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May
Recent Developments in
District Bank Liquidity
.
.
Liberalization of
World Trade and Payments
Current Statistics
.
.
.
.
. .
.
.
.
1960
. page
3
. . page
9
.
. page 16
FEDERAL RESERVE BANK
OF KANSAS CITY
Subscriptions to the Mo THLY REvmw are available to the public without charge. Additional
copies of any issue may be obtained from the
Research Department, Federal Reserve Bank of
Kansas City, Kansas City 6, Missouri. Permission
is granted to reproduce any material in this
publication.
Recent Developments in
District Bank Liquidity
M
in the Tenth Federal Heserve District si11C'e the encl of \Vorld
\Var 11 have witncss<'cl an expansion in the
dollar vol11111c of their loans about as large as
the growth in their deposits. The hanks have
a<lc.led little to their ownership of cash and
Government securities, which was comparatively high at the end of the war, and the percentage of bank assets held in liquid form
has been reduced markedly. Bank loan and
investment policies have had to be adjusted
to the decline in liquidity. The liquidity problem has presented itself more forcibly at
some times than at others, since growth rates
of loan demands and deposits have varied
frorn one year to the next, often requiring
EMBEH HANKS
Loan-Deposit Ratios of District Member Banks
PER CENT
60
50
RESERVE CITY
40
30
COUNTRY
84NKS
20
10
0
._____.___.___.____,J'---.....___,___,___,'--..L--'------L---1._L.._...J____J
1946
'48
'50
Monthly Review •
'52
'54
May 1960
'56
'58
'60
temporary reductions in liquid asset holdings.
1n I D,59, the problem of operating with rc·d11C"cd liq11idity positions ass1111H'd larger proportions for District mcml)('r hanks, because
the near-record expansion in loan volume was
accompanied by a decline in deposit levels.
This was the first year since 1946 in which
total deposits of all District members were
lower on December 31 than at the beginning
of the year. The experience was not confined only to member banks in the Tenth
Federal Reserve District-total deposits at all
member banks in the Nation also were below
year-earlier levels on December 31, 1959 nor was the loss of deposits in the District
particularly large. It amounted to just $46
millio11, or about one half of one per cent of
total deposits. Developments since the first
of the year, nevertheless, have indicated that
the 1959 drop in District bank deposits was
more than a quirk of year-end statistics. The
contraction of deposits which took place in
the first quarter of 1960 was much larger than
normal seasonal proportions, requiring member banks in the District-as well as banks
elsewhere in the Nation-to clip heavily into
their secondary reserves of Government securities.
While most of the 1960 decline in District
bank deposits is perhaps completed, since
bank deposits in this region usua1ly begin to
advance seasonally after midyear, the recent
3
Recent Developments
experience suggests the desirability of reviewing loan, deposit, and investment changes at
District banks as a means of obtaining a
broader perspective on the problem of liquidity confronted by the District banking community. The principal part of this article
deals with developments early in 1960, but
some attention is given to patterns evidenced
in 1959 and earlier years.
Deoosits
Shar
·
the F· r t Qu
er
A seasonal slump in deposit balances from
high year-end levels is typical in the first
quarter, but the opening 3 months of 1960
witnessed unusually large losses of deposits
at District members. On an average daily
basis, the decline in total deposits between
late December 1959 and late March 1960
amounted to almost $450 million-a reduction
of about 5½ per cent - substantially more
than is typical of this period. As usual, the
loss of deposits centered in demand balances.
Time accounts continued to rise, but the first
quarter increase was the smallest since 1956.
Reserve city and country member banks
shared almost equally in the deposit reduction, with each class of bank experiencing
the largest first quarter deposit loss of any
recent year.
Following the slight decline in total deposits during 1959, the further contraction in
the first 3 months of 1960 enlarged the gap
from the levels of a year earlier. At year-end
1959, total deposits of all District members
were $46 million below the December 31,
1958, figure, as noted previously; by the end
of March 1960, the margin from year-ago
figures had widened to $170 million-all of
which was registered at reserve city banks.
At all country members, the first quarter reduction brought the total deposit level for
these banks at the end of March 1960 to
about the figure of 12 months previously.
The accompanying chart shows the percentage reduction of total deposits in the
4
Changes In Total Deposits
Weekly Reporting Member Banks
PER CENT CHANGE, MARCH 1959 TO MARCH 1960
All DISTRICT
REPORTING MEMBERS
KANSAS
CITY,
MO .
DENVER
OKLAHOMA
CITY
OMAHA
WICHITA
TULSA
-8
-6
-4
-2
0
+2
year ended March 1960 at weekly reporting
member banks in the District's six major cities.
This group of banks is comprised mainly of
those in the reserve city classification. It may
be noted that all of the major cities except
Denver recorded a deposit attrition over this
period, and in Denver-where deposit expansion has been rapid in recent years-the yearto-year percentage gain was fractional. The
largest decline, a figure of 6.4 per cent, was
registered at weekly reporting members in
Wichita.
Since the decline in deposits at District
members in 1959 and in the first quarter of
1960 paralleled deposit trends at all member
banks in the United States, it seems reasonable to presume that forces at work at the
national level also were important in the District. It is interesting to note, in this respect,
that the percentage of total deposits at all
member banks in the United States accounted
for by District members was only slightly less
in March 1960 than in March 1959.
