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The original documents are located in Box B2, folder "Balance of Payments (6)" 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States of America his copyrights in all of his unpublished writings in National Archives collections.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.
Confidential (FR)
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 16, 1972
To
Board of Governors
Subject:
From
Ralph C. Bryant
Projections of the U.S. balance of payments for the
remainder of 1972 and for 1973 have again been substantially
revised in an adverse direction. These two memos, prepared
by John Reynolds, discuss these revisions and some possible
implications.
Attachments 2.
cc: Mr. R. Solomon
FORD & 076830 LIBRARY
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
DATE: August 16, 1972
TO:
Chairman Burns
FROM: RALPH C. BRYANT
I believe these two memos warrant
your attention.
FORD is LIBRARY 074870
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 11, 1972
To
Mr. Bryant
Subject:
Revised Projections of U.S.
From
John E. Reynolds
Balance of Payments
CONFIDENTIAL (FR)
At a meeting on August 4, the interagency Balance of
Payments Information Committee made very substantial adverse revi-
sions in its projections for 1972 and 1973. Our staff representa-
tives concur in these new projections. But the projected deficit
magnitudes have now become so large that the projections seem cer-
tain to self-destruct within the next few months. That is to say,
the projected magnitudes are most unlikely to be allowed to mate-
rialize; several of the assumptions (present exchange rates, ex-
isting controls, stable capital flows, willingness of foreign
central banks to accumulate billions of additional dollar claims
on the United States) are almost certain to prove false.
On the assumptions used, the U.S. deficit on current
account and long-term capital transactions would remain at a
record $13 billion annual rate in the second half of 1972 and
would subside only to a $10 billion rate in 1973 (compared to
$5 billion projected for 1973 in the June chart show to the FOMC).
(See Table 1.) As these magnitudes gradually become known to the
public (through monthly trade figures, shrewd guesses by Morgan
Guaranty about the over-all deficit, etc.), it is most unlikely
GERALD FORD LIBRARY
- 2 -
Table 1. Summary of Balances: 1969-1973e
(In billions of dollars; half-years at seasonally adjusted annual rates)
Current
account
Official
Merchan-
Goods
Goods,
& long-
settlements
dise
and
services, &
term
(excl. SDR
Period
trade
services
remittances
capital
allocations)
1969
0.6
1.9
0.6
-3.0
2.7
1970
2.2
3.6
2.1
-3.1
-10.7
1971
-2.7
0.7
-0.8
-9.4
-30.5
1972e
-6.7
-3.7
-5.4
-12.8
?
(1st hf)p
(-7.2)
(-4.7)
(-6.3)
(-12.7)
(-8.9)
(2nd hf)e
(-6.2)
(-2.8)
(-4.5)
(-12.9)
(?)
1973e
-4.5
-1.3
-3.1
-9.9
?
(1st hf)e
(-4.7)
(-1.4)
(-3.1)
(-9.9)
(?)
(2nd hf)e
(-4.3)
(-1.3)
(-3.1)
(-9.9)
(?)
P = Preliminary.
e = Projected, August 4, 1972.
that net inward movements of short-term capital will offset much or any
of this basic deficit. So the official settlements deficit is likely
to be this large, or larger, which implies huge new accumulations of
dollar assets by foreign central banks.
Most of the revisions in the projections have been made in
goods and services, these being the items most susceptible to quanti-
tative analysis and projection. The capital account projections re-
main about as before, but rest, as noted above, on unrealistically
favorable assumptions of relative stability.
GERALD FORD ALBRARA
- 3 -
Goods and services
Compared with the June chart show, the projected balance
on goods and services has been revised downward by large amounts.
The balance for 1972 has been revised down by $2.1 billion, to
--$3.7 billion, and that for 1973 has been revised down by $4.4 bil-
lion, from +$3.1 billion to -$1.3 billion. (See Table 2.)
Most of the revisions have been made on the import side,
in both goods and services. (See Table 3.) Merchandise imports
were 2 per cent higher in the second quarter than had been expected
as recently as early June (when the latest trade data available
were those for April). This seemed to disprove the earlier com-
forting theory of a temporary spring bulge as a result of an
earlier bunching of orders. Also, recent data suggest that the
effects of exchange rate changes both in raising import prices and
in discouraging import volume are coming more slowly than had
earlier been anticipated. Finally, growing petroleum imports have
been more explicitly allowed for in the new projections. The re-
sult of all these considerations has been an upward revision of 4
to 5 per cent in projections for merchandise imports in the second
half of 1972 and throughout 1973. (Even so, the projected ratio
of merchandise imports to GNP levels off at 4.7 per cent after
early 1972, after having risen sharply for several years.)
BERRLD FORD GERANT
- 4 -
GERALD FORD
Table 2. Goods and Services: Projections for 1972-73
(In billions of dollars)
Years
Half-years (annual rates)
1972
1973
1972-I
1972-II
1973-I
1973-II
Merchandise, ex. military
Exports
47.8
54.9
46.5
49.1
53.2
56.5
Imports
-54.5
-59.3
-53.8
-55.3
-57.9
-60.8
Balance
-6.7
-4.5
-7.2
-6.2
-4.7
-4.3
(June chart show)
(-5.0) (-2.4)
(-6.3)
(-3.6)
(-2.6)
(-2.1)
Services and military
transactions
Exports
24.9
27.4
24.0
25.8
26.9
27.8
Imports
-21.9
-24.2
-21.5
-22.4
-23.6
-24.8
Balance
3.0
3.2
2.5
3.4
3.3
3.1
(June chart show)
(3.4)
(5.5)
(2.9)
(3.8)
(5.0)
(5.9)
Goods and services
Exports
72.7
82.2
70.6
74.8
80.1
84.3
Imports
-76.4
-83.5
-75.3
-77.6
-81.5
-85.6
Balance
-3.7
-1.3
-4.7
-2.8
-1.4
-1.3
(June chart show)
(-1.6)
(3.1)
(-3.4)
(.3)
(2.4)
(3.8)
Note: Data for first half 1972 are actual for trade, preliminary estimates
for services.
Table 3. Goods and Services: Revisions of Projections for 1972-73
between June 1972 Chart Show and August 4, 1972
(In billions of dollars)
Years
Half-years (annual rates)
1972
1973
1972-I
1972-II
1973-I
1973-II
Merchandise, ex. military
Exports
-0.1
+.5
-0.3
+0.2
+0.7
+0.4
Imports
-1.7
-2.7
-0.6
-2.8
-2.7
-2.7
Balance
-1.7
-2.1
-0.9
-2.6
-2.0
-2.2
Services and military
transactions
Exports
+0.2
-0.6
-0.1
+0.4
-0.1
-1.1
Imports
-0.6
-1.7
-0.3
-0.8
-1.6
-1.8
Balance
-0.4
-2.3
-0.4
-0.4
-1.7
-2.8
Goods and services
Exports
+0.1
-0.1
-0.4
+0.6
+0.5
-0.7
Imports
-2.2
-4.4
-0.9
-3.6
-4.3
-4.4
Balance
-2.1
-4.4
-1.3
-3.0
-3.8
-5.1
- 5 -
Projections of imports of services have been revised
upward even more sharply, percentagewise, especially for 1973. The
revisions reflect both a more explicit allowance than before for
anticipated increases in U.S. short-term interest rates, and an
upward revision of the volume of liabilities to foreigners on which
interest will have to be paid. Also the earlier projection for
exports of services in the second half of 1973 has been revised
downward to eliminate an anomalous sharp rise in miscellaneous
receipts that had crept into the earlier projections.
Comparisons with OECD projections and "aims"
The OECD secretariat, in its Economic Outlook of June 19,
1972 (written largely in May), was even farther off the mark in its
estimates for the first half of 1972 than we were at that time. (See
Table 4.) It put the trade deficit in that period at an annual rate
of $4.9 billion (compared with an actual $7.2 billion), and it esti-
mated net earnings on services and remittances at a rate of $2.1 bil-
lion (compared with an actual preliminary rate of only $0.9 billion).
The balance on goods, services, and remittances (referred
to as the balance on "current account" in OECD discussions of balance
of payments aims) was projected by the OECD in June at -$2.0 billion
for the year 1972, whereas we now expect it to be -$5.4 billion, and
at an annual rate of only -$0.6 billion in the first half of 1973,
whereas we now foresee a rate of -$3.1 billion in that period.
