry,” 1958.

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

Portfolio investment and other private credit
In the 1920’s, b y far the greater part o f U .S. private foreign invest
m en t took the form o f buyin g new issues o f foreign dollar bonds.
A fter 1931 and until the end o f the war, new issues o f foreign securi
ties were negligible in am ount, exceeding $100 m illion in o n ly one
year, 1943. In the m eantim e, despite defaults and the difficulty o f
m aking transfers during the war, redem ptions o f outstanding securi
ties am ounted to over $2 billion from 1931 to 1945. B etw een 1946
and 1950, another $1 billion o f outstanding securities were redeem ed,
nearly all o f these Canadian. In the m eantim e, new issues o f foreign
dollar bonds rem ained relatively small, except for those o f C anada
and the W orld B ank.
Since 1951, there has been a substantial increase in new issues o f
foreign securities. I t is clear that the U .S. m arket has taken a m ore
favorable view o f the investm ent qualities o f foreign dollar bonds.
B y far the greater part o f the nearly $3.5 billion in foreign securities
issued in the U nited States from 1951 to 1958 was Canadian. A n d
m ore than half o f the rem ainder was issued b y international institu
tions— that is, the W orld B ank. T h e attitude o f U .S. investors
tow ard such bonds is very m uch the same as their attitude tow ard
the highest grade dom estic bonds. N ew issues o f securities o f other
countries am ounted to on ly $660 m illion in this period. A substantial
part o f this am ount represents the securities o f countries in the
C om m onw ealth and in W estern E urope. T h e m arketability o f these
securities has in som e instances been greatly enhanced b y associating
the issues w ith transactions being undertaken with the W orld B ank.
F or the L atin A m erican countries and for the underdeveloped
countries generally, it remains true that th ey cannot raise substantial
am ounts o f private capital in the U nited States through the issues o f
dollar bonds. T here has, how ever, been a gradual broadening o f the
countries that have found it possible to issue dollar bonds. A part
from the W orld B ank, 13 countries succeeded in raising funds in the
U nited States through b on d issues in 1959. E xcep t for Canada, the
am ount for any one cou n try was n ot v ery large. I t is w orth n oting
th at foreign purchasers take a large p ortion o f new dollar bonds
offered in the U .S. m arket.
T a b le

7-5.— New foreign security issues in the United States by areas, 1951-58
[In millions of dollars]

Canada

1951..........................................
1952...........................................
1953...........................................
1954............................ ..............
1955...........................................
1956...........................................
1957...........................................
1958...........................................

302
158
203
167
39
375
324
367

Western
Europe

Latin
America

25
121

All other
countries

50
46
36
54
56
78
61
87

Inter
na ( ional
institu
tions

Total

139
82
31
88
187
366

Source: Balance of Payments, Statistical Supplement, and Survey of Current Business, June 1959.

491
286
270
309
128
453
597
955

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

The very large volu m e of new security issues from 1955 to 1958,
aggregating m ore than $2 billion, offers the h ope that this form o f
foreign investm ent will becom e of increasing im portance. I t is n ot
to be expected that the exceptionally high level o f 1958 can be reached
again, except under equally favorable conditions. In that year, very
low long-term interest rates encouraged an enorm ous outpourin g o f
new issues. W hile the higher interest rates that n ow prevail will, to
som e extent, discourage foreign borrowers, long-term interest rates in
the U nited States are n ot higher than in m ost other natural capital
exporting countries. A n d it remains true that, in general, access to
the U.S. capital m arket is still considerabty easier than to m ost capital
m arkets o f W estern E urope. In the first half o f 1959, new issues o f
dollar bonds am ounted to about $300 m illion.
A p a rt from new security issues, U.S. investors have show n an
enorm ous interest in foreign equities, particularly those o f the leading
com panies o f Canada, W estern E urope, and the C om m onw ealth
countries. U .S. foreign investm ent in this form has risen v ery rapidly
in recent years. B y the end o f 1958, U.S. holdings o f foreign securities,
particularly equities, am ounted to very little less than holdings o f
foreign dollar bonds. T h e large increase in this typ e o f foreign
investm ent is n ot likely to decline. A num ber o f U .S. investm ent
trusts have been form ed for the special purpose o f investing in foreign
equities.
O ther long-term U .S. private investm ent abroad largely takes the
form o f bank loans for extended periods— often up to 5 years. These
loans m a y have their origin in projects undertaken b y U .S. com panies
and largely financed through the E xp ort-Im p ort B ank. T h e larger
A m erican banks are offered the early m aturities o f these loans and
find them an attractive investm ent. T h e am ount o f such credit
extended in recent years has been rather substantial. In 1958, when
m on ey was fairly easy, $574 m illion o f other long-term private credit
was m ade available (net) to governm ents and institutions abroad.
There is also a substantial am ount o f U.S. private investm ent in the
form o f short-term credits. These credits are p rovid ed b y U.S.
business firms, banks, and other financial institutions. M o s t o f it is
conn ected w ith the financing of trade or w ith m eeting tem porary
foreign exchange needs. B y their nature, short-term credits m ust be
soon repaid, so that while new credits m a y rise substantially from
year to year, the aggregate am ount outstanding increases rather
slow ly. A t the end o f 1958, the total o f such credits is estim ated to
have been ju st under $3.5 billion.
T a b le

7-6.— U.S. private foreign investment, except direct investment, end of 1958
[In million dollars]
Total

Canada_______________________
Latin America________________
Western Europe_______________
International institutions
Total___________________

Foreign dol Other foreign
lar bonds
securities

2,094
5,320
2,403
139
3,388
244
1,733
All other
countries_____________
547
907
907
13,749

Source: Survey of Current Business, August 1959.

3,931

Other long
term

Short term

2,474
40
974
202

345
860
1,114
321

407
1,364
1,054
663

3,690

2,640

3,488

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

InternationafBank forlReconstruction ancTDevelopment
T h e W orld B an k is not, o f course, a private institution or a U .S.
institution, although this country is the largest subscriber, b y far, to
the capital o f the B ank. W hile some o f the resources available to
the B an k for its lending operations com e from the 20 percent o f the
original capital paid in b y its members (18 percent in their ow n cur
rencies), m uch the greater part of these resources are derived from the
issue o f its own securities or the sale o f the obligations it has acquired
to other investors. In this sense, the W orld B ank is an im portant
interm ediary for the funneling of private capital into international
investm ent. Insofar as U .S. investors provide these resources, the
am ounts transferred to the B ank are already included in U .S. private
foreign investm ent.
I t is w orth noting that the W orld B an k has been a pioneer in the
view that other countries have the cap acity to p rovide capital for
international investm ent and that they have an obligation to m ake
their paid-in subscriptions available for use b y the B an k in its lend
ing operations. U ntil the end of June 1959, the W orld B an k had
m ade loans o f $4,426 million, n ot including loans canceled. I t had
disbursed $3,377 million, o f which about 72 percent was in U .S. d ol
lars and the rem ainder in 30 other currencies. Outside the U nited
States, it has issued its bonds in the U nited K in gd om , Canada,
Switzerland, and the N etherlands, and there are investors in these
securities in a large num ber o f countries. T h e B ank has also b or
row ed considerable sums in U .S. dollars for shorter periods from the
G erm an B undesbank. It has sold the obligations it has acquired
from its debtors in Belgium , Canada, G erm any, the N etherlands,
Switzerland, and the U nited K ingdom . T h e international character
o f the B ank extends not only to its borrowers, bu t to its capital, its
issues o f securities, and the investors in its securities.
T h e doubling o f the capital o f the W orld B ank in 1959 has increased
enorm ously its potential for m eeting m ore o f the capital requirements
o f the underdeveloped countries. It m ay be expected that the am ount
o f lending done b y the W orld B ank will increase gradually. N one
o f the recent increase in capital o f this $20 billion institution is
to be paid in b y the m em ber countries. Instead, this additional
capital, as the unpaid part o f the original capital, is to be su bject to
call, if ever needed, to m eet the obligations o f the W orld B an k on
its ow n outstanding securities. T he operating resources o f the W orld
B ank will continue to com e from private investors in the U nited
States and other countries.
Cyclical fluctuations in capital flovj
A ll types o f private long-term U.S. foreign investm ent fluctuate
from tim e to time, often in an irregular manner. D ire ct investm ent
abroad, particularly, seems to fluctuate with U .S. business conditions
in m uch the same w^ay as dom estic investm ent. Prior to the current
recession, the largest annual fall in the am ount o f new funds going
into U.S. direct investm ent abroad was in 1953, when such investm ent
was $128 m illion less than in 1952. As a practical m atter, during
the short and m oderate postw ar recessions in the U nited States, the
fluctuations quarter to quarter have been larger than year to year.
In 1949, new funds going into U.S. direct investm ent abroad fell
considerably in the m idst o f the recession. In 1952, the sudden drop

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

in industrial production (from 121 in M arch to 115 in J u ly), although
n ot constituting a recession, was follow ed b y a sharp fall in new funds
going into direct investm ent. In 1953, the new funds goin g into
U .S. direct investm ent abroad again fell considerably during the
recession.
B ecause o f the large increase in U .S. foreign investm ent in 1956
and 1957, the decline in direct investm ent was m uch greater in 1958.
N ew funds going into U .S. direct investm ent abroad am ounted to
nearly $1.9 billion in 1956 and nearly $2.1 billion in 1957. A sharp
decline in U .S. direct investm ent abroad occurred in the third quarter
o f 1957, coincident w ith the recession. N ew funds for such invest
m ent fell from the peak o f about $1 billion in the second quarter o f
1957 to less than $200 m illion in the first quarter o f 1958. F or 1958
as a whole, direct investm ent abroad fell to abou t $1.1 billion. T h e
decline in the total o f all U .S. private long-term investm ent in the
recent recession was m uch less because new security issues and oth er
long-term investm ent rose considerably in 1958.
As cyclical fluctuations in business a ctivity in other countries are
n ot synchronous w ith those in the United States, it w ould seem that
U .S. direct investm ent should respond to business conditions abroad
rather than at hom e. In fact, such investm ent falls at the same tim e
as, b u t proportionately m uch m ore than, hom e investm ent in plant
and equipm ent in the m anufacturing industries in the U nited States.
T h ere are various reasons w h y com panies reduce their new foreign
investm ent when th ey con tract dom estic investm ent. In the first
place, directors are likely to regard business conditions in the U nited
States as indicative o f w hat conditions will soon be in other countries.
W h en sales fall at hom e, m ost com panies prefer n ot to com m it new
funds to expanding investm ent abroad. In the second place, a part
o f U .S. direct investm ent is for the purpose o f developing raw m aterials
for export to the U nited States. In recession, supplies are adequate
w ith ou t developing new sources. In the third place, the new funds
for direct investm ent abroad com e ou t o f profits o f dom estic com panies
which fall sharply in recession. A t such times, com panies prefer to
conserve funds to im prove their liquidity rather than to invest abroad.
T h e accom pan yin g chart (7 -1 ) shows fluctuations in U.S. direct
investm ent quarterly from 1949 to 1958 and the corresponding fluctua
tions in dom estic investm ent in plant and equipm ent in the m anu
facturing industries. B ecause of the erratic m ovem ent o f U .S. direct
investm ent abroad in som e quarters, the data for this series are
p lotted on the basis o f a m ovin g average for four quarters term inating
in the quarter after the reference point. F o r this reason, thera is a
slight tendency fo r direct investm ent abroad to lag som ew hat behind
hom e investm ent in the m anufacturing industries. B oth series are
p lotted on the basis o f annual rates. T h e data for direct investm ent
abroad are taken from the Survey o f Current Business, those for
investm ent in plant and equipm ent are taken from E co n o m ic
Indicators.

