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FEDERAL RESERVE BANK
OF NEW YORK
Circular No. 5 0 2 2 1
L February 19, 1965 J
r
Role of Federal Reserve System, Banks, and Other Financial
Institutions in President’ s Balance of Payments Program
To All Banks and Other Financial Institutions
in the Second Federal Reserve District:
F or your information, enclosed are copies of remarks and a chart presenta
tion made yesterday at meetings in Washington on the President’s Balance of
Payments Program, as follow s:
Remarks by the Honorable Douglas Dillon, Secretary of the Treasury, at the
White House Conference on the Balance of Payments
Remarks of Wm. McC. Martin, Jr., Chairman, Board of Governors of the Federal
Reserve System, to representatives of bank and nonbank financial institutions
with respect to the President’s Balance of Payments Program
Remarks of J. L. Robertson, Member of the Board of Governors of the Federal
Reserve System, to representatives of banks and other financial institutions
with respect to the President’s Balance of Payments Program
Chart presentation, “ Salient Developments in the U. S. Balance of Payments”
A d d itio n a l co p ie s o f the en closu res w ill be fu rn ish ed u pon request.
A
lfred
H
ayes,
President.
TREASURY DEPARTMENT
Washington
REMARKS BY THE HONORABLE DOUGLAS DILLON
SECRETARY OF THE TREASURY
AT THE WHITE HOUSE CONFERENCE
ON THE BALANCE OF PAYMENTS
THURSDAY, FEBRUARY 18, 1965
Today we stand at a decisive point in our drive to end our
balance of payments deficits.
Last year, our deficit on regular transactions was $3 billion -a disappointingly small improvement over the $3-1/4 billion deficit
of 1963, and far too large a figure for us to accept passively
after four years of strong and sustained effort to end that deficit.
But while to cite these overall figures is to throw into bold
relief the challenge before us, it is also to obscure the very real
and lasting progress that our program of the past four years has
achieved.
We have cut the annual dollar outlay for foreign aid by almost
$500 million.
Today a full 85 percent of our foreign aid
commitments go for American goods and services.
We have also
trimmed our net military expenditures abroad from $2.7 billion in
1960 to $2.0 billion last year -- a saving of $700 million despite
rising costs abroad.
We have made an intensive effort to encourage American exports.
Such measures as last year's tax cut, the liberalized depreciation
allowances and the investment credit of 1962 -- and above all the
maintenance of wage price stability -- have not only helped
generate greater incomes, profits and incentives, but have also
helped translate them into greater productivity and thus into greater
American competitiveness in world markets.
This accomplishment, along with numerous other measures to
aid exports directly, has brought rich rewards -- to American
business and to our balance of payments.
Our commercial exports -those not financed by the government -- last year reached a level
of $22.4 billion, 28 percent higher than in 1960 -- thus giving
us a commercial trade surplus of $3.7 billion, $900 million larger
than in 1960.
- 2 These efforts -- coupled with an increase of nearly $1.9
billion in our income from foreign investment -- have brought us
about $3.9 billion worth of balance of payments improvement over the
past four years -- enough, all else aside, to have brought actual
balance in our payments last year.
Instead, we had
a deficit of $3 billion.
Why?
One reason is the net rise of some $400 million in our travel
and tourist deficit since 1960.
But the major reason is that since
1960 we have also had a rise of $2.5 billion in annual private
capital outflows -- $2 billion of which occurred last year.
Unless
we curb these outflows all our other efforts will be nullified.
And to curb them we need your help.
The Interest Equalization Tax held last year's outflow of
capital into foreign securities under $700 million -- $1-1/4
billion, or more than 65 percent, below the rate in the first
half of 1963 -- returning it virtually to the 1960 level.
But
the outflow in other forms of capital has multiplied.
Since 1960, for example:
-- the annual increase in outstanding bank
claims has grown from $1.1 billion to
$2.5 billion;
-- direct investment has risen from $1.7 billion
to $2.2 billion;
-- and incomplete data indicate that other
short-term lending by corporations has grown
from $353 million to somewhere around
$700 million.
These -- plus a $300 million increase in other long-term
capital outflows -- have sent the total outflow of private capital
up from just under $3.9 billion in 1960 to over $6.3 billion last
year, a rise of some $2.5 billion.
What particularly concerns us
today is the fact that $2 billion of that rise occurred last year.
Only a small amount of this capital went to finance our
exports, and the great bulk of it went to the other industrial
countries -- thus adding to their dollar holdings.
It is here
that we must make substantial improvement.
- 3 Last year
-- well over half of the outflow of short-term
bank capital went to advanced countries;
-- well over half of new long-term bank commitments
went to industrialized countries, and only about
15% of them for exports;
-- while direct investment in developing countries
serves to offset outflows that might otherwise be
required in the form of aid appropriations, and
will not be affected by our new program, the fact
is that in the first nine months of 1964 almost
two-thirds of our direct investment outflow went
to Europe;
-- and virtually all of the build-up in corporate liquid
balance abroad occurred in the developed countries.
