Foreign Relations of the United States, 1958–1960, Foreign Economic Policy, Volume IV

49. Paper Prepared in the Department of State⁰

July 24, 1959.

INTERNATIONAL PAYMENTS POSITION OF THE UNITED STATES

The substantial increase in the outflow of gold and in the level of foreign liquid dollar holdings over the past year and a half have led to widespread public and official attention to the overall international payments position of the United States.

Concern is being expressed over the implications of a continuing adverse trend in the United States balance of payments, and various suggestions are being made as to measures designed to arrest the trend, including the possibility of modifying the world-wide procurement policies now followed by the Development Loan Fund.

The purpose of the present memorandum is to suggest the main conclusions which can be drawn from an analysis of the payments position of the United States and to propose an overall program of actions and policies.

The conclusions and recommended program of action are set forth immediately below. The balance of payments data on which they are based are annexed.¹

Conclusions

1. The existing financial capability of the United States to cope with large deficits in its international payments is still great. The United States reserve is still very large, both absolutely and in relation to reserves held elsewhere. There is no immediate threat to the strength of the dollar, or to its standing as an international reserve currency.

2. Concern about the very large deficit in the U.S. payments in 1958, which is increasing in 1959, arises from the following considerations:

(a) The 1958–59 deficit comes on top of a series of smaller but persistent yearly deficits going back to 1950.

(b) The 1958–59 deficit may imply a weakening of the international competitive position of U.S. producers. This comes in a period when U.S. capital outflows have increased and require a corresponding increase in the U.S. export surplus if losses of gold and dollar assets are not to be excessive. (The decline in U.S. exports has been due partly to special non-recurrent factors, partly to world-wide recession and general contraction of trade, and partly to a decline in the U.S. share of the world market for manufactures. The last development has been largely the result of the improved position of West Germany and Japan.)

(c) The large balance-of-payments deficit is resulting in an increasing pressure on the U.S. Government to adopt restrictive policies in conflict with broader long-term foreign policy objectives.

(d) Continued large balance-of-payments deficits such as we are presently incurring cannot be permitted to continue for much longer.

3. In the period 1950 through 1957, increasing amounts of funds in the form of capital and military expenditures left the United States. But these were largely offset by U.S. surpluses on trade and services. Thus, the annual U.S. balance of payments deficit was less than $2 billion. In 1958 there was still a substantial surplus on current account (comparing favorably with prior years except 1956 and 1957), but capital outflows were considerably higher than in the pre-1956 period.

The situation altered markedly in 1959, with a large reduction in the U.S. export surplus. The latest estimate for 1959 is for a drop in the surplus on trade and services by $2.5 billion below that of 1958. This will increase the U.S. overall deficit by almost the same amount. The change is nearly all in the merchandise trade account: a slight further decline of exports and a $2 billion increase in imports. The overall deficit for 1959 is estimated at $5 billion.

4. Of the total of capital outflow plus military expenditures, the largest single component in 1958 has been military expenditures.

These have risen sharply from $0.6 billion in 1950² to $2.5 billion in 1953 and continued to rise more moderately to $3.4 billion by 1958. The $3.4 billion military expenditures in 1958 was larger than either net private investment ($2.9 billion as compared with $1.3 billion in 1950) or net government economic grants and loans ($2.6 billion, as compared with $3.6 billion in 1950.) Moreover, it was heavily concentrated, as was private investment, in Western Europe, Canada and Japan, all of whose reserves have been rising.

5. As the U.S. lost $3.4 billion in gold and liquid dollar assets in 1958, Western Europe gained $3.7 billion. Of Western Europe’s gain, $1.6 billion was attributable to direct transactions with the United States, resulting from a combination of (a) a sharp decline in the U.S. current surplus with Western Europe and (b) the maintenance of large U.S. military expenditures³ in Western Europe. The balance of Europe’s gain in gold [and?] in dollars appears to have been achieved through (a) the acquisition of new gold production and Soviet gold sales to the extent of about $900 million and (b) earnings of $1.2 billion from third countries paid to Western Europe from the payments surpluses of such countries with the United States. The capacity of Europe to earn gold and dollars from the rest of the world was markedly influenced by a shift in the terms of trade in favor of Europe. With respect to capital outflow, an increased proportion has not been linked directly to U.S. exports. One factor in this trend has been the increase in foreign security flotations in the U.S. which amounted to $345 million in 1953–55 (annual average) compared with $1,750 million in 1958.