15.0

5.0

OF U.S. ECONOMIC

10,0

EFFECTS
POLICY

B illio n
Dollars

INTERNATIONAL

Billion

Chart 7-1
U.S. DIRECT INVESTMENT ABROAD AND INVESTMENT
IN PLANT AND EQUIPMENT IN MANUFACTURING

o>
00

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

Fluctuations in U .S. direct investm ent abroad have had negligible
effects on w orld paym ents. U ntil recently, the am ount o f U .S. direct
investm ent was small relative to other international transactions o f
the U nited States. Furtherm ore, the cyclical decline in direct invest
m en t is p artly offset b y a fall in U.S. exports o f equipm ent associated
w ith such investm ent. M u ch m ore significant is the effect on the
econ om ic developm ent o f other countries. A lth ou gh hom e savings
are far larger than capital inflow, even in low -in com e countries, the
decline in foreign investm ent m ay be of considerable significance, par
ticularly to countries exporting prim ary products, where the im pact
o f the recession is already severe. W ith lower export prices, their in
com es, savings and investm ent tend to fall in a U .S. recession. A
sharp reduction in U.S. direct investm ent, which is likely to be rela
tiv ely larger in the nonindustrial countries, m a y add to the difficulty
o f m aintaining p rodu ction and em ploym ent, quite apart from its effect
on econ om ic developm ent.
Fluctuations in new issues of foreign securities are greater than
fluctuations in direct investm ent, allowance being m ade for the sub
stantially smaller role o f this typ e o f foreign investm ent. Further
m ore, the am ount o f new foreign securities issued in any period depends
largely on decisions b y the W orld B ank and the local governm ent
authorities in C anada to enter the bon d m arket. W hile their ow n
needs are o f preem inent im portance in determ ining whether th ey will
com e to the U .S. m arket for funds, they cannot be indifferent to
the state of the b on d m arket. I t is not surprising, therefore, that
there is a fair degree o f correlation betw een new issues o f foreign
securities and issues o f bonds b y dom estic corporations. T h e a c
com panying chart shows the am ount o f new issues o f foreign securities
(m ovin g average) and o f dom estic corporate bonds quarterly since

1955.

Billion
dollars

Chart 7-2
NEW ISSUES OF U.S. CORPORATE
AND F0REIGN SECURITIES

MilUon
dollars

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

A s the m arket for bonds is likely to be som ewhat m ore favorable in
a period o f easier credit, the fluctuations in new security issues tend,
to som e extent, to be contracyclical. Thus, b oth in 1954 and 1958,
there was a peak in new issues o f foreign securities and o f dom estic
corporate bonds. These cyclical fluctuations, how ever, are over
shadow ed b y the steady upward trend in new issues— dom estic as well
as foreign. T h e tendency for direct investm ent to decline in a re
cession, therefore, is partly offset b y the tendency for new security
issues to rise. O f course, the cou n try distribution o f borrow ers
through security issues and recipients o f U .S. direct investm ent are
n ot the same, so that there remains a cyclical im pact o f U .S. fluctua
tions in foreign investm ent on individual countries. Furtherm ore, as
direct investm ent is three to fou r times as large as new security issues,
the contracyclical m ovem ent in new issues does n ot fu lly offset the
m uch greater fluctuations in direct investm ent.
Restraint on foreign investment
T h e great increase in U .S. private foreign investm ent took place
from 1956 to 1958. W hile private foreign investm ent will p rob ab ly
be considerably less in 1959 than from 1956 to 1958, it will be sub
stantially greater than in any year before 1956. B ecause this higher
level o f private foreign investm ent has com e at a tim e o f w ider recog
nition of the persistence in the overall deficit in the international p a y
m ents o f the U nited States, questions have been raised as to the extent
to w hich the outflow o f private capital has contributed to the recent
pressure on the balance o f paym ents and whether the U nited States
can continue such an outflow o f private capital in view o f its present
international paym ents position.
Clearly, the continued ou tflow o f private capital from the U nited
States is profitable to U .S. investors and beneficial to the econ om y o f
the countries in w hich investm ent is m ade. In the lon g run, it is in
the interests o f the U nited States and the w orld econ om y to have
private foreign investm ent m ake the greatest possible contribution to
m eeting the shortage o f capital in other countries. A n y substantial
decrease in the ou tflow o f private capital, particularly to the under
developed countries, w ould ham per the grow th o f the w orld econ om y
and w ould lead to greater pressure on the G overnm ent o f the U nited
States to provid e m ore aid. E ven a tem porary redu ction in the
ou tflow o f U .S. private capital w ould be undesirable unless it were
evident that this is indispensable to an im provem ent in the U .S.
paym ents position.
B etw een 1950 and 1955, before the recent large increase in U .S.
private foreign investm ent, the average annual ou tflow o f private
capital was $1.1 billion a year net. I t m a y revert in the next few years
to a level o f about $2 billion to $2.5 billion a year. T h e ou tflow o f
private capital is the source o f the substantial receipts o f the U nited
States from the rem ittance o f earnings on such investm ents. In
1958, rem itted earnings on U .S. private foreign investm ent am ounted
to over $2.6 billion. F rom 1951 to 1953, the rem itted earnings on U .S.
private foreign investm ent am ounted to $1.6 billion. In 1959, the
relation o f such receipts to private capital ou tflow will be a bou t the
same as it was from 1951 to 1953— that is, rem itted earnings from
private U .S. foreign investm ent will be slightly larger than the net
flow o f new funds into private U .S. foreign investm et.
49762— 60------ 6

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

Billion
dollars

Chart 7-3
REMITTANCES FROM PRIVATE FOREIGN
INVESTMENT AND NET PRIVATE FOREIGN
INVESTMENT, 1951-59
^

3.0

2 .0

1 .0

\ /

1951

1953

*1955

1957

______ I____ __ I______ I_______I_______I______ I______ L

1959

This is n ot to deny “ the short-run possibilities o f con tractive ad
ju stm en t in the capital accou n t” as a means o f gaining tim e fo r the
longer run adjustm ents that m ust be m ade. F or a tim e, no d ou bt,
a reduction in private ou tflow o f capital is possible w ith ou t affecting
the receipts from foreign investm ent. W h at is in d ou b t is the w isdom
o f such a p olicy and the feasibility o f im plem enting it. As this
cou n try does n ot have direct controls on the outflow o f capital, and
as such controls are com pletely contrary to ou r basic econ om ic and
exchange system , the on ly w ay to discourage an ou tflow o f private
capital is through greater pressure on the m on ey m arket. I f credit
becom es tighter and its cost higher, there is little d ou b t that the
ou tflow o f U .S. capital w ould be diminished.
Such a credit p olicy m ay be justified in a period o f expansion
because o f the state o f the dom estic econ om y. I t w ould be quite
undesirable to im pose an even m ore restrictive credit p olicy, m ore
severe than is called for b y dom estic econ om ic conditions, m erely to
reduce the ou tflow o f U .S. private capital. In fact, on ce m on etary
p olicy in the U nited States m ust be m ade prim arily for balance o f
paym ents reasons, this cou n try will have lost the great freedom
it secured from its enorm ous international liquidity. I t w ould be
unfortunate for the U nited States and the w orld econ om y if this
cou n try were com pelled to restrict expansion and to induce con traction
largely for balance o f paym ents purposes. T h e principal cause o f the
U .S. paym ents problem m ust be sought in oth er segm ents o f our
international accounts and the solution to this problem m ust deal
with the cause.

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY
C h a p t e r V I I I . U .S. A id

and

G o v e r n m e n t E x p e n d it u r e s

T h e great change that has taken place in the postw ar period is n o t
o n ly in the m agnitude b u t in the structure o f the U .S. balance o f
paym ents. T h e grow th in private com m ercial transactions and in
U .S. private foreign investm ent has been on abou t the scale that w ould
be expected in a w orld econ om y which is generally strong, prosperous,
and expanding at a fairly rapid rate. W h at is unique in the U .S .
balance o f paym ents is the enorm ous am ount o f the U .S. G ov ern m en t’s
dollar expenditures abroad and the transfers and paym ents it m akes on
aid and capital accou n t. In 1958, the U .S. G overnm ent m ade p a y
m ents and transfers for all purposes that am ounted to over $9 billion.
Thus, U .S. G overnm ent expenditures and transfers abroad (including
transfers in kind) am ounted to abou t 45 percent as m uch as the tota l
o f all private paym ents for im ports o f good s and services and the net
ou tflow o f U .S. private capital.
I n te r n a tio n a l p a y m e n ts th ro u g h G o v ern m en t a c c o u n t

I t is n ot possible to set up a balance o f paym ents for the G overn m en t
o f the U nited States that w ould show actual receipts and paym ents in
the usual form . G overnm ent paym ents go through com m ercial chan
nels, such as its purchases o f im port goods. Sim ilarly, som e o f the
receipts o f the U .S. G overnm ent are included in the com m ercial
accounts, such as sales o f surplus agricultural com m odities on aid
terms. N o attem pt is m ade in this rep ort to determ ine the incidence
o f such transactions— particularly the extent to w hich sales o f this
typ e are at the expense o f w hat otherwise be truly com m ercial exports
for paym ent in dollars. T h e balance o f paym ents on G overn m en t
a ccoun t shown below is intended m erely to show the m agnitude and
diversity o f the transactions undertaken b y the U .S. G overnm ent.
Table 8-1. International receipts, payments and transfers, U.S. Government, 1958
[In million dollars]

Receipts:
1. Exports of military supplies under grants_______________________ 2, 522
(i)
2. Exports of other goods under aid programs_____________________
3. Interest on U.S. Government loans_____________________________
307
Total____________________________________________________________ 2,829
Payments and transfers:
4. Government expenditures, except military______________________
305
5. Military expenditures---------------------------------------------------------------- 3, 416
6. Interest on U.S. Government debt--------------------------------------------139
7. Government pensions and other transfers_______________________
182
8. Military grants (contra 1)----------------------------------------------------------2, 522
9. Other grants (partly contra 2)--------------------------------------------------- 1, 611
966
10. Government loans less repayments____________________________ _
Total____________________________________________________________ 9, 141
i N ot separated from commercial transactions.
Source: Survey of Current Business, June 1959, p. 20.

T h e m a jor role o f the U .S. G overn m en t in international paym ents
is a postw ar developm ent. T h e U nited States p rovid ed som e credits
to foreign governm ents after the First W orld W ar, b u t virtually none
after
In the
relatively small sums were lent through the
E x p ort-Im p ort B ank, b u t this was regarded as a stim ulus to U .S .

1920.