We recognize that, over the long run,this capital outflow
comes back in the form of dividends, interest and loan repayments.
We recognize that, over the long run, these outflows of capital
become a source of strength and more than pay for themselves.
But,
in the short run, they cost our balance of payments position dearly,
and it is with the short run that we must now be concerned.
The problem is that our capital outflows are simply growing
too fast in relation to the inflows they generate, and in relation
to the improvements we have been making in other areas of our
balance of payments. While we are waiting for the return flows
to mount, we look abroad and see an ever rising tide of short-term
liquid claims on us -- a rise in claims that if allowed to continue
will inevitably lead to further gold outflows.
Since 1957, our gold stock has declined by $7.4 billion, our
liquid dollar liabilities to the monetary authorities of other
countries have risen from $9 to $14 billion -- and private banks,
individuals and businesses abroad hold another $11 billion. We
know that these holdings are simply the essential counterpart of
the dollar's position as a reserve currency and of its vital role
in world trade.
But we must also realize that the willingness of
foreigners to accumulate additional dollars is not without limits.
It is now perfectly clear that that willingness is nearing an end.
The time has come when we must show rapid and clear cut progress
in reducing our payments deficit.
- 4 -
I know that you have, in recent weeks, been reading and hearing
about a so-called "attack" on the dollar and on the gold exchange
system.
Indeed, this disparagement of our currency comes from
lofty heights -- but it is an isolated view.
We need your help to
make sure it remains an isolated view.
But this view is indicative of one very important fact.
That
is, that the power and influence of the United States throughout
the world, in a political as well as a financial sense, depends
on the continued strength and soundness of our dollar.
We must move now while we can still move from a position of
strength. With your help we can make the swift and lasting
advance that we need, thus assuring that, as our nation -- and your
businesses and your banks -- grow and prosper in the months and
years ahead, the dollar will continue to be the strongest currency
in the world.
0O0
\
F E D E R A L
p
press
i
R E S E R V E
release
For immediate release
February 18, 1965
Remarks of J. L. Robertson, Member of the Board of
Governors of the Federal Reserve System, to repre
sentatives of banks and other financial institutions
with respect to the President's Balance of payments
Let me discuss more closely what the President's
program means for banks and other financial institutions bearing in mind, of course, that what is asked of them is
only part of the over-all attack on the balance of payments
problem.
Given the urgent need for a decisive cutback in
capital outflows this year, what is an appropriate and
realistic target for the banking community?
After a great
deal of thought, the Federal Reserve has concluded that
any expansion of bank lending abroad in 1965 should not
be greater - and preferably should be less - than the
rate of growth of domestic lending.
Last year, in con
trast, foreign bank lending rose three times as rapidly
as domestic loans and investments.
More dollars are needed abroad day by day, month
by month, to finance trade throughout the free world -
- 2 bu(: not as tnany dollars as we have been providing.
Hence
the need for voluntary restraint on dollar outflows - the
need for a curtailment of the rate of expansion of the
outflow,
Here is a situation in which we can make prog
ress by standing still awhile - as the need for dollars
abroad increases.
Therefore, we have asked all banks to restrict
credits to foreigners that are not clearly and directly
for the purpose of financing exports of United States goods
and services.
While all exports must be financed, we seek
to have outstanding credits to foreigners (including e x
port credits) held during 1965 to a level not over 5 per
cent above the amount outstanding on December 31, 1964.
In most instances, individual banks should do better - es
pecially the larger ones - to offset the fact that some
bona fide export credits to foreigners may be granted by
banks that had no outstanding foreign credits at all last
year.
This target must apply to all foreign credits loans and investments, acceptances and deposits.
target must be aimed at by all banks.
And the
The institutions
represented in this room account for most of the outstand
ing U. S. bank credit to foreigners, but of course we
texpect the smaller banks also to participate in this pro
gram.
This target will take care of any possible increase in
bona fide export credits.
The National Foreign Trade Coun
cil has estimated that U. S. exports in 1965 will be about
5 per cent higher than the rate for the fourth quarter of
1964.
Hence, an increase in export credits by 5 per cent
of the amount outstanding at the year end should cover the
requirements of export expansion, assuming no change in the
proportion of exports financed by credit.
Thus, even if
all credits granted by banks to foreigners were export
credits, the 5 per cent target would still be realistic.
Actually, as you know, only a fraction of bank
credits to foreigners are used to finance exports of U. S.
goods and services.
In the case of long-term credits, we
know that this fraction is only around 15 per cent.
the case of acceptances, it is about 40 per cent.
