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The original documents are located in Box B2, folder "Balance of Payments (4)" of the Arthur F. Burns Papers at the Gerald R. Ford Presidential Library. Copyright Notice The copyright law of the United States (Title 17, United States Code) governs the making of photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United States of America his copyrights in all of his unpublished writings in National Archives collections. Works prepared by U.S. Government employees as part of their official duties are in the public domain. The copyrights to materials written by other individuals or organizations are presumed to remain with them. If you think any of the information displayed in the PDF is subject to a valid copyright claim, please contact the Gerald R. Ford Presidential Library. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM DATE: May 10, 1971 TO: CHAIRMAN BURNS FROM: ROBERT C. HOLLANDA BA Attached is a memo from David Hexter that tries to summarize briefly the issues involved in the question of the relation of U.S. anti-trust laws to our balance of payments. It is the final paragraph on page 3 that seems to me to give us the basis for an early letter. I have asked Hexter to try drafting such a letter. After you read this memo, a discussion session between you and the staff group could be helpful, I think, to guide both the letter and the follow-up study. Attachment FORD i LIBRARY GERALD DRAFT DBH:rj 5/3/71 U.S. Antitrust Laws and the Balance of Payments. I. Potential benefits to BoP from changes in the antitrust laws (and their interpretation and application). A. Are the antitrust laws a major impediment to effective competition by U.S. enterprises with foreigners (1) in the U.S. or (2) abroad? In discussing this subject, sometimes there is a tendency to focus solely on the ability of U.S. business to export its products. Actually, U.S. competition with foreigners takes at least four forms: 1. Competing abroad, using goods produced in U.S. 2. Competing abroad, using goods produced abroad by sub- sidiaries of U.S. enterprises ("multinational corporations"). 3. Competing in U.S. markets against imported goods. 4. Competing in U.S. markets against goods produced in U.S. by subsidiaries of foreign enterprises ("multinational corporations"). From the BoP standpoint, categories 2 and 4 are less significant than categories 1 and 3, because the former affect the BoP only to the extent of the profits that are transmitted to the U.S. parent (cate- gory 2) or the foreign parent (category 4). Categories 1 and 3 have a BoP effects measured by a major part of the selling price of the goods (as well as having a material effect - favorable in one case, unfavorable in the other - on U.S. employment). Over the long run, U.S. investment abroad or foreign investment in the U.S. may have a large effect (witness the $5 billion (net) the U.S. receives annually from investments abroad), but our BoP problem requires focus on shorter term effects. According to a 1964 report of the Subcommittee on Antitrust of the Senate Judiciary Committee, at hearings during the preceding year "witnesses from the State, Commerce and Justice Departments all testi- fied that there was no evidence that our antitrust laws had inhibited the activities of American firms abroad." ("Antitrust Developments in the European Common Market", p. 57) Although that testimony dealt with "activities abroad", the antitrust laws would hardly be a greater obstacle to competition against imports in U.S. markets. The core question is whether the impediments to U.S. competition with FORD LIBRARY is 076839 foreign-produced goods derive crucially from the restraints of our antitrust laws. To a large extent, the problem is one of price com- petition. It may be argued that the cost of U.S. products could be substantially reduced economics that could through "cooperation" by U.S. producers along such lines as combining their research and development efforts; patent arrangements; unified -2- purchasing, selling, and shipping; division of markets; and so on. Even if this is conceded, however, it may be that the demonstrated ability of foreigners to undersell U.S. producers in important fields stems from lower labor costs (and to a lesser extent, from more efficient modern plant) to such a degree that no attempts to give countervailing advantages to U.S. producers, such as relaxation of antitrust, could redress the imbalance. B. What changes in antitrust laws are needed to enable U.S. enterprises to command a substantially larger share of the markets in which they compete with foreigners (either here or abroad) ? If the conclusion on the preceding question ("A") is that the anti- trust laws are not a major impediment to effective competition with foreigners - that no changes in those laws would materially increase the U.S. share of relevant markets - this question "B" need not be dealt with. However, if the opposite conclusion is reached, or ques- tion "A" is deliberately left unresolved, this matter must be considered. It is improbable that material BoP benefits could be expected from any but radical relaxations of antitrust laws. For over a half century, we have had the Webb-Pomerene Act, designed to enable U.S. business to increase export sales through activities that otherwise would con- travene the antitrust laws. That Act has been used relatively little, and experts have concluded that it offers few benefits, if any, with respect to export trade.* It seems, therefore, that if relief is available at all through the antitrust route, it would necessarily be through permitting U.S. busi- ness to combine "in restraint of trade" in U.S. operations not related principally to export trade. Prima facie, it seems unlikely that exemptions from provisions of the Sherman and Clayton Acts could be tailored so as to confine their effect to competition with foreign organizations; this seems obvious from the nature of the potential relaxations mentioned in the last paragraph of "A". If that is so, we must evaluate proposals to repeal the antitrust laws in fundamental respects. Any suggestion and action along these lines doubtless would be confined to industries found (by Congress, the Department of Justice, or other- wise) to be in particular need of relief from the effects of foreign competition - for example, industries or "product areas" in which a specified percentage of the domestic market has been captured by foreign competitors in the preceding year. "You get all the protection under the antitrust laws themselves that you get under the Webb-Pomerene Act." Thurman Arnold, former U.S. Judge and former Assistant Attorney General (Antitrust Division), testifying in hearings on "Foreign Trade and the Antitrust Laws" before the Antitrust Subcommittee of the Senate Judiciary Committee (88th Cong., July 23, 1964) 130. BERRED FORD LIBRARA -3- II. Potential "costs" of changes in antitrust laws aimed at improving U.S. BoP. A. It is our national position, embodied in such laws as the Sherman and Clayton Acts, that the welfare of the United States is promoted by vigorous economic competition, and that monopoly, oligopoly, and carteliza- tion are inimical to our national welfare. Unless this premise is now to be reexamined, evaluation of proposals to relax the antitrust laws must accept the fact that any BoP advantages would be gained at the cost of the benefits secured and safeguarded by our policy favoring vigorous competition in "trade or commerce among the several States, or with foreign nations". B. Reasoned evaluation of the cost/benefit equation is possible only on the basis of a fairly explicit plan. As previously mentioned ("I.B."), it seems unlikely that useful antitrust relaxations could be confined to our competition against foreign enterprises. In the first place, an increasingly important part of that competition relates to the impact of imports on our domestic markets, which could hardly be compartmentalized. But even if the relaxations were aimed solely at improving the competitive position of U.S. exports, it is doubtful whether we could devise any materially significant changes in the antitrust laws that would aid our export trade without affecting also competition among U.S. producers in domestic markets. C. Can the antitrust laws be relaxed in specific ways that would enhance the ability of U.S. industry to compete successfully with foreign enter- prises without destroying our general antitrust policy? To an inexpert - GERALD FORD LIBRARY observer, this seems improbable, but the problem can be solved - if at all - only by imaginative and courageous experts in the antitrust field. Only such experts could marshal the practicable alternatives and combina- tions of governmental action and decide intelligently whether the desired result could be achieved by relaxations that would not destroy the sub- stance of U.S. antitrust policy. apparent D. Let us assume that (1) contrary to the/probabilities, changes could be made in the antitrust laws that would enable U.S. businesses to compete substantially more successfully against foreign businesses, but (2) that result could be achieved only by scrapping our antitrust policy and permitting practices of the sort adopted in countries that have opted for cartelization or "cooperation" rather than vigorous competition of the sort fostered by our antitrust laws. This presents squarely the ultimate question, which cannot be "quantified" but must be answered on the basis of intuition - whether the expectable advantages to the U.S. BoP outweigh the disadvantages to be anticipated from abandonment of antitrust as a national policy. In considering this subject, one must keep in mind that the Sherman Act (1890) and Clayton Act (1914) were designed for a local, a regional, or - at most - a nationwide arena in which all competitors were governed by the same anti- trust rules. Today we have, increasingly, a worldwide arena, in which foreign competitors are not effectively governed by the U.S. antitrust laws. This change may provide the most plausible ground for contending that to relax our antitrust laws would not be a rejection of the policy favoring vigorous competition, but only a recognition of a changed economic environment in which survival depends on the ability of U.S. business to compete with rivals who are not restrained by the same rules. 6 May 14, 1971 TRADE BALANCES OF THE UNITED STATES WITH PRINCIPAL FOREIGN AREAS (millions of dollars, balance of payments basis) 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 Trade balance, total 4,906 5,588 4,561 5,241 6,831 4,951 3,926 3,860 624 638 2,185 Western Europe 2,549 2,787 2,602 2,880 3,377 2,682 1,914 1,581 336 1,424 2,926 UK 4.66 294 147 173 468 214 -24 162 -116 -86 307 EEC 1,296 1,015 151 1,031 1,740 2,083 2,493 2,455 2,707 2,909 2,468 } Other 642 404 301 479 889 Canada 1,024 790 566 571 776 865 801 448 -451 -815 -1,644 Automotive trade 389 363 460 500 535 638 429 318 60 -408 -765 Other 635 427 106 71 241 227 372 130 -511 -407 -879 Japan 225 710 180 320 200 -388 -634 -345 -1,110 -1,390 -1,241 Other Developed Countries 407 218 120 194 555 623 336 474 460 299 457 Other 701 957 1,093 1,276 1,923 1,395 1,509 1,702 1,389 1,120 1,687 1/ Australia, New Zealand, South Africa 2/ Includes international organizations. GERALE FORD LIBERRY fame letter the President May 19, 1971 STRICTLY CONFIDENTIAL (FR) Dear John: The international monetary crisis is not over. It is therefore highly important to plan ahead. If things come to the pass of a U.S. suspension of gold sales and purchases, we should do all we can--both substantively and sosmetically--to make it appear that other governments have forced the action on us. We want to portray suspension as a last resort and to present a public image of a cool-headed government responding to ill-cônceived, self-defeating actions of others. The opposite tack-initiating suspension without being forced to it by the actions of others--would probably leave us in a much weaker bargaining position for post-suspension negoti- ations. Many foreign governments would claim that the U.S. Government had been eager to throw down the gauntlet, and had done so with insufficient excuse. In the public eye, both here and abroad, a large part of the onus for the ensuing period of crisis would probably fall on us. In such a hostile environment, it might be significantly less likely that we could negotiate limited exchange-rate flexibility, a more equitable sharing of aid and defense burdens, and other important U.S. objectives. It is therefore desirable to pay out gold and other reserves in substantial amounts--perhaps two billion dollars--before a suspension. In any announcement of suspension, moreover, VORD & LIBRARY GERALD -2- STRICTLY CONFIDENTIAL (FR) extensive albeit low-keyed publicity should be given to the actions of those countries purchasing gold in the weeks prior to suspension. There is little reason for believing that the United States would be significantly better off after suspension with, say, $10-1/2 billion of gold rather than with, say, $8-1/2 or $9 billion. The balance of advantages, therefore, is very strongly in favor of paying out reserves for an interim period before closing the gold window. One of our main post-suspension bargaining chips (i.e., a concession to give to other governments) would be an agree- ment to restore dollar convertibility (into gold and SDRs) as part of a package resolution of the crisis. If anything, this bargaining chip would have a higher value if we wait to suspend until it seems to be forced on us by the actions. of others. Sincerely yours, Arthur F. Burns The Honorable John Connally Secretary of the Treasury Department of the Treasury Washington, D.C. Copy to: The President GERALD FORD VIBRARY koLa For release on delivery Statement by Fred H. Klopstock Manager, International Research Department Federal Reserve Bank of New York before the Subcommittee on International Exchange and Payments of the Joint Economic Committee June 22, 1971 FORD is LIBRARY 668470 It is a pleasure and a privilege to appear before this distinguished Committee which has made such an important contribution to the public's under- standing of the international financial mechanism. Your committee has already added substantially to our knowledge of the subject under review this afternoon by commissioning the intensive study of the Eurodollar market that was prepared by Ira 0. Scott, Jr. who was at that time Professor of Finance and Dean of the Arthur T. Roth School of Business Administration at the C.W. Post Center of Long Island University. This highly informative study, which your parent committee published last year, provides a full description of the Eurodollar market, how it operates, its structure and the policy questions its existence has raised. Therefore, with your permission, I will skip over the history of the market and its functioning, and instead will focus on some problem areas of the market that have recently surfaced. I would like to comment in particular on those aspects of the market that continue to puzzle and worry the international financial community. In this context I plan to comment briefly on the implications of the phenomenal growth of the Eurodollar market for the international position of the dollar, and on some proposals for the supervision and control of the market. There is no doubt in my mind that the Eurodollar market has made a major contribution to the financing of economic growth in this past decade. Perhaps its outstanding merit is that it has enabled banks outside the U.S.-- including the overseas branches of U.S. banks--to draw huge amounts of balances originating in many parts of the world into the financing of international trade transactions and the operations of large private and public corporations. The market has become a funnel through which temporarily unemployed funds in virtually all parts of the world are quickly and efficiently transmitted to banks in major GERALD FORD LIBRARY 2 financial centers and, through them, to borrowers in need of loan accommodation. It has added immensely to the ability of banks in Europe, Canada and even in the United States through their overseas branches to provide financing of their customers at advantageous rates. The Eurodollar market has been an efficient transmission belt for the movement of vast amounts of funds from low interest to high interest rate countries and has made a major contribution to evening out surpluses and shortages in national money markets. It is nevertheless true that many central bankers and other members of the international financial community have become increasingly disenchanted with the market. Many close observers of the market are appalled by its huge dimensions, and fearful of its proven ability to set into motion capital flows that are capable of undermining domestic monetary policies. While not disregarding the market's valuable contributions to the financing of world trade they increasingly have come to look upon the huge capital movements associated with it as a major source of domestic and international monetary instability. The market is also often severely criticized because it has financed speculative attacks on currencies that are vulnerable and speculative flows into countries whose currencies are candidates for revaluation. In view of the market's gigantic size and the destabilizing capital flows which it has financed, a prominent central banker recently referred to the Eurodollar market as a "monster". Other European central bankers have suggested that much of the Eurodollar market's explosive growth is due to multiple credit creation within the market and that this uncontrolled credit expansion has been an important factor in furthering FORD is LIBRARY GERALD world inflation. Several central bankers, notably Governor Carli of the Bank of Italy, have called for control of the Eurodollar market. Federal Reserve Board Chairman Arthur Burns has warned against the practice of central banks' recycling their 3 reserve gains into the market. The market has increasingly become a source of medium-term loans to borrowers in many corners of the world, but these loans are almost entirely financed with short-term money, often under terms and conditions that have caused a number of prominent commercial bankers to raise questions about the quality of credit in the market. There is thus a great deal of evidence that many leaders of the international financial community are deeply worried over recent developments in the market. I believe some of this concern is justified, but it is also true that the central bank community is making a major cooperative effort to prevent the market from undermining international monetary stability and at the same time to retain and strengthen the market's valuable role in the financing of a large variety of the world's credit needs. With your permission, I will now briefly comment on several of the market's aspects that have raised concern and uncertainties here and abroad. First a few words about the recent growth of the market and the fact that the market's net size now surpasses foreign liquid dollar holdings in the United States. GERALD FORD LIBRARY Linkage of Market's Size to Foreign Dollar Balances in the U.S. During the past three years, the Eurodollar market has grown by leaps and bounds; this growth continued in 1970, contrary to expectations. Many observers had felt that the market would shrink as United States banks and corporations repaid their heavy Eurodollar borrowings incurred during the tight money era in 1969. However, huge borrowings by corporations in Germany in response to tight money market conditions in that country and by banks in Italy absorbed the Eurodollars set free by U.S. repayments. Heavy medium-term borrowings by multinational corporations and public and semi-public institutions in the less developed countries also added significantly to the demand for Eurodollar 4 loan facilities. Most of the added supplies in the Eurodollar market may be attributed to the rapidly growing placements by central banks, primarily those in the less developed countries, but also by several Western European countries that in the past had stayed away from the market. After making allowance for double counting arising from interbank deposits within the Eurodollar area, dollar deposits in banks outside the United States now exceed $50 billion, $46 billion of this huge amount represents dollar deposits in eight European countries which make up the core of the Euro- dollar system and regularly report their dollar liabilities to the Bank for International Settlements. It is on the basis of these reports, that the BIS computes the net size of the market which reflects commercial bank liabilities of these eight countries vis-a-vis monetary institutions, commercial banks and non-banks outside the area and vis-a-vis central banks and non-bank residents inside the area. But my $50 billion plus estimate also includes sizable amounts of similar net dollar liabilities of banks in several countries outside Europe that have become increasingly important participants in the Eurodollar market, notably banks in Canada, Japan and Nassau. At more than $50 billion, the Eurodollar market far exceeds foreign liquid dollar holdings in the United States, which at the end of 1970 amounted to $43 billion. The market has grown much more rapidly than the dollar accruals to foreign accounts resulting from our balance-of-payments deficit. Some members of the financial community have expressed puzzlement over these facts and concern about their implications for the dollar's international position. They have expressed fear that dollar balances held in the Eurodollar market represent a potential claim on the United States and, therefore, on our diminishing monetary reserves. These fears are not well founded. Only those Eurodollar deposits FORD & GERALD LIBRARY 5 that Eurodollar banks have employed in the United States or that they retain in U.S. banks for reserve and transactions purposes constitute a claim on United States reserves. Presently such balances represent no more than a small fraction of total deposits employed in the market. Eurodollar deposits that are not passed on to United States banks or borrowers in the United States give rise to claims only on the banks abroad in which they are lodged. In the event of withdrawal of these deposits, the banks would have to either acquire dollars in the foreign exchange market or fall back upon maturing Eurodollar deposits and loans, most of which are obligations of foreign banks and corporations. To many observers it appears puzzling that the market's size exceeds foreign liquid dollar holdings in the United States, especially since each Eurodollar deposit involves a transfer of foreign dollar deposits from one account in a United States bank to another. But upon further reflection the excess of Eurodollar deposits over U.S. liquid liabilities need not evoke surprise. The size of the market is not limited by outstanding foreign dollar holdings. It is primarily determined by the cash holdings denominated both in domestic currencies and in dollars that a large variety of investors throughout the world wish to place in the market. The explanation of the discrepancy between foreign liquid holdings in the U.S. and net holdings in the Eurodollar market is that one and the same foreign-held dollar balance can be repeatedly employed for making Euro- dollar deposits. Dollar balances acquired by investors for placement in the market to the extent that they are not employed in the United States are almost instantaneously returned to the foreign exchange market as the dollar-accepting banks, or borrowers from these banks, or those to whom they make payments, convert FORD & GERALD LIBRARY 6 these dollar balances into third currencies in foreign exchange markets. Some or all of these balances may be acquired by central banks. These same dollar balances, after passing through the hands of several holders--possibly in several countries-- as a result of a series of transactions outside the Eurodollar system, may again become vehicles for Eurodollar deposits as investors desirous of making additional deposits reacquire them in the foreign exchange market. The repeated utilization of some part of the existing stock of foreign dollar balances associated with the recurrent reinjections of the same dollars into the market that had previously been ejected from it also explains why the increase in the size of the market during recent years far exceeds the dollar balances obtained by foreigners as a result of our balance-of-payments deficit. It is, of course, true that certain Eurodollar placements, primarily those by United States residents, add to our liquid liabilities. Some Eurodollar deposits, notably those that are borrowed by U.S. banks or are invested by the overseas branches in U.S. Treasury or Export-Import Bank securities, as well as reserve and transaction balances of Euro-banks, are reflected in our liquid liabilities. Some portion of foreign-held dollar balances--actually no more than a small portion-- performs a vehicle role in the placing of Eurodollar deposits. But the great bulk of Eurodollar deposits does not affect our short-term liabilities and the growth rates of the two magnitudes are therefore to a large extent independent of each other. GERALD R. FORD Multiple Credit Creation in the Eurodollar Market Several central bankers as well as some prominent members of the academic profession have attributed the enormous expansion of the market to the process of multiple credit creation. They have suggested that the Eurodollar system functions in the same way as the U.S. banking system where, as borrowers disburse loan proceeds, the recipients have virtually no choice but to redeposit them in the same or another American bank. This bank, as a result of the attendant reserve gains, may find itself in a position to make additional loans and investments. 