FORD is GERALD LIBRARY
- 6 -
Table 4. Current Account Projections Compared, 1972-73
(In billions of dollars)
Year
Half-years (annual rates)
1972
1972-I
1972-II
1973-I
Merchandise exports
Current projection
47.8
46.5
49.1
53.2
(OECD, June 1972)
(49.7)
(47.7)
(51.6)
(55.2)
Merchandise imports
Current projection
-54.5
-53.8
-55.3
-57.9
(OECD, June 1972)
(-54.0)
(-52.6)
(-55.3)
(-58.7)
Trade balance
Current projection
-6.7
-7.2
-6.2
-4.7
(OECD, June 1972)
(-4.3)
(-4.9)
(-3.7)
(-3.5)
Services and remittances, net
Current projection
1.3
0.9
1.7
1.5
(OECD, June 1972)
(2.3)
(2.1)
(2.5)
(2.9)
Balance on goods, services,
and remittances
Current projection
-5.4
-6.3
-4.5
-3.1
(OECD, June 1972)
(-2.0)
(-2.8)
(-1.2)
(-0.6)
The differences partly reflect different assumptions about
the impact of last year's exchange rate changes. The OECD secretariat
assumes that such changes will have improved the U.S. balance on cur-
rent account by roughly $5 billion at an annual rate in the first
half of 1973, whereas we now would expect only a $4 billion to $5 bil-
lion improvement by the end of 1973, and perhaps only a $2-3 billion
improvement in the first half of that year. Neither party feels very
confident about its judgments of this matter, and it is unlikely that
the ultimate outcome will ever be measurable.
GERALD FORD LIBRARY
- 7 -
In OECD discussions last October, the United States
suggested that it should aim at a surplus on "current account"
(goods, services, and remittances) of about $9 billion in 1974.
The OECD secretariat suggested a minimum of $6 billion, as a
figure that we and the world might be able to live with. In a
more recent paper of July 27, 1972 (CPE/WP3(72)14), the secre-
tariat suggests (page 7) that a figure in the $3 billion to $6
billion range may actually be achievable in 1974; it asks for
discussion as to how satisfactory or unsatisfactory such an
outcome might seem, implying that it would leave something to
be desired. Our present projections of the "current account"
balance, at minus $5-1/2 billion in 1972 and minus $3 billion
in 1973, suggest that major changes will have to occur in ex-
change rates or in other parameters (controls?) if a sizable
current surplus is in fact to be achieved in 1974, or indeed
at any later time.
cc: Mr. R. Solomon
Mr. Partee
Mr. Hersey
Mr. Irvine
Mrs. Junz
Mr. Katz
Mr. Pizer
Mr. Wood
Mr. Roxon
Miss Morisse
FORD & LIBRARY GERALD
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
John E. Reynolds
CONFIDENTIAL (FR)
August 3, 1972
Widespread Reserve Gains Continue
The balance of payments surpluses abroad that are the
counterpart of the huge U.S. deficit are very widely spread among
the other countries of the world. This can be roughly demonstrated
by a study of changes in official reserve assets, for which data
are available for most countries through June of 1972.
Reserve changes
Of the 40 countries that each hold reserve assets of more
than $400 million, all except the United States gained reserves over
the year to mid-1972. Eight had reserve gains of more than 100 per
cent: Japan and the United Kingdom among industrialized countries;
Greece, New Zealand, and Yugoslavia among other developed countries;
and Iran, Saudi Arabia, and Israel among less developed countries
(see Table 1).
Most of the others had gains of at least 25 per cent.
This was true for all industrialized countries except Belgium and
Italy, for all the other developed countries without exception, and
for the developing countries of the Philippines, Kuwait, Brazil,
Libya, Mexico, Lebanon, and Venezuela.
The reserve figures used are in U.S. dollars, and therefore
include the effects of the 8.57 per cent revaluation of gold and SDRs
as well as the 1972 allocation of new SDRs. Nevertheless, reserve
gains of more than 25 per cent in the year are a fairly unmistakable
sign of over-all payments surplus.
Widespread reserve gains have persisted for more than a
year. Over the two-year period to mid-1972, countries that have
increased their reserves by more than 40 per cent include all the
industrial countries except Italy and the United States, all other
developed countries except South Africa, and eleven less developed
countries including the five Middle East petroleum producers, and
Israel, the Philippines, Brazil, Mexico, Lebanon, and Venezuela
(see Table 2).
For about three-fourths of the 40 countries studied,
reserve gains have been even larger in the first half of 1972 than
a year earlier. (The IMF data used here show the gold and SDR re-
valuation as of December, so that it does not affect the comparison
of first half years). This is true for all industrialized countries
except Japan, Italy, and Norway; for 7 of the 10 other developed
countries; and for 10 less developed countries (see Table 3).
QERALD FORD LIBRARY
Table 1. Countries Ranked by Percentage Reserve Gains
(measured in U.S. dollars) in the Year to Mid-1972
Per
Per
Per
cent
cent
cent
Country
gain
Country
gain
Country
gain
Industrial countries
Other developed countries
Less developed countries
United Kingdom
113
Yugoslavia (10 mos.)
(144)
Iran (11 mos.)
(158)
Japan
103
Greece
122
Saudi Arabia
106
Denmark
87
New Zealand
114
Israel (10 mos.)
(102)
France
66
Turkey
96
Philippines
55
Sweden
45
Australia
79
/
e
Kuwait
47
Switzerland
38
Spain (9 mos.)
(54)
Brazil (9 mos.)
(45)
Germany
36
Finland
53
Libya
35
Norway
34
Ireland
29
*Mexico (11 mos.)
(31)
Austria
32
Portugal (11 mos.)
(28)
Canada
28
South Africa
25
Lebanon (10 mos.)
(31)
Venezuela
25
Netherlands
25
Thailand
14
Belgium
20
*India (10 mos.)
(14)
Italy
6
United States
-1
Iraq
13
Taiwan
7
Malaysia (10 mos.)
(6)
Korea (11 mos.)
(0)
* Latest month's data are confidential.
/ Including Government assets which are reported only at irregular intervals and for which interpolated
estimates are used.
Source: Based on IMF data.
GERALD FORD LIBRARY
Table 2. Countries Ranked by Percentage Reserve Gains
(measured in U.S. dollars) in the Two-year Period to Mid-1972
Per
Per
Per
cent
cent
cent
Country
gain
Country
gain
Country
gain
Industrial countries
Other developed countries
Less developed countries
Japan
288
Turkey
299
Iran (23 mos.)
(210)
United Kingdom
177
New Zealand
229
Saudi Arabia
184
Germany
157
Australia
166
Israel (22 mos.)
(157)
Denmark
132
Greece
165
Philippines
136
Sweden
116
Spain (21 mos.)
(162)
Libya
114
France
111
Yugoslavia (22 mos.)
(103)
Brazil (21 mos.)
(105)
Norway
94
Finland
100
Kuwait /
77ᵉ
Netherlands
64
Ireland
46
*Mexico (23 mos.)
(65)
Switzerland
63
Portugal (23 mos.)
(44)
Austria
62
South Africa
-21
Iraq
59
Lebanon (22 mos.)
(59)
Belgium
48
Venezuela
52
Canada
43
Malaysia (22 mos.)
(29)
Italy
37
United States
-18
*India (22 mos.)
(15)
Taiwan
14
Thailand
9
Korea (23 mos.)
(-3)
* Latest month's data are confidential.
1/ Including Government assets which are reported only at irregular intervals and for which interpolated
estimates are used.
Source: Based on IMF data.
GERALD FORD
Table 3. Countries Having Larger Reserve Gains in the
First Half of 1972 than a Year Earlier
Reserve gain ($m.)
Reserve gain ($m.)
Reserve gain ($m.)
1st hf
1st hf
1st hf
1st hf
1st hf
1st hf
Country
1971
1972
Country
1971
1972
Country
1971
1972
Other
Less
Industrial
developed
developed
countries
countries
countries
Germany
3,086
4,246
Australia
861
1,262
Kuwait 1/
180ᵉ
340ᵉ
France
695
1,145
South Africa
-158
357
Brazil
249
(331 - 3 mos.)
United Kingdom
793
1,142
Turkey
12
98
Saudi Arabia
284
486
Switzerland
-49
52
Finland
47
89
Israel
89
(350 - 4 mos.)
Canada
173
517
Thailand
18
189
Greece
21
211
Netherlands
264
592
New Zealand
135
244
*Mexico
134
(196 - 5 mos.)
Belgium
349
371
Yugoslavia
40
(242 - 4 mos.)
Iran
104
(187 - 5 mos.)
Austria
128
142
Taiwan
-60
80
Sweden
204
284
Korea
-29
(11 - 5 mos.)
United States
-983
149
Philippines
48
81
Denmark
-60
64
* Latest month's data are confidential.
1/ Including Government assets which are reported only at irregular intervals and for which interpolated estimates
are used.
Source:
Based on IMF data.
FORD & 9ERALD LIBRARY
- 2 -
Naturally, the largest reserve gains and payments imbal-
ances in absolute amount have been those of the countries that have
the largest international transactions, notably Japan and the main
industrial countries of Europe. But the gains of other countries
have been surprisingly large, too. Over the past two years, for
example, Australia has added $2.9 billion to its reserves, Spain
(in 21 months through March) added $2.2 billion, Canada $1.9 bil-
lion, Libya $1.7 billion, Saudi Arabia $1.3 billion, and Brazil
and Kuwait each $1 billion.
