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ECONOMIC REVIEW Additional copies of the ECONOMIC REVIEW may be obtained from the Research Department, Federal Reserve Bank of Cleveland, P. O. Box 6387, Cleveland, Ohio 44101. Permission is granted to reproduce any material in this publication providing credit is given. OCTOBER 1971 DEFINING MONEY: PROBLEMS AND ISSUES Charles //. H all The effect o f m onetary policy on em ploym ent, income, and prices stems from its influence on a wide range o f financial variables ranging from the m onetary base,1 bank reserves and the money stock to the to ta l liq u id ity o f the economy, interest rates and financial flows in general (see Chart 1). The degree o f importance assigned to any one o f these variables in the transmission o f monetary policy from Federal Reserve actions to the ultim ate goals o f policy depends both on one's theory o f how the economy functions and on the interpretation and evaluation o f a lim ited am ount o f empirical evidence. Some analysts and policymakers can be expected to s h ift the focus o f their interest and concern from one set o f financial variables to another as economic conditions change, or as new evidence on the role o f various financial variables becomes available. 1The m onetary base is calculated as follow s: Defining Money: Problems and Issues..........................3 The Travel and Transportation Components o f the Total Federal Reserve Credit Outstanding plus Gold stock plus Special Drawing Rights plus Treasury currency outstanding minus Treasury cash holdings minus Treasury deposits at Federal Reserve banks minus Foreign deposits at Federal Reserve banks minus other deposits at Federal Reserve banks minus other Federal Reserve liabilities and capital United States Balance equals Source Base o f P a ym e n ts ..................... 13 plus Reserve adjustments equals M onetary Base 3 ECONOMIC REVIEW C h a rt I . SELECTED FINANCIAL MEASURES B I L L I O N S O F D OL L A R S B I L L I O N S O F DOLLARS N O N B O R R O W E D RESERVES S c a l e _____ _ / - —"" T O T A L B A N K CREDI T FOR ALL C O M M E R C I A L BANKS 4 (EN D O F M ON TH) S c a le _ — ______ ____ ------- - A D J U S T E D B A N K CREDI T P ROXY SELECTED L I Q U I D ASSETS HELD BY PUBLIC ( e n d o f m o n t h ) ^ — ----------Scale S E A S O N A L LY AD JU STED - MONTHLY OCTOBER 1971 Recently, one o f the financial variables—the concepts, however, presents the d iffic u lty of money stock—has received considerable attention, determ ining just w hat assets meet the criteria both in the conduct o f monetary policy and in established by a theoretical concept. Some assets economic literature. In early 1970, the Federal th a t are thought to e x h ib it a particular charac Open Market Com m ittee (FOMC) began placing teristic o f money can be easily converted in to somewhat greater emphasis on money and bank other assets; fo r example, tim e deposits at credit in its policy deliberations and in its resulting commercial banks, w hich can be easily changed directives to the Federal Reserve Bank o f New o Y ork. The increased emphasis placed upon these in to demand deposits. Consequently, decisions on w hat should monetary particular aggregates reflected, in large part, a or should measure of n o t be included in a money are somewhat m odification o f operating procedures, rather than d e b a ta b le . a change in the ultim ate objectives o f m onetary measurement w ould not be particularly critical if p o licy—prom oting m axim um production, main taining fu ll em ploym ent, attaining price sta b ility, The problem of money stock the various measures tended to behave sim ilarly. Such is not always the case, however. This article discusses some o f the problems and achieving balance o f payments e q u ilib riu m .3 have associated w ith defining and measuring money and tended to provide support fo r the argument that analyzing its behavior. To illustrate some o f the the rate o f change in the qu a n tity o f money has a com plexities associated w ith money stock analysis, substantial im pact on the level o f and changes in three readily available and w idely used measures o f In addition, recent empirical studies economic activity. The issue, however, continues money are examined.4 Because o f the behavior o f over whether money is a major factor affecting the individual components in the three measures, economic activity. each measure provides a somewhat d iffe re n t view A ny analysis o f the behavior and im pact of money requires recognition of the problems o f monetary growth. The in te n t o f the discussion focusing on alternative approaches to defining involved in defining and measuring the money money is to explain w hy more than one measure stock and in interpreting changes in its rate o f o f money exist. growth. There is no one, universally accepted measure o f money. In fact, several conceptual MEASURES OF THE MONEY SUPPLY definitions o f money have considerable m erit. An Three measures o f the money stock are w idely empirical approxim ation o f any one o f the various used in economic analysis and carefully watched by those who in te rp re t or form ulate monetary 2 In January 1970 the FOMC expressed its desire to "see a modest grow th in money and bank c re d it." See the "R ecord o f Policy Actions of FOM C," Federal Reserve B ulletin, A p ril 1970, p. 334. policy; they are designated M ^, M 2 , and Mg. A t times, however, these measures may give d iffe re n t views o f the strength o f m onetary stim ulus or re s tra in t and thus make interpretation of 3 For a thorough explanation o f the circumstances sur rounding the increased use o f money and bank credit in the conduct o f m onetary policy see, "M onetary Aggre gates and Money Market Conditions in Open Market P o licy," Federal Reserve B ulletin, February 1971, p. 80. 4 The three money supply measures and related data are published weekly in Federal Reserve Statistical Release H .6 and m on th ly in the Federal Reserve B ulletin. 