7 Those who believe that this phenomenon is also a characteristic of the Eurodollar market claim that a very substantial amount of Eurodollar deposits represents balances that can be traced directly to Eurodollar loan proceeds. In fact, concern over multiple credit creation in the market has caused some of its close observers to support recommendations that Eurodollar borrowing be made subject to reserve requirements. I have argued elsewhere that at least until the end of 1969 multiple credit creation has played no more than a minimal role in the expansion of the Eurodollar market. This argument is supported by the fact that the market experienced its most impressive rate of growth in the late 1960's when most new Eurodollar deposits were pulled out of the market by U.S. banks and corporations that borrowed heavily in it. These funds were used in the United States and thus could not serve as a base for multiple credit expansion in the Eurodollar market. In 1970, the credit multiplier tended to increase inasmuch as several central banks during the year acquired sizable dollar balances that originated in the FORD & LIBRARY GERALD Eurodollar market and redeposited them in the market. But even now the great bulk of Eurodollar borrowings is either paid to U.S. residents or converted in foreign exchange markets into local and third-country currencies and not returned to the market by those who acquire these balances. Altogether, the available evidence on worldwide uses of Eurodollars suggests that only a small part of the proceeds of Eurodollar credit is redeposited in the market, and in my view the multiplier remains only a fraction of the figures that have recently been publicized. Central Bank Participation in the Market Another question widely discussed by Eurodollar market participants is the placement by official monetary institutions of part of their dollar holdings in the Eurodollar market. In any appraisal of central bank participation in the Eurodollar market, a sharp distinction should be drawn between (a) dollar balances recycled by Western European central banks that deposit part of their dollar gains either directly in European banks or in the Bank for International Settlements, Klg 8 and (b) deposits in European banks by monetary authorities throughout the world, notably in lesser developed countries and also in Eastern Europe. According to the Bank for International Settlements, during the past year central bank deposits in the Eurodollar market have increased by approximately $7 billion. A large portion of these deposits was placed by European central banks, but a very sub- stantial part originated in less-developed countries. Many central banks in these countries, dependent as they are on the income from their exchange reserves, found it difficult to resist the relatively attractive yields available in the Eurodollar market. Undoubtedly, as Federal Reserve Board Chairman Arthur Burns recently pointed out in Munich, central banks as they place funds in the Eurodollar market have aggravated their own problems. Such deposits have added to the explosive growth of monetary reserves in Europe, flooded European economies with unwanted liquidity, expanded money supplies and thus contributed to inflationary pressures. The process through which this occurs is simple. Typically, a sizable part of the central bank deposits placed in Eurobanks is used for loans to European borrowers. These borrowers or those to whom they make payments tend to convert all or virtually all of their dollar borrowings into local currencies. As the borrowers sell dollar balances to their commercial banks, their domestic currency deposits and thus their nations' money supply increase. The commercial banks-- by selling all or part of the resulting dollar accruals to their central bank-- are in turn in a position to add to their reserve balances and consequently to their lending capacity. In this process, the central banks, in their capacity as residual buyers of dollars in the foreign exchange market, in effect reacquire the balances that they had placed in the Eurodollar market. According to press reports, the major European central banks are presently reviewing the investment FORD i GERALD LIBRARY 9 of their monetary reserves with a view toward limiting their placements in the Eurodollar market. They are reported to be ready to withdraw balances from the market, if market conditions permit them to do SO. Incidentally, central bank deposits in the Eurodollar market are solely an obligation of the banks in which they are deposited. Taken together, they are not a reserve liability of the United States and do not affect our balance of payments. Control of the Market The phenomenal growth of the market together with its credit creation potential, and its ability to mobilize massive amounts of funds that may flow quickly from country to country and thus undermine domestic monetary policies, have given rise to demands for a comprehensive system of international control of the market. These demands have gained in strength in recent weeks as Euro- dollar balances, as has happened often in the past, have again been used on a large scale to feed speculative movements into currencies that have become candidates for revaluation, notably the Deutsche mark. In appraising demands for international control of the market it should be kept in mind that presently the market is already subject to a large measure of national controls. For many years, central banks have used a variety of devices to regulate the flow of Eurodollars out of and into their countries. Moreover, for many years, central bankers have exchanged views on their Eurodollar market policies and on occasion have taken concerted action to coordinate their regulatory activities in this area. At times, notably at year-ends, central banks have rechannelled substantial deposits into the market either directly or through the Bank for International Settlements, with a view to smoothing out temporary disturbances in the market when such action did not conflict with basic monetary policy objectives then being pursued. FORD is GERALD LIBRARY 10 Central banks are likely to strengthen their existing controls and supervision of the market. As a matter of fact the central bank governors meeting regularly in Basle have set up a study group to analyze the problem and to work out terms of reference for a standing group which might suggest policies to be adopted by the governors. There is thus every reason to expect that central bank coordination and cooperation with respect to policies affecting the Eurodollar market will become more intensive in the months and years ahead. For instance, central banks could intensify cooperation so as to avoid that national controls work at cross-purposes. They might well make even greater efforts than in the past to coordinate their monetary policies with a view to reducing the emergence of large scale capital movements that do not serve their purpose. But it is difficult to visualize any system of supranational control of the Eurodollar market. In my personal view, central control on a worldwide scale is not a practical proposition. There is no international institution extant that can effectively control the vast supplies in the market or restrict the worldwide demand for Eurodollars. International control of the market would, moreover, call for GERALD FORD LIBRARY comprehensive foreign exchange regulations that many countries are unwilling to adopt. The obstacles to control by an international institution also stem for divergencies in national objectives of the countries whose banks play a major role in the market. Hopefully, central bank cooperation involving primarily coordination of national controls will serve to reduce, if not eliminate, Eurodollar flows that tend to undermine international monetary stability. Medium-Term Lending and the Worsening of Credit Quality Another recent development in the Eurodollar market is the rapid growth of medium-term lending of Eurodollars. During the last year or two, the overseas branches and affiliates of American banks, as well as other major banks in London and elsewhere in Europe, have been heavily engaged in extending 5 to 8 year roll- over Eurodollar loans, usually to large commercial and semi-public corporations, 11 with the lending rate periodically adjusted in line with the interbank rate for three or six-months Eurodollars. Typically, the banks managing such loan arrange- ments syndicate them, placing varying portions with a number of other banks and retaining in some cases only a small portion on their own books. Borrowers of medium-term loans reside in many countries throughout the world. In order to serve this rapidly growing market for Eurodollar term loans, several groups of United States and European banks have established a large number of jointly owned international banks. In meeting the deep-seated need for medium-term finance, the balance sheets of many banks operating in the Eurodollar market have become less self- liquidating. Of course, the fact that interest rates for these loans are period- ically readjusted in line with prevailing Eurodollar interbank rates eliminates the risk that rates in the market will run against the lender. This risk has been passed on to the borrower who hopefully is always in a position to assume it. The fact that the Eurodollar market, despite its dependence on purchased as distinct from hard-core demand deposit money, has become so large a source for meeting the world's medium-term credit needs should not be overlooked in any assessment of its overall position. Quite apart from the growing maturity gap, many thoughtful bankers have become increasingly concerned over the disregard in Eurodollar banking of the strict lending standards that have long been in vogue in term lending in the United States. Elaborate term loan agreements with a number of appropriately protective covenants such as the obligation of the borrower to maintain his working capital at minimum levels are much less common in Eurodollar banking than in the United States. Few Eurodollar term loans include amortization arrangements that provide for the tailoring of maturities in line with prospective - FORD & LIBRARY GERALD 12 cash flows. Single-payment revolving loans stretching over five years are not uncommon. It is probably true that as rapid an expansion in the number of borrowers as occurred during the last two years has brought into the market some second class names not deserving of unsecured loan facilities. It is encouraging that prominent bankers have publicly drawn attention to the easing of Eurodollar lending criteria. Still and all I do not believe that there has been any fundamental deterioration of credit quality in the market. The market continues to be dominated by the biggest and strongest banks in Western Europe and generally these banks remain highly selective as to the borrowers to whom they extent loan facilities. Conclusion In concluding my remarks, I should like to reemphasize the important contribution of the Eurodollar market to the growth of the international economy and the expansion of world trade. It would be most unfortunate if the widespread demand for control of this market should give rise to restrictions on international capital movements that would regulate it out of existence or impair its functioning as an efficient medium for allocating credit on a worldwide scale. Meanwhile, the obvious ill-effects of the market and some undesirable deposit and loan practices that have recently emerged are receiving the intense attention of the central banking community and there is every reason to expect timely action to maintain the fundamental soundness of the Eurodollar system. FORD i LIBRARY GERALD 6/25/71 SUPPLEMENTAL APPENDIX A: THE U.S. BALANCE OF PAYMENTS: REVISED PRESENTATION* Beginning in the June 1971 Survey of Current Business the presentation of the U.S. Balance of Payments accounts will be revised. Some of the disaggregated components of the accounts have been redefined and two new summary balances have been derived. The new balances are the "Balance on Current Account and Long-term Capital" and the "Net Liquidity Balance." The definition for the "Official Reserve Trans- actions Balance" remains unchanged. The old "Liquidity Balance" has been dropped. Unlike other macro-measures, such as the Gross National Product, the "balance" of a set of international transactions involves a selection of relevant items rather than a simple summary or averaging of all avail- able data. No one "balance" can in itself measure an absolute degree of deviation from some "equilibrium" position. The summary balances are presented merely to provide a not-too-misleading starting point for discussions of whether the underlying balance of payments position is changing in a desirable direction or not. Presentation of the basic data has been reorganized so that the various summary balances can be derived directly from the dis- aggregated listing of transactions in the main balance of payments tables, with and without seasonal adjustment (Tables 2 and 3 in the June 1971 Survey of Current Business). A new summary table has been introduced (Table 1 in the Survey) which shows the relationship of each balance to the others. See Table A-2 at the end of this Appendix. The newly presented "Balance on Current Account and Long-term Capital" is intended to give a rough indication of trends in the U.S. balance of payments apart from movements of short-term capital. This balance is the sum of net export of goods and services, remittances and pensions, U.S. Government grants and capital, and the net flow of U.S. and foreign long-term capital (except to and from foreign official reserve holders.) See Table A-1, below, lines 1 through 9. Equally new is the presentation of a "Net Liquidity Balance" which is intended to be a broad indicator of trends apart from move- ments of the more liquid types of short-term capital. This balance includes not only those items that went into the balance on current account and long-term capital but also changes in the nonliquid short- term claims and liabilities reported by private U.S. concerns, net * Prepared by Kathryn A. Morisse, Economist, Balance of Payments Section, Division of International Finance. FORD & LIBRARY GERALD of -2- errors and omissions, and the allocation of special drawing rights (SDRs). See Table A-1, line 1-17. Unfortunately, insofar as changes in errors and omissions reflect variations in liquid capital outflows, their inclusion detracts from the usefulness of this balance as a measure of what it is intended to measure. The new "Net Liquidity Balance differs from the old "Liquidity Balance" in two ways. First, changes in short-term liquid U.S. claims are now treated symmetrically with changes in U.S. liquid liabilities -- both are "below the line" for the "Net Liquidity Balance," being con- sidered to be part of the financing of that balance. See Table A-1, lines 11 and 19. Since the changes in private liquid claims were above the line for the old "Liquidity Balance," a simultaneous increase in such claims and in U.S. liquid liabilities increased the old "Liquidity" deficits but such a simultaneous change does not affect the new "Net Liquidity Balance." The second difference relates to the treatment of certain U.S. liabilities to foreign official reserve holders- that were put into the nonliquid category in former years in order to have a favorable impact on the old "Liquidity Balance." The nonliquid lia- bilities involved in this type of special financial transaction have now been moved below the line and a change in such liabilities therefore has no impact on new "Ne Liquidity Balance." See Table A-1, lines 8 and 21. The "Official Reserve Transactions Balance" is reached by adding to the "Net Liquidity Balance" changes in short-term liquid private U.S. claims and liabilities. See Table A-2, lines 13 through 18. The definition of this last balance is unchanged. It is the balance financed by changes (decreases) in U.S. official reserve assets plus changes (increases) in U.S. liquid and nonliquid liabilities to foreign official reserve holders. This balance is a rough proxy for exchange market pressures on the dollar. The revised presentation of the balance of payments accounts reflects the results of a study begun in the fall of 1970 by the Interagency Committee on Balance of Payments Statistics that was set up by the Office of Management and Budget in recognition of the grow- ing dissatisfaction with the balances as previously presented -- particularly the old "Liquidity Balance." The Survey of Current Business does not use the term "reserve holders" but we find it useful to distinguish such holders from other foreign government agencies which hold claims in the United States such as military export prepayment accounts. FORD & GERALD LIBRARY 434 GERALD LIBRARY Confidential Until Published 6/25/71 Table A-1 COMPARISON OF NEW "NET LIQUIDITY BALANCE" WITH FORMER "LIQUIDITY BALANCE" FOR 1970 (in millions of dollars) 1970 1970 "Liquidity Balance" "Net Liquidity As published Balance" Revised data March 1971 1. Balance on goods & services +3,592 +3,592 +3,672 2. Remittances & pensions -1,410 -1,410 -1,387 3. U.S. Gov't grants & capital -3,332 -3,332 -3,235 4. (of which advance repayments) (+244) (+244) (+243) 5. Long-term capital 6. U.S. private -5,781 -5,781 -5,233 7. Foreign except "special" +3,716 +3,716 +3,253 8. Foreign "special" 1/ +176 -99 -95 9. BALANCE ON CURRENT ACCOUNT & LONG-TERM CAPITAL -3,038 -3,314 -3,025 10. Short-term capital 11, U.S. claims, "liquid" (excl. reserve assets) ...2/ +273 ) 12. U.S. claims, "nonliquid" -1,118 -1,378 -1,378 ) 13. U.S. liabilities, "nonliquid" +830 +830 +704 14. Errors & omissions -1,132 -1,132 -1,274 15. BALANCE BEFORE SDR ALLOCATION -4,719 -4,721 -4,715 16. SDR allocation -867 +867 +867 17. BALANCE AFTER SDR ALLOCATION -3,852 -3,854 -3,848 FINANCED BY 18. U.S. reserve assets, decrease +2,477 +2,477 +2,477 19. Other "liquid" claims, decrease (+) +273 ... ... 20. Liquid liabilities to reserve holders and others, increase (+) +1,377 +1,377 +1,371 21. Other liabilities to reserve holders, decrease(-) -275 ... ... MEMORANDUM ITEMS: 22. Total Special Transactions 3/ (+420) +145 +148 23. Balance before SDR allocation & before special transactions ... -4,866 -4,863 The figure for special transactions in column 1 differs from that in column 2 because the decrease in "other liabilities to reserve holders" (line 21) is now treated 0888 negative financing. item whereas before it was a special transaction enlarging the deficit. 2/ Now treated as a financing item (line 19). 3/ Sum of lines 4 and 8. CONFIDENTIAL (FR) (until published) June 25, 1971 19th Table A-2. U.S. BALANCE OF PAYMENTS (in millions dollars, seasonally adjusted) FORD & LIBRARY GERALD Source SCB Years 1970 1971 June 19711/ 1969 1970 Qtr.1 Qtr.2 Qtr.3 Qtr.4 Qtr.1 1. Balance on goods & services T.1 # 11 +2,011 +3,592 +881 +1,045 +995 +670 +1,051 2. Remittances & pension T.3 # 31,32 -1,266 -1,410 -338 -362 -359 -351 -351 3. U.S. Gov't grants & capital T.3 # 30,33 -3,837 -3,332 -841 -757 -838 -895 -1,031 4. Long-term capital 5. U.S. private T.3 # 39,40,41,44 -4,855 -5,781 -1,925 -1,128 -1,492 -1,237 -1,692 6. Foreign T.3 # 48,49,50,52,55 +5,068 +3,892 +926 +632 +1,354 +981 +607 7. BALANCE ON CURRENT ACCOUNT & LONG-TERM CAPITAL T.1 # 26 -2,879 -3,038 -1,297 -570 -340 -832 -1,416 8. Short-term capital, nonliquid 9. U.S. nonliquid claims T.3 # 42,45 -693 -1,378 -270 -315 -245 -548 -100 10. U.S. nonliquid liabilities T.3 # 51 +91 +830 +163 +151 +124 +392 0 11. Errors & omissions T.3 # 64 -2,603 -1,132 -62 -430 -433 -207 -1,268 12. SDR allocation T.3 # 63 -- +867 +217 +217 +217 +216 +180 13. NET LIQUIDITY BALANCE T.1 # 33 -6,084 -3,852 -1,250 -945 -679 -977 -2,604 14. Short-term capital, liquid 15. U.S. liquid claims T.3 # 43,46 +124 +273 +257 -81 -15 +112 -232 16. U.S. liabilities to commercial T.1 # 39 +9,166 -6,507 -1,863 -441 -1,315 -2,888 -3,025 banks -504 +265 -9 +65 -68 +277 +338 17. U.S. liabilities to other private T.1 # 40,41 18. OFFICIAL RESERVE TRANSACTIONS BALANCE T.1 # 42 +2,702 -9,821 -2,865 -1,402 -2,077 -3,476 -5,523 19. Financed by 20. U.S. reserve assets, decrease (+) -1,187 +2,477 +264 +805 +584 +824 +682 21. Liquid liabilities to foreign official agencies, increase (+) -517 +7,619 +3,021 +97 +1,738 +2,763 +5,065 22. Nonliquid liabilities to foreign official reserve holders, decrease (-) -998 -275 -420 +500 -245 -111 -224 1/ Survey of Current Business, June 1971, U.S. Balance of Payments, Table 1 and Table 3. CHAIRMAN BURNS For Information Only BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM f June 29, 1971 To: Board of Governors From: A. B. Hersey Attached are three memoranda (by Mrs. Higgins, Mr. Karcz, and Mr. Kohn) reporting on testimony at the Reuss hearings last week. These cover: Arndt ) on surplus Birnbaum ) nations and the Bronfenbrenner ) U.S. competitive Houthakker ) position, Cohen ) on military Brazier ) expenditures, and Javits ) on reform of Halm ) the international Bergsten ) monetary system Willett ) GERALD R. FORD LIBRARY BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date June 22, 1971 To Mr. Ghiardi Subject: Congressional Hearings on From Ilse S. Higgins, Balance of Payments Problems This morning's Reuss hearings on the "Surplus Nations and the U.S. Competitive Position" opened with a statement by Klaus- Dieter Arndt, head of the Berlin Economic Research Institute. The Berlin Institute in a minority move -- had recommended a revaluation of the DM rather than a floating in the May report of the five economic institutes. 