Changing levels of deposits at all member
banks in the Nation reflect, of course, the
impact of monetary policies in regulating the
volume of bank reserves. In 1959, restraint
on the growth of bank reserves and bank deposits limited the participation of banks in
in District Bank Liquidity
financing the unusually large demands for
credit expressed in the financial markets. As
interest rates rose, owners of bank deposits
-and other types of financial assets on which
yields were less flexible-were encouraged to
channel a large volume of funds directly into
the securities markets. Estimates of the Securities and Exchange Commission indicate
that individuals' acquisition of securities other
than U. S. savings bonds totaled $13.7 billion
in 1959, accounting for 43 per cent of gross
private financial savings of individuals-the
highest allocation of funds to the securities
markets of any postwar year. Corporations
other than hanks and insurance companies
also directed the increase in their ass<'l holdings to the securities markets, acquiring $5
billion in Treasury issues during 1959. A
continuing corporate demand for short-term
Treasury securities in the first quarter of 1960
has been reported by observers close to the
national money markets.
It would be surprising, indeed, if this region were insulated from the effects of growing investment in fixed-income obligations by
individuals and other investors across the Nation. Direct evidence on this score is confined
to comments received from District bankers,
but these confirm the view that customers of
banks in this area also have expressed an expanding demand for Treasury and other securities. As might have been expected, the
influence of changes in investment preferences in the District appears to have affected
importantly the growth of time deposits as
well as the performance of demand balances.
Time accounts at all District members rose
7.7 per cent in the 15 months ended in March
1960; in the preceding 15 months, when
bank interest rates were more favorable in
relation to yields on open-market securities,
the percentage gain in time accounts was
more than twice as large.
Another factor of considerable significance
in explaining the recent behavior of District
Monthly Review •
May 1960
bank deposits, however, is to be found in the
agricultural sector of the regional economy.
Cash receipts from farm marketings dropped
substantially below 1958 levels in District
states during the second half of 1959 and remained below year-earlier figures in the opening months of 1960. As might have been expected, the slide in farm income, coupled
with the increase in farm investments, tended
to reduce cash balances of farmers. At a
sample of 105 rural banks in the District,
where deposits are mainly those of farmers,
individual and business demand balances fell
4 per cent during 1959. A recent survey of
demand deposit ownership suggests that the
reduction in demand halances of District farm
operators may have been significantly greater
than that. The deposit attrition apparently
was particularly large in Nebraska, where
demand balances at country members other
than banks in Lincoln declined 6 per cent
in the year ended March 30, 1960.
The loss of demand deposits at some country members followed a 2-year period during
which loan demands in the farming areas
were unusually high, and as pressures on the
reserve positions of these banks mounted,
cash balances maintained with city correspondents were reduced. Consequently, correspondent balances at the larger city banks
in the District, already at comparatively low
levels early in 1959, were drawn down further
in the past year. In the final 2 weeks of
March, interbank demand deposits at District reserve city members averaged out to a
figure lower than in the comparable weeks
of any of the past 5 years.
l
n Vo
row n
During the 2 years ended in mid-1959, loan
totals of District members swelled by nearly
$750 million-a gain of more than one fourth.
An eventual slowdown from this feverish pace
of expansion was inevitable, particularly in
the face of a less favorable deposit perform-
s
Recent Developments
ance, and signs of a relaxation began to appear at the larger city banks during the second half of 1959. The less buoyant performance has continued at these banks during the
first quarter of 1960. At country members in
the District, loan totals advanced strongly
through the latter half of last year, and further
growth was evidenced in the first quarter of
1960. The rate of growth in the opening
quarter of this year, however, was considerably less than in the same period of 1959.
At the District's weekly reporting member
banks, which are concentrated in the larger
cities, the second half of 1959 witnessed a
relatively mild expansion of loan totals. This
reflected , in part , th(' effects of the steel
strike in curtailing business demands for
funds. At the same time, demands for nonguaranteed farm loans were moderated , possibly by the declining trend of cattle prices.
These loans rose substantially less in the second half of 1959 than in the same period of
the 2 previous years. An additional factor in
slowing down the pace of loan expansion was
the curtailment of loans to the mortgage
market, both through reduced purchases of
real-estate mortgages and through a cutback
First Quarter Changes In Principal
Loan Categories
District Weekly Reporting Member Banks
In millions of dollars
Type of Loan
Real estate
Commercial and industrial
Personal and sales finance companies
Other nonbank financial institutions
Nonguaranteed farm
Consumer and other
Average
1960
-- 6
+4*
-1
- 2
- 18
- 5*
Total, principal loan components - 28
n.a. -
1959 1955-58
-+5
+24
-1
-21
n.a.
n.a.
n.a.
n.a.
+2
+6
- 6
+7
- 21
+37
Not Available .
*Due to reclassifications in July 1959, these data are not strictly
comparable with previous years. A rough comparison of busi ness loan changes may be obtained by assuming that loans to
personal and sales finance compan ies and to other nonbank fi nancial institutions were included in the commercial and indus~rial category prior to reclassification. Thus, the 1960 changes
1n these three categories taken together may be compared with
changes in commercial and industrial loans in 1959 and previous
years.
