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INTERNATIONAL FINANCIAL PROBLEMS OF OUR ECONOMY Member Board of Governors of the Federal Reserve System Delivered before Fifty-Third Annual Convention Maryland Bankers Association Atlantic City, New Jersey Opening Session, 9:30 A.M,, May 9, 1949 For Release in Newspapers at Time of Delivery INTERNATIONAL FINANCIAL PROBLEMS OF OUR ECONOMY iiig our international as well as in our domestic economy we are vitnoss5fter.a Adjustment from deficit to surplus conditions. This readjustment is an i nd?Infth.of our inflationary postwar boom. Crippling bottlenecks in production Pro^QUoying scarcities of consumers' goods have now largely disappeared. The «cU * we_currently confront is one of sustaining a high level of economic y without the questionable benefit of inflationary supports. Ikclj ° ^ U L - S . Export Surplus in 1 9 ^ 6n In the % domestic field, the readjustment has been reflected in a softC prices, a slight decline in industrial production, and some increase in spent ;?fteiJt« The backlog demand of the immediate postwar period has largely ^Ved^t f o r c e « The country's plant and equipment have been expanded and imp5ss peacetime needs. Inventory pipelines have been filled. The ex^s ^ effective demand over available .supply at prevailing prices and incomes decrer disappeared. Reduction in the level of prices without substantial PliesU.e 111 consumers' incomes may be essential to avoid accumulation of sup-ri evcecs of effective demand. f f JUctiQ • the international field, readjustment is indicated by a sharp re°ur export surplus. During the early postwar period the problem of einand heen much more acute than - n the United States; in countries •ientj^^^y affected by the war, goods had been far more scarce end a suffisnci k e % rapid increase in production was far more difficult to achieve c ^t Ve'r °untries were ? nxious, therefore, to receive any amount of exports, tj0 s u PP 1 y their foxier customers with corresponding quantities SUff In ici however, the output of many war-devastated countries rose ^y to make it possible for them to replace shipments from the United ^tieg *th domestic commodities, and at the same time to send increasing quantheir products to us as well as to other markets. As a result, our 3 d i n e d and our imports rose. ln we killi I n exported goods and services valued at &16.8 billion, or Muea than in 194-7; on the other hand, we imported goods and services denv l 0 # 5 billion, or billion more than in 1947. Our export surplus CU n e d by $5 billion, from $11.3 billion in 1947 to $6.3 billion in 1943. n Pla decline becomes even more significant when we consider that it te rrn ^ Ce o des Pite an increase in our average price level of about 9 per cent. f VoluniQ . — t h a t is to say, in terms of constant prices—our exports Per declined by about 13 per cent and our imports increased by about ^ * Should similar changes occur in 1949, our export surplus would ' ^ disappear. i^ 0 relat^10 m o s t imP°5'tant single factor influencing our international econo n s iri thiB 1943 was the recovery progress in Western Europe. Countries tQci area r e c e r. Ucti ived in 194.8 about one-third of our total commodity exports. ^Coiloniic0p i n m o e t countries which are members of the Organization for European ^ o n s t ^ ° P e r a t i o n has now reached or surpassed the prewar level. Industrial n e Messed ' h a s t e n e d by assistance under the European Recovery Program, has to the ^ i p m * Point where the most important gaps in the need for capital °8®ther , a n d r a v mc-terials have been filled. 'Agricultural rehabilitation, U . s . aid, has so improved living standards that the productivity of ^-Port^t^5 r i s e n a l m o s t prewar level. As a consequence, production of five c °al in t u ^ 0 0 ^ ' namely, foodstuff a, textile products, ships, motor cars, and theSe ^ e s e European countries has increased so much that our exports of Uhig oui° 'S d e c l i n e d by a total of more than $1.6 billion in 194-8. At the same ^ U o n i i n p o r t s o f machinery, motor cars, and textile products rose by $300 tions b ; ilore over, the rehabilitation of the merchant marine of seafaring na? u g h t about a decline in our net revenue from transportation from $1 t o ler,s k&st 'than $500 