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September-October

1963

ON~·HLY REVIEW
KANS.

Agriculture in Our
Capitalistic Economy

page

The Payments PlightT rode Aspects
. .

page

page 16

Current Statistics

FEDERAL RESERVE BANK
OF KANSAS CITY

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is granted to reproduce any material in this
publication.

AGRICULTURE IN OUR
CAPITALISTIC ECONOMY

HE AGRICULTURAL sector of the American
economy is highly competitive. In thi s
environment, the economic conditions prevailing in agriculture have provided strong incentives for farmers to adopt the newer, more
effective farm practices developed by agri cu ltural experim ent station , th e U.S. Depa rtm ent
of Agri c ultur , a nd oth ers . The r suit has be n
an extremely dynami c industry with a hi gh d gr e of vari ability. The reso urce mix in the
industry h as been changing in such a manner
that less labor and more capital are being used.
The rapid pace of the changes can be illustrated by the shifts that took place in the relative importance of the different kinds of farm
inputs used from the early 1950's to the early
1960's. The U. S. Department of Agriculture
estimates changes in the different major input
groups for the last decade, measured in term s
of p r cent of total, to be:
Early Ea rly
1950's 1960's
Input Group
F arm labor
39
26
R eal estate
14
15
20
22
Power and machinery
Feed, seed, and livestock
13
9
4
6
Fertilizer and lime
14
18
Other
These changes emphasize the rapidity with
which farmers substituted other inputs for
labor inputs.
Farmers also we re quick to accept new technique developed through resea rch. Acceptance of innovation in the kinds of resources
used and in the methods by which they were
used enabled farmers to increase output per
unit of man-labor at a much faster rate than

Monthly Review •

September-October 1963

demand for farm products grew. With output
per unit of man-labor in agriculture having increased roughly four times as rapidly as consumption of fa rm products, substantial1y less
labor was needed to produce farm products in
the ea rly 1960' a compa red with th e ea rly
1950's. E nvironmental a nd other factor
fr quently made it diffi cult fo r labor th at had
be ome surplu s in agriculture to find acceptable altern ative em ploy ment. Since far m labor
wa provided largely by the farmer and hi s
family , unemployment did not prevail so long
as the individual had a piece of land to farm.
Underemployment in these conditions was hi gh,
however. Many underemployed farmers made
an intensive effort to become more fully employed by using new techniques, increasing
capital resources, and obtaining additional land.
These efforts encouraged rapid shift in the
use of farm inputs and in th e use of more
ca pital by farm ers. They also were instrumental
in maintaining a hi gh level of farm output,
despite the severe price-cost squeeze in the
industry.
The changes just described made American
agriculture the most productive in the world,
measured either in terms of output per manhour or in terms of cost per unit of product.
In fact, output per unit of man-labor increased at a substantially more rapid rate in
agriculture than it did for the dome tic economy as a whole during the period since World
War II. The industry provided the Nation's
consumers with abundant supplies of food and
other raw materials at low prices. Despite these
achievements, the industry continues to be
confronted with severe adjustment problems.

Agriculture in Our

aggregate gross income- rising from an average of $5,751 in 1950 to $11,061 in 1962because of the decline in number of farmers.
Average realized net farm income per farm increased from $2,3 34 in 1950 to $3,414 in
1962 as the smaller aggregate reali zed net
farm income was divided among fewer farmers .
The most recent data that enable a era ssection analysis to be m ade which wiJI show
variability among farmers were collected in
the 1960 Sample Survey of Agriculture . Survey
data are estimates based on figures obtained
for a sample of farms and , hence, are subj ect
to sampling errors. A di scuss ion of approximate mea ures of th ese sampling e rrors and
general measures of th e reliability of these
estimates is 1 iven in 1960 Sample Survey of
A1;rirnlture, Special R eports published by the
Bureau of the Census, U. S. Department of
Commerce. Data from the Sample Survey th at
are used in this article are statistically reliable
at generally accepted levels.
Survey data were classified by economic
class of farm on the basis of similar characteristics and size of operation. The farms were
grouped into two major categories-commercial farms and "other" farms- on the basis of

Available data indicate a continued rapid rate
of change and wide variability in output and
income, capital requirements, and use of fam1
credit on farms. Since these problems have
significant implications to all sectors of th e
economy, an effort will be made to show some
of the changes since 1950 and point out the
continuing wide variability.
OUTPUT

U. S. Department of Agriculture figures
indicate that farm output has increased by a
fourth since 1950, while the amount of labor
used and total number of farms declined approximately two fifth s. The only farms th at
increa sed in numbe r durin g this peri d were
th ose pro lucin g m re than $ I 0,000 of farm
products for sale annuaIJy.
Although total realized gross farm income
trended upward from $32.5 billion in 1950 to
$40.8 billion in 1962, aggregate realized net
farm income in the early l 960's averaged less
than in the early l 950's. The more rapid rate
of increase in farm production expenses than
in realized gross farm income accounts for this .
Realized gross income per farm in the
United States increased more rapidly th an did

Table 1
FARMS CLASSIFIED BY VALUE OF SALES BY OPERATORS, 1960
UNITED STATES

---

Economic Class
Commercial Farms
I
II
Ill
IV
V
VI

$40,000 and over
$20,000-$39,999
$10,000-$19,999
$5,000-$9,999
$2,500-$4,999
$50-$2,499

Other - VII -IX
Total

Number
of
Farms
(thousands)

---

Total
Value of
Farm Products Sold
(thousands)

Per Cent
of Total
Number

Average
Value of
Farm Products Sold
Per Farm

Per Cent
of Total
Value
Sold

2,265

69.6

$ 29,164,445

96.7

$ 12,882

106
228
490
591
543
307

3.2
7.0
15.1
18.2
16.7
9.4

10,050,195
5,919,950
6,667,950
4,188,364
1,913,975
424,011

33.3
19.7
22.1
13.9
6.3
1.4

95 ,235
26,014
13,599
7,090
3,528
1,379

988
3,2 53

30.4

982,445

3.3

994

$ 30,146,890

100.0

$ 9,268

->-

100.0

SOURCE: U. S. Departm ent of Commerce , U. S. Census of Agriculture : 1959, 1960 Sample Survey of Agriculture,
Special Reports.