6
in loans to real-estate mortgage companies.
Real-estate loans on residential properties
actually declined during the second half of
1959, but there was a more than offsetting increase in loans on commercial and other
properties.
Real-estate loans of the reporting member
hanks d eclined $6 million in the first 3 months
of 1960 and consumer and other miscellaneous loans were also reduced somewhat. But
the dominant factor tending to reduce loan
totals in the quarter was the steep drop in
nonguaranteed farm loans as cattle marketin gs i11 crcasccl. Business Joans showed a moderate in crease from January through March ,
although s<'asonal expectations are for a co11 siderahk reduction in this period. The growth
in business loans was significantly less than
in 1959, however, as borrowing in the taxpayment month of March failed to match the
performance of a year earlier. As may be
noted in the tahle, the sum of the major loan
components at the District's weekly reporting
banks was reduced $28 million in the first 3
months of the year, a performance which is
close to the average change for the years
1955-58.
Some of these sources of weakness in loan
growth at th e larger city banks were instrumental in curtailing the volume of loans
at the District's country members. As was
tru e in the case of the larger city banks,
the major weakness was in nonguaranteed
farm loans, which declined $10 million from
the first of the year to March 15. Loans other
than money-market loans and loans guaranteed by the Commodity Credit Corporation
showed a net decrease of $9.0 million between
year-end and spring calJ dates ; in 1959, there
was a net increase of $22 million.
Liquidation of Investment Holdings Continues
Ownership of liquid assets - particularly
Government securities - was reduced substantially in 1959 as a result of the combined ef-
in District Bank Liquidity
fects of a large increase in loan volume and
a slight reduction in deposits. At the end of
the year, cash assets of all District members
had been reduced nearly $70 million, and
holdings of Treasury securities had declined
more than $200 million. Ownership of other
securities also declined in 1959-the first annual reduction since the end of World War II.
The liquidation of Government securities
accelerated in the early months of this year
as a result of the more-than-seasonal contraction of deposits. Treasury security holdings
were re<luced $143 million betw en December 31 , 1959, and March 30, 1960, and a
further reduction of $24 million in other invcstm<'nls also occnrrcc.l. Al the end of March
l 960, th ownership of Government sccuriti s
by District members had reached a postwar
low.
The large investment liquidation of the
first quarter was primarily a product of the
need to make adjustments in the face of an
adverse deposit movement. Yet it is significant that District members did not resort to
a temporary solution, such as expanded borrowings at the Reserve Bank, in confronting
the problem of heightened reserve pressures.
Average daily borrowings of all District members were lower in Mar h 1960 than in December of last year. In this respect, the behavior of District members paralleled that of
all commercial banks in the United States.
An extraordinary volume of Treasury securities was liquidated by banks during the first
quarter, but borrowings of all member banks
in the United States in March averaged considerably lower than in December 1959 and,
in fact, were the lowest for any month since
March 1959. The apparent willingness of
the banks to part with securities may reflect,
in part, a judgment that the sources of reserve pressures late in 1959 were not of a
short-lived character and that adjustments to
them would have to be more fundamental
than through temporary borrowing. It is
M onthly Review •
M ay 1960
also important to recall, however, that yields
on short-term Treasury securities were b elow
the discount rate during most of the first
quarter. Therefore, sales of short-term securities were the more economical means of
bank adjustment to the contraction of deposits.
The liquidation of Treasury securities has
affected primarily the ownership of shortterm issues, but there has been a reduction
of bank ownership of intermediate and longer-term issues as well. Figures from a group
of District commercial bank ( including all
reserve city hanks and a considerable number
of country member and nonmcml)('r hanks)
inclical' that market sales duriug 1959 rccluce<l ownership of 5-10 year issu s by an
estimated $15 million and holdings of issues
with more than 10 years to maturity by $18
million. These market transactions acted to
reduce holdings of Treasury securities in the
over-5-year maturity range by a bit more
than 6 per cent. Reductions in the less-than-1year range, however, were much more drastic
and at the end of December 1959, ownership
by these banks of very short-term securities
was at the lowest year-end level since 1955,
as is evident in the accompanying table. A
further decline evidently occurred during the
first quarter of 1960. At District reporting
member banks, for which reports are available on a week-to-week basis, the liquidation
of Treasury securities from January through
March was accounted for entirely by a deOwnership of Marketable Treasury Securities
At a Sample of District Commercial Banks
Year end, 195S-S9
Par values in millions
Securities
Maturing in:
Dec. 31
1955
Less than 1 year
1-5 years
5-10 years
Over 10 years
$ 414 $ 692 $ 742 $ 813 $ 664
1,047 1,162 1,194 1,225 1,294
734
367
241
388
324
111
121
130
146
91
-- -- -- -$2,305 $2,342 $2,308 $2,572 $2,372
Total
NOTE:
Dec . 31
1956
Dec . 31
1957
Dec . 31
1958
Dec . 31
1959
Detai Is may not add to totals because of rounding.
7
Recent Developments in District Bank Liquidity
cline in Treasury bill and certificate holdings.