1930’s,

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

exports rather than as aid to foreign countries or as an instrument
o f foreign p olicy. D uring the Second W orld W ar, U .S. G overnm ent
loans increased som ewhat, b u t the aid o f the U nited States to foreign
countries largely took the form o f lend-lease. It was after the war,
w hen lend-lease was term inated, that econom ic aid began on a large
scale and on ly in 1951, after the K orean fighting, that m ilitary aid
and U .S. m ilitary expenditures abroad grew to significant m agnitudes.
Som e o f the expenditures of the U .S. G overnm ent abroad are, in
fact, for services currently rendered and o f which the U nited States
is the sole beneficiary. T h ey do n ot differ essentially from similar
paym ents m ade b y the private sector of the econom y. These include
the interest paid on the U .S. G overnm ent debt, the pensions and
social security paym ents to people living abroad, and a considerable
part o f U .S. G overnm ent expenditures for purposes other than m ili
tary. There remain, however, four m ajor categories o f U .S. G overn
m ent expenditure and transfers which are political in character and
in w hich the benefits are shared in greater or less degree b y other
countries as well as the U nited States. These include m ilitary
expenditures abroad, grants o f m ilitary supplies, other grants, and
net G overnm ent capital ou tflow — that is, the excess o f new loans over
repaym ents. T h e follow ing table shows the sums spent or transferred
b y the U nited States in these categories from 1946 to 1958.
T a b le

8 -2 .—

Principal foreign expenditures and transfers of U.S. Government
1 9 4 6 -5 8
[In million dollars]

Year

1946__________________________
1947_____________ ____________
1948____________ ________- ........
1949-------------- ------ ----------------1950__________________________
1951_________________ _________
1952----- -------- ------------- -----------1953_______________ _______ _ ....
1954----- ------ ----------------- --------1955________________ ____ _____
1956___________ ______________
1957_____________ ____ - ........—
1958_____________ - ........- ........-

Total

5,860
9,364
6,017
6,480
4,742
5,931
6,940
8,844
7,318
7,359
7,896
8,174
8,515

Military
expenditures
493
455
799
621
576
1,270
1,957
2,535
2,603
2,823
2,955
3,165
3,416

Military
grants
69
43
300
210
526
1,470
2,603
4,254
3,161
2,325
2,579
2,435
2,522

Other grants

2,274
1,897
3,894
4,997
3,484
3,035
1,960
1,837
1,647
1,901
1,733
1,616
1,611

Net capital
outflow 1
3,024
6,969
1,024
652
156
156
420
218
-9 3
310
629
958
966

1 Including investments in the International Monetary Fund and the World Bank. In 1959, the new
U.S. investment in the International Monetary Fund will result in a considerable increase in net capital
outflow of the U.S. Government.
Source: Balance of Payments, Statistical Supplement (1958) and Survey of Current Business, June 1959.

T h e total o f all U .S. G overnm ent expenditures and transfers abroad
has grow n very considerably since 1950, when aid under the M arshall
plan began to decline. In recent years, abou t 70 percent o f U.S.
G overnm ent expenditures and transfers abroad were for m ilitary
expenditures and m ilitary grants. Other grants, largely bu t n ot
exclusively for econ om ic purposes, have been declining since 1950 and
rather rap id ly since 1951, the end o f the M arshall plan. A fter the
postw ar loans to the U nited K in gd om and other countries from 1946
to 1948, there was a very sharp decline in net loans b y the U .S.
G overnm ent. T h e increase since 1955 is m ainly accou n ted for b y the
agricultural surplus disposal program .

In te r n a tio n a l

e ffe c ts

xi.s.

e c o n o m ic

p o lic y

T h e geographic distribution o f U .S. G overnm ent expenditures and
transfers abroad has changed in the course o f time and with the shift
in the purposes for w hich these outlays are m ade. B etw een 1946 and
1951, the greater part o f the foreign expenditures and transfers o f the
U .S. G overnm ent were m ade to the W estern European countries, the
m em bers o f the Organization for E uropean E con om ic C ooperation .
In this period abou t 80 percent o f the total expenditures and transfers
o f the U .S. G overnm ent abroad were for or in W estern E urope.
Since 1952, the W estern E uropean share o f such expenditures and
transfers has fallen steadily and in 1958, this region accounted fo r on ly
43 percent o f the total o f U .S. G overnm ent expenditures and transfers
abroad. This shift in the regional distribution is better seen in co n
n ection with the change in the pattern o f such expenditures and
transfers.
U .S . m ilit a r y e x p e n d itu r e s a n d m ilit a r y g r a n ts

M ilita ry expenditures o f the U nited States abroad and grants o f
m ilitary supplies and services to other countries rose sharply after the
K orean conflict. This reflects, o f course, the fear of aggression directed
at other countries; and it is intended, as well, to establish the defense
o f the U nited States at points some distance from this cou n try.
Betw een 1951 and 1954, grants o f m ilitary supplies and services
exceeded the am ount o f U .S. m ilitary expenditures a broad ; bu t grants
o f m ilitary supplies and services have tended to decline since 1953,
while our ow n m ilitary expenditures abroad have continued to rise
w ithout interruption.
The distribution o f U .S. m ilitary expenditures b y regions shows the
very high concentration o f such outlays in W estern E u rope and in
Asia. R ela tively small am ounts are spent for this purpose in Latin
A m erica and until recently in Canada. U .S. m ilitary expenditures in
Asia have varied little since 1951 and in recent years have been
slightly m ore than $1 billion. On the other hand, U .S. m ilitary
expenditures in W estern E urope have been rising steadily, rather
rapidly until 1955 and m ore slow ly since then. In 1957 and again in
1958, U.S. m ilitary expenditures in W estern E urope exceeded $1.8
billion. Their relative m agnitude m W estern E u rop e's balance o f
paym ents w ith the U nited States is indicated b y the fact that U .S.
m ilitary expenditures in this region have am ounted to m ore than half
as m uch as W estern E u rope's exports to the U nited States.
T a b le 8—3.— U.S. m ilitary expenditures abroad , by regions , 1 9 4 6 -5 8
[In million dollars]
Year

1946............. ................................
1947__________________________
1948__________________________
1949_____ _____________________
1950__________________________
1951______ _____ ______________
1952__________________________
1953__________________________
1954__________________________
1955__________________________
1956___________________ ______
1957__________________________
1958..________________________

Total

493
455
799
621
576
1.270
1,957
2,535
2,603
2,823
2,955
3,165
3,416

Western
Europe
16
164
298
305
168
313
739
1,171
1,455
1,647
1,702
1,809
1,852

Latin
America
10
8
34
16
7
34
29
27
24
21
29
37
49

Canada

31
8
22
20
26
38
150
192
194
217
259
288
448

All other
countries
436
275
445
280
375
985
1,039
1,145
930
938
965
1,031
1.067

Source: Balance of Payments, Statistical Supplement (1958) and Survey of Current Business, June 1959.

INTERNATIONAL EFFECTS OF TJ.S. ECONOMIC POLICY

U .S. m ilitary expenditures abroad com prise all the paym ents m ade
b y the defense forces, including the personal expenditures o f the troops
and o f civilians on m ilitary assignment, stationed abroad. As a
m atter o f fact, the personal expenditures o f the troops and civilians are
on ly a small part o f the m ilitary expenditures o f over $3.4 billion in
1958. A b ou t three-fourths o f the total represents the paym ents m ade
b y the Defense D epartm ent for procurem ent o f supplies and services
and for construction in the countries in which U .S. forces are stationed.
In short, U .S. m ilitary expenditures abroad are largely paym ents o f the
U.S. G overnm ent for m ilitary purposes for the defense o f the U nited
States and its friends and allies. I t is n ot possible, o f course, to sepa
rate the interests o f the U nited States and other countries, in the
com m on defense. I t should be possible, although n o t w ith ou t diffi
culty, to m ake som e ju dgm ent whether other countries should n o t
share in larger part in these com m on costs.
T h e grants o f m ilitary supplies and services b y the U nited States
to other countries am ounted to $2.5 billion in 1958. T here are in d i
cations that such grants will decline, as orders for m ilitary equipm ent
to supply such grants have been declining. V ery little o f the m ilitary
grants goes to the L atin Am erican R epublics and none at all to C anada.
In fact, Canada itself makes substantial grants o f m ilitary supplies
and services to other countries. F rom 1951 to 1953 over 80 percent
o f the m ilitary grants w ent to W estern E urope and the bulk o f the
rem ainder to countries in Asia. Since 1954, the prop ortion o f the
m ilitary grants goin g to W estern E urope has been declining and in
1958 it was 60 percent. As the share o f L atin A m erica in such grants
is negligible, the rem ainder goes alm ost entirely to a few countries in
Asia. In 1958, the proportion going to these countries was a bou t
37 percent o f the total.
T a b le

8-4.— U.S. military grants, by regions, 1946-58
[In million dollars]

Year

1946....... ...............................................................
1947 .............................................................. ........
1948.....................................................................1949 ........................... ........................................
1950.............................. .............................. .........
1951____________________ ____ ____ __________
1952___________________ ________________ ___
1953________________________________ _______
1954____________________ ________ —........... —
1955............................ ..........................................
1956___________________ ___________ —.........
1957___________ ___ ____ _______ ____________
1958_____________________________ ____ ____ -

Western
Europe

Total

69
43
300

210

526
1,470
2,603
4,254
3,161
2,325
2,579
2,435
2,522

Latin
America

All other
countries
69

43
254
170
463

1,112

2,151
3,435
2,313
1,706

1,866
1,542
1,514

62
56
36
49
32
61

68
71

46
40
63
296
396
783
799
587
652
825
937

Source: Balance of Payments, Statistical Supplement (1958) and Survey of Current Business, June 1959.

M u ch the greater part o f U .S. m ilitary expenditures and m ilitary
grants are in and to W estern E urope. I t m a y be presum ed that the
am ount spent in and for W estern E u rope on m ilitary accou n t is indis
pensable to the defense o f these countries and the U nited States.
There is n o reason w h y this defense should n ot be continued on the

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

necessary scale. There is good reason, how ever, for the European
countries to assume a considerable part o f the defense costs represented
b y U .S. m ilitary expenditures in E u rop e and U.S. grants o f m ilitary
supplies to E urope. It is understandable that from 1951 to 1953,
when W estern European econ om ic recovery was still n o t com plete
and the m onetary reserves o f W estern E u rope had n ot yet been fu lly
restored, the U nited States should have m et all o f the costs o f the
supplies, services and construction for our forces in E u rope and should
have provided, as grants, a substantial part o f the m ilitary equipm ent
for the E uropean forces. T h e econ om ic situation has changed rad
ically since those days.
T h e production, exports and reserves o f m ost W estern European
countries have increased enorm ously. T h e U nited States has a large
balance o f paym ents deficit which it has been settling through an
outflow o f gold and the accum ulation o f short-term dollar obligations
to European governm ents and central banks. U nder these circum
stances, it is n ot unreasonable to discuss w ith our friends and allies
in E u rope the desirability o f their m eeting in larger part som e o f the
costs o f their defense n ow m et through U .S. m ilitary expenditures
and m ilitary grants.
E c o n o m ic a id a n d G o v er n m e n t lo a n s

T h e postw ar p olicy o f the U nited States was based on the simple
principle that the rehabilitation and reconstruction o f the countries
whose produ ctive ca p acity had been destroyed or im paired b y the
war was indispensable to the restoration o f a strong and balanced w orld
econom y. F or this purpose, the U nited States m ade substantial
fgrants for relief and rehabilitation in the im m ediate postw ar years,
argely through U N R R A . Furtherm ore, to facilitate the reconstruc
tion o f W estern E urope, large loans were m ade to the U nited K in gdom ,
France, and other countries in 1946 and 1947. Th e expectation was
that after the establishm ent o f the W orld B an k loans for reconstruc
tion could be m ade b y that institution. In fact, some o f the m ore
pressing needs of som e o f the continental W estern E urope countries
were m et through loans o f the W orld B ank. I t soon becam e apparent,
how ever, that the reconstruction problem s o f W estern E urope were
o f such enorm ous m agnitude that the resources available for m eeting
them were w h olly inadequate.
The solution to the problem s o f E uropean reconstruction and
recovery was p rovided b y the M arshall plan. T h e participating
countries in W estern E urope cooperated in establishing policies to
facilitate the recovery o f their produ ction and trade. T h e U nited
States provided very substantial aid through grants and, to a m inor
extent, through loans. D uring the life o f the M arshall plan, from
1948 to 1951, the U nited States m ade grants totaling $15.4 billion on
a balance o f paym ents expenditure basis. N early $12 billion o f these
grants were to the O E E C countries. W hile econ om ic grants to
W estern E urope continued on a substantial scale fo r a few years
longer, the am ount declined steadily and in recent years v ery little
o f this aid has gone to the high-incom e countries. In fact, som e o f
the econ om ic grants to W estern E urope are intended to enable these
countries to carry m ore o f the burden o f their own defense.

