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Draft of January lU, 1963

Speech for Mr. Kimbrel on
balance of payments deficits
at I t , Gordon

In our recent discussion of the Common Market we stated that
economic and political factors often are just as important as military
factors in the struggle with international communism.

The difficult part

about understanding this situation is that frequently all three elements
are involved in a specific problem.
Today I want to discuss with you one of the most pressing problems
facing this country.

That is our balance of payments problem.

This problem

has received quite a bit of publicity in the past few years, and I might
add, rightly so, for it is the backdrop against which almost all domestic
and international decisions must be made.

All decisions are weighed,

in other words, on the basis of how they m i l affect our balance of
payments.
To put the whole problem in perspective, we have to start
with some comments on gold,
metal.

Gold, as you know, is a rare and precious

There are, of course, other rare and precious metals, such as

platinum and silver.

But gold has been given added importance.

Since

it is recognized as the base for the international monetary system,
its value does not change.

If the United States wanted to buy something

from Italy, France, or any other country, it could use gold to buy it.
By the same token, we could use gold instead of dollars as a medium of
exchange here in this country,

In other words, gold is the fixed

standard or base for the international monetary system.
Why isn’t gold used instead of dollars, you might ask.
cumbersome, and it is heavy.




It is

It would be difficult to carry the large

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amounts needed for major transactions.

So the government keeps the gold

and issues dollars, which are in effect, I.O.U.'s backed by gold.
The same thing is true of currencies of other countries.
issues francs, Germany issues marks, and so on.

France

This paper money— currency

while indispensable to keep business moving, is not valuable in and of
L < & c u JjtL lx W in c U 'tJiv y ijA J
itself. It is valuab1e^because at represents gold in the international
monetary system.
In international trade, gold is not used.
the various countries are used.
dollars are used.
country.

The currencies of

When Americans buy something in France,

The French would use francs to buy something in this,

This again is simply because it is more practical to use currency

I.Q.U.’s— than to ship the gold around the world every time a sale is
made between countries*
Periodically, the countries get together to balance the books
The United States uses francs which were spent here to buy back the dollars
that Americans spent in France.

If Americans spent the same amount i .
n

France as Frenchmen spend here, the I.O.U.’s cancel out each other.

In

other words, it is like someone owing you $ > and. you owing the same
5

with which it carries on trade.
international books.

This is just a matter of balancing the

The plus or minus we end up with is called balance

of payments.
If everything came out exactly even every time, the whole
business of balance of payments would be simple.
case.

But this is seldom the

We might owe Germany more than it owes us, or Italy may owe us

more than we owe Italy.




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BALANCE OF PAYMENTS

frn & 'C jlv i) C iu r t j
When the American people spend, lend, gad invest,more money
in foreign countries than foreigners spend here,, we have what is known
as a deficit in onr balance of payments.
At one time or another, most of us have been in a similar
position.

That is, we spend more than we make in a week or a month.

This is not something to worry about too much because usually the
people to whom we owe money will wait until the next week or the next
month to get paid.

If we pay our debts when the next week or month

rolls around, everything is fine.
Countries usually operate this way too.

They do not come
/7
V
rushing in demanding that they be paid immediateh^when the U. S. owes
them money.

Many countries figure that they may owe us the following

year, so they carry a credit— -what we owe them— as a buffer.
But what would happen if you continued to spend more than you
earned?

You could, do it on credit

you charge things.
money.

only as long as people would let

Sooner or later these people would i
-jant their

If you had some savings put away, you would have to use some

of it to pay your bills.

If you didn’
t, the people to whom you owe

money would not let you buy anything more on credit.
It works pretty much the same way between countries.

If one

country continues to run up deficits, the other country will soon
insist on being paid.

If the United. States keeps spending more in one

country than that country spends here, it will want to be paid.

Since

the dollars spent in that country are, in effect, I.Q.U.’s for gold,
that country would want to be paid in gold.
With this background, let’s look at some facts and figures.