In
In the
case of other short-term credits, it may well be less than
in acceptances, but assuming for argument’s sake that the
fraction were equally high, this would mean that alto
gether only $3 billion of the total of $10 billion of
bank credits to foreigners outstanding on December 31,
1964, was for the purpose of financing exports of U. S.
- 4 goods and services.
An increase of $500 million in such
credits would thus finance an export expansion, not by 5
per cent, but by more than 15 per cent - an expansion
that, unfortunately, is highly improbable.
And in fact, this calculation is still too conserva
tive.
All of your short-term credits and a substantial
part of your long-term credits will be repaid in 1965.
Assuming - quite conservatively - that only half of your
total nonexport credits outstanding will fall due this
-year, an additional $ 3 - 1/ 2 billion would become available
this year to expand your export credits.
Although it is
unrealistic to expect that extensions or renewals of non
export credits could be cut back to zero, in theory you
could (within the Federal Reserve target) increase your
export credits outstanding from $3 billion to $7 billion enough to finance an export expansion of 133 per cent1
.
You will understand, therefore, that I do not in
tend to lose any sleep about the possibility that our
target might prove to be too restrictive to permit the
granting of all bona fide export credits.
You will have
plenty of opportunity to cut down your nonexport credits,
if that should prove necessary in order to make room for
- 5 any imaginable expansion of export credits.
We recognize
that in some cases this adjustment cannot be made over
night, especially if the credits granted or committed dur
ing the first six weeks of this year have already taken you
over the target.
But you should be able to get within the
limit in a reasonably short period of time.
In fact, you
will probably be able to maintain your nonexport credits to
foreigners at a level which will not impose a serious burden
either on you or on your domestic or foreign customers,
since the target level will be one-third higher than your
outstanding credits were at the end of 1963.
Within the limits set, we roust avoid creating more
problems than we solve.
Hence, it is assumed that while
abiding by the target, you will exercise discretion in a l
locating loans.
Since it would be in your own best inter
est, undoubtedly you will concentrate on credits that are
exempt from the Interest Equalization Tax.
This would mean
that in the medium and long-term field you ^ill give prefer
ence to the less developed nations.
Moreover, again in
your own interest as well as in that of the U. S. economy
at large, you will presumably avoid any cutback that would
inflict a serious burden on less developed countries, whose
- 6 economic growth is especially in our national interest, or
on such developed countries as Canada or Japan (both of
which are heavily dependent on U. S. finance) and the
United Kingdom (which, as we all know, is going chrough a
difficult period in its own balance of payments)*
But
again, I am sure this problem will hardly arise in prac
tice since you will be able to stay within the target
limit and still meet the real needs of these countries.
The 5 per cent targec is simple and straightfor
ward.
It requires a minimum of interference with your o p
erations and no elaborate machinery or detailed supervi
sion.
With the understanding that bona fide export fi
nancing is to be given priority and met adequately, and
that serious cutbacks in other credits may need to be
avoided for certain countries, within this 5 per cant
target each bank would be free - subject only to any
guidelines that may be developeo - to use its resources
as it thinks best.
\je will need some informational reporting, mainly
of a kind already supplied to the Treasury.
Without ade
quate information, we could not spot points at which
threats to the effectiveness of the program or problems
of its equitable execution might arise; we could not gauge
- 7 the success of the program and hence the possibility of
relaxation; and we could not become aware that an unco
operative institution was taking advantage of che volun
tary character of the program to compete unfairly with ocher
banks.
But let me emphasize that we have no desire to
buraen you with unnecessary reporting.
We are aware that a number of Difficult problems are
likely co arise in carrying out the program.
relationships with
For instance,
your foreign branches will certainly
pose complicated questions.
Another major problem will be
domestic credits which would affect che U. S. payments b a l
ance as much as credics to foreigners.
example,
I am thinking, for
of credits to domestic borrowers chat the borrower
is going to use for financing operations abroad other than
those directly connected with exports.
Jr some of your
customers may be eager to increase the amount of their b o r
rowings for export financing so as to free their own funds
for uses inconsistent with our program.
These are areas
in which we will be working closely with you, and with
the Department of Commerce in its efforts to limit foreign
credits and investments of nonfinancial corporations.
- 8 In the case of the so-called Edge Act and Agreement
corporations, the guiding
principle, of course, is that
banks with such subsidiaries be neither favored nor pen
alized in comparison with other banks.
The most equitable
solution, as a rule, seems to be to combine the parent bank
and its subsidiaries for the purpose of calculating the 5
per cent target.
Equity investments abroad, which are not
available to banks without Edge Act subsidiaries, may re
quire special treatment, but we are in a position to deal
with that problem.
In connection with these investments and with banks'
holdings of foreign securities or other foreign assets,
problems may arise with respect to the disposition of
those assets.
It would obviously undermine the program if
banks were to sell such assets aomestically so as to free
more of their own funds for investment abroad.