Some implications
Not all of the surpluses reflected in large reserve
gains represent fundamental imbalances. Some countries (Yugoslavia,
Turkey, Israel, South Africa, the Philippines) are reaping the first
fruits of fairly recent devaluations designed to restore earlier re-
serve losses; and it may be expected that their surpluses will dimin-
ish as temporary restraints on imports and on domestic spending are
gradually relaxed. The large reserve gains of the United Kingdom
have reflected both a huge inflow of short-term capital that has
since been reversed, and a large current surplus that has recently
been rapidly eroding.
There is room for considerable disagreement as to whether
the surpluses of some continental European countries (notably Germany,
France, Switzerland, the Netherlands) are likely to persist, or are
instead likely to fade away as recent exchange rate changes take
effect and as recent huge inflows of short-term capital abate and
are reversed. But it seems clear that at least the surpluses of
Japan, Australia, and the petroleum-producing countries of Iran,
Saudi Arabia, Libya, and Kuwait do represent fundamental and per-
sistent imbalances of the sort that might appropriately be dealt
with by exchange rate changes. Since such changes would tend to
enhance the surpluses of European countries, some exchange rate
adjustments on their part are also likely to be needed. Thus it
appears that a fairly general realignment of exchange rates may
soon be required.
The difficulties of persuading other industrial countries
to acquiesce in such adjustments are well known. Less attention
has been paid to the problem of the petroleum-producing countries.
It is interesting also to note that two large countries that al-
ready permit considerable exchange rate flexibility -- Canada with
its floating rate and Brazil with its crawling peg -- continue to
manage their rates in such a way as to insure continuing payments
FORD
surpluses and reserve gains.
GERALD
Agengly
- 3 -
One implication of recent widespread reserve increases
may be that countries have sought as a matter of policy to increase
their reserves substantially, both to remedy what was earlier felt
to be a reserve stringency and to preserve a proper proportion be-
tween reserves and the rising value of international transactions.
If so, this would argue for the creation of a larger amount of new
SDRs than has generally been contemplated, as the only alternative
to intractable U.S. payments deficits and continued turmoil in for-
eign exchange markets.
FORD is LIBRARY 9ERALD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 24, 1972
To
Mr. Ralph C. Bryant
Subject: U.S. Merchandise Trade --
From Sujin Shin
July 1972
In July, the U.S. trade deficit was $7.1 billion at a seasonally
adjusted annual rate (balance-of-payments basis), about equal to the
deficits recorded in May and June. The levels of both exports and imports
rose about equally in July. From February through June exports and imports
showed little month-to-month variation. For January-July the trade deficit
was $7.2 billion at an annual rate.
Imports in July were $54.9 billion at an annual rate (balance-of-
payments basis), about 2.2 percent above the June rate. The major increase
in imports from June to July was in imports of industrial supplies and
materials, continuing the strong upward movement which had begun about
April. Arrivals of cars from non-Canadian sources also rose in July but
were still below the levels in the first part of the year. These advances
were partially offset by relatively small declines in foodstuffs, capital
goods, and nonfood consumer goods (other than autos) from the high June
levels.
Exports in July were $47.8 billion at an annual rate (balance-of-
payments basis), a rise of 2.4 percent over June. Shipments of agricultural
commodities in July advanced further above the already high June level.
The major element in the July advance was larger shipments of industrial
materials and machinery which had been relatively flat in the last three
months. The July rise in exports of these nonagricultural commodities may
represent the first sign of exports responding to improved economic
conditions abroad. The bulk of the rise in exports from June to July was
in shipments to Western Europe. Exports of commercial aircraft declined
in July to a very low level.
U.S. Merchandise Trade, Balance of Payments Basis
(billions of dollars, seasonally adjusted annual rates)
1971
1972
Year
IQ
2Q
Apr.
May
June
July
Exports
42.8
47.2
45.9
44.5
46.4
46.7
47.8
Imports
45.5
53.9
53.6
53.3
53.7
53.7
54.9
Balance
-2.7
-6.7
-7.7
-8.7
-7.3
-7.0
-7.1
Note: Details may not add to totals because of rounding.
FORD & LIBRARY GERALD
Table 1
U.S. Merchandise Trade
(billions of dollars, seasonally adjusted annual rates)
GERALD FORD LIBRARY
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
45.5
-1.9
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
0.9
III
36.1
34.2
1.9
35.5
34.3
1.3
IV
34.3
34.1
0.2
33.5
33.8
-0.2
1969 I
30.5
30.6
-0.2
30.0
30.3
-0.4
II
39.1
38.4
0.7
37.9
38.3
-0.3
III
39.6
37.3
2.3
38.3
37.1
1.2
IV
40.1
37.8
2.3
39.5
37.5
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
-3.1
42.8
46.9
-4.0
III
46.7
47.8
-1.1
45.9
47.8
-1.9
IV
38.9
44.1
-5.2
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 July
41.9
45.5
-3.6
41.1
45.4
-4.3
August
44.1
47.1
-3.0
43.4
47.1
-3.7
September
54.1
50.9
3.2
53.3
50.9
2.4
October
32.5
42.3
-9.8
31.7
42.3
-10.6
November
37.9
40.5
-2.6
37.3
40.5
-3.2
December
46.3
49.5
-3.2
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
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
July
48.2
54.7
-6.5
47.8
54.9
-7.1
*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
LIBRARY
Including Department of Defense Shipments
(Seasonally adjusted; annual rates)
billions of dollars
1971
1972
Year
1Q
2Q*
/
Apr.
May
June
July
Foods and feeds
6.1
7.0
6.9
6.1
7.1
7.5
7.4
Industrial materials
12.7
13.7
12.5
12.2
12.8
12.5
13.3
Capital goods
15.1
16.5
16.0
15.7
16.1
16.1
16.1
Civilian aircraft
(3.3)
(3.3)
(3.3)
(2.7)
(4.0)
(3.3)
(2.6)
Machinery
(11.6)
(12.9)
(12.5)
(12.5)
(12.4)
(12.5)
(13.1)
Automotive equipment
4.4
4.8
5.0
4.9
5.1
4.9
4.9
To Canada
(3.2)
(3.6)
(3.9)
(3.9)
(4.0)
(3.9)
(4.1)
To other
(1.2)
(1.2)
(1.1)
(1.1)
(1.1)
(1.1)
(1.1)
Consumer goods (non-auto)
2.8
3.3
3.3
3.2
3.3
3.3
3.6
All other
3.0
2.8
3.0
3.3
3.1
2.7
3.3
Total
44.1
48.2
46.9
45.7
47.6
47.3
49.0
Agricultural goods
7.8
9.1
8.5
7.7
8.7
9.1
9.4
Nonagricultural goods
36.4
39.2
38.4
38.0
38.9
38,2
39.6
U.S. General Imports
by End-Use Commodity Categories
(Seasonally adjusted; annual rates)
billions of dollars
1971
1972
Year
1Q
2Q*/
Apr.
May
June
July
Foods and feeds
6.4
7.3
6.8
6.5
6.9
7.0
6.9
Industrial materials
17.0
18.9
19.2
18.5
19.2
19.9
20.8
Fuels and lubricants
(3.7)
(4.3)
(4.6)
(4.8)
(4.5)
(4.6)
(4.9)
Iron and steel
(2.9)
(2.7)
(2.7)
(2.2)
(2.9)
(2.9)
(3.0)
Capital goods
4.1
5.3
5.4
5.2
5.2
5.7
5.6
Automotive equipment
7.9
8.9
9.4
10.2
9.5
8.5
8.9
From Canada
(4.5)
(5.0)
(5.5)
(6.3)
(4.9)
(5.3)
(5.2)
From other
(3.4)
(3.9)
(4.1)
(4.4)
(4.6)
(3.4)
(3.7)
Consumer goods (non-auto)
8.6
11.5
11.0
11.5
10.4
11.3
11.0
Nondurable goods
(3.3)
(4.2)
(3.8)
(3.9)
(3.6)
(4.0)
(3.9)
Durable goods
(4.7)
(6.5)
(6.4)
(6.9)
(6.0)
(6.5)
(6.2)
Unmfgd. goods
(0.6)
(0.7)
(0.7)
(0.7)
(0.7)
(0.8)
(0.9)
All other
1.6
1.8
1.7
1.8
1.7
1.6
1.6
TOTAL
45.6
53.7
53.7
53.5
53.6
53.9
54.7
Note:
(1)
Details may not add to totals because the commodity sections were
independently adjusted for seasonal variations.
(2)
Totalswill 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.