1. In reply to questions by Reuss regarding the possible improvement in the U.S. competitive position from the recent exchange rate moves in Europe, Arndt pointed out that -- unless all EEC countries, ideally also Japan appreciate their currencies, the improvement in the competitive position of the U.S. will "not be significant. " Arndt stressed, however, the obstacles to a joint revaluation move within the EEC: that is the strong resistance of at least two GERALD R.FORD LIBRARY member countries (France and Italy). A unilateral revaluation on the part of Germany, on the other hand, he expects to be resisted particularly by the agricultural sector. Arndt also added that, if other industrial countries revalue their currencies, the U.S. should respond by liberalizing its economic relationships, ridding itself of import quotas, and untying aid. Arndt also pointed out repeatedly that Germany was not much of a surplus nation any longer. Questioned by Reuss whether he considered a revaluation of all EEC currencies the desired solution with respect to aiding To: Mr. Ghiardi -2- GERALD FORD VIBRARY the U.S. competitive position, and if so -- which percentage revaluation -- Arndt answered in the affirmative, but was vague on the percentage appreciation of the currencies. He indicated that the rate of revaluation would need to be larger if the yen was also revalued. However, if Germany alone upvalued its currency, it would not be by more than the Austrian or Swiss rate (5 to 7 per cent, respectively). Reuss concluded that "the more the revaluations the merrier the dollar." Arndt agreed. 2. Arndt's statement was followed by that of Birnbaum who focussed on the U.S. balance of payments problems, his objections to, or views on, related restrictive official policies and consequences, and the current Euro-dollar problem. More specifically, he advanced his theory on the concept of "current account convertibility.' (See paper for details.) Reuss objected to the "dreadful phrase" of current account convertibility, and had Birnbaum clarify the concept by explaining that the dollar would be legally convertible under such an arrangement not only for current account transactions, but also for capital transactions. 3. Bronfenbrenner focussed on the question whether the Japanese are likely to revalue the yen. He emphasized that no yen revaluation can be expected in the months to come, and that Japanese authorities are likely to use other devices instead to ward off pressures on the yen, such as lower official interest rates (even at the risk of domestic inflation), large-scale lowering of tariff rates, especially on products from developing countries, large increases in To: Mr. Ghiardi -3- foreign aid, as well as some liberalization in capital transactions. Here, Reuss pointed out that a liberalization of capital movements was not necessarily beneficial for the U.S. On the contrary, U.S. capital exports to Japan, and the possibility of investment earnings not being repatriated, may make matters worse from the U.S. Balance of Payment's viewpoint. Despite the substantial undervaluation of the yen, Bronfenbrenner could see a revaluation only in the long run. As one of the reasons for the strong resistance against a revaluation, he cited the high dollar-debts and the dollar-invoiced orders in the Japanese shipbuilding industry. Bronfenbrenner reasoned that unless the debts are paid off, and new contracts contain a yen-clause, a revaluation appears quite unlikely. Other reasons given were the still low level of reserves in terms of imports, as well as the low Japanese standard of living. Reuss then asked all three witnesses for their opinion on the question: "If international action (revaluations) is unsuccessful, would it be a good idea to (1) close the gold window, (2) support the dollar legally by foreign exchange operations, using IMF support, or (3) present the governors of the IMF with the undisputable truth that the world is suffering from disequilibrium, and ask the IMF to work out new parities, if necessary, using an 'interim transitional float. 111 FORD is GERALO LIBRARY To: Mr. Ghiardi -4- Arndt answered vaguely that it would be a good idea to introduce more flexibility into the rules of the IMF; but he felt unqualified to comment on the kind of move the U.S. should take. Bronfenbrenner agreed with closing the gold window, but disagreed on having the Fund establish new parities ("new parities- new problems"). Birnbaum opined that the question of parity realignment following a change in the dollar value has been exaggerated. He would consider some realignment of parities helpful, but warned that the actual effect may be modest and not worth it. Contrary to Reuss, he argued that the exchange rate is a very important price, which cannot be changed "like the price of cabbage." Countered Reuss: "Since the exchange rate is such an important price, we have to correct it when it is out of line.' 11 4:- Houthakker, the fourth witness in this morning's hearings, was much more optimistic on the beneficial effects of the recent European exchange rate actions on the U.S. balance of payments (see paper). With regard to Reuss' proposal of a "transitional dollar float," Houthakker opposed the idea of closing the gold window, and suggested working through the existing IMF system. More specifically, he doubted whether a dollar float may remove the yen problem. Much of the question-and-answer exchange between Reuss and Houthakker evolved around the workings of the Fund whose task it should be -- according to Reuss -- to "sit down for one weekend GERALD R.FORD LIBRARY To: Mr. Ghiardi -5- and redesign the exchange rate system," (Houthakker objected), and the question on how one could convince Japan to revalue the yen. FORD is 076835 LIBRARY BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date June 23, 1971 To Mr. Ghiardi Subject: Congressional Hearings on From Jan W. Karcz Mf Balance of Payments Problem I have attended the morning session of the Subcommittee of the Joint Economic Committee on Monday, June 21. The session was devoted to the impact of our military expenditures on the balance of payments. Two testimonies only were of importance; these were by Professor Benjamin J. Cohen of Princeton and by Deputy Assistant Secretary of Defense Don R. Brazier. There was virtually no question session as apart from Chairman Reuss (who periodically left the room) no other members of the Subcómmittee attended the session. The highlights of the testimony were as follows: 1. Prof. Cohen differentiated between the direct and indirect effects of our military activities on the balance of payments. The direct effects, which had been making a negative contribution of about $3.5 billion p.a. lately, stem from our expenditures in foreign exchange related to our military presence abroad and are partially offset by sales of military hardware. The indirect effects Cohen classified as: a. Induced increase in domestic demand resulting from our military activities abroad (and hence higher level of imports generally). b. Increased imports of materials used in higher level of domestic production of defense-related items. c. Upward shift of propensity to import for U.S. personnel and their families stationed abroad (this may be a long-lasting effect, continuing even after the personnel returns home). BERALD FORD LIBRARY -2- d. The induced upward shift of foreign demand for U.S. goods resulting from dollar earnings by foreigners. e. Sales of military hardware tied to our presence abroad (e.g., sales to Germany under the successive offset agreements). Prof. Cohen estimates that the net result of the indirect effects is positive and reduces the overall impact of our military activities to the level of, currently, about $3 billion per annum. Prof. Cohen further examined two areas in which our commit- ments abroad could be reduced and the balance of payments thus improved: Europe and Asia. Without prejudicing the case, he con- cluded that balance of payments considerations cannot be used as an argument to bring the troops home and, conversely, bringing the troops home by itself will not solve the balance-of-payments deficit. 1 2. Mr. Brazier's testimony could be described as an apologia for the adverse impact of our military presence abroad on the country's balance of payments. He argued that as long as national defense considerations require us to be abroad such impact must result. All the Department of Defense could do (and has been doing) is to ensure the optimum level of expenditures commensurate with defense require- ments. He pointed out that in spite of various improvements and savings effected, the overall level of foreign-exchange spending has been rising because wage levels in countries where we maintain defense establishment had been rising very rapidly in recent years. FORD is LIBRARY BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date June 25, 1971 To Mr. Ghiardi Subject: JEC Hearings, Wednesday morning, From Martin J. Kohn MJK June 23, 1971 Summary: All four witnesses at the Joint Economic Committee hearings on the U.S. balance of payments on Wednesday morning, June 23, urged reform of the international monetary system. The four witnesses were Senator Javits, George N. Halm, C. Fred Bergsten, and Thomas D. Willett. The proposals for reform ranged from a very vague plan put forward by Senator Javits for setting up an international federal reserve system to Professor Willett's recommendation that the United States adopt a purely passive approach to its balance of payments, placing the burden of adjustment squarely on the rest of the world. There was a broad measure of agreement among the witnesses on many points, however. All agreed, for example, that greater exchange rate flexibility was called for, with a widening of the bands around parity being the minimum requirement. Furthermore, three of the witnesses advocated termination or drastic curtailment of the dollar's role as a reserve currency and the fourth -- Professor Willett -- felt such a step was necessary if his recommendation of a "flexible dollar standard" -- the logical consequence of the passive approach to the U.S. balance of payments -- was not implemented. Another point in common among the witnesses was a sense of irritation over the lack of cooperation by Japan in matters of interna- tional trade and finance. GERALD FORD LIBRARY Mr. Ghiardi - 2 - Though for the most part the witnesses confined their comments to the international sphere, Senator Javits directed several comments to the state of the U.S. economy. Deploring high unemployment, lagging productivity and rapid inflation, he urged a wage and price freeze, a step he claimed the public would welcome at this point. Bergsten Testimony Bergsten urged reform of the international monetary system, with changes in the role of the dollar being "negotiated" as a major part of the reform. He held that the objections of foreign countries to the U.S. balance of payments deficit are far more political than economic in nature. He estimated the underlying deficit as being about $2.5 to $3 billion - - or "a bit more," when one takes into account the administrative and legal restraints on capital outflows. He further estimated that, in line with the dollar's position as the world's pre- eminent vehicle currency, foreign countries would welcome additions of dollars to their reserves in an amount up to about $2.5 billion annually. However, foreign countries nevertheless resent our deficits on equity grounds, he said, maintaining that "Persistent U.S. deficits financed by foreign dollar accruals look unfair to the rest of the world, since no other country has such a means to resist adjusting, even if they represent no economic disequilibrium under the present system and therefore in reality call for no adjustment." GERALD LISAARY ? FORD Mr. Ghiardi - 3 - GERALD R. FORD LIBRARY To deal with this essentially political problem, Bergsten recommended that the U.S. "accept monetization of outstanding official dollar balances, via an additional creation of special drawing rights for that purpose, to whatever extent desired by present holders and with the firm agreement that dollars not so converted would continue to be held in national reserves except in cases of balance of payments need." Bergsten noted that under this plan the U.S. would be permanently relieved of the liabilities converted in this manner into SDR's. Similar suggestions, by Triffin, for example, have called for the funding of foreign dollar claims exchanged for other reserve assets issued by an international agency. Under the arrangement advocated by Bergsten, the U.S. would also be obliged to "convert, into U.S. reserve assets, future dollar accruals to whatever extent individual countries declare in advance that they do not wish to hold such dollars." In return for limiting the use of dollars to finance deficits, the U.S. should insist, according to Bergsten, that improvements in the adjustment mechanism be worked out and that an adequate supply of liquidity from "non-dollar sources" be provided for. The basic element in the new system of adjustment would be "more frequent and probably much smaller changes in parities based upon presumptive criteria indicating the need for such changes." In answer to a question by Reuss, Bergsten said that while the dollar could adjust against other currencies under his plan, this Mr. Ghiardi - 4 - would be difficult -- given the continuation of the dollar's role as a vehicle and intervention currency -- and that the system would work most efficiently if other currencies adjusted against the dollar. He favored providing for sanctions against countries that ignore the presumptive criteria, which constituted the lynchpin of the system. The need for liquidity would probably be reduced by the new adjustment system, Bergsten said. He indicated that adding $4 or $5 billion a year in SDR's -- a much larger amount than is likely to be authorized -- starting in 1973 would probably assure a satis- factory amount of liquidity. Bergsten also advocated widening the bands to 3 per cent on both sides of parity. If this were done, formal changes in parity would simply "ratify" changes which in effect had already taken place. Bergsten emphatically opposed "unpegging the dollar from gold at this time." Such a move was unnecessary he said, and, if made, probably might not work anyway, since other countries -- viewing such action as an adoption by the U.S. of a beggar thy neighbor policy -- could prevent appreciation of their currencies by maintaining their dollar intervention points. GERALD FORD LIBRARY Mr. Ghiardi - 5 - Willett Testimony The gist of Willett's presentation was that a choice must be made between two distinct adjustment mechanisms. The first -- and the one he favors on economic grounds -- is based on the adoption of a full-fledged dollar standard. Under this arrangement, the United States takes a passive approach to its balance of payments, letting the rest of the world adjust their exchange rates in order to maintain balance. The other alternative is for the dollar to be stripped of its reserve currency role and be allowed to adjust as any other currency can. Willett declared that "Either of the two polar positions ... would secure the major U.S. interest -- freedom from the need to use controls or restrictive macroeconomic policy to correct a balance of BERALD FORD LIBRARY payments." The U.S., he believes, should force a choice, something it could do simply by announcing that "until such a time as the interna- tional community might decide that it wishes to adopt a workable U.S.- - as-equal system which gives the United States effective ability to change the exchange-rate of the dollar vis-à-vis other countries, we shall adopt a full fledged passive balance of payments policy -- the flexible dollar standard solution." Reuss was skeptical of the passive balance of payments approach. ("Not so glorious" he called it.) He noted that failure to respond to benign neglect tactics by countries with undervalued Mr. Ghiardi - 6 - currencies can create severe unemployment problems here. In particular, he cited the harmful impact on employment in steel and electronics that Japan's continued refusal to revalue can be expected to have. Willett characterized this as a "trade problem," which would not hamper efforts -- which can be more freely made when the balance of payments is ignored -- to expand aggregate demand and thus boost overall employment. But Reuss felt that unemployment might not be so easily reduced, given the immobility of many of the workers in the affected industries. Reuss was also concerned over the probable disappearance of the remainder of our gold stock if Willett's passivity prescription were followed, a prospect that left Willett unperturbed. Reuss -- who, of course, favors the elimination of the use of gold in interna- tional monetary affairs -- nevertheless considers it advisable to hang on to what gold we still have until an international monetary agreement is worked out. Halm Testimony Halm advocated "a considerable measure of limited flexibility," but indicated that measures to increase flexibility should follow "a general realignment of parities.' By "considerable measure of limited flexibility" he meant a combination of wider bands and some form of crawling peg, preferably one not based on a formula but on "presumptive rules." He was confident that "the gliding-band system would enable us GERALD FORD GERART Mr. Ghiardi - 7 - to improve the international payments situation so substantially that we could then consider U.S. deficits with 'benign neglect. 111 To the move toward inflexibility within the EC -- that is, toward establishment of fixed parities among European currencies -- Halm was vehemently opposed. "The EEC's decision to achieve full monetary union is dangerous and completely unnecessary," he said, after stating that "monetary union is not at all needed for the welding together of European markets and the best allocation of resources. Yet the tensions produced by enforced integration may well blow up the whole EEC." Javits Testimony The high point in Javits' prepared remarks was his recommendation that an international "federal reserve system" be established. He advocated the demonetization of gold and the eventual elimination of the dollar's position as a reserve currency. Javits provided few details on his proposed fed-for-the-world, indicating only that the new agency could be separate from the IMF and should be given "sufficient power to control the supply of official reserves in the world economy, and to prevent the misallocation of reserves and sharp currency flows which have plagued the monetary system recently." Javits urged that several interim measures be adopted before the international central bank begins to operate, including widening of BERALD FORD CIBRARY Mr. Ghiardi - 8 - the bands around parity and abandonment of any obligation on the part of the U.S. to buy or sell gold (though, unlike Reuss, he did not want to "close the gold window" immediately, preferring to settle this question through international negotiations). In the discussion of his testimony, Javits -- in response to a question by Senator Percy, the only other member of Congress besides Reuss present at the session -- said he would be willing to see the dollar float at the present time. "The U.S.," he said, "has to take its chances with everybody else." He predicted that the dollar would turn out to be "the most stable currency in the world," if it were floated, by which he presumably meant that it would not depreciate significantly with respect to other major currencies. His argument seemed to be that floating the dollar would have a shock effect om America, leading to a major campaign to enhance productivity, whose success would make our good competitive with little or no fall in the price of the dollar. Javits placed great stress on the need to improve productivity, urging the revival of productivity councils such as those set up in the U.S. during World War II. These councils, which operated at all levels in the economy, from the plant on up, were staffed with representatives of labor, management and the public. Javits also urged a wage and price freeze, a step he claimed would be broadly welcomed by the public at this point. His theme throughout was that the country is in deep trouble and that drastic FORD in LIBRARY 078870 Mr. Ghiardi and 9 - measures are called for. Such measures, he forecast, far from alarming or demoralizing the people, would have a tonic effect on their morale, leading them to undertake a vigorous campaign to set things right. With respect to international matters, Javits, joined by Percy, urged far more "Burden sharing" by our allies. Javits said this objective would be best accomplished by adopting a tone of "indignation" in addressing ourselves to our allies rather than by use of threats. Both Javits and Percy dwelt at some length on our problems with Japan. In his prepared statement Javits said, "There are some encouraging signs that Japanese political leadership is beginning to realize the implications of Japan's too-little-too-late foreign economic policies on the world's international economic order and on the long-term interests of Japan herself." But both Senators clearly felt Japan was still not doing enough. Percy urged Japan to relieve pressures leading to a trade war by easing restriction on imports of both goods and capital. Percy also observed that Europe was intensifying our problems with Japan by maintaining a multitude of restrictions on Japanese imports, thereby causing an even larger influx of Japanese goods into the United States. FORD is LIBRARY 07V839 bots be June 29, 1971 4 Export Credits and the VFCR Demands continue to be made that U.S. bank credit to foreigners be exempted from the Voluntary Foreign Credit Restraint (VFCR) Program. There are firm grounds for maintaining that the exemption is neither necessary to ensure adequate financing of U.S. exports nor desirable in terms of achieving balance of payments objectives. The vast bulk of U.S. bank export financing is done by a handful of institutions. Of 14,000 banks in the country, only 170 have enough foreign loans and investments ($500,000 or more) to be considered participants in the VFCR Program. Of those 170, the biggest 20 account for three fourths of the VFCR ceilings and almost four fifthsof the foreign assets (loans and investments) under the ceilings. Furthermore, the biggest five banks account for almost half of the total VFCR ceilings and almost half of the foreign assets under those ceilings. (See Table I.) The 20 biggest banks have substantial latitude to make export credits under the existing program. First, their General and Export Term-Loan Ceilings aggregate almost $8-1/2 billion. The 20 biggest banks can use their domestic funds to make loans under ceilings to this amount. Second, they can use the resources of their foreign branches. Loans by foreign branches with foreign-source funds are outside the VFCR. GERALD FORD LIBRARY - 2 - 4 The London branches alone of the 20 biggest U.S. banks have over $25 billion in resources. (See Table II.) The biggest 20 banks, in the face of a long-standing request to give priority to export financing, are devoting only a minor portion of their domestic and foreign branch resources to financing U.S.. exports. As of late 1970, one sixth of these banks' foreign loans and investments subject to the VFCR ceilings were credits to finance U.S. exports. (See Table III.) The medium-sized and smaller banks, which make up 150 of the VFCR reporting banks and which account for about one fourth of the ceilings and foreign assets under the General Ceiling, have lesser foreign resources than the big banks but have more room under the ceilings. At the end of May, they had leeway of 15 per cent under their General Ceilings. Many of them have foreign branches today -- about 50 having "shell" branches at Nassau that may be used for obtaining resources and making loans outside the Program if they, individually, use up their ceilings. (All size categories of banks have large leeway under the separate ceiling for export loans of over one year maturity. In April, there were a little over a quarter billion dollars of such loans under an Export Term-Loan Ceiling that aggregated almost $1-1/2 billion.) FORD is GERALD LIBRARY VF - 3 - l The Need for Continued Restraint Any removal of export credits from the VFCR would lead to a capital outflow. It would induce banks to lend from their head 1 office resources where they are now lending from foreign branch resources. It would also make it difficult to adjust and to administer restraints on nonexport credits. In recent months the banking system has been provided with a generous amount of funds. As monetary conditions ease in the. United States, banks tend to reduce their borrowings from foreigners and to increase their loans and investments abroad. Since the fall of 1969, U.S. banks have repaid $12 billion of over $14 of borrowings from their foreign branches. Any further outflow at this time would be concentrated in their foreign lending and investment. The VFCR program, however, restrains the banks from making foreign loans and investments and insures that the funds supplied by the Federal Reserve will be utilized to stimulate the domestic economy rather than resulting in capital outflow. 