6. An approach to adjustment in the U.S. balance of payments would therefore appear to lie primarily in the direction of (a) increasing the U.S. current account surplus, especially with Western Europe, through normal trade and services transactions and possibly through requiring payment for transfers of military equipment; (b) reducing where possible U.S. military expenditures in Western Europe; and (c) increasing the flow of long-term capital from Western Europe to third countries, particularly the less-developed areas. The last is called for by the increased economic and financial strength of Western Europe. If such capital assistance were available on an untied basis, it might have some favorable effect on the U.S. balance of payments, though its impact is likely to be slight and slow.

7. It is highly unlikely that a policy of tying Development Loan Fund loans to procurement in the United States would itself materially improve the U.S. balance of payments. Tying is not likely to alter the more basic factors influencing the U.S. balance of payments as a whole. Moreover, tying of DLF loans would either work a hardship on the very countries whose reserves are low, whose payments position is poor, and whose economies we are trying to help in our overall national interest, or it would necessitate larger DLF expenditures to achieve our objectives.

8. The main case for the principle of tying DLF loans is to use it as a threat to persuade Western European countries to expand their long-term lending to the less-developed areas (i.e. “to finance their own surplus”) and to do so on an untied basis. But if the threat has to be carried out, it will very probably have lost its effectiveness. The main impediment to European long-term government lending is the absence of necessary government policies and institutions. The mere practice of tying individual U.S. loans is not likely to bring these institutions into being. Also, there may result a dangerous expansion of European short or medium term credit of the export credit insurance variety which is not suitable to development needs. Nevertheless, the possibility of tying DLF loans should be used by the U.S. in negotiations with Western European governments aimed at obtaining a substantial increase in European long-term capital.

9. Efforts to adjust the U.S. balance of payments over the years ahead can be either expansive or restrictive. As the postwar experience of Western Europe amply demonstrates, restrictive or discriminatory methods serve to suppress and conceal the symptoms of imbalance. They do not promote, and usually impede, sound adjustments in the balance of payments, which can only come about through the pressures of competitive market forces operating within a framework of sound fiscal and monetary policy. Efforts to promote adjustment in the U.S. balance of payments should be of a non-restrictive character, designed to encourage balance at as high a level of international trade and payments as possible. The size of U.S. reserves and the basic strength of the U.S. economy allow ample time for such a policy to be fully tested.

Recommendations

1. Over the next several months the United States should undertake an intensive effort to eliminate or assure the early elimination of the remaining discriminatory trade and payments restrictions against dollar exports. This effort should embrace the following elements:

(a) Bilateral, high level approaches to selected Western European governments urging the early removal of all discriminations. The United States should also seek to persuade European governments to permit outside suppliers to compete for contracts let on domestic government account, as the United States Government does under the administration of the “Buy American” Act.

(b) Negotiations in the IMF designed to bring about an early decision directed toward the general removal of discriminatory restrictions now that the world’s trading currencies are externally convertible, and later (perhaps in the first part of 1960) a decision terminating recourse to Article XIV (the transitional period provisions) at least for the developed countries.

(c) Maintain pressure in other international forums (GATT, OEEC) for the removal of quantitative import restrictions affecting dollar imports.

2. A determined effort should be made to better the competitive position of U.S. exporters:

(a) As a first step, the Export-Import Bank should be requested to review and report on the competitive effect of Western European export credit insurance vis-à-vis the facilities presently available to U.S. exporters. If it appears that more favorable credit facilities are available to Western European exporters than to our own exporters, the report should make recommendations on how to equalize the situation. The report should also include a thorough study of the advisability of the United States instituting a system of export credit insurance.

