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Talk by \{. Braddock Hickrnan, President
of the Federal Reserve Bank of CIeveland, at
the annuaL rneeting of 350 officers and directors
of The BancOhio Corporation a.nd officers and
directors of its ZZ af.Í.íliated banks at Colurnbus'
Ohio, on Monday, F'ebruarY ZZ, 1965.
For Release: TUESDAY AMrs' February 23' 1965' and After
THE BALANCE OF PAYMENTS SITUATION
When Lee Stoner invited rne to speak to you several rnonths ago, he asked
rne to talk about rnonetary policy and the Open Market Cornrnittee of the Federal
Reserve systern. since, then, one of the principal interests of the Open Market
Cornrnittee has been the U. S. balance of payrnents situation, to which we have had
to pay increasing attention in recent weeks, I thought it would, therefore, be
tirnely and pertinent if I would talk with you today about this problern and what
it involve
s.
My career as an econornist and prognosticator has been a checkered one,
but in the balance of payrnents aïe-a I",have occasionally been known to hit the
nail on the head. T o year" o.{o last rnonth, lot .*"ttple, I talked to a group
at the University of Kentucky on this subject, and I began with the staternent that
the U. S. balance of payrnents--or rather the deficit in that balance--was one of
the rnost serious probleins facing the country. My f eeling then was that strong
steps.were needed to irnprove the situation--and these steps were not taken. It
is
an undesirable state of
affairs when, sorne two years later, I can begin a talk
on the sarne subject with the sarne staternent'
(rnore)
President 'W. Br¿uddock Hickrnan -Z-
In every year but one since 1950, the United States has experienced
a
deficit in its balance of payrnents. In all but one year since I950 we have paid
out to the rest of the world rnore than the rest of the world has paid us, Total
payrnents by the
U. S. to other countries since 1950 have exceeded receipts
by
nearly $35 billion; in the past seven years alone, annual deficits have totaled
$25
billion, or an average of $3.5 billion ayear. This can go on for just
so
long. Moreover, progress in correcting the irnbalance has been very slow
indeed. Ín
1962 through L964, the
deficit declined by only $300 rnillion ayear .
At this rate, it will take another ten years for us to wipe out the total deficit.
The situation becarne particularly serious in the fourth quarter of. 1964,
The year as a whole had been expected to show substantial irnprovernent, and
the first quarter of the year was favorable. But the situation deteriorated as
the year progressed, and the fourth quarter changed the picture cornpletely.
The deficit
accounted
for the fourth quarter was by far the largest in our recent history,
for about half of the whole yearrs deficit. This developrnent points
up the Lact tÌl,at the balance of payrnents situation can change very quickly- -
unfortunately, often for the worse.
(rnore)
and.
President W. Braddock Hickrnan -3A deficit has to be financed, and the way in which it is financed has
world-wide irnpact. This becaûre very obviouts in the fourth quarter. The United
States rnust finance
its deficits either by inducing foreigners to hold rnore
dollars in the forrn of bank balances and short-terrn U. S, securities or by
perrnitting thern to exchange their dollars for sorne of our gold reserves. As
bankers, we all know that no individual or business can spend rnore than is
earned indefinitely and that we can rnake up the difference through borrowing
or drawing down on savings for only so long. The fourth quarter
o7 1964 rnay
well have been the turning point for the United States, in that we lnay have
reached the lirnits of world acceptance of our continuing deficits.
Sorne recent events
will illustrate this. In
I9 64 as a
whole'
ou1
creditors built up their dollar balances substantially, but drew on our gold
reserve by only $125 rnillion. That was the srnallest reduction in our gold
reserve in the past seven Years.