2 difficution- advisition problems surrounly GERALD FORD LIBRARA What is "Expno evelir" us Foreigness - Who und in on cal Louis - 4med use June 29, 1971 Table II Total Assets of London Branches of 20 Largest VFCR Reporting Banks - / as of March 31, 1971 (thousands of dollars) Banks Ranked by Size, Largest First Total Assets 1-5 15,252,452 6-10 5,605,179 11-15 2,744,755 16-20 1,536,163 Total 25,138,549 1/ These are the assets of the London branches with total dollar liabilities exceeding $10 million. FORD & GERALD LIBRARY June 29, 1971 Table III 1/ Export Credit as a Percentage of Outstanding Foreign Credi (millions of dollars) Share of Share of Export Foreign export non-export Foreign Export loans Non-export credits credit in credit in Ranking of banks credits loans as % loans as % related total total by size outstanding subject of VFCR of VFCR to foreign foreign largest first under VFCR to VFCR credit credit Exim/DoD credits3/ credits 1-5 4,554 683 15.0 85.0 408 22.0 78.0 6 10 1,628 320 19.7 80.3 87 23.7 76.3 11 - 15 770 111 14.5 85.5 33 18.0 82.0 2/ 16 - 20 224 31 13.1 86.9 7 16.2 83.8 Largest 20 7,176 1,145 16.0 84.0 535 21.8 78.2 All other banks in survey 1,032 229 22.2 76.7 93 28.6 71.4 Total of 72 banks in survey 8,208 1,374 16.7 83.3 628 22.7 77.3 Based on data for November 1970. 2/ One bank in this group was not included in the survey. 3/ This column shows export credit exempt from VFCR by virtue of being Exim or DoD related plus export credit under VFCR as a percentage of total outstanding foreign credit, excluding Canada. FORD & GERALD LIBRARY June 29, 1971 Table 1 VFCR Ceilings by Size of Bank Assets as of May 31, 1971 (millions of dollars) ⑈ Combined General Outstanding Assets Adjusted Export and Export Subject to the Adjusted General Term Loan Term Loan Total Assets of General Ceiling on Ceiling Ceiling Ceiling December 31, 1968 May 31, 1971 GERALD FORD LIBRARY Banks Ranked by Size, Largest First Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent 1 5 4,673.7 47.0 492.2 33.6 5,165.0 45.3 71,626.1 28.9 4,809.9 48.8 6 10 1,700.0 17.1 212.5 14.5 1,912.3 16.8 34,415.4 13.9 1,862.4 18.9 11 15 803.8 8.1 132.9 9.1 936.8 8.2 23,523.8 9.5 794.8 8.1 16 20 331.5 3.3 77.0 5.3 408.5 3.6 14,993.4 6.0 305.1 3.1 20 Subtotal, largest 7,509.1 75.5 914.7 62.5 8,423.8 73.8 144,558.7 58.3 7,772.2 78.8 Banks All other reporting 2,441.3 24.5 549.4 37.5 2,990.7 26.2 103,556.4 41.7 2,085.7 21.2 v Banks Total, all 9,950.4 100.0 1,464.1 100.0 11,414.5 100.0 248,115.1 100.0 9,857.9 100.0 VFCR reporting Banks World Financial Markets Morgan Guaranty Trust Company of New York January 19, 1972 The balance of billion in 1970. The net liquidity bal- ance, which measures changes in The balance of payments payments in 1971 U.S. reserve assets and in private in 1971, 1 and official net liquid claims on them, The exchange-rate The U.S. balance-of-payments defi- has lost much of its significance as realignment, 3 cit in 1971 exceeded all expecta- a guide to policy. The outlook, 5 tions. On the official-settlements During 1971, U.S. official reserve Statistical appendix, 7 basis the deficit is estimated to have assets fell by about $2.4 billion, to been about $31 billion, excluding the $12.1 billion, with virtually all of effect of the January 1971 allocation the change occurring in the period of SDRs. This was nearly three times prior to August 15. At the same time, the size of the $10.7-billion deficit U.S. liabilities to foreign official in- recorded on the same basis in 1970. stitutions increased by more than The huge, $20-billion increase in the $29 billion, to an estimated $521/2 official-settlements deficit between billion by yearend, of which about the two years was due both to a very $45 billion was in the form of U.S. large rise in the deficit on current Government obligations. These lia- account and long-term capital trans- bilities continued to rise until the actions and to massive short-term GERALD R.FORD exchange-rate realignment in the capital outflows from the United middle of December, reflecting the States. heavy exchange-market interven- The deficit remained very large tion of foreign monetary authorities. following the August 15 measures There was a small, $700-million re- and the cutting of the gold-dollar duction toward yearend, following link. In the fourth quarter of last year, the realignment. the official-settlements deficit was While details still are fragmentary, about $6.7 billion, before seasonal the balance on current account and adjustment. Although this was sub- long-term capital transactions - or 23 Wall Street, New York 10015 stantially below the approximately basic balance - showed a deficit Banking offices also in London, $121/2-billion deficit recorded in the estimated at about $10 billion in Paris, Brussels, Antwerp, Frankfurt, third quarter, it was slightly above 1971. This compares with a deficit of Düsseldorf, Milan and Rome (Banca the average deficit in the first two $3 billion in 1970 and an average of Morgan Vonwiller), Zurich, Tokyo, quarters of 1971. under $21/2 billion for the years 1966- Nassau The net liquidity balance was in 1970, and is considerably larger than Representative offices in Madrid, deficit by about $23 billion last year, was expected a few months ago. Beirut, Sydney, Hong Kong, São again after the exclusion of allo- The 1971 deficit probably was Paulo, Caracas cated SDRs, compared with $41/2 swollen by $1 billion or more be- Page 1 major, weekly-reporting banks. An versal, although the unwinding of additional $2 billion may have been leads and lags is a very gradual Table 1 cause of the absence of the usual, sales rose by approximately $500 transferred abroad by U.S. agencies process which could take more than very large yearend capital reflows, million, so that net military outlays and branches of foreign banks. a year. U.S. balance of payments due to the decision to allow Amer- declined by at least $600 million. in millions of dollars; excluding SDRs Perhaps another $1 1/2 billion or ican corporations two additional Thus, the adverse swing in the over- more took the form of an increase all current account was only $2.8 The exchange-rate months - until the end of February in U.S. banks' short-term loans to 1970 1971e 1972 to repatriate from abroad the billion - from a $400-million surplus nonresidents, some of which prob- realignment funds necessary to satisfy OFDI in 1970 to a $2.4-billion deficit in ably were related to exchange-rate Merchandise trade +2.1 -2½ rules. 1971. uncertainties. Finally, American On December 18, the Group of Ten Current account +0.4 -2½ The increase in the basic deficit Net long-term capital outflows companies and foreign-controlled countries agreed on a new pattern Long-term capital -3.4 -8 can be attributed to a signifi- probably totaled more than $8 bil- companies resident in the United of exchange rates and a temporary Basic balance -3.0 101/2 cant worsening of the balance on lion in 1971, representing an in- States may have transferred over- widening of the margins, of up to Net liquidity balance -4.7 23 merchandise trade and, even more, crease of some $41/2 billion over the seas at least $10 billion. The cor- 21/4%, on each side of their new Official-settlements 9.8 -31 to a sharp increase in various net figure for 1970. Accordingly, about balance porate outflows occurred chiefly central rates. Subsequently, a large long-term capital outflows. two-thirds of the widening of the through a wide variety of leads and number of countries outside the Ten The deficit on merchandise trade basic deficit last year was due to lags in commercial transactions. also realigned the exchange rates may have reached nearly $21/2 bil- stepped-up long-term capital out- e-estimated Accordingly, of last year's $20- for their currencies against the dol- lion last year, resulting in an adverse flows. Four major factors accounted billion short-term capital outflow, $8 lar and adopted the broader bands. swing of about $41/2 billion from the for these increased outflows. U.S. billion or so was a movement of Countries that maintained the previ- $2.1-billion trade surplus achieved companies raised their direct in- interest-rate sensitive funds, and ously existing exchange rates for in 1970. During the first eleven vestment outflows by $1 billion, to mainly represented a reversal of in- their currencies relative to the dollar months of 1971 exports rose only more than $51/2 billion last year. flows from the Euro-dollar market account for only about 18% of total 11/2% while imports increased by Foreign direct investment in the recorded during the 1968-69 period. U.S. trade. A few countries devalued 131/2%. The rise in total exports, United States, which increased by These funds are unlikely to return against the dollar, but for reasons however, concealed a decline in the almost $1 billion in 1970, probably to the United States. The remaining largely unrelated to the multilateral value - and an even sharper drop dropped by $300 million - a turn- $12 billion has a potential for re- exchange-rate realignment. in the volume - of exports to some around of $1.3 billion. Another $1- major countries and areas, such billion adverse swing was attribut- Table 2 as Japan and Europe. Data for the able to U.S. banks' long-term lend- period January-November 1971 ing abroad, which rose by as much Exchange-rate changes show pronounced worsening in U.S. as $800 million in 1971, following a percentage changes against trade balances with Canada ($450 $200-million decline in 1970. Net the U.S. dollar from pre- trade-weighted average million worse), Japan ($1,675 mil- portfolio capital inflows were only May 1971 paritiest, changes against a group expressed in U.S. cents of major currencies lion), Common Market countries about $700 million down from more new new ($1,035 million) and other European than $1.2 billion in 1970 - as a result central market rates central market rates of both reduced foreign purchases rates Dec 31 Jan 18 rates Dec 31 Jan 18 countries ($1,105 million). Although the trade outcome was of U.S. securities and increased United States dollar 0.00 0.00 0.00 - 10.35 - 9.05 - 9.58 distorted by U.S. dock strikes and U.S. purchases of foreign securities. Canadian dollar +8.49* +7.87 +7.43 +5.58* +5.44 +4.77 the threat of a steel strike, the trend Net short-term capital outflows of Japanese yen +16.87 +14.37 +15.17 +11.93 +10.34 +10.78 clearly was one of sharp deteriora- about $20 billion accounted for the British pound +8.57 +6.35 +7.51 +0.67 - 0.43 -0.07 tion. Coming as it did in the absence difference between the estimated German mark +13.58 +12.01 +13.87 +4.54 +4.24 +4.89 of a strong economic expansion in $10-billion basic deficit and the $31- Four currencies with French franc +8.57 +6.45 +7.78 -1.31 -2.20 -2.14 billion official-settlements deficit in Italian lira +7.48 +5.28 +6.28 -1.90 -2.76 -2.96 the United States, the distinct Belgian franc +11.57 +11.61 +13.17 +1.51 +2.79 +2.91 weakening of the U.S. trade position 1971. The difficulty of identifying the market rates above Dutch guilder +11.57 +11.33 +13.19 +1.17 +2.12 +2.56 was a major factor leading to the short-term capital flows is indicated Swiss franc +13.87 +11.75 +12.94 +3.89 +3.39 +3.31 new U.S. approach to international by the $81/2 billion of transactions new central rates Austrian schilling +11.59 +9.59 +11.54 +0.60 +0.22 +0.74 economic policy. classified as errors and omissions Danish krone +7.45 +6.26 +6.80 -1.31 -1.17 -1.70 in the balance-of-payments figures Norwegian krone +7.49 +6.56 +6.82 -1.41 -1.04 -1.80 In contrast, most other current- on 1/18/72 Swedish krona account items showed improvement for the first three quarters of 1971 +7.49 +6.47 +7.60 -1.46 -1.16 -1.07 Australian dollar +8.57 +6.12 +6.35 - 0.24 1.15 -1.63 relative to 1970. In particular, direct alone. However, some $6 billion investment income is estimated to of the $20-billion total was due to the reduction of U.S. banks' t pre-June 1970 for Canada have risen by $800 million. U.S. mili- A central rate has not been set for the Canadian dollar. The December 17, 1971 market rate is used in tary expenditures abroad fell by Euro-dollar liabilities, of which $5 lieu of a central rate. about $100 million, while military billion can be attributed to the Morgan Guaranty Trust Company / Page 3 Page 2 / World Financial Markets / January 1972 The actual devaluation of the dol- exchange-rate parities that existed Vis-à-vis the 14 major currencies considerably below the record out- lar against all major currencies is in prior to May 1971 are shown in the listed in Table 2, the new central flows of 1971. sharp contrast to the view widely first column of Table 2. In announc- rates represent an effective devalua- The effective dollar devaluation held only 12 to 18 months ago that ing the results of the Group of Ten tion of the dollar of 10.35%, on a could favorably affect the U.S. trade the dollar could not be successfully meeting last month, Secretary Con- trade-weighted average basis. The balance over time by at least $6 bil- devalued against more than just a nally stated that the effective devalu- United States conducts about two- lion. However, such research as has handful of currencies. Moreover, the ation of the dollar against major in- thirds of its total trade with this been done in this field indicates assumption generally made that dustrial countries, weighted by bi- group of countries. Since a central that it takes about two to three all less-developed countries would lateral trade, amounted to 12%. This rate has not been set for the Cana- years for exchange-rate changes to automatically follow the United figure is the trade-weighted average dian dollar, the December 17, 1971, have an appreciable effect on trade States by maintaining existing ex- change in the exchange rates for market rate is used in lieu of a cen- patterns, and even longer to exert change rates for their currencies the dollar vis-à-vis eight other coun- tral rate for this computation. The their full impact. The short-term ef- vis-à-vis the dollar has proven tries, expressed in U.S. cents per method used in this publication for fects of exchange-rate changes are wrong. Clearly, the world accepted foreign-currency unit. These eight calculating the trade-weighted aver- small. Experience with the devalu- the necessity of a sizable effective countries are the other members of age devaluation of the dollar was de- ation of the pound sterling in No- dollar devaluation. Moreover, many the Group of Ten with the exception scribed in the October 1971 issue. It vember 1967 and the revaluation of countries discovered that, in the con- of Canada. The United States con- should be noted that apart from the the German mark in October 1969 text of a world-wide realignment of ducts only about 38% of its total inclusion of more countries than attest to the long period that is exchange rates, an appreciable re- trade with these eight countries. The were used in the 12% figure, required for exchange-rate changes valuation of their currencies against exclusion of Canada - with which the method used here measures to exert their full influence. the dollar need not result in a sig- the United States conducts approx- changes in exchange rates ex- Another important reason not to nificant effective revaluation against imately one-fourth of its total trade pressed in U.S. cents per foreign- anticipate significant improvement all currences, measured on a trade- from the calculation is an important currency unit as well as those ex- in the trade balance this year is that weighted average basis. omission. Canada apparently was pressed in foreign-currency units the U.S. economy is expected to The percentage changes in the excluded because it continues to per U.S. dollar. show a substantial expansion in new central rates for the major cur- float its currency, but this omission Against all currencies which re- the year ahead while other major rencies, expressed in U.S. cents per tends to distort the extent of the valued relative to the dollar, the dol- industrial countries, as a whole, are unit of foreign currency, from the effective devaluation of the dollar. lar's effective devaluation was about likely to show only very modest eco- 9.7%, on a trade-weighted average nomic growth, at least through the Table 3 basis. These countries account for first half of 1972. Three-month interest nearly 80% of total U.S. trade. Fi- Furthermore, the potential realign- rate arbitrage nally, against all of the currencies ment effect can be eroded unless of the world, including those which the United States is able to keep its spread against Euro-dollarsd did not change their exchange rates price increases below those of hedged unhedged vis-à-vis the dollar and those which other major industrial countries. forward devalued vis-à-vis the dollar - such money exchange money money The potential trade benefits can- loan market premium loan market loan market as Israel, Ghana, South Africa, and not be reaped unless U.S. industry ratesa ratesb or discountc rates rates rates rates Yugoslavia — the effective dollar de- is willing to take full advantage of valuation on a trade-weighted aver- the new opportunities presented by Euro-dollars® 6.07 5.19 1.18 +0.06 age basis was about 7½. the realignment. The past tendency Germany 7.25 5.25 P 1.31 -2.49 +1.37 France 8.65 5.25 d 0.23 -2.35 -0.17 -2.58 +0.06 to de-emphasize exports and give a Italy 8.00 5.50 P 0.61 -2.54 +0.92 1.93 +0.31 The outlook very high priority to investing abroad Belgium 7.00 5.15 d 0.68 -0.25 -0.72 0.93 -0.04 has to change to help bring about Netherlands 6.50 5.00 d 0.37 0.06 -0.56 0.43 0.19 It is reasonable to expect the a major swing in the U.S. trade bal- Switzerland 7.00 1.50 P 4.81 -5.11 +1.12 -0.93 -3.69 United Kingdom 5.50 4.50 p 0.28 -0.69 basic balance to show some im- +0.29 -0.41 +0.57 ance. Also, the hoped-for results will 5.78 1.03 +0.06 provement this year from 1971's $10- not be forthcoming unless some of Japan 7.10 5.25 P 4.75 +4.81 billion deficit, but it is not prudent the major surplus countries ease to project this improvement to be trade barriers that no longer are a latest available rates for all countries more than a few billion dollars. The warranted by their balance-of-pay- b latest available representative money market rates for all countries except Switzerland, for which the 3-month bank deposit rate is used trade and current account deficits ments positions. C based on New York noon quotes on 3-month forward rates for foreign currencies on January 18, should not be expected to decline There are offsetting forces at in per cent per annum d in favor of domestic currency, +; in favor of Euro-dollars, — much this year, but long-term capi- work in the area of invisibles. The e noon rates on January 18 tal outflows are likely to remain revaluation of foreign currencies will Page 4 / World Financial Markets / January 1972 Morgan Guaranty Trust Company / Page 5 increase the dollar value of overseas the accumulation of dollars by for- Statistical appendix investment income - a large part of eign central banks will continue. In for key to data in charts and tables which is denominated in foreign cur- fact, U.S. liabilities to foreign cen- See pages 22 and 23 rencies - earned by U.S. corpora- tral banks rose by $600 million tions, banks and other parties. In through the first two weeks of Janu- contrast, the revaluation will tend ary, thus nearly offsetting the de- to increase the dollar cost of U.S. cline in these liabilities during the last two weeks of 1971. Spot exchange rates, 8 military expenditures abroad. Simi- larly, the balance-of-payments bene- A large reflux of short-term capital Weighted average exchange- rate changes, 9 fit of the considerable decline in U.S. requires the restoration of confi- interest rates will be offset by the dence in the pattern of exchange International bond yields, 10 and 11 sharp rise in total U.S. liabilities to rates as well as appropriate market Euro-dollar deposit rates, 10 foreigners. incentives. For market participants U.S. companies' borrowing rates, 11 There could be a reduction of $2 to unwind their leads and lags, and New international bond issues, 12 and 13 billion to $3 billion in long-term capi- positions taken in yen, marks and tal outflows. This could result from other foreign currencies, they have International bond issues outside the United States, 14 a much smaller increase than in to consider exchange rates - even 1971 in U.S. banks' long-term loans within their new 41/2% bands - to be Central bank discount rates, 15 to foreigners; a resumption of for- attractive. This