Transactions of banks for account of their cus
tomers and fiduciary accounts will also require attention.
I am sure that you will avoid encouraging customers
to extend any credit to foreigners that you could not ex
tend yourself within the target limits, and that you will
avoid acting as brokers or intermediaries by diverting to
- 9 them credits that you would normally finance out of your
own funds in the usual course of business.
We will endeavor to develop, very soon, appropriate
guidelines to deal with these and other problems.
In do
ing so, we may request representatives of the banking com
munity to serve on a small technical advisory committee to
assist us.
In any event - whether or not we issue guide
lines or have an advisory committee - officers of our R e
serve Banks will be in touch with you on an individual
basis to assist in working out problems that you encounter.
As you know, this is not the only group that is b e
ing asked to make a strenuous voluntary effort to imple
ment the President’s program.
You were joined at the
White House today by representatives of leading business
corporations that are being asked to make similar efforts.
But the contribution that the banking system itself can
make is crucial.
And your economic interest in the suc
cess of the whole program and in the consequent continu
ing strength of the dollar is particularly strong.
The place of nonbank financial institutions in
the President’s program i s
somewhat different.
To the
best of my knowledge - which is admittedly imperfect
- 10 in this field - most of these institutions have played a
minor role in che recent expansion of credits to foreign
ers, although some of them have purchased large amounts of
IET exempt foreign bonds and also have placed part of
their liquid funds abroad.
What we must ask from them,
at this time, is that their foreign credits and invest
ments in 1965 also be kept within limits comparable to
those we are suggesting for the banking community, and
that no additional liquid funds be placed abroad.
Obviously, any potential foreign borrower whose
credit application must be rejected by a commercial bank
on account of the voluntary restraint program will be
tempted to tap other credit sources.
The pressure on
investment houses, finance companies, insurance companies,
and pension funds to extend foreign credits not subject to
the IET - perhaps even credits that are - will no doubt in
crease considerably.
Many if not most of these potential
borrowers will be excellent risks and will offer excellent
terms.
It is asking a great deal when we request these
institutions to resist the temptation.
we must do so.
But, of course,
If such credits were granted, restraint
by the banking system would be in vain.
From the point
-
11
-
of view of our payments balance, it makes no difference
at all whether a credit to a foreigner is extended by a
bank or by some other lender.
One problem involved in charting a course for non
bank financial institutions is the relative lack of data
regarding their foreign lending.
Only a few of them have
undertaken transactions that are reportable on Treasury
foreign exchange forms.
We shall certainly have to re
quest additional reports from these institutions.
Moreover, in the case of some nonbank institutions
the problem of customer accounts will probably be even
more troublesome than in the case of banks.
And in the
case of insurance companies, obvious exceptions must be
made for foreign investments connected with foreign cov
erage requirements - exceptions that will have to be analo
gous to those made for the same reason in the IET legisla
tion.
But there is no denying that the Federal Reserve is
far less conversant with the practices and problems of non
bank lenders than with those of banks.
Hence, discussion
of doubtful points with us in the System by the representa
tives of these financial institutions will be particularly
important.
i
-
12
-
As you see, the success of this entire sector of
the President s program depends on your acceptance, your
dedication, and your unremitting effort to achieve its
purpose.
Given the present circumstances of our nation’s
economy - and che desire of all of us to avoid rigid con
trols - the Government believes that, in this area, it
would be in the best interest of all to rely on voluntary
restraint - rather than on laws and regulations - to re
duce che outflow of dollars on capital account.
With
your cooperation, the country‘s balance of payments in
1965 can be leveled in the direction of full equilibrium.
Your actions could have a decisive effect, and world con
fidence in the dollar would reflect it.
k
P
F E D E R A L
press
R E S E R V E
release
F o r i m m e d i a t e release.
R e m a r k s of W m .
F e b r u a r y 18, 1965.
McC.
Martin,
Jr. , C h a i r m a n ,
£ o a r d of G o v e r n o r s of the F e d e r a l R e s e r v e S y s t e m ,
to representatives of b a n k an d n o n b a n k financial
institutions with respect to the President's
_____________ B a l a n c e of P a y m e n t s P r o g r a m
T h e B o a r d h a s invited y o u h e r e so that w e c a n present
in m o r e detail the part the F e d e r a l R e s e r v e and the b ank i n g s y s t e m
as a w h o l e h a v e to play in helping to achieve the v e r y im p o r t a n t
balan ce of p a y m e n t s objectives that P r e s id en t J o h n s o n talked about
to y o u earlier today.
Since y o u are, for the m o s t part, ba nk e r s ,
in b a n k ers ' t e r m s .
let m e
speak
A s a r e s e r v e c u r r e n c y country, the United States
occupies a financial position v e r y similar to that of a bank.
