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For release 10:00 a.m.
Eastern Time
April 8, 1961________

Some Thoughts on Our Balance
of Payments Problem
J. L. Robertson, Member of the Board of
Governors of the Federal Reserve System
1961 Eastern Conference
Controllers Institute of America
Shoreham Hotel, Washington, D. C.
April 8, 1961

One warm afternoon an elderly couple, back in my
home town in Nebraska, were sitting out on the front porch
rocking, when a parade passed by. John said, ’There's a
parade going by, Martha."
"Seems to be a right big one," she replied.
"Yep," said John.

"I'd say it’s the biggest I ever

"Is that a fact?" said Martha. "I'd sure like to
see it. It's a pity I'm not facing that way."
This is not typical of people in Broken Bow. Most
of the people there, like you gentlemen, need not be told
of the importance of taking the trouble to face in the
right direction and see what the actual situation is - at
least when it comes to controlling the affairs of a busi­
ness enterprise. The situation can change rapidly from day
to day, and it is never safe to assume that the facts that
formed the basis of important policy decisions yesterday
necessarily govern today. This is a fast moving world, and
those who sit back and rock, content to let fast changing
events slip by unheeded, are going to have trouble surviv­
This point is made in the story about the golfer
whose ball went into the rough and landed near an ant hill.
The golfer, who was something of a duffer, swung mightily
and missed the ball completely, pretty well demolishing the
ant hill in the process. He took another swing, and another,
each time with the same result. Finally, there were only
two ants left. One of them looked at the other and said,
"If we are going to survive, we had better get on the ball."
The need to pay careful attention to day-to-day
changes in the actual situation applies just as much to
government and public policy as it does to business. This
explains why such large sums of money are devoted to re­
search activities in government agencies. Nearly a third
of the annual budget of the Federal Reserve Board, for ex­
ample, is devoted to research activities. We try to make
maximum use of the output of our research departments in
the formulation of policy. We can be badly misled if we
do not know - and face - the facts.

- 2 -

One of the great advantages in the independence
that Congress has given the Federal Reserve System is
that we are able to act on the facts as we see them with­
out subjecting them to examination under a partisan po­
litical microscope. This has the great advantage of per­
mitting us to act with far more speed and flexibility than
might otherwise be the case. Some would say that it also
permits us to act in a more objective manner, though I per­
sonally would say that where in the past we have differed
from those in political posts, this has arisen from honest
differences of judgment. We can lay no claim to infalli­
bility, but we try hard to keep abreast of the changes in
our economic and financial situation and translate honest
judgments into timely policy actions.
We are certainly prepared to reverse ourselves, as
recent events prove, where the course of developments indi­
cates to a majority of the policy-makers that a previous
judgment has been in error. The trend of economic events
is seldom so clearly foreseeable that one can confidently
adopt measures that cannot quickly be reversed.
Indeed, in spite of the fact that we have one of
the world's best economic research organizations, we can
never be absolutely certain where we stand at any given mo­
ment, because there is an unavoidable lag in the collection
and analysis of economic data. Often we know only where we
were last week or last month. It is not uncommon to find
observers outside government, who are dependent on informa­
tion that reaches them only after some delay, forced to form
judgments about the wisdom of current policy on the basis of
what was going on two or three months earlier.
This can be a serious problem, for the absence of
factual information may lead to needless misunderstandings,
and it often means that even so-called expert opinion, to
say nothing of public opinion, is not as well prepared as
it might be to suggest, support, or criticize public actions.
I think our mass communications media could do a far better
job than is now being done to disseminate information in
this area, but I also wonder whether we at the Federal Re­
serve are doing as effective a job as we might in supplying