was not the case in Treasury bill rates, 16 and 17 eign direct investments in the United the first few weeks after the realign- Representative States; a reduction in U.S. direct- ment, when all foreign currencies money-market rates, 16 and 17 investment capital outflows, which were in the lower part of their bands. Commercial bank were unusually large last year; and It was not until the second week in deposit rates, 18 and 19 stepped-up foreign portfolio invest- January that several foreign curren- Commercial bank lending rates ment in U.S. securities. However, cies moved up to around their new to prime borrowers, 18 and 19 such a development requires a large central rates; the mark, guilder and Domestic government measure of confidence, not only in Belgian franc moved above their bond yields, 20 and 21 the exchange-rate structure, but also central rates. As a result, on January Domestic corporate bond yields, 20 and 21 in such things as U.S. economic per- 19 the trade-weighted average de- formance. Moreover, such a favor- valuation of the dollar reached able trend could be thwarted in part 9.58%. Although this was close to by a further easing of U.S. controls the highest percentage since the re- Information herein is from sources we consider to be reliable but is furnished over long-term capital movements. alignment agreement, it was still be- without responsibility on our part. Since the basic balance will con- low the 10.35% based on central tinue to be in substantial deficit this rates. year, there will still be a heavy, Another important market factor undercurrent outflow of dollars from that has deterred the reversal of the United States. The question short-term flows has been the lack arises as to the extent to which this of any interest-rate incentives. outflow will be covered by the reflow Money-market rates in the United of short-term capital. As noted States have been low and declining. above, at most $12 billion of last Although rates in European coun- year's short-term capital outflow has tries and Japan also have come the potential of being reversed. down, 3-month lending and money- If a large part of this outflow market rates there, as a rule, have indeed is reversed during 1972, it been well above U.S. and Euro- would offset the basic deficit, and as dollar rates, both on a hedged and an a result the balance of payments on unhedged basis (see Table 3). Ac- an official-settlements basis could cordingly, European companies, es- be in equilibrium or could even show pecially those in Germany, had little a modest surplus this year. Con- or no incentive to reduce their heavy versely, if the reflux remains small, foreign indebtedness. Page 6 / World Financial Markets / January 1972 Morgan Guaranty Trust Company / Page 7 Spot exchange rates Exchange rate changes vis-à-vis a group of 14 major currencies left scale: U.S. cents per unit, weekly average of daily rates in New York weighted according to 1970 bilateral tradet right scale: percentage change from parities existing as of April 1971 changes from pre-May 1971 parities (pre-June 1970 for Canada), based on weekly average of daily exchange rates for commercial transactions 332148 2.28271 Japanese yen Belgian franc 14 -2 5 United States 18 United Kingdom 12 324675 2.23135 16 10 317530 2.18225 -7 0 14 8 12 6 ste -12 5 10 10 5 4 Canada Italy 2.06000 8 ) 31.5289 14 Dutch guilder .294445 6 5 12 0 19.9976 30.8195 French franc 10 10 19.5477 30.1413 8 8 0 - 5 12 5 19.1175 6 Japan Netherlands 6 4 28.8674 .175926 Italian lira 7 0 2 8 171969 18.0044 0 31.7460 16 6 German mark 2 5 168185 10 5 14 4 Germany Belgium 31.0318 12 2 30.3490 161600 5 0 10 26.6383 Swiss franc 16 , 8 26.0417 14 29.3717 266.434 0 5 Pound sterling I 12 10 10 3 25.4712 Switzerland France 260.571 10 8 0 24.8129 254.708 6 101.750 10 5 Canadian dollar 4 8 244.800 2 98.0500 Sep Oct Nov Dec Feb Sep Oct 6 Jan Nov Dec 0 Jan Feb 7 A S O N D J A S O N D J tBased on method described in October 1971 World Financial Markets. Page 8/ World Financial Markets / January 1972 Morgan Guaranty Trust Company / Page 9 International bond yields International bond yields % Long-term issues, at or near end of month: 10 Long-term dollar bonds Govern- U.S. companies European companies ments U.S. German Swiss U.S. German U.S. European companies dollar mark franc dollar mark dollar 9 1970 Dec 8.27 7.71 5.97 8.61 8.04 8.23 1971 Jan 8.10 7.40 5.91 8.38 7.89 7.96 Feb 8.23 7.61 5.78 8.46 7.98 7.92 U.S. companies Mar 8.36 7.44 5.66 8.52 7.93 7.80 8 Apr 8.46 7.32 5.53 8.64 7.84 7.84 Governments May 8.56 7.91 5.52 8.78 7.91 7.99 Jun 8.48 7.61 5.64 8.67 8.05 7.96 Jul 8.81 7.56 5.70 8.91 8.00 8.07 Aug 8.89 7.68 5.67 9.00 8.09 8.31 7 Sep 8.76 7.44 5.50 8.98 7.92 8.39 Dec Mar Jun Sep Dec Mar Jun 1970 1971 Oct 8.28 7.34 5.39 8.40 7.89 8.10 Nov 8.16 7.34 5.36 8.42 7.92 8.01 U.S. companies' borrowing rates Dec 7.84 7.35 5.47 8.09 7.84 7.84 % 10 Domestic and international Euro-dollar bank loans 9 Euro-dollar deposit rates International dollar bonds prime banks' bid rates in London, at or near end of month 8 7-day One Three Six Twelve Domestic Call notice month months months months bonds 1968 Dec 6.75 6.88 7.00 7.06 7.13 7.13 1969 Mar 7.88 8.00 8.63 8.44 8.50 8.44 International Jun 9.25 9.25 10.00 10.50 10.50 10.94 7 DM bonds Sep 9.63 10.00 10.38 11.31 11.25 10.94 Dec 10.13 10.13 9.75 10.13 10.06 9.81 1970 Mar 8.63 8.63 8.50 8.50 8.50 8.50 Jun 8.63 8.63 8.81 9.00 9.06 9.06 6 Sep 7.88 7.88 8.00 8.38 8.44 8.44 Dec 5.38 5.38 6.19 6.44 6.75 6.75 Domestic bank loans 1971 May 7.75 7.75 7.81 7.56 7.56 7.56 Jun 4.63 5.00 5.69 6.50 7.00 7.38 5 Jul 5.50 7.25 6.69 6.69 7.25 7.25 Aug n.a. 10.50 9.25 8.88 8.75 8.13 Sep 5.38 5.63 7.06 7.75 7.75 7.75 Oct 4.75 4.75 5.13 5.94 6.06 6.38 Nov 5.00 5.00 6.50 6.44 6.50 6.56 4 Dec 5.13 5.25 5.75 5.75 5.81 6.00 Dec Mar Jun Sep Dec Mar Jun 1970 1971 Page 10 / World Financial Markets / January 1972 Morgan Guaranty Trust Company / Page 11 New international bond issues New international bond issues Issuer Country/state Amount, Offer Coupon Offer (Guarantor) (Euro-bond: E; Foreign bond: F) of domicile millions date rate a Maturity price Yield b Issuer Country/state Amount, Offer Coupon Offer (Guarantor) (Euro-bond: E; Foreign bond: F) of domicile millions date rate a Maturity price Yieldb January 1972 - preliminary December 1971 U.S. companies Union Oil International Finance Corporation Delaware $20 19 7a 1979 U.S. companies (Union Oil Company) (E) $30 19 7 1/2 a 1987 Grolier International, Inc. Delaware $15 6 83/4 a 1986 97 9.00 (Grolier, Incorporated) (E) Other companies DuPont Overseas Finance N.V. N. Antilles $30 7 7½ a 1978 100 7.36 Imatran Voima Osakeyhtiö Finland DM 75 5 8 1987 991/2 8.06 (E.I. duPont de Nemours & Co.) (E) (Republic of Finland) (E) Transocean Gulf Oil Company Delaware $40 30 7½ a 1987 100 7.36 Bayer International Finance N.V. N. Antilles SwF 80 7 61/4 a 1987 100 6.16 (Gulf Oil Corporation) (E) (Bayer, A.G.) (F) British Insulated Callender's Cables Finance N.V. N. Antilles $20 13 73/4 a 1987 99 1/2 7.66 Other companies (British Insulated Callender's Cables Limited) (E) Bank of Tokyo Holding S.A. Luxembourg $25 1 73/4 a 1978 100 7.61 Crédit Lyonnais S.A. (E) France $25 13 61/2 a 1975 100 6.40 (Bank of Toyko; Industrial Bank of Japan) (E) Stora Kopperbergs Bergslags A.B. (F) Sweden SwF 60 14 61/4 a 1987 99 6.26 Commercial Union Assurance Company, Limited (E) U.K. $30 7 8½ a 1986 100 8.33 Shell International Finance N.V. N. Antilles $70 20 7 1/2 a 1987 1001/2 7.31 $15 7 77/8 a 1978 100 7.73 (Shell Petroleum N.V., Shell Petroleum Co., Ltd.) (E) Refineria de Petróleos del Norte S.A. Spain $15 20 8½ a 1986 991/2 8.38 Sandvikens Jernverks A.B. (E) Sweden DM 75 20 7 1/2 1987 993/4 7.53 (Gulf Oil; Banco de Bilbao; Banco de Vizcaya) (E) I.C.I. International Finance Limited Bermuda $50 25 71/4 1992 (Imperial Chemical Industries) (E) State enterprises Electricity Supply Commission of South Africa South Africa $20 2 81/2 a 1986 98 8.57 State enterprises (Republic of South Africa) (E) Copenhagen Telephone Company (E) Denmark DM 40 3 7 1/2 1986 98 1/2 7.67 The Hydro-Electric Power Commission of Ontario Canada DM 100 8 71/2 1986 98 1/2 7.67 Norges Kommunalbank (E) Norway $20 12 7 1/2 a 1987 991/4 7.45 (Province of Ontario) (E) Eurofima (E) C FI 50 20 7a 1979 Europistas Concesionaria Española, S.A. Spain DM 100 15 8 1986 97 1/2 8.29 (Spanish State) (E) Governments Development Bank of Singapore, Limited Singapore $10 22 81/2 a 1981 100 8.33 Kingdom of Denmark (E) $30 11 71/2 a 1990 99 7.46 (Government of Singapore) (E) Commonwealth of Australia (E) DM 100 21 7 1987 Governments Republic of Iceland (E) $15 26 8 1987 Republic of South Africa (E) $25 26 8 New Zealand Government (F) £10 1 71/4 7.30 1987 New Zealand 1977 993/4 New Zealand Government (E) DM 100 27 7a 1987 Department des Alpes-Maritimes (F) France SwF 9 20 7a 1987 100 6.88 City of Oslo (F) Norway DM 80 23 7½ 1986 98 1/2 7.67 International organizations European Coal and Steel Community (F) Lit 20,000 20 7 1987 International organizations 941/2 7.62 European Investment Bank (F) FF 100 6 73/4 a 1981 100 7.60 International Bank for Reconstruction and DM 250 10 7½ a 1986 100 7.36 a Coupon interest is payable semiannually b Where coupon interest is payable annually, c Private placement. Development (F) unless followed by an "a" which indicates payment is discounted semiannually for com- an annual coupon. parability in computation of yield. Asian Development Bank (F) ASch 150 13 7 1983 98 1/2 7.19 European Coal and Steel Community (F) FF 150 15 81/2 a 1989 100 8.33 a Coupon interest is payable semiannually b Where coupon interest is payable annually, unless followed by an "a" which indicates payment is discounted semiannually for com- an annual coupon. parability in computation of yield. Page 12 / World Financial Markets / January 1972 Morgan Guaranty Trust Company / Page 13 International bond issues outside the United States Central bank discount rates in millions of U.S. dollars 1968 1969 1970 1971 Current 1971 Jan end end end end end end end Jan 18 Effective 1967 1968 1969 1970 1971 Oct Nov Dec 1972 1971 Dec Dec Dec Mar Jun Sep Dec 1972 since Euro-bonds, total 002 3 573 3156 2 966 3624 155 530 255 461 290 United States 5.50 6.00 5.50 4.75 4.75 5.00 4.50 4.50 Dec 13, 71 Canada 6.50 8.00 6.00 5.25 5.25 5.25 4.75 4.75 Oct 25, 71 by category of borrower Japan 5.84 6.25 6.00 5.75 5.50 5.25 4.75 4,75 Dec 29, 71 U.S. companies 562 2 096 1 005 741 1 090 34 195 85 50 25 Other companies 575 603 817 1 065 1119 11 224 85 212 109 Belgium 4.50 7.50 6.50 6.00 6.00 5.50 5.50 5.00 Jan 6, 72 State enterprises 442 349 682 594 838 55 56 85 67 129 France 3.50 8.00 7.00 6.50 6.75 6.75 6.50 6.00 Jan 14, 72 Governments 303 500 584 351 479 42 55 - 132 27 Germany 3.00 6.00 6.00 6.00 5.00 5.00 4.00 4.00 Dec 23, 71 International organizations 120 25 68 215 98 13 - - - - Italy 3.50 4.00 5.50 5.00 5.00 5.00 4.50 4.50 Oct 14, 71 by currency of denomination Netherlands 5.00 6.00 6.00 6.00 5.50 5.00 5.00 4.50 Jan 6, 72 U.S. dollar 1 780 2554 1 723 1775 203 35 445 200 325 181 German mark Denmark 6.00 9.00 9.00 8.00 7.50 7.50 7.50 7.00 Jan 10, 72 171 914 1 338 688 786 82 71 55 121 71 Dutch guilder - - 17 391 298 27 14 15 28 Norway 3.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 Sep 27, 69 - Other a Sweden 105 5.00 7.00 7.00 6.50 6.00 5.50 5.00 5.00 Nov 12, 71 51 78 112 337 11 - - - 10 Switzerland 3.00 3.75 3.75 3.75 3.75 3.75 3.75 3.75 Sep 15, 69 by type of security United Kingdom 7.00 8.00 7.00 7.00 6.00 5.00 5.00 5.00 Sep 2, 71 Long-term straight debt 1 427 1108 1 852 1 995 2 623 128 371 185 381 247 Medium-term straight debt 260 480 173 733 706 27 84 70 55 28 South Africa 5.50 5.50 5.50 6.50 6.50 6.50 6.50 6.50 Mar 30, 71 Certificates of deposit 55 75 - - - - - - 25 - Convertible 260 1910 1 131 238 295 - 75 - - 15 Foreign bonds, total 403 1 135 827 378 1 527 132 146 170 71 27 Day-to-day money rates monthly averages by category of borrower U.S. companies 48 139 223 55 200 44 - - - 14 1967 1968 1969 1970 1971 Other companies 65 56 128 83 208 21 34 - 37 13 Dec Dec Dec Dec Jun Jul Aug Sep Oct Nov Dec State enterprises - 12 107 16 156 - 5 - - - Governments 157 317 98 53 254 - - 51 - - United States 4.51 6.02 8.97 4.90 4.91 5.31 5.57 5.55 5.20 4.91 4.14 International organizations 133 611 271 171 709 67 107 119 34 - Canada 5.67 5.46 7.78 5.14 3.03 3.64 4.01 4.14 4.16 3.72 3.61 Japan 7.30 7.15 8.50 7.50 6.50 6.25 6.25 6.00 5.50 5.50 5.00 by currency of denomination German mark 10 674 531 89 308 - - 93 - - Belgium 2.54 3.36 6.07 5.55 2.68 4.53 3.55 3.60 3.55 4.20 4.10 Swiss franc 153 238 196 193 659 65 54 2 37 27 France 4.76 8.22 10.38 7.48 6.38 5.91 5.75 5.96 5.94 5.94 5.30 Italian lira 24 72 24 - 32 - - - 34 - Germany 2.80 2.06 8.13 7.50 7.00 6.25 6.25 7.00 7.50 4.63 5.88 British pound 102 19 - 12 138 - - 24 - - Netherlands 4.05 4.96 7.11 6.73 2.91 2.69 5.53 3.80 5.35 3.79 4.91 Other b 114 132 76 84 390 67 92 51 - - by type of security Switzerland 2.00 3.25 4.75 5.50 2.50 2.50 0.50 0.50 0.13 0.00 0.00 Long-term straight debt 377 956 641 345 1 204 104 146 146 71 27 United Kingdom 7.45 6.52 7.64 6.66 5.88 5.75 5.16 4.92 4.66 4.13 4.06 Medium-term straight debt 2 179 120 33 293 28 - 24 - - Convertible 66 30 Australia 4.16 4.18 4.40 4.90 5.91 5.88 5.59 5.70 5.74 5.11 5.14 - - - - - - - - South Africa 4.85 4.55 4.21 4.35 5.35 5.36 5.27 5.39 5.39 5.51 5.72 International bonds, total 2 405 4 708 3 983 3 344 5 151 287 676 425 512 317 Euro-dollars 5.03 6.58 10.00 6.97 5.58 5.29 n.a. 6.42 5.19 5.08 5.26 a Includes European unit-of-account, European Currency Unit, and £/DM option issues. b Includes £/$ option issues. P Preliminary Page 14 / World Financial Markets / January 1972 Morgan Guaranty Trust Company / Page 15 Treasury bill rates Treasury bill rates bond-equivalent yields, at or near end of month 9 10 1967 1968 1969 1970 1971 Dec Dec Dec Dec Jun Jul Aug Sep Oct Nov Dec 8 9 United States 5.09 6.38 8.28 5.03 5.24 5.34 4.56 4.56 4.41 4.25 3.72 Canada 5.95 6.24 7.81 4.44 3.37 3.68 3.91 4.06 3.47 3.37 3.21 7 8 Japan 5.71 5.71 5.94 5.81 5.42 5.42 5.17 5.17 5.17 5.17 5.17 France United Kingdom Belgium 6 4.40 5.00 8.50 6.95 4.80 4.90 4.70 4.60 4.50 4.60 4.80 7 France 5.23 8.41 10.18 7.73 7.17 6.80 6.61 6.96 6.32 5.97 5.68 Germany 2.78 2.78 5.83 5.83 4.30 4.30 4.30 4.30 3.80 3.80 3.28 United States 5 Italy 5.05 6 5.05 5.70 6.57 5.80 5.90 6.52 6.30 5.90 5.53 5.41 Netherlands Sweden 4.60 5.06 6.25 6.25 4.37 4.00 4.63 4.75 4.75 4.00 5.00 4 5 Sweden 6.92 5.32 8.69 8.42 6.34 6.09 6.09 5.56 4.79 3.79 3.79 United Kingdom 7.62 6.90 7.80 6.95 5.68 5.64 5.90 4.78 4.61 4.33 4.46 Belgium Canada 3 4 Australia 4.50 4.50 4.79 5.65 5.37 5.37 5.37 5.37 5.37 5.08 5.08 South Africa 5.07 4.71 4.42 4.55 5.58 5.56 5.50 5.62 5.64 5.72 6.04 2 3 Jun Sep Dec Mar Jun Sep Dec Jun 1970 Sep 1971 Dec Mar Jun Sep Dec 1970 1971 Representative money market rates % % 11 Representative money-market rates 10 bond-equivalent yields, at or near end of month 10 9 1967 1968 1969 1970 1971 Dec Dec Dec Dec Jun Jul Aug Sep Oct Nov Dec 9 Euro-dollars 8 Germany United States 5.91 6.96 9.46 6.05 5.65 5.79 5.65 5.65 5.13 4.75 4.49 Canada 6.74 6.61 9.34 6.09 4.30 4.81 4.81 5.06 4.94 4.81 4.42 8 United Kingdom 7 Japan 8.03 8.40 9.25 8.75 7.00 6.50 6.50 6.25 5.75 5.75 5.75 France Belgium 4.90 5.25 8.75 7.25 5.15 5.30 5.05 4.90 4.80 4.80 5.15 7 6 France 4.94 8.50 10.88 7.25 7.13 5.88 6.50 6.50 5.81 5.81 5.75 Germany 4.63 4.50 9.13 8.25 7.38 7.63 7.38 7.50 7.25 6.50 5.50 Italy 3.52 3.41 5.00 7.38 5.88 5.75 5.75 5.50 5.38 5.25 5.50 6 5 Netherlands 5.50 6.13 9.00 7.38 5.10 4.56 5.00 5.56 5.75 5.50 5.50 Belgium Netherlands 5 United Kingdom 8.00 7.75 9.13 7.00 6.25 6.13 5.88 5.38 5.06 4.38 4.63 4 Australia 5.00 5.25 5.75 6.00 7.75 7.25 7.00 7.00 6.50 6.25 6.50 United States Canada South Africa 5.78 5.37 5.47 7.44 7.23 7.54 7.13 7.96 7.85 8.00 8.68 4 3 Euro-dollars 6.25 7.06 10.13 6.44 6.50 6.69 8.88 7.75 5.94 6.44 5.75 3 2 1.38 Jun Sep Dec Mar Jun Sep Dec Jun 1970 Sep Dec Mar 1971 Jun 1970 Sep Dec 1971 Page 16 / World Financial Markets / January 1972 Morgan Guaranty Trust Company / Page 17 Commercial bank deposit rates Commercial bank deposit rates at or near end of month 10 10 1967 1968 1969 1970 1971 Dec Dec Dec Dec Jun Jul Aug Sep Oct Nov Dec Euro-dollars 9 9 United States 5.50 6.00 6.00 5.63 5.50 5.88 5.38 5.63 5.00 4.75 4.25 Canada 6.25 6.50 7.50 5.50 4.00 4.25 4.75 5.00 4.88 4.63 4.40 Japan 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 8 United Kingdom 8 Belgium 4.75 6.63 9.25 7.00 5.00 5.31 5.13 4.75 4.50 4.50 4.50 France 4.00 6.00 9.00 6.50 6.50 6.75 6.75 6.75 6.75 6.75 6.75 Germany 4.00 4.38 8.63 7.50 6.50 6.75 6.63 6.75 6.50 6.00 5.00 7 7 Germany Italy 2.75 5.50 7.50 6.00 4.75 4.75 4.75 4.75 4.75 4.75 4.75 Netherlands 5.63 6.25 9.00 7.00 4.85 4.50 4.80 5.25 5.75 5.50 5.63 Denmark 6.25 4.75 7.00 8.00 6.50 6.50 6.50 6.50 6.50 6.50 6.50 6 6 Netherlands Norway 2.50 2.50 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 Belgium Sweden 5.75 4.75 6.75 6.75 5.75 5.75 5.75 5.25 5.25 4.75 4.75 Switzerland 4.00 4.25 5.00 5.25 3.50 3.50 2.50 2.50 2.00 1.50 1.50 5 5 Italy United Kingdom 7.88 7.63 9.13 7.00 6.19 6.00 5.75 5.19 4.94 4.25 4.50 Australia 4.00 4.25 5.00 5.50 5.50 5.50 5.50 5.50 5.50 5.50 5.50 United States South Africa 5.50 5.00 5.50 6.00 6.75 6.75 6.75 6.75 6.75 6.75 6.75 4 4 Euro-dollars 6.25 7.06 10.13 6.44 6.50 6.69 8.88 7.75 5.94 6.44 5.75 Canada Switzerland 3 3 1.50 Jun Sep Dec Mar Jun Sep Dec Jun Sep Dec Mar Jun Sep Dec 1970 1971 1970 1971 Commercial bank lending rates to prime borrowers Commercial bank lending rates to prime borrowers at or near end of month 11 11 1967 1968 1969 1970 1971 Dec Dec Dec Dec Jun Jul Aug Sep Oct Nov Dec 10 United States 6.00 6.75 8.50 6.75 5.50 6.00 6.00 6.00 5.75 5.50 Euro-dollars 10 5.25 Canada 6.50 6.75 8.50 7.50 6.50 6.50 6.50 6.50 6.00 6.00 6.00 Italy Japan 7.00 7.04 7.37 7.46 7.33 7.33 7.27 7.22 7.18 7.14 7.10 Belgium France 9 9 Belgium 6.25 6.50 10.00 8.50 8.00 8.00 8.00 7.50 7.50 7.50 7.50 France 5.85 7.85 10.35 9.65 9.05 9.05 9.05 9.05 9.05 9.05 8.65 Germany Germany 6.00 6.00 9.00 9.00 8.00 8.00 8.00 8.00 7.50 7.75 7.25 Netherlands Italy 6.75 6.50 8.25 10.25 9.00 9.00 9.00 8.75 8.75 8.25 8.25 8 8 Netherlands 6.50 7.00 8.50 8.50 8.00 8.00 7.50 7.50 7.00 7.00 7.00 Denmark 10.00 8.50 11.50 12.00 10.50 10.50 10.50 10.50 10.50 10.50 10,50 United Kingdom 7 6.00 6.50 7.50 7.50 7.50 7.50 7.50 7.50 7.50 7.50 7.50 7 Norway Sweden 8.50 7.50 9.50 10.00 9.00 9.00 9.00 8.50 8.50 8.00 8.00 Switzerland Switzerland 6.25 6.25 6.50 7.00 7.00 7.00 7.00 7.00 7.00 7.00 7.00 Canada United Kingdom 8.50 7.50 9.00 8.00 7.00 7.00 7.00 6.00 6.00 5.50 5.50 6 6 Australia 6.75 7.00 7.25 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 United States South Africa 8.50 8.00 8.00 8.50 9.00 9.00 9.00 9.00 9.00 9.00 9.00 5 5 Jun Sep Euro-dollars 7.13 7.94 11.00 7.32 7.38 7.57 9.76 8.63 6.82 7.32 Dec Mar Jun 6.63 Sep Dec Jun Sep Dec Mar Jun Sep Dec 1970 1971 1970 1971 Page 18 / World Financial Markets / January 1972 Morgan Guaranty Trust Company / Page 19 Domestic government bond yields Domestic government bond yields % % long-term issues, at or near end of month 11 12 1967 1968 1969 1970 1971 Dec Dec Dec Dec Jun Jul Aug Sep Oct Nov Dec 10 11 United States 5.48 5.97 6.92 6.42 6.35 6.37 6.12 5.88 5.89 5.94 5.92 Canada 6.54 7.30 8.33 6.99 7.30 7.49 7.07 6.97 6.71 6.54 6.56 Japan 6.98 7.24 7.22 7.19 7.20 7.20 7.22 7.20 9 10 7.05 7.14 7.21 Italy Belgium 5.23 5.22 5.77 5.49 5.24 5.22 5.21 5.34 5.34 5.32 5.33 France 5.60 6.00 6.78 7.64 7.59 7.80 7.69 7.77 7.53 7.37 7.34 8 Germany 9 Germany 6.89 6.56 7.38 7.84 7.93 7.92 7.83 7.72 7.63 7.61 7.54 United Kingdom France Italy 6.58 6.59 7.30 8.90 8.71 8.73 8.68 8.45 8.17 8.18 7.93 Netherlands 6.13 6.34 7.50 7.16 6.75 6.83 6.75 6.76 6.58 6.65 6.83 7 8 Canada Denmark 9.78 8.78 10.73 11.34 11.45 10.90 10.89 10.92 10.72 10.83 Netherlands 10.81 Norway 4.95 4.89 6.30 6.41 6.39 6.40 6.35 6.41 6.42 6.45 6.37 6 7 Sweden 6.80 6.19 7.27 7.32 7.28 7.29 7.30 7.10 7.11 7.12 7.14 Switzerland Switzerland 4.55 4.35 5.34 5.70 5.42 5.45 5.31 5.09 4.97 4.86 4.99 United Kingdom 7.14 8.03 8.85 9.80 9.22 9.36 9.12 8.49 8.65 8.54 8.45 Belgium 5 6 Australia 5.25 5.02 6.00 7.00 7.00 7.00 7.00 7.00 6.75 6.65 6.50 United States South Africa 6.46 6.44 6.42 7.75 8.50 8.50 8.50 8.50 8.50 8.50 8.50 4 5 Jun Sep Dec Mar Jun Sep Dec Jun Sep Dec Mar Jun Sep Dec 1970 1971 1970 1971 Domestic corporate bond yields Domestic corporate bond yields % % long-term issues, at or near end of month 12 13 1967 1968 1969 1970 1971 Dec Dec Dec Dec Jun Jul Aug Sep Oct Nov Dec 11 12 United States 6.74 7.04 8.95 7.90 8.05 8.25 7.60 7.75 7.55 7.50 7.30 Canada 7.59 8.18 9.29 8.83 8.52 8.56 8.41 8.32 8.21 8.14 8.24 10 11 United Kingdom Japan 8.57 8.66 9.07 9.20 7.95 7.61 7.49 7.44 7.42 7.49 7.38 Italy Belgium 6.05 5.92 6.96 6.92 6.40 6.18 6.35 6.32 6.07 6.09 6.12 9 10 France 7.52 7.76 8.71 8.83 8.74 8.65 8.68 8.95 8.74 8.77 8.69 Germany 6.95 6.43 7.60 7.77 7.90 8.00 7.83 7.74 7.62 7.59 7.59 France Italy 7.15 7.12 8.51 9.74 9.13 9.15 n.a. 8.92 8.62 8.46 Netherlands 8.72 8 9 Netherlands 6.71 6.98 8.54 7.88 7.58 7.70 7.60 7.91 8.05 7.65 7.91 Canada Germany Norway 5.79 5.75 7.42 6.81 6.74 6.76 6.76 6.77 6.78 6.70 6.77 7 8 Sweden 7.49 6.73 8.57 7.48 7.39 7.41 7.42 7.22 7.21 7.22 7.22 Belgium Switzerland 5.11 5.13 5.58 6.09 5.74 5.72 6.01 5.63 5.55 5.30 5.42 United Kingdom 7.97 9.16 10.70 10.84 10.38 10.26 9.99 9.36 9.22 9.09 9.19 United States 6 7 Australia 7.25 7.50 8.25 9.25 9.25 9.25 9.25 9.00 9.00 8.75 8,50 Switzerland South Africa 7.25 7.50 7.75 9.25 9.75 9.75 9.75 9.75 9.75 9.75 9.75 5 6 Jun Sep Dec Mar Jun Sep Dec Jun Sep Dec Mar Jun Sep Dec 1970 1971 1970 1971 Morgan Guaranty Trust Company / Page 21 Page 20 / World Financial Markets / January 1972 Key to data in charts and tables Key to data in tables and charts - continued I. Rates and yields by country Bank lending rate to prime borrowers Government bond yield average of lowest rate for commercial bank loans yields on nine outstanding 6% bonds of South Africa Corporate bond yield (Financial New-issue volume Australia and advances, including a commission public-sector entities. Day-to-day money rate National Fi- Times)-Actuaries 20-year debentures Data include all publicly announced is- Day-to-day money rate - approximate ef- of 0.375 per quarter on the total line Corporate bond yield average of yields nance Corporation call money rate. and loans. sues, whether publicly or privately fective interest rate in the authorized of credit. on ten outstanding bonds of leading placed, but exclude those where the short-term money market. Government bond yield 41/2% govern- Italian industrial companies. Treasury bill rate 3-month Treasury ment bond of 1997. bills at tender. United States investor is a monetary authority. Treasury bill rate new issues of 13- week Treasury notes. Japan Representative money-market rate 90- Day-to-day money rate - effective Fed- Representative money-market rate France day bank acceptances. eral funds rate. month prime finance company paper. Day-to-day money rate - Tokyo call Bank deposit 3-month time de- Treasury bill 3-month Treasury Categories of borrower Day-to-day money rate call money money, unconditional, lenders' rate. Bank deposit rate - 3-month certificates posits at merchant banks. bills. of deposit. Treasury bill rate - 60- to 62-day non- U. S. companies include both parent against private paper. Bank lending rate to prime borrowers Representative money-market rate 3- Bank lending rate to prime borrowers Treasury bill rate new issues of one- interest-bearing discount government companies and their affiliates, either bills. unsecured overdraft rate for prime month prime industrial paper. domestic or foreign. approximate overdraft rate for prime year Treasury bills. Representative money-market rate To- borrowers. Bank deposit rate 3-month negotiable Other companies include private com- borrowers. Rate for prime borrowers Representative money-market rate 3- usually 0.25% to 0.75% below the month interbank money against private kyo call money, over-month, lenders' Government bond yield 61/2% govern- certificates of deposit issued by Morgan panies domiciled outside the United rate. ment bonds of 1994. Guaranty Trust Company. States and their affiliates. maximum overdraft rate; rate shown is paper. 