million in 1948. Altogether, we find that at an 1:i on ° be tit f > o r almost one-half of the total decline in our export surplus, aced directly to the success of our assistance to Western Europe. f^er v -^creased production in Canada, Latin America and the Middle East, to6 size^hi t h e l a r g e v o l u m e o f out P u " t i n the United States, was responsible for H u b ^ X e . r i s e in our imports of raw materials—like oil, metal ores and sem^Xt,:i''le f i b e r s > dumber and wood pulp, meat, coffee, cocoa, tea, and Hlii0J'""luxury *,f)odstuf f a• The increase in these imports amounted to about cr the one-fifth of the decline in our export surplus. The improvement ^ cont ^ ^ i o n a l economic situation is, therefore, responsible for'about 70 01 the drop in our 194-3 export surplus. 6 er ! > mny f h ° r e m aining 30 per cent of the decline .in the export surplus, howasc fi o ribed mainly to effects of the war that' have not yet been come peted jl f^ 0 m e ' T h e continuing poverty of a large part of the world is reso cclled d^^res* ~ dollar shortage, namely, the progressive exhaustion of 0 r v e s o f 1710st our" foreign countries. For instance, this shortage holds n j ^ i e s * p o r t s o f industrial and electrical machinery although virtually all ati11 i r badly in need of further modernization and expansion of of^uTl ^nipment. In fact, the entire output of such machinery in all na tions could not satisfy the over-all demand if the purchasing power ° c°nntries were equal to their needs. p 1 " r t i o u l a r , the decline of more than $700 million in our exports to $ the Probably was due to the depletion of their dollar resources durPostwar years rather than to a reduction in their need for our nbries like in ^y'i Venezuela which still hod emple -j oiler reserves have Ur their to ° purchases in this country. A decline of $>400 million t0 the sterlin rec° S f-rea outside of Europe, while in part attributable overy of the United Kingdom, was in part due to the "dollar shortage". ^ 3e ttl ed pother part of the decrease in our exports can be attributed to the ical v/j ^he F a r 2 situation in the countries bordering on the Soviet Union and a th 0Hi> p r , f: T h e unwillingness to remain dependent upon the West, coupled §3r S°viet n 7 b i t i o n o f e x P o r U ? o f strategic materi-Is to the area dominated by 0n by mi llio > re suited in a drop in our exports to Eestem Europe of about ab °ut < i i C o n t i n u e d strife in the Far East reduced our exports to that area ^ 0 0 million. e ^ Xpo^+ S e d e v 0 lopments account in the main for the sharp decline in 1948 0ln ti? ic conr ^ r p l u s < T h e y indicate substantial progress toward more stable to finH i o n s * I n t h c financing of the export surplus, however, we conles ^oI s th £ v i d e n c e o f the decisive role of the aid given by the United Sto States. n ^ by r' billion, only about 20 per cent less than in 1947, was -y Government loans and grants and by advances by the International - 3 anc ^diV*^ ^ International Bank for Reconstruction and Development. An na Priv-.+° ^ ^ ^ 0 million, or about the same amount as in 194-7, was financed by Euro e reinittances, occasioned mainly by the continuing sorry plight of the br0a^GJn r N a t i v e s and friends of our citizens. Private capital invested athe xj ° t a l f c d &900 million (net), a small increase over 1947. Sales of gold to ni e< m ? S ^ t e s amounted to $1.5 billion, or almost 50 per cent less than in itigs* . d e c l i n e probably reflects the heavy liquidation of foreign gold holdf orei»ri°r ^94-8. Sales of gold .in 1943 were largely offset by an increase in holdings of short-term assets in this country. "^^^^ChanRes in Export Surplus From the point of view of our international relations, the decline in furplus is welcome, especially insofar as it indicates progress of abroad. In 1948, when inflationary pressures still prevailed in it was also welcome from the point of view of our domestic finanexport surplus is financed—apart from private relief contribuari innei^ler U. S. Government funds, private extension of credit, or ° f g o l d * A 1 1 three methods have inflationary effects. The largest to achi n a l ex P en <iiture—Government grants and loans—made it more difficult ex tende!T/e a budget surplus of decisive anti-inflationary proportions. Credits the V o l finance purchases by foreigners contributed to further expansion in C u of ° 34 our money. Gold inflow provided additional bank reserves which come the basis of a multiple expansion of credit. ex *ehabiv+ this c cial n s irab]_e ^ further decline in our export surplus, however, might have less de^hen dom^° n ! 