5 ECONOMIC REVIEW monetary developments quite d iffic u lt. A n y o f the blance to three savings measures considerable of the variation m o n th -to -m o n th money on basis. stock exhibits a week-to-week Consequently, it or is commercial paper than to passbook accounts. In ad d ition , the am ount o f certificates outstanding has varied sharply over time. extrem ely d iffic u lt to discern developing patterns The th ird measure o f the money stock (M ^) when analyzing short tim e periods. The divergence includes assets th a t are very close substitutes fo r of indicate th a t no single tim e and savings deposits at commercial banks. In measure o f the money supply can be considered addition to all the assets included in M 2 , the M^ the best fo r all times and purposes. measure includes deposits o f mutual savings banks grow th rates may The M.j measure is the traditional measure o f and savings and loan shares.7 A lthough deposits o f money and corresponds to the long held view o f mutual savings banks and savings and loan shares, money as th a t group o f assets used as a means o f as well as tim e and savings deposits at commercial payment. The measure includes currency in circu banks, are not used fo r actual transactions lation, demand deposits held by the nonbank purposes, there is some ju stifica tio n fo r including public at commercial banks,5 and foreign demand them in a measure o f money. These assets can be deposit balances at Federal Reserve banks. A t the easily converted in to currency or demand deposits, present tim e, the measure is adjusted to exclude and serve as a potential source o f purchasing interbank deposits, cash items in the process o f power; many analysts consider the latter to be an collection, im p o rta n t characteristic o f money. and Federal Reserve flo a t. United States Government deposits at commercial banks are n o t included in any o f the money stock Behavior of the Money Stock. An exam ination o f the behavior o f the three measures o f money from January 1964 through June 1971 provides an measures. The M 2 series is a somewhat broader measure indication o f some o f the problems associated w ith of money. In addition to the items in M ^, it money stock analysis.8 The study also illustrates includes th a t all tim e and savings deposits at the measures sometimes signals o f cates because they are composed o f d iffe re n t assets. of deposit issued $100,000 or more by in denominations of o f monetary behavior large, w eekly reporting banks. The large, negotiable certificates o f deposit are excluded from M 2 because they are essentially money m arket instrum ents issued by banks to attract funds.6 They bear a much closer resem5 Demand deposits held by the nonbank p ublic at commercial banks include deposits o f state and local governments, foreign commercial banks, and foreign officia l institutions as well as deposits o f individuals and businesses. See "N egotiable Certificates o f Deposit,” Money M arket Instrum ents, (Federal Reserve Bank o f Cleveland, 1970). 6 the strength give co n flictin g commercial banks except negotiable tim e c e rtifi 7 Measures o f and M 2 consist o f averages of daily data and are published on a m on th ly or weekly basis. Data fo r the nonbank th r ift in stitutions, w hich are used in M ^, are available on ly as o f the end o f each m onth. To approach a m on th ly average concept comparable to and M 2 , these end-of-m onth data are averaged to derive a m on th ly figure. Therefore, the figure fo r the deposits o f the nonbank th r if t institutions fo r any particular m onth is the average of the figure fo r the end of the m onth in question and the end-of-m onth figure fo r the preceding m onth. O January 1964 is the firs t m onth fo r w hich comparable data fo r the three money supply measures have been published. June 1971 is the latest m onth fo r which the "R ecord o f Policy Actions o f the FO M C" has been published as o f this w ritin g . OCTOBER 1971 A ll three measures of the money stock rate 3.3 percentage points slower than in the increased considerably from January 1964 through previous period o f m onetary ease. The grow th June 1971. The rates o f the M 2 and Mg measures, on the other measure grew at an average annual rate o f 5.3 percent, and M 2 and Mg both hand, were 7.0 and 5.4 percentage points, respec increased at a 7.9 percent average annual rate. tive ly, below those o f the previous period. Because None o f the measures grew at a steady pace w ith in the this seven and one-half year period, however. The uncertainty rates o f grow th also varied considerably in relation m onetary restraint imposed during the period. to one another, reflecting changes in the demand U ncertainty also arises in periods o f policy ease. behavior of the exists m onths degree fro m of For through November 1968, the grow th rate o f M^ and the financial environm ent. remained unchanged the the in economic conditions, m onetary policy goals, period. during measures differs, fo r d iffe re n t types o f financial assets and changes Chart 2 shows the annual rates o f growth in example, three concerning July relative to the previous The rates o f grow th of M2 and Mg selected monetary policy periods fo r each o f the accelerated, however. An incom plete development three money stock measures and, therefore, the of economic theory makes it d iffic u lt to interpret effect o f d iffe re n t monetary policy actions on such co n flic tin g signals concerning the th ru st o f these measures.9 For example, from December policy. 1968 through January 1970—a period o f m onetary A comparison o f one period o f p olicy ease w ith restraint—the grow th o f all three measures fell another (or one period o f policy restraint w ith considerably another) also illustrates the varied behavior o f the increase 1968—the below the corresponding rates o f from July 1968 im m ediately through November money stock measures. For example, the months when from December 1966 to November 1967 and from policy was less restrictive. On the other hand, July 1968 to November 1968 were both periods o f when monetary ease. Exam ination o f the growth o f M^ policy was preceding period eased, such as during the December 1966-November 1967 period, the rate w ould o f growth o f the three measures accelerated. experienced somewhat greater m onetary thrust. seem to indicate th a t the latter period A lthough the relationship between the broader From Ju ly 1968 to November 1968, M^ grew at a measures—M 2 and M g—remained relatively more faster rate than during the previous period o f stable from period to period than the relationship monetary ease. However, Mg showed somewhat between either o f these tw o measures and M ^, the faster grow th in the earlier period. This type o f be relationships among the three measures varied havior by the measures o f money makes it d iffic u lt times as monetary conditions to discern the relative strength o f m onetary grow th. considerably at changed (see Charts 2 and 3). In the December 1968-January 1970 period, M^ grew at an annual During the period covered in this article, the three money stock measures also showed a sensitivity to the m axim um interest rate ceilings g The intent o f m onetary policy from January 1964 to June 1971 is stated in the "R ecord of Policy Actions of the Federal Open Market C o m m ittee," w hich is published in various issues o f the Federal Reserve Bulletin. set on deposits by the various regulatory agencies. When rates on money m arket instrum ents reach or surpass the rate ceilings on tim e and savings deposits at commercial banks, deposits at savings 7 ECONOMIC REVIEW C h a r t 2. THREE MEASURES of MONEY SUPPLY: With Annual Rates of Growth For Selected Periods B I L L I O N S O F D OL L A R S Last e n t r y : Source-. Ju