0.50% below. Bank deposit rate - 3-month time de- Bank deposit rate 3-month time de- Corporate bond yield an approximate Bank lending rate to prime borrowers State enterprises include public agen- posits of F 100,000 or more. New series. posits. yield based on average yields of long- minimum commercial lending rate of cies. Government bond yield 20-year gov- ernment bonds. Bank lending rate to prime borrowers Bank lending rate to prime borrowers term bonds of the semipublic ESCOM, Morgan Guaranty Trust Company. In ad- Governments include central and local overdraft rate for prime borrowers, in- average rate on loans and discounts of plus %. dition, compensating balances are re- Corporate bond yield-long-term secured governments. cluding a commission of 0.05% per city banks, computed by the Bank of quired. debentures, indicated by Australian Uni- ted Corporation. Japan. In addition, compensating bal- Sweden Government bond yield Morgan Guar- month on highest debit balance during the month. ances may be required. Treasury bill rate new issues of 3- anty 20-year U.S. Government Bond Belgium Government bond average yield month Treasury bills. Index. Types of security Government bond yield Institut Na- Day-to-day money rate call money. tional de la Statistique et des Etudes on outstanding maturities of 61/2% na- Bank deposit rate deposits at 6- Corporate bond yield - Morgan Guar- Long-term straight debt 8 years or more. Treasury bill rate 3-month Treasury Economiques (INSEE) tax-adjusted yield tional government bonds. months' notice. anty index of new issue yields for Aa on 5% government perpetual bond. Corporate bond yield average of yields Bank lending rate to prime borrowers utility bonds with five-year call pro- Medium-term straight debt 3 to 7 years. certificates. Corporate bond yield INSEE tax ad- on outstanding Nippon Telegraph & Tel- tection. Certificate of deposit 3 years or more. Representative money-market rate 4- overdraft rate for prime borrowers, in- month Fonds des Rentes certificates. justed average yield on outstanding pri- ephone interest-bearing yen debentures. cluding a fee of 1% per annum prior to Convertible includes issues with war- Bank deposit rate special maximum May 1970 (11/4% thereafter) on total rants. vate corporate bonds. rate for 3-month time deposits in large amount of credit authorized. Netherlands amounts. Government bond yield 15-year gov- Germany Bank lending rate to prime borrowers Day-to-day money rate open-market ernment bonds. II. Euro-dollar rates Yields prime overdraft rate. Day-to-day money rate interbank call call money in Amsterdam. Corporate bond yield Central Statisti- Government bond yield Kredietbank 10- money. Treasury bill 3-month Treasury cal Bureau average yield on industrial Day-to-day money rate prime banks' Yields are calculated to the nearest day to 20-year government bond average Treasury bill rate 60- to 90-day Treas- bills. bonds. New series as of 1970. bid rate for call money in London. of maturity. Interest on bonds with an- nual coupons is discounted semiannu- yield net of withholding tax. ury bills as sold by German central Representative money-market rate 3- Representative money market rate Switzerland ally for comparability in computation of Corporate bond Kredietbank 10- bank. month municipal loans. prime banks' bid rate for 3-month yield. This applies with respect to orig- to 20-year private bond average yield Representative money-market rate 3- Bank deposit rate 3-month time de- Day-to-day money rate call money. deposits in London. inal offering yields as well as secondary net of withholding tax. month interbank deposits. posits in large amounts. Bank deposit rate 3-month time de- Bank deposit rate prime banks' bid market yields. Canada Bank deposit rate 3-month time de- Bank lending rate to prime borrowers posits. rate for 3-month deposits in London. Secondary market yield indices are sim- posits in large amounts. overdraft rate for prime borrowers. Day-to-day money rate-chartered banks' Bank lending rate to prime borrowers Bank lending rate to prime borrowers ple arithmetic averages of end-of-month Bank lending rate to prime borrowers Government bond yield Central Bureau overdraft rate for prime borrowers, in- representative average rate for 3-month day-to-day loans. yields for groups of selected straight- approximate effective approved over- of Statistics (CBS) average yield on nine cluding commission of 0.25% per quar- loans to prime borrowers. debt securities. Yield indices for six Treasury bill rate 3-month Treasury draft rate for prime borrowers. bills at tender. 3% to 31/2 % government bonds. ter on highest debit balance in quarter. categories of bonds have been calcu- Government bond yield Frankfurter All- Representative money-market rate 3- Corporate bond yield CBS average Government bond yield Swiss Confed- lated according to borrower and cur- gemeine Zeitung (FAZ) 7% public au- month prime finance company paper. yield on three 4½ % to 43/4 % corporate eration bond average. rency. They are based on issues of thority bond average. bonds. good-quality, well-known borrowers of- Bank deposit rate 3-month time de- Corporate bond yield FAZ 6% indus- Corporate bond yield average of yields III. International bonds fered in 1970 and earlier. posits. trial bond average. on outstanding bonds of five leading Bank lending rate to prime borrowers - Norway Swiss companies. Definitions The number of issues represented in each of the indices is as follows: prime rate. In addition, compensating Bank deposit rate 3-month time de- An international bond issue is one sold balances sometimes are required. Italy posits. Higher rates may be negotiated United Kingdom outside the country of the borrower. It Long-term, U.S. companies, U.S. dollar - Government bond yield Bank of Can- Treasury bill rate - yield on 5% Trea- for 6-month or more time deposits in Day-to-day moneyrate day-to-day loans. may be either a Euro-bond issue or a ten Euro-bond issues. ada average yield on all direct govern- sury bonds maturing April 1, 1973. large amounts. Treasury bill rate 91-day Treasury bills foreign bond issue. Long-term, U.S. companies, German ment bonds due or callable in 10 years Representative money-market rate in- Bank lending rate to prime borrowers at tender. A Euro-bond issue is one underwritten mark ten Euro-bond issues. or over. terbank deposits of up to one-month overdraft rate, including a charge of Representative money-market rate 3- by an international syndicate and sold Long-term, U.S. companies, Swiss franc Corporate bond yield McLeod, Young, maturity. 0.375% per quarter on the total line of month local authority deposits. principally in countries other than the - ten foreign bond issues. Weir Co., Ltd., average yield on ten in- credit. Bank deposit rate Time deposits of country of the currency in which the dustrial bonds. Bank deposit rate 3-month time de- Long-term, European companies, U.S. L 100 million or more. Government bond yield 5% govern- issue is denominated. dollar - ten Euro-bond issues. posits. Denmark Bank lending rate to prime borrowers ment bond of 1996. A foreign bond issue is one underwritten Bank lending rate to prime borrowers Long-term, European companies, Ger- Bank deposit rate time deposits of 3- unsecured overdraft rate for prime Corporate bond yield 53/4 Dalen by a syndicate composed of members man mark - ten Euro-bond issues. months' notice. borrowers. unsecured overdraft rate for prime Portland-Cement bond of 1969-84. from one country, sold principally in borrowers. Long-term, governments, U.S. dollar that country, and denominated in the six Euro-bond issues (governments of Government bond yield 31/2% war loan. currency of that country. Australia, Denmark, and Italy. Page 22 / World Financial Markets / January 1972 Morgan Guaranty Trust Company / Page 23 STRICTLY CONFIDENTIAL (FR) January 28, 1972 1971 U.S. BALANCE OF PAYMENTS (millions of dollars, seasonally adjusted) 1971 Year e/ Qtr. 1 Qtr. 2 Qtr. 3 Qtr. 4e/ Exports 42,753 11,016 10,706 11,466 9,565 Imports -45,659 -10,768 -11,767 -12,026 -11,098 TRADE BALANCE -2,906 +248 -1,061 -560 -1,533 Services, net +2,838 +922 +1,087 +554 +275 BALANCE ON GOODS & SERVICES -68 +1,170 +26 -6 -1,258 Remittances & pensions -1,455 -342 -355 -388 -370 U.S. Gov't. grants & credits 1/ -4,221 -1,108 -1,059 -1,059 --995 Private long-term capital U.S. capital -6,790 -1,724 -1,964 -1,782 -1,320 Foreign capital +1,681 +722 +116 +71 +772 BALANCE ON CURRENT ACCOUNT AND LONG-TERM CAPITAL -10,853 -1,282 -3,236 -3,164 -3,171 Private short-term nonliquid capital -2,826 -384 -394 -1,167 -881 Private liquid capital -7,806 -3,029 +51 -2,828 -2,000 Errors & omissions -9,265 -1,018 -2,331 -5,141 -775 OFFICIAL RESERVE TRANSACTIONS BALANCE (ex. SDR allocation -30,750 -5,713 -5,910 -12,300 -6,827 1/ Includes U.S. Gov't. nonliquid liabilities to other than official reserve holders. e/ Partly estimated. Source: Inter-agency balance of payments projection committee, 1/26/72. FORD & LIBRARY GERALD STRICTLY CONFIDENTIAL (FR) January 28, 1972 U.S. BALANCE OF PAYMENTS (millions of dollars) 1972 p/ 1/ Before After Exchange Rate Exchange Rate 1969 1970 1971 Changes Changes Exports 36,490 41,980 42,753 45,705 47,260 Imports -35,830 -39,870 -45,659 -50,770 -50,325 TRADE BALANCE +660 +2,110 -2,906 -5,065 -3,065 (+1,000) Services, net +1,351 +1,482 +2,838 +3,300 +3,450 BALANCE ON GOODS & SERVICES +2,011 +3,592 -68 -1,765 +385 (±1,000) Remittances and pensions -1,266 -1,410 -1,455 -1,510 -1,510 U.S. Gov't. grants & credits 2/ -3,574 -3,768 -4,221 -4,405 -4,405 Private long-term capital U.S. capital -4,855 -5,781 -6,790 -5,760 -5,760 Foreign capital +4,805 +4,328 +1,681 +4,730 +4,730 BALANCE ON CURRENT ACCOUNT AND LONG-TERM CAPITAL -2,879 -3,038 -10,853 -8,710 -6,560 (±1,000) Private short-term nonliquid capital -602 -545 -2,826 -100 -100 Private liquid capital +8,786 -6,000 -7,806.- ? ? Errors & omissions -2,603 -1,104 -9,265 ? ? OFFICIAL RESERVE TRANSACTIONS BALANCE (ex. SDR allocations) +2,702 -10,688 -30,750 ? ? 1/ Projected 1972 data are presented before and after allowing for exchange rate changes. 2/ Includes U.S. Gov't. nonliquid liabilities to other than official reserve holders. e/ Partly estimated. p/ Projected. Source: Inter-agency balance of payment projection committee, 1/26/72. FORD & GERALD LIBRARY January 28, 1972 STRICTLY CONFIDENTIAL (FR) Table 1 U.S. BALANCE OF PAYMENTS (In millions of dollars) 1971 p/ p/ OI QII QIII QIV Year 1. Change in liabilities, dec., (-) 2,039 5,748 9,185 3,595 20,567 A. To foreign official agencies 1/ 4,573 5,624 11,306 6,182 27,685 B. To private foreigners, liquid -2,534 124 -2,121 -2,587 -7,118 Of which to foreign branches of U.S. banks (-1,905) (46) (-1,630) (-1,398) (-4,887) 2. U.S. reserve assets, inc., (-) 862 838 1,373 -8 3,065 Gold stock 109 456 300 1 866 Special drawing rights 2/125 196 150 -3 468 Reserve position in IMF 255 252 851 -8 1,350 Convertible currencies 373 -66 72 2 381 3. Liquid claims, inc., (-) -341 10 -446 n.a. n.a. Balances (deficit -) 2/ Official settlements, N.S.A. (1A+2) -5,435 -6,462 -12,679 -6,174 -30,750 11 " S.A. , -5,713 -5,910 -12,300 -6,827 Liquidity, N.S.A. (1+2.) -2,901 -6,586 -10,558 -3,587 -23,632 11 , S.A. -2,999 -5,871 -9,992 -4,770 Net liquidity, N.S.A. (1+2+3) -2,560 -6,596 -10,112 n.a. n.a. 11 11 S.A. , -2,684 -5,961 -9,472 n.a. n.a. p/ Preliminary. n.a. = Not available. 1/ Includes IMF gold investment and deposits. 2/ Excludes allocation of $717 million of SDRs by IMF on January 1, 1971. Note.--Data for fourth quarter and year are partly estimated. FORD & LIBRARY GERALD Jan. 27, 1972 June 29, 1971. Strictly Confidential (F.R.) 1960-1971 Financing of U.S. Balance of Payments on Official Reserve Transactions Basis N.S.A. (In millions of dollars) Out- standing 1971 Nov.30, 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 JAN-NOV. TI 1971 [] Balance on offic. res. trans. (deficit, -) -3,403 -1,348 -2,702 -2,011 -1,564 -1,293 270 -3,417 1,641 2,700 -10,688 -27,575 Financed by changes in: U.S. Reserve Assets (increase, -) 2,145 606 1,533 377 171 1,222 568 52 -880 -1,187 3,344 3,073 12,131. Gold Stock 1,703 857 890 461 125 1,665 571 1,170 1,173 -967 787 866 10,206 Net gold sales to or açquisitions from (-) United Kingdom 2/ 550 306 387 -329 -618 -150 -80 879 835 -- : - France 173 -- 456 518 405 884 601 -- -600 -325 : 473 Other Western Europe 995 448 262 210 301 565 138 101 434 -645 204 323 Other countries 251 216 -272 -7 -52 23 -51 51 449 13 427 48 International Monetary Fund -300 -150 -- -- -- 225 -177 -22 3 -10 156 22 Net sales to domestic industrial users 34 37 57 69 89 118 140 161 52 -- : I Special drawing rights -- -- -- -- -- -- -- -- -- : 16 468 1,100 Reserve position in IMF 442 -135 626 29 266 -94 537 -94 -870 -1,034 389 1,353 582 Convertible currencies -- -116 17 -113 -220 -349 -540 -1,024 -1,183 814 2,152 386 243 Sterling -- -- -- -15 -247 -394 -301 -898 -961 663 1,847 306 - French francs -- -- -1 -- -25 25 -- -- -432 235 199 - Other -- -116 18 -98 52 20 -239 -126 210 -84 106 80 243 Liabilities to for. offic. institutions (dec., ) 1,258 742 1,169 1,634 1,393 71 -838 3,365 -761 -1,513 7,344 24,502 48910 Liquid: 1,258 742 919 1,673 1,075 -18 1,595 2,046 -3,101 -517 7,619 24,955 Chstiti IMF gold investment and deposits 300 -- -- -- -- 34 177 22 -3 -11 -453 - 22 544 Marketable U.S. Govt. obligations Bills and certificates 569 -340 1,450 -288 145 -748 -450 481 -1,493 -1,554 7,993 11,816 23,332 Bonds and notes -100 14 -139 466 -58 -20 -245 48 -379 -79 -39 1,452 1,747 Nonmarketable U.S. Treasury securities Certificates payable in dollars -- 450 -90 59 -139 380 -420 1,188 -1,006 -88 1,517 4,888 6,739 Certs. payable in for. currencies -- 46 2, -18 -30 -- 517 -365 311 -261 -54 636 158 Bonds and notes 3/ -- -- 703 376 122 -945 455 -10 -163 -126 5,000 5,000 Other short-term 489 572 -304 751 781 214 -229 217 -521 1,639 -1,219 1,185 7,027 Nonliquid: -- -- 250 -39 318 89 757 1,319 2,340 -996 -275 -453 4,363 Non-marketable Treasury bonds and notes Payable in dollars -- -- -- 13 191 130 -6 163 1,176 -237 1,049 74 2,554 Payable in foreign currencies -- -- 251 -74 -20 -- -46 250 601 150 -542 - 1,597 Certain other liab. reported by U.S. Govt. -- -- -1 13 -2 -7 20 39 29 -75 28 -8 38 Reported by U.S. banks -- -- -- 9 149 -34 789 867 534 -834 -810 -519 174 N.S.A. Not seasonally adjusted. p/ Preliminary. Estimate. Deposits (demand and time), time certificates of deposit, bankers' accept- 1/ Excludes allocations of SDRs by IMF; $867 million on January 1 ances and commercial paper. 1970; and $717 million on January 1, 1971. 5/ Principally time deposits and certificates of deposit with original maturities 2/ For period 1963-1968 includes U.S. share of Gold Pool settlement. more than one year. 3/ Payable in foreign currencies except the following which are payable For payment to International Monetary Fund. in dollars: 1963, $150 million; 1966, -$125 million; and 1969, -$25 million: and 1971, 5,000 million GERALD LIBRARY January 28, 1972. Historical Summary of U.S. International Reserve Position 1946-1971 (In billions of dollars) GERALD FORD LIBRARY Reserve assets Reserve liabilities To official To institutions International in foreign Monetary End of period Total Gold 1/ Other Total countries Fund / 1946 20.7 20.7 -- 3.8 3.8 : 1947 24.0 22.9 1.1 2.2 2.2 : 1948 25.8 24.4 1.4 3.1 3.1 -- 1949 26.0 24.6 1.4 3.1 3.1 : 1950 24.3 22.8 1.5 4.6 4.6 : 1951 24.3 22.9 1.4 3.9 3.9 : 1952 24.7 23.3 1.4 5.3 5.3 : 1953 23.5 22.1 1.4 6.2 6.2 : 1954 23.0 21.8 1.2 7.2 7.2 : 1955 22.8 21.8 1.0 7.8 7.8 -- 1956 23.7 22.1 1.6 9.0 8.8 .2 1957 24.8 22.9 1.9 8.9 8.7 .2 1958 22.5 20.6 1.9 9.5 9.3 .2 1959 21.5 19.5 2.0 10.6 10.1 .5 1960 19.4 17.8 1.6 11.9 11.1 .8 1961 18.8 16.9 1.9 12.6 11.8 .8 1962 17.2 16.1 1.1 13.6 12.8 .8 1963 16.8 15.6 1.2 15.2 14.4 .8 1964 16.7 15.5 1.2 16.6 15.8 .8 1965 15.5 13.8 1.7 16.7 15.8 .8 1966 14.9 13.2 1.7 15.9 14.9 1.0 1967 14.8 12.7 2.1 19.3 18.3 1.0 1968 15.7 10.9 4.8 18.5 17.4 1.0 1969 17.0 11.9 5.1 17.0 16.0 1.0 1970 14.5 11.1 3.4 24.4 23.8 .6 1971 Mar. 14.3 11.0 3.3 29.0 28.4 .6 June 13.5 10.5 3.0 34.6 34.0 .5 Sept. 12.1 10.2 1.9 45.9 45.4 .5 Nov. 12.1 10.2 1.9 48.9 48.4 .5 Dec. 12.2 10.2 2.0 *52.1 * 51.6 .5 Includes (a) gold sold to the United States by the International Monetary Fund with the right of repurchase, and (b) gold deposited by the IMF to mitigate the impact on the U.S. gold stock of foreign purchases for the purpose of making gold subscriptions to the IMF under quota increases. 2/ U.S. Government obligations at cost value and funds awaiting investment obtained from proceeds of sales of gold by the IMF to the United States to acquire income-earnings assets. Upon termination of investment, the same quantity of gold can be reacquired by the IMF. Beginning 1966 includes gold deposit liability to IMF. * Strictly Confidential (F.R.); represents preliminary estimate. Strictly Confidential (F.R.) Jan. 27,1972 June 29, 1971 Changes in Liabilities to Foreign Official Institutions, By Country-1960-1971 (In millions of dollars) 1971 p/ Outstanding 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 JAN-NOV. Nov. 30, 1971 Total: Increase or decrease (-) 1,258 742 1,169 1,634 1,393 71 -838 3,365 -761 -1,513 7,344 24,502 48,910 Western Europe 742 1,061 91 1,089 851 -499 -1,100 2,549 -2,262 -951 6,533 14,507 28,142 Germany 1,702 -640 -123 559 -745 -587 600 141 671 -1,673 6,151 3,320 10,946 Italy -469 345 329 -612 589 298 -234 520 -1,162 -252 474 598 1,636 France -67 412 203 343 70 -615 -294 273 -357 -211 808 1,401 2,330 Belgium 7 164 -118 224 50 -34 -5 167 -384 172 84 255 606 Netherlands 22 -119 39 123 14 -28 8 232 -363 115 338 - 391 169 Total EEC 1,195 162 330 637 -22 -966 75 1,333 -1,595 -1,849 7,855 5,183 15,687 Switzerland -87 157 88 91 179 -192 -47 191 368 -49 249 2.443 3,461 United Kingdom 189 482 -638 22 145 897 -718 480 -402 -128 -444 5,254 5,443 Sweden 9 180 80 -30 141 -22 22 -179 -61 -63 63 272 645 Total major European countries 1,306 981 -140 720 443 -283 -668 1,825 -1,690 -2,089 7,723 13,152 25,236 Other Western Europe -564 80 231 369 408 -216 -432 724 -572 1,138 -1,190 1,355 2,906 Canada 36 167 723 -58 23 -110 -369 -23 557 -242 1,327 759 3,710 Japan 532 -427 356 78 -46 33 -53 -96 692 72 514 10,022 12,823 Latin America 39 -166 103 146 230 266 -245 270 282 24 -238 - 345 1,349 All other countries -391 107 -103 366 337 354 732 604 -56 -480 -367 - 411 2,304 38 Certain non-liquid liabilities -- -- -1 13 -2 -7 20 39 29 75 28 - 8 reported by U.S. Government 1/ - 22 544 IMF Gold investment and deposits 300 -- -- -- -- 34 177 22 -3 -11 -453 Not reported by country. Preliminary. FORD is LIBRARY GERALD 6 February 4, 1972 To: Mr. Ralph C. Bryant Subject: Chairman's Statements on From: Samuel Pizer sp U.S. Balance of Payments in 1971. I have looked through the Chairman's statements of May 19, 1971 before the Senate Committee on Banking, Housing and Urban Affairs, and of June 30, 1971 before the Subcommittee on Foreign Economic Policy of the JEC. The May testimony took the line that although the underlying imbalance was large it was nowhere near large enough to have created a crisis -- so that the focus was placed on short-term capital flows and the events leading to the German float on May 10. The conclusion stated that there was no reason for gloom -- looking ahead -- and cites several factors that would be helpful. These factors included: a) Relatively good price performance, especially if a stronger incomes policy is adopted here. b) Rising investment income. c) Foreign purchases of U.S. stocks. FORD if LIBRARY CERALD d) Reductions in military expenditures. e) The fact that the bulk of our short-term capital flows was behind us because the branch liabilities were largely liquidated. Finally, there was mention of the need for surplus countries to see their balances change. In the June statement, much more stress was put on the basic imbalance, though it was suggested that it had not broken out of the Mr. Ralph C. Bryant -2- range of recent years. Again emphasis was put on the fact that the underlying imbalance had been overshadowed by short-term capital movements. By June 30 the fact that the trade balance had been in deep deficit in April and May was known (at the time of the May 1.9 speech only the January-March data were available, still showing small surpluses) and the statement stresses our trading difficulties. Looking ahead, the statement mentioned much the same list of favorable elements cited in May, but took the view that since a repetition of large capital outflows was unlikely the deficit should subside. However, the statement also says (page 13) that policies followed since 1958 were insufficient to restore equilibrium and that decisive steps needed to be taken to correct the situation. Main emphasis was put on price stability and the conviction that specific policies to moderate price and wage increases were necessary. Stress was put on the need for multilateral actions including (1) reduce differences in credit conditions, (2) investment outlets for official reserve holders, (3) further role for the SDR (4) improve the adjustment process. In connection with the last point, the need for more flexible exchange rates and wider margins is stressed, for the first time, I believe. The closing of the statement rejects complacency but emphasizes the fundamental strength of the United States. FORD is LIBRARY GERALD Mr. Ralph C. Bryant -3- In the light of what has happened since June 30, how do these statements stand up? 1) They were among the first to point to the worsening underlying condition of the trade balance and to warn that new, decisive policies were necessary. But, in common with other analyses being made at that time, the speed and depth of the deterioration were not yet fully appreciated. 2) At the time, there was a general feeling that after the German and other exchange rate changes of May the flow of short-term capital would be stabilizing, giving a breathing space for adjustment. In fact, in June there was an official settlements surplus of over $1 billion. However, once the DM rate moved the market began to focus on other currencies that had not appreciated, and a self-reinforcing speculative splurge ensued. This went far beyond the final liquidation of U.S. bank liabilities to branches noted in the statements, and involved huge increases, largely unrecorded, of U.S.-owned assets abroad. In short, the statements were quite right to point out that the extent of the underlying U.S. imbalance in the first half of the year was being exaggerated by short-term capital flows, but wrong in assuming that speculation had run its course. 