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For release at 3*.00 p.m. Monday, November lU, 1955 Address of A, L. Mills, Jr. Member, Board of Governors of the Federal Reserve System before the U2nd National Foreign Trad® Convention The Waldorf-Astoria New York City November 1U> 1955 FINANCE AND FOREIGN TRADE I propose to begin by discussing the importance of banks to the foreign trade of the United States. This importance obviously derives from the role of banks as financial intermediaries between the various parties to international financial transactions. In that connection it is fair to say that banks follow foreign trade that has been opened up and are not its primary originators. This point is well illustrated in the development that has taken place in our international banking business in the ten years since the end of World War II hostilities. In the period between December 31* and September 30, 1955, foreign offices of United States banking institutions have increased from 78 to 116» Latin America and the Far East are the geographical areas accounting for the largest part of this increase, with expansion in Brazil, Cuba, and Japan standing out. As is fully reflected in the statistics of United States foreign trade, our growing commercial interests give cogent reasons for the extension of our banking services abroad. The increase since 19U£ in the business of the foreign banking offices that were then in existence is as impressive as the rate of in crease in newly established offices. An analysis of the causes for the growth in the foreign trade of the United States as to the extent to which it was war-born, the con sequences of natural forces, or the product of vigorous promotion is beside the point of this discussion. What must be noted is that various circumstances have combined to place the United States in the forefront of the world’s suppliers of goods and services, and that achievement of this position has been reflected in the expansion of our foreign banking facilities. What must also be remembered is that the foreign countries that are hosts to United States banking institutions have highly developed banking systems of their own which are equipped to serve both the needs of their own nationals and the foreigners doing business in their lands. The foreign offices of United States banking institutions play an important part in this international financial context as inter mediaries for serving the credit needs abroad of their countrymen, and also for serving the reciprocal needs of the foreign nationals in whose countries these offices are domiciled. Tilth the dollar as the world's anchor currency, the complementary advantages of these arrangements cannot be overstressed. The clearest conclusions to be reached from the expansion of our foreign banking facilities are, first, at some point in the develop ment of our export trade with a foreign nation it becomes advisable and profitable to provide our nationals abroad with an extension of the banking services of domestic United States banking institutions. Second, once established, foreign offices of United States banking institutions engage as intermediaries in fostering two-way trade to the mutual advantage of our own and of foreign businessmen. The fact that our foreign banking activities follow rather than lead an initial growth of international trade does not detract from belief in the usefulness of our banking establishments abroad, in that once in operation they become outposts not only for the granting of credit, but -3also become pools of information and sources of experience to which not only our own countrymen, but our foreign friends, can turn advantageously. In truth, the heart of banking at home or abroad is the ability of the banker to apply a broad experience in financial matters to practical problems in ways that will work to the ultimate benefit of national and international well-being. Stated more pros<rdealIy, the foreign banking facilities of United States banking institutions participate importantly in the development of our foreign trade by way of this advisory function of their officials and the credit-creating actions that follow therefrom. Thus, while banks are not to be regarded as the primary originators of foreign trade, they certainly help to increase the level of such trade once the initial trade contact has been made. The fact, however, that the United States dollar has been a persistently hard currency brings into focus the necessity for the judgment and discretion that must be used by the officials of United States banking institutions abroad in their dealings, so as to channel our foreign trade in those directions that will do most to foster multilateral balance of trade conditions and prevent distortions conducive to potential trade imbalances. A look at the present foreign trade position of the United States is illuminating. For the first half of 195? our nonmilitary exports of goods and services came to 9*5> billion dollars while our1 nonmilitary imports of goods and services came to 7.1 billion dollars, thereby resulting in an export surplus of 2.U billion dollars. An export surplus of this relative - U - magnitude has been true for some years past and has been an important stimulant of our domestic prosperity. To emphasize that point, it is only necessary to mention that in 1953 merchandise exports represented 6.6 per cent and in 195k, 7*^ per cent of the total, production of United States movable goods. Obviously, exports make a significant contribution to our total economic activity, as is also revealed in the fact that in 1953 goods and services exported represented lu7 per cent and in 195U, h*9 per cent of gross national product. However, the disparity between the amount of United States ex ports and imports has been reflected in the balance of trade problems of some foreign countries that have experienced difficulty in covering their trade deficits through conventional means. In some such cases, the deficits have been met through United States Government grants and military expendi tures abroad, which for the first half of 1955 at 2.5 billion dollars more than offset the 2.1+ billion-dollar favorable balance on trade and non military services that has been referred to. Partly as a result of these kinds of payments, the difficulties implicit in the otherwise adverse trade balances of some countries were mitigated; and after allowance for various less important items figuring in our balance of payments, the gold and dollar reserves of all foreign countries increased for this period by over 600 