Capitalistic Economy

total value of farm products sold. In general,
all farms with a value of sales of $2,500 or
more were classified as commercial. F arms
with sa les of $50 to $2,499 were class ifi ed as
commercial if the operator was under 65 years
of age and either did not work off th e farm
100 or more days during the yea r, or if his
income and that of hi s family from nonfarm
sou rces was Jess th an th e value of all prod ucts
sold. The remain ing fa rm s with a value of
sales of $50-$2,499 and institutiona l farm a nd
Jndi an reserv ati ons w re classified as "other."
The data in Table 1 indicate that operators
of fa rm s prod ucing $10,000 or more of farm
products for sale in 1960 accou nted for only
25 pe r ce nt of a ll operators bu t produ · d 75
pe r c ' Ill or th e total va lue o f fa rm product
sa les. Th
.2 per c nt of op rators producing
$40,000 or more of farm products for sale produ ced a third of a ll such items, whi le 40 per
cent of all operators producing less than
$2,500 worth of products for sale accounted
for only 5 per cent of the total.
Although a su bstantial proportion of the
operators of "other" fa rms do not depend to
a major extent on farming as a source of livelihood , many of this gro up do depend on farm
income to supplem ent meage r inco mes from
othe r so urce . It shou ld be pointed o ut a lso
that 44 pe r cent of all fa rm rs in 1960 we re
opera tin g com mercial farms with less tha n
$10,000 of sales, and a large proportion of
the e farme rs were underemployed in term s of
modem techniques. If cash operating expenses
are deducted from value of farm products sold,
the per farm average varied from $22,4 11 for
highest earning Class I farms to $339 for the
"oth er" fa rms category. The average remaining for Class VI farms- th e smaliest commerci al farms - wa $78 1 per farm. These da ta
con firm th a t famili es of a relat ively large proporti on of fa rm operators would have had a
meage r sub istence in 1960 unl ess th ei r farm
mcomes had been supplemented by nonfarm
sources.
Monthly Review •

Se ptember-October 1963

CAPITAL REQUIREMENTS

According to the Balance Sheet of Agriculture, the total dollar value of assets used
in the agri cultural indu stry increased from
$130.8 billion in 1950 to $207.3 billion in
1962- an increase of 58 p er cent. Although
higher rea l-estate prices accounted for a large
proportion of the increase, substantial increases
also occ urred in livestock, machinery, crop,
and ho usehold eq uipm ent inves tments.
Production expenses are anothe r indicator
of changi ng capital requirements . Total production expenses increased from $19 .3 billion in 1950 to $28.2 biIJio n in 1962- an increa se of 46 pe r ce nt . Thu , d spite the sha rp
decline in th amo unt of labo r us d a nd the
numb ' r or fa rm ' rs sin ce 1950, tota l ca pital
rcquirem nts of farm e rs have in rea ed sttbstantially .
The rapid ra te of substitution of capital for
labo r and th e resulting increase in size of farm
have caused an even more rapid increase in
capital requirements per farm than in the
aggregate. In 1950, the average value per farm
of assets used in production for the Nation was
computed at $17 ,193. By 1962 , the fi gure was
set at $4 7 ,632-an increase of 177 per cent
in 12 yea rs. If production ex pen es are used
as th indicator, th e p r fa rm average cha nged
from an estim ated $3 ,417 in 1950 to $7,647
in 1962- an increa e of 124 per cent.
Althou gh exactly comparable dat a are not
avai lable for measuring va ri ability in capital
req uirements as of 1960, the Sample Survey
does give estimates by economic class of farm
for value of land and buildings operated and
total cash operating expenses of farm operators.
Operators of Class I farms ha ndl ed an estim ated 22 per cent of the aggrega te investment
in farm land a nd buildings. The average value
o f land and bui ldings ope rated on th e e farms
was $266,95 9. Ave ra ge val ue pe r operator for
commercial far ms tended to decline sharply
with declining size of farm, as measu red by

Agriculture in Our
Table 2
ESTIMATED VALUE OF LAND AND BUILDINGS OPERATED
UNITED STATES

Per Cent
of All
Farms

Economic Class
Commercial Farms
I
II
Ill
IV
V
VI

- $40,000 and over
$20,000-$39,999
$10,000-$19,999
$5,000-$9,999
$2,500-$4,999
$50-$2,499

$ 113,859

88.2

$ 50,365

3.2
7.0
15.1
18.2
16.7
9.4

28,047
23,1 64
27,936
20,824
11 ,1 05
2,783

21.7
18.0
21.6
16.1
8.6
2.2

266,959
101,756
56,980
35,308
20,519
9,074

15,212

11.8

15,426

100.0

$ 39,753

100.0

Total

Per Cent
ofTotal
Value

69.6

30.4

Other- VII-IX

Total Value
of Land and
Buildings
(millions)

Average Per
Farm Value
of Land and
Buildings
Operated

---

$ 129,071

SO URCE : U. S. Department of Commerce , U. S. Census of Acrlculture: 1959, 1960 Sample Survey of A1rlculture,
Special Reports .

For the three smallest commercial classes, the
proportion of total investment operated fell
sharply with declining size of farm.
Value of land and buildings operated by the
"other" economic classes tended to be relatively high in relation to value of products sold
and the proportion of cash operating expenses
used by this group. This is to be expected,
since these farms, by definition, are either part-

economic class, and was only $9,074 for
operators of CJ ss VI farms - the smallest
commercial farm. The proportion of the total
value of land and buildings operated by farmers on the three classes of farms with sales of
$10,000 and over was about the same for each
class, since increasing numbers in each class
about offset the influence of declining average
size of investment as size of farm declined.