Table 3
Imports as Per Cent of GNP
(billions of current dollars)
DERALD FORD LIBRARY
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
930.3
35.80
3.85
1970
976.4
39.80
4.08
1971
1,050.4
45.46
4.33
Half Years at Annual Rates, Seasonally Adjusted
1968
1H
845.7
31.91
3.77
2H
882.7
34.02
3.85
1969
1H
915.3
34.29
3.75
2H
945.3
37.30
3.95
1970
1H
964.9
39.12
4.05
2H
988.0
40.48
4.10
1971
1H
1,033.2
44.90
4.35
2H
1,067.5
46.02
4.31
1972
IH
1,124.3
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
28.61
3.51
1968
I
834.0
31.28
3.75
II
857.4
32.54
3.80
III
875.2
34.27
3.92
IV
890.2
33.76
3.79
1969
I
907.0
30,30
3.34
II
923.5
38.27
4.14
III
941.7
37.08
3.94
IV
948.9
37.52
3.95
1970
I
958.0
38.92
4.06
II
971.7
39.32
4.05
III
986.3
39.87
4.04
IV
989.7
41.08
4.15
1971
I
1,023.4
42.91
4.19
II
1,043.0
46.89
4.50
III
1,056.9
47.80
4.52
IV
1,078.1
44.23
4.10
1972
1
1,109.1
53.93
4.86
II
1,139.4ʳ
53.55
4.70
1/ Balance of payments basis.
r = Revised.
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
GERALD FORD LIBRARY
35
J
F
M
A
M
J
J
A
SS
o
N
D
J
F
M
A
M
J
J
A
S
0
N
D
1971
1972
U.S. MERCHANDISE TRADE
Balance of Payments Basis
Quarterly, Seasonally Adjusted, Annual Rates
Billions of Dollars
60
50
Exports
40
Imports
30
BERALD ERALO FORD NOVARE ARY
20
10
1967
1969
1971
1973
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date November 6, 1972
To
Mr. Samuel Pizer
Subject: Revised balance of payments
From
Daniel Roxon
estimates for 1972 and 1973.
STRICTLY CONFIDENTIAL (FR)
Revised estimates for 1972 and 1973 of U.S. exports and imports
of goods and services and other components making up the "basic" balance
of the U.S. balance of payments are shown in the attached tables. The
assumptions underlying these estimates are shown in Table 1. A basic
assumption was that domestic price snd wage controls will be continued
throughout 1973.
For 1972 the estimate for goods and services is for an import
balance of $4-3/4 billion. (See Table 2). For 1973 the estimate is for
a substantially lower import balance -- about $2-1/4 billion. The
smaller deficit results almost entirely from a reduction on the trade
deficit -- from $6-3/4 billion in 1972 to $4-1/2 billion in 1973. The
net surplus on services is estimated to increase only marginally from
1972 to 1973.
It should be noted that the estimates of exports and imports
of goods and services for 1972 and 1973 will differ from those shown
in the GNP accounts since the goods and services figures for the second
quarter of 1972 shown in the GNP accounts are unrevised and will probably
remain so until the next annual revision of the GNP data next July.
The estimates shown in the GNP accounts in the periods following the
second quarter are linked to this unrevised figure, i.e., the quarter
to quarter changes in the estimates on the revised balance of payments
GERALD
LIBRARY
Mr. Samuel Pizer
-2-
basis are applied to the unrevised second quarter GNP data. The deficit
balance on goods and services on the GNP basis is therefore about
$1 billion less at an annual rate each quarter than the estimates on
a balance of payments basis. (See Table ).
The "basic" balance -- the sum of current account transactions
(including Government grants) and long-term Government and private
capital flows -- is estimated to be only slightly lower in 1973 than the
very large deficit of $11-3/4 billion estimated for 1972. In 1971 the
"basic" balance was also a large deficit of about $9-1/2 billion.
Trade: The estimated reduction in the trade deficit in 1972
from 1972 arises from a very strong rise in exports (16 percent) while
imports may increase more moderately (10 percent). See Table 4). The
trade deficit in the first half of 1973 may still be quite high --
$5 billion at an annual rate -- but then is estimated to decline to a
rate of about $3 billion in the fourth quarter as exports expand
more rapidly than imports. Exports in 1973 may total $56.3 billion,
almost $8 billion more than in 1972, and substantially larger than
earlier estimated. The principal reasons for the new higher projected
level of exports are: (1) the fuller recognition of the huge amount
of agricultural commodities to be exported next year, (mainly because
of the sales to the Soviet Union but also because of larger exports to
other countries because of limited supplies in competing foreign
suppliers); (2) the expectation of greater deliveries of commercial
aircraft, particularly the new DC-10's; (3) a probable increase in
GERALD FORD LIBRARY
Mr. Samuel Pizer
-3-
aid to Viet-Nam toward the end of 1973 with the ending of the
war. As the estimates for foreign industrial activity are unchanged
from those made previously, there is no change in the estimated value
of U.S. exports related to this element.
The effect of exchange rate change on exports in 1972 is
estimated to be zero and about $1.3 billion in calendar 1973. By the
fourth quarter of 1973 it is estimated that the effect of the exchange
rate changes on exports may be about $2-1/2 billion at an annual rate.
Imports in 1973 are estimated to be about $61 billion --
$5-1/2 billion (10 percent) more than in 1972. This is somewhat higher
than previous estimates. An important element in raising the value of
total imports in 1973 is the anticipated further increase in fuel imports.
In 1973 such imports may total about $6-1/2 billion compared with $3.7
billion in 1971 and an estimated $4.7 billion in 1972. The effect of
the exchange rate changes on imports may become positive, i.e., reduce
imports, in 1973 compared with the negative or "perverse" effect of
raising the value of imports in 1972. The exchange rate effect may be
to reduce imports by about $1 billion in calendar 1973 and by a rate
of $2-1/4 billion by the fourth quarter of 1973. Thus the combined
positive effects of the change in exchange rates for both exports and
imports may be about $4-1/2 billion at an annual rate in the last quarter
of 1973.
Services: The net surplus on services in 1973 is estimated
to be about the same as in 1972, i.e., $2 billion. Military expenditures
GERALD FORD LIBRARY
Mr. Samuel Pizer
-4-
abroad may dip only slightly between the two years; shipments of military
equipment may rise somewhat. The estimated increase in fees and
royalties receipts from direct investment abroad may be largely offset
by reduced net income receipts as increased liabilities to foreigners
combined with rising domestic interest rates may raise income payments
to foreigners. The increase in the net import balance on travel from
1972 to 1973 may be substantially less than the very large increase
from 1971 to 1972.
Government grants and credits: The outflow of Government
grants and credits in 1973 is estimated to be exceptionally high --
$5 billion. This compares with a little less than $4 billion in 1972.
The major factors in the $1 billion increase are: (1) Additional
Viet-Nam aid of $300 million; (2) Increased CCC credits (mainly to
the Soviet Union under the grain sale agreement) and P.L. 480
financing, together totaling an increase of $300 million; (3) Greater
Export-Import Bank loans of $375 million; (4) Increased payments
to international institutions (IDA and IDB) of $200 million. U.S.
Government aid and credit outlays have been below $4 billion in the
past 5 years except in 1971 when it totaled nearly $4-1/2 billion.
Private long-term capital: The net outflow of private long-
term capital in 1973 is expected to be moderately larger than in 1972
but considerably below the outflow in 1971. U.S. private long-term
capital outflow in 1973 may be somewhat higher than in 1972. Direct
investments abroad are estimated to rise in 1973 from the relatively
FORD
GERALD
LIBRARY
Mr. Samuel Pizer
-5-
low level estimated for 1972. This increased outflow may be partially
offset by a moderate decline in bank claims on foreigners.
The inflow of private foreign long-term capital in 1973 is
estimated to be about the same as in 1972. The moderate increase
estimated for foreign direct investment in the United States may be just
about offset by an estimated reduction in sales of new bond issues abroad
by U.S. corporations (to finance their direct investments) from the
exceptionally high amounts sold in 1972. Sales of U.S. equities to
foreigners in 1973 are estimated to be unchanged from the estimated
$1.7 billion sold in 1972.
(It should be noted that these estimates of capital flows
are subject to even greater reservations and caveats than are
generally applied to the estimates of exports and imports of goods
and services.)
cc: Messrs. Bryant, Gemmill, Hersey, Katz, Norwood, Reynolds, Wood,
Siegman, Irvine, Mrs. Junz, Messrs. Henry, Peret, Zeisel,
Henderson, and All Economists in Trade, Aid, and Investment
Section.