3 e q U e n c e s ^ d o v n w a r d pressures developed in the domestic economy. H pr ®stic d e m a n ^ contracts, a strong foreign demand is beneficial because C ns ° tru ^as t e e n a rgued, by opponents of the joint program of European rene was ^ fit° ^ ^ ^ a t o u r intended less to help Western Europe than to Ur Wn econom ^ serv° ° y by opening otherwise unavailable markets for our goods t 0 ti C e S * T h i s contention does less than justice both to our motivation - a c t u a l situation in 1948. In that year domestic demand could have v ^aift u irtually all our exported products, and the export surplus was a fu ture * * 0llr economy. Moreover, the possibility that we might benefit in the ^ harmj0111 i n c r e a s e d sales abroad would not mean that foreign countries would our to —unless grossly mismanaged—would in any case cona %eign positive contribution to foreign economies. In fact, the needs of C u ° Id n °0Un"tries for additional goods and services are so immense that they ° b e satisfied for a long time to come by the output of their rehabili°uuctive systems and all our aid combined. ^ Ve i assistance to foreign countries could harm their economies only 8l3 t,ed thgr. " on exporting goods that would compete with their industries and % ^ o u r n a t i o n s were unable to shift their production to other, more advanm a t e a ^ i v i " b i e s * Actually, our aid consists overwhelmingly of foodstuffs, t i ^ + u > a n d capital equipment and the most biased protectionist could + - m a i n t a i n that such shipments diminished the opportunities for the<^ i n recipient countries. On the contrary, they make it possible i ^ 6 countries to increase employment, production, and consumption at the - k - fr0!n 1n(rt In any case, our export surplus probably will net decline as rapidly viU ^ 8 ( to 194.9 as it did between 194-7 and 1948. We may hope that imports to increase, both because of large demand at home and because cf su to PPly abroad. We also can expect exports of a number cf commodii.Lies 6f5 sarv Our foreign responsibilities, however, will make it nec6: U s f>or S 0 I u e t i m e t o c o m e ship certain 'port amount of "unrequited" that is? exports not paid for by imports. QUl» first of these responsibilities concerns the areas occupied by ?rces' 1n contrary to the general trend, our exports to Gerth^1*3'^ a n c i Korea were considerably larger than in 1947. While it is ic to c/dfc n o * u -ther rise in aid will become necessary, it would be unrealist°Urit upon too rapid a decline in the needs of these countries. f second responsibility relates to countries threatened by foreign ^eCeo^0n* 19^3, that responsibility resulted in increased exports to ^ceGsa^nci Turkey. Under the North Atlantic Pact, further increases may be 'u y enable the European members to fulfill their treaty obligations. -h responsibility exists in respect to countries which have l 'Hh the1^'0 ^ o n S-term plans for reconstruction and development in connection k^rarv f U r ° ^ e a n Heconstruction Program. It would be wasteful, as well as 1. ° U r economic and political interests, to leave that work unfinished ns at +f ? u r a ssistance below the amount required by the participating na^P-ital , leil ' current state of recovery, We have just started to deliver g 0 o f ° 0 d s r'-ther than foodstuffs, and a decline in domestic demand for capQvn -S possible an increase in deliveries without deprivation of 41 -^dustrv. ^ dem&nd for capital goods. Such a development would be most 0ur own economy if it were timed so that increased demand for urecic would coincide with declining needs of the Western European CQUn tries V Cl>e He considerations do not imply, however, that we should p.rtificialxport surplus not warranted by the needs of the recipient nato provide 'ie>i\y Q°*der ,7 provide markets maricexs for ior our our goods. gooes. Even .even if ii drastic aras^ic anti-deflauna-aeiia0 r PPoi> tnnI+/° ns should become necessary here, che Government would have ample alce g ^they It +to tak 0 >Ti& "'0.