- 3 -

the public with essential information. Let me take this
opportunity to invite your suggestions on this score. I
am aware that government organizations, being insulated
from the discipline of the market, are something less than
perfectly responsive to the ever-changing requirements of
their clientele. This can be remedied to some degree if
the clientele makes its requirements better known.
Two of the major subjects that we must scrutinize
constantly are the trend of production and employment here
at home and the state of our balance of international pay­
ments. Both illustrate the importance of having up-to-theminute information and maintaining sufficient flexibility
in policy to act promptly in response to a changed situa­
For instance, early in 1960 the Federal Reserve de­
tected a decline in key sectors of business activity that
might signal the onset of a recession. To counter this
threat, we took action in early spring to ease bank reserve
positions. In June, and again in August, we reduced the
discount rate. Open market operations and adjustments in
reserve requirements were employed further in the summer
and fall to keep the reserve position of the banking system
easy. By the end of 1960 the banks had net free reserves
in excess of $700 million, in contrast with net borrowed
reserves of a half a billion dollars at the end of 1959.
As a consequence, the Treasury bill rate, for example, which
had exceeded 4.5 per cent in December 1959, had already
fallen to 2.46 per cent in June 1960 and stayed just under
this level through the last half of the year.
In spite of these facts, talk of 1 tight money" poli­
cies persisted well through the second half of 1960, per­
haps because we had not done an effective job in bringing
the public to full awareness of the changes that had taken
place. Or perhaps the measures we took, despite their time­
liness, were simply not quite adequate. It is easy to see
in retrospect that more might well have been done, although
I would like to think that the moderateness of this down­
turn may have been due - at least in part - to the fact that
we took cognizance of it at an early date, and acted accord­

- 4 -

Some might object to calling this a moderate reces­
sion in view of the seriousness of the unemployment prob­
lem. Let me emphasize that I apply this adjective with
full awareness that the degree of unemployment is not mod­
erate and that we certainly should not view it lightly.
However, the broad measures of total output that we use
to trace the business cycle do show this to be the mild­
est of our postwar recessions. Even with respect to unem­
ployment, let us remember that the rate of unemployment in
this recession has increased only a third, which compares
with an increase of about 75 per cent at the same stage of
the 1957-58 downturn. The seriousness of the unemployment
problem stems not from this having been an especially se­
vere recession in terms of its effect on employment, but
rather from the fact that unemployment was at a high level about 5 per cent of the labor force - even before the down­
turn began.
This leads to consideration of the other problem
which we must keep under particularly close scrutiny - our
balance of payments position. I suppose that the American
people have never been made so aware of the balance of pay­
ments and its significance as they were in the latter months
of 1960, when our loss of $1.6 billion in gold riveted atten­
tion on this problem. However, our balance of payments dif­
ficulties did not begin in the last half of 1960. They have
been with us to a worrisome degree since 1958. Our deficit,
as measured by our loss of gold and the increase in our
short term liabilities to foreigners, has ranged from $3.5
billion to $3.8 billion for the past three years.
1 have advocated, as strongly and persistently as I
know how, the point of view that we should not allow the
foreign tail to wag the domestic dog, on the ground that
the first and foremost responsibility of monetary authori­
ties is the healthy development of the domestic economy.
However, I hope no one believes that we can or should for­
mulate and execute monetary policy completely heedless of
the impact of our domestic actions on international confi­
dence in the dollar and on our ability to compete in world

- 5 -

This international aspect was one important basis,
among many others, for the restrictive tone of monetary
policy during 1959. Remember that with the recovery in
the latter half of 1958 and its flowering into expansion
in the first half of 1959, unemployment was cut from 7 per
cent to 5 per cent, and there was reason to hope that the
employment picture would continue to improve as activity
expanded further. In spite of the fact that we had unem­
ployed resources, we were still experiencing wage increases
and upward pressure on prices. We were also experiencing
a heavy balance of payments deficit caused in part, at
least, by a bulge in imports and a slump in exports. While
much of the trouble resulted from differences in the tim­
ing of the business cycles here and abroad, there did exist
the real danger that inflation here could, among other bad
effects, seriously damage our competitive position in for­
eign markets.
Theorists may argue that it is impossible to have
serious inflation as long as you have unemployment, but I
submit that the upswing of 1958-59 proves the contrary.
Of course, no one wanted to choke off expansion and keep
unemployment around the 5 per cent level, but at the same
time many of us recognized that the balance of payments
situation made it imperative that we expand without infla­
I did not believe then, nor do I now, that high level
employment and a stable dollar are incompatible objectives.
However, I confess that we have not succeeded as well as
some other countries in achieving both of these objectives
in recent years. This does not mean that we must abandon
the effort and go all out for one objective at the expense
of the other. On the contrary, we should redouble our ef­
forts. We ought to consider very carefully why we have done
less well than - for example - Germany and Japan. What do
the Germans and Japanese have that we have not?
Even a cursory comparison of the economic data for
the three countries reveals some striking differences. One
is the substantially higher rate of investment that Japan
and Germany have experienced in recent years. During the past