3) The June statement in particular mentioned pointedly the inadequacy of conventional monetary and fiscal policies for dealing with GERALD FORD LIBRARY Mr. Ralph C. Bryant -4- present price and wage problems, and advocated strongly that specific actions should be taken. 4) The June statement for the first time, I believe, contained a strong plea for exchange rate adjustments. In view of the exchange crisis that had just occurred, and the delicacy in any case in advising other countries to change their exchange rates, it is difficult to see how the statements could have been any stronger or more pointed on that subject. 5) The June statement contained the leading elements of the August 15 actions -- specific action on prices and wages and need for exchange rates to change. 6) The principal failure of judgment about the underlying situation is that the list of factors mentioned that would be helpful is very largely a list of factors that will be helpful in the longer run, but could not be expected to yield benefits in the next year or two. This leads to a more optimistic near-term prospectus than was justified even in the light of what was known on June 30. However, at the time it was impossible to foresee that the situation would become even more unstable when the news of deeper trade and balance-of-payments deficits here -- so much in contrast with the growing surpluses and reserve accruals of Germany and Japan in particular -- whipped up a new wave of speculation. Moreover, even if such a course of events had been expected with a fairly high degree of probability the Chairman was scarcely in a position to predict it and precipitate a panic. cc: Messrs. R. Solomon and Hersey FORD is LIBRARY GERALD Mr. Cardon, Mr. Holland BOARD OF GOVERNORS Prepared before U.K. FEDERAL RESERVE OF THE SYSTEM decision to float Office Correspondence Date June 22 1972 To Mr. Bryant Subject: Outline of Major Factors From Larry Promisel Affecting the Outlook for Sterling I. There has been much concern recently about the viability of the present sterling exchange rate. This concern, reflected in state- ments by the press and by public figures, and, in turn, in market pressure on sterling, is based essentially on three factors: A. the outlook for wages and prices, B. the outlook for the balance of payments, and C. U.K. entry into the E.C., scheduled for January 1, 1973. II. The outlook for wages and prices has worsened. A. Wage increases -- in the wake of the miner's settlement in February have been accelerating, after slowing down around the turn of the year (see Table, lines 1 and 2). B. The outlook for wage settlements is now less favorable, partly because of the recent acceleration, but also because the new National Industrial Relations Court received major setbacks last week. 1. It was hoped that the Court would put teeth into the Government's Industrial Relations Act, thereby lessening the risk of labor disruption and tending to moderate the increase in wage settlements. FORD & LIBRARY To: Mr. Bryant -2- 2. The Court recently ruled that a union is responsible for the actions of its shop stewards. It imposed fines totalling £55,000 on the Transport and General Workers' Union for contempt in not stopping its stewards from blocking certain road haulage companies. 3. This decision was thought by some to mark the beginning of a new -- and significantly better -- era of labor relations. 4. This decision was overruled by a Court of Appeals on June 13. 5. Another recent decision by the Industrial Relations Court, to imprison three London dock workers for ignoring an injunction to cease picketing, was over- ruled by the Court of Appeals on June 16. C. Recently, price rises have been accelerating (see Table, FORD i LIBRARY GERALD lines 3 and 4). D. The outlook for prices has worsened, 1. because of the outlook for wages (see above), and 2. the money supply has been growing at rates thought by many to be excessive (see Table, line 5). E. A major uncertainty in the whole wage and price picture is the likelihood of formal price and income controls. So far, Heath has categorically denied that such an action is To: Mr. Bryant -3- possible, and has pinned his hopes instead on an extension -- in modified form -- of the voluntary restraint policy of the Confederation of British Industries. III. The balance of payments surplus, which fell in the first quarter (see Table, lines 6-9), is expected to be increasingly eroded over the next year or two. A. The balance of payments picture reflects the sharp deteriora- tion already observed in the visible trade balance (see Table, lines 10-12). 1. The competitiveness of British goods has declined (see Table, lines 13-15), and will decline further if the unfavorable outlook for prices proves to be correct. 2. Economic activity in the U.K. is expected to pick up markedly. Given the large cyclical response of import demand previously experienced in the U.K., this upturn in activity is likely to aggravate the U.K. trade posi- tion significantly. B. It should be emphasized that the U.K. current account is still roughly in balance, with the surplus on invisibles offsetting the visibles deficit, and that the U.K. reserve position is strong. A serious basic balance of payments deficit is not really expected, before 1973, at the earliest. FORD & LIBRARY GERALD To: Mr. Bryant -4- IV. U.K. entry into the Common Market may influence the timing of a devaluation of sterling. A. If a devaluation of sterling within a year or two appears inevitable, then it could be argued that it would be easier -- and, therefore, better -- to devalue before entry, rather than after. B. Note: Entry into the Common Market is also expected to have an adverse impact on the U.K. balance of payments, at least initially, as the cost to Britain in agriculture is expected to outweigh any gains in the industrial sector in the short run. 1 FORD i LIBRARY GERALD UNITED KINGDOM: SELECTED STATISTICS 1971 1972 Q1 QII QIII QIV QI Jan. Feb. Mar. Apr. May Percentage change over previous period at annual rate. 1. Hourly wage rates +16.1 +8.2 +10.2 +13.5 +13.9 +11.9 +1.8 +5.9 +6.7 n.a. 2. Average hourly earnings (SA) + 8.2 +9.8 +11.6 + 7.3 + 9.1* +10.7 * +20.7* +28.5 n.a. 3. Retail prices +10.9 +14.2 + 5.6 + 5.2 + 6.1 +12.7 +5.4 + 4.5 +10.7 +5.9 4. Wholesale prices (manufactured products, home market sales) + 8.8 + 8.6 + 5.8 + 2.9 + 3.8 + 4.7 +3.8 + 1.9 + 6.6 +7.6 5. Money Supply M3 (SA) +11.2 + 6.7 +10.0 +19.3 +21.9 +21.9 +3.0 +30.4 +25.6 n.a. *As industrial activity was severly disrupted by restricted electricity supplies, no enquiry was held in February. The changes are therefore computed with January and March data only. LEGARA GERALD R. FORD UNITED KINGDOM: SELECTED STATISTICS (cont.) 1971 1972 Year Q1 QII QIII QIV QI Jan. Feb. Mar. Apr. May Balance of Payments (£ million) 6. Current balance +979 +51 +338 +331 +259 -50 FORD i LIBRARY 7. Investment and other capital flows +1858 +626 +306 +474 +452 +54 N.A. 8. Balancing item +391 +296 -10 -137 +242 +53 9. Total currency flow +3228 +973 +634 +668 +953 +57 10. Exports (f.o.b., SA) 8880 1995 2286 2322 2280 2214 742 751 721 750 751 11. Imports (f.o.b., SA) 8580 2061 2172 2145 2205 2325 741 784 804 800 794 12. Visible balance (SA) +300 -66 +114 +177 +75 -111p +1 -33 -83 -50 -43 Unit Values (1961 = 100) 13. Exports 148 143 146 149 152 155 154 154 156 156 14. Imports 136 133 137 138 138 139 139 138 139 139 15. Terms of trade 108 108 107 108 111 112 111 112 113 113 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM K Office Correspondence Date June 23, 1972 To Mr. Ralph Bryant Subject: The EEC and Sterling From Charles Siegman 1. General features of intervention, interim financing procedures and settlements arrangements under system of narrower EEC exchange rate margins. A. Intervention procedures a. each central bank intervenes on its own exchange market. A special telephone system links participating central banks, providing them the means to consult each other on a regular basis and whenever necessary b. intervention in Community currencies is required when the 2.25 per cent fluctuation limit between the strongest "Snake" and weakest EEC currency is reached c. intervention in dollars is required when a Community parity or central rate reaches + 2.25 per cent against "turnel" the dollar d. intervention within these bands requires Community agreement B. Interim financing a. the positions built-up in the process of maintaining the narrow intra-EEC bands will be covered by a swap system which would provide exchange guarantees and a uniform FORD & 03RALD LIBRARY Mr. Ralph Bryant -2- interest rate -- equal to the average of participating central banks discount rates -- on the balances. b. there are no limits to the interim financing ar- rangements and the financing is unconditional C. Monthly bilateral settlement arrangements a. a debtor country could attempt to repurchase strongest currency for repayment of swap if market permitted during month b. settlement of net creditor-debtor positions among central banks as a result of their intervention in EEC currencies will take place on the final business day of the month following date of intervention c. a debtor central bank may request a three month extension from its settlement date d. the debtor country may first use for settlement any balance of the creditor's currency it might be holding. e. for the remainder, the reserves used for settlement should be in proportion to the composition of the debtor country's reserve position at the end of the month preceding the settlement date. For this purpose, reserves are classified into two categories: gold and holdings having a gold link and foreign exchange. FORD & LIBRARY 938470 Mr. Ralph Bryant -3- f. settlement in other forms requires the mutual consent of the debtor and creditor countries. 2. EEC contingency plans regarding pressure on the operation of narrower intra-EEC bands There do not appear to have been any contingency plans by the EEC Commission or EEC Council of Ministers in anticipation of possible difficulties in managing the narrower intra-EEC margins. When the narrowing of intra-EEC margins was instituted April 24th, it was considered to be somewhat experimental, with a number of technical and operational details to be ironed-out as the central banks would acquire experience. (As events during the past 10 days have shown, in fact, the mechanisms with which the narrower EEC bands were attempted to be maintained faced a variety of technical difficulties.) No serious problems -- such as having one EEC currency showing persistent weakness while other EEC currencies showing persistent strength - were envisaged, since at "Snake" the start the EEC currencies were safely inside the 2.25 per cent band and the international financial markets were experiencing relative calmness. IIII If there was a European currency which was considered to be a potential candidate for showing divergent exchange rate developments and thereby placing pressure on the narrower EEC bands, it was thought to be the lira. An indication that EEC officials did not consider sterling to be a possible GERALD FORD LIBRARY Mr. Ralph Bryant -4- source of tension for the operation of narrower intra-EEC margins arrangements may be drawn from the fact that the United Kingdom was invited to participate by the EEC prior to official entry into the EEC. There was no need to do so if difficulties were anticipated. Moreover, the United Kingdom, not yet being an EEC member, would not be entitled to draw on the $1 billion EEC automatic short-term swap network established in 1970 and on the $2 billion medium-term credit facility which was approved in 1971 * and to become effective this year. Thus, no thought that a serious test of the effectiveness of the operation of the EEC narrow margins was expected so soon, nor of the magnitude of inter- vention as has occurred, and not involving sterling at this time. The EEC therefore has been caught unprepared for this immediate crisis. 3. EEC capital controls. The EEC Council of Ministers' resolution to move towards economic and monetary union which was approved on March 21, 1972 -- of which the narrowing of intra-EEC margins was only one element -- included a paragraph dealing with Community action to counter destabilizing capital flows. FORD LIBRARY & GERALD "5) So as to discourage excessive flows of capital and to neutralize their negative effects on internal liquidity, the Council adopts the directive proposed by the Com- mission on June 23, 1971, concerning the regulation of international financial flows and the neutralization of their undesirable effects on internal liquidities." *Although these credit facilities have not yet been used by EEC members, they were considered to provide support to the operation of the narrow intra-EEC margins. Mr. Ralph Bryant -5- According to the June 1971 proposals, in order to counter capital inflows or neutralize their impacts Community central banks were to be given such weapons as the suspension of interest payments on foreign deposits, curbs on external borrowing by banks or business firms and controls on non-resident purchases of securities. Since March no significant progress appears to have been made in devising such uniform capital controls. Nor has there been agreement on individual country application of specific capital control measures. For the time being capital control measures are still being instituted on a unilateral basis. A1- though recent reports suggest that the Germans may be mellowing somewhat with regard to their previous strong opposition to exchange and capital controls, the fundamental differences between France and Germany regarding the desirability and form of such controls remains. It does not appear likely that the EEC is ready at this juncture to adopt uniform capital control measures. There may be a greater likelihood for EEC countries again to adopt a joint position to regulate short-term capital movements, with each country selecting its own instruments. 4. Immediate future of narrower intra-EEC margins. Although the EEC has incentives -- mainly political and psychological -- to make an effort to continue operating the narrower intra-EEC margin arrangements once the United Kingdom has departed from the grouping, there is likely to be mounting pressure on the FORD GERALD. LIBRARY Mr. Ralph Bryant -6- operation of the narrower intra-EEC margins in the weeks ahead. If the divergence between the lira and other EEC exchange rates widens, a new pressure point may be building up. It is doubtful whether Germany, France, Belgium and the Netherlands would be will- ing to extend credit to Italy so soon after the experience of these past 10 days. If such pressure points do arise, it is safe to conclude that the experiment to narrow intra-EEC margins will be suspended. FORD & LIBRARY GERALD 5. Joint EEC float? It would appear highly unlikely for the EEC countries to reach agreement at this time to adopt a joint Community float against the dollar. The Netherlands would object since she considers the December 1971 revaluation of the guilder to have been excessive, and would not countenance a further appreciation. Italy also would oppose a joint float since she would not want to see the lira appreciate, given the limited confidence in the strength of the lira owing to political instability and labor difficulties. France would likely strenuously oppose a joint float on the grounds that such an action would provide the United States total freedom to pursue its external and internal policies at the "expense" of the rest of the world. In addition, France would not like to see any appreciation of the franc. might Only Germany would be likely to look favorably on a joint float, but it is doubtful whether she will be able to convince her partners. cc: R. Solomon, R. Sammons, R. Gemmill, A. Hersey, H. Junz, and D. Roxon BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date June 23, 1972 To Mr. R. Bryant Subject: Likely choice of option for exchange rate regime among Common From Helen B. Junz LB.F Market countries. If and when foreign exchange markets reopen on Tuesday next week, it is most likely that the Common Market currencies, with excep- tion of sterling, will be trading according to the rates and rules established at the Smithsonian agreement last December. Strains on the rates are likely to be warded off by exchange controls of some sort. A common float of the six against the dollar does not seem a really viable option at the moment. The French, the Italians and probably the Belgians would not wish to see their rates appreciate against the dollar and, philosophically, would prefer exchange con- trols of some sort in any event. The Germans and the Dutch, who might wish to avoid going the road of controls, have little leverage at the moment. Neither would feel that they can afford to appreciate against the other Common Market currencies, so that the option of floating by themselves, as they did last year, is really not open to them now. Without this leverage, the chance of getting the other Common Market countries to agree to a common float is small. In addition, it is not even clear that the Germans, at this point, would not consider some control regime the lesser of two evils. They might find further appreciation of the snake against the dollar tolerable, if it were small, but an appreciation against the yen would probably be thought to be intolerable. FORD & LIBRARY GERALD To: Mr. Bryant - -la- Furthermore, an upward move of the E.E.C. snakewould put great pressure on the Italians. The lira is at the lower limit of the E.E.C. band and rather than float up with the other E.E.C. currencies, the Italian authorities might wish to take the oppor- tunity to move the lira rate down. The dilemma faced by the E.E.C. governments, thus, is that of keeping the currencies of the Six within the E.E.C. band without creating further pressure on the lira. Still, it seems that the status quo, buttressed by exchange controls, is the most likely outcome at the moment. FORD & LIBRARY CERALD To: Mr. Bryant -2- To some extent holding to the Smithsonian agreement by all currencies except sterling may well be the best that can be expected. The short-term gain of a lessening of pressure on the dollar associated with a common float of the E.E.C. currencies might be useful, but a coming apart of the Smithsonian agreement under market pressure, and before any real negotiation or reform has started, might be counterproductive in the long run. This would be so, even if a further depreciation of the dollar rate were thought to be desirable. The rate at which sterling is likely to settle in a free float depends upon the attitude the British government takes towards the exchange crisis. If it is taken that the current wave of speculation reflects only the conviction that the current sterling rate vis-à-vis the Common Market currencies is not realistic and would have to be revised at some time around the forthcoming E.E.C. summit scheduled for October next, market reaction may well drive sterling below $2.50. However, if it is taken that current concerns were triggered also by the view that relative rates of inflation tend to make the current sterling rate unrealistic and measures are taken to moderate inflationary trends, sterling may hold at around $2.50. It would seem that the latter course of action is the more appropriate, particularly because the fact that a $2.40 rate would FORD is LIBRARY GERALD To: Mr. Bryant -3- put considerable pressure on the cost of living provides leverage for the adoption of, and compliance with, incomes policy measures. However, a managed float as a holding operation may be successful in the short run and possibly is the more likely course of action to be expected at this time. will GERALD R. FORD BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM + Office Correspondence Date June 23, 1972 To Mr. Ralph Bryant Subject: U.K. Balance of Payments From Larry Promisel A summary of the U.K. balance of payments is presented in Table 1. Since the British no longer provide a breakdown of capital flows into long-term and short-term flows, the best measure of the balance of payments is the "Total Currency Flow." On the basis of this, the U.K. balance of payments surplus deteriorated sharply from a quarterly average of £807 million in 1971 to only £57 million in the first quarter of this year. This deterioration can be traced to several elements. A large part of it reflected the absence of speculative inflows, which had been very sizeable in 1971 -- particularly in the fourth quarter. U.K. private investment overseas was the largest capital outflowin the first quarter, amounting to £360 million, compared to a quarterly average outflow last year of £190 million. About half of the first quarter outflow was direct investment. Portfolio investment -- almost entirely by financial institutions investing in the United States and the E.E.C. -- was about £120 million, compared to a quarterly average of about £10 million in 1971. How- ever, this portfolio investment was financed by foreign-currency borrowing by U.K. banks. FORD & LIBRARY GERALD To: Mr. Bryant -2- The most significant element in the deterioration of the balance of payments was the current account, which showed a surplus of only £30 million (seasonally adjusted) after showing quarterly surpluses last year averaging almost £250 million. This, in turn, reflects a worsening of the balance on visible trade, although there was also a slight reduction in the surplus on invisibles. The recent trend of U.K. trade is presented in Table 2. Exports this year are actually lower than they were the last three quarters of last year, both in value terms and, more markedly, in volume terms, since there has been a continuing improvement in the terms of trade. This poor export performance has frequently been explained by noting that (1) world trade has been growing slowly in recent quarters, and (2) the U.S. dock strike and the U.K. coal miners' strike caused disruption to exports. However, even in real terms, (1) world trade has not actually declined,/ as have U.K. exports, and (2) although the effects of the power shortage during the miners' strike is clearly seen in the March export figure, the fact that the recovery of exports since then has been disappoint- ing (the April-May average was less than the average of the last three quarters of 1971), suggests that something else -- probably a decline in competitiveness -- is the explanation. The expecta- tion that prices in the United Kingdom are going to rise faster FORD & LIBRARY GERALD Table 1. U.K. Balance of Payments (£ millions) 1971 1972 1969 1970 1971 1st qtr 2nd qtr 3rd qtr 4th qtr 1st qtr Seasonally adjusted A. Current account Visible trade - 141 + 7 + 297 - 66 + 113 + 176 + 74 - 118 Invisibles + 584 + 604 + 682 + 166 + 170 + 178 + 168 + 148 CURRENT BALANCE + 443 + 611 + 979 + 100 + 283 + 354 + 242 + 30 Not seasonally adjusted B. Currency flow and official financing Current balance + 443 + 611 + 979 + 51 + 338 + 331 + 259 - 50 Investment and other capital flows - 97 + 578 + 1,858 + 626 + 306 + 474 + 452 + 54 Balancing item + 397 + 98 + 391 + 296 - 10 - 137 + 242 + 53 TOTAL CURRENCY FLOW + 743 + 1,287 + 3,228 + 973 + 634 + 668 + 953 + 57 Allocation of special drawing rights (+) - + 171 + 125 + 125 - - - + 124 Gold subscription to IMF (-) - ever 38 - - - - - - Total of above + 743 + 1,420 + 3,353 + 1,098 + 634 + 668 + 953 + 181 Financed as follows: Net transactions