C n the
whole, the position is a go od one, like that of a v e r y solvent bank,
with a n enviable capital structure.
Over-all, w e h a v e international
assets a m o u n t i n g to about $96 billion.
O u r total liabilities a m o u n t
to only $56 billion, leaving a n equity position of $40 billion, or a
ratio of m o r e than 40 per cent.
O u r r e s e r v e position also is strong.
W e h a v e gold r e s e r v e s of $15 billion, against liquid c l a i m s of about
$32 billion, the equivalent of a l m o s t 50£ of c a s h in the till for e v e r y
dollar of " d e m a n d " deposits.
-2 -
O n the other hand,
w e a r e having a p r o b l e m that is,
basically, on e of s e c o n d a r y liquidity.
O u r loans a n d i n v e s t m e n t s
h a v e i n c r e a s e d m o r e rapidly than h a s the d esi re of others to hold
with us "deposits" or dollar claims.
We
are therefore faced with
" a d v e r s e clearing balances, " an d the international liquidity p o s i
tion of ou r c o u n t r y h as w o r s e n e d ,
1957.
particularly in the period since
O v e r the s e v e n y e a r s ending with 1964, o ur m o n e t a r y
r e s e r v e s declined b y $7 billion a n d o u r net position in the Inter
national M o n e t a r y F u n d b y $1 billion.
A t the s a m e time,
our sh o r t
t e r m liabilities to foreign central b a n k s a n d g o v e r n m e n t s - -liabilities
w e m u s t a l w a y s b e r e a d y to r e d e e m in gold o n d e m a n d - - r o s e m o r e
than $6 billion, while our liquid liabilities to private foreigners r ose
b y n early $5 billion.
In the c i r c u m s t a n c e s w e ,
similar p r o b l e m ,
like a b a n k faced with a
c a n do either or both of t w o things.
We
c a n try
to in c r e a s e the willingness of depositors to leave m o n e y with us b y
offering higher interest rates an d other i n d u c e m e n t s ,
cut back,
or w e c a n
for the t i m e being, on our lending a nd investing, or w e
c a n do both.
We
other attractions.
h a v e a l r e a d y do n e quite a bit to e n h a n c e rate and
Since 1960,
U. S. bill r a t e s h a v e m o v e d up f r o m
a r o u n d 2. 25 p e r cent to nearly 4 p e r cent, a n d rates paid b y
c o m m e r c i a l b a n k s on foreign deposits a n d other s h o r t - t e r m rates
-3-
h a v e i n c r e a s e d correspondingly.
W e h a v e offered foreign central
b a n k s the so-called " R o o s a B o n d s , " payable in foreign currencies,
to afford t h e m protection against a n y fluctuation in the dollar's
e x c h a n g e rate.
W h e n it c o m e s to lending a n d investing, h o w e v e r ,
h a v e not so far m a d e a n y m o v e t o w a r d curtailment.
we
T h e fact is
our loans a n d i nvestments, a l r e a d y at a high level following a long
climb, b e g a n s h o w i n g a further m a r k e d rise a f e w m o n t h s ago.
It is a s h a r p but n e c e s s a r y reduction in the elevation of this rate
w h i c h the P r e s id en t n o w p r o p o s e s ,
w o r k with y o u to effect.
and w h i c h w e should like to
I think y o u will all a g r e e that this c o u r s e
w o u l d be a s o u n d a nd prudent one for a n y b a n k to follow in similar
c i r c u m stance s.
It is in the interest of all of us to explore n e w m e a n s
of dealing with the p r o b l e m before us so that w e c a n find a
co rrection that is r e a s o n a b l e and w o r k a b l e and that will not start
us d o w n a path w h o s e c o u r s e an d end w e cannot foresee.
Perhaps
there is no f o r m of action feasible, including that the A d m i n i s t r a
tion is urging, that is without pitfalls.
payment
proposals,
T h e President's ba la nce of
on the other hand, h a v e b e e n c h o s e n in part
b e c a u s e they will not i m p i n g e severe ly o n the functions of the
m a r k e t as the final regulator of business,
and also b e c a u s e they
will not b u r d e n unduly ou r d o m e s t i c prosperity a n d g r o w t h n or be
disruptive of international trade.
4-
U n d e r the President's n e w p r o g r a m , the b a n k s are
being a s k e d to a s s u m e a central responsibility for restraint.
h a s not b e e n a n arbitrary decision.
This
It necess ar ily follows f r o m the
relationship that b a n k lending ha s to the persistent r e d u n d a n c y of
dollars in international m a r k e t s and the c o n s e q u e n t deterioration
in o ur international liquidity.
I ' m s ur e that all of y o u h e r e will a g r e e with m e that
unless w e p r e s e r v e the integrity a nd strength of the dollar t h r o u g h
out the w o r l d w e cannot possibly sustain the p r o s p e r o u s e c o n o m i e s
h e r e an d a b r o a d that d e p e n d u p o n the dollar a n d the trade it
finances.