- 6 decade, the ratio of investment to gross national product
has varied from a quarter to a third in Japan, a fifth to
a quarter in Germany, and, according to the best available
estimates, it has been less than one-fifth in this country.
The high rate of investment in Germany and Japan cannot be
explained away as simply reconstruction of war damage. Both
of these countries had surpassed prewar levels of indus­
trial output by the end of 1952.

Another significant difference is the higher rate of
expansion of the labor force in Germany and Japan. These
countries have been increasing their output rapidly not
only because their high rate of investment has raised pro­
ductivity, but because the number of workers, especially
those engaged in manufacturing, has risen sharply. Both
Germany and Japan scored larger gains in productivity than
we did and at the same time they have fully employed a la­
bor force that has grown at a faster rate than ours. This
means, among other things, that these countries have been
doing a better job than we in solving the problems of unem­
ployment that arise from technological changes.
It is one thing to point out that the Germans and the
Japanese have had a more rapid expansion of investment and
of utilized labor force. It is another to try to explain
why this has been the case. Certainly much of the growth
in the working population can be explained in terms of uti­
lization of refugees and immigrants in Germany and a mass
movement from rural to urban areas in Japan. However, we
have not been handicapped by our population not increasing
fast enough. Indeed, our problem is that we have not been
able to utilize all those who are able and willing to work.
It is relatively easy to point out some of the fac­
tors that have not been responsible for the success of the
Germans and the Japanese. They have not been more inflation­
ist than we; over the past five years their wholesale and ex­
port prices have risen even less than ours. They have not
had lower interest rates; on the contrary, their interest
rates have been much higher than ours. They have not relied
more heavily than we on governmental expenditure to stimu­
late the economy; in both Germany and Japan, government has

- 7 -

absorbed substantially less of the national product than it
has in the United States. This, of course, reflects the
fact that we have been carrying a heavy military burden, as
well as a large program of economic and military aid, which
these other countries have not had to bear.
It is less easy to state what factors have been
chiefly responsible for the fact that these countries have
had higher rates of domestic investment and labor force uti­
lization than we. Each of us might come to different con­
clusions after studying the same data but, personally, I am
strongly impressed by the role that exports have played in
their economic expansion. From 1955, when these countries
had already recovered from the war, through 1960, Japanese
exports more than doubled and German exports increased 86
per cent, while U. S. exports rose less than 40 per cent.
Had we increased our exports at the same rate as the Japa­
nese during this period, we would have sold an additional
$9.5 billion worth of goods abroad last year.
A leading Japanese bank has concluded that the drive
to expand exports ranks with technological innovation as a
potent stimulus to investment in plant and equipment. And
in Germany there has been an almost pathological emphasis
on export promotion over the past decade. It is easy to
see why this might spur investment and growth. Cracking
export markets often means facing keener competition than
is encountered at home. This necessitates adoption of the
most efficient techniques and equipment, and at the same
time, through providing a larger market, it may bring econ­
omies of scale. Where the managers and workers are highly
export conscious, they are likely to be more cost conscious
and consequently more concerned about inflationary trends
that could endanger export markets. The pervasive export
consciousness in Germany and Japan undoubtedly has been one
reason why these countries have been able to maintain and
improve their competitive position in recent years.
This country, on the other hand, went through most
of the 1950's with an entirely different attitude. Our ex­
ports were almost an embarrassment to us. We had large sur­
pluses in our foreign trade which were financed by government

