ERM83 IiTTERiMTATIO2AL BAi:( FOR IlCO1.STRUCTIOIT AiD D2V UOPiZ T RESiARCH DZPARTI Ei1T THE LUTIITT-D S2ATLIS 3ALAIT'C ?O Y 21[TS A.D TE "IOL."C SHOR2.G2" Restricted Economic Polic,r Studles Staff Coordinated b,,r: Alexander Steveenson Aproved by: Leoriard 3. Rist EPS 2 Date: Augu.st 22, 1947 Copy .5.23 -L C1 rORY TABIJ1, OF, CJTITT1S T~TJE MTITED STATDS BAIXTTC OF PAYHE1TTS ATD TIHE "DOLLAR S:TORTIAGEB SUI flIA RY I. Istorical BackGround. ....... ........ .. l 1. The Inter .rar Period ................. . 1 2. The 'Jar Period . . ........... .. * . 2. 3. The First Post'iar Period 2 II. 1947 Prospects . . 4. ... ........... . .... 4 1* Balance of Payment Surplus , 4 2. Pinanci,tl 1ieans Available to meet the Surmlus . . . . . 5 III. The. Regional Distribl: tion of United States Trade 7 .... 7 IV. The ?osition of tile '"Idarshall Plan Countriestt 9 V.' The Period of Re-na.yiient ._............... ..13 VI. Conclusion ... . . .. ... .... , . 15 rinTSM Annex I The United States Balance of Payments Annex II U. S. Foreign Trade by Area Annex III Balance of United States Recorded Trade, by Area Annex IV Export of U.S. to "Ilarshall Plan Europe" Annex V U. S. Government Loan to the U. E. Annex VI Export-Import Bank Loalns to "1ijarshall Europe" Annex VII International Postsrar Credits and Grants Annex VIII Gold and Dollar Position o' Countries larticipating in the Paris Conference THI T77ITED STAT2S BAIACE OF PP..`TTS2I AN'D TIE, '1301iAR SHOPTAGE" Simmary 1. Throughout the whole interwear period the balance of payments of the United States showed a surplus on current account. In the first year after World 7ar I this surplus rose to a peak of over $4 billion, but by 1922 it had fallen to $719 million wrhich was practically equal to the average for the rest of the decade. During the t-enties this export surplus was offset by a net outflow of American long-term canital. Thereafter, it,ith t'e collapse of the multilateral trading system, the export surplus was consistently smaller until the rearmament boom in Europe, coinciding with the sharp American recession of 1937-1938, caused the surplus to rise. In the thirties, in contrast to the pre- vious decade, a consistent deficit on account of other current items tended to offset this surolus, so that in 1937, for example, the over- all current balance showed a deficit of $31 million. 2. In the two years since the close of 7Torld tar I! huge export surpluses have again been recorded, far larger even than those of 1919- 21. 7hereas in those years the export surplus Tras partially offset by deficits on account of other current items, in the last tw-ro years $.t has been increased by large surpluses on account of these alsr. In 1946 the United States export surplus amounted to -6.9 billion and the surplus on account of all trade and service items to $8.1 billion. The current year will in all probability see an even larger excess of currernt dollar re- ceipts over cu-rrent dollar payments. For the first six months of 1947 the net excess of recorded ex'-orts ran at an annual rate of about $9.4 billion and the over-all surplus on trade and service items was at an / A summary table of the U.S. balance of payments in 1945-46 and the first quarter of 1947, together w.Tith an entimate of the balance of payments for the wrhole of 1947, is attached as Anniex I. EPS-2 -ii- annual rate of $12.7 billion. Though some slowing doawn in that rate may be expected in the second half of the year, it seems unlikely that the current surplus for 1947 will fall much below $1 billion. To meet this deficit other countries will use up most of the credits already granted and wTill, in addition, have to liquiidate a substantial amount of their foreign assets. 3. The current dollar shortage is not exclusivelly a European problem. It is world-wide. In the period 1936-1938 the United States had a large export surplus toward Europe, and also trade surrnluses toward ITorth America, Oceania and Africa. These were partially offset by a large import surplus in trade w1rith Asia and a smaller iimport sur- plus towrard Latin America. During the first six months of 1947, how- ever, export surpluses were recorded towerard each continental area. hurope has of course by far the largest single deficit, but the others aggregate very substantial amounts and their position is becoming increasingly serious. 4. The "M4arshall Plan countries" account for the bulk of 7'urone's trade writh the UTnited States. Their net dollar deficit with the TJnited States on trade and shipping account -as about $2.4 billion in 1946, and may reach about $4.25 billion in the current year. This has been met out of credits granted by the United States and out of their gold and foreign exchange holdings. "Then considered in relation to the amouints reauired for monetary reserves and worling balances, however, the latter are no longer large, w-hile at the present rate of disbursements the major credits wTill be substantially exhausted by the end of 1947. 