Table 3
ESTIMATED CASH OPERATING EXPENSES OF FARM OPERATORS
UNITED STATES
-~

Per Cent
of All
Farms

Economic Class
Commercial Farms
I - $40,000 and over
II - $20,000-$39,999
111 - $10,000-$19,999

IV - $5,000-$9,999
V - $2,500-$4,999
VI - $50-$"2,499
Other- VI I-IX

Total
--

Total
Cash
Operating
Expenses
(thousands)

Per Cent of
Total Cash
Operating
Expenses

Average
Per Farm
Cash
Operating
Expenses

69.6

$ 18,370,409

96.6

$ 8,114

3.2
7.0
15.1
18.2
16.7
9.4

7,685 ,1 46
3,573,237
3,719,623
2,247,407
960,935
184,061

40.4
18.8
19.6

72,824
15,702
7,586

11.8

3,804

5.0
1.0

1,772
599

30.4

647,123

3.4

655

100.0

$ 19,017,532

100.0

$ 5,847

---

SO URCE : U. S. Department of Commerce, U. S. Census of A1riculture : 1959, 1960 Sample Survey of A&riculture,
Special Reports .

Ca pita listic Economy

time, part-retirement, or abnormal-farms on
which the value of residential property is likely
to be high in relation to actual farming operations.
Estimates on cash operating expenses also
indicate wide variability among operators in
the amount of capital used. Operators of the
largest farms, which accounted for only 3.2
per cent of all operators, spent 40 per cent of
all cash operating expenses for the entire agricultural industry. The estimated average per
operator for these operators was $72,824.
Both total cash operating expenses and the
average per operator showed a strong tendency
to dimini h with declining size of farm . Alth ugh 9 .4 p r cent of a ll farm operators were
on the smallest comm rcial clas of farm , they
spent only 1 per cent of all cash operating expenses, or an average of $599 per farm.
These estimates show that the 25 per cent
of operators of farms with a sales value of
$10,000 or more per farm spent 79 per cent
of the cash operating expenses for the entire
agricultural industry. The other 75 per cent
spent only 21 per cent of the cash operating
expenses used in the industry in 1960. Thus,
the available data on both the value of the land
and building investment operated and cash
operating expenses indicate wide variability in
capital requirements among farms in the
United States.
USE OF FARM CREDIT

per farm would be roughly twice that for the
industry as a whole.
The 1960 Sample Survey indicated that
there is considerable concentration in the use
of credit by farmers. At the time of the Survey, it was estimated that 58 per cent of all
farm operators were indebted and had a total
outstanding debt of $16.8 billion. Farm landlords had an additional outstanding farm debt
estimated at $3 .1 billion.
Because of the limited size of the sample and
the desire to avoid undue risk of large sampling
errors in estimates for small groupings, it was
nece sa ry to combine economic classes when
different cross cla sification were made . The
combin ations mad w re las I and Ir, lass
HI and IV, and
la s V - IX. Operators of
DISTRIBUTION OF FARM OPERATOR DEBT
By Number of Operators and Average
Size of Debt
Per Cent

+Without Debt
With Debt

30
20

20,000 or more
5,000 - $19,999
ess than $ s,ooo
~

land II
Ill and IV
V - IX
Economic Class of Form

By Dollar Volume and Average Size of Debt
Per Cent

Rapidly changing capital requirements in
agriculture were reflected in the use of credit
by the industry. In 1950, farmers in the United
States had an estimated $12.5 billion worth of
credit outstanding at the beginning of the year.
It was estimated that farmers had $27.6 billion
worth of credit outstanding at the beginning
of 1962. These data indicate that farmers increased their use of credit, in the aggregate, by
121 per cent from 1950 to 1962. Because of
the declining number of farm ers, the per cent
increase in dollar volume of credit outstanding
Monthly Review •

September-October 1963

40
30
20
10

I an d 11
111 and IV
V - IX
Economic Closs of Farm
SOURCE : U. S. Depa rtment of Commerce , U. S. Census of Agriculture: 1959, 1960 Sample Survey of Agriculture.

Agriculture in Our Capitalistic Economy

Class I and II farms accounted for 10 per cent
of all operators-three fourths of whom were
indebted- produced 53 per cent of all farm
products, and held 41 per cent of the total outstanding debt. Operators of Class III and IV
farms accounted for 33 per cent of all operators- 70 per cent of whom were indebtedproduced 36 per cent of the farm products and
held 40 per cent of the total outstanding debt.
Operators of the small farms, Classes V-IX,
accounted for 57 per cent of all operators,
produced 11 per cent of the farm products and
held 19 per cent of the total outstanding debt.
Slightly Jess than half of these operators of
small farms had outstanding debt at the tim e
of the Sample Survey.
The dollar volum e of farm operator debt
outstanding also was hcc1vily conccntrat cl by
average size of debt. Six per cent of th e farm
operators with an average outstanding debt
of $20,000 or more held 53.2 per cent of the
total outstanding debt. An additional 19 per
cent of the operators with an average debt of
$5,000-$19,999 held 36.4 per cent of the outstanding debt. Thus, 25 per cent of the farm
operators held 90 per cent of the outstanding
farm operator debt at the time th e Sample Survey was taken in 1960. The remaining 75 per
cent who were either debt-free or had an average debt of Jc s th an $5,000 held only 10 per
cent of the outstanding operator debt.
SUMMARY AND CONCLUSIONS
F armers in the United States accepted innovation and increased their use of capital at
a rapid pace during the past quarter of a century. Available evidence indicates that these
changes continued unabated in the past decade.
The pace of these changes undoubtedly was
influenced by the competitive nature of the
agricultural industry in this capitalistic society.

The severe price-cost squeeze was a strong inducement for farm operators to employ all devices in their efforts to increase efficiency and
maintain profits.
The result has been a substantial change in
the resource base of the agricultural industry.
Capital has become a much more important
resource, whil e the amount of labor needed has
decl.ined sharply. These changes have had a
significant impact on many phases of economic
activity. Underemployed farmers have become
much more interested in labor markets. Individuals in urban areas have followed farm developments more closely. Urban marketsparticul arly those in dominantly rural areashave been inrtu need. Underemployed farm
labor ha s become compe titive in som no nform
labor mark ets. These chang s hav had a particular impact on in stituti o ns and individu als
engaged in the farm finance sec tor. Substantially fewer farmers are using more total credit
today as compared with a decade or two ago.
Furthermore, the kinds of financing needed by
farmers today are significantly different from
those needed in the past.
Census data that enable a cross-section
analysis of the agricultural industry to be m ade
as of 1960 indicate a continued wide degree of
variability among farms. Mu ch of thi s variability suggests that the same forces th at have been
operative during the past decade are likely to
continue for some time in the future. To th e
extent that these forces continue to operate, the
agricultural sector of the economy is likely to
remain relatively dynamic. Such developments
are likely to cause a continuation of the adjustment problems that have faced the agricultural industry . However, they also wi11 help
the Nation's farm indu stry to m aintain its position as the most efficient and productive agricultural plant in the world.