While it is quite clear that sales of shortterm securities have impinged on District
bank liquidity, the extent of the alteration in
liquidity positions cannot be fully appreciated
by reference to aggregate figures alone. Some
banks entered the period with less ample
liquidity cushions than others, and the degree of pressure on reserve positions has varied considerably among banks. Consequently,
the decline in ownership of Government securities has drawn down the ownership of
short-term securities by some banks to particularly low levels. For xample, on March
30, 1960, the District's wc<.'kly reporting member hanks as a group held Treasury issues
with l ss than a y ar to maturity in amounts
equal to about one fifth of their total Government securities. But among these reporting
members is a smaller group of 21 banks which
on that date had only 2 per cent of their
Treasury issues in the shortest maturity bracket. These 21 banks accounted for 39 per cent
of all Government securities held by District
weekly reporting members, but less than ,5
per cent of the issues in the less-than-1-year
range.
Concluding Comments
The problems faced by District banks in
adjusting to heightened reserve pressures in
1959 and early 1960 are not new ones. On the
contrary, the developments leading to the reduction in bank liquidity have been evident
in most of the postwar years, and banks increasingly have become acquainted with
methods of adjusting to alterations in the
tempo of loan demands and deposit flows.
The new element in the picture is the fact
that the recent adverse performance of deposits immediately followed a phenomenal
expansion of loans in the 2 years ended in
mid-1959, and taken together, these two
events have served to reduce District bank
liquidity to the lowest level of the postwar
8
era. A year ago, loan-deposit ratios of District member banks had reached new postwar
highs, and cash assets of country members
had been drawn down to comparatively low
figures. There was at that time, however, a
fairly ample volume of short-term securities
reasonably well distributed among reserve
city and country banks. The 12 months ending in March 1960 witnessed a continued advance in ratios of loans to deposits, a further
decline in cash assets of country members,
and deep inroads into District bank ownership of short-term Treasury issues.
Su ch important changes in hank liquidity
ar<.' hound to have an influence on hank lending and i11vcstnwnl poli ·ics, and some of the
results of this influence arc alr('ady cvi<l ~nt.
The liquidation of intermediate and long rterm Treasury securities by District banks
during 1959 is a case in point; in periods
when deposits have grown rapidly and loan
demands were less ebullient, demands by
District members for such issues have been
relatively large. The curtailment of real-estate loans on residential properties and the
decline in loans to real-estate mortgage lenders ar symptomatic of the fact that the banks
hav begun to ration more intensively a limited supply of loan funds among competing
uses.
Whether further intensive efforts in the
direction of checking the decline in liquidity
will be required of District banks during the
remainder of 1960 remains an open question.
In a region where bank deposits are dependent importantly upon developments in agriculture, the vagaries of the weather may be
sufficient to make the difference between an
intensification or some easing of pres ures on
bank reserves. It is clear, nevertheless, that
unless loan demands weaken considerably or
the trend of deposits turns favorable, the
District banking community will face a larger
problem of living with reduced liquidity than
has been encountered in recent years.
~iberalization
of WORLD TRADE AND PAYMENTS
XCESSES OF UNITED STATES payments
abroad over receipts from abroad during
the past 2 years have attracted worldwide
attention. Speculation on the causes of and
remedies for these balance of payments deficits has been widespread and highly divergent
in character. Views on the matter of remedies
have ranged from the relatively complacent
one that the deficits will disappear almost
automatically with cycli al expansion in foreigu demands for U. S. goo<ls and services,
and therefore will requir no special corrective steps by the Government, to the extreme
position that forces contributing to recent
deficits are so deep-seated and persistent as
eventually to necessitate restriction of U. S.
payments abroad or other harsh measures.
Developments since the summer of 1959
have provided some assurance th at forces
are at work lessening U. S. payments difficulties and have led to a reassessment of the
more extreme views. Nevertheless, the United
States continues to experience a payments
deficit. Primarily as a result of developments
during the first half of 1959, the most impressive of which was a sharp surge in imports, the deficit advanced about $300 million,
from $3.4 billion in 1958 to $3.7 billion in
1959, excluding the payment of $344 million
in gold and $1,031 million in noninterestbearing notes to the International Monetary
Fund (IMF) to cover the increased U. S.
quota.
While observers have expressed quite different views on the appropriate remedies to
halt the outflow of gold and the increase in
foreign short-term dollar assets that financed
this deficit, all are agreed that an imbalance
of the magnitude experienced over the past
2 years cannot be sustained indefinitely.
E
Monthly Review •
May 1960
However, the gold reserves of the United
States, comprising nearly half of the estimated
free-world stock, provide the United States
with both time and latitude in adjusting policies to restore balance or in awaiting foreseeable improvements in the balance of payments position.
In the formulation of judgments concerning the policies to be pursued by this country in correcting the foreign payments situation , careful consideration must he given lo
developments abroad and to the impact of
these upon U. S. deficits. In this regard , it
must be recognized that payments gaps experienced by the United States have a counterpart in surpluses abroad that increase
foreign gold and dollar reserves. Past deficits
in the U. S. balance of payments, by contributing importantly to the redistribution
and growth of international currency reserves,
have permitted foreign countries to examine
critically the whole range of quantitative restrictions on trade and payments that were
introduced or maintained during earlier postwar years to deal with payments deficits and
serious drains on gold and dollar reserves.