A n d I 'm also sure that w e c a n count u p o n y o u r aid in
ou r efforts to see to it that confidence in the dollar is m a i n t a i n e d
the w o r l d over.
Le t us n o w c o m e d o w n to s o m e particulars of w h a t the
President's p r o g r a m m e a n s for y o u r institutions.
going to turn the m e e t i n g o v e r to G o v e r n o r J. L.
F o r that, I a m
R o b e r t s o n , to w h o m
the B o a r d h a s delegated responsibility for the d a y - t o - d a y conduct of
ou r p r o g r a m .
-0 -
Division of International Finance
Board of Governors of the Federal Reserve System
SALIENT DEVELOPMENTS IN THE U.S. BALANCE OF PAYMENTS
I.
Background Up to 1959
For more than a decade after the end of the War, the economic and financial
policies of the United States aid of other countries were greatly influenced by an
over-riding need to get the economic system of the Western World back on its feet.
Tremendous progress was made —
in physical reconstruction, in bringing the defeated
countries, Germany, Italy, and Japan, back into the currents of world trade, in
gradually dismantling much of the prewar and wartime paraphernalia of exchange con
trols and trade controls, in rebuilding monetary reserves, in reactivating the
machinery of private credit.
The wartime inflation of money and prices was halted,
and the new inflation set off all around the world by the Korean war boom was halted.
To help Europe and Japan get into the position of financing themselves internation
ally by trade instead of American aid, many currencies were devalued in 1949.
Later,
the French franc was again devalued in 1957 and 1958.
In this earlier period the United States had a balance of payments deficit,
but it was not one this nation was concerned about.
been deliberately created,
The deficit may be said to have
to give economic assistance to the rest of the world and
to rebuild the monetary reserves of the rest of the world.
The great problem for
the whole world was the “ dollar gap," and we were doing out best to close it.
In the m i d - ,50*s, things were beginning to change, and they were changing
more rapidly than many people appreciated at the time.
regaining their economic strength.
Europe and Japan were rapidly
Between the recessions of 1954 and 1958, the United
States had a consumption and investment boom during which our price level for metals
and machinery rose 20 per cent from the end of 1954 to the end of 1957.
That part
- 2 -
of our price structure —
a particularly important part in determining our internation
al competitive position —
kept on rising in 1958, and by the end of 1959 those prices
were nearly one-fourth higher than in 1954.
With Europe and Japan steadily increas
ing their ability to produce goods for export,
conditions were being created that
were to make it more difficult than before for the United States to achieve an
adequate surplus in the current account of the balance of payments -- that is, a
current surplus sufficiently large to cover the flows of U.S. private and Government
capital to the rest of the world.
II.
Seven Years of Payments Deficits
Beginning in 1958, the United States
U .S . P A YM EN T S
DEFICIT
has had a long series of large international
Billions of dollars
Regular Transactions
Official Settlements
payments deficits.
(Chart 1.)
Throughout
this period, except in 1958 and 1959, the
United States has had large annual surpluses
on current account.
(Chart 2.)
The current
account surplus as here defined represents
1956
1958
1960
1962
1964
exports less imports of goods and services —
including investment income and also including,
on the debit side, U.S. military expenditures
abroad —
less net payments for remittances
and pensions.
- 3 -
But these current account surpluses
U S. BALANCE
of
PAYM ENTS
have been inadequate to cover the large and
4
growing net outflow of capital, private and
Governmental,
(Chart 2.)
Of course, the
0
over-all deficit does not mean that we are liv
8
ing beyond our means; except for Government
4
grants for economic aid (about $2 billion a year)
0
all Government and private capital outflows do
add to our investments in, and other financial
claims on, the rest of the world.— ^
C hart 3
However, the over-all deficits have
U .S . RESERVE POSITION
been eating into our net reserve position.
Du r
ing the past seven years our gold reserves fell
by a third, from $23 billion to $15-1/2 billion,
and our liabilities to foreign central banks
and governments increased from $9 billion to
$16 billion.
(Chart 3.)
1/ "Errors and omissions" cannot be allocated
accurately to either the current account or
the capital account, and are omitted in
Chart 2.
-4 C h a rt 1
In addition, our short-term (and
U .S . P A Y M EN T S
DEFICIT
other "liquid") liabilities to foreign commer
cial banks and other private persons and to
the World Bank and other international institu
tions increased by $6 billion, with a particu
larly large increase in 1964.
(Chart 4.)
This growth of liquid liabilities
to others than foreign central banks and govern
ments served to reduce somewhat the amounts of
F IN A N C IN G
the
D EFIC IT
the deficits that had to be financed by "official
settlements."
(Chart 1.)