GERALD FORD LIBRARY
November 6, 1972
Table 1. ASSUMPTIONS USED FOR GOODS & SERVICES PROJECTIONS: 10/27/72
UNITED STATES
FOREIGN
Change in
Whole-
Real
Business
sale
Industrial
Wholesale
Capacity
GNP
Deflator
GNP
PCE
Inventory
Prices
Production
Prices1/2/
Pressure
1958 $
(1963=100)
(1963=100)
(1963=100)
Years:
1971
1050.4
141.6
741.7
664.9
3.6
120.7
164.6
123.0
11.18
1972
1151.1
145.9
789.0
720.9
4.8
125.1
174.6
128.1
10.98
1973
1264.9
150.4
841.3
789.2
12.0
128.5
187.9
132.4
12.55
Quarters:
1971 - 4 actual
1078.1
142.9
754.5
680.5
1.7
121.7
167.1
124.5
10.37
1972 - 1 actual
1109.1
144.7
766.5
696.1
.4
123.4
170.0
126.1
10.59
2 actual
1139.4
145.3
783.9
713.4
5.0
124.5
172.8
127.5
10.71
3
1162.2
146.1
795.3
728.1
5.7
125.7
175.9
128.8
11.04
4
1193.6
147.3
810.2
746.1
8.0
126.7
179.5
130.0
11.56
1973 - 1
1224.2
148.7
823.3
764.1
10.0
127.5
182.9
131.1
11.89
2
1253.8
149.8
837.0
782,1
12.0
128.2
186.2
132.0
12.25
3
1279.0
150.9
847.6
797.6
13.0
128.8
189.4
132.9
12.67
4
1302.8
152.0
867.0
813.1
13.0
129.3
193.2
133.7
13.39
Percent change:
Years:
1972/71
9.6
3.0
6.4
8.4
3.6
6.1
4.1
1973/72
9.9
3.1
6.6
9.5
2.7
7.6
3.4
Qtr. 4/Qtr. 4:
72/71
10.7
3.1
7.4
9.6
4.1
7.4
4.4
73/72
9.1
3.2
7.0
9.0
2.1
7.6
2.8
Weighted average.
2/ Excludes effects of exchange rate changes.
&
FORD
3/ Measures difference between production capacity and actual production.
GERALD
LIBRARY
November 6, 1972
Table 2. U.S. Balance of Payments - Projected for 1973
billions of dollars, seasonally adjusted
YEARS
HALF YEARS
1971
1972
1973
1972
1973
1H
2H
1H
2H
Balance on goods & services
.7
-4.7
-2.2
-2.7
-2.0
-1.4
-.8
Remittances & pensions
-1.5
-1.5
-1.8
-.8
-.8
-.9
-.9
Current account (ex. Gov't grants)
-.8
-6.3
-4.0
-3.5
-2.8
-2.2
-1.7
Gov't grants & capital
-4.4
-3.9
-5.0
-1.6
-2.3
-2.4
-2.5
Private long-term capital
-4.1
-1.7
-2.4
-.4
-1.3
-1.3
-1.2
U.S.
(-6.3)
(-5.9)
(-6.4)
(-2.8)
(-3.1)
(-3.2)
(-3.2)
Foreign
(+2.2)
(+4.2)
(+4.0)
(+2.4)
(+1.8)
(+1.9)
(+2.0)
Balance on current account &
long-term capital
-9.4
-11.8
-11.3
-5.5
-6.3
-5.9
-5.4
Nonliquid short-term capital
-2.4
-.6
-.5
-.1
-.5
-.3
-.3
Errors & omissions
-10.9
-.2
Liquid private capital
-7.8
+1.4
OSB (ex. SDR allocations)
-30.5
4.5
FORD & LIBRARY GERALD
November 6, 1972
Table 3. GOODS & SERVICES - PROJECTED
billions of dollars, seasonally adjusted annual rates
A. BALANCE OF PAYMENTS DATA:
EXPORTS
IMPORTS
NET
Goods &
Goods &
Goods &
Services
Goods
Services
Services
Goods
Services
Services
Goods
Services
1971
66.1
42.8
23.4
65.4
45.5
19.9
.7
-2.7
3.4
1972
73.1
48.6
24.5
77.8
55.2
22.6
-4.7
-6.6
1.9
1973
83.9
56.3
27.6
86.1
60.7
25.4
-2.2
-4.4
2.2
1972 - 1 actual
71.1
47.2
23.8
75.7
53.9
21.8
-4.7
-6.7
2.0
2 actual
69.4
45.9
23.5
75.6
53.6
22.0
-6.2
-7.7
1.5
3 preliminary
73.8
49.1
24.7
78.7
55.8
23.0
-4.9
-6.7
1.8
4 projected
78.1
52.0
26.0
81.1
57.4
23.7
-3.1
-5.4
2.3
1973 - 1 projected
80.3
53.8
26.5
83.1
58.9
24.2
-2.8
-5.1
2.3
2
"
82.8
55.5
27.3
85.5
60.4
25.1
-2.7
-4.9
2.2
3
"
84.9
57.0
27.9
87.2
61.4
25.8
-2.3
-4.4
2.1
4
"
87.5
59.0
28.5
88.5
62.0
26.5
-1.0
-3.0
2.0
B. GOODS & SERVICES DATA IN THE GNP ACCOUNT :
/
Exports
Imports
Net
of G & S
of G & S
G & S
1971
66.1
65.4
.7
1972
73.4
77.6
-4.2
1973
84.5
85.7
-1.2
1972 1
71.1
75.7
-4.7
2
69.4
75.6
-6.2
3
74.4
78.2
-3.8
4
78.6
80.7
-2.1
1973 1
80.9
82.7
-1.8
2
83.4
85.1
-1.7
3
85.4
86.7
-1.3
4
88.1
88.1
0
FORD & GERALD LIBRARY
1/ Differs from actual balance of payments data because of lags in including revisions.
CONFIDENTIAL (FR)
November 6, 1972
Table 4
MERCHANDISE TRADE and SERVICES: PROJECTED
millions of dollars, seasonally adjusted
MERCHANDISE TRADE
1972
1973
1971
1972
1973
Qtr.1
Qtr.2
Qtr.3
Qtr.4
Qtr.1
Qtr.2
Qtr.3
Qtr.4
Exports
a)
Basic estimate
42,770
48,550
55,025
11,809
11,463
12,272
13,006
13,350
13,675
13,850
14,150
b)
Effect of exchange rate changes
--
--
+1,300
--
--
--
--
+100
+200
+400
+600
c)
Exports - projected
42,770
48,550
56,325
11,809
11,463
12,272
13,006
13,450
13,875
14,250
14,750
Imports
a)
Basic estimate
45,459
54,165
61,575
13,242
12,932
13,740
14,251
14,675
15,200
15,650
16,050
b)
Effect of exchange rate change
--
+1,000
-900
+240
+460
+200
+100
+50
-100
-300
-550
c)
Imports - projected
45,459
55,165
60,675
13,482
13,392
13,940
14,351
14,725
15,100
15,350
15,500
Trade Balance
a)
Basic estimate
-2,689
-5,615
-6,550
-1,433
-1,469
-1,468
-1,245
-1,325
-1,525
-1,800
-1,900
b)
Effect of exchange rate changes
--
-1,000
+2,200
-240
-460
-200
-100
+50
+300
+700
+1,150
c)
Trade Balance - projected
-2,689
-6,615
-4,350
-1,673
-1,929
-1,668
-1,345
-1,275
-1,225
-1,100
-750
SERVICES
Exports of services - receipts
23,363
24,528
27,550
5,954
5,884
6,180
6,510
6,625
6,825
6,975
7,125
Imports of services - payment
19,947
22,625
25,400
5,455
5,501
5,740
5,929
6,050
6,275
6,450
6,625
Net services
+3,416
+1,903
+2,150
+499
+383
+440
+581
+575
+550
+525
+500
BALANCE ON GOODS & SERVICES
Balance before exchange rate change
+727
-3,712
-4,400
-934
-1,086
-1,028
-664
-750
-975
-1,275
-1,400
Effect of exchange rate changes on trade
--
-1,000
+2,200
-240
-460
-200
-100
+50
+300
+700
+1,150
Balance after effect of exchange rate changes
+727
-4,712
-2,200
-1,174
-1,546
-1,228
-764
-700
-675
-575
-250
FORD
GERALD
LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date February 1, 1973
To
Chairman Burns
Subject: Preliminary Balance of
From
Samuel Pizer
Payments Figures
(through Ralph C. Bryant)
The attached tables show the first preliminary data for the
official settlements balance for 1972. The deficit of $10.8 billion
is somewhat larger than expected; the year-end inflows were probably
less than in the past few years. On the liquidity basis the deficit
for the year was $15.4 billion, of which about $4 billion came in the
last quarter.
The second table shows the preliminary figures for increases
in bank-reported claims on foreigners. These showed a very large increase
in December -- $1.3 billion -- bringing the total for the year to about
$3-1/2 billion. Unless revised downward, which is possible, this would
be a larger outflow than was reported in 1971. We have no information
yet on the character of the increase in banking claims, but it seems
likely that it was influenced by tightening in foreign credit markets.
Attachments
cc: Mr. John Reynolds
GERALD P.: FORD LIBRARY
STRICTLY CONFIDENTIAL (F.R.)
JANUARY31,1973
Table A.4 Financing of Balances - Continued
(In millions of dollars)
p/
BI
QII
SIII
OCT.
NOV.
DEC.