But this year is an entirely different story,
with our gold stock already down $450 rnillion, over three tirnes the entire
loss of 1964" At Ieast one European country apparently intends to exchange all
future net increases in dollar clairns for goId. Furtherrnore, there seerns to
be increasing resistance on the part of several rnajor industrial nations to
increasing U. S. investrnents in their econornies. Individuals in France,
Gerrnany, the Netherlands, and Belgiurn have begun to grurnble about Arnerican
subsidiaries rnoving into those countries"
(rnore)
President \il. Braddock Hickrnan -4These foreign attitudes rnay be a
little easier to understand against
the
background of tirne. The United States has been running balance of payrnents
deficits quite consistently in the postwar period. Before L957, this was an
intentional policy, in that we were trying to fill the world need for dollars to
finance reconstruction frorn 'World'War II. By 1958, however, lrlost European
nations had recovered frorn the war to such an extent that they began to use
our deficit dollars to build their financial reserves. The result was the first
large drain on the U, S. gold supply.
Since I958, dollar clairns held by foreigners have increased sharply,
serving as a rerninder that our gold stock could be threatened. Our Governrnent has had to resort to a nurnber of special financing arrangements to
induce our creditors not to exchange dollars for gold. These technical
arrangefirents include currency swap agreernents, special Treasury bonds
(known as Roosa bonds), and advance payrnents on foreign debts to the
U.
S.
Most recently, a law has passed both Houses of Congress to increase the supply
of gold that is free to rneet the dernands of our creditors. I arn referring,
of course, to the rneasure that elirninates the necessity of holding gold reserves
against rnernber bank deposits at the Federal Reserve Banks.
Now what has been causing our balance of payrnents difficulties in the
past few years?
.\tre
had sorne warning in I958 that the so-called world dollar
shortage of the early postwar period had turned into a dollar surplus. It was
not until L960, however, that rneasures were taken to counter-balance our
deficits. But progress has been poor, with great expectations disappointed
f
requently.
(rnore
)
President W. Braddock Hickrnan -5'
What developrnents
in our international transactions share the blarne?
In a nutshell, our current earnings overseas have been Iess than our foreign
Ioans and. investrnents and Governrnent grants and Ioans. In effect, we are like
a bank that
is over-loaned
and over-invested'
An exarnination of the rnajor categories of the U. S. balance of payrnents
accounts reveals sorne contrasting patterns. For one thing, we have achieved
alarge net surplus on current account in recent years. This rneans that we
have earned. rnuch rnore frorn the export of goods and services than we have had
to pay for sirnilar irnports, Also contributing to the excellent showing of this
category is the increasing strearn of incorne frorn U. S. investrnents in other
countries--incorne in the forrn of interest and dividends on foreign stocks and
bonds and profits returned frorn overseas branches of U. S. cornpanies.
Our past showing on current account does not convey a picture of
a
nation losing out in its current transactions in world rnarkets. This is
particularly true in rnerchandise trade where the United States has a very
strong and favorable position in exports. About the only "losers'r in the current
account are the large annual exodus of U. S. tourists and their nì.oney to other
countries and net outpayrnents for pensions and charity,
reflect the prosperity of our nation.
(rnor
e)
Even these outflows
President Vü'. Braddock Hickrnan -6-
Unfortunately, our net earnings frorn sales of goods and services abroad
have not been large enough to wipe out serious deficits
in other categories of the
balance of payrnents. 'We know that U. S. Governrnent grants and loans abroad
have been large throughout the postwar
period, reflecting the role of this country
as a Ieader of the free world. Many of the decisions that shape these flows.of
funds are political ra.ther than econornic, but efforts have been rnade to reduce
the drain. The Governrnent is struggling to irnprove the efficiency of U.
S.
foreign aid prograrns and to obtain lrrore assistance frorn other countries in aiding
under-developed areas of the world. One effective counter-m.easure has been to
increase the proportion of U. S. aid that is spent directly on U. S. rnerchandise--
so-called rrtied aidrr. Governrnent capital flows continue to represent a serious
drain on our balance of payrnents, but recent efforts to hold down these flows have
paid off.
The rernaining rnajor category in our international accounts reflects trans -
fers of private capital. Private capital outflows have been a constant drain on our
balance of payrnents in recent years, clirnbingto a peak level in the fourth quarter
Iast year. Such outflows rnay be long- or short-terrn in nature and take firany
forms. Long-terrn capital outflows generally are divided into two parts: d.irect
investrnent (spending by U. S. cornpanies on branches and affilíates oveïseas) and
indirect investrnent (extensions of longer-terrn U" S. bank loans abroad and U.
purchases of foreign stocks and bonds.)