million dollars. Important as United States aid has proven to be, and continues to be, a general betterment in economic conditions abroad has been the chief factor for strengthening foreign gold and dollar reserves and for the con sequent ability of many foreign countries to meet pressure on their balance - 5 - of payments. It is new necessary to ask by what means the remarkable gains that have been won in the field of international finance and trade can be consolidated and then extended in ways that will enable foreign countries to balance thsir international accounts and reduce their needs for some forms of United States aid. There are several answers to this question, of which the most important is the capacity and willingness of the United States to import from abroad because, fundamentally, payments for our exports must depend on the dollars that we supply in payment for our imports. United States imports of floods and services continue to rise impressively, and in 1953 represented 3*8 per cent and in 195k) 3*7 per cent of the gross national product; but which percentages, it m i l be noted, are considerably below the percentages that our exports bore to gross national product in the same years. How to encourage a foreign trade that will preserve and increase our vital export business and at the same time work toward evening out the disparity between the total of our exports and that of our imports is un doubtedly close to the core of the objectives of the National Foreign Trade Council. There is no argument but that a further expansion of United States imports is to be sought after. solution to the problem. However, increased imports are not a complete An expansion of multilateral trade, facilitated by the lowering of international trade barriers, is one solution that holds considerable promise, in that each step taken in the direction of expanded -6multilateral trading implies a lesser dependence by foreign nations on the United States to supply dollars as a preferred means of payment in foreign transactions. Encouragement can be taken from the progress that has been recorded in this area and which is most evident in the moves toward currency convertibility that have been made during the past year, and which are especially significant as regards the United Kingdom, The Netherlands, Belgium, and Western Germany, As you are aware, the relaxation of import restrictions and re strictions on the transfer of capital have been the most fruitful steps that have been taken toward currency convertibility, which, when finally achieved on a broad international basis, will remove a great many of the barriers obstructing foreign trade. Other actions that, can be helpful in placing the foreign trade of the United States on a more secure foundation focus on our foreign investment activities. In 195>U> United States private investments abroad increased by nearly 3 billion dollars, to reach a total of 26-1/2 billion dollars. The fact that more than 10 billion dollars have been invested abroad by United States corporations since YJorld War II gives some idea of the size of this facet to our foreign business. The importance of our foreign investments lies, of course, in the stimulus that they give to the domestic productivity of recipient foreign nations. Broadly speaking, the lasting benefit of our foreign investments is the help given foreign nations to become more self-sustaining and in the process to raise their standards of living. In so doing, greater - 7purchasing power is placed in the hands of their peoples, who then become likely customers for more diverse lines of United States products» Both governmental and private actions have been taken within the past year to facilitate United States investment abroad. Participation by the United States in the International Finance Corporation has been approved by Congress and will have an indirect bearing on the flow of United States funds into foreign investments» Congress has also approved an ex panded lending authority for the Export-Import Bank. Regulation K of the Federal Reserve Board has been amended, liberalizing the conditions under which United States banking corporations can conduct their foreign banking business. In this latter connection, it is interesting to remark that five United States banks recently combined to form the American Overseas Finance Corporation, which has been set up to provide medium-term credit to domestic exporters of the type similarly provided by the Export-Import Bank. Last month announcement was given of the formation by a group of investment houses and foreign banks of the Transoceanic Development Corporation, Ltd., which will engage in the field of foreign capital financing, All of these actions and organizations are symbolic of the interest in and efforts to encourage investments abroad in ways that will work to the advantage of enlarging and stabilizing world trade. As to enlarging and stabilizing world trade, it is interesting to trace the course of recent developments. ’Torid exports rose at an annual rate of about 7 per cent in volume and 5 per cent in value during - 81953 and the first half of 195U. for a time. Later in 195U, the rise became steeper By the first half of 1955* world exports were about 10 per cent greater in volume than the year before, and 9 per cent greater in value. Export increases of this size are further indications of the re covery that has been made from the ravages of 7/orld T7ar II and of wide spread prosperity in many parts of the world. Even so, prosperous conditions have not been attained without putting heavy pressure on the balance of payments positions of a number of foreign countries. Such difficulties have derived from high levels of domestic employment and consumption, which together have had the effect of absorbing domestic resources at the expense of export activities necessary to trade-balancing requirements. In result, not only has export income fallen short in these cases of the amounts necessary to help balance the cost of imports, but the high rate of domestic activity, in subjecting wage rates and prices to upward pressures, has threatened to place export undertakings at a competitive disadvantage in world markets. Developments of this kind have been characteristic as regards the United Kingdom, Australia, and other countries that might be mentioned. Unlike the United States, all of these countries are critically dependent on their import requirements; and that being the case, are highly sensitive to conditions that are due partially to their internal prosperity, but which have un