The "official settle
ments" include primarily gold sales and in
creases in liabilities to foreign official
holders, and also changes in our position in
the International Monetary Fund and changes in
our official holdings of convertible currencies,
1958
1960
1962
1964
as well as receipts of prepayments on intergovern
mental debts and on military exports.
INDUSTRIAL PRICES
115
110
105
10 0
95
Ill,
(Chart 4.)
Developments since 1959
Since the end of the long steel
strike in 1959 we have had an unprecedented
degree of stability in U.S.
industrial prices,
while creeping inflation has been going on in
the rest of the world.
(Chart 5.)
- 5 And in the last four years, along
U .S . E C O N O M Y
with this price stability we have had an u n
precedented long period of uninterrupted and
generally well balanced economic growth, raising
real GNP by 20 per cent in four years.
(Chart 6.)
Chari 7
U. S. F O R E IG N T R A D E
This combination of economic growth
and price stability has produced a great expan
sion of our international receipts and expendi
tures, with both good features and bad.
Our
merchandise exports last year were larger by
one-third than in 1960.
(Chart 7.)
C hari 8
U S . IMPORTS
and
6NP
Imports also rose, but in relation to GNP they
are now no higher than at the beginning of 1960,
before the sharp recession of U.S.
that year.
(Chart 8.)
imports later
-6 C h a rt 9
Compared with the first half of 1960,
U S. CURRENT TRANSACTIONS
our annual surplus on merchandise trade increased
to 1964 by more than $2-1/2 billion, and our net
intake of investment income increased by almost
$2 billion.
(Chart 9.)
In 1964, on current
account, our balance of payments made a splendid
record.
1956
1958
1960
1962
1964
But we have also had a great upsurge
in the outflow of capital and credit from the
United States to the rest of the world.
U. S. BALANCE
of
PAYM ENTS
Billions ef dollars
Current Account
Surplus
2.)
(Chart
Part of the gain in exports since 1959 has
been due to a $1 billion rise in the annual level
of economic aid to the less developed countries,
a rise which occurred mainly between 1959 and
1961.
Some private capital outflows too, have
been essential to support the improvement in
the current account.
1955
1957
1959
1961
But last year private
1963
capital outflows went much farther than that.
Outflows that made no direct contribution to our
export growth were very large in 1964, and they
wiped out a great part of the potential improve
ment in our over-all balance of payments which
could have been expected on the basis of the
rise in U.S. exports alone.
IV.
Composition of the Private Capital Outflow
U.S. private capital outflows include
U.S. PRIVATE CAPITAL OUTFLOWS
direct investments of U.S. corporations in affili
lillin s if lillirs
ates and branches abroad, other long-term invest
ments and loans, and various types of short-term
credits and investments.— ^
(Chart 10.)
Direct investment outflows as r e
C h a r t 11
DIRECT INVESTMENT OUTFLOWS
2.0
corded in the balance of payments now exceed $2
billion a year.
An important fraction of the
total fixed capital expenditures of American
enterprises abroad and of additions to their
working capital abroad is financed by internal
funds of the enterprises, and an additional part
by increases in their accounts payable, tax and
other accruing liabilities, and by borrowing
from financial institutions and issues of stocks
or bonds abroad.
What the U.S. balance of
1/ Chart 10 covers outflows that increase U.S.
assets abroad ("U.S. private capital outflow").
The over-all net private capital outflows shown
in Chart 2 are smaller than these U.S. capital
outflows by the amount of inflows increasing
foreigners' assets, other than liquid assets,
in the United States.
-
8 -
payments registers is the remaining financing,
C h a r t 11
DIRECT INVESTMENT OUTFLOWS
2.0
from U.S. owners,
including of course any
ploughing back of dividends received from affili
ates or of profits of branches.
The annual out
flow to Europe, so measured, rose from $500
million in 1959 to about $1.3 billion in 1964.
(Chart 11.)
U.S.
residents' purchases of foreign
NEW ISSUES SOLD TO U. S.
securities newly issued in the United States have
long constituted an important part of the long
term capital outflow other than direct invest
ment.
As a result of the July 1963 proposal and
August 1964 enactment of the Interest Equaliza
tion Tax, this type of outflow to Europe and
Japan, which had begun to grow rapidly in 1962
and 1963, became negligible in 1964.
Following
the enactment of the IET, however, a bulge in
Canadian new issues in the fourth quarter brought
the year's outflow on these issues, which are
exempt from the tax, to about $700 million; this
matched the previous year's Canadian total, which
had been heavily concentrated in the first half
of 1963.
(Chart 12.)
- 9 The IET also caused a half-billion
shift in the flow of dealings in outstanding
foreign securities, by reducing gross U.S.
acquisitions.