- 8 -

grants and credits to foreign countries, and even in 1958,
when we had already begun to run into balance of payments
difficulties, some people were still trying to devise ways
and means of exporting more American capital rather than
more American goods. During the early 1950's the entire
emphasis was on finding ways of closing the so-called "dol­
lar gap", and it was thought that the best way to do this
was to encourage Americans to increase their purchases of
foreign goods, spend more on foreign travel, and invest
more money abroad. I do not suppose it occurred to anyone
at that time that these policies were not those most con­
ducive to a great increase in our own rate of economic
growth, but in retrospect, it appears that we were play­
ing the part of the indolent hare while our foreign com­
petitors were acting like souped-up tortoises.
I do not say that our policies were wrong in the
early fifties, but we have long since emerged from the
period when they were appropriate. I wish that I could
say that we have learned our lesson and are completely re­
formed. I cannot. We are still a long way from being an
export-minded country. There is a touch of pessimism around
today with respect to the future of our export performance.
It is said that now that we are again up to an annual ex­
port rate of nearly $20 billion, we cannot expect much more
expansion in the short run. With this attitude I have lit­
tle patience.
I would like to see us set an ambitious export tar­
get and then, instead of just paying lip service to it (as
we are wont to do), put all the steam we can generate behind
a drive to attain it. This, I submit, would be a more ef­
fective way of tackling our balance of payments problem than
tinkering with interest rates and invoking quasi-protective
measures like "buy-American" policies in foreign aid and
smaller duty-free tourist allowances. The German and Japa­
nese experience indicates that it might also be one of the
most effective ways to stimulate economic growth.
Some may say that it is shortsighted and unrealistic
to think that American exports can be expanded greatly with­
out creating new imbalances in the world and re-introducing

- 9 -

the "dollar gap" problem. This is not necessarily true.
If we envision a world in which most countries are enjoy­
ing a rapid rate of economic growth, we must envision a
world of expanding trade. We have seen this in Western
Europe and Japan, and we have wisely encouraged these
countries to help themselves by reducing trade barriers
and making trade expansion possible.
I am afraid that our vision has been somewhat clouded
with respect to other parts of the world. There seems to be
a feeling that the less developed countries cannot be ex­
pected to expand their exports to the degree that would be
necessary to support the rate of economic growth they seek
to achieve. We have lent large sums of money to these coun­
tries for repayment in their own currencies - terms that
suggest that we do not believe they are likely to be able
to increase export earnings enough to pay us back. We have
not encouraged them as much as we have the Europeans to de­
velop their economies through expansion of international
trade. Unless the less developed countries of Asia and
Africa and Latin America can develop along lines that will
bring a substantial increase in exports, they will not for
long be able to maintain rising levels of imports. This
will make it more difficult to attain the growth in world
trade that is needed if we ourselves are to enjoy the kind
of economic expansion everyone would like to see.
This suggests that our long-term policy should be
not only to emulate Germany and Japan in the development of
export trade, but also to persuade the governments of the
less developed countries of the desirability of policies
that will lead to an expansion of their international trade.
This, of course, means that we will be expected to
keep our own doors open to imports from the developing coun­
tries, including imports of manufactured goods as well as
raw materials. Fortunately, we have a pretty good record
on this score, and much of the criticism that is heard of
American protectionism reflects not the actual situation,
but rather that the critics are not aware how liberal Ameri­
can commercial policy has been in the postwar period.

- 10 -

Frankly, I do not think it will be nearly as hard
to persuade the American people to tolerate the importa­
tion of goods from the so-called "cheap labor" countries
as it will be to persuade many of those countries that they
must, in their own best interest, open their doors to the
competition of goods manufactured in the "high wage" coun­
tries. But if we can accomplish both of these objectives,
and not lose sight of the competitive necessity (not merely
the desirability) of keeping our own wage and price levels
stable, we can look forward to the kind of expansion of
world trade that will contribute to higher rates of solid
economic growth both here and abroad.