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY
T a b le 8-5. —Economic grants of the U.S. Government, by regions, 1946-58
[In million dollars]
Year

1946______ ____ __________ ____
1947__________________________
1948__________________________
1949__________________________
1950__________________________
1951__________________________
1952________ _________________
1953__________________________
1954__________________________
1955__________________________
1956__________________________
1957__________________________
1958__________________________

Total

2,274
1,897
3,894
4,997
3,484
3,035
1,960
1,837
1,647
1,901
1,733
1,616
1,611

Western
Europe
382
672

2,866

3,951
2,775
2,317
1, 453
1,138
1,018
807
491
317
316

Latin
America
17
43
18
30
19
17

28
42

68
83
112

118

Other
countries
347
595
894
912
601
657
425
578
525
945
1,067
1,103
1,117

International
institutions
1,528
587
116
104
89
44
60
93
62
81
92
84
60

Source: Balance of Payments Statistical Supplement (1958) and Survey of Current Business, June 1959.

O f course, none o f the U .S. econom ic grants goes to high-incom e
countries outside E urope. E ven Latin Am erica, in which region
there are som e countries w ith very low incomes, receives little aid in
the form o f econom ic grants. It is on ly in 1957 and 1958 that such
grants to all L atin Am erican R epublics reached $100 m illion a year.
A b ou t 70 percent o f this form of U .S. econom ic aid, exceeding $1 billion
annually since 1956, now" goes to the underdeveloped countries o f Asia
and Africa. This is a recent developm ent and appears to be a con
com itant o f the reduction in econom ic grants to E urope. A further
shift o f U.S. aid in this direction w ould be econom ically desirable and
helpful to the U .S. balance of paym ents.
T h e contribution o f the U nited States to aid through international
institutions has n ot been o f significant am ount since the early postw ar
years. M ore recently, the U nited States has been contributing to
various U nited N ations funds for the benefit o f the underdeveloped
countries. The am ount has been substantially less than $100 m illion
a year. One advantage in providing some U.S. econom ic aid through
the U nited N ations is that it encourages a sharing o f costs w ith other
countries that contribute for the same purpose.
In the early postw ar years, the U .S. G overnm ent p rovided large
resources through the outflow of public capital. F rom 1946 to 1948,
about $11 billion o f G overnm ent funds went into loans to other cou n
tries and investm ent in international institutions. T h e loans were
prim arily to the U nited K ingdom , France, and som e other W estern
E uropean countries. T h e investm ent was alm ost entirely in the
International M on eta ry Fund and the W orld B ank. F rom 1949 to
1955, the net capital outflow of the U .S. G overnm ent was relatively
small, exceeding $500 m illion in on ly one year (1949). Since 1956,
the net outflow o f G overnm ent capital has risen and in 1958 it was
close to $1 billion. This rise is the result o f the program for the dis
posal o f agricultural surpluses.

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

Table 8-6.— U.S. Government net capital outflow, 1946-58
[In million dollars]
Year

1946__________________________
1947__________________________
1948__________ ________ _______
1949__________________________
1950.....................—.................. 1951.______________ __________
1952._____ ___________________
1953__________________________
1954__________________________
1955_________ _____ _____ _____
1956................. .............................
1957................. — ................ ........
1958________________ ______ — -

Total

3,024
6,969
1,024
652
156
156
420
218
-9 3
310
629
958
966

Western
Europe

2,108
3,668
1,064
566
82
-141

110
-154
-202
48
50
372
39

Latin
America

45
176
-5 4
40
94
65
345
34
51
96
146
471

Other
countries

548
63

26
52
191
239
29
76
213
450
436
460

International
institutions

323
3,062
3

20
22
12
6
-2
-1

-2
33
4
-4

Source: Balance of Payments Statistical Supplement (1958) and Survey of Current Business June 1959.

T h e U.S. program for loans to foreign countries has been on a very
m odest scale since 1949. E xcep t in 1957, when the U nited K in gd om
required som e credit as a consequence o f the paym ents difficulties
associated with the Suez incident, the net extension o f credit b y the
U .S. G overnm ent to W estern E urope has been negligible. R e p a y
m ents on outstanding loans now exceed new long-term loans, so that
the net increase in credits to W estern E urope is m ainly o f a short-term
character, partly in connection w ith agricultural surplus disposal.
E ven L atin A m erica, w hich has long been accustom ed to borrow ing
from the E x p ort-Im p ort Bank, has received very little net credit from
the U nited States in the postw ar period. T h e average over the entire
postw ar period has been on ly $116 m illion a year and this is heavily
weighted with som e large loans to Brazil (now alm ost repaid) and to
Argentina to help them fund com m ercial arrears. F o r the rest, the
m oderate am ounts o f new credit have barely exceeded repaym ents on
old loans. T h e large increase in U .S. G overnm ent credits in recent
years has been to the underdeveloped countries o f Asia, m uch o f it
in the form o f the accum ulation o f local currencies received in paym ent
for agricultural surpluses.
It is w orth n oting that the U .S. G overnm ent has b ecom e a very
large creditor o f the rest o f the w orld. A t the end o f 1958, the G overn
m ent held credits and claims against foreign countries am ounting to
$14.9 billion, o f which $12.7 billion were long-term loans on which
interest and am ortization paym ents are m ade regularly. A part from
this, the U.S. G overnm ent had investm ents o f $3,476 m illion in inter
national institutions, alm ost entirely the International M on eta ry
F und and the W orld Bank. This does n ot include the additional
subscription o f $1,375 m illion that the U nited States m ade to the
International M on eta ry F und in 1959 on the occasion o f the general
increase in the quotas o f the m em bers o f that institution.

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY
Table 8-7.— U.S. Government credits and claims, by regions, end of 1958
[In million dollars]
Region

Total

Long term

Short term

Western Europe_________________________________________
Other Europe____________________________________________
Latin America__________________________________ ____ ____
Other countries__________________________________________

9,969
451
1,699
2,736

9,074
327
1,559
1,760

895
124
140
976

All regions....................................... ................... ..............

14,855

12,720

2,135

Source: Survey of Current Business, August 1959.

A t a tim e when the U .S. G overnm ent must give m uch greater con
sideration to its international paym ents position, the large assets held
b y the U.S. G overnm ent, as well as the large U .S. private foreign in
vestments, must be regarded as an im portant element o f strength. O f
course, not all o f these G overnm ent credits and claims will enter into
the balance o f paym ents receipts o f the U nited States in the future.
Som e o f the short-term credits outside W estern Europe, particularly
those represented b y local currency holdings, m ust be regarded as
indications o f grants already m ade rather than assets to be realized
in the future. T h e long-term credits, however, represent assets on
w hich this G overnm ent has been realizing receipts steadily in a ccord
ance w ith the terms under w hich the credits were extended. In 1958,
the U.S. Governm ent received $307 m illion o f interest and repaym ent
o f $647 m illion o f principal on its credits to foreign countries. A b ou t
two-thirds o f the interest and about 40 percent o f the principal p a y
m ents were from W estern European countries.
T a b l e 8 -8 .—

Interest and principal payments on credits of U.S. Government, 1946-58
[In million dollars]
Principal repayments

Year

Total

1946.......................
1947....................1948.......................
1949.......................
1950........ ..............
1951........ ..............
1952_______ ____ _
1953.......................
1954_____________
1955.......................
1956.......................
1957.......................
1958.......................

Western
Europe

294
443
205
295
305
429
487
507
416
479
659
647

43
84

121

107
173
225
339
337
335
253
288
218
245

Interest

Other coun
tries
43

210
222
98
122

80
90
150
172
163
191
441
402

Total

Western
Europe

21
66
102

98
109
198
204
252
272
274
194
205
307

14
43
70
73
78
164
167

202
207
207
125
124
203

Other coun
tries
7
23
32
25
31
34
37
50
65
67
69
81
104

Source: Balance of Payments Statistical Supplement (1958) and Survey of Current Business, June 1959.
E x p o r ts a n d a id

Because o f the large overall deficit in our international paym ents,
there is m ore concern at this time regarding the relation betw een U.S.
G overnm ent expenditures and aid and the balance o f paym ents.
In the early postw ar years, it was frequently said that every dollar
spent abroad or given as aid w ould ultim ately becom e a dem and for
U .S. exports. This simple doctrine had a great deal o f validity in a

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

period when the rest o f the w orld was desperately short o f goods and
the U nited States was one o f the few countries that cou ld provid e
additional exports p rom p tly and on a large scale. A t such a tim e, all
o f the dollar receipts o f the rest o f the w orld— whether in paym ent for
our im ports o f goods and services or derived from private investm ent
or G overnm ent expenditures, aid or credits— did tend to increase the
dem and for our exports rather p rom p tly.
T h e situation is quite different n ow . Our dollar paym ents fo r all
purposes are on a m uch larger scale than th ey were 10 years ago.
T h e shortage o f goods has been relieved in the high-incom e countries.
M o s t im portant, the great industrial countries o f E u rope have re
stored their cap acity to produ ce and export and th ey have resum ed
their custom ary place in w orld m arkets. U nder these conditions,
it does n ot follow that the dollar receipts o f the rest o f the w orld will
all be used to b u y exports from us. T h ose who receive dollars m a y
prefer to spend them on exports from other countries; and the in
dustrial countries o f E urope m a y prefer, as they are actually doing, to
use som e o f their net foreign exchange receipts to purchase gold from
the U nited States or to build up their U.S. dollar balances.
D espite this, it is still argued that the aid given b y the U nited
States, as distinguished from U .S. G overnm ent expenditures and
private transactions, does result in an equivalent increase in exports
and, therefore, has n o n et effect on the U .S. paym ents position.
W hile m ilitary grants o f the U nited States are m atcned b y a transfer
(exports) o f an equivalent am ount o f goods and services, the net
effect on U .S. exports is considerably less than the actual m ilitary
grants. A part o f these m ilitary supplies is purchased in E urope, and
to this extent exports o f dom estic ou tp u t are less than the m ilitary
grants. N or can it be assumed that in the absence o f m ilitary grants
our friends and allies, particularly in W estern E urope, w ou ld n ot have
purchased som e o f these supplies. Furtherm ore, the exports o f m ili
tary supplies do n ot in any case consist exclusively o f U .S. output.
T h e offshore procurem ent aside, our exports, regardless o f the charac
ter o f the goods or the paym ent for them , have a considerable im port
com ponent. This is especially im portan t because the U nited States
is a net im porter o f alm ost all types o f raw m aterials that go into
m ilitary goods, so that the m arginal exports o f such goods necessitate
im ports equivalent to their raw m aterial content.
T h e effect o f U .S. aid on U .S. exports m ust be considered in the
environm ent in w hich such aid is given. F o r nearly a decade, m ost
o f the great trading countries o f E u rope have been able to provid e
for all o f their private and public consum ption and expenditure out
o f their ow n ou tput. T heir exports have increased on a scale that
enables them to balance their international paym ents and to con vert
their surplus o f savings into reserves o f gold and U .S. dollar balances.
Their ou tp u t is clearly adequate to m eet a m uch larger part o f the
costs o f their ow n defense and to undertake a larger role in the p ro
vision o f aid to the underdeveloped countries. T h e assum ption o f
m u ch o f the costs o f their defense b y the U nited States, through
m ilitary grants and U .S. m ilitary expenditures, does n ot result in
increasing the dem and for U .S. exports, bu t in facilitating the con
tinuation o f their balance o f paym ents surplus and their accum ulation
o f reserves o f gold and U .S. dollars.