OTV
YEAR
1. Change in liabilities, dec., (-)
3201
2,983
5,643
4661
962
454
3,077
14,904
A. To foreign official agencies 1/
2,609
794
5,422
787
161
304
1,252
10,077
B. To private foreigners, liquid
592
2,189
221
874
801
150
1,825
4,827
FORD & LIBRARY 07V839
Commercial banks abroad
514
1,980
107
627
641
Foreign branches
-200
396
34
98
-530 -
336
-96
134
Other
714
1,584
73
529
1,171
Other private foreigners
53
281
148
201
- -77
Intl. and regional
25
-72 -
-34
46
237
-97
186
105
2. U.S. reserve assets, inc., (-)
607
-53
122
-96
6
157
67
743
Gold stock
544
-7
3
-
-
-
-
1,
547
Special drawing rights 3/
-
-
-
-
-
-
Reserve position in IMF
- -1
185
-15 -
-5
-5
5
7
-15
154
Convertible currencies
64
-245
134
-91
11
162
82
35
3. Liquid claims, inc., (-)
-729
113
-491
N.A.
Bank-reported
-439 -
300
- 394
Nonbank-reported
- 1290
-187 -
-97
Balances (deficit -)
Official settlements, N.S.A. (1A+2)
-3216
-741
-5544
-691
-167
-461
-1,319
-10,820
"
"
,
S.A.
-3,429
-1,027
-4,801
-1,563
-10,820
Liquidity, N.S.A. (1+2)
-3,808
-2,930
-5,765
-1,565
-968
-611
-2,942
-15,445
"
S.A.
-3,983
-2,216
-5,197
-4,049
-15,445
Net liquidity, N.S.A. (1+2+3)
"
"
-3,079
-3043
-5,274
, S.A.
-3,310
-2,413
-4,630
N.A
p/ Preliminary. n.a. Not available.
investment ($400 million) and with-
1/ Includes transactions in U.S. Govt.
drawal of gold deposits ($144 million).
agency securities.
3/ Excludes allocation of $710 million
2/ Reflects termination of IMF gold
of SDRs by IMF on Jan. 1, 1972.
note. - Excluder Japanese purchases
8,4.5. criporate hondr which amounted
to $168 million - 1972.
STRICTLY CONFIDENTIAL (F.R.)
January 31, 1973
U.S. PALANCE OF PAYMENTS
Table A.10 Changes in Claims on Foreigners
Decrease or increase (-)
(In millions of dollars)
1972p/
N.S.A.
S.A.
N.S.A.
S.A.
N.S.A.
S.A.
N.S.A
S.A
Bank-reported claims
Q-I
Q-I
Q-II
Q-II
Q-III
Q-III
Oct.
Nov.
Dec.
Q-IV
YeAR
Q-IK
Short-term
-770
-1,120
475
779
-384
-857
81
-609
-1,057
-1,585
-1,066
-2,264
Liquid
-439
-533
300
312
-394
-449
342
-108
Nonliquid
-331
-587
175
467
10
-408
-261
-501
Long-term 1/
-178
-178
-352
-352
-337
-337
-96
-41
-246
-383
-383
-1,250
Total
-948
-1,297
123
426
-721
-1,194
-15
-650
-1,303
-1,968
-1,449
-3,514
Nonbank-reported claims 2/
Short-term
-241
-157
-98
-12
-131
-236
Liquid
-290
-140
-187
-115
-97
-118
Nonliquid
49
-17
89
103
-34
-118
Long-term 1/
-78
-78
-71
-71
-10
-10
Total
-319
-235
-169
-83
-141
-246
p/
Preliminary
S.A.
Sessonally adjusted
N.S.A. Not seasonally adjusted.
1/
This series not seasonally adjusted.
21
Monthly data not available.
GERALD
FORD
STRICTLY CONFIDENTIAL (FR)
THE U.S. BALANCE-OF-PAYMENTS PROBLEM:
RECENT DEVELOPMENTS AND PROSPECTS
Special Briefing for the Board of Governors
by the Division of International Finance
February 5, 1973
FORD LIBRARY is 938870
I. Introduction (Mr. Reynolds)
In recent months, our Division has been reassessing in
some depth the current and prospective state of the U.S. balance
of payments and the whole international payments problem.
It now appears to us that the causes of the deterioration
in the U.S. international trade and payments position during the
late 1960's and early 1970's were more deep-seated and persistent
than was generally realized even as recently as one year ago. The
Smithsonian exchange rate adjustments went a considerable distance
towards correcting international imbalances, and we shall be bene-
fiting substantially from their lagged effects during the next few
years. But it is becoming increasingly clear that the Smithsonian
adjustments did not go far enough.
Let me outline our presentation for you so you can see
how the pieces fit together. Mr. Pizer will review very briefly
the developments that led up to the U.S. emergency actions of
August 1971. Mrs. Junz will discuss the adjustments that were
sought, and those that were achieved, at the Smithsonian. Mr. Clark
will describe developments during 1972, attempting to separate the
effects of exchange rate changes from those resulting from business
cycle swings and special factors. I will conclude with an estimate
of the distance we still have to go to reach reasonable equilibrium
in our international transactions.
I think it will be most useful to you if we speak our pieces
first, and then invite your questions. But you should, of course,
interrupt at any point if it is not clear what we are trying to say.
Mr. Pizer.
FORD & LIBRARY GERALD
- 2 -
II. Background to the Smithsonian Agreement (Mr. Pizer)
In the first half of the 1960's there were persistent
but relatively small overall deficits in our balance of payments.
Even though these deficits were not worsening, liquid liabilities
to foreign monetary authorities were piling up and U.S. reserves
were declining.
At that time the trade balance was strong, as seen in
the top panel of Chart 1, and seemed to be improving. The view
was widely accepted that in consequence of the superior U.S. price
performance after 1959, time was on our side. Rising capital out-
flows did cause some concern, and the IET was enacted. In fact,
there was enough worry about the deficits to produce several Presi-
dential messages on the balance of payments, all listing measures
aimed at alleviating or financing what was thought to be a temporary
problem.
By 1965, with the gap between actual and potential GNP
closed, and the war in Vietnam adding to demands, the U.S. trade
balance began to deteriorate. The worsening was interrupted only
briefly in 1967, and in 1969-70, by slowdowns in U.S. demand rela-
tive to other industrial countries, and the worsening accelerated
in 1971.
Meanwhile, private long-term capital outflows -- shown
in the middle panel of Chart 1 -- which had been steadily growing
larger, were reduced by the voluntary restrictions in 1965 and the
FORD is LIBRARY GERALD
Chart 1
MAJOR BALANCE OF PAYMENTS SECTORS
Billions of dollars
MERCHANDISE TRADE BALANCE
5
+
0
5
10+
+
0
5
PRIVATE LONG-TERM CAPITAL FLOWS, NET
10
+01
+
0
BASIC BALANCE
(CURRENT ACCOUNT PLUS
LONG-TERM CAPITAL)
5
10
1960
1962
1964
1966
1968
1970
1972
1974
FORD is LIBRARY GERALD
- 3 -
more stringent mandatory controls imposed in 1968. This checking
of long-term capital outflows offset the weakness of the trade
balance for a time, and the basic balance -- given in the bottom
panel of the chart -- showed only a slow worsening.
The top panel of Chart 2 repeats the plot of the basic
balance. The middle panel of the chart shows recorded net private
short-term capital flows and the errors and omissions item. As you
can see, recorded short-term capital inflows temporarily swelled to
enormous proportions in 1968-69, as U.S. banks reacted to tighter
monetary conditions at home and the ready availability of liquid
funds abroad. For a time, therefore, favorable shifts in capital
flows offset the decline in the trade balance and kept the official
settlements deficit within a relatively narrow band. Indeed, as
shown in the bottom panel of the chart, there were surpluses in
this overall measure in 1968 and 1969, which caused some relaxation
of concern.
This situation changed abruptly in 1970, when the slowdown
in the U.S. economy produced only a mild gain in the trade accounts,
while the accommodating posture of monetary policy resulted in a
reverse flow of dollars borrowed earlier by U.S. banks. Even then,
however, neither we nor other observers, such as the OECD staff,
expected more than minor further worsening in the trade balance in
the period ahead. The course of Federal Reserve staff projections
FORD is LIBRARY DERALD
Chart 2
OVERALL BALANCE OF PAYMENTS
Billions of dollars
+01
+
0
BASIC BALANCE
10
5
5
RECORDED PRIVATE
SHORT-TERM CAPITAL FLOWS, NET
10
+
0
ERRORS AND
OMISSIONS, NET
5
5
10
+
0
OFFICIAL SETTLEMENTS BALANCE
5
10
30.5
1960
1962
1964
1966
1968
1970
1972
1974
FORD & LIBRARY GERALD
- 4 -
of the trade balance is shown in Chart 3. When, in 1971, the trade
balance weakened so much more than had been generally expected --
and when on top of that was piled the final liquidation of U.S.
bank borrowings from the Euro-dollar market -- a massive specula-
tive flow into foreign currencies began.