This article is designed to examine the increase in foreign gold and dollar reserves and
to describe some of the steps taken abroad to
lessen restrictions on international trade and
payments. The liberalization of trade and
payments promises to ease the adjustment in
the U. S. balance of payments as well as to
provide a world trading environment more
consistent with the objectives to which the
United States and most other countries of the
free world subscribe through membership in
the IMF and as contracting parties to the
General Agreement on Trade and Tariffs
(CATT).
9
Liberalization of
Chart 2.
U. S. Receipts and Payments, 1950-59
U. S. Payments and Foreign Gold
and Dollar Reserves
During the past decade deficits in the U.S.
balance of payments have by no means been
unusual, for they were recorded in every year
except 1957. In that year, a $0.5 billion surplus
in U. S. transactions with foreign countriesan excess of receipts over payments-occurred
in response to a sharp advance in exports
brought about largely by supply difficulties
stemming from the Suez crisis. During the
1950-56 period, deficits ranged from $0.3
billion in 1951 to $3.6 billion in 1950. Generally, however, th e payment imbalances of
those years were greatly overshadowed by
those of 19.58 anc.l 19,59, w hid1 were roughl y
2 'I~ times the average for the 1950-56 period.
Placed in the broader perspcctiv of the
p ast decade, U. S. deficits can be viewed as
the product of net private and Government
loans and investments abroad, private remittances, pensions, and nonmilitary Government grants exceeding the surplus of receipts
over payments from transactions in goods
and services. As Charts 1 and 2 show, howChart 1.
U. S. Merchandise Exports and Imports,
1950-59
BIiiions of Dollars
21
19
Merchandise Exports*
17
15
13
II
9
0 ._____._..........._ __.__ _.__ _.__...,___..___..____._ __J
1950
'52
'54
'56
'58
'60
* Excludes military exports under Government grants .
SOURCE : U. S. Department of Commerce .
10
BIiiions of Dollar,
8
Net Receipts From
Transactions in
Goods and Services*
6
/
4
2
0
-2
-4
-6
4
2
0
-2
~~-~-~
1950
'52
_ __..__ _,___.__~_ __.__~-~
'54
'56
'58
'60
*Excludes military aid transferred under Government grants.
* * Includes net capital outflow, private remittances abroad, pensions , and nonmilitary Government grants, but excludes
Government military grants .
***Excludes payment of $344 million in gold and $1 ,031 million
in non interest-bearing notes to the I MF in 1959 to cover the
increased U. S. quota.
1Surplus .
SOURCE : U. S. Department of Commerce .
ever, the payments gap widened during 1958
and 1959, primarily as a result of a decline in
net receipts from transactions in goods and
services. Merchandise exports - excluding
military shipments under Government grants
- fell $3.2 billion, while merchandise imports
rose $2 billion, and the excess of payments
over receipts from transactions involving
shipping, insurance, travel, military expenditures, and transfers of income from investments increased by $700 million over this 2year p eriod. In 1959, U.S. purchases of
goods and services abroad exceeded sales for
the first time during the postwar period. Net
payments amounted to $137 million, while in
1958 net receipts from these transactions totaled $2,248 million.
World Trade and Payments
Chart 3.
Foreign Holdings of Gold and Short-Term Dollar Assets, 1950-59
Billions of Dollars
Billions of
Dollars
22
4
BY AREAS
20
BY COUNTRIES
2
18
0
_J
16
14
12
Continental
Western Europe*
10
8
6
4
pa
2
....
~
I'
Canada
0
1950
'52
'54
'56
'58
' 60
NOTE: Data include holdings of gold reported by foreign governments and central banks and official and private holdings of shortterm dollar assets, including bank deposits, Treasury bills and certificates, bankers ' acceptances, and other short-term dollar assets.
*Excludes gold holdings of French Exchange Stabilization Fund.
SOURCE: Board of Governors of the Federal Reserve System .
The total payments deficit for the decade
was $17.4 billion, excluding the increase in
the U. S. quota in the IMF mentioned above.
This deficit, combined with production of
new gold, and gold sales by the U.S.S.R. and
Eastern European countries, swelled foreign
official holdings of gold and official and private holdings of U. S. Government securities,
bank deposits, and other short-term dollar
assets by $21.1 billion to $36.4 billion. During this period, IMF holdings of gold and
short-term dollars, which serve as secondary
reserves of IMF member countries, rose by
$3.1 billion to $6.2 billion.
Foreign countries have not shared equal1y
in this growth of gold and dollar reserves.
Chart 3, showing foreign holdings of gold and
short-term dollar assets - those with original
maturities of less than 1 year, indicates that
the most substantial growth in these reserves
Monthly Review •
May 1960
was experienced primarily by countries in
Europe. Over the past 2 years, however, the
reserves held by Japan also have risen sharply and some other countries have increased
their holdings of gold and dollar reserves or
other currency reserves by moderate amounts.
Countries that are producers of primary
products, notably metals, have not shared
proportionately in the advances in free-world
gold and dollar reserves, particularly over
the 1958-59 period. This is exemplified by
developments in Latin American countries
where earnings of foreign currencies commonly are dependent upon shipments of one
or a few products such as oil, coffee, or primary metals. Some of these countries found
export earnings sagging with depressed coffee prices. Others that are dependent upon
exports of minerals to the industrial countries
experienced a reduction in foreign currency
11
Liberalization of
earnings when cyclical declines in activity in
manufacturing centers led to declining sales
volume and to falling export prices.