^ domestic measures that would expand incomes and expenditui W incoIue /^t ? ~ groups. Moreover, the sums involved in any prospective ^ti0n Plus probably would not be large enough to be decisive in anti-deGn e Qgeign Trade ^ea^"thyinternational economic system requires equilibrium in our tional payments, apart from those commodities sent to foreign ^ther • Equilibrium does not mean equality of exports and imports ec iuality of our export surplus—apart from the relief shipments J^noe - 5 mervt ioned—.and the amount of our voluntary foreign investment. na Such an tion . equilibrium, however, would not restore satisfactory interre a n e } tions unless it accompanied a high and expanding level.of world gr& -nts - c j u i l i b r i u n i a s c u c h could be achieved any day by cutting out Government pr loa ®ssi0 n s and permitting trade to decline to the low levels of the dein years devel * H o w e v e r , progress in rehabilitation of war-devastated areas and ly, u n d °P me nt of backward areas would be halted, our exports would drop violent^an thaf UP i m p o r t s f r o m these areas could not increase further. This would the benef•+° reiSn c o u n t r i e s a G w c l 1 a s the United States would have to forego its of buying and selling goods in the most advantageous markets. not s o mu >At R h l g h l e v e l o f w o r l d trade, however, equilibrium would be reached b e n C r b y r e d u c i n £ ©sports as by increasing imports. Such a development fruits o f ! ^ a 1 1 P a r t i e s making it possible for them to enjoy fully the the international division of labor. Voulci beco C ° n G U I a e r s generally welcome the added quantities of goods and services d U c e r s m \ a V a i l a b l e f ° r d o m e s t i c consumption through an increase in imports. fi ned to „ o v e v e r > frequently favor additional imports only if they are conn °t C o r W m a t e r i a l s o r other producers' goods or to such consumers' goods as import ?ete W i t h d o n i e s t i c products, it so happens that the greater part of that type our ^eriaig i > i S * In largest import items were industrial 0ffee oil /° , > ruhher, "ool, wood pulp, copper and t c. , G sugar and Per'ce^t > cocoa; these nine commodities alone accounted for about !ctinty ° f 0 u r e n t i r e trade. If we maintain our high level of economic at We C a n p r o b a b l y a b s o r b Prod u ever-increasing quantities of the commodities i h°me on! e r S f a v c r ? i n c lading high-quality goods which could be manufactured d at labor P r o h i b i t i v e costs because of the large amount of highly specialnecessary for their production. ro ^Porti ng I t 1 1 S u n l i k e l y > however, that we can maintain a high level of trade by a ^ c t s °r y t h o s e commodities and services which do not compete with domestic i0lne rav % mn + f a C t ' p r o g r e s s i n synthetic production has reduced our demand for h 8 e Part f n a l S ' especially silk and rubber, which before the war formed a imports vhVe t o inol * W e m u s t f a c e the fact thrt our imports will also lc h are ^ T S O m e con sumers' goods which could be produced domestically bat produced at greater advantage abroad. !? £ s t ic D r n , i n c r e a s e i n s u c h i m P° r ts will, of course, be resisted by competing si, n t a ge of x,°erG- T h e resistance will become more stubborn as the comparative forei n ef? ^port" 8 exporter increases. In some cases, an increase* in 0t u m Pon°i i? actually lead to hardship. Even in those cases, however, the VQ °ts on t u n i d u a l industries would not be more drastic and the over-all thUla *esui+ ? e c o n o m i e s a b r o a d and at home less severe than the damage that e m fallure P°int. to maximize foreign trade. An example will illustrate Of • If Ve were to reach li ^Porto equilibrium by reducing exports to the 19^3 level if r GXport ndus > W i tries would have to curtail sales by about $6 bil^ e i of e H e r > w e were to reach equilibrium by raising imports to the 19^8 ^t. x / ? aoinestic industries would have to curtail sales by the same ° cases, it is assumed for simplicity's sake that other domestic - 6 Sales anr) e:(p0r+ .Pur<chases would remain unchanged. If we used the method of cutting