5. The debts to the United States now incurred or authorized are already substantial. Then the period of repayment begins, service of EPS-2 -ii4u.. all existing pre- and Lpost-wiar indebted.ness is estimated lo amount to around $1 billion anniually. Service of this debt should not be im-pos- sible - on certain conditions. One condition is t'hat debtor countries complete their reconstruction programs and achieve internal and political stability. Service of the debt is also de^,endent on a high level of economic activity and more liberal imports into the United States and the acceptance by the United States of a steady and sizeable net out- flow of ca-pital as a normal attribuate of its position as the worldts leading creditor nation. 6. The greatest daniger lies in the yrears betPreen 1948 and. 19509 Foreign needs and thlerefore dollar requirer.ie,ts -ill remain high while Euronels earnirng powrer wrill still be substantially below norMal. Credits available un1der existing authorizations and present foreign-held gold and dollar balances are cuite insufficient to fill thlis gap. If additional aid is not granted, parts of national reconstruction plans may have to be abandoned, and the future earning powTer of the debtor countries reduced correspondingly. EPS-2 TH:E UNITETD STATES BLr,ALiACE OF PAYMTZTTS AND THE 11DOLAR' SiOLTAG-" . I. Historical Background 1. The Interwar Period Although the most striking fact which emerges from an examination of the international accounts of the United States in the interwar peri- od is the lack of any stability or continuity of development, the coln- tryls balance of payments showed consistency in at least one important respect, In every year between the wars an export surplus was recorded. The size of this surplus varied widely. It reached a peak of over $4 billion in the first year after tWorld 'ta.r I, but by 1922 it had fallen to $719 million, wihich was practically equal to the average for the rest of the decade. For the years 1923 through 1929, when the export surplus was often accompanied by a surplus on invisible items, the United States current surplus averaged about $750 million a year, which corresponded roughly to the rate of net outflow of American long-term capital in these years, Thereafter, with the collapse of the restored multilateral trading system and with the world economy adjusting itself to a smaller degree of economic interdependence among nations, the export surplus was con- sistently smaller until the rearmament boom in Durope, coinciding with the sharp American recession of 1937 - 1938, caused it to rise, In 1937, for example, erxorts amounted to $3,349 million and imports to $3,084 million, giving an export surplus of $265 million, and in 1938 the surplus rose to almost $1 billion. A consistent deficit on account of other cur- rent items, arising chiefly from lowered income from American investments abroad, tended to offset the e,oort surplus, however, so that in 1937 the United States overall current balance showved a small deficit of $31 million. 2. The Par ?eriod. W;Iith. the coming o: Vlorld 7ar II new factors entered the picture. While e:ports from the warring cowntries to the United States were drasticallyr throttled doinm, the Alliesl need of American products increased greatly and, during the period when the United States was actually at war, her exports averaged about $11,8 billion annually. The adoption of Lend-Lease, however, made it possible for the large movements of goods needed for the common war effort to be transferred without leaving a heavy debt burden and in fact reflected the recognition by the United States thiat such a burden would not be in its own long-run interestso In 1945, for example, current receipts totalled $15.4 billion, current payments only $8.9 billion, the bulk of the gap being filled by net unilateral transfers to other countries amoulting to about $6 billion. 3. The First Postwpr Year The end of the war d-id. not bring a decrease in the demand for American exports, but only a change in the character of that demand, the need for military suiDplies being replaced by the varied require- ments of relief and reconstruction in the war-devastated areas and, in the more fortunately situated countries, by the accuimulated demand for American goods which had not been available during the war. Since steps were taken to terminate Lend-Lease aid immediately after the olose of hostilities,l/ the enormous e:mort surplus had to be financed i/ The w-inding up of such a vast operation naturally took, a consider- able time, so that Lend-Lease transactions were important items in the United States balance of payments for a year after VJ-Day. In general, the granting of aid in goods and services without specific agreement for payment was discontinued immediately, while assistance continued to be granted to other countries in the procurement of needed supplies under terms specifically requiring full payment for goods and services received, principally through ULTRRA contributions and the 'resumption of large- scale United States foreign lending. The major items in the 1946 balance of payments can be summarized in the following manner: Receipts Payments (billions of dollars) Goods Exported 12.1 V Goods Imported General Imports 4.9 Military purchases abroad and misc. .3 Services (mainly transnortation) e2.5 Services 1.9 Total Goods and Total Goods and Services 14.6 Services 7.1 Net Receipts from Investment .6 Deficit 8.1 15.2 15.2 sDeficit Met as follows: (billions) Export of long-and short-term capital .3.0./ Liquidation of long-term assets .3 Liquidation of gold holdings and short-term assets. 