It is not surprising therefore that many
Latin American countries failed to add to
their gold and dollar reserves in 1958 when
foreign markets were depressed cyclically. A
longer-run view of the balance of payments
problems of less developed regions also must
take account of the fact that the urgency of
economic development and ambitious programs to advance living standards have tended to put upward pressures on prices and to
increase import demands.
Thus, the growth in int<'rnational currency
reserves alld the strengthening in payments
positions abroad have b een most strikillg for
the industrial countries. The restoration an<l
growth of productive capacity of countries
whose industrial plant was destroyed during
World War II, and the vigorous anti-inflationary policies pursued in recent years by
many of the European countries to preserve
the over-all competitive position of producers, have strengthened external payments
positions and augmented gold and dollar reserves. Additionally, it is notable that the
United States has become a more receptive
market for many foreign produced goods,
especially for finished manufactured products. Imports of finished consumer goods
alone increased $700 million, or by 40 per
cent, in 1959, with automobile imports leading the advance.
These longer-run developments undoubtedly were basic to the rise in European gold
and dollar reserves over the past decade. Additionally, however, it should be noted that
U.S. exports in 1958 and early 1959 were
restrained by recession in Europe and have
only more recently begun to advance with
the recovery of economic activity in Europe,
while U.S. imports responded to a somewhat
earlier cyclical advance in business activity
in this country. These developments provide
12
partial explanation for the accelerated rise in
foreign reserves of gold and dollars by some
countries over the past 2 years and they are
in turn partly responsible for the accelerated
freeing of trade and payments from quantitative restrictions.
Progress in the Liberalization of Trade
and Payments
During the early postwar period, countries
throughout the world were faced with the
difficult tasks of reconstruction or with pressing developmental needs . Quantitative restrictions on mC'rchandisc imports and systems of fon,ign exchange colltrols, designed to
ration current earnings of forcigll currencies
and to conserve available reserves of international means of payment, appeared essential to the maintenance of balance between
demands for and supplies of these means of
payment. Thus, countries that originally had
introduced restrictions on imports or exchange
controls, limiting payments abroad, as a
means of marshaling financial resources for
a maximum wartime effort or as a means of
promoting domestic employment during the
economically depressed 1930's, commonly
maintained or augmented these restrictions in
dealing with postwar balance of payments
difficulties.
While quantitative restrictions were applied
to prevent depletion of gold and dollar reserves during the postwar years, most countries applying these restrictions had as an ultimate objective the removal of most quantitative restrictions on trade and payments
and the eventual establishment of a system
of multilateral trade and payments. These
objectives were responsibilities accepted with
membership in the IMF and participation in
negotiations under the CATT. However,
those individuals and Governments responsible for the development of the IMF Agreement and the GA TT foresaw the trade and
payments problems that would be inherent
World Trade and Payments
in the postwar distortions of production and
distribution. Provision was made therefore
for quantitative restrictions for balance of
payments reasons-as opposed to protectionist reasons - during the transition from war
to n01mal peacetime conditions.
The seriousness with which many countries
have approached the objective of establishing
a trade and payments system consistent with
the goals set forth by the IMF Agreement and
the CATT, once payments positions strengthened, is revealed by the recent accelerated
progress in reducing quantitative import restrictions and in freeing payments from exchange controls. Perhaps the most striking
evidence of this progress wc1s the headlin('d
announcemc'nt at the cnc.1 of W,58 that external
currency convertibility had been restored by
most countries of Western Europe and by a
number of other countries throughout the
world. This did not mean, as it once had
meant, that currencies again could be exchanged freely for gold. Nor did it mean
generally-Germany being a notable exception - that residents of any one country were
permitted freely to convert their own currency
for the currency of another country. What
it did mean was that residents of one country,
say France, were free to convert current earnings of another currency, the pound sterling,
for example, into other currencies. ( Previously this was possible only in unofficial foreign
exchange markets.) Thus, the concept is described accurately as "external" currency
convertibility.
Since exchange control systems of many
countries formerly had not permitted the conversion of current earnings into dollars, the
introduction of external convertibility meant
that one aspect of discrimination against U.S.
goods or payments to the dollar area had disappeared. The move to convertibility in Europe and elsewhere signified that balance of
payments positions had strengthened and
that gold and dollar reserves had accumulated
Monthly Review • May 1960
sufficiently to permit gradual adoption of
principles of nondiscrimination and the removal of general restrictions on trade and
payments.
With external convertibility a reality, a
balance of payments justification for discriminatory quantitative restrictions on trade and
payments by residents of countries that introduced external convertibility required
critical survey. If external payments positions
had strengthened sufficiently to permit the
elimination of discriminatory treatment of
nonresident earnings of the domestic currency, what justification remained for the
discriminatory restriction of resident pa y11w11ts to tli<' United Stales as opposed to
over-all restriction of payments? Current
earnings of other currencies that had been
made convertible could be used to acquire
dollars. Thus, a surplus of receipts over payments in pounds sterling, for example, could
be used to settle deficits in dollars through
the conversion of pounds sterling into dollars
in foreign exchange markets. As the IMF
noted in the Tenth Annual Report on Exchange Restrictions, "The currency moves in
Europe at the encl of 1958 have special significance for th e general level of remaining
restrictions and, particularly, for the problem
of discrimination." And, after calling attention
to the strengthening of reserve and balance
of payments positions of Western European
countries as a group, the Report continued:
"If the present improvement continues, one
country after another should cease to have
any balance of payments reasons for continuing to maintain restrictions."