(b) The current balance of payments position makes it all the more important that the forthcoming tariff negotiations, especially with the European Common Market, be successful in reducing the general level of tariffs, especially the margins of preference which will operate against U.S. exports of manufactures to the Common Market.

3. Measures should be undertaken to increase the Western European share of the military burden and reduce its impact on the balance of payments of the United States. The military aid programs and activities related to our military expenditures abroad should be reviewed from the point of view of possible changes in policies and procedures which were instituted at a time when we desired to assist Western Europe in balancing its payments and building up its reserves.

4. The United States should make a determined effort to persuade selected Western European governments to increase European long-term lending to the less-developed areas.

(a) As a part of this effort, the U.S. should arrange, during the fall meeting of the Bank, for an informal meeting at the ministerial level with Germany, the UK, France, Italy, Belgium, the Netherlands and Canada. At this meeting, the U.S. should:

(1) Press upon the Europeans the need for expanding such institutional arrangements as will result in a greater volume of long-term lending on an untied basis to less developed countries.

(2) State its willingness to meet informally from time to time with other creditor countries, under the aegis of the Bank, with a view to exchanging information and, to the extent practicable, coordinating long-term lending policies and programs.

(3) Express the need for keeping medium-term credit (of the export credit insurance variety) within reasonable bounds; and

(4) Make it clear that unless the key countries of Western Europe undertake larger long-term credits on an untied basis, the U.S. will be forced to reconsider its own lending policies under the DLF and possibly the world-wide procurement policies followed by ICA.

5. The U.S. in carrying out Title I P.L. 480 sales should use great care to ensure the smallest possible reduction in ordinary commercial exports for dollars, and should severely limit barter transactions under Title III, which are effected almost wholly at the expense of dollar exports. This should not preclude the carrying out of the “Food for Peace” program for stimulating commercial exports as well as noncommercial consumption under Titles II and III.

6. An inter-agency group should be established to analyze, on a continuing basis, the competitiveness of the United States in international trade and trends in the U.S. balance of payments.

7. A high-level government official should make a major public address expressing confidence in the U.S. balance of payments situation and outline a constructive expansionary program of action. This probably should be made in advance of the announcement of the second quarter balance of payments figures scheduled for September.⁴

8. Finally, the United States should continue to pursue anti-inflationary policies and, in the current situation, encourage expansion in Western Europe.

0. Source: Department of State, S/P Files: Lot 67 D 548, Economic Policy, 1957–1960. Confidential. No drafter is indicated on the source text. Acting Secretary Dillon sent a copy to Don Paarlberg with a covering note dated July 31, which referred to it as a “preliminary report” and stated that he had sent copies to Anderson and Upton and was sending copies to others who were present “at the discussion of this matter in Secretary Anderson’s office.” The discussion is not further identified. Paarlberg commented on the paper in a letter of August 5 to Dillon, calling it “especially commendable in that it focuses on restrictionist means of improving the balance, rather than on restrictionist measures.” (Eisenhower Library, White House Central Files, Confidential File, State)
1. The annexes (four charts and nine tables) are not printed.
2. Comparison with 1950 is in many respects misleading. The year 1950 preceded the start of the real development of NATO, and the start of NATO infrastructure expenditures. Also, in 1950 Germany and Japan were bearing a major portion of the cost of maintaining U.S. forces in their countries—at that time the overwhelming bulk of U.S. forces overseas—through payment of occupation and support costs. [Footnote in the source text.]
3. U.S. capital outflow declined. [Footnote in the source text.]
4. Paarlberg commented on this point: “The best thing to inspire confidence would be a clear statement of the problem, accompanied by wise administrative action. Statements deliberately intended to inspire confidence will backfire unless accompanied by appropriate action. This is what is needed, rather than secrecy, soothing syrup, or emergency measures.” (Eisenhower Library, White House Central Files, Confidential File, State)