A central question for us is -- why did the U.S. trade
balance deteriorate so rapidly after 1964? I believe most observers
would concentrate on three factors: (1) relative trends in costs
and prices, (2) the growth of productive capacity abroad and dif-
ferences in attitudes of producers toward foreign markets, and
(3) some specific instances of shifts in trade patterns that re-
flect institutional changes or changes in consumer tastes.
The most important underlying factor in the rapid and
continuing worsening in the U.S. trade balance after 1964 was the
sharp increase in U.S. prices relative to prices in other indus-
trial countries. The change in price relationships is illustrated
in Chart 4 in terms of export unit values of manufactures expressed
in U.S. dollars. In that chart one can also see that revaluations
and inflation are currently pushing up export prices of some of
our main competitors. Nevertheless, there was a sharp break in
our own price performance after 1964, creating opportunities for
foreign producers, and probably still operating to our disadvantage.
FORD & LIBRARY GERALD
Chart 3
U.S. TRADE BALANCE WITH F.R. PROJECTIONS
Half years, annual rates, billions of dollars
8
6
Nov. '70
4
June '70
2
+
June '71
0
Nov. '71* *
ACTUAL
2
PROJECTED
June '72
4
Nov. '72
6
8
1960
1962
1964
1966
1968
1970
1972
1974
LIBRARY GERALD R. FORD
* Included assumption that the import surcharge would continue.
Chart 4
DOLLAR EXPORT PRICES OF MANUFACTURES
Ratio scale, unit values, 1960=100
150
REVALUATION
DEVALUATION
*
UPWARD FLOAT
140
UNITED STATES
130
120
UNITED KINGDOM
GERMANY
110
CANADA
JAPAN
100
Non-U.S.
data through
90
first half of
1972
GERALD
?
1960
1962
1964
1966
1968
1970
1972
FORD
LIBRARY
- 5 -
Increased productive capacity abroad did not suddenly
arrive on the scene in 1964, of course, but given its existence
foreign producers were able to take advantage of the U.S. infla-
tion, and of the growing pressures on our own supply capabilities.
Foreign industrial firms usually depend much more on foreign
markets than do their U.S. counterparts, and concentrate consid-
erably greater effort on their export sales. Moreover, U.S.
manufacturers have had a greater tendency to meet growing demand
abroad by building foreign plants, rather than with exports from
the home country. The formation of the European Common Market
is an example of an institutional factor that affected trade --
especially our trade in agricultural products -- and also helped
to convince U.S. firms to produce abroad. All of these influences
have tended to reduce the U.S. share in world trade in manufactures,
while the share of Japan, in particular, has increased sharply from
a very low post-war base.
While U.S. exports have risen more slowly relative to GNP
than has been the case in many other countries, U.S. imports have
been increasing more rapidly relative to GNP than elsewhere. The
faster rise of U.S. imports that began in the 1960's means that
imports are now equal to nearly 5 per cent of GNP, compared to
less than 3 per cent ten years ago -- a very sizable difference
at the current rate of GNP.
FORD is LIBRARY GERALD
- 6 -
A major feature of the growth of U.S. imports has been
the steep rise in finished manufactures; these now account for
over half of the total compared to about 25 per cent in the late
1950's. This growth has been quite general, but the most spectacu-
lar shift has been in automotive products, where our trade balance
has worsened by $4 billion since 1964. More recently, we have
seen the beginnings of a steep rise in imports of fuels; such
imports rose only about $1 billion over the whole decade of the
1960's, but are now expected to rise by $1-1/2 billion or more
annually.
All these questions of just how fast our trade balance
and basic balance were worsening, and what would be needed to
reverse the trend, came to a head in August 1971.
Mrs. Junz will now pick up the story of the Smithsonian
realignment.
FORD & LIBRARY GERALD
- 7 -
III. The Smithsonian Adjustments (Mrs. Junz)
The three main questions that needed to be resolved in
August 1971 were: first, how large was the U.S. payments imbalance?
second, how was its counterpart distributed among other countries?
and third, what pattern of exchange rate changes would correct
these imbalances?
Most analysts focused on a rather short-range disequilib-
rium in considering the needed size of the U.S. adjustment. That
is, we within the Fed as well as others tried to estimate the under-
lying disequilibrium -- apart from cyclical fluctuations -- that
would exist in 1972. It is important to note that no allowance
was made for the fact that large U.S. deficits would continue after
1972, while conditions leading to the adverse trend were being
reversed. This omission resulted in part from the difficulty of
reaching agreement even as to the size of the disequilibrium in
1972, let alone as to what the shape of the underlying trend would
be two or three years hence. In part, it also reflected the assump-
tion that future exchange rate changes, if needed, could be more
easily obtained than before. Finally, it was judged that the full
adjustments really needed were probably not negotiable.
In this connection, you will perhaps recall the shock
reaction foreign officials had to the Treasury's estimate of a
$13 billion required swing in the U.S. payments balance.
FORD & LIBRARY GERALD
- 8 -
The $13 billion figure was derived from an estimate that
the basic balance, cyclically adjusted, and in the absence of ex-
change rate changes or equivalent policy measures in 1971, would
be in deficit by $10 billion in 1972. To this $10 billion figure
was added a goal of an official settlements surplus of $2 to $3
billion a year, to replenish reserves and establish confidence.
Given the trends in capital flows and government expenditures
abroad, U.S. analysts arrived at the conclusion that virtually
all of the adjustment would have to come in the current balance.
If the requirement of a surplus was relaxed, this implied a needed
improvement in the trade accounts of about $10 billion. Although
some observers, notably the OECD and, to a lesser extent the IMF,
started out with much lower estimates, a compromise consensus was
eventually reached that an adjustment of about $8 billion should
be aimed at.
From the point of view of the United States, the easiest
way to achieve the desired improvement in our balance of payments
would have been to get the highest possible rate of devaluation
vis-à-vis our main competitors in the domestic market and in third
markets. But such a devaluation pattern, while yielding the right
amount for the United States, would not necessarily also have
yielded a sustainable equilibrium for each of the other countries
involved. Therefore, we had to form a view of how the counterpart
of the U.S. disequilibrium was spread among our trading partners
FORD i LIBRARY GERALD
- 9 -
and translate this into an exchange rate pattern that was sustainable
and negotiable.
Calculation of such an exchange rate pattern is an
enormously difficult jigsaw puzzle. It involves taking account
of the effect of the exchange rate changes on domestic cost levels
of each of the countries, on the one hand, and the changes in
countries' imports and exports that would result from the shift
in competitive positions, on the other hand.
Putting all the elements of the puzzle together as
best we could, we did derive a desired exchange rate pattern that,
in fact, turned out to be not too different from the one that was
finally negotiated at the Smithsonian meeting in December 1971.
The main differences between our estimated pattern and that which
finally resulted was that we had calculated a somewhat greater
adjustment for the Japanese yen, a higher rate for the Canadian
dollar than it has floated to, and a somewhat smaller rate increase
than Great Britain agreed to and indeed, was unable to maintain.
Looking back now, a little over a year later, we
recognize at least three important aspects in which our analysis
fell short -- First, it was generally assumed that non-OECD
countries would not change their exchange rates vis-à-vis the
dollar and that they would respend any extra earnings that might
result from their implied devaluations against the OECD area.
However, a number of these countries, notably the oil countries
FORD & LIBRARY
- 10 -
but also some others like Brazil, have been accumulating reserves
for some time and are continuing to do so. Second, we failed to
allow for the fact that revaluations by many industrial countries
force up the dollar prices of primary commodities. This raised
U.S. import values significantly in 1972. Third, and perhaps
most important, too little attention was paid to the fact that
lags are long in the adjustment process.
These lags should be thought of in terms of years
rather than quarters because it takes time for importers, exporters,
and domestic producers to become convinced that the changed profit
opportunities are there to stay. And then it takes time to follow
through with new investments and marketing programs. Of course,
the effect of any specific exchange rate change is crucially
influenced by the cyclical constellation at the time. The ideal
cyclical position for a devaluing country would be for it to be
on the downswing, while competing countries are near the top of
their cycle. For example, the French devaluation of August 1969
was effected under near ideal circumstances in this respect. The
Smithsonian agreement, unfortunately, came at a time when cyclical
circumstances were particularly unfavorable for quick reactions:
the United States was moving into a vigorous upswing, while demand
abroad was slack.
FORD is 9ERALO LIBRARY
- 11 -
Last year's misreading of the likely time path led to
false expectations of how soon the adjustment results should become
visible and consequently to some disenchantment with the efficacy
of exchange rate changes as an adjustment instrument. But it
should be clear that any lasting adjustment -- that is any funda-
mental change in the underlying trends -- can hardly take less
than three years. During that time U.S. deficits continue --
albeit at a diminishing rate -- and liabilities cumulate.
