Foreign Relations of the United States, 1950, National Security Affairs; Foreign Economic Policy, Volume I

Department of State Committee Files, Lot 122, Box 15559

Attachment to the Memorandum to the President of February 16, 1950¹

confidential

[Washington, February 16, 1950.]

The Problem of the Future Balance of Payments of the United States

1. Two economic facts of international significance have emerged during the post-war period which stand out above all others. One is the tremendous increase of production in the United States. The other is the heavy dependence of the rest of the world on this production. At the same time, the obligations due the United States from other countries have increased, their sources of invisible income have diminished; their resources of gold and foreign exchange have been reduced, and the pre-war pattern of trade has been greatly altered. We have been able to maintain the flow of our products to meet these foreign needs only in part through the normal economic processes of international trade, public and private investment, gold purchases and the like. About one-third of total foreign requirements has been sustained by huge grants of extraordinary foreign assistance, in amounts surpassing the total of our annual exports before the war.

2. Estimates of our international economic transactions in 1949 are as follows:

	Billions of Dollars
Recorded U.S. exports of goods and services	$16.2
Other foreign demands* For dollars	1.3
Total requiring payment		$17.5
Means of Financing:
Recorded U.S. imports of goods and services	9.9
Public and private investments (net)	1.0
Foreign liquidation of gold and dollar assets	0.4
Private donations	0.5
Foreign assistance program	5.7
Total means of financing		$17.5

3. Our international accounts will always and inevitably reach a balance. This might come about in the future by the drastic reduction of United States exports of goods and services as a consequence of the rapid tapering off of extraordinary financial assistance. This would mean acceptance by this country of a low level of international trade in goods and services, with adverse effects on our domestic and foreign economic policy objectives. Domestic and foreign production would be reduced; American exports and foreign imports would fall and become subject to increasing restrictions designed to safeguard foreign monetary reserves; sources and markets would be governed less and less by competition; standards of living would drop; and employment abroad and at home, especially in export industries, would suffer. The economic condition of the rest of the world is still weak. Such a decline in our foreign trade, which is likely to take place in the absence of corrective action on our part, is large enough to jeopardize our political and security interests in Europe and elsewhere. We therefore must continue to maintain in the United States a high level of production and exports. This is necessary both to support our own economy and to prevent the economies of other countries from being gravely weakened.

4. The degree to which we maintain a high level of exports will depend chiefly on three elements in the balance of payments: (a) the extent of assistance which is provided; (b) the flow of public and private foreign investment; and (c) the volume of imports of goods and services into the United States.

5. The use of extraordinary financial assistance is closely related to the achievement of our political and security objectives. However, it is clear that we ultimately must find ways and means whereby the objectives of maintaining exports can be accomplished on an economic and self-sustaining basis, by means other than extraordinary financial assistance. Such assistance constitutes a burden on the taxpayer and its continuance can only be justified by its close relationship to our economic, political and security objectives abroad. Under present circumstances, to slash such expenditures too sharply would clearly imperil past progress and risk the waste of expenditures already made. Furthermore, it would be unrealistic to assume that all extraordinary foreign assistance can completely disappear within a few years. There will inevitably continue to exist special situations (e.g., Greece, Austria, Korea) whose independent survival may depend upon support from us. In our international dealings, our economic strength is one of our greatest assets, and we should be ready to use it in the form of extraordinary assistance even beyond these few cases whenever it can significantly serve our political and security objectives. Furthermore, assistance programs can also serve to further our economic objectives if directed toward removing obstacles to, and encouraging the development of, multilateral trade and exchange convertibility.

6. The need for extraordinary assistance will be further lessened if our economic programs are successful in expanding world trade. On the other hand, it is clear that a low level of United States foreign trade and investments would put additional strains upon foreign countries which would be so dangerous to our political and security interests as to necessitate additional foreign assistance programs. Much would depend upon the country distribution of our imports and exports, but in the case of a reduction in trade, those countries which constitute the hard-core of foreign assistance programs would probably need some further assistance, and additional countries would be unable to sustain tolerable levels of economic activity without assistance as well. On the other hand, if United States foreign trade and investments were to rise to substantially new levels, the needs of even the special hard-core cases would undoubtedly be reduced.

7. In addition, if there should be further deterioration of relations with the Soviet bloc, this would probably necessitate larger foreign assistance programs than otherwise. A substantial amount of the contemplated hard-core assistance requirements is attributable in part to the inability of various countries (e.g., Austria, Western Germany, Japan and Korea) to re-establish normal economic trading relationships with areas under Soviet domination. Should the Soviet bloc bring concerted economic pressure upon these and other countries, their trading position with the Soviet bloc would become dangerously weak unless they could look to some alternative source of supply and financing.

8. Public and private investment can scarcely be expected to make up for the probable reduction in extraordinary financial assistance. Private investment cannot be revived to the necessary scale rapidly enough even though substantial progress may be made in removing existing obstacles to investment. Loans from public funds, although they may be expected to continue on a substantial scale, must be related to soundly-conceived projects and kept within the capacity of foreign countries to service. Normally, capital flow tends to increase the element of capital goods in the commodity export total, and is not, therefore, a gross offset against whatever trade deficit may already exist. Nevertheless, because of the priority given to capital goods by many countries, an increase in foreign investment at the present time would contribute substantially to supporting the export level, making possible the release of foreign exchange of the capital importing countries for consumption imports.

9. An increase in United States imports of gold would be undesirable because foreign gold and dollar reserves are at dangerously low levels, and should be rebuilt through the addition of some portion of the world’s new gold production.

10. When all is said and done, it is evident that if exports are to be maintained and there is to be curtailment in extraordinary assistance, the main burden of adjustment in our balance of payments must be accomplished by an increase in our imports of goods and services. If the total level of economic activity of the United States expands during the next few years, this will in itself lead to a considerable expansion of imports. However, full achievement of this import objective will require the pursuit by the United States, and by other countries as well, of a program of concerted measures over a wide range of economic activities. It will, above all, require a change in our traditional attitude towards imports, and a willingness to place the economic interests of the nation as a whole, plus its international political and security interests, above the special interests of particular groups which may have to face increased competition from abroad.

11. It is important that we face the future now. We cannot delay until the end of the ERP period. As grants are diminished, the new pattern will take shape. The immediate necessity is the determination of the broad lines of policy, the development of a program of specific measures to achieve the purposes set forth in such a policy, and the assignment of responsibility within the government for implementing the program. Simultaneously, the problem and the program must be explained to the people, and ways must be found to enlist public interest and support. As one step in this effort, consideration should be given promptly to the establishment of a committee of leading public citizens to prepare recommendations for consideration by the President.

1. The source text was not attached to the memorandum to the President, supra. It was attached as an independent document to a Departmental Dollar Group Working Paper of March 8, 1950 (DDG D–2/1).
2. This item reflects the fact that recorded exports are undervalued, that recorded imports are overvalued, and that there are certain unrecorded capital movements. Some part of this figure might be included as a negative item under “Means of Financing” but it would not affect the other items, except to reduce the balancing total. [Footnote in the source text.]