n e 1971 B o a r d o f G o v e r n o r s o f t h e F e d e r a l R e se r ve Sy ste m 8 OCTOBER 1971 C h a r t 3. ANNUAL RATES OF CHANGE IN THREE MEASURES OF MONEY SUPPLY 1964 Last e n t r y : Source: 1965 1966 1967 1968 1969 1970 1971 2 Q '71 B o a r d o f G o v e r n o r s o f the F e d e r a l R e s e r v e S y st e m and loan associations, and deposits at mutual duration than in 1969, and the spreads between savings banks fo r extended periods, these deposits money m arket rates and the ceilings were smaller. tend to become relatively less attractive to savers. More Recent Developments. The tim e period Instead, funds are frequently placed d ire ctly w ith from borrowers who are able and w illin g to pay a more special interest in examining the behavior o f the February 1970 through June 1971 is o f attractive market yield. Under such conditions, the money stock. During this period, the Federal Open growth in savings deposits may slow or perhaps Market Com m ittee even decline. When such “ disinterm ediation” or greater emphasis rechanneling o f funds occurs, the rate o f growth o f market conditions M.j may exceed th a t o f either M2 or Mg. This type growth in both money and bank credit. Early o f situation existed fo r several months in the in December 1968-January 1970 period, when the eventually 1970, m arket the rate (FOMC) on money and ceilings fell on somewhat than on encouraged interest rates placed rates below savings money moderate began falling; the effective rate o f growth o f M^ surpassed both M 2 and Mg. interest Such money stock behavior, o f course, does not commercial banks and deposits at th r if t in s titu deposits at always accompany a period o f disinterm ediation. tions. In response to the falling interest rates, the For several months in 1966, interest rate ceilings quantities o f funds flo w in g in to savings accounts on savings deposits made them somewhat less increased. This was reflected in the rapid growth attractive rates o f M 2 and Mg after early 1970 (Chart 2). growth to of savers. M2 and Nevertheless, the rate o f Mg exceeded the rate o f On the other hand, M^ exhibited d iffe re n t increase o f M^ throu gh o u t the period. The disin behavior. The measure grew at approxim ately a 6 term ediation percent annual rate during the firs t three quarters in 1966, however, was o f shorter 9 ECONOMIC REVIEW o f 1970 (Chart 3). During the fo u rth quarter, m arily derived by considering the functions o f however, the rate o f growth o f M-| fell to a 3.4 money. This functional approach, however, has percent annual rate. This shortfall was p rim a rily a failed to yield a single, unique concept o f money. result o f a tem porary decline in the demand fo r The tw o other approaches also present problems in currency and demand deposits because o f the defining money. A ll three approaches, o f course, dampening effect o f the autom obile strike on can be and are often com bined; and depending economic then upon the importance an analyst places on d iffe re n t accelerated sharply during the firs t six months o f a ctivity. The growth of functions and characteristics, varying groups o f 1971, reflecting a rebound o f economic a ctivity assets can be assumed to q u a lify as money. from the strike, increased demand fo r currency The Functions of Money. The most w idely used and demand deposits, decreases in United States approach to defining money firs t involves id e n ti Government deposits, and a substantial increase in fying the functions o f money and then isolating bank reserves.10 the assets th a t serve those functions. A basic An exam ination o f three measures o f money and th e ir sometimes co n flictin g illustrates some of behavior thus the d iffic u ltie s in making fu n ctio n o f money is its role as a medium o f exchange (or use fo r transactions purposes). This function is fu lfille d by those assets com m only judgments concerning changes in the money stock accepted and raises the question: Why is there more than Money, however, also serves as a u n it o f value or one measure o f money? in exchange fo r goods and services. u n it o f account, and the " value” o f all goods and services is usually measured and expressed in terms D EFIN IN G MONEY On a of a monetary u nit. Money is also w idely used as a several store o f value. The holder o f money is, in effect, a approaches th a t can be taken to define money. holder o f purchasing power, w hich can be used as However, nation conceptual level, there are no m atter w hat approach or com bi of approaches universally accepted is used, concept or no unique, measure he sees f it fo r the things he wants to buy. A ny valuable asset performs this function to one degree has or another; however, certain assets have advantages resulted. The existence o f the three measures o f over others in th a t they do not entail storage costs, the money stock reflects this lack o f general do not become obsolete, and are more liquid than agreement concerning the precise d e fin itio n o f the other assets. Finally, money functions as a money. standard o f deferred payment, or the u n it in terms The various approaches may be conveniently grouped in to three general categories: (1) tional, (2) fu n c The functional approach to defining money The necessitates focusing on the issue o f w hether it is money discussed earlier were p ri possible to id e n tify a unique set o f assets that structural, and measures o f o f w hich deferred or fu tu re payments are stated. (3) em pirical. serves as an empirical counterpart to w hat are 10 For an explanation o f the effect on the components of M.j of changes in United States Government deposits see, "T h e Influence o f Government Deposits on the Money S u p p ly ," Econom ic Commentary, Federal Reserve Bank of Cleveland, June 28, 1971. 10 essentially abstract concepts. To be unique, these assets must meet some or all o f the criteria established in the functional approach. It is also necessary th a t the assets selected possess a high OCTOBER 1971 degree o f su b stitu ta b ility among themselves and o f a select number o f explanatory variables (the e xh ib it a much lower degree o f s u b s titu ta b ility rate o f return on substitute assets, level o f income, w ith alternative assets. The etc.). In this way, a change in the supply o f money and demand deposits) measure (currency approximates money w ill have a predictable im pact on these variables defined fu n ctio n a lly as a medium o f exchange. and n o t cause erratic shifts. In a ddition, the supply However, there is considerable d iffic u lty in making of a precise distinction between those assets th a t demand so th a t a change in one variable w ill not serve as a medium o f exchange and those that do cause an immediate offsetting change in the other. money should be largely independent o f not. For example, travelers' checks also perform If monetary