1.8 Net grants of money, goods and services by U.S. ... 8.1 t/ The main items included were commercial exports, UWBRA and Lend- Lease shipments, transfers of surplus property already in other countries, and civilian supplies consigned to occupied areas. _2/ The United States subscriptions to the International Bank and the International Monetary Fund are of course not included. Gross ex- port of American long-term capital amounted to almost $4 billion, while about $1 billion of American capital invested abroad was repatriated. )J/ Net payments on account of personal and institutional remittances totalled almost $700 million, net government unilateral transfers of goods and services, $2.4 billion. II. 1947 ProsPects 1. Balwace of Parmenit Surplus The current year will in all probability see an even larger excess of receipts over payments on account of goods and services. Agricultural prices, which rose steeply in the seoond half of 1946, have continued their upward trend.. And, though some durable goods are still in short supply, in general a much larger volume of commodities are now avail- able for export. In the first ouarter of the year recorded exports amounted to almost $3.6 billion while additional transfers of goods, not included in export statistics, including surplus property already located abroad, certain ship sales, and civilian supplies for occupied countries, raised the total merchandise transferred to foreign countries to over $4 billion, Services reached over $800 million, giving total receipts onf account of goods and services of almost $4.9 billion. Recorded ex- ports have since continued high, reaching $4 billion, for the second quarter, and total transfers of goods and services to other countries reached an annual rate of $20.7 billion for the first six months of the year. Transfers of merchandise to the United States, on the other hand, wprere less than $1.5 billion in the first quarter, and payments by the United States on invisible items brought total transfers of goods and services from foreign countries to $1.9 billion. Recorded general i.m- ports in the second quarter were, as in the previous period, only $1.4 billion, so that unless imports show a substantial recovery in the latter months of the year, payments on account of goods and services will be around $8 billion, w.^hich would give the United. States a surplus on goods and service items of about $12.7. billion. -5- This figure should be considered as a maximum. Food exports, deliveries of surplus ships, transportation equipment and some other industrial goods may be expected to drop somelwlhat in the latter half of the year, while the surplus on shipring account will decline as foreign fleets grow and ocean freight rates drop. In addition, for- eign countries are already taking measures to save their shrinking dollar resources by curtailing imports from the United States, and further such restrictions may be expected, though their extent will depend in part upon the expectations of other countries as to future dollar grants or loans from the TJnited States. Some increases in American imports may also be exnected before the end of the year. On the whole, however, it seems unlikely that the current surplus on goods and services will fall much below $11 billion. That is to say, it will again be of a completely different order of magnitude from those of prewar years. It will be at least four times as great as the level reached in 1920, the second year after the first wrorld war. The addition of $300 - 500 million for the repatriation of United States invest- ments abroad would bring the dollar deficit to around $11.5 billion. 2. Financial Means Available to meet the Lrplus This enormous dollar need, will not all have to be met by orthodox financial means. Despite the fact that T .PRA ald will fall sharply to around $500 million, a substantial proportion of the gap, probably around $2.7 billion net, will be filled by outright grants to foreign countries, even assuming that no new foreign aid program gets under way this year.!/ This would. leave almost $9 billion to be financed through e.g., Argentina, Brazil, Canada, Colombia, Denmark, Ecuador, Mexico, "Tor,-ay, Sweden and the UTnited Kingdom. g/ Disbursements under the Post-UNTRRA and Greek-Turkish aid programs and the Philippine Rehabilitation Act vrill m&ai:e up for part of the gap caused by the end of UE;RRA activity. Personal remittances are estimated at $800 million for the year. long and short-.term cred&is, shipments oL ne.rly mined gold to the United States, and. the liquidation by fore..gn countries of their ex- isting gold and fore ig,n exchanzge resources. Of the foreign credits already grannted by the United States Government at the end of 1946, about $5 billion had not been used. Less than $2 billion more may be expected in new! loans under exIsting authorizations g-' giving total long-term credits available from the United States Go-ernment in the current year of arourid $7 billion. Althoug'i these loans had been intended to last much longer w,h,en they were granted, it