Substantial progress has been made since
the beginning of 1959 in the reduction of
the over-all level of restrictions on trade ancl
payments in Europe and in other parts of
the world as well, but the reductions of discriminatory restrictions of imports and other
paymen ts to the United States and Canada
perhaps have been most striking. Movements
13
Liberalization of
toward freer trade and payments are not,
however, entirely of recent origin. Canada
abolished all restrictions on payments in 1951.
Switzerland long has maintained a practically
unrestricted payments system. As early as
1950, member countries of the Organization
for European Economic Cooperation ( OEEC)
adopted a "Code of Liberalization" calling
for the elimination of quantitative restrictions
on trade with the United States and Canada
as well as on trade with member countries.
The Code called for the "liberalization" of
trade requiring each country to admit commodi tics either without licensing or with the
:111lomati · and imnwdialc issue of licenses
for the importation of foreign commodities.
Liberalization was to h<' ac ·ompaniccl by
automatic a1locatio11 of foreign exchange required for such imports, thus preventing the
reduction of commercial restrictions-such as
increases in import quotas-from being offset by more restrictive foreign exchange controls. The Code also called for the gradual
removal of restrictions on other types of payments by residents, such as payments for
travel abroad, insurance, and transfers of
earnings from subsidiaries to foreign parent
companies.
Reports of earlier progress of OEEC countries in liberalizing imports from the United
States and Canada are summarized in the
accompanying table, showing that the proportion of 1953 imports from the United
States and Canada that could enter the member countries free of quantitative restrictions
increased from 44 per cent on September 30,
Percentage Liberalization of Dollar Imports
By OEEC Member Countries
Based on 1953 imports from the United States and Canada
Food
and FoodRaw Manufactured
stuffs
Materials Products Total
September 30, 1954
64
44
27
44
January 1, 1956
71
55
36
54
May 1, 1957
73
67
42
61
SOURCE: OEEC, Liberalization of Europe's Dollar Trade, Second
Report, June 1957, p. 12.
14
1954, to 61 per cent at mid-1957. Imports by
countries such as Belgium, Luxembourg, and
Switzerland were relatively free of restrictions
at the end of 1954. Denmark, Germany, and
the United Kingdom, among others, took steps
to open markets to U.S. goods in 1955 and
1956. From early 1956 to mid-1957, Austria
and Germany made substantial progress in
liberalizing imports from the United States
and Canada. Germany increased the percentage liberalization from 68 per cent to
90 per cent of 1953 imports from these countries with a revision of restiictions in June
1956.
For many OEEC countries, liberalization
was slowed during the Su 'Z crisis. Still , none
of these cotmtrics restored quantitative r ·strictions formC'rly withdrawn, partly because
they were able to make use of accumulated
gold and dollar reserves and to draw upon
the credit facilities offered to member countries by the IMF.
The removal of restrictions, established or
maintained for balance of payments reasons
by European and other countries, accelerated
in 1959, following the announcement of external currency convertibility. One country
after another announced increases in import
quotas, broader participation of the United
States in these quotas, liberalization of imports
from or other payments to the United States,
and more lenient licensing of imports from
the United States where restrictions continued
in force. The United Kingdom, for example,
virtually eliminated restrictions on imports
from the United States in two major moves
during 1959 and the few products that continued to be subject to restriction were licensed more freely. The moves by the United
Kingdom generally were followed hy reductions in quantitative import restrictions by
other members of the sterling area - countries such as Australia, India, and British dependencies, whose economic ties with the
United Kingdom have led them to hold for-
World Trade and Payments
eign currency reserves in pounds sterling and
whose gold and dollar reserves are held centrally by Great Britain.
Practically all exchange restrictions on German residents were removed with the move
to convertibility and import restrictions were
reduced further in 1959. In October 1959,
Austria increased the list of liberalized raw
material imports from the United States to 99
per cent of the 1953 import base and finished
product imports were liberalized to the extent
of 93 per cent of 1953 imports. Finland increased quotas for certain import categories
and placed imports from th Unit d States
on the same basis as imports from OEEC
countries, therrhy incrC'asing the list of U. S.
commoditi s that can enter licens free . Norway opened a global quota to the Unit d
States for automobile imports effective on
January 1, 1960, and reported that liberalization of imports from the United States
amounted to 91 per cent of the total. Italy
liberalized imports from the dollar area in
June 1959 and again in January 1960, advancing the percentage of liberalized imports
from 20 per cent to 60 per cent. France took
additional steps to free imports from quantitative restrictions and increased liberalized
imports from the Unit d States from 56 per
cent to 86 per cent of the 1953 base. Limited
reductions in restrictions of Japanese imports
were announced late in 1959 and additional
measures were taken early in 1960 to open
Japanese markets to U. S. goods.