policy is to w o rk through a group o f this fu n ctio n . In addition, assets such as savings assets called money, then this group o f assets must accounts at commercial banks, although not usable have well-defined characteristics th a t fa cilita te a themselves fo r transactions purposes, are so easily reasonable am ount o f control. A th ird method o f defining money is to take a converted into transactions assets that the d istinc purely empirical approach.11 The analyst can seek tion is blurred. This uncertainty has led some analysts to place increased emphasis on the other characteristics that m onetary assets are thought to possess— liq u id ity , store o f value, etc. Thus, the money groups o f assets having specific, tested impacts on other economic variables. Again, if monetary policy is to w o rk through the group o f assets called money, changes in the supply o f or demand supply is extended (as in M 2 and M^) to include fo r these assets must have discernible effects on liquid assets th a t can be readily substituted fo r such u ltim ate objectives as em ploym ent, income, transaction assets and th a t possess some o f the and characteristics o f money. money A ctu a lly, there is a prices. A in this number o f authors w ho define manner have made statistical continuum o f assets that, more or less, perform analyses o f the relationships between d iffe re n t the various functions o f money. Possible d e fin i asset aggregates, w hich are consistent w ith the tw o tions and measures o f the money supply are, preceding therefore, not lim ited entirely to the three measures discussed in this article. A lte r n a tiv e D e fin itio n s . The structural the role of m onetary control and, therefore, focuses on those assets over w hich the m onetary from money (currency in circulation plus and income relationship. em pricial The conclusions drawn analysis, however, d iffe r from study to study. The studies also fail to establish indisputable causation. PROBLEMS OF MEASUREMENT Money can be measured by considering a wide a u th o rity has the greatest influence—such as highpowered approaches, measures in an a ttem pt to determine the closest empirical approach to defining money tends to emphasize conceptual range o f assets. On one hand, some experts believe reserves o f member banks), bank reserves, or the th a t monetary base. The approach also attempts to require a statistical measure o f the money stock economic, analysis and m onetary co n tro l discern w hich o f the groups o f assets has the most stable demand and/or supply characteristics. For example, m onetary control is enhanced if the demand fo r money is as stable as possible in terms 11 This approach is favored by M ilto n Friedman and Anna J. Schwartz in M onetary Statistics o f the United States: Estimates, Sources, Methods, (New Y o rk: Columbia University Press, 1970). 11 ECONOMIC REVIEW th a t is closely related to the mechanism through CONCLUDING COMMENTS In w hich money is created or extinguished. Some economists view the m onetary recent years, the supply o f money has base or some received growing attention in economic theory, measure o f bank reserves as being more significant m onetary policy considerations, and the financial than the money stock measures discussed in this press. However, disagreement still exists over the article. On the other hand, many analysts feel th a t d e fin itio n the to ta l liq u id ity o f the economy is o f greater concerning the appropriate concept o f money significance. Consequently, they w ould probably arises consider money. If there were general agreement on the Mg to be the "b e s t" o f the three of from money. d iffe re n t The diversity approaches of to views defining measures o f money published and may actually appropriate concept, however, problems associated prefer a broader measure, w hich m ight include w ith the derivation o f the em pirical counterpart to such assets as travelers' checks, bank credit, large that concept w ould still exist in regard to the negotiable certificates o f deposit, and Treasury choice o f assets to be included in a particular bills, or even a measure o f to ta l liq u id ity . measure o f money. The selection is complicated The number o f assets th a t can be included in a money stock measure is lim ited somewhat by the by the fact th a t some assets are capable o f being converted easily in to others. need fo r a measure th a t is tim e ly. Too long a tim e period may be required to gather pertinent data on a particular asset fo r inclusion in a measure o f The existence defining money, o f alternative however, approaches to together w ith the money. C urrently, figures on deposits at mutual measurement savings bank and savings and loan shares, w hich are several money stock measures exist. If the analyst, included in Mg, are collected only once a m onth. as well as the policym aker, makes every e ffo rt to problems, help to explain w hy Data on various other financial magnitudes are understand the in fo rm a tio n given by each o f the often less readily available. In addition to the tim e measures, it should become apparent th a t the lags involved in the gathering o f data, the measure various money stock measures supplement each m ent o f money other, necessity fo r is also often estimating lim ite d by the quantities of rather than act as substitutes fo r one certain another. Each measure gives a somewhat d iffe re n t assets. This problem exists even in the calculation aspect o f the overall picture o f m onetary behavior. o f the three money stock measures discussed in By this article. various measures, the analyst w ill obtain a more For example, th a t p o rtio n o f the demand deposit com ponent accounted fo r by assimilating the complete picture in fo rm a tio n of money given stock by the behavior. banks th a t are n ot members o f the Federal Reserve A lthough there may be times when one o f the System must be estimated by using benchmark measures may be more accurate or useful than the measures, w hich can be calculated o n ly tw ice a other, year as deposit data fo r these nonmember banks periods and all circumstances. Obviously, consid become available. The broader the measure o f erably more research is needed (and is underway) money, the more complex the problems o f data to improve our understanding o f these im portant collection become. financial variables. 