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BALANCE OF PAYMENTS

Ymit-r, b ' i - l i , nni H —+ hn. +Bo T- iUeU. . + p h c i g +h<> yj p I L
- --rf- t
. 1
V,
q.-o;
..=
ipr
country "on f i s Taue of "the ear U r
ar
h*

This simply means fj
east the United

States has more gold— international money— than any other country.
In 1950 the United States had $22.8-billion in gold.

That

was 6l per cent of all the gold owned by all of the countries of the
Free World.

In terms of dollars, gold is worth $35 an ounce.

The

United States Government has pledged that it will sell gold to any
government at the price of $3i per ounce.
$;>5

This firm pledge,

which we have always kept, has developed the attitude by other
countries that the dollar is as good as gold because it can be
exchanged for a certain amount of gold at any time.

Under these

circumstances the dollar is considered as an international currency»
In fact,

s& s& f

countries use dollars in addition to gold as backing for

their own currencies.
Under this arrangement, the United States is in effect the
banker for all the countries of the Free World.
responsibility.

This is a tremendous

It means that our payments deficits and our ability to

make good on our pledge to sell gold for $35 an ounce are the concern
of the entire Free World.

Their interest is similar to the interest

you and I have in the bank where we keep our money.

We want to be

assured that the money will be safe and that we will be able to get it
whenever we want it.
Let’s look at the record.

Between 1950 and 1957} the United States

had balance of payments deficits which averaged $1*3-billion per year.
These deficits were not cause for alarm.
reserves by other countries.

The dollars were being used as

These countries knew the U. S. had. a

tremendous gold supply and they didn’ have any doubt about our ability
t




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BALANCE OF PAYMENTS

to sell gold for dollars.

This is consistent with what I sand a moment

ago about spending more than yon make.

We could do it because our

national savings— or gold supplies— were very large.
But the situation changed drastically in 1958.
between 1958 and

1961

our deficits were over $13-billion.

just a case of a series of small deficits.

In fact,
It wasn!t

It was a series of big

deficits averaging $3#3-billion a year.
As other countries began accumulating more and more dollars,
they started to purchase gold with some of the dollars.

In the four-

year period— 1958 to 1961— our gold supply dropped from more than $22-billion
to about $17-billion.

Preliminary figures for 1962 show that we had another

deficit of close to $2-billion in our international balance of payments
last year, and. our gold supply is now down to about $l6~billion— or less
than 39 per cent of the Free World’s total supply.
What factors influence our balance of payments?
do to bring them into balance?

What can we

Are we showing any improvement?

Let’s start with the first question.

.Anything that causes

dollars to leave the United States has an influence on our balance of
payments.

When American tourists buy perfume in Paris or cameras in

Germany or leather goods in Italy, they are adding to the payments deficit.
When the United States Government sends foreign aid dollars overseas, it
is adding to our payments problem.

When American businessmen import goods

from overseas, they pay for the goods in dollars and this adds to the
outflow.

When American investors invest their money in foreign stocks

and bonds, this also contributes to the dollar drain. When the Government
find
AjJju''vnfa
KJ
spends money to maintain tr 0 opstoversesub, it is causing dollars to leave
the country.




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BALANCE OF PAYMENTS

What is being done to slow down this dollar outflow?
approaches are being tried,

Many

A year or so ago, the dollar amount of

duty-free goods that could be brought back into this country from abroad
by American tourists was reduced.

Americans can still bring back as

much as they desire,, but they have to pay duties on everything over $100,
This was intended to reduce the amount spent by American^ abroad.
The United States has not taken any steps to discourage imports
because we have traditionally exported more than we have imported.

In

more abroad than foreigners
have sold to the Uo S.

If the United States tried to restrict imports,

the other countries would restrict what we sell to them.

We do not

want to see this because one of the best opportunities we have to improve
our balance deficits is to increase our exports.

Actually, exports and

imports change with the business conditions in a country.

If business

is good in the United States, Americans are willing to spend more.
Consequently, we import more when business is good and less when business
is in a slump.

The same is true of other countries.

If there is a

business slump in France, we will not be able to sell as much to the
French as we would if their business were booming.