The Payments Plight
Urade ol-JpectJ

E of th e trade secto r durin g th e
postwa r period has bee n a continuo us
sou rce of strength to th e over-a ll U. S. ba la nceof-paymen ts positi o n. N eve rth e less, in 12 of th e
past 13 years , thi trade strength has no t been
sufficient to overcome the sho rtfa lls resultin g
from tra nsactio n o n other balance-of-payme nts acco unts. T he combi ned we ight o f U. S.
military ex pe nditures ahro;1d , priv ~1tc a nd pubIi · Pil'ts , and sizable c.tp it;_ d o utfl ows h~1s mo re
than offs t th ex cess ea rnin gs on th e trade
acco unt a well as from othe r so urce, of rece ipts . A seri es of de ficits o n th e over-all
U. S. ba la nce o f payments- of co nsid erable
magnitude since 195 8 -h as resulted and h as
been manifested in th e loss of gold by the
United States and by th e accumulation of other
short-te rm a nd liquid li a bilities in th e h a nds of
foreigners. This is th e esse nce of th e U . S. payments situ ation and two alternat ive appro aches
have been sugges te d fo r its a meli oration .
One a lte rn at ive is to vi ew the problem as a
. hortfa ll in rece ipts. Con cquc ntly, a ny act ion
on th e pa rt of the United States tending to
increa e th e level of receipts would a id in resto rin g equilibrium in th e balance of payments.
On the other h and , an excessive level of U. S.
expenditures abroad also m ay be rega rded as
th e source of the U. S . p ayments difficulties .
Thus, it can also be argued that a solution to
the deficit dilemma may be found in a retrench m ent in th e scale of U . S. foreign sp ending
activities, both public and priva te.
It rem a ins to be seen , howeve r, whi c h co urse
of act ion , or combin ati o n o f action s, ca n reasona bly be ex pected to bear fruit in th e nea r
future. Thi s articl e exa mines both a pproac hes,
with the m ajo r emph as is on the role of th e
ERFORMAN

Monthly Review •

September-October 1963

trade sector in easi ng the balance-of-payments
pressure on th e United States.
A NEAR-TERM VIEW OF ALTERNATIVES

Of the two approaches to the U. S. paym e nts dilemma- increasing receipts or reducin g expe nditure - th e latte r will be considered
lir ·t.
xpe nditures fo r impo rt of good s and
services, inte res t a nd dividend p.1ym ents to fore ign inves tor!-> , ;ind military outlays to mainli1in U . S. troops abroad arc g ' nera lly acco unted fo r in th e ·atcgo ry called urre nt A cco unt
- o ne of severa l major acco unts which compri se th e ba l,m ce of payments.
In add ition to cyclical changes in over-all
demand , imports of goods depend to a large
extent on such fac tors as rela tive p rice, quality ,
and availability. There is little reason to suppose th at the United States is prepared to invoke sub tanti ally grea ter direct controls on
imported good s in o rder to slow down the ir
e ntry into th e United State . The rece nt p assage o f th e Trade Ex pa nsio n Act is indicative
o f th e de ire n th e part of th e United Sta te
to libera li ze foreign trade. In addition , the
rea li zati o n th a t effo rts to res trict imports inva ri a bly call forth re tali a tion, seems to warra nt th e observation that increased trade restri ction s by the United States are unlikely in
the nea r fut ure. However, th e effects of risin g prices a nd costs abroa d relative to the
United States , as well as press ure o n forei gn
ca pac ity which wi ll stretc h out de live ry time s,
m ay bring J bo ut some rel a tive declin e in th e
le ve l o f U. S. impo rts. Th e e m a rk e t forc e
do no t o p rate with dramatic suddenn ess, but
a rc opera ti ve over lo nge r periods of time a nd ,
as a con sequence , th ey cannot be reli ed on to

The Payments Plight -

diminish U. S. imports rapidly in the near
future. F ive years ot relative price stability in
the United States, however, has narrowed the
gap between domestic and foreign prices. Although merchandise imports have not declined
in absolute terms relative to earlier levels, in
recent years they have risen more slowly than
the gross national product. Thus, one of the
consequences of U. S. price stability has been
to mitiga te a ny deterioration of the U. S. competitive position in the face of cyclical developments which favored substantially higher levels
of imports. In the future, it may be noted,
th ose same market forces which have raised
the prices o f foreign goods may temporarily be
cir umvented to some extent by foreign contro ls designed to dampen inflationary press ures
abroad. Recent anti-infla tion ary actions taken
by th e French government illu strate thi s.
hanges in the services component of C urrent Account are influenced by the vast gulf
between incomes, and prices for most personal
servi ces here and abroad. This disparity,
coupl ed with the continuing upward trend of
fo reign travel by Americans, seems to point
toward increased U. S. tourist outlays abroad.
In the case of transport services, the picture
is somewhat mixed. U. S. international air
ca rrie r have demonstrated a n increasingly aggressive competitive conduct. This is refl ected
in th eir recent efforts to secure rate reductions
fo r both passenger and freight movements. On
th e oth e r hand, cost di sp a rities between foreign
and U. S. merchant marine services indicate
th at the United States is under a sizable competitive handicap in the ocean carriage of foreign trade.
Military outlays to maintain U. S. troops
abroad account for a sizable net drain on th e
bala nce of payments, yet th e e commitments
are not prima rily a functi on of economics,
but are dependent on national security consideratio ns. The United States is attempting to
cu rtail these ex penditures through the redeploy ment of troops from overseas to the continental United States, as well as by eliminating