12 no one measure is appropriate fo r all OCTOBER 1971 THE TRAVEL AND TRANSPORTATION COMPONENTS OF THE UNITED STATES BALANCE OF PAYMENTS Richard D. Carter During the past decade, international travel has increased at a phenomenal rate, and the expendi tures of have Total expenditures o f United States residents the traveling abroad and payments o f passenger fares United States by ever increasing amounts. United to foreign carriers, fre ig h t payments to foreign States exports and im ports o f goods have also carriers, and foreign p o rt expenses amounted to exceeded United States spending by travelers foreign abroad AN OVERVIEW : TR A V E L AND TRANSPORTATION TRENDS visitors to increased dram atically, and this, coupled w ith the almost $8.0 b illio n in 1970, an increase o f about growth in international travel, has resulted in a $4.2 b illio n from 1961 (see Table I). During the rapid increase in payments and receipts fo r trans same period, U nited States receipts from compa portation. travel and rable transactions increased from more than $2.7 transportation components constituted the th ird b illio n to nearly $6.0 b illio n . Thus, the net d e fic it largest ite m —fo llo w in g merchandise exports and in the travel and transportation components o f the d irect investment income—in the exp o rt o f goods United States balance o f payments almost doubled and services and the second largest ite m —fo llo w in g from about $1 b illio n to nearly $2 b illio n between merchandise im ports—in the im p o rt o f goods and 1961 and 1970. In 1970, the combined services o f the U nited States balance o f payments. This article reviews the trends in United States A lthough this d e fic it on travel and trans portation has contributed to the current United travel and transportation expenditures and receipts States balance o f payments problems, it cannot be during the past decade and the factors influencing viewed in isolation. The travel and transportation these trends. It is the th ird in a series1 covering the components should be considered as integral parts current account o f the United States balance o f o f the overall balance o f payments account. There international payments. are interrelationships among the various com po nents o f the balance o f payments—although many 1The previous articles are, “ The Pattern of United States International Trade," Econom ic Review, Federal Reserve Bank o f Cleveland, August 1970, and "D ire c t Foreign Investment o f the United States," Econom ic Review, Federal Reserve Bank o f Cleveland, March 1971. are d iffic u lt, if not impossible, to measure—and they should be kept in mind when evaluating any one com ponent. For example, even though the combined travel and transportation components 13 ECONOMIC REVIEW T A B LE I our Combined Travel and Transportation Components o f the U nited States Balance o f Payments 1961-1970 (B illions o f Dollars) benefits o f travel, in particular, and transportation ever shrinking w orld. These "in v is ib le " expenditures and receipts are im p o rta n t consider ations in evaluating the im pact o f these com po nents on the balance o f payments. Year Payments Receipts Net 1961 1961 1963 1964 1965 1966 1967 1968 1969 1970 -$ 3 ,7 2 8 -4 ,0 6 7 -4 ,4 3 0 -4 ,6 7 5 -5 ,1 1 2 -5 ,5 7 9 -6 ,1 8 8 -6 ,2 7 9 - 6 ,9 5 0 -7 ,9 5 7 $2,752 2,921 3,130 3,524 3,794 4,198 4,436 4,721 5,170 5,978 - $ 976 -1 ,1 4 6 -1 ,3 0 0 -1 ,1 5 1 - 1 ,3 1 8 -1 ,3 8 1 -1 ,7 5 2 -1 ,5 5 8 -1 ,7 8 0 -1 ,9 7 9 TR A V E L COMPONENT Definition. Payments associated w ith travel in foreign countries by U nited States residents are recorded in the balance o f payments as im ports o f goods and services o f funds), w hile receipts from foreigners traveling in the United States Source: U. S. Departm ent o f Commerce (outflow s are recorded as exports o f goods and services (inflow s o f funds). The travel com ponent o f the im p o rt account measures foreign expendi have been in persistent d e fic it during the last tures o f United States travelers fo r lodging, food, decade, they exert some positive, counterbalancing transportation w ith in foreign areas, entertainm ent, influence on personal purchases, and other outlays incidental to other sectors o f the balance o f payments account. Travel spending abroad by a trip abroad. It also includes passenger fares paid United States residents can lead in d ire ctly to the to Canadian and Mexican carriers by United States expansion o f United States exports, since dollars residents spent in other countries represent a source o f com ponent does not, however, include expendi visiting these countries. The travel foreign exchange w ith w hich the recipient nation tures o f United States Government and m ilita ry can purchase United States goods and services. personnel stationed abroad or th e ir dependents. Travel These expenditures are included in the appropriate dollars are particularly im p o rta n t to developing nations in Latin America, the Middle governm ent transactions the East, Asia, and A frica because th e ir methods o f balance States citizens living abroad are likewise excluded the number o f United States residents traveling since such citizens are classified as foreigners fo r abroad business activities o f balance o f payments purposes. Also excluded are foreign carriers who, in tu rn , may purchase a large transoceanic passenger fares, w hich are part o f the share o f their equipm ent from the United States transportation com ponent. D istinctions sim ilar to expand the Expenditures o f of earning d ollar exchange are lim ited. Increases in also o f payments. com ponent United aircraft industry. O f course, in addition to the those described economic expenditures by foreign residents traveling in the influences exerted by international above are made in measuring travel, im p ortant "in v is ib le " benefits are derived United States, including passenger fares received from the exposure to new and d iffe re n t cultures o f by United States carriers from Canadian and both United States travelers abroad and foreign Mexican visitors. These outlays are recorded as visitors to the United States th a t result in better receipts from tourists in the exp o rt travel com po understanding o f people, events, and conditions in nent. Digitized for14 FRASER OCTOBER 1971 TA B LE II Travel Payments and Receipts in the United States Balance o f Payments Selected Years (M illions o f Dollars) Area W orld* Western Europe Eastern Europe Transaction 1961 1964 1967 1970 Payments Receipts -$1,785 947 -$2,211 1,207 -$3 ,1 9 5 1,646 -$ 3 ,9 5 3 2,319 Net -8 3 8 -1 ,0 0 4 -1 ,5 4 9 -1 ,6 3 4 Payments Receipts -6 0 0 133 -7 5 8 157 -9 4 4 227 -1 ,3 1 0 318 Net -4 6 7 -6 0 1 -7 1 7 -9 9 2 Payments Receipts - 4 0- - 9 0- Net Canada1 26 -1 0 2 -4 9 5 -1 6 4 Payments Receipts -3 7 0 200 -4 9 0 342 -5 9 0 457 -7 2 0 545 Net -1 7 0 -1 4 8 -1 3 3 -1 7 5 -7 2 102 -229 62 -365 263 -4 8 0 334 Net 30 -1 6 7 -1 0 2 -1 4 6 Payments Receipts n.a. n.a. -5 4 __ 25 -5 8 42 -9 7 -2 9 -1 6 -1 4 23 -2 2 32 Payments Receipts n.a. n.a. Net Other in Asia and A frica -2 4 -1 ,0 4 9 885 Net Australia, New Zealand South Africa -1 4 - 1 ,0 7 0 575 Payments Receipts Japan -2 4 0- - -5 5 0 448 Net Other Latin American and Western Hemisphere 0- -4 2 5 451 Payments Receipts M exico1 -1 4 - 101 -40 41 10 Payments Receipts n.a. n.a. Net -1 1 2 38 -1 3 2 50 -2 3 3 __ 95 -7 4 -8 2 -1 8 3 n.a. Not