is now clear that most of them vill, be exhausted by the end of 1947. During the fLirst quarter of 1947, drafts on them totalled about $1 billion. In thie second quarter the rate of disburse- ment on some items increased sharply, rin.d at the end of June around $2.5 billion had been dra!rn on United States Governmeit credits. The greatest increase has been in drawings on the United Kingdom loan. In the first quarter $500 million wras drairn, in the second qu7arter $950 million, while in the DerioCi from Ju:ly 1 throwgil AuO,-ust 20 a furtller $1250 million was withdrawn, giving totc-l disbursements this year of $2o7 billion. Even if the rate of disbtursements on U. So Government loans slos!s domn in the rest of the year as countries see'- to husband their raDidly diminishing dollar resources, total draLts on toese credits may even exceed $5 billion. Up to $1 billion more may be obtained from the International Banl, and Fund and from private resources including direct investment by nmerican corporations, bringing the aggregate outflow-! of long-term capital to a, minimlun of $5 billion. E/ specially the uncormAited lenrdi2ig Euth-.ority of the £xport Import Bank wfthich amounted to over $900 miLlion at the beginning of 1947¢ -7- By selling ne;rly mined gold to the United States and drawpTing on their existing gold and dollar reserves other countries should be able to male up the balance of the 1947 d.eficit,' But their gold and dol- lar resources are already none too large when considered in relation to existing prices and levels of business activity. Total gold. holdings outside the United States and the U.S.S.R.,for example, were estimated at about $12.5 billion at the middle of 1947, or approximately equal to their total at the end of 1938, compared with $21.3 billion for the United States alone. WXhile reported reserves of Latin America and t'le Union of Sou.th Africa doubled, those of the Ulnited Iingdom and the liberated countries of Europe not including the U.S.S.R. had been reduced by at least 50 per cent fron thleir 1938 total to around $4.1 billion, or to about $4.5 billion if subscriotions to the International Hlonetary Fund are included. In purchasing power over imports they wrere equal to only about a quarter of these cointriest prewar holdings. Thus gold holdings are umevenly distribbuted, .,rith those countries having least wrhich need them most urgently. By the end of this year some, especially in Europe, .iill ezperience acute difficulty in financing dollar imports. III. The Regional Distribution of United States Trade ho veographical breakdown of the United States balance of payments is available. Howrever, the regional distribution of recorded exPorts and imports sho,Trn in Annexes II and III gives some idea of the pattern of international payments between the United States and the rest of the world. 1/ It should be rn.oted, however,that inr the first half of 194.7 foreign countries dipped more heavily into their gold and dollar hold.ings than ia any previous period. Then adjustment is made to eliminate transactions with the International IIonetary Piund and the Initernational Bank, the United Sta.tes gold stock increased by $1424,5 million in the first half of 1947 compared with an increase of $464 million in the thole of 1946. The net decline in foreign short-term dollar assets in the United Staet- int -' t i'^X-t of' 1947 amonted to $565 million. The war has brought great changes in the g,eogra?hicel distribution of United States trade 1'Tith the rest of the wrorld. In prewar years the United States had. a large export sur-plus with Europe, larger even than its overall export surplus, and also sirnificant surpluses in trade with 1\]orth America, Oceania and Africa. These irere partially offset b,y a large import surplus in trade 1wtith Asia and a smaller import surplus with Latin America. In 1946 the total United States export surplus was ten times as large as in 1936 - 38 and there were surnluses to."ard all continental areas except Oceania. The export surplus toward 3u.rope, at $3,302 mil- lion, was rhore than six times its prewar size while that with Yorth America, at $856 million had also grown in arpproximately the same propor- tion. The annral average deficit of p248 million recorded in trade writh Asia in 1936 _ 38 was replaced by a surplus of $436 million, while the comparatively small prewar deficit towrard Latin America wFras also replaced by a surplus. During the first six months of 1947 the overall trade surplus ran at an annual rate of $9408 million, almost double the 1946 figure, and wi,tas made up of surpluses towlard each continental area. The export surplus toward. Europe rose to a rate of $4992 million, or more than half the total, while the surplus toward "Torth America, at $1758 million, wTas twice as great as for the previous year. The export surpilus toward Latin America showred a phenomenal increase to a rate of $1226 million, wh^Zlile that towrard Asia and Africa taken together wras runningZ at a rate twice as great as the figure for 1946. The comparatively small deficit toward Oceania recorded in 1946 was replaced by a surplus of the seme size. -0- Although the details of the picture mig,ht be altered some..hat by the