The shift was from an outflow
for net U.S. purchases, averaging nearly $300
million a year between mid-1960 and mid-1963,
to an inflow through net U.S.
sales of outstand
ing foreign securities of over $150 million in
1964.
Term lending abroad by U.S.
banks
NET LONG TERM BANK LENDING
began to increase rapidly in the first half of
1963, before the IET proposal.
The 1964 net
outflow approached $1 billion, over half of which
was to Europe.
Toward the end of the year, com
mitments for loans of one-year term or more were
increasing very rapidly, not only for Europe but
also for nonindustrial countries.
1 956
1958
1 960
1962
(Chart 13.)— ^
1964
1/ Other types of long-term capital flow, in
cluded in the totals in Chart 10 if involving
changes in U.S. assets abroad and included in the
Chart 4 net totals in any case, are:
long-term
commercial claims of U.S. residents on foreigners
and vice versa, foreign direct investments in the
United States, transactions in outstanding U.S.
corporate securities, and receipts through r e
demptions of foreign securities.
-
10 -
Within the total outflow of U.S.
U.S. PRIVATE CAPITAL OUTFLOWS
short
term capital (Chart 10), there were large in
creases last year in outflows of bank credits
and in outflows of funds of U.S. corporations,
banks, and other U.S. residents into liquid
investments abroad.
(Chart 14.)
The short-term
bank credit outflow (including loans and accept
ance credits) was moderate in 1962 and 1963, but
SHORT-TERM CAPITAL OUTFLOWS
last year it exceeded $1.1 billion.
Within the
year 1964, this outflow was particularly large
in the first quarter and again in the fourth
quarter.
Short-term and long-term bank credit
together produced an outflow of about $2 billion
in 1964, twice as great as in any previous
calendar year.
(Chart 15.)
The outflow of U.S.-owned liquid funds
(Chart 14, lower panel) was relatively small in
iT s . BANK CREDIT OUTFLOW
1962.
In 1963 there was a substantial outflow
Billions of dollars
in the first half.
After the Federal Reserve
raised rediscount rates and also the Regulation
Q ceilings for 3- and 6-month time deposits in
July 1963, there was a net reflux in the second
half, so that in 1963 as a whole there was little
net movement.
1956
1958
1960
1962
1964
In the first half of 1964 the out
flow was again very large.
The total for the
-
11 -
year 1964 is estimated to have exceeded $600
SHORT-TERM CAPITAL OUTFLOWS
million,
though in the second half the outflow
slackened more than seasonally.
1.0
lower panel.)
.5
U.S.
0
1.0
(Chart 14,
The bulk of the net outflow of
liquid funds in most years
(1960 excepted)
has gone into deposits abroad denominated in
.5
U.S. dollars rather than into foreign currency
assets.
As previously mentioned (see Charts
1 and 4 on page 4) inflows of foreign funds,
other than those of central banks and governments,
into liquid assets in the United States have been
FOREIGN SHORT TERM INFLOW
large in some years.
2.0
1.5
1.0
These inflows partly off
set the outflows of U.S. capital, and reduced
the amounts of the deficit that had to be fi
nanced by "official settlements."
This was the
.5
case especially in 1964, when short-term balances
0
due to commercial banks abroad (including
.5
branches of American banks) increased by $1.4
billion.
Short-term assets in the United States
of other private foreigners increased by $300
million.— ^
(Chart 16.)
1/
In Chart 4, unlike Chart 16, increases in
liquid assets of "foreign private" include those
of international institutions; also in Chart 4
holdings of U.S. Government securities are
counted as liquid assets regardless of whether
their original maturities are under or over one
year.
-
V.
12 -
Prospects
In view of the exceptionally large
U .S . P A Y M EN T S
Billions of dollars
DEFICIT
buildup of foreign private balances in the United
Regular Transactions
Official Settlements
States last year, a further large inflow this
year appears unlikely.
Accordingly,
it is likely
that a major part of the over-all 1965 deficit
will have to be financed by official settlements.
How large the over-all deficit will be depends
1956
1958
1960
1962
1964
on developments both with respect to capital
outflows and in the current account.
C hart 2
While the competitive position of the
U .S . BALANCE or PAYM ENTS
B illiiis i f dollars
Current Account
Surplus
United States is stronger now than it was a few
years ago, U.S.
exports still tend to be corre
lated in the short run with changes in business
activity abroad.
Given the present mixed out
look for economic growth abroad in 1965, it
appears rather unlikely that the U.S. current
account surplus will increase greatly this year.
Farther ahead, continued growth can be expected.
Thus the improvement in the over-all balance of
payments urgently needed this year must come
principally from a sharp diminution in U.S.
private capital outflow.
N ot e. Data for 1964 in the charts were partly estimated on the basis of prelimi
nary information.
In some cases later estimates have been used in the text.
Both
charts and text may require further revision when complete
data are published.
February 18, 1965
@FedFRASER