available. * Includes passenger fares fo r Canada and Mexico. Source: U. S. Department of Commerce Travel Payments and payments by United Receipts. Both travel increase during the 1961-1970 period (see Table States residents traveling II). The o n ly in te rru p tion occurred in 1968 when abroad and travel receipts from foreign visitors to travel payments fell 5.4 percent from the level o f the United States showed an almost continuous the previous year. This decrease, however, was 15 ECONOMIC REVIEW more a reflection o f the sharp increase in 1967 particularly during the latter part o f the period travel payments than a deviation from the general (see Chart 1). Canada's Expo-67 attracted A lthough the recent recession in the United large numbers o f United States visitors and was the States did n o t slow the grow th in numbers o f m ajor reason fo r the 1967 jum p in overseas travel overseas travelers, it did bring about some s h ift in payments. Because some foreign travelers were the travel destinations. Travel to the European- long-term diverted uptrend. Canada, Mediterranean area and "o th e r areas" continued to receipts from foreign visitors also eased in 1967. from the U nited States to increase rapidly in 1970, w hile travel by United Largely as a result o f this one event, the net d e fic it States residents to South America increased only in the travel com ponent o f the United States slightly and travel to the West Indies and Central balance o f payments increased nearly $500 m illio n America actually declined. Reductions in air fares in 1967, compared w ith relatively small increases across the A tla n tic , particularly student fares, and in previous years. In the rapid grow th o f charter flights and package 1968, the travel d e fic it narrowed as pay tours stim ulated travel to Europe. Rising prices o f ments decreased from th e ir high 1967 level and Caribbean to u ris t services, coupled w ith the lower travel receipts continued to increase. In 1969 and A tla n tic air fare structure, were considered to be 1970, however, the d e fic it in the travel com ponent factors in the leveling o f to u rist travel to the West o f the balance o f payments resumed its relatively Indies area. Japan's Expo-70 was a m ajor factor in rapid rate o f increase, largely because the number the grow th o f travel to "o th e r areas," p rim a rily of the Pacific and Far East. United States residents traveling abroad in creased at a faster pace than the number o f foreign A lthough the to ta l number o f United States visitors to the United States. Rising travel costs, residents traveling abroad increased dram atically other the during the 1961-1970 period, both the number d e fic it and the p roportion traveling by ocean declined amounted to $1.6 b illio n , compared w ith $838 (see Chart 1). In 1961, 17 percent traveled by than increased air fares, also contributed de ficit. In 1970, the travel to m illion ten years earlier. ocean; w hile in 1970, ocean travel accounted fo r Numbers and Types of International Travelers. on ly slightly more than 2 percent o f the total The number o f United States residents traveling number o f Americans traveling abroad. As a result abroad (excluding Mexico and Canada) increased o f this sh ift, w hich reflects the easing in air fares by 1961-1970 and a sharp increase in charter flights and package (see Chart 1). The largest part o f this tours, United States residents have been taking increase took place between 1966 and 1970 when more, but shorter, trips abroad. For example, the the number o f overseas travelers from the United average length o f stay o f American travelers to the about period 234 percent during the States rose by more than tw o m illio n or double European-Mediterranean the increase fo r the previous five years. days in 1963 to 27 days in 1970 (see Table III). Travel to the European-Mediterranean area and "o th e r areas" (including the Pacific, Asia, and This, of course, influenced expenditures o f these travelers. In A frica) increased at a faster pace than travel to the U n ite d West Indies, Central America, and South America, Mediterranean Digitized for16 FRASER also area dropped from S ta te s traveler to the the 45 average 1963, each European- area spent an average o f $680, OCTOBER 1971 C h a r t 1. U. S. T R A V E L E R S * ™ OVERSEAS COUNTRIES, BY DESTINATION AND M E A N S OF TRANSPORTATION M i l l io n s of t r a v e l e r s M B -<&>& h? • ! TOTAL ---‘V ^ ~ U i n j r 'l ^ n iii^ s f -&r ■‘f, u T'-t > i3> E U RO P E. A N D ME DITE RRANEA N a M $ i f e ! SOUTH AME RICA W ES T I NDI ES A N D CENTRAL A M E RI C A E f f is r TOTAL 1961 Last en t r y: 62 * Excludes cruise tra ve le rs a n d S o ur ce : ■69 ’70 ANNUALLY 1970 b o r d e r a r e a s o f C a n a d a an d M e xi co . U. S. D e p a r t m e n t o f C o m m e r c e 17 ECONOMIC REVIEW TA B LE III The number o f foreign visitors to the United States, excluding those from Canada and Mexico, Length o f Stay and Expenditures of United States Travelers European—Mediterranean Area 1961-1970 Average Stay (Days) Year 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 increased period Average Expenditures (Dollars per Stay) n.a. n.a. 45 41 39 37 33 30 29 27 more than residents ra p id ly during the overseas travel (267 percent by 1961-1970 United compared States w ith 234 percent). However, the number o f foreign visitors to the United States was still less than one-half the $757 692 680 637 611 583 563 512 490 490 number o f U nited States travelers abroad (see Charts 1 and 2). The largest number o f foreign visitors to the U nited States arrived from European-Mediterranean area. The m ost the rapid increase, however, has been in the number o f visitors from "o th e r areas;" th a t is, areas other than Europe and Central and South America. n.a. Not available. In an a ttem pt to Source: U. S. Department o f Commerce alleviate the basic travel imbalance, efforts were made to encourage foreign exclusive o f transatlantic transportation costs. In travel 1970, the average expenditure dropped to $490 American travel abroad. In 1961, the In te rn a tio n a l (see Table III). Travel A c t was passed fo r the purpose o f strength The type o f individual traveling abroad to the United States, rather than lim it is ening domestic and foreign commerce by establish reflected in passport statistics. In 1970, 2.2 m illio n ing the U nited States Travel Service w ithin the States passports were issued.2 O f the Departm ent o f Commerce. In 1965, the Cabinet passport recipients, 43 percent lived in just seven C om m ittee on Travel Planning and P rom otion and m etropolitan Discover United areas, including New Y ork, Los America, Inc. n o n p ro fit Boston, D e tro it, and San Francisco-Oakland; 16 President Johnson to bring the various elements o f percent alone indicated they lived in the New the United States travel industry together in an Y ork M etropolitan Area. By occupation groups, e ffo rt to increase the size o f the United States students made up 20 percent o f total passport to u rist market. in 1970; and students, housewives, The were as a private, Angeles-Long Beach, Chicago, Washington, D. C., recipients organization) (formed established by "g a p " between the number o f United teachers, and clerk-secretaries combined accounted States residents traveling abroad and the number fo r o f foreign visitors to the United States can be nearly 48 percent. Through June 1971, approxim ately 9.3 m illio n valid passports were attributed outstanding, w hich (1) higher per capita income in the United States, represents a large pool o f potential foreign travelers. 