stabilized their general economies. This kind of situation has been reflected in ^veakness in the foreign exchange value of some currencies. However, the warning of these - 9experiences has brought remedial actions which, in the case of an important trading nation like the United Kingdom., have principally been in the area of monetary policy. This accounts for the setting of higher discount rates, rising interest rates, and regulatory limitations to the avail ability of credit in order to damp down pressures on internal economic activities. ’.Then the vast amount of business that is transacted through the medium of credit is considered along with the greater use of credit that accompanies prosperity, the latent power of Monetary policy to cut down the use of credit through its cost and availability factors becomes clearly apparent. Monetary policy is in no wise a cure-all to economic instability of the kind discussed, but it is a highly useful instrument in the hands of governmental authorities, as is borne witness in the current course of events in the United Kingdom. As you are aware, a supplemental budget has been submitted in the United Kingdom which is intended to strengthen the hand of monetary policy by actions on the fiscal front. It has been the aim of this discussion to point out the relevance of finance to foreign trade, beginning with the recital of the outpost duties of the foreign offices of United States banking institutions and their international usefulness, on to the constructive bearing that United States investment activities abroad have on the domestic economies of foreign countries. The magnitudes of United States foreign trade were sketched in as the background to these two kinds of financial activities. The discussion then turned to the recovery in the volume of foreign trade - 10 since the end of '.Torid TTar II and the economic consequences to some countries of growing prosperity. The perverse financial ramifications of these situations were then explored. The time has now come to take up the relevance of domestic finance to the foreign trade of the United States. The United States is net only the world's largest self-contained market, but also the largest market in the world for foreign exports. The latter is of particular significance to foreign countries whose internal stability is heavily dependent on their export trade with the United States. In that connection it is well to remember that although United States imports of the products of some foreign countries may not loom large in the over-all total of our business and industrial activity, a reduction of such imports often has harmful effects on the economies of the exporting countries. In turn, difficulties started in this way, if not countered, can spread out effects that can eventually become matters of serious concern at home. The vital importance to world prosperity of a stable and active economy in the United States is widely recognized. For example, it has been calculated that the modest downward readjustment in United States business conditions in 1953-195U caused a drop of around 7 per cent in the aggregate value of our imports. The interaction of economic impulses between the United States and foreign countries reveals vividly the importance of foreign trade in supporting world economic activity and the particular importance of the United States to this whole scheme of things. It is, therefore, now necessary to scrutinize the bearing that the internal financial affairs of the United States has on its foreign - 11 trade relationships which, in essence, involves delving into the means by which our domestic financial arrangements can contribute to the nation's economic stability and growth. It is quite evident that, under our system, bank deposits con stitute the most important element in our supply of money; and through the use of bank checks provide our most familiar medium of exchange. Inasmuch as bank deposits are the product of bank credit-creating operations, it follows that our national money supply very largely owes its paternity to activities ■within the banking system. Experience has also shown that if inflation or deflation is to be avoided, the size of the money supply must be held in consistent relationship with the pace of economic activity. It is here that the operations of our domestic banking institutions come into contact with the foreign financial relationships of the United States, for any distortion in our domestic bank credit-making activities that leads to internal inflationary or deflationary tendencies is bound to have repercussions in the sphere of international economic affairs. It is here, too, that the Federal Reserve System comes onto the stage, for Congress has placed with it the responsibility of setting the limits -within which our commercial banks can ply their credit-creating trade. As has already been pointed out, in view of the large part of all business that is carried on through the medium of credit, any regulation of the supply of credit available to the nation's business community has a decisive influence on our internal economic stability. - 12 As to Federal Reserve policy at the present time, the picture that has been drawn of foreign economic affairs and your own observations, both of foreign and domestic economic affairs, must reconcile in your ininds a policy that has as its objective the containment of credit activities within bounds that will sustain a high level economy, geared to a reasonable growth factor. However, it is the individual banks of the United States that have the last word as to whom and how the avail able supply of credit ’¿all be granted, and on whom we must rely to follow the kinds of banking policies most conducive to maintaining our national prospex’ity. As you well know, it is customary to report the statistics of United States foreign trade in terms both of dollar value and physical quantity. This twin fashion for reporting our international movements of goods is a perfect example of the affinity that exists between finance and foreign trade. The tivo are linked inseparably, for all transactions in our foreign trade have a financial side. Starting with production and leading on through transportation to distribution — all of the tuuL bitvdo of processes that enter into the marketing of the vast array of goods that flow through the channels of our foreign trade at some point grasp the helping hand of finance. And thus it is that "Finance and Foreign Trade" has been a fitting stibject for discussion.
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