certain overseas facilities no longer regarded
as strategically necessary in light of recent developments in the U. S. military transport capabilities. Despite these efforts, as well as increased effo rts on the part of the U. S. allies
to undertake a larger financial responsibility
for their own defen se, ass uming that internationa l tensions remain hi gh, such outlays may
still be ex pected to continue at relatively high
levels in the near future .
Income ea rned by foreigners on investments
in th e United Sta tes is quite small relative to
the volume of interest and dividend returns to
Americans as a res ult of U. S. investments
overseas. Beca use of th e small magnitude of
this income, any diminution in it would afford
little imp rovement in the over-all U. S. balance of payments. As a matte r of fact, increased efforts arc being made to attract foreign inves tors, which would have a favorable
effect on the U. S. deficit now even though it
would res ult in a higher future level of interest
and dividend payments to foreigners.
The Unilateral Account, excluding military
grant-aid, has remained remarkably stable since
1952. This account- which includes private
and public gifts- has averaged approximately
$2.4 billion a year, a nd has moved within a
relatively narrow range of plu s o r minu s $1 50$200 million. To the extent that some of the
gra nts o r gifts enable fo reigners to purch ase
U. S. goods, or if such grants by the Governmen t are tied pa rtly to U. S. procurement, a
diminution in this account would result in a
lower level of U . S. exports. In this connection, it is interesting to note that since 1960
the volume of ti ed aid has risen in each successive yea r. A decrease in the level of Unilateral Transfers, th erefore, would not necessa rily res ult in a n equiv alent improvement in
th e ove r-all U. S. balance of payme nts. Considera tions gove rning these outlays for th e
mo t part have been political, diplomatic, and
hum ane, rather th an economic. A ssuming that
such conside rati o ns will continue to underlie
these ex penditures, th ei r future behavior will

Trade Aspects

be largely independent of changing cost-price
relation hips here and abroad .
Private and U. S. Government capital outflows are recorded in the Capital Account.
These movements include both short- and longterm outflows and may take several forms in
response to different motives. U. S. Government nonmilitary capital outlay are made in
most instances on a long-term basis and are
essentially for developmental reasons. Private
capital movements, on the other hand, include
short- and long-term flows and are associated
with the normal profitseeking motives on the
pa rt of the investors. Short-term interest rate
differentials between th e United States and
abroad, as well as the expcctati n of higher
rates of retu rn o n inves ted capita l than may be
earned in the United States, provide stimulus
for the sho rt- and long-term U. S. capital outflows . While short-term outflows involve the
building up of dollar balances held abroad by
Americans or an increase in similar balances
held in the United States by foreigners, longterm movements take other forms. They may
be either "portfolio" investments-the purchase
of foreign stocks or bonds-or " direct" investment in actual physical plant and equipment
abroad o r in the acquisition of a controlling
interest in a fo reign corporation.
Altho ugh all capital outfl ows have an immedi ately un favo rab le impact on the U . S. balance-of-payments position , th ere are other dimensions to th em which should also be considered. These considerations revolve around
the subsequent beneficial effects of capital
movements on U. S. international receipts, and
open the door for a discussion of the role of
receipts in the b alance-of-payments problem.
While it h as been noted that capital outflows exe rt an adverse effect upon the U. S.
payments position , it is also true th at part of
the fund s which flow abroad help to provide
a share of th e purchasing power needed to enable foreigners to acquire U. S. goods which
might otherwi se h ave gone unsold . In addi tion , direct U. S. investments abroad have cerMonthly Review •

September-October 1963

tain salutary effects such as an increase in the
demand fo r U. S. capital equipment and materials for foreign subsidiaries . Similarly, both
direct and portfolio investments abroad involve
future reverse flows of interest and dividend
payments to Americans. H ere it may be noted
tha t an important so urce of receipts for the
United States has been from such investments
made in ea rli er periods. The level of U . S.
investm ent income h as exceeded the annual
volume of U. S. long-te rm capital outflows in
recent years and it is reasonable to expect future gains even if U. S. capital outlays remain
consta nt. Altho ugh future U. S. receipts would
be further en hanced by an increa e in the current I vc l of U. S. ca pital exports, many regard such outfl ow with sc riou co ncern . '
Th us, any apprai ·a l of the impact of capital
o utfl ow on th over-all U. S. bala nce-of-payments position involves balanci ng the immediate costs against the attendant future benefits.
To pursue th e receipts approach further, it is
necessa ry to consider elements of the balance
of payments other than the Capital Account.
In this connection, some of the comments
made in earlier sections have touched upon
considerations which are pertinent here- as for
example, th e for mer obse rvations relative to
foreign touri sm and to shipping. Assuming that
th e present intern ational defen e posture remain cs enti ally th e same, a decl ine in U. S.
military outlays abroad may not necessa rily
involve th e over-all assumption of the e defense
req uirements by foreign governments and thereby, perhaps, increased military purchases in the
United States. The recent airlift of some
16,000 U . S. combat troops to Europe was apparently a test to determine whether the United
States can redeploy troops in the United States
lThe proposed interes t equa lization tax on U . S. purchases of fo reign ecurities is designed to discourage,
or at lea t to diminish to some extent, capita l outflows
from the United Sta tes. Similarly, upwa rd pre sure by
the monetary authorities on short-term interest rates
has been pur ued as a m eans of stemming the tide of
capital outflows.

The Payments Plight -

without at the same time imposing unduly
higher defense burdens on its allies. Although
such a cha nge would definitely reduce the net
U. S. outflow on this account, its impact in
term s of increased U . S. receipts is uncertain.
T he preceding remarks serve to outline briefly some of the significant factors influenci ng
severa l majo r items in the U. S. international
pay ments acco unt, as well as to provide a
quick overview of the current sta tu of those
accounts. Of all the various international economic transact ions, however, merchandise exports account for the largest dollar volume and ,
as a consequence, exert th e greatest leverage
efTcc t on th e vcr-a ll payments balance. T he
r maindcr of th e article dea ls with thi s a ll-impo rtant sec to r, attempts to show some of the
changes which have t·:1ken place in it during
the po twar period, and a lso give som attention to factors involved in increasing the volume of U. S. exports.
THE COMPETITIVE PICTURE