2 For fu rth e r details on passport recipients, see “ Summary of Passport Statistics Calendar Year 1970 Supplement No. 1 ," Passport O ffice, Departm ent o f State, Washington, D. C. Digitized for18 FRASER to a variety o f factors, including: w hich tends to stim ulate foreign travel; (2) the language barrier and relatively higher cost o f tourism in the United States; and (3) the fact th a t the United States travel industry is n o t structured to handle large numbers o f middle-income, non- OCTOBER 1971 C h a r t 2. FOREIGN V IS IT O R S * TO THE U. S. BY AREA OF ORIGIN Millions of travelers TOTAL pEUROP WEST INDIES A N D CENTRAL A ME R I CA SOUTH AMERICA LAT I N A M E R I C A OT H E R AREAS - 1_____ 0 1961 ’62 '63 ’64 ’68 '69 Last e n t r y : 1 9 7 0 ^ E x c l u d e s vi si to rs fro m C a n a d a a n d M e x i c o . Source: U. S. D e p a r tm e n t of Co mme rc e English speaking visitors. Although '70 ANNUALLY travel by percent o f total travel receipts in 1961 and 61 residents o f other countries is expanding rapidly as percent in 1970. During the 1961-1970 period, a result o f improved income levels, particularly in travel payments to Canada increased at a faster Europe, pace than travel receipts, b u t the opposite was true they appear to prefer traveling to countries other than the United States because o f lower costs and fewer language problems. in the case o f Mexico (see Table II). In 1962, the United States shifted in to a d e fic it o f Travel Payments position in the travel account w ith Canada. This and Receipts. Reflecting the ease of travel to and s h ift resulted, in part, from a devaluation o f the from Canada and Mexico, United States travel Canadian dollar, w hich stim ulated United States payments to and receipts from these countries are travel to Canada and made Canadian visits to the Geographic D istribu tio n larger than those w ith other individual countries. United States less attractive, and a reduction o f Travel the d u ty free exem ption fo r Canadians w ho were payments to both Canada and Mexico accounted fo r 45 percent o f total United States traveling abroad. In addition, the 1962 Seattle Fair travel outlays in both 1961 and 1970; however, stim ulated United States travel payments to the proportion paid to Canada increased during Canada by attracting m illions o f Americans who the period, w hile Mexico's share declined. Travel also visited the western provinces o f Canada. Since receipts from these countries accounted fo r 68 1962, the United States has continued to run a 19 ECONOMIC REVIEW d e fic it w ith Canada—the d e fic it taking a sharp to the Western European countries reflects, in jum p in 1967 as a result o f Expo-67 in Montreal. part, civil disturbances abroad during the firs t half United States travel payments to the group o f o f the year. U nited States travel expenditures in countries th a t make up Western Europe represent France were affected the most by these d istu r another large part o f total payments, w hile travel bances, w hich also had an influence on travel to receipts from this geographic area are relatively other European countries, p articularly those in the small compared w ith travel receipts from Canada Mediterranean area. and Mexico. As a result, a major share o f the In the remainder o f the w o rld , a slight surplus d e fic it in the United States travel com ponent o f in the travel account o f the U nited States balance the balance o f payments has been due to travel o f payments has persisted w ith Australia, New deficits w ith Western Europe. In 1961, 56 percent Zealand, and South A frica as a group. A small o f the d e ficit in the United States travel account surplus also developed in 1970 w ith Japan, was due to imbalances w ith Western Europe; and reflecting the increase in foreign travel by the by 1970, the travel d e fic it w ith Western Europe Japanese, w hich resulted, in part, fro m the rapid represented 61 percent o f the to ta l d e fic it in the growth rate o f the Japanese economy and the travel account o f the United States balance o f stimulus th a t affluence gives to both personal and payments. In only tw o o f the last ten years (1966 business foreign travel. and 1968) has the d e fic it in this account w ith Western Europe been smaller than during the TRANSPORTATION COMPONENT previous year. Definitions. As w ith Many obstacles stand in the way o f overcoming the d e fic it w ith Western the travel com ponent, payments associated w ith foreign transportation Europe. Comparative expenditures are recorded in the United States incomes are lower in Europe than the United balance o f payments account as im ports o f goods States, and Europeans are less able to pay the cost and services (outflow s o f funds) and receipts o f o f transatlantic flights. Many potential European transportation expenditures of foreigners are visitors fear high U nited States prices, problems recorded as exports o f goods and services (inflow s associated of w ith exchanging currencies, and a funds). The transportation com ponent of language barrier. As a result o f these problems, the im ports measures passenger fares paid to foreign deciding ocean and air carriers by United States residents factor fo r many foreign visitors is whether or not they have friends or relatives in the fo r transoceanic transportation; fre ig h t payments United States w ith w hom they can stay. to foreign-operated ocean, air, and other carriers A lthough the number o f United States residents traveling abroad continued to increase in both (including rail and Great Lakes shipping in Canada) fo r the international transportation o f 1966 and 1968, there was some diversion o f travel United States im ports; operating expenditures by away from Europe tow ard Mexico, the Caribbean, United States carriers in foreign ports; and pay and South America. An economic slowdown in the ments made to foreign owners fo r the charter o f United States in 1966 also may have influenced vessels and the rental o f freight cars. Passenger the dollar am ount o f average to u ris t expenditures fares fo r travel between the U nited States and in Europe. The 1968 slowdown in travel payments Canada