with overseas monetary authorities - 699 - 1,295 - 1,817 - 894 - 508 - 92 - 323 + 10 Official reserves (drawings on, +; additions to, (1) - 44 - 125 - 1,536 - 204 - 126 - 576 - 630 - 191 (1) From 23 August 1971, valued in sterling at the rates at which transactions occurred (see Technical Note in December 1971 issue of Economic Trends). Source: H. M. Treasury FORD is LIBRARY 9ERALD Table 2. UNITED KINGDOM: MERCHANDISE TRADE (monthly averages) 1971 1972 Q1 Q2 Q3 Q4 Q1 Jan. Feb. Mar. Apr. May Value (£ millions; balance of payments basis; SA) Exports 665 762 774 760 740 741 756 721 750 751 Imports 687 724 715 735 779 743 790 804 800 794 Balance -22 +38 +59 +25 -39 -2 -34 -83 -50 -43 Volume (1961 = 100; SA) Exports 150 169 167 162 158 159 162 152 160 n.a. Imports 162 164 160 164 172 163 175 177 179 n.a. Unit Value (1961 = 100; NSA) Exports 143 146 149 152 155 157 154 156 156 n.a. Imports 133 135 137 137 139 139 138 139 139 n.a. Terms of Trade 108 108 109 111 112 112 112 112 112 n.a. Source: Central Statistical Office FORD & LIBRARY GERALD BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date June 23, 1972 To Mr. Bryant Subject: Italian Balance of Payments From R. H. Mills, Jr. Italy's balance of payments has been strong for nearly two years, because of a large surplus on current account. In 1972 to date the overall balance has weakened because of larger capital outflows that were probably generated by political uncertainties. The outlook is for continued large surpluses on current account together with the possibility that intensified labor troubles and political weaknesses might further raise the level of capital out- flows. In 1971 the recorded overall external surplus was $740 million (after a downward adjustment of $40 million to eliminate the effect of exchange rate changes on the dollar value of official reserves). But this far understates the "true" surplus because it reflected $780 million of advance debt repayments by Italian state enterprises that were made at the suggestion of the authorities (although they could also have been justified by interest rate con- siderations as well). Adjustment for advance debt repayments gives an overall surplus last year of about $1.5 billion. The current account was in surplus by no less than $1.9 billion on a transactions basis (more than double the 1970 figure). Balances on trade, services, and transfers all increased last year. FORD LIBRARY s GERALD To: Mr. Bryant -3- than prices elsewhere implies that a turnaround in U.K. export performance is unlikely (in the absence of a devaluation). We think this is true in spite of the beneficial impact on U.K. exports expected from the forecast upturn in economic activity in Britain's trading partners. Imports in the United Kingdom have been rising strongly. As in the case of exports, some of this can be attributed to the miners' strike, which resulted in sharply higher imports (notably of coal) in February and, perhaps, in March. But, again, the maintenance of high levels of imports in April and May suggest that this trend is quite fundamental, related largely to the up- turn in U.K. economic activity. In sum, the total currency flow in the first quarter would have been somewhat higher if adjustment to the trade balance were made for strike effects, although cyclical adjustment to the trade balance would probably more than offset the strike effects. (That is, adjusted both for cyclical conditions in the United Kingdom and abroad and for the strikes, the trade deficit might have been larger.) On the other hand, the balance of payments surpluses in 1971 were inflated by speculative inflows. Neverthe- less, although the raw data may overstate the case, we conclude that there has been a significant, basic deterioration in the U.K. balance of payments position. FORD & LIBRARY GERALD To: Mr. Bryant -2- Exports rose 13 per cent and imports 7 per cent in value, but in volume terms imports did not rise at all, a development that underscored the failure of aggregate demand in Italy to rise more than minimally (real GNP was up 1-1/2 per cent). Capital flows other than the afore- mentioned debt prepayments, and errors and omissions, produced a net outflow of $335 million on a transactions basis. (Trade credits are included here, but excluded from the figures on an exchange record basis.) The first four months of this year show a $190 million overall deficit; there would have been a surplus of $130 million had there not been further debt prepayments in January-February. But that would have been less than the surplus of $370 million in the first four months of last year; and there was a deficit in March- April this year of $20 million compared with a $150 million surplus a year ago. Net capital movements on an exchange record basis produced a $275 million net outflow in the first quarter that was additional to the debt prepayments, compared with a quarterly average net inflow (on an exchange record basis) last year of nearly $200 million. Close to two-thirds of this swing is accounted for by an increase in capital exports financed by exports of Italian banknotes. The trade balance, seasonally adjusted, changed little in either the fourth quarter of 1971 or the first quarter of 1972. FORD is LIBRARY GERALD To: Mr. Bryant -3- The current account should continue to be very strong, per- haps even get stronger. At present it seems doubtful that the level of economic activity in Italy in the near future will be rising as fast as in Italy's main trading partners taken as a whole. In April the OECD Secretariat projected a small rise in Italy's seasonally- adjusted current account surplus in the first half of 1972, then no change at all in the next two half-years. As you know, the Italian economy is in a state of malaise, as was well illustrated by Gov. Carli's gloomy remarks at the Bank of Italy annual meeting May 31. Since 1969 unit labor costs have advanced enormously, profits have shrunk, the business community is pessimistic, and private investment is in a slump. A new round of crucial wage negotiations is about to start. If labor is as demand- ing as it was in 1969, the situation could get worse, particularly since government leadership is quite weak. While the future is very murky, the possibility of a sizeable step-up in the exodus of Italian capital seems a real one. QERALD FORD LIBRARY BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date June 23, 1972 To Mr. Ralph C. Bryant Subject: May Trade Figures. From Daniel Roxon The official trade data for May was about the same as given to you earlier. The May deficit is estimated to be $7 billion at an annual rate, balance of payments basis. Though the May deficit is still high, about equal to the rate in the first quarter, it is quite a bit below the $8-3/4 billion deficit of April. The drop in the deficit in May resulted from an increase in exports, principally in foodstuffs and aircraft; imports were virtually unchanged from the high April level. Trade Data, Balance of Payments Basis (millions of dollars, seasonally adjusted annual rates) Exports Imports Balance 1971 - Annual 42.8 45.5 -2.7 Q-1 44.1 42.9 +1.0 Q-2 42.8 46.8 -4.0 Q-3 45.9 47.8 -1.9 Q-4 38.3 44.2 -6.0 1972 - January 50.0 55.2 -5.2 February 45.5 52.8 -7.3 March 46.2 53.8 -7.6 1Q 47.2 53.9 -6.7 April 44.5 53.3 -8.7 May 46.5 53.5 -7.0 for FORD & LIBRARY GERALD BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date June 28, 1972 To Mr. Gemmill Subject: May Balance of Payments From M. Garber Data STRICTLY CONFIDENTIAL Preliminary balance of payments data for May indicate that there was a surplus of $542 million on the official reserve transactions basis and a surplus of $81 million on the liquidity basis. For the three weeks ended June 21 there were deficits of $126 million on the official reserve transactions basis and $381 million on the liquidity basis. Bank-reported claims on foreigners declined $234 million during May; short-term declined $336 million while long-term increased $102 million. FORD is LIBRARY 0ERALD Chairmen Burns BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date June 26, 1972. To Mr. Ralph C. Bryant Subject: U.S. Merchandise Trade -- From Sujin Shin May 1972. In May, the U.S. trade deficit showed a moderate decline from the very high deficit of April. The deficit in May was $7.3 billion at a seasonally adjusted annual rate (balance-of-payments basis), compared with $8.7 billion in April. The drop in the deficit in May resulted from a substantial increase in exports while imports rose only slightly. For April-May combined the trade deficit was $8.0 billion at an annual rate, considerably higher than the first quarter deficit of $6.7 billion. Imports in May were $53.7 billion at an annual rate (balance-of-payments basis), about 0.8 percent above the April level. Imports, however, have varied within a narrow range in the last three months. The rise in imports from April to May was largely in imports of foods, and industrial supplies and materials (especially steel). These advances were somewhat offset by the declines in imports of consumer goods, and automotive vehicles and parts. Arrivals of cars from Canada fell sharply from the record April level; the value of imports of cars from other sources, however, advanced in May. Exports in May were $46.4 billion at an annual rate (balance-of-payments basis), a rise of 4.3 percent over April. The moderate increase in May reflected gains in agricultural products (foodstuffs, tobacco) and large deliveries of civilian aircraft. Both of these categories were at an exceptionally high level in May. Exports of machinery showed little change from April to May. U.S. Merchandise Trade, Balance of Payments Basis (billions of dollars, seasonally adjusted annual rates) 1971 1971 1972 Year 10 2Q 3Q 4Q 1Q Apr. May Exports 42.8 44.1 42.8 45.9 38.3 47.2 44.5 46.4 45.5r r Imports 42.91 46.9 47.8 44.2 53.9r 53.3r 53.7 Balance -2.7ʳ +1.2ʳ -4.0 -1.9ʳ -6.0° -6.7° -8.7 -7.3 Note: Details may not add to totals because of rounding. GERALD FORD LIBRARY Table 1 U.S. Merchandise Trade (billions of dollars, seasonally adjusted annual rates) Census Basis Balance of Payments Basis* Exports Imports Balance Exports Imports Balance 1963 22.5 17.2 5.3 22.3 17.0 5.2 1964 25.8 18.7 7.1 25.5 18.6 6.8 1965 26.7 21.5 5.2 26.4 21.5 4.9 1966 29.5 25.6 3.9 29.3ʳ 25.5 3.8r 1967 31.0 26.9 4.1 30.6r 26.8 3.8r 1968 34.1 33.2 0.8 33.6 33.0 0.6 1969 37.3 36.0 1.3 36.4ʳ 35.8 0.6ʳ 1970 42.7 40.0 2.7 42.0 39.8ʳ 2.2r 1971 43.6 45.6 -2.0 42.8 45.5° -2.7ʳ 1968 I 32.1 31.5 0.6 31.8 31.3 0.5 II 33.9 32.6 1.3 33.5 32.5 1.0 III 36.1 34.2 1.9 35.5 34.3 1.2 IV 34.3 34.1 0.2 33.5 33.8 -0.3 1969 I 30.5 30.6 -0.2 30.0 30.4 -0.3 II 39.1 38.4 0.7 38.0 38.3 -0.3 III 39.6 37.3 2.3 38.4 37.1 1.3 IV 40.1 37.8 2.3 39.6 37.6 2.0 1970 I 41.3 38.9 2.4 40.9r 38.9 2.0ʳ II 43.2 39.5 3.7 42.3 39.3 2.9ʳ III 43.4 40.1 3.3 42.8 39.9ʳ 2.9r IV 43.0 41.3 1.7 41.8 41.1° 0.8ʳ 1971 I 45.0 43.2 1.8 44.1 42.9r 1.2ʳ II 43.9 47.0 -3.2 42.8 46.9r -4.0r III 46.7 47.9 -1.2 45.9 47.8r -1.9ʳ IV 38.9 44.2 -5.3 38.3 44.2r -6.0r 1972 I 47.7 53.7 -6.0 47.2 53.9r -6.7r 1971 May 45.4 47.8 -2.4 44.1r 47.6ʳ -3.5ʳ June 43.9 48.2 -4.3 43.2 48.1ʳ -5.0ʳ July 41.9 45.5 -3.6 41.1 45.4ʳ -4.3r August 44.1 47.2 -3.1 43.4r 47.1r -3.7ʳ September 54.1 50.9 3.2 53.3r 50.9 2.4 October 32.5 42.4 -9.9 31.7ʳ 42.3r -10.6r November 37.9 40.6 -2.7 37.3ʳ 40.5r -3.2 December 46.3 49.6 -3.3 45.7r 49.8r -4.1r 1972 January 50.7 54.5 -3.8 50.0r 55.2r -5.2r February 45.7 52.8 -7.2 45.5 52.8ʳ -7.3ʳ March 46.7 53.7 -7.0 46.2r 53.8r -7.6r April 45.1 53.5 -8.4 44.5 53.3ʳ -8.7r May 47.0 53.6 -6.6 46.4 53.7 -7.3 *The monthly balance of payments figures are only rough estimates and are subject to considerable revision. r = Revised. Note: Details may not add to totals because of rounding. FORD is LIBRARY GERALD Table 2 U.S. Exports of Domestic and Foreign Merchandise by End-Use Commodity Categories Including Department of Defense Shipments (Seasonally adjusted; annual rates) billions of dollars 1971 1972 1st 2nd 1st Half Half Qtr. Apr. May Foods, feeds, and beverages 6.1 6.1ʳ 7.0ʳ 6.1 7.1 Industrial supplies and materials 13.3ʳ 12.2 13.7ʳ 12,2 12.8 Capital goods excl. automotive 15.2 14.9r 16.5ʳ 15.7 16.1 Civilian aircraft and parts (3.4) (3.1) (3.3) (2.7) (4.0) r Machinery (11.6) (11.6) (12.9) (12.5) (12.4) Automotive vehicles and, parts 4.5 4.4 4.8r 4.9 5.1 To Canada (3.2) (3.2)r (3.6) (3.9) (4.0) To other (1.2) (1.2) (1.2) (1.1) (1.1) Consumer goods 2.7 2.9 3.3ʳ 3.2 3.3 All other 3.2 2.9 2.8ʳ 3.3 3.1 Total 45.0 43.4 48.2 45.7 47.6 Agricultural commodities 8.0 7.6 9.1 7.7 8.7 Nonagricultural commodities 36.9 35.8 39.2ʳ 38.0 38.9 U.S. General Imports by End-Use Commodity Categories (Seasonally adjusted; annual rates) billions of dollars 1971 1972 1st 2nd 1st Half Half Qtr. Apr. May Foods, feeds, and beverages 6.5 6.3 7.3ʳ 6.5 6.9 Industrial supplies and materials 16.6 17.3 18.9ʳ 18.5 19.2 Fuels and lubricants (3.3) (4.1) (4.3) (4.8) (4.5) Iron and steel (2.9) (2.8) (2.7) (2.2) (2.9) Captial goods excl. automotive 4.1 4.1 5.3ʳ 5.2 5.2 Augomotive vehicles and parts 7.5ʳ 8.4r 8.9 10.2 9.5 From Canada (4.4)r (4.7) r (5.0) (6.3) (4.9) From other (3.1) (3.7) (3.9) (4.4) (4.6) Consumer goods 8.7 8.4 11.5 11.5 10.4 Nondurable goods (3.3) (3.3) (4.2) r (3.9) (3.6) Durable goods (4.8) (4.6) (6.5) (6.9) (6.0) Unmanufactured goods (0.6) (0.5) (0.7)ʳ (0.7) (0.7) All other 1.6 1.5 1.8 1.8 1.7 Total 45.1 46.0 53.7 53.5 53.6 Note: (1) Details may not add to totals because the commodity sections were independently adjusted for seasonal variations. (2) Totals will not correspond to the Census basis totals in Table 1 because Department of Defense Military Grant-Aid shipments are included in exports of domestic and foreign merchandise in Table 2. mm- 1080 j LIBRARY GERALD Table 3 Imports as Per Cent of GNP (billions of current dollars) Annual GNP Imports 1/ Percent 1961 520.1 14.52 2.79 1962 560.3 16.22 2.89 1963 590.5 17.01 2.88 1964 632.4 18.65 2.95 1965 684.9 21.50 3.14 1966 749.9 25.46 3.40 1967 793.9 26.82 3.38 1968 864.2 32.96 3.81 1969 929.1 35.80 r 3.85 r 1970 974.1 39.80 r 4.09 1971 1,046.8 45.46 r 4.34 r Half Years at Annual Rates, Seasonally Adjusted 1968 1H 845.7 31.90 r 3.77 2H 882.7 34.02 3.85 1969 1H 914.1 34.31 3.75 2H 944.1 37.35 3.96 1970 1H 962.3 39.12 4.07 2H 986.0 40.48 r 4.1F 1971 1H 1,030.4 44.90r 4.36r 2H 1,063.2 46.02r 4.33ʳ Quarterly at Annual Rates, Seasonally Adjusted 1967 I 774.4 26.64 3.44 II 784.5 25.86 3.30 III 800.9 26.17 3.27 IV 815.9 28.62r 3.51 1968 I 834.0 31.28 3.75 II 857.4 32.53 r 3.79 r III 875.2 34.28r 3.92 IV 890.2 33.77ʳ 3.79 1969 I 906.4 30.36 3.35 II 921.8 38.26 4.15 III 940.2 37.11 3.95 IV 948.0 37.59 3.97 1970 I 956.0 38.92r 4.07 II 968.5 39.32 4.06 III 983.5 39.87r 4.05r IV 988.4 41.08 r 4.16r 1971 I 1,020.8 42.91r 4.20ʳ II 1,040.0 46.89r 4.51r III 1,053.4 47.80ʳ 4.54r IV 1,072.9 44.23r 4.12r 1972 1 53.93ʳ 4.89 r 1,103.6 1/ Balance of payments basis. FORD & LIBRARY GERALD r = Revised. P = Preliminary. U.S. MERCHANDISE TRADE Balance of Payments Basis Quarterly, Seasonally Adjusted, Annual Rates Billions of Dollars 60 50 Exports 40 Imports 30 20 FORD & LIBRARY GERALD 10 1967 1969 1971 1973 U.S. MERCHANDISE TRADE Balance of Payments Basis 1-2-1 Moving Averages Seasonally Adjusted, Annual Rates Billions of dollars 60 55 50 Imports 45 Exports 40 GERALE FORD LIBRARY 35 J F M A M J J A S O is D J F M A M J J A S 0 A D 1971 1972 BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date July 27, 1972 To Mr. Ralph C. Bryant Subject: U.S. Merchandise Trade -- From Sujin Shin June 1972. In June, the U.S. trade balance was a deficit of $7.0 billion at a seasonally adjusted annual rate (balance-of-payments basis), slightly below the May deficit of $7.3 billion. The drop in the deficit in June resulted from a slight increase in exports while imports were about equal to the May level. For the second quarter of 1972, the trade balance was a deficit of $7.7 billion (SAAR), compared with a deficit of $6.7 billion for the first quarter. The levels of both exports and imports in the second quarter declined from those of the first quarter but the drop in exports exceeded that of imports. Imports in June were $53.7 billion at an annual rate (balance- of-payments basis), equal to the May rate. In June virtually all commodity groups increased, except automotive imports from Europe and Japan which showed a significant decline. However, sales of these cars in the United States rose in June; it appears that there was a downward adjustment in inventories following an inventory buildup in the earlier months of the year. Imports of other nonfood consumer goods, which had declined in the previous two months, rose strongly in June. Imports of industrial supplies and materials (mainly metals other than iron and steel) and capital goods (mostly machinery) also increased in June. The ratio of imports to GNP in the second quarter declined. to 4.70 percent, compared with 4.86 percent in the first quarter. However, if first quarter imports were adjusted for the dock strike makeup in that period, the import/GNP ratio would probably be about the same in both quarters. Exports in June were $46.7 billion at an annual rate (balance- of-payments basis), an increase of less than one percent from the May rate. Most of the increase in the level of exports was due to the significant increase in shipments of agricultural commodities. This advance was partially offset by the decline in nonagricultural commodities. Exports of machinery, however, showed almost no change from the previous two months. U.S. Merchandise Trade, Balance of Payments Basis ( billions of dollars, seasonally adjusted annual rates) 1971 1972 Year 1H 2H 10 2Q May June Exports 42.8 43.5 42.1 47.2 45.9 46.4 46.7 Imports 45.5 44.9 46.0 53.9 53.6 53.7 53.7 Balance -2.7 -1.4 -3.9 -6.7 -7.7 -7.3 -7.0 GERALD FORD LIBRARY Note: Details may not add to totals because of rounding. Table 1 U.S. Merchandise Trade (billions of dollars, seasonally adjusted annual rates) Census Basis Balance of Payments Basis* Exports Imports Balance Exports Imports Balance 1963 22.5 17.2 5.3 22.3 17.0 5.2 1964 25.8 18.7 7.1 25.5 18.6 6.8 1965 26.7 21.5 5.2 26.4 21.5 4.9 1966 29.5 25.6 3.9 29.3 25.5 3.8 1967 31.0 26.9 4.1 30.6 26.8 3.8 1968 34.1 33.2 0.8 33.6 33.0 0.6 1969 37.3 36.0 1.3 36.4 35.8 0.6 1970 42.7 40.0 2.7 42.0 39.8 2.2 1971 43.6 45.5r -1.9r 42.8 45.5 -2.7 1968 I 32.1 31.5 0.6 31.8 31.3 0.5 II 33.9 32.6 1.3 33.5 32.5 0.9ʳ III 36.1 34.2 1.9 35.5 34.3 1.3r IV 34.3 34.1 0.2 33.5 33.8 -0.2r 1969 I 30.5 30.6 -0.2 30.0 30.3ʳ -0.4r II 39.1 38.4 0.7 37.9r 38.3 -0.3 III 39.6 37.3 2.3 38.3ʳ 37.1 1.2r IV 40.1 37.8 2.3 39.5r 37.5ʳ 2.0 1970 I 41.3 38.9 2.4 40.9 38.9 2.0 II 43.2 39.5 3.7 42.3 39.3 2.9 III 43.4 40.1 3.3 42.8 39.9 2.9 IV 43.0 41.3 1.7 41.8 41.1 0.8 1971 I 45.0 43.2 1.8 44.1 42.9 1.2. II 43.9 47.0 -3.1ʳ 42.8 46.9 -4.0 III 46.7 47.8r -1.1° 45.9 47.8 -1.9 IV 38.9 44.1° -5.2ʳ 38.3 44.2 -6.0 1972 I 47.7 53.7 -6.0 47.2 53.9 -6.7 II 46.3 53.7 -7.4 45.9 53.6 -7.7 1971 June 43.9 48.1ʳ -4.2r 43.2 48.1 -5.0 July 41.9 45.5 -3.6 41.1 45.4 -4.3 r August 44.1 47.1ʳ -3.0 43.4 47.1 -3.7 September 54.1 50.9 3.2 53.3 50.9 2.4 October 32.5 42.3ʳ -9.8ʳ 31.7 42.3 -10.6 November 37.9 40.5ʳ -2.6r 37.3 40.5 -3.2 December 46.3 49.5r -3.2ʳ 45.7 49.8 -4.1 1972 January 50.7 54.5 -3.8 50.0 55.2 -5.2 February 45.7 52.8 -7.2 45.5 52.8 -7.3 March 46.7 53.7 -7.0 46.2 53.8 -7.6 GERALD FORD LIBRANT April 45.1 53.5 -8.4 44.5 53.3 -8.7 May 47.0 53.6 -6.6 46.4 53.7 -7.3 June 46.9 53.9 -7.1 46.7 53.7 -7.0 *The monthly balance of payments figures are only rough estimates and are subject to considerable revision. r = Revised. Note: Details may not add to totals because of rounding. Table 2 U.S. Exports of Domestic and Foreign Merchandise by End-Use Commodity Categories Including Department of Defense Shipments (Seasonally adjusted; annual rates) billions of dollars 1971 1972 1st 2nd 1st 2nd* Half Half Qtr. Qtr. May June Foods, feeds, and beverages 6.1 6.1 7.0 6.9 7.1 7.5 Industrial supplies and materials 13.3 12.2 13.7 12.5 12.8 12.5 Capital goods excl. automotive 15.2 14.9 16.5 16.0 16.1 16.1 Civilian aircraft and parts (3.4) (3.1) (3.3) (3.3) (4.0) (3.3) Machinery (11.6) (11.6) (12.9) (12.5) (12.4) (12.5) Automotive vehicles and, parts 4.5 4.4 4.8 5.0 5.1 4.9 To Canada (3.2) (3.2) (3.6) (3.9) (4.0) (3.9) To other (1.2) (1.2) (1.2) (1.1) (1.1) (1.1) Consumer goods 2.7 2.9 3.3 3.3 3.3 3.3 All other 3.2 2.9 2.8 3.0 3.1 2.7 Total 45.0 43.4 48.2 46.9 47.6 47.3 Agricultural commodities 8.0 7.6 9.1 8.5 8.7 9.1 Nonagricultural commodities 36.9 35.8 39.2 38.4 38.9 38.2 U.S. General Imports by End-Use Commodity Categories (Seasonally adjusted; annual rates) billions of dollars 1971 1972 1st 2nd 1st 2nd.*/ Half Half Qtr. Qtr. May June Foods, feeds, and beverages 6.5 6.3 7.3 6.8 6.9 7.0 Industrial supplies and materials 16.6 17.3 18.91 19.2 19.2 19.9 Fuels and lubricants (3.3) (4.1) (4.3) (4.6) (4.5) (4.6) Iron and steel (2.9) (2.8) (2.7) (2.7) (2.9) (2.9) Captial goods excl. automotive 4.1 4.1 5.3 5.4 5.2 5.7 Automotive vehicles and parts 7.5 8.4 8.9 9.4 9.5 8.5 From Canada (4.4) (4.7) (5.0) (5.5) (4.9) (5.3) From other (3.1) (3.7) (3.9) (4.1) (4.6) (3.4) Consumer goods 8.7 8.4 11.5 11.0 10.4 11.3 Nondurable goods (3.3) (3.3) (4.2) (3.8) (3.6) (4.0) Durable goods (4.8) (4.6) (6.5) (6.4) (6.0) (6.5) Unmanufactured goods (0.6) (0.5) (0.7) (0.7) (0.7) (0.8) All other 1.6 1.5 1.8 1.7 1.7 1.6 Total 45.1 46.0 53.7 53.7 53.6 53.9 Note: (1) Details may not add to totals because the commodity sections were independently adjusted for seasonal variations. (2) Totals will not correspond to the Census basis totals in Table 1 because Department of Defense Military Grant-Aid shipments are included in exports of domestic and foreign merchandise in Table 2. Preliminary = sum of three months. GERALD FORD LIBRARY Table 3 Imports as Per Cent of GNP (billions of current dollars) Annual GNP / Imports Percent 1961 520.1 14.52 2.79 1962 560.3 16.22 2.89 1963 590.5 17.01 2.88 1964 632.4 18.65 2.95 1965 684.9 21.50 3.14 1966 749.9 25.46 3.40 1967 793.9 26.82 3.38 1968 864.2 32.96 3.81 1969 930.3r 35.80 3.85 1970 976.4r 39.80 4.08ʳ 1971 1,050.4 45.46 4.33r Half Years at Annual Rates, Seasonally Adjusted 1968 1H 845.7 31.91ʳ 3.77 2H 882.7 34.02 3.85 1969 1H 915.3ʳ 34.29r 3.75 2H 945.31 37.30ʳ 3.95r 1970 1H 964.9r 39.12 4.05r 2H 988.0 r 40.48 4.10 1971 1H 1,033.2ʳ 44.90 4.35r r 2H 1,067.5ʳ 46.02 4.31 1972 IHP 1,124.1 53.74 4.78 Quarterly at Annual Rates, Seasonally Adjusted 1967 I 774.4 26.64 3.44 II 784.5 25.86 3.30 III 800.9 26.17 3.27 IV 815.9 28.61r 3.51 1968 I 834.0 31.28 3.75 II 857.4 32.54r 3.80r III 875.2 34.27ʳ 3.92 IV 890.2 33.76r 3.79 1969 I 907.0ʳ 30.30ʳ 3.34r II 923.5ʳ 38.27r 4.14r III 941.7r 37.08ʳ 3.94r IV 948.9ʳ 37.52 3.95r 1970 I 958.0ʳ 38.92 4.06r II 971.7ʳ 39.32 4.05ʳ III 986.3ʳ 39.87 4.04r IV 989.7ʳ 41.08 4.15r 1971 I 1,023.4ʳ 42.91 4.19r II 1,043.0r 46.89 4.50r III 1,056.91 47.80 4.52r IV 1,078.1 44.23 4.10r GERALD FORD LIBRARY 1972 1 1,109.1ʳ 53.93 4.86r IIP 1,139.0 53.55 4.70 1/ Balance of payments basis. r = Revised. P = Preliminary. U.S. MERCHANDISE TRADE Balance of Payments Basis Quarterly, Seasonally Adjusted, Annual Rates Billions of Dollars 60 50 Exports 40 Imports 30 FORD & LIBRARY GERALI 20 10 1967 1969 1971 1973 U.S. MERCHANDISE TRADE Balance of Payments Basis 1-2-1 Moving Averages Seasonally Adjusted, Annual Rates Billions of dollars 60 55 50 Imports 45 Exports GERALD FORD MBRARA 40 35 J F M A M J J A S 0 N D J F M A M J J A S 0 N D 1971 1972