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

A stronger case can be m ade for the argum ent that our aid to
underdeveloped countries results in a net increase in exports equiva
len t to the aid, but even this is o f d oubtfu l validity. N o d ou bt,
aggregate im ports o f the underdeveloped countries are increased b y
precisely the am ount o f the aid— a premise that cannot be accepted
for W estern E urope. T h e increase in their im ports m ay be largely
from the U nited States, but it is certainly n ot all from the U nited
States. E ven when loans are tied, so that th ey are spent for U .S.
export goods, the availability of the loans frees the export receipts o f
the underdeveloped countries for buying other goods from other
countries. T h e nearest approach to econom ic aid that increases U .S.
exports to a precisely equal extent w ould seem to be grants or credit
sales o f surplus agricultural com m odities. E ven in this case, h ow
ever, it is alm ost certain that the availability o f these com m odities
under aid conditions reduces com m ercial sales b y the U nited States
and b y other countries. T h e fact is that it is inconceivable that under
present conditions any country, especially the U nited States w ith its
fu lly convertible currency, can count on an increase in exports fully
equal to any aid it m a y provide to other countries.
In considering the paym ents position of the U nited States and the
ultim ate incidence of U .S. G overnm ent expenditures and transfers
abroad, it should be noted that the overall paym ents o f the U nited
States have been in deficit since 1950. Thus, in periods o f dom estic
prosperity, when dom estic ou tput is at a cyclical peak, our total
p rod u ction plus incom e from abroad is inadequate to m eet expenditure
for dom estic consum ption, dom estic investm ent, private foreign in
vestm ent, and G overnm ent expenditures at hom e and abroad. T h e
balance o f paym ents deficit is thus evidence of excessive aggregate
expenditures, private and public— including U.S. G overnm ent ex
penditures abroad. Unless U .S. ou tp ut rises relative to private and
p u blic expenditure, the international paym ents of the U nited States
cannot be restored to balance. A n d even if U .S. ou tput were to rise
w ithou t a corresponding increase in private and public expenditure,
the international paym ents w ould not be restored to balance so lon g as
the great trading countries of E urope are n ot prepared to use for their
ow n consum ption, their dom estic and foreign investm ent, their p ublic
expenditures, including defense and foreign aid, all o f the resources
available to them from their ow n ou tp ut and U.S. aid. In brief, if
W estern E u rope is determ ined to run a large balance o f paym ents
surplus, facilitated b y U .S. G overnm ent expenditures and transfers,
this cou n try will be unable to restore its international paym ents
p osition and halt the drain of reserves except b y reducing U .S.
G overn m en t expenditures and transfers in and to W estern E urope.
C h a p te r

IX . T h e P r o b le m o f M o n e t a r y R e s e r v e s

T h e proper functioning of the w orld econ om y requires an adequate
level of m on etary reserves reasonably well distributed am ong the
great trading countries. Since 1950, the U nited States has sold abou t
$4.5 billion of gold and foreign countries have acquired an additional
$9 billion in U .S. dollar balances held b y their banks and official
institutions. In the m eantim e, the continental European countries
h ave increased their gold and foreign exchange reserves b y over $12
billion. W hile som e transfer of reserves from the U nited States to

INTERNATIONAL EFFECTS OF U .S.

ECONOMIC POLICY

other great trading countries was necessary in order to restore their
reserve position, continued transfer of reserves on the scale o f recent
years w ould undermine the reserve position of the U nited States. If
this cou ntry is to retain a considerable measure o f freedom in m aking
m onetary and fiscal p olicy in a tim e of recession, it m ust soon bring
to a halt the large outflow o f U.S. reserves. Th e continuing need o f
an expanding w orld econom y for larger m onetary reserves can best be
m et through the International M on eta ry Fund.
G e o g r a p h ic d is tr ib u tio n o f m o n e ta r y r es e r v e s

F or a generation, it has been custom ary to introduce all discussions
o f reserve problem s b y com m enting on the very large gold reserves o f
the U nited States and the urgent need for a better distribution o f the
w orld's m on etary reserves. T h e U nited States has traditionally been
b y far the largest holder o f gold reserves. In 1913, the U nited States
held 23 percent o f the m onetary gold o f the w orld, according to a report
o f the D irector o f the M in t. In 1928, the U nited States held abou t
37 percent o f the gold reserves o f central banks and governm ents,
according to data published b y the Federal R eserve B oard. E ven
now , after a very substantial transfer o f reserves to other countries
and to international institutions, the gold reserves o f the U nited States
are about half o f the w orld total, excluding the holdings o f the C o m
munist countries.
There was a period when the gold reserves o f the U nited States were
disproportionately large. D uring the great depression, the gold re
serves o f the U nited States rose from $7.4 billion in 1934 to $22.7
billion in 1941, when th ey am ounted to over 70 percent o f the w orld
total outside the S oviet Union. A lthough the gold reserves o f the
U nited States declined slightly and foreign-held dollar balances rose
m oderately during the war, there was no basic change in the dom inant
reserve position o f the U nited States. W ith the acute need for dollar
im ports in the early postw ar period, the reserves o f the U nited States
grew relative to those o f other countries. This further concentration
o f reserves in the U nited States continued until the produ ction and
exports o f W estern E u rope and Japan recovered. T h e aid and other
transfers and paym ents o f the U.S. G overnm ent nevertheless increased,
and the overall balance o f paym ents o f the U nited States becam e
adverse. F rom 1950 to 1959, the U nited States sold $4.5 billion in
gold to foreign governm ents and central banks and the short-term
dollar assets o f foreign banks and official institutions increased b y over
$9 billion.
T h e period since 1950 has been one o f radical change in the relative
reserve position o f the U nited States and the rest o f the world. A s
m an y o f the underdeveloped countries feel that th ey cannot afford to
invest large resources in holding m onetary reserves and as Canadian
exchange p olicy involves little change in reserves from year to year,
the reserve positions that are m ost significant for the w orld econ om y
are those o f the U nited States, the U nited K in gd om , and continental
E urope. T h e accom pan yin g table shows that the gross reserves o f the
U nited States have been declining over the past 9 years, those o f the
U nited K in gd om have fluctuated sharply b u t are n ot m ore n ow than
th ey were in 1950, while the reserves o f continental E u rope have in
creased rapidly and steadily in recent years— that is, b y over $12 billion
since 1950.

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

T a b le

9-1.— Official gold and foreign exchange reserves of countries and regions 1

Year end

Total

United
States

Canada

Latin
America

Conti
nental
Europe

United
King
dom

Other
sterling
countries

0.7
4.1

0.7
1.4
7.3
7.0
7.2

Rest of
world

Billion dollars
1928...........................
1937...........................
1948...........................
1950............................
1951............................
1952............................
1953............................
1954............................
1955...........................
1956............................
1957............................
1958...........................

13.0
27.6
46.5
48.5
48.9
49.5
51.3
53.0
54.1
55.4
56.3
57.0

3.8

12.8
22.8
24.4

22.9
23.3

22.1
21.8
21.8
22.1
22.9
20.6

0.1
.2
1.0
1.8
1.8
1.9
1.8
2.0
1.9
1.9

1.8

1.9

1.2
.9
2.8

3.2
2.9
2.9
3.2
3.0
3.2
3.7
3.8
3.1

5.1

6.6

2.0

5.9
6.7
7.7
8.7
10.4

2.5

13.4
13.8
14.9
18.2

2.4
3.1

12.0

3.7
2.4

2.0
2.8
2.2
2.2

6.8

7.4
7.5
7.3
7.1
6.7
6.3

1.4
1.5
3.2
3.5
4.0
4.0
3.8
4.0
4.5
4.7
3.9
3.9

Percentage of total
1928...........................
1937............................
1948............................
1950............................
1951............................
1952............................
1953...........................
1954............................
1955............................
1956............................
1957............................
1958............................

100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0

28.7
46.4
52.2
47.1
46.7
47.0
43.0
41.1
40.2
39.8
40.5
36.1

0.7
.7

2.2

3.6
3.7
3.8
3.6
3.7
3.5
3.5
3.3
3.5

8.9
3.2
5.9
6.5

6.0

5.9
6.3
5.7
5.8

6.6
6.7
5.4

39.4
24.0

12.6

13.7
15.7
17.6
20.3

22.6
24.7
24.9
26.4
31.8

5.8
15.0
4.3
7.6
4.9
4.0
4.9
5.3
4.0
3.9
4.2
5.4

5.8
5.2
15.7
14.4
14.8
13.7
14.4
14.1
13.5

12.8
11.0

11.9

10.7
5.5

6.8
7.1
8.2
8.0
7.5
7.5
8.3
8.5
7.0

6.8

i Gross basis; excludes holdings of international institutions.
Sources: International Financial Statistics and IM F Report on International Reserves and Liquidity.

T h e accum ulation o f reserves b y continental E u rope has corrected
n ot on ly the distortions arising from the war, bu t those originating in
the great depression as well. In June 1934, the U nited States held
gold reserves o f $7,856 m illion, w ith short-term banking liabilities to
foreigners o f less than $500 m illion. In June 1959, the U nited States
held gold reserves o f $19,746 m illion, w ith short-term banking liabil
ities to foreigners o f nearly $16 billion, o f w hich a b ou t $9 billion was
to foreign governm ents and central banks. Thus, th e change in the
reserve position o f the U nited States over the 25 yea rs from 1934 to
1959 has in volved an increase o f less than $12 billion in gold and m ore
than $15 billion in short-term liabilities to foreigners. In this same
period, the official reserves o f continental E u rope increased fro m abou t
$9 billion in June 1934 to over $18 billion in June 1959. T o this increase
o f official reserves should be added nearly $1 billion in foreign exchange
held b y the banks o f continental E urope. I t should be n oted th at
there are n o significant short-term banking liabilities to be set off
against these large reserves o f gold and foreign exchange held b y the
countries o f continental E urope.
R e s e r v e 'p o s i t i o n o f t h e U n i t e d S t a t e s

W hile the dom estic m on etary legislation o f the U nited States "re
quires the Federal R eserve banks to h old reserves o f 25 percent in
gold certificates against their note and deposit liabilities the reserves
required for this purpose are far less than the U nited States m ust
prudently keep in view o f its position in international trade and invest
m ent and the w ide use o f the U .S. dollar as an international reserve

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

currency. A large decline in U.S. gold reserves w ould be o f serious
consequence to this country and the w orld econ om y long before the
m inim um gold reserve ratio under the Federal R eserve A c t had been
reached.
T able

9-2.— Principal constituents in the U.S. reserve position, 1950-59
[In billion dollars]
Short-term foreign liabilities to:

Year end

Gold reserves

N e t position
in I M F
Official
institutions

1950.........................................................
..................................................
1951
1952.........................................................
1953.........................................................
1954 .......................................................
1955.........................................................
1956.........................................................
1957.........................................................
1958........................................................
1959 *......................................................

22.82
22.87
23.25
22.09
21.79
21.75
22.06
22.86
20.58
19.58

1.45
1.48
1.46
1.37
1.19
1.04
1.61
1.98
1.96
2.08

3.88
3.94
4.91
5.85
6.98
7.29
8.27
7.91
8.66
9.22

Banks

1.84
2.20
2.37
2.39
2.36
2.65
3.19
3.47
3.52
4.38

Others

1.40
1.52
1.68
1.78
1.80
1.78
2.08
2.25
2.43
2.57

i End of September 1959.
Source: International Financial Statistics, December 1959, pp. 254-255.