and between the United States and Mexico 20 OCTOBER 1971 are not included, and freight payments on United these factors, to ta l United States transportation States exports carried by foreign carriers are not payments increased from $1.9 b illio n in 1961 to included since they do not result in transportation $4.0 b illio n payments to receipts advanced from or from United States residents. in 1970, and total transportation about $1.8 b illio n to Foreign p o rt expenditures (both ocean and air) by nearly $3.7 b illio n during the same period (see United States carriers are payments fo r landing Table IV ). services, fuel, and a variety o f other expenses such The various transactions measured by the trans as wages to foreign personnel and passenger food portation com ponent o f the United States balance and services in foreign ports. o f payments are interrelated. For example, during United States receipts fo r transportation the past tw o decades, there has been a sharp services are composed o f passenger fares received decrease by in the pro p o rtion of Lhited States States ocean and air carriers from exports and im ports transported by United States residents traveling between the United carriers (see Table V ). This tended to increase the States and foreign countries and between tw o size o f freight payments to foreign carriers. How foreign countries. The transportation com ponent ever, because more foreign ships were calling at also measures the freight revenues o f United States United States ports, United States receipts from ocean, po rt United foreign air, and other carriers (including rail, expenditures of these foreign carriers pipeline, and Great Lakes shipping) fo r the move increased (see Table IV ). Also, the rapid growth in ment o f United States exports; freight payments the number o f United States residents traveling on abroad goods transported between tw o foreign has greatly increased passenger fare countries; p o rt expenditure receipts from goods payments to foreign air carriers (foreign travelers and services purchased in the United States by tend to patronize th e ir own countries' airlines, foreign receipts w hile United States travelers tend to be fascinated from foreign operators fo r the charter o f vessels by the experience o f fly in g on a foreign airline). and the rental o f freight cars. This increase has been somewhat offset by the transportation companies; and p o rt expenditures paid by these foreign carriers Transportation Payments and Receipts. United and also by some grow th in a irfreight receipts o f States transportation payments and receipts are U n ite d d ire ctly payments related to the volume o f merchandise States carriers. and receipts Both have, transportation however, been exports and im ports, the number o f U nited States influenced by higher costs, both in the United and foreign residents traveling abroad, and the States and abroad. na tionality o f the carrier th a t provides the trans Despite these counterbalancing forces, the portation services. Between 1961 and 1970, the d e fic it in the transportation sector o f the United value exports States balance o f payments trended upward during of United States merchandise increased fro m about $20 b illio n to $42 b illio n , the 1961-1970 period (see Table IV ). The co n tin and the value o f im ports advanced from about $15 uous increase in the surplus o f the p o rt expen billio n to nearly $40 b illio n . As previously noted, d itu re the to ta lly number of international travelers also advanced sharply during this period. As a result o f com ponent offset has not been su fficie n t to growing deficits in the other components, however. 21 ECONOMIC REVIEW TA B LE IV United States Transportation Transactions Selected Years (M illions o f Dollars) Total transportation payments Total transportation receipts Net 1961 1964 1967 1970 -$ 1 ,9 4 3 1,805 -$2,464 2,317 -$2,993 2,790 -$4,004 3,659 -1 3 8 -1 4 7 -2 0 3 -3 4 5 - 1 ,3 8 2 1,331 -1 ,7 1 7 1,732 -1 ,8 7 9 1,851 -2,319 2,258 -5 1 15 -2 8 -6 1 -4 8 1 383 -6 4 1 476 1,020 820 -1,588 1,255 -9 8 -1 6 5 -2 0 0 -3 3 3 -5 0 6 183 -6 3 5 234 -8 3 0 371 -1 ,2 1 5 553 -3 2 3 -4 0 1 -7 6 8 625 -9 8 4 820 -1 4 3 -1 6 4 -3 9 9 898 -5 1 2 1,146 -5 9 8 1,493 -8 0 8 1,942 499 634 895 1,134 -2 7 0 __ 99 -3 3 3 117 -3 4 3 126 -4 7 3 177 -1 7 1 -2 1 6 -2 1 7 -2 9 6 By Type o f Transportation Ocean transportation payments Ocean transportation receipts Net A ir transportation payments A ir transportation receipts Net - By Type o f Transaction Passenger fare payments Passenger fare receipts Net Freight payments Freight receipts Net Port expenditures abroad Port receipts in United States Net Other payments Other receipts Net - -4 5 9 -6 6 2 1,222 800 -1 ,5 0 8 987 -4 2 2 -5 2 1 Source: U. S. Department o f Commerce SUMMARY segment o f the population to overseas travel. The The travel and transportation components o f rapid grow th in w o rld trade during the 1961-1970 the U nited States balance o f payments have been period also contributed to the increase in trans in persistent d e fic it during the last decade, w ith portation payments and receipts. the d e fic it growing from about $1 b illio n in 1961 The advent o f lower air fares, charter flights, to nearly $2 b illio n in 1970. The upward trend in and special tours has brought about a trend toward numbers o f international travelers has resulted shorter overseas stays and, consequently, lower from a grow th o f personal income in the United average expenditures States and countries, coupled w ith downs during the period did n o t appear to hinder decreases in air fares, w hich have attracted a larger the grow th in numbers of United States residents in foreign 22 per trip . Economic slow OCTOBER 1971 T A B LE V Net Registered Tonnage in United States Ports Selected Years (M illions o f Tons) Tonnage Total United States Register Foreign Register Entered Average 1946-1950 1955 1960 1965 1967 1968 87 128 162 209 221 230 46 34 30 34 31 30 41 94 132 175 190 200 51% 27 19 16 14 13 Cleared Average 1946-1950 1955 1960 1965 1967 1968 87 129 167 209 220 230 45 34 31 34 31 31 42 95 136 175 189 199 52 27 19 16 14 14 Year Percent United States Source: U. S. Department of Commerce traveling abroad, but did appear to have an account. There are, fo r example, some offsetting influence on average expenditures, and resulted in influences such as increased purchases o f United some shifts in the destination o f travelers. States goods and services by nations th a t earn United States travel dollars. The travel and trans Despite the growing d e ficit, the travel and portation com ponent o f the Uhited States balance transportation components o f the United States o f payments must, therefore, be viewed as an balance of pendently payments cannot be viewed from the inde other components o f the integral part o f the overall balance o f payments account. 23
@FedFRASER