A consequence of recent U. S. balance-ofpayments difficulties has been a rather critical
reappraisal of the competitive strength of th e
United States. While opinions have varied in
degree, they h ave stressed a decline in the
ability of th e United Sta tes to compete successfully in world markets. The postwar decline in
th e U.S. share of total world ex ports, as well
as slippage in th e share of specific classes of
export commodities, has been cited by many
as evidence of competitive deterioration. Yet,
during this same period, the United States has
recorded continuous, and for the most part
substantial, fa vorable balances on its trade account-a perform ance which tends to result in
some confusion among those attemptin g to
make a substantive assessment of the U. S.
competitive strength.
Jn an ab o lute sense, it would be extremely
difficult to argue th at the United States is at
present, or has been in the pa st characterized
by competitive weakness. Table 1 shows the
net U. S. posi tion on balance of trade during

the entire postwa r period. The export surplus
as a per cent of total U. S. exports-the ''export ratio"-gives some indication of the latitude which the trade sector allows with respect
to undertaking new intern ational fin ancial obligations or meeting existing ones. Although
cyclical factors, as well as others, can influence
th e over-all trade balance, as well as the export ratio, it still can serve as a use ful fi rst
approxim ation of a country's ability to compete
succe sf ully in international ma rkets.
The yea rs 1946 through 1949 were marked
by an extreme export ratio o f more th an
50 p r cent- due largely to the wartime destruction or b th J apancse a nd Western uropcan productive capab iliti s. It d clincd by
nea rly four fifths durin g 19 0 . Fo r th e e ntire
d ·cac.k subseq uent to 1950, thi s rat io averaged
approxima tely 18.4 per cent, with the years
l 956 and 1957 characterized by well above
average marks as a consequence of a surge in
European investment activi ti es in 1956 and
the Suez episode which bolstered export figures
for 1957. The smallest export ratio of the entire postwar period-in 1959- was due to a
large cyclical ri se in imports of nearly one fifth
while exports rema ined essenti ally unch anged.
Table 1

NET U. S. FOREIGN TRADE POSITION *

Year

Excess of E;~o;!?c;~lts
Merchandise Merchandise Exports over of Total
Exports
Imports
Imports U.S. Exports
(Millions of dollars)
-$ 3,094
$ 1,960
$ 1,134
36.7

1938
1946-49
Average
12,556
6,1 26
6,430
51.2
1950
9,993
8,874
1,119
11.2
1951
I
13,96 7
10,998
2,969
21.3
1952
13,204
10,753
2,451
18.6
1953
12,263
10,914
1,349
11.0
1954
12,855
10,292
2, 563
19.9
1955
14,294
11,491
2,803
19.6
1956
17,338
12,774
4,564
26.3
1957
19,507
13,255
6,252
32.1
1958
16,373
13,255
3,118
19.0
1959
16,406
15,627
779
4.7
1960
19,609
15,017
4,592
23.4
1961
20,152
14,713
5,439
27.0
1~9~62~ ~ -2_,..
0 ~90~1~,..__16=3=9~6 _...~_;_,
4 =50=5~ ~
21=-..6
:.;i----,-_

* as e on exports in c u ing re expor s an genera impo rt s. a a
for expo rts exclude mi litary grant-ai d for 1950 and sub seq uent
year s.
SOURCE : U. S. Department of Commerce .

Trade Aspects

During the past 3 years, this ratio averaged 24
per cent- fully a third hi gher than for the preceding decade, a lth ough it showed considerable
variation- and a string of positive balances on
the trade acco unt were reco rded whi ch we re
exceeded only during 1956 a nd 1957 jn the
precedin g IO yea rs. On balance th en, any
doubt · concerning the over-all U. S. competiti ve trength mu st be conditional.
ln sp ite of the apparent stren gth of the
United States in world markets, as evidenced
by th e siza ble a nd favorable trade balances
durin g th e postwa r pe riod , th ere is still reason
for leg itim ate co nce rn with th e awa reness th at
the le vel or
. inte rn a ti o na l fin a nc ia l c mmitm e nts ·o uld more ad equat e ly be acco1111110c.l:tt cd by a still Pf"C:tler c.:o mretitive r e rfornnnce
by U. S. indu try. 13 ca us a ga in in r cc ipts
from th trad e ector m ay help to a ll ev ia te some
of th e payme nts pressures the United Sta tes has
bee n subj ec ted to , the competitive ability of
th e United States bears hea vily on the e ntire
balance-of-payments picture. In this connection , the accompanying chart traces the shifts
in th e composition of U. S. exports and imports by broad economic class during much of
th e postwa r period and provides some ev idence

to affirm a relative d ecli ne in the U. S. compe tit ive p os ition.
1n looking at the composition of U. S. exports, the dominant po ition of finished manufac tures is readi ly apparen t a nd demonstrates
a remarkable ta bility in the over-all export
picture- acco unting for approxi mate ly 60 per
cent o r more of total receip ts throughout the
e ntire pe riod.
qually impre sive has been
the re la tive stab ility of crude m ate rials and
semim a nufactures, and food stuffs during this
sa me period, although in the case of foodstuffs
a sli ght ri sing tre nd i. perceptible. From thi s,
it mi ght be co nc luded that the United State
has m an ~1°ed to m a intain th e sa me de <T ree of
c.:om p;1r;1tive adv a nt;1 l in th ese variou s o m modity lin es and ·crn sequ ' ntl y ha s suffcrul n o
co mp titivc d c t ri ora tion in th e ir produ ti o n .
On th e import s id e, howe ve r, stron g evidence
indicates th a t th e United State h as undergone
some erosion in its co mpetitive position. While
imports of crude m aterials a nd semimanufactures , and foodstuffs h ave show n a slight downwa rd trend in the past 13 yea rs, the important
fi nish ed manufactures group shows a substantial rise- nea rl y doubling when taken as a perce ntage o f tota l imports, a nd almost trebling

U. S. FOREIGN TRADE BY ECONOMIC CLASS
Per Cen t

Per Cen1

IMPORTS

EXPORTS

r--..... ' ,._ _ _,, ,-.... ,
II

, ,__ ,,,,_,-'

NET

+8
/,.