W hile it was possible until recently to regard the steady grow th in
foreign-held dollar assets as part o f the process of restoring the reserve
position of the rest o f the w orld, this attitude tow ard any further im
pairm ent in the U .S. reserve position cannot be justified. First, the
reserve position o f the great trading countries o f E urope has been
greatly im proved and in som e instances it is basically stronger than
that of the U nited States. Second, foreign holdings o f U.S. dollar
assets are considerably in excess o f working balances, so that a sub
stantial part o f these short-term funds could be transferred to other
centers or converted into gold under adverse econom ic or political
conditions. Third, the reserve position o f the U nited States has been
deteriorating for a num ber of years and there is no indication that the
situation will be reversed in the near future. W ith ou t attem pting
any fine measurem ent o f the significance o f the gross and net reserves
of the U nited States, it is reasonably clear that the U nited States can
not continue to perm it its reserve position to be weakened w ithout
losing the freedom it has so long had in form ulating dom estic m onetary
policy.
I t is pointless to com pare the gross reserves o f the U nited States
with U.S. im ports and show how m uch larger th ey are than those o f
nearly all other countries. I t is even m ore irrelevant to com pare the
ratio o f U.S. gold reserves to short-term dollar liabilities and show
that the ratio is m uch higher than that o f U nited K in gd om gold and
dollar reserves to sterling liabilities M o st o f the countries o f conti
nental E urope are n ot su bject to the special pressures o f an inter
national reserve center. Som e o f the great trading countries, and
particularly the U nited K ingdom , are com pelled b y the inadequacy
o f their reserves to adjust their m onetary and fiscal policies prom ptly
to their balance o f paym ents. W hile discipline o f this sort is not
w ithout som e m erit, it w ould be unfortunate if the U nited States were
com pelled to give too m uch consideration to the short-run balance of
paym ents effects o f its financial policies and too little consideration
to their production and em ploym ent effects.

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

The United States needs gold reserves that are large enough to give
it freedom in making fiscal and credit policy in time of recession.
Cyclical fluctuations in the United States are generally greater in
amplitude than in other countries. The impact of a U.S. recession
on world trade and investment is never negligible and under adverse
conditions could be serious. For this reason, it is desirable that the
reserves of the United States should be sufficiently large to enable the
monetary authorities to undertake a recession budget and an easy
credit policy as a means of facilitating recovery whenever this is neces
sary. If the United States must be concerned about the outflow of
gold, it will be hampered in putting such policies into effect. For
while a budget deficit might have only a minor effect on the U.S. bal
ance of payments, particularly if the recession in this country is accom
panied by a high level of economic activity abroad, an easy money
policy in the United States at such a time might lead to a large out
flow of gold.
U.S. monetary policy and reserves

When the United States has a balance of payments deficit, the
counterpart accrues to other countries as an excess of U.S. dollar
receipts. These excess receipts may be used to build up dollar deposits,
to acquire Treasury bills and other money market obligations, or to
purchase gold. The extent to which dollars are used for these pur
poses depends upon the magnitude of the U.S. deficit, the countries
with the corresponding payments surplus, and the attractiveness of
the U.S. money market for short-period, investment. Until now, there
has been a decided tendency to build up official dollar assets to the
extent of about $1 billion a year. If the U.S. deficit is larger than this,
much of the remainder is used to buy gold. Of course, gold purchases
are larger when the surplus countries are gold-holding countries, such
as the United Kingdom and Switzerland, rather than dollar-holding
countries, such as Germany and Canada. In any case, the induce
ment to retain dollar assets instead of buying gold is much greater
when interest rates in the United States are relatively high.
Of the $16 billion of foreign short-term dollar assets in the United
States, over $9 billion is held by official institutions (Governments and
central banks), about $4.4 billion by other banks, and $2.6 billion by
business firms and individuals. Most of the foreign official holdings
of U.S. dollars are kept as working balances or out of preference for
dollars as reserves. Nevertheless, a not inconsiderable part of the
official holdings of dollar assets are held in this form because they
yield a return and some official dollar assets would be converted into
gold if U.S. interest rates were to fall to relatively low levels. The
dollar assets held by commercial banks and other business firms and
individuals are even more responsive to interest rates. A substantial
decline in U.S. interest rates relative to interest rates in other financial
centers would probably lead to a withdrawal of much of these funds.
The significance of interest rates can be seen from the form in
which foreign dollar assets are now held. A relatively small part of
the $16 billion of foreign dollar assets is held as deposits with the
Federal Reserve banks. Nearly $8 billion is held as deposits with
other banks, most of it as time deposits bearing interest. Another
$7.8 billion is held in the form of U.S. Government securities and
other money market paper. These holdings are especially sensitive

B illio n
d o lla r s

INTERNATIONAL

Chart 9-1
GOLD SALES AND INCREASE IN
FOREIGN DOLLAR BALANCES

2.0,

Gold purchases

■1.0-

1950

■■

1951

1952

JLJ_

1953

1954
■J-J-

_I_U

1955

1956
-i-L.

1957

1958

First
half
1959

EFFECTS OF U.S. ECONOMIC POLICY

1 .0 *

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

to the level of interest rates. At the end of the second quarter of
1958, when short-term interest rates were at a cyclical low, foreign
holdings of U.S. Government securities fell to $3.8 billion. As the
yield on short-term funds rose, foreign holdings of U.S. Government
securities also increased, reaching $6.3 billion by the end of September
1959. In the first half of 1958, with low interest rates, there was a
very small increase in foreign dollar assets and a very large outflow
of gold. In the first half of 1959, with a much greater balance of pay
ments deficit but higher interest rates, there was a substantial increase
in foreign dollar assets and a much smaller outflow of gold.
The role of short-term interest rates in inducing the holding of
U.S. dollar assets rather than the purchase of gold will become of
increasing importance for U.S. monetary policy as liabilities to for
eigners become larger relative to U.S. gold reserves. The United
States has reached the stage where interest rates in this country must
be closely related to interest rates in the principal financial centers of
Western Europe. The need for greater international conformity of
short-term interest rates may not be obvious at this time when
monetary policy suited to domestic conditions requires a level of in
terest rates that also induces the retention of foreign dollar assets.
The limitations on U.S. monetary policy imposed by the large foreign
holdings of dollar assets will become more evident when the business
situation in the United States changes from cyclical expansion to
cyclical contraction.
At some time within the next 1 or 2 years business activity in the
United States will probably turn down. There is no way of telling
now whether such a recession will be short and moderate, although
this has been the typical postwar pattern. Even with a moderate
recession, the Federal Reserve authorities would want to ease credit
to facilitate recovery. Their capacity to undertake such a policy will
be severely hampered if the U.S. balance of payments is still in deficit
then and if the reserve position of the United States has been seriously
impaired in the meantime. It is important to restore the U.S. pay
ments position before the next recession.
The monetary policy of the United States in the postwar period has
involved a very sharp decline in short-term interest rates during
recession. In 1949, in 1954, and again in 1958, the yield on 3-month
Treasury bills was brought below 1 percent per annum. It is unlikely
that the Federal Reserve Board will be able to follow the same reces
sion policy of ultracheap money again. A repetition of the pattern
of very low short-term interest rates that prevailed in the first half of
1958 might induce an outflow of gold on the order of $2 billion in the
next recession. While the U.S. monetary authorities could accept
such an outflow of gold under present conditions, it is not so clear that
they will be able to do so 2 years from now, if the reserve position of
the United States deteriorates further.
The Federal Reserve Board will have to be careful to see that lower
interest rates do not induce too large an outflow of gold. While yields
of less than 1 percent per annum on Treasury bills may no longer be
feasible, a more moderate range of cyclical fluctuation, with a low of
about 2 percent per annum, may be almost as helpful for the domestic
economy without being as disturbing to the reserve position. More
important, if the United States is to continue to be able to use mone
tary policy with a reasonable degree of freedom, it is essential to pro

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

vide for the orderly growth of international monetary reserves and to
safeguard the great reserve centers from the risks of large and unex
pected withdrawals at a time of political or economic stress.
Monetary reserves and the IM F

The value of world trade, as measured by exports, was nearly five
times as large in 1958 as in 1938. Service transactions have probably
increased about as much as trade. Furthermore, the international
flow of private capital, which was negligible before the war, has risen
to substantial levels in recent years. The need for additional mone
tary reserves to finance the larger volume of international payments
has been met in two ways: first, by greater use of dollars and sterling
as reserves; second, by the creation of a common reserve of gold and
currencies held by the International Monetary Fund.
T

a b l e

9 -3 .—

Year

1951.......................
1952.......................
1953.......................
1954.......................
1955.......................
1956.......................
1957.......................
1958.......................

Ratio of gross monetary reserves to imports, 1 9 51 -5 8

All countries, including United States

All countries, excluding United States

Reserves
(billion
dollars)

48.9
49.5
51.3
53.0
54.1
55.4
56.3
57.0

Imports
(billion
dollars)
82.1
80.7
77.0
80.0
89.5
98.8
108.4
100.7

Ratio
(percent)

59.6
61.3
66.6
66.3
60.4
56.1
51.9
56.0

Imports
(billion
dollars)

26.0
26.2
29.2
31.2
32.3
33.3
33.4
36.4

70.2
69.0
65.2
69.0
77.1
85.0
94.1
86.7

Ratio
(percent)

37.0
38.0
44.8
45.2
41.9
39.2
35.5
42.0

Source: International Financial Statistics, December 1959, pp. 16-21 and 24-27.

It is futile to attempt to determine the adequacy of monetary
reserves by comparing the present ratio of gold and foreign exchange
reserves to imports for individual countries or the world economy with
similar ratios a generation ago. Recent comparisons may have some
what greater significance. The ratio of gross gold and foreign ex
change reserves to the value of world imports is nearly the same now
as in 1951; and the ratio of the gross gold and foreign exchange
reserves of all countries, except the United States, to their total
imports is slightly higher now than in 1951 and 1952. It should not
be concluded from these comparisons that there is no reserve problem.
The recent stability in the ratio of reserves to world trade has been
made possible by an enormous transfer of gold and dollar reserves
from the United States to the rest of the world—amounting to $12.6
billion since 1950. The reserves of the world cannot continue to be
built up by large-scale transfers from the United States without
weakening the reserve position of this country.
The International Monetary Fund has been of inestimable value in
enabling the world economy to adjust its reserves to its greater
postwar needs. This institution holds a common reserve of $12.8
billion in gold and currencies for the 68 countries that comprise its
membership. The significance of the Fund as a common reserve is
not, of course, shown by the actual use of its resources, substantial
though this has been. The function of a second line of reserves is to
encourage countries to use their own reserves with greater freedom.