inclusion of other current items in the balance of payments, its general features would not be greatly affected. It is quite clear thet the dollar shortage is not P. Europrean but a worldwide probllem. It is only more acute in Eurone thean in other areas because Euronean exports either to the United States or to other areas have not recovered their prewar volume because, i.!ith the major exception of Sw ritzerlanld, Europets liquid dolla.r assets have been more depleted than those of the rest of the wrorld, and because the prewlar pattern of multilateral inter- national peyments has been, for the time being at least, destroyed. IV. The Position of the "tiKarshall Plan Countries.ffi The above conclusion is true for the so-called "ilarshall Plan Countries," which in fact accounted for the bulk of Europels trade writh the tJnited States. For the years 1936 - 1938 the United States export surplus to them wias $490 million, out of a total surplus toTard Europe of $532 million. In 1946 the United States trade surplus to.,ard the "Marshall Plan countries" was about $2.5 billion, of wrhich over $1 bil- lion represented deliveries of food, about $`0e$5 billion of machlinery and vehicles, and about $0,3 billion each of textile fibers and manufacturess of non-metallic minerals, and of chemicals, metals and metal manufactures. Exports of coal, not including shipping costs, wrere $0.1 billion. For the first four months of the current year the trade deficit of the "Marshall Plan countries1l ran at an annual rate of $4.3 billion. Some decline may be expected in the second half of the year, but the bad harvest and the fuel shortage in Europe, anid the orders already placed I/ Included under this expression are the countries taking part in the Paris Confferenceo -10- for machinery and equiprment .will preclude its being very great, so that the trade deficit .ill probaoly be aroulnd $,4 billion. As is showm in graphic form in Anner IV, the fraction of American exports to the "Marshall Plan co-ntries" w:rhich had to be covered by the receivinig countries out of their owm means has gronm much more rapidly than the American exports to these areas. UIMRAR and- -Lend.-Lease grants have declined and have not been fully renlaced by the program of post- U)R4o relief. Deduction of U1MBRA deliveries andt other outright grants wrould lower the 1946 dollar deficit of the 11Iarshall Plan coLutries" rith the United States to around $2o1 billion, but the addition of dollar costs incurred for ship-ming freights would raise it again to about $2.4 billion. Outright grants wrill showr some decline in 1947, and the addition of dollar costs incurred. for shipping freight will bring the total dollar deficit of the "14arshall Plan coumtriestl toward the TUJnited States on trade and shipring accotmt to around $4*25 billion. As '.ras mentioned above, the dollar shortage is not confined to any geographical region, b-at is 1-orldwide. A measure of the -'orld demand for dollars is given by the overall current sur-plas in the United States balance of payments. Since virtually all countries ex-cept Swritzerland are short of dpllars, they all try to sell their exports against dollars, It is clear, therefore, that with the notable exce)tion of Switzerland, the "M'arshall Plan coantries" are freauently recuired to pay dollars for purchases outside the United States. Their actual dollar needs are there- fore much larger than the above-mentioned deficits to.ard the United States on trade and ship2ing account. Toward Argentina and Canada alone they had a trade deficit of about pA billion in 19469 In fact the overall dollar defi- cit of these countries may be estiriated. at above $5 billion in 1946 and at over $6 billion in the current year. This estinqate is based largely on the I411- statistics of the "iNarshall Plan countriest" themselves, and is necessarily only an approximation. Examination of the trade of the tIMarshall Plan countries" with the rest of the wrorld, however, indicates that the order of magnitude is reasonable. These deficits have been met mainly out of dollar credits and out of the gold and foreign exchange resources of the receiving countries. The credits granted by the United States have been very large, but they are be- ing depleted so rapidly that the most important items may be exhausted by the end of 19L47. As is showrn in Annex V, of the loan of $3,75 billion granted to the United Ktingdom in the summer of 1946, $2,75 billion had been drawm by the end of July, and subseauent August withdrawals and notificar tions of intent to .wnithdrwr total $600 million)-] The other most important credits are those granted by the Export-Import Bawrl The amonMts granted to and. disbursed by the "i.Iarshall Plan countries" are shown in Annex VIe As of the end of iHay 1947 loans amounting to almost $1.8 billion had been authorized, of 'Thich more than $13 billion had been disbursed, Other undisbursed dollar credits available to the "Marshall Plan countries" as of Jume3O, 1947 amounted to only about $1 billion exclading the Greelk- Turkish aid program. Of this $1 billion almost $600 million represented the undisbursed amount of the Canadiarn loan to Great Britaino-/ The gold and dollar position of the "l'arsh