121. Memorandum From the Deputy Under Secretary of State for Economic Affairs (Prochnow) to the Secretary of State1
- Foreign Liquid Dollar Claims on the United States
Foreign liquid dollar claims (official and private dollar accounts, international institutions, officially held US Government securities) on the United States have been rising consistently. Simultaneously, US gold stocks, while very substantial, have been relatively stable. Some concern has been expressed over the adequacy of our gold stocks. The table below illustrates the statistical basis for this concern. (Also see Tab A.)2
|(in billions of dollars)|
|December 31, 1953||June 30, 1956|
|U.S. gold stock||$22.1||$21.9|
|Required domestic reserves||12.0||11.5|
|Excess over domestic reserves||10.1||10.4|
|Foreign liquid dollar claims||12.7||16.1|
|(Of which, foreign official account)3||(8.4)||(10.9)|
It is apparent that if all foreign liquid dollar claims were converted into gold, our stocks would be inadequate if the statutory reserve requirement is also to be maintained.
What has given rise to the increase in claims of foreigners against us? The attached table4 shows that imports of goods and [Page 309] services and capital outflow have together increased at an annual rate by $4.7 billion while U.S. military expenditures abroad have increased by only $0.6 billion since the year 1953 through June 30, 1956. Exports of goods and services have not shown a corresponding increase and payment for these have been offset in some degree through government aid and loans. Consequently, one cannot point to a single item which would be, in large part, responsible for the growth of foreign claims against us. (Tab B)
Are these claims dangerously large? Under today’s conditions, international reserves (gold and dollars) of foreign countries are not considered excessive in terms of the volume of world trade and financial obligations. World trade has increased from $150 billion at the end of 1953 to an annual rate in 1956 of about $200 billion. Invisible transactions (debt service, shipping, tourism) have no doubt shown a similar increase.
A move on a substantial scale to convert dollar and readily negotiable security holdings into dollars would only occur under two conditions: (1) a firm and widespread belief that the price of gold is to be increased, or (2) a lack of confidence in the future of the dollar. Our policy has left no doubt about our intention not to increase the price of gold. There seems to be little reason to expect a loss of confidence in the dollar. Sterling, the only other widely used trading currency, has lost ground relative to the dollar. Our exports have held up well and opportunities exist for increase if restrictions against dollar goods are removed.
A further barrier against a flight from the dollar is our strong creditor position both in the short and long run. Short term claims of Americans against foreigners amount to about $1.6 billion.
There is always, of course, the danger of a short term movement from the dollar to gold. For example, we lost $2.5 billions of gold from the end of 1949 to the end of 1953. No significant changes have since taken place in our gold stocks.
World gold production (excluding USSR) is at the rate of $900 million annually. This production for the last seven or eight years has been absorbed abroad. Except for a brief period, foreign countries have shown a distinct preference to hold their increased reserves in dollars rather than in gold. This preference has been encouraged by the increased need for dollars to finance trade as well as by the stability of the currency.
An increased effort on our part to expand exports should provide the best insurance against any desire of foreign countries at [Page 310] once or over a period of time to convert their dollar holdings into gold.
Reduction of imports or tourism or elimination of aid or military expenditures abroad all seem to involve decisions extending beyond considerations aimed at reducing claims against our gold.