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

The $3.4 billion of exchange transactions of the Fund, up to September
30, 1959, indicates the wide use that has been made of the Fund's
resources by its members.
The Fund agreement provides for a quinquonniel review and a
general revision of quotas when this becomes necessary. During
1959, the quotas of nearly all members of the Fund were increased by
50 percent or more. If the common reserve held by the Fund is to
provide for the reserve needs of the world economy, the Fund quotas
should be integrated with the working reserves of its members. The
Fund quotas are not merely for extreme contingencies but for meeting
ordinary fluctuations in a country’s balance of payments. The Fund
has made great progress in recent years in giving members greater
assurance that they will be able to use its resources when needed; and
its members have shown great responsibility in restoring their position
in the Fund. The time is coming when the Fund should be able to
give members complete assurance that their basic quotas are a supple
ment to their own reserves.
At the end of October 1959, the net credit balance of the United
States in the Fund was over $2 billion. This sum is as much a part
of the available foreign exchange resources of the United States as the
gold it holds in the Treasury. The United States would find it
advantageous to use its credit balance in the Fund when it has an
outflow of gold. There is no technical difficulty or financial cost in
having the Treasury purchase currencies from the Fund for sale in the
exchange market. The premiums over the par value would more than
cover the transactions charge of the Fund.
Problem of the reserve centers

In the past 20 years, the world economy has depended primarily on
dollars and sterling to meet its greater reserve needs. At the end of
1938, the monetary reserves of the world consisted of about $26.4
billion in gold, and less than $2 billion in official sterling and dollar
balances. At the end of 1958, the monetary reserves of the world
(excluding international institutions) consisted of about $38.1 billion
in gold, $10.4 billion in short-term dollar assets of the monetary au
thorities and deposit banks (even more according to U.S. data), and
about $9.4 billion in sterling balances, not all of which was held by
monetary authorities and banks. In addition, there were smaller
amounts of other foreign exchange held as official reserves.
While the short-term monetary liabilities of the United States and
the United Kingdom have risen enormously, their own reserves have
increased relatively little. Since 1938, the increase in gold reserves
has been about 40 percent for the United States and the increase in
gold and dollar reserves has been about 10 percent for the United
Kingdom. The freedom of these reserve centers in making monetary
policy is already limited by their large short-term foreign liabilities.
The pressure on them could become even more serious if there were
substantial withdrawals of dollars or sterling in a period of stress.
Prof. Robert Triffin of Yale University has called attention to the
dangers implicit in a world monetary system depending so heavily on
national currencies as international reserves.10 Furthermore, he sees
a continuing deficiency in additions of gold and foreign exchange to
monetary reserves, once U.S. payments are restored to balance. He
See his two articles in the Quarterly Reivew of the Banca Nazionale del Lavoro, March and June 1959.

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

proposes to meet these two difficulties by converting the International
Monetary Fund into the equivalent of a world central bank, holding
deposits that can be used as reserves. These deposits would be
transferable among members and they could be drawn upon to acquire
any currency needed for international payments. In short, countries
holding deposits with the Fund could convert them into U.S. dollars
or sterling. The advantage in holding deposits in the Fund rather
than balances of dollars and sterling is that such deposits would have
guaranteed convertibility into other currencies and assurance against
any loss from devaluation in terms of gold. A modest rate of interest
would be paid on these deposits.
To assure the strength and liquidity of such a reserve system, each
country would undertake to keep 20 percent of its gross reserves in the
form of deposits with the Fund. Countries now holding more than
20 percent of their reserves in the form of dollars, sterling or other cur
rencies would transfer these claims (i.e., in the form of bank deposits,
Treasury bills, or other short-term assets) to the Fund. Other coun
tries would deposit gold with the Fund to the extent necessary to make
such deposits equal to 20 percent of their gross reserves. The Fund
would thus have a substantial initial reserve of gold and this reserve
would grow as part of the newly mined gold of the world is deposited
with the Fund. Furthermore, it would be possible for the Fund to
create reserves in the form of deposits through the extension of credit
to its members.
This apparently simple plan would necessitate far-reaching changes
of doubtful practicality. For example, countries would no longer have
the right to hold reserves in the form of dollars and sterling, despite
traditional financial ties with the United States and the United King
dom. Furthermore, the transfer of huge claims for dollars and sterling
to the International Monetary Fund, with an obligation to liquidate
them, would place in the hands of this institution the means for com
pelling compliance by the United States and the United Kingdom with
whatever financial policies the Fund may regard as necessary. Fi
nally, it is not desirable to give an international institution the power
to create reserves through credit operations, with the obligation on the
part of member countries to provide the real resources equivalent to
the Fund deposits they acquire.
That is not to deny the importance of the problem for which Pro
fessor Triffin has offered a solution. The problem can be better met,
however, within the framework of the present institutional arrange
ments. A wortd economy, so much of whose reserves are held in the
form of foreign exchange, needs very strong reserve centers. That
means that the international payments position of the United States
and the United Kingdom must be balanced and that they must have
large resources to fulfill their special functions. Furthermore, such
reserve centers must remain strong and liquid even under severely
adverse circumstances. As the report of the Fund on International
Reserves and Liquidity states: “There is always the possibility—
slight though it may' be—that there may be a run to convert dollars
into gold and sterling into dollars or gold.”
In a world in which the principal reserves are foreign exchange, two
reserve centers are safer than one, provided both centers are strong.
If only one currency is used as reserves, a flight from such a currency
is most likely to be into gold; but if two currencies are used as reserves,

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

a flight from either would be partly into the other currency. For
further security, the two reserve centers should have arrangements to
help each other, as is already done to some extent through the Fund.
It is not merely for the reserve problem that a strong two-center
world is to be preferred. No country can altogether avoid the cyclical
fluctuations that give rise to moderate booms and recessions; and such
fluctuations have a wider impact when they originate in a great trad
ing country. For this reason it is important that the United States
and the United Kingdom should hold reserves that permit them to
follow an independent monetary policy. The world economy func
tions much better when two or more reserve centers are so strong that
either can offset in considerable part the economic fluctuations
originating in the other.
The recent increase in Fund quotas provides for the greater reserve
needs of the next few years. Over and above these increased quotas,
the Fund must have access to substantial additional resources to meet
any extraordinary contingency that could arise—whether a run on a
major currency, protracted weakness in raw materials prices, or a
widespread and prolonged depression in one or several industrial
countries. The best way to provide for these emergency resources is
to have the Fund arrange to issue debentures and to have the great
trading countries undertake to acquire stated amounts of these securi
ties under certain conditions. Thus, the United States could under
take to buy up to $2.5 billion, the United Kingdom $1 billion, and
France, Germany, Canada, and some other countries perhaps an
additional $2.5 billion of these debentures.
A country would be called on to take up its subscription only if the
Fund needs the resources for emergency use. Extraordinary resources
would be used by the Fund only for waiver transactions with a fixed
3-year repurchase provision. No country would be called on to take
up its subscription unless it had a surplus in its payments and were
increasing its reserves. Furthermore, the debentures could be used
by the subscriber prior to maturity to purchase any currency in the
Fund. Thus, a member undertaking to acquire a stated amount of
these debentures would always be assured that its own payments and
reserve position could not be impaired by meeting its subscription.
A contingent reserve for the Fund provided by the great trading
countries is the link between reserve centers that is the logical fulfill
ment of the Bretton Woods system.
One final point must be emphasized. Regardless of what changes
are made in the institutional arrangements for assuring the adequacy
of monetary reserves, the United States cannot permit a further
deterioration in its own reserve position. Such proposals as those
discussed above do not obviate the need by each country to keep its
international payments in balance. A persistent deficit in U.S. pay
ments and a continued decline in U.S. reserves will make it far more
difficult to maintain a high level of world trade and international
investment.
C

hapter

X . E

c o n o m ic

P o l ic y

and

I n t e r n a t io n a l O b j e c t iv e s

The policies of a government are intended to achieve objectives that
range from personal welfare to international peace. The achievement
of these objectives necessitates the incurrence of costs, all of which

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

must be met from the national product. Even with our enormous
output, our resources are not unlimited and our policies must take
account of the alternatives for which these resources can be used.
As the overseas transfers and expenditures of the U.S. Government
are less than 2 percent of the gross national product, they are certainly
not more than this country can afford for such purposes, if they
make a positive contribution to the achievement of our international
objectives. Our program of aid to Western Europe was very im
portant and successful in the past. With the economic recovery of
Western Europe, however, a shift in our aid program in larger part
to the underdeveloped countries would put less strain on the economy
of this country and would be more helpful in achieving our inter
national objectives.
Economics and foreign policy

There is not and cannot be a complete separation of domestic policy
from foreign policy. There were times in the past when our foreign
policy, as that of other countries, was concerned to further our trade
interests. There have been instances, over a generation ago, when
force or the threat of force was used to protect our foreign investments.
But our foreign policy was never directed exclusively to economic ends
and the time has long passed when economic interests have been of
major importance in determining our foreign policy. In fact, there
has been a complete reversal of the role of economics in foreign policy.
In the past 15 years, there has been an unprecedented granting of inde
pendence by the United States and Western Europe to the people of
Asia and Africa and enormous sums have been spent to help the new
countries establish a strong economy.
Our foreign policy has as its objective to assure the security of this
country by peaceful means. For this purpose, our foreign policy must
persuade other countries that our own intentions are peaceful and it
must dissuade other countries from policies that are a threat to peace.
There can be no substitute for strength in a world in which absolute
assurance of security is unattainable. This strength cannot be merely
military; it must be social and economic as well. Furthermore, peace
depends not only upon our own strength, but that of our allies and our
friends. The instruments of our foreign policy include not only diplo
matic negotiation, but the propagation of ideas and the use of economic
resources.
In economics, there is a principle that the most efficient way to
achieve objectives is to make generous use of the long factors and
sparing use of the short factors. Our long factor, what we have in
greatest relative supply, is our industrial and agricultural strength.
Our short factor is our manpower—not in quality, but in numbers;
not in absolute terms, but relative to that of other countries. In a
world in which our security depends upon our own strength and the
strength of our friends abroad, it would be unwise to fail to use our
economic power to achieve the objectives of our foreign policy. There
is nothing novel in using economic power for this purpose. The great
coalitions of the past have always depended upon financial aid—what
in France is called St. George's cavalry.11
ii This refers to the figure of St. George on the back of the gold sovereign. According to Larousse’s En
cyclopedia, the term originated in the Napoleonic era in connection with Britain’s aid to her continental
allies.

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

The time may come when the world will be relieved of some of the
present burden of arms expenditure. It is doubtful whether even in a
world in which there is a greater measure of security it will be possible
to avoid most of the large expenditure that this Government now
makes for various purposes abroad. The cost itself, despite the large
sums involved, is relatively small for this country. The total of all
the Government’s expenditures and transfers abroad for economic and
military purposes amounts to less than 2 percent of the gross national
product. If these expenditures and transfers are essential in achieving
the objectives of our foreign policy the cost could very well be regarded
as a small premium for our insurance in national security.
The problems connected with our expenditures abroad are not
basically whether we can afford the costs that are entailed. Rather,
the questions that must be considered are whether the countries to
whom and for whom these payments are made actually need such
resources from us to maintain adequate defense and to facilitate eco
nomic progress. There is 110 clear-cut answer to this question. It
would appear that some European countries have the resources to
pay for a larger share of the costs of common defense without re
ducing their private consumption and investment, or their Govern
ment consumption and investment. On the other hand, it would
appear that some of the underdeveloped countries do not have the
resources to maintain an adequate level of investment—one that would
create the conditions for more rapid economic progress. Because the
resources we provide to some European countries are not needed or
used for consumption, investment or government purposes, they add
to the European balance of payments surplus and become a drain on
our monetary reserves.
Objectives of foreign economic policy