their ^ v o u l d hit those producers that have proved to be more efficient than goods 0I ° r e i £ n competitors. However, the method of cutting sales of domestic leoo J JlPeting with imports from abroad would curb those enterprises that are v °rld than foreign producers. From the point of view both of the Prefp>,ef?noiny a n d the domestic consumer, the second solution would be far •arable to the first. ex ma Pect ^ h a z a r d a forecast on the basis of past experience, wo may llibriuin iod ^ to be reached after the end of the European Recovery Program tion< ' d t _ a point somewhat in between the two extremes posed by our illustras our econom (iriclUcj.>n y should suffer serious recession, a level of imports Services Since t h ^ v ) o f 1 0 t o 2 0 P e r cent above 19/,S would seem feasible. du Cerg / ie b u l k oi' these imports would be in the fields of crude materials, pro^ l e s t i ^ 0 0 ^ Qnc^ °t iier commodities end services which do not compete with finest! ^ ^ t s , such an increase would not involve appreciable hardship for n r v p r o d u c e r s * * A t the same time, the recovery of the rest of the world T he result-an e x p o r t I e v e l o f 10 to 20 per cent below 194-8 seem attainable. 1948^ p r v l n g e x P ° r t surplus of about $.2 billion, or almost 70 per cent below 6as U y b , l y c o u l d b e covered by private investments alone, or even more ei gn t r a d - l n V e S t m e n t 3 p l u S m o d e r a t e relief contributions. Such a level of forget a s . e represent about the same proportion of our gross national proa somewha ' rs t World ^ ^ t lower ratio than prevailed either before the a war or during the inter-war period. per Pect ation "j;he hope for achieving such a balance is based primarily upon the exp^n V e b i- 1 " W G s h a 1 1 n o t repeat the mistake of the last interwar period, s t expe 1 6 V e d w e c o u l d expand exports and at the same time restrict imports. aS V e eVer Perm> n C e """ t h a t i n t h e l o n g l u n f o r e i £ n e r s c a n b u / f r o m u s o n l y a s m u c h t h e m t 0 C e l 1 t0 us ywhere " ~ i s already repeating itself since our exports are restricted by the so-called dollar scarcity. j^th' U s . ^ or tunately, the main trading nations of the world are ready to join 2° Minium Un- i n t e r n a t i o n a l program which would help us expand foreign trade ^ °Pe, ' T h e regional commissions set up by the United Nations for an u AlT10rica nio n > t h e N e a r East, and the Far East, as well as the Pan-Amerto-a n d t h e Organization for European Economic Cooperation, are all Uci ^ v e l o ^ a r d this end. In addition, the International Bank for Reconstruction e h ^ l e ther + n t h a s G t a r t e d to grant credits to undeveloped nations, which will e J t i o r i al c n xpand their production and to participate more actively in interUs merco tirig J * T h e International Monetary Fund is tackling the problem of nrealistic * lift exchange rates so that the main trading nations can grad^ e d i n t s ° m e of their most irksome exchange restrictions• Finally, the proVnati n a t i o n a l T r a ^ e Organization should become an important forum in Varyi^*5 °P er ating at different stages of economic maturity end struggling lVer proble gent m s of balance-of-payments disequilibrium can reconcile their n terests and substitute cooperation for international economic warfare. tSVe °ur q 1 1 those organizations, however, can work successfully only if we interna than t ^ t i o n a l economic problems in a manner designed to expand rati ^ternav r e 3 t " r i c t commerce. Our economy, which has become the largest source Su "^the PPlies of goods and services, cannot escape being at the same international market. Neither regional organizations, Uri ited States i - 7 wtuwi P^act ^ u x wxcnange r a m s , nor prom, dj.^ ion 01 u m a i r excnange inu ora es c a n ab^ Q x? restore equilibrium in international economic relations if we Sx make our dud ^ Cti ^ 3e financial resources available to our customers or 6 again cretf^ , "their poods from our territory. It is fortunate indeed that a adapted8?* " t r a d e P o l i c y aimed at international cooperation will also be best vO meet. +.Vl£> fnflir-o r>onili yamM+c f nnv Amap+ ! r\ 0Ar,tinmw
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