During 1962, business

was fairly good in this country and. we imported more than in previous
years.

Business in Europe seemed to level off a bit and our sales to

European countries dropped slightly.

Our tra.de surplus— the difference

between what we make on exports and spend on imports— dropped to about
JyrtYl i S J i j c L \ A/ a u t j
Sk-billion last yeai^ Since this was nqt enough to cover all of the other
expenditures overseas by the United States, we ended up with a deficit.
That brings us to military expenditures abroad.

We could cut

down on the loss of dollars caused by maintaining troops overseas.




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BALANCE OF PAYMENTS

this would mean neglecting our commitments to defend the Free World and
it would be a psychological victory for communism.

However, short of

bringing home our servicemen from abroad, there are other steps the
United States can take to lessen the impact of military expenses on our
balance of payments situation.

For example, we have worked out what

are known as offset arrangements with some of the European countries.
Germany, for instance, buys military equipment in this country which
balances— or offsets--the amount we spend in Germany to maintain troops.
The balance of payments problem explains why the military services
have put restrictions on dependents going overseas.

The added expense

of additional Americans abroad would mean an additional outflow of
dollars.
The United States is also asking its allies to shoulder more
of the burden of defending the Free World.
Here at home the Federal Reserve— the government agency
responsible for monetary policy— has attempted to keep short-term
interest rates high so that foreigners will invest their money here.
This again is a complicated process$for, when interest rates rise, it
costs more to borrow money.

The higher rates may discourage some of

our own people and businesses from borrowing money and this in turn
could cause business to slow down.

This is what I meant earlier when

I said the deficits must be considered in both domestic and international
policies.
To reduce the dollar drain caused by foreign aid, the government
is insisting that almost all foreign aid funds be spent in this country.
We are also asking other prosperous countries to increase their aid to
underdeveloped nations«




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BALANCE OF PAYMENTS

You could sum up most of what I have said so far by simply
saying the United States has been living beyond its income as far as
international finances are concerned.

Just as you or I would do, it is

trying to correct the situation by a series of steps designed to either
increase income or decrea.se expenses®
I said earlier that this is one of the most pressing problems
facing the United States.

Unless we reverse the situation, the eonse-

quences could be drastic.

We have had eleven^deficius in the past 12

years.

One deficit— or even several--would not be alarming and would

not be serious for a country as rich as ours because the other nations
would have confidence in our ability to pay.

However, deficits year

after year can only cause other nations to question the soundness of the
dollar.

As they accumulate more and more dollars, the confidence factor

becomes more important.

If they feel that we are disciplining ourselves

and getting our financial house in order, they will continue to maintain
their dollar holdings.

But if they wonder how safe the dollar Is, they

may want to use the dollars to buy gold.

The fact of the matter is that

if foreign governments wanted to convert all their dollar holdings to
gold right now we would not have enough gold to go around.

It would be

like all depositors going to the bank at the same time tp withdraw money.

(fchthctin.UdiU
The bank, which has many loans outstanding, would not^have enough to
pay all of the customers.

Yet, the bank would have more

it than it owes to depositors.

money owed to

The U1 S. is in the same situation.

Many

nations owe the United States money, which is being paid back gradually
over a number of years.

In fact, some nations are repaying debts ahead

of schedule because of our problems.




These nations realize that the

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BALANCE OF PAYMENTS

whole international monetary system— based on gold and the dollar— would
suffer if the United States could not continue to sell gold at the fixed
rate of $35 an ounce.
short run.

But the long-term loans cannot help us in the

The problem is immediate.
I don! think I have to say anything more about the seriousnes
t

of the problem.

We have to discipline ourselves to reduce the dollar

outflow and bring our payments into balance.
important factor.

Time is becoming an

We must take these corrective steps soon.

The longer

the deficits continue, the harder it will be to cure our financial ills.
In closing, let me say that this explanation of the problem
has attempted to hit only the highlights.

But I hope it will give you

the background so you will be able to understand the reasons behind the
steps the government is taking to solve the problem.
Thank you.




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