Finished Manufactures

50 /

----

- - , Crude Materials and
' ~mi manufactures

______ ,-

40
Crude Materials and
Semi manufactures

\
30

Billions of Do lla rs
+10

\
\_...-----

../""'-~'~,'

,,
30

\,,'

. , ..---

Finished

.,,; 'Manufactures

Average

,. ,,... •·\ Finished
' , Manufactures

1~ 3L8---,'5-'
o-..,..
'5-5....,.'5_.._6_.--:, 5-'-8--'--:, 6:-'-:o--'---,-,6:-'-:2--'

BALANCES

- -_./

Foodstuffs

-2

~9 3._8_ ,' 5~
-o -.,....
'5-5 ....,.
, s~s--'---,, 5~8~---,,6~0~---,,6~2__.
Average

Foodstuffs J"
Crude Materials
and Semimonufoctures

- i9 3._8_,',5--o~ -,,55---,'5,.._6__.c.......,..,
, 5,...,8__.---,, 6_._o__._
, 6~2__.
Average

• Based on exports including reexports and general Imports. Data for exports exclude military grant-aid for 1950 and subsequent years .
SOURCES: Data for 1938 only from Historical Statistics; data for 1950 through 1962 from U. S. Department of Commerce , Overseas Business
Reports.

Monthly Review •

Septem ber-October 1963

The Payments Plight -

in terms of the dollar volume of imports. Although it is logical to assume that a portion of
this rise in imports of finished manufactures
is purely the result of a rising level of national
income in the United States, it should be
recognized that this is also a reflection of increasingly aggressive worldwide competition in
product lines which have been regarded here
as exclusively American.
Table 2 shows how the U. S. position in
manufacturing exports has shifted in recent
years- with the most pronounced weaken ing
occurring since 1958. The performance of the
Uni ted Kingdom closely parallels that of the
United Stat , while France, with few exceptions, shows little change in its shar of world
m,rnufacturing xp rts. On th
ther hand ,
W ·t Germany, Italy , and Japan have m ade
strong inroads into world markets in the last
d cade. It would be erroneo us to conclude,
however, that this tum of events was altogether
a manifestation of an inherent competitive deterioration by the United States. Many diverse
factors-including some over which the United
States had no control-were operative during
this period. Part of the decline in the U. S.
share of manufacturing exports was simply the
result of a relat ive decline in th e total level of
goods imported by Latin America and anada
Table 2
SHARES OF LEADING INDUSTRIAL COUNTRIES
IN WORLD EXPORTS OF MANUFACTURES, 1953-62 *
AS A PER CENT OF TOT AL

Year

1953
1954
1955
1956
1957
1958
1959
1960
1961
1962

United
United
West
States** Kingdom Germany France

26.2
25 .3
24.7
25.4
25.5
23.4
21.3
21.7
20.6
19.9

20.9
20.0
19.3
18.7
17.8
17.7
17.3
15.9
15.8
15.2

13.4
14.9
15.6
16.5
17.6
18.6
19.2
19,4
20.4
20.1

9.1
9.1
9.4
7.9
8.0
8. 7
9.2
9.7
9.5
9.2

Italy

3.3
3.2
3.4
3.6
3.8
4.1
4.4

5.2
5.7
6.1

Six
Other
Japan Countriest

3.8
4.7
5.2
5.7
6.0
6.0
6.7
6.9
6.9
7.5

23.4
22 .8
22 .6
22.2
21.2
21.5
21.9
21.2
21.2
22.0

• The total on wh ic h the percentages are calculated consists only of exports of
manufa ctures- Standa rd Industrial Trade Classificat ions (SITC ) Sections 5-8- from
the co untrie s included in the table , wh ic h account for about 90 per cent of worl d
exports of manufa ctures . Armaments are excluded .
• • The U. S. figures and th e world total exclude U. S. special category exports
through out.
t Belg i um , Luxembourg, Canada , Netherlands, Sweden , and Switzerland .
SOURCE: The Brook ings Inst i tution, Washington, D. C. : The United States Balance of
Payments in 1968, p. 65 .

- markets which had accounted for upwards
of 40 per cent of all U. S. exports prior to
1960. Moreover, the U. S. proportion of all
imports taken by these areas also has fallen.
In addition , the phenomenal growth of industrial capacity-especially in Western Europe
and Japan, and largely related to the rebuilding
of war-damaged plant- created export potential which had heretofore been largely nonexi tent and significa ntly shortened the technological lead the United States forme rly enjoyed in
many sophisticated product lines. A gain in
intra-European trade as a consequence of the
f rmation of the Common M arket and the
uropean Free Trade Association may also
hav s rv d to dampen U. S. exp rt opportunitie in these markets.
It would b qually rroneous, howev r, to
conclude that pure price considerations- indicative of an actual weakening in the fundamental competitive posture of the United States
-were not at least responsible in part for the
relative U. S. decline in world markets. In this
connection, it is quite significant to note that
numerous studies on this subject appear to
corroborate the view that relative price movements and changes in export shares positions
arc closely correlated. Substanti al gains in the
export of manufacture made by Japan, West
Germany, and ltaly ca n be clo ely associated
with favorab le unit cost developments occaioned by rapid productivity gains in these
countries . In sharp contrast are the losses suffe red by the United States and the United Kingdom which may be related to perceptibly higher
unit costs as a result of much slower productivity growth during much of the 1950's.
THE OUTLOOK

If the United States had not voluntarily assum ed a tremendous burden of international
obligation during the po twar period , the issue
of competiveness and its payments implications
mi ght currently be of far less consequence. The
economic resurgence in Western E urope and
Japan would have represented simply a ration-