However delicately the proposition may be put, the objective of all
foreign policy is security; and our security can be firmly based only on
the strength of this country, its allies abroad, and of the world gen
erally. No one can guarantee that such a policy will bring peace;
but it provides the best hope for peace. We must be strong enough
to negotiate a fair settlement of the differences that we have with the
Soviet bloc and Communist China.
In the modern world, strength rests on an economic base. Our
economy provides the highest level of industrial and agricultural pro
duction per capita in the world. Our aggregate output is sufficiently
large to provide for a generous standard of consumption, a high level
of investment in plant and equipment, adequate public service of a
nonmilitary character, and whatever expenditure on defense may be
necessary. Even then, we can provide a generous part of our own
output for foreign investment and for aid to our friends and allies
abroad. This does not mean that this country can meet all needs at
home and abroad without limit. It does mean, however, that our
economy can meet all important needs without imposing hardship on
our people, without depriving our economy of capital for growth, and
without neglecting essential public services.
The economic recovery of Europe has been an essential part of our
foreign economic policy throughout the postwar period. Immed
iately after the war, large loans were made to some Western European
countries either directly by the United States or by the World Bank,

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

In 1948, it was recognized that far larger aid would be needed for
European recovery and this was provided from 1948 to 1951 through
the Marshall plan. The recovery in the production and trade of
Europe has been remarkable. While the resources for European re
covery came primarily from their own output and their own savings,
there can be no doubt that with the help of the United States and other
friendly countries the recovery came sooner and was more complete
than would otherwise have been possible.
Economic aid has been of negligible importance for most of the
European countries since the termination of the Marshall plan, but
military aid has been available to them since 1951 on a very consider
able scale. At the same time, our expenditures abroad for our own
military forces have increased enormously. This program of provid
ing military aid for Europe and supporting large forces of our own
within Europe has added greatly to the strength of the common de
fense. No one questions the need to continue the same or higher
standard of defense jointly with Europe. What is in question is the
need to share this cost now on the basis of criteria established in 1951,
long before Europe’s economy had reached its present highly pros
perous state.
The chances for peace and security are better in a world where
people feel that they are making progress. For this reason, crushing
poverty and economic despair would increase the difficulty of building
centers of strength throughout the world. That is why the foreign
policy of the United States must be concerned with raising standards
of living and encouraging economic growth in Asia, Africa, and Latin
America. The truth is that in these parts of the world the economic
system condemns vast numbers of people to labor long hours for very
little, with little hope for themselves or their children. It is essential
that the peoples of these regions should have the opportunity to use
modern means of production to eradicate the grinding poverty with
which they are afflicted. Our task is not merely to convince govern
ments. We must make even the peasants and factory hands see that
the people of this country are ready to help them with tools and equip
ment and with the technical knowledge necessary for a healthy society
and a progressive economy.
U.S. resources and free world strength

The capacity of this country and other high-income countries to
provide for their defense and security has increased enormously in
the postwar period. Our own output is about 60 percent higher now
than it was in 1947. The output of Canada, Australia, and some other
high-income countries has increased at least as much; and the output
of most countries of Western Europe has increased considerably more.
The increase in output in Western Europe has been accompanied by
a qualitative change of the highest importance—from being a deficit
area, dependent on foreign aid, Europe has become a surplus area,
capable of making a considerable contribution of its own to the com
mon defense and to the aid of underdeveloped regions.
In 1958 and 1959, the expenditures and transfers of the U.S. Gov
ernment for our military forces abroad, for military and economic
aid, and for net capital outflow from U.S. Government agencies
amounted to about $8.5 billion a year. As our surplus of receipts from
private international transactions, including private foreign invest

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

ment, was considerably less than the net payments of the U.S. Gov
ernment, there has been an overall deficit in the U.S. balance of
payments that amounted to about $3.4 billion in 1958 and may amount
to about $4 billion in 1959, exclusive of the additional U.S. subscrip
tion to the International Monetary Fund. With these large deficits,
the question has been raised whether the United States can afford
foreign expenditures and transfers on such a scale.
In one way or another, the international payments of the United
States will have to be restored to balance. Those who say that the
United States cannot afford to maintain the present level of foreign
expenditures and transfers may merely mean that the Government
cannot continue to make net payments abroad in excess of the surplus
on private account— that is, a balance in our international payments
will have to be restored. They may mean that it would be difficult,
if not impossible, to restore a balance in U.S. payments at the present
level of Government expenditures and transfers abroad. Or they may
mean that it would be difficult to restore a balance in U.S. payments
with the present geographic pattern of Government expenditures and
transfers abroad—that is, with so much concentrated in Europe.
The balance of payments deficit means that the total output of
this country has not been sufficient to meet private consumption and
investment and Government expenditures, including expenditures
and transfers abroad. The excess of aggregate expenditures is identical
with the deficit in the balance of payments. In an economy with
gross production of nearly $500 billion of goods and services annually,
with personal consumption expenditures of well over $300 billion a
year, and gross private domestic investment of about $70 billion a
year, it is farfetched to say that this country cannot afford the re
sources going into its governmental expenditures and transfers
abroad. If U.S. international payments could be brought into
balance merely by reducing domestic consumption and investment
by 1 percent there would, in fact, be no balance-of-payments problem.
The difficulty is not the amount of resources that is being devoted
to our foreign economic policy, but the manner in which these re
sources are used. A deficit in the United States is simply the counter
part of a surplus in other countries. If the United States is using more
resources than its own output, after deducting transfers to other
countries, the Western European countries must be using less resources
than their own output, after adding transfers from the United States.
If this country were to attempt to restore its balance of payments by
exporting more or importing less it would find that the measures it
takes to deflate the domestic economy would have little effect on its
balance of payments unless the surplus countries of Western Europe
were to expand home demand to an equivalent extent.
The United States can certainly afford the resources it devotes to
its foreign economic policy, provided these resources are usefully em
ployed in achieving the objectives of this policy. The resources put
at the disposal of the low-income countries help to increase their in
vestment. The resources put at the disposal of Europe merely serve
to increase the surplus of that area. They are thus not being used for
any purpose, except to add to Europe's reserves at the expense of our
own monetary reserves. The United States is making very large
military expenditures within Europe; it is giving considerable military
aid to that region. These are expenditures that such a high income

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

region would be expected to meet out of its own output, particularly
when that output is substantially in excess of its own consumption
and investment, private and public, domestic and foreign. The
essential point is not that the United States cannot afford to use re
sources to achieve its objectives, but that it cannot afford to provide
resources to countries that simply use them to increase their reserves.
A new aid policy

In many respects, our postwar international economic policy has
been remarkably successful. World trade has expanded enormously.
Private international investment has revived. The so-called dollar
shortage has completely disappeared. The reserve position of most
of the great trading countries has been restored. The problems that
confront the world economy are no longer the payments crises of the
early postwar years, but the persistent difficulties of the low-income
countries whose progress is far too slow for a world aware of the social
and economic responsibilities of democratic governments to their
people.
To say that our postwar international economic policy has been
successful does not imply that it should be continued in its present
form. There is actually no need for modification of our foreign trade
policy. The time is favorable for restoring currency convertibility
through the International Monetary Fund and for eliminating all
discriminations against imports on the basis of the currency in which
payment is made. The need for support by the United States and
by other countries of a policy of freer trade on a multilateral basis
may soon become of great practical importance. If the United States
is to exercise its influence for a more liberal trade policy in this period
in which new regional alinements are being made, it must itself be
free of the taint of restrictionism and protectionism.
To make the greatest contribution to the security of this country
and the prosperity of the world economy our international economic
policy must be modified to meet the problems of today. Our foreign
aid policy is virtually the same now as it was in 1951. In the mean
time, the world has become radically different. Our interest in
maintaining a strong and dynamic economy in Europe is in no way
diminished. Our recognition of the importance of European defense
is as great as it has ever been. Fortunately, Europe is quite capable
of meeting all of its economic needs and far more of its defense needs
than it has been meeting up to now. Our policy must now be directed
toward restoring our own international economic position and ac
celerating the development of the low-income countries.
The most important factor for prosperity in the world economy is
a high level of income and expenditure in this country. The capacity
of this country to pursue policies designed to maintain a rising level
of production and employment is threatened by the persistence of the
balance of payments deficit and the deterioration in the reserve posi
tion of the United States. Unless the payments position is restored
soon, this country may feel impelled to take harsh corrective measures,
restricting our own economy and as a consequence world trade.
There is, in fact, no need to resort to extreme deflationary measures.
The payments position of the United States can be restored in the
most effective way, with a minimum adverse impact on the world
economy, by reducing sharply the transfers and expenditures of the
U.S. Government in Europe and on behalf of Europe.

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

At the same time, our foreign aid policy should be modified to
provide more help to the low-income countries. For the greater part
of the postwar period, the capital requirements of the underdeveloped
countries have been assigned a low priority. Strategic considerations
first dictated the concentration of our economic aid for the recovery
of Europe and then the expansion of military aid for the defense of
Europe. Without diminishing the security of this country and its
friends and allies, it is now possible to devote far more resources to
the development of the low-income countries. Any increase in U.S.
aid to the underdeveloped countries can come from part of the funds
diverted from our expenditures for Europe. Furthermore, other
countries are now in a position to provide considerably more resources
to help in the development of the low-income countries.
Without overlooking the generosity of other countries, the fact is
that the United States has hitherto borne a disproportionately large
part of the burden of providing resources for the reconstruction and
development of the free world. That was inevitable in a period when
the productive capacity of Europe had not yet been restored. The
time has come, however, when other countries can and should share
in greater part in this responsibility. There is much to be said in
favor of a multilateral approach to the problem of providing addi
tional resources for development.
The problems of the world economy are continuing ones. As some
are solved, new ones arise. It will never be possible to devote all the
resources that are necessary to their solution until peace and security
have been assured. We can, nevertheless, do much more to create a
prosperous and growing world economy. To do that, however, we
must modify the policies of the 1950's so that they are better suited
to meeting the problems of the 1960's. This country and its friends
in Europe and other regions have delayed too long in making this
change. We must now move promptly and boldly in our own interests
and in the interests of the world economy.
It must not be overlooked that the United States is only one of many
countries whose policies have an important effect on the world
economy. Because our national output is much larger and our foreign
trade considerably larger, the impact of the United States on the
world economy is greater than that of any other country. Other
countries, however, are of great importance in world trade and can be
of greater importance in international investment and in foreign aid.
Their policies on trade, investment, and aid are also of consequence,
and in the aggregate of very great consequence, to the world economy.
The United States has a duty of leadership in proposing and in pur
suing policies that will contribute to a prosperous and progressive
world economy. The responsibility for the well-being of the world
economy cannot, however, devolve on the United States alone. It is
a responsibility that must be shared by all other countries.
Our foreign economic policy is concerned with three objectives—
the expansion of world trade on a nondiscriminatorv, multilateral
basis; the encouragement of private international investment; and
the acceleration of the development of low-income countries. The
United States must urge wider international participation in such
policies. It is unreasonable for countries to expect a generous trade
policy from the United States while they continue restrictions that
have no economic justification. It is impossible for countries to

INTERNATIONAL EFFECTS OF U.S. ECONOMIC POLICY

secure an adequate flow of private capital while their own legislation
places severe penalties on foreign investment. It is wasteful for
countries to permit inflation when their own savings and foreign aid
provide insufficient resources for development.
The United States has given loyal support to the institutions that
have been established to facilitate international economic cooperation.
These institutions, notably the World Bank and the International
Monetary Fund, have been remarkably successful in their operations.
Along with GATT, they are the foundation for a world economy
maintaining fair standards in trade and exchange policy and facili
tating the flow of capital for productive purposes from the capital
exporting to the capital importing countries. The best hope for
securing wider international participation in the trade, investment,
and aid measures necessary for the world economy is through our
continued support of these institutions.

Full text of Materials Prepared in Connection with the Study of Employment, Growth, and Price Levels for Consideration by the Joint Economic Committee, Congress of the United States : Study Paper No. 16 : International Effects of U.S. Economic Policy

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