(rnore
)
S.
President'W. Braddock Hickrnan -7Basically, Iong-terrn funds flow out to other countries because profit
opportunities are greater there than here. U. S. funds have been readily
available because of relatively easy conditions in credit and capital rnarkets, the
high levei of iiquidity in the econorny, and the increasing volurne of earnings.
The outflow of direct investrnent has been particularly heavy to Europe, as
Arnerican cofirpanies have rushed to get established in the Cornrnon Market to
take advantage of tariff benefits and attractive rnarkets. Many of the countries
that have received large U. S, direct investrnents are the sarne ones that have
been taking
U. S. gold. Last year, the net outflow of direct investrnent from
this country rose to rnore than $2 billion.
Indirect investrnents also have been increasing rapidly, so lrruch so that
controls were proposed in 1963 to restrict use of our capital rnarkets. U.
indirect investrnent rose sharply during the Iast half of 1962
and
early
S.
1963,
chiefly in the forrn of new foreign bonds and stocks floated in our capital
rnarkets. This developrnent prornpted the Treasury to irnpose the interest
equ¿lization tax, designed to rnake foreign borrowing nìore costly. The threat
of the tax and its effect when enacted did have sorne success in restraining this
type of capital outflow, but the success was lirnited because under-developed
countries were excluded frorn the tax and Canada, the largest foreign borrower
in the U.
S.
, was exernpted.
(rnor
e)
President W. Braddock Hickrnan -8-
Moreover, a new and
off setting
trend developed, when foreigners turned
frorn our capital rnarkets to our banking systern as an alternative source of funds.
Beginning in 1963, there was a very large expansion in the volurne of terrn
lending to foreigners by U. S. banks, lending that was exernpt under the interest
equalization tax. Terrn lending in 1964 arnounted to about $l billion, and was
four tirnes as large as in
Sorne outflows of
196?-.
U. S. capital , including bank loans, are short-term
in nature. In addition to bank loans, such transactions represent the shifting
of liquid corporate funds frorn a bank balance here in Colurnbus, Ohio, or
Cleveland, to a tirne deposit in a Canadian bank or into British or Canadian
Treasury bills. Short-terrn capital outflows in the aggregate rose rnarkedly
in 1964, following sorne irnprovernent in this area in the previous two years.
Because liquid funds usually rnove to gain an interest rate advantage, the
Federal Reserve and the Treasury have t ried to keep interest rates here and
abroad in rough alignrnent and to avoid or cushion disturbances in world
financial rnarkets that rnight lead to speculative runs against the key reserve
currencies (the pound and the dollar). Despite all our efforts, the outflow of
total short-terrn funds frorn the U. S" was not discouraged last year; in fact,
the volurne rnay even have doubled frorn the 1963 level to reach $Z ¡ittion.
(rnore)
President 'W. Braddock Hickrnan -9The overall deficit in the fourth quarter of last yeanl has caused grave
cÒncern in this country and abroad, particularly because
it cafire on the heels
of the currency crisis in Great Britain and despite efforts of the Federal Reserve
and the Adrninistration to
correct our balance of payrnents difficulties. Speaking
very frankly, the lack of success in controlling the deficits has weakened the
international position of the dollar, put the United States in a bad bargaining
position in world politics, and harnpered policy actions concerning dornestic
econornic activity. As a result, the President with the full support of the Federal
Reserve System has initiated a broad-scale prograln to cornbat our balance of
payrnents situation. Granted that sorne of the fourth quarter developrnents rnay
have been temporary in nature, the basic problern has been going on
far
too
long and perm.anent progress has been rnuch too slow to be tolerated. As the
President pointed out in his special rnessage to Congress on the balance of
payrnents on February I0, accelerated progress rnust be achieved in order to
assure therlcontinued and growing strength" of the dollar in world rnarkets.
have told the world that the dollar
keep
is 'ras good as gold",
and we rnust
'W'e
strive to
it that way so that the world will be willing to hold dollars "as a safe and
convenient rnediurn of international exchange.
rl
The new balance of payrnents prograrn has special significance
as rnernbers of the financial cornrnunity, and so
I would like to
for
us
spend the
rernaining rninutes in outlining the rnajor proposals. There are two basic parts
to the prograrn: first, recofi).rnended legislation, and second, rneasures needing
voluntary cooperation. Let rne surnrnarize tlne requested legislation.