Trode Aspects

aJization of world trade toward a more normal
pattern, rather than a cause of some anxiety on
the part of the United States- one end product
of which is the somewhat paradoxical conclusion that the United States is "strong," but not
·'strong enough. " In light of these even ts, however, and the subsequent deterioration in the
U. S. balance-of-payments position, questions
of trade and competitive strength have assumed
a position of primacy, and quite logically so
in view of the importance of the trade sector
in the over-all balance-of-payments scheme.
The past must be drawn upon in attempting
to assess th e future course of event in th e
trade sec tor. While wage and productivity developments on th e Co ntin ent and in Japan
durin(I th e 1953 -58 period favored foreign produ ce rs or manufactur d goods, rel ative U. S.
wag
tab ility and impressive productivity
growth since 1959 appear to have operated in
favor of the United States, thereby narrowing
the relative U. S. price disadvantage in export
markets. Although gains from these developments have for the most part been in the form
of maintaining the U. S. competitive position,
the situation doe s augur well for possible future
improvement. Similarly, continued high levels
of econo mic growth , both in Europe and Japan ,
imply some increa e in th e level of U . S. export · to those areas merely as a result of thei r
rising levels of national income. In th e case
of the ontinent, howeve r, any optimi m must
be tempered by an awa reness that the further
lowering of barriers to intra-European trade
may result in some additional degree of trade
diversion which would tend to limit any potential U. S. gain in the export of manufactured
goods. Although the results of the forthcoming
tariff negotiations are indeterminate at thi s
tim e, th e aforementioned consideration, along
with th e rea li zatio n th at an increasingly restrictive agricultural policy on the part of the European Common Market must adversely affect
the future m ark et for U. S. farm products, sugge ts that sizable gai ns in U. S. exports to
Western Europe will not be won easily.
Monthly Review •

September-October 1963

The prospects for future assistance to the
United States through substantially expanded
trade with Canada, Latin America, and Africa
are somewhat dubious. Even if these areas were
capable of absorbing a sufficient volume of
added U. S. exports to have a favorable net
impact on the U. S. balance-of-p ayments position, one of the conditions necessa ry for an
expa nded volume of trade is the existence of
adequate international reserves to accommodate the increase. An examination of the internation al financial scene suggests not only that
th ese three areas in question are in a poor position to finance a greatly increased volume of
trade with th e United States but, add ition ally ,
that Western Europe alone appears to have th~
wherewithal to do so . Ironically , it is in this
same a rca that prospects for substantially inc reased U. S. trade face their strongest challenge. Sizable U. S. export ga ins to Canada ,
Latin America, and Africa may only be accomplished as these countries acquire the necessary financing through increased exports on
their part, or by means of capital imports. To
the ex ten t that the United States is the source
of these funds, however, the net gain on the
U. S. balance of payments from increased exports to these areas i th reby reduced.
There is every rea so n to be gratified at the
renewed inte rest which the Admini tration and
the public-at-large are taking in the promotion
of U. S. ex port activities. Certainly, any gains
in the trade sector will be of assistance in compensating for the short-falls in th e other balance-of-payments accounts. However, the evidence presented suggests that the outlook for
any substantial improvement in the U. S. payments position through the medium of increased
trade in the near future is not assured. In the
fin al analy i , it doe not appear as though
the trad e sector alone will provide the panacea
for th e U. S. payment quandary. For the fu ture then, continuou pre sure and an imaginative and resourceful attack on many front
- including trade- will apparently be required
to resolve the payments plight.

BANKING IN THE TENTH DISTRICT

Reserve
City
Member
Banks

District
and

Loans

Deposits

Loans
Country
Member
Banks

Reserve
City
Mem ber
Ban ks

Rese rve
City
Member
Banks

Country
Member
Banks

Deposits
Reserve
City
Member
Banks

Country
Member
Ban ks

July 1963 Perc entage Change From
Aug. 1963 Percentage Change From
- -, - - , - - , - - - - r - - - . -- - , - - ~ -- -- ~ 1 - ~ - - July Aug. July Aug. July Aug. July Aug. June July Ju ne July June July June July
1963 1962 1963 1962 1963 1962 1963 1962 1963 1962 1963 1962 1963 1962 1963 1962

States

Tenth F. R. Dist.
Colorado
Kansas
Mi sso uri *
N braska
N wM xi co*
Ok lahoma*
Wyoming

t +9
- 1 +1 0
**
**

- 1 + 12
+l +18
- 2 + 5

t + 14

- 1
- 1

- 1
- 3
+ 1 + 16 - 4
**

13
**
-u

* Tenth District portio n on ly .

16
!--9
17

+ 13

- 2

+ 2 + 10
- 2 +3

+ l +1 3
**
**

+ 16
- 2 + 7

+ l
**

+ 7
**

+ 7
+ 11

- 3

- 1

+ 4

- 1

+ 3 + 12

- 3

+ l

t
2

4
I6

I 1 + 15
,,*
**

- 1
I 2

+ 1 + 1
**
**

l
l
3
2
2

+
+
+
I
-I

- 1
1

- 1

+ l

t
t

- 2 + 3
- 2 + 2
**
**

+ 9

I l

+ _1_4....__*_
* ...___
* "__.___
+ ~ _±_~ ~

I 13

13
I 16

I 3 -I 18

* _ * \__.± l_ -=:I- 1~ ~ **_

+
+
-t
-I

4
6
5
9
7

tL ss th an 0 .5 p r c ent.

*'* No reserv e citi s in t hi s state.

PRICE INDEXES, UNITED STATES
Index
Consumer Price Index (195 7-59 = 100)............
Wholesale Price Index (1957-59 = 100) ............
Prices Received by Farmers (1910-14 = 100). .. .
Prices Paid by Farmers (1910-14 = 100) ........ .

Aug.
1963

July
1963

June
1963

Aug.
1962

July
1962

107.1
100.4
242
311

107.1
100.6 r
245
312

106.6
100.3
241
311

105.5
100.5
244
305

105.5
100.4
240
305

r Revised.

TENTH DISTRICT BUSINESS INDI CATORS
Va lue of
Check
Payments

District
and Principal

Percentage change from previous yea r

Met ro po I itan
Areas
Tenth Federal Reserve District.. .... ..
Denver........... .. .. ......................... .
Wichita ....................................... .
Kansas City ............ ................... ..
Omaha ...... .. ........... .. ................... .
Oklahoma City ...... ...................... .
Tulsa .......................................... .

Value of
Department
Store Sales

Aug.

July

Eigh t
Mont hs

Aug.

July

Eight
Mont hs

1963

0
- 5

+ 10
+1 6
8

+ 3
+ 4
0

+ 8
+ 13

+ 8
+ 12

+ 4

+ 12

+
+
+
-

+ 6
+ 11
+ 6
+ 6
+3

+ 4
+2
- 6
+6
- 6

+ 7
+ 12
+ l

4
3
8
4

+
+
+
+

7
9
5
2

Full text of Economic Review (Federal Reserve Bank of Kansas City) : September-October 1963

FRASER