The products covered by these measures
included food products, raw materials, and a
wide range of consumer and producer manufactured goods. Some countries, while liberalizing trade and payments, have maintained
discriminatory quotas or prohibitions on some
products of great interest to the United
States. Furthermore, high tariffs in some
countries continue to serve as barriers to U.S.
exports and to the expansion of world trade.
Generally, however, the removal of restricMonthly Review •
May 1960
tions on imports from the United States must
be viewed as a development offering the
United States broader access to foreign markets in a wide range of commodities.
Meaning for the United States
Does the accelerated dismantling of trade
and payments restrictions that has accompanied improvement in foreign gold and dollar reserve positions portend advances in U.S.
exports and improvement in the U. S. balance
of payments? Since it is rarely possible to
distinguish the effects of trade liberalization
from the effects of oth r forces responsible for
a growth in exports, an answer to this qu stion probably can never he given with certainty. One thing is clear, however , namcJy,
that the ff cts are unlikely to b identified
by a sharp surge in a wide range of commodity sales abroad. Liberalization frequently is
preceded by freer licensing of restricted imports as a means of testing import responses
abroad . Moreover, the adaptation of U. S.
producers to new sales opportunities and the
fact that foreign consumers must be introduced to or be reacquainted with U.S. products means that the impact of liberalization
ordinarily can be expected to be gradual. The
attraction of foreign mark ts must be analyzed in the context of the improved competitive positions of foreign producers, a development suggesting the need for cautious
appraisal of the significance of freer trade
and payments for expanded U.S. sales
abroad.
Clearly, however, the lessening of quantitative import restrictions and the gradual removal of exchange restrictions, particularly
those that have discriminated against U.S.
goods, have provided access to markets formerly closed to U.S. producers. Liberalization
of trade and payments ha provided an important lubricant for the easing of U.S. payments
difficulties. It has not, however, relieved U.S.
producers of the task of competing effectively
15
Liberalization of World Trade and Payments
with foreign producers. This requires not
only the quotation of competitive prices, but
it also requires provision of credit facilities,
prompt delivery, and supplies of products
technically suited to the needs of foreign
consumers.
The opportunities afforded by liberalization of trade and payments abroad well may
be of crucial importance to the United States
in the adjustment of the foreign payments
problem. While the expansion of exports is
by no means assured by these developments
abroad, it is perhaps the most promising route
to an improvement in the U. S. payments position. Many alternative means of correcting
the foreign payments problem would r '(luire
sacrifice of oth r ohjc tives and these sa rific s must be weighed in choosing the appropriate measures to redress the balance of
payments. For example, the curtailment of
U. S. military outlays abroad and the improvement in the payments position which
would accompany such an action must be
weighed against the possible sacrifice of
adequate defense for the free world. Similarly, a reduced rate of growth and possible
political instability in less developed countries of the world are sacrifices which must
be considered when examining the improvements in the foreign payments position that
might accompany the withdrawal of Government aid to these countries. Resort to restriction of trade and payments, in violation
of objectives pursued by the United States
in th framing of the IMF Agreement and
the CATT, surely would he unfortunate' when
r al progr ss has h en made in the restoration of a system of multilat ral trade and payments over the past few years and when
there is promise of further progress.
BANKING IN THE TENTH DISTRICT
Loans
Deposits
Reserve
City
District
Member
Banks
and
States
PRICE INDEXES, UNITED STATES
Index
Reserve
Country
Member
Banks
City
Member
Country
Member
Banks
Banks
March 1960 Percentage Change From
Mar.
1960
Feb.
1.9 60
Mar.
1959
123.7
Consumer Price Index
(1947-49=100)
125.7
125.6
wholesale
(1947-49=100)
120.0
119.3 r
119.6
p rices Rec'd by Farmers
(1910- 14 = 100)
240
233
244
p rices Paid by Farmers
(1910- 14 = 100)
300
299
297 r
Price Index
r Revised.
TENTH DISTRICT BUSINESS INDICATORS
Feb.
Mar.
Feb .
Mar.
1960 1959
1960
1959
Feb .
1960
Mar. Feb. Mar.
1959 1960 1959
-1
+6
t
+9
-4
-4
-2
t
Colorado
-1
+11
t
+11
-4
-2
-3
t
Kansas
- 2
+2
t
+6
-1
-3
-3
t
Missouri *
+1
+1
+3
+18
- 4
- 5
-3
+3
Nebraska
- 1
+3
+1
+9
- 2
- 4
- 2
- 3
Tenth F. R. Dist.
New Mexico *
Oklahoma *
Wyoming
Percentage change-1960 from 1959
Year
to date
Year
to date
Mar.
+4
+4
-7
- 4
Denver
+11
+9
+1
+1
Wichita
- 6
0
- 18
- 14
+2
+4
- 11
- 3
+1
0
- 9
-3
0
+3
- 3
- 6
+3
+2
-1 0
-7
Tenth F. R. District
Kansas City
**
+1
+12
**
**
+2
+1
- 2
+4
t
+a
- 4
- 7
t
+3
Oklahoma City
**
**
t
+1
**
**
- 5
- 1
Tulsa
** No reserve cities in this state.
Value of
Department
Store Sales
Value of
Check
Payments
Mar.
**
*Tenth District portion only.
t less than 0.5 per cent.
16
District
and Principal
Metropolitan
Areas
Omaha
@FedFRASER