(rnore)
President 'W. Braddock Hickrnan - l0The interest equalization tax would be extended beyond its original life
to rernain in effect through 1967, and broadened to cover nonbank loans with
a
rnaturity of rnore than one year to borrowers in developed countries. The
President also irnposed the tax on bank loans of sirnilar rnaturity to the sarne
borrowers. Congress has been asked to provide banks with irnrnunity frorn
the
anti-trust Iaws to allow bankers to serve on cornrnittees seeking to reduce
foreign loans.
Legislation also will be requested to irnprove tax incentives affecting
the purchase of U"
in the United
S. securities by foreigners, in order to encourage investrnent
States.
Recognizing the irnpact of foreign travel on the balance of payrnents,
the President has asked that the duty-free exernption on overseas purchases
by U. S. travelers be reduced frorn the present $100 to only $50, and applied
at the retail rather than the wholesale level.
The heart of the new prograrn--the real punch--is contained in a series
of voluntary proposals applying to banks and businesses. On the one hand, the
Cornrnerce Departrnent is going to deal with business corporations in an atternpt
to restrain their loans and investrnents overseas. For exarnple, U,
S,
corporations will be asked not to increase their holdings of Canadian tirne
deposits or British bills. Furtherrnore, businesses wiII be requested to return
rnore foreign earnings to this country, to borrow funds abroad, and to lirnit the
establishrnent or enlargernent of new plants in the developed countries.
(rnore
)
President 'W. Braddock Hickrnan -ll -
In addition to negotiating the voluntary investrnent restraint prograrrr,
the Cornrne,rce Departrnent will continue its vigorous efforts to prornote growth
in U. S. rnerchandise exports. Arnerican business will be rerninded again that
continued wage and price rnoderation
is essential jn order to strengthen our
world trade position.
The Federal Reserve Systern is assigned the responsibility of dealing
with banks and other financial institutions (insurance cornpanies, pension funds,
charitable institutions, etc. ). Banks are being asked to lirnit their foreign
lending to finance U. S. exports and to restriet the increase in their total foreign
clairns this year to 5 percent of foreign loans and investrnents hald as of
Decernber 3I , 1964. Specific details about the voluntary lending restraints are
still being forrnulated, but we already know that there will be rnany problerns to
be solved in the adrninistration of the prograû).. For exarnple, we know that sorne
banks are already forward'-q6s1111itted to provide credits to foreign countries in
excess of the 5 percent guideline--and if these cornrni.trnents are firrn, they will
have to be honored. At the sarne
tirne, special efforts rnust be rnade to prornote
export credits so as not to hinder sales of U. S. goods abroad. Finally, the new
restraints will not be equitable for all banks. Those just starting in the business
of foreign lending will ha.ve fewer rnaturing foreign loans that can be renewed or
extended to other foreign borrowers than banks that have been operating
for
a
long tirne in the foreign field; in effect, each bank will be tied into its existing
foreign loan base on the books on Decernber 3l , 1964.
(rnore
)
President'W'. Braddock Hickman -lZ,-
Neverthelesg, despite r:rrany problerns, we rnust rernernber the national
irnportance of the entire program.. l,tre rnust defend the dollar and the position
of the United States in world finance, The heart of the balance of payments
progratn is voluntary, as opposed to one based on direct controls, and it is in
our national interest to join in to the fullest extent. Thus far, all the Fourth
District banks that I have contacted will cooperate 100 percent. There is
sorne
foreign skepticisrn--but I think I know the Arnerican people--and particularly
bankers--better than they do. If we all pulI together, wê câfi rnake this thing
work,
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