In summary, we do not doubt that the exchange rate
changes of 1971 have created the potential to arrest and reverse
over the next few years the adverse trend in the U.S. trade posi-
tion. But whether or not the full potential will be realized,
depends upon demand management policies here and abroad; moreover,
even if the full potential is realized, it will give us something
less than we thought was needed.
Mr. Clark will now continue the story into 1972.
LIBRARY GERALD R. FORD
- 12 -
IV. Developments in the U.S. trade account since the Smithsonian
Agreement (Mr. Clark)
When appraising the effects of the December 1971 Smith-
sonian Agreement, it is important to remember that the dollar began
to be effectively devalued more than a year earlier. This can be
seen in Chart 5, which depicts the value of the U.S. dollar in
terms of foreign currencies, measured from the second quarter of
1969. The Canadian dollar was allowed to float upward in 1970 by
about 5 per cent. There were further adjustments in the first
part of 1971 as various other currencies appreciated or floated
upward. While the Smithsonian exchange rate adjustments were
ratified only at the end of 1971, they were in fact occurring
throughout the year.
As far as magnitude is concerned, the U.S. devaluation
as calculated in Chart 5 was about 10 per cent if measured against
other G-10 countries, and only about 6-1/2 per cent against all
currencies. There are other methods of calculation which would
indicate somewhat larger magnitudes for the devaluation.
Mrs. Junz has described the anticipated long-run impact
of the dollar devaluation and she has emphasized that its effects
will be observed only with a considerably greater lag than was
generally recognized a year ago. In analyzing the U.S. experi-
ence in 1972, it should be pointed out that the path of adjustment
of the trade balance to a devaluation is usually "J-shaped," that
FORD is LIBRARY GERALD
Chart 5
INTERNATIONAL VALUE OF THE U.S. DOLLAR
2nd quarter 1969=100
100
IN TERMS OF ALL
FOREIGN CURRENCIES
95
IN TERMS OF OTHER
G-10 CURRENCIES
90
1969
1970
1971
1972
1973
Note: Market exchange rates weighted by foreign trade in 1969.
Assumes no change in average exchange rates of non-G-10 countries against the dollar.
FORD is GERALD LIBRARY
- 13 -
is, an initial perverse effect from an increase in import prices
is only later followed by a shrinkage in import volume and growth
in exports. As I shall explain in a moment, we believe that the
United States has passed the bottom of the "J"; the net impact of
the 1971 exchange rate changes on U.S. trade was unfavorable
early in 1972, and had probably become favorable by the end of
1972. For the year as a whole, the net effect was approximately
neutral.
I should emphasize that it is very difficult to separate
out the early effects of exchange rate changes from the much
larger effects of cyclical swings and special events such as
dock strikes. Different assumptions and techniques, none of which
can be rejected out of hand, lead to different results. Neverthe-
less, alternative calculations are consistent in that they do not
point to large gross effects on export and import volumes and
prices for 1972 as a whole, and what effects there are tend to be
offsetting. Thus there is little dispute that the net effect of
the currency realignment on the U.S. trade account in 1972 was
minor.
With respect to exports, we estimate a positive effect
in volume terms only for finished manufactures amounting to $1/4
to $1/2 billion. It appears that the dollar unit values of these
FORD & LIBRARY GERALD
- 14 -
exports -- which of course lag behind new contract prices -- did
not rise in 1972 measurably more than they would have in the
absence of the dollar devaluation. Thus there was a relative
decline in the foreign currency prices of these goods which
induced an increase in the quantity sold to foreigners. There
was probably no significant increase in the volume of exports
other than finished manufactures as a result of the 1971 exchange
rate changes. But we believe that the dollar prices of some of
these goods rose as a result of the dollar devaluation, so that
the value of these other exports increased from $1/4 to $1/2
billion. Thus we estimate that the increase in value of total
exports in 1972 which can be ascribed to the dollar devaluation
ranges from $1/2 to $1 billion.
With respect to imports, it should be pointed out that
there will be a reduction in the dollar value of imports only if
the decline in the quantity imported exceeds the increase in
expenditures on imports caused by higher dollar prices. For
imports of finished manufactures it appears that in 1972 the
reduction in quantity imported roughly offset the rise in import
prices resulting from the dollar devaluation. Thus the 1971
exchange rate realignment probably did not cause either a signi-
ficant increase or decrease in the value of finished manufactured
imports in 1972. However, for other goods, namely foods, materials,
FORD i LIBRARY GERALD
- 15 -
and semimanufactures, there was an increase in import prices asso-
ciated with the realignment which was apparently not offset by a
reduction in the quantity imported. Consequently dollar expendi-
tures for these imports increased. Our overall estimate is that
the value of total imports may have increased by $1/2 to $1 billion
in 1972 because import prices had risen as a result of the dollar
devaluation.
In summary, we find that the rise in export earnings of
$1/2 to $1 billion was roughly offset by larger expenditures on
imports, and that therefore the trade deficit in 1972 was not
materially affected by the exchange rate changes of 1971.
Why did the trade balance deteriorate by $4 billion
between 1971 and 1972? We think there were four main factors:
(1) an abnormally high rate of growth in this country compared to
most other countries; (2) increased expenditures on imports due
to the steep rise in the dollar prices of primary commodities,
much of which would have occurred even without the devaluation;
(3) the lagged impact of the rapid inflation of 2-3 years ago,
coupled with continued growth in the capacity of foreign coun-
tries to exploit the resulting cost-price differentials; and
(4) a $1 billion increase in oil imports, partly offset last
year by a temporary surge in agricultural exports.
FORD is GERALD LIBRARY
- 16 -
It is important to note that the large worsening in the
trade deficit in 1972 does not itself call into question the
general efficacy of parity changes. We have already observed in
1972 the beginnings of the anticipated responses in exports and
imports to the 1971 exchange rate changes. We anticipate that
for the year 1973 as a whole there will be an overall positive
impact on the trade balance ranging from $1-1/2 to $2-1/2 billion,
and we expect the beneficial effects in 1974 and 1975 to be sub-
stantially larger.
The question remains, however, whether they will be
sufficient. Mr. Reynolds will discuss this question.
GERMALO B. FORD LIBRARY
- 17 -
V. Outlook and Concluding Observations (Mr. Reynolds)
Mr. Clark has explained why the exchange rate changes of
1971 had little net effect on our trade and payments position in
1972. Mrs. Junz has explained why we expect that those rate changes
during the next two or three years will be substantially improving
our trade balance compared with what it would otherwise have been.
Chart 6 presents a schematic, highly simplified, diagram of the
way in which these exchange rate effects may work themselves out.
This diagram, I should note, has become the object of
much controversy among those in the International Division who
are working on this subject. No two economists would draw it in
exactly the same way. Yet its general shape is agreed to by all,
and illustrates four major points.
(1) First, the United States entered the 1970's with a
large underlying payments deficit. By underlying deficit we mean
the deficit on official reserve transactions adjusted for cyclical
fluctuations and for abnormal capital flows.
(2) Second, this underlying deficit was tending to
increase rapidly, primarily because of the deterioration on
merchandise trade account. There is some uncertainty about what
the trend actually was in 1970-72, and, of course, great uncer-
tainty as to how the trend might have developed beyond 1972 if
FORD is LIBRARY 076830
Chart 6
SCHEMATIC DIAGRAM
Billions of dollars
+01
+
0
UNDERLYING PAYMENTS DEFICIT AFTER
1971 EXCHANGE RATE CHANGES
5
10
UNDERLYING 1 PAYMENTS DEFICIT
WITHOUT 1971 EXCHANGE RATE CHANGES
15
1970
1971
1972
1973
1974
1975
1976
GERALD
LIBRARY B. FORD
- 18 -
there had been no exchange rate changes. The width of the lower
shaded area in the diagram illustrates this uncertainty. We saw
no point in extending what might have been beyond 1974.
(3) Third, all Division economists agree that the exchange
rate changes of 1971 will work in the direction of reducing the under-
lying payments deficit below what it would otherwise have been, mainly
by reducing the trade deficit below what it would otherwise have been.
The amount of that improvement remains very uncertain, partly because
we are not sure of our techniques of analysis, but even more because
other developments in the United States and abroad are only dimly
foreseeable. To encompass the full range of views of all the econo-
mists in the International Division, the upper shaded area in Chart 6
would have to extend from about -$1 billion to about -$9 billion in
1975, rather than the narrower range shown.
(4) Nevertheless, and this is the fourth point, we all
agree that the probabilities are that the United States will still
have a substantial underlying payments deficit in 1975 and beyond if
no further adjustment actions are taken. And we are virtually
certain that there will be large underlying deficits in the inter-
vening period, 1973 and 1974. This will be so, as the schematic
diagram indicates, in spite of the large beneficial effects we
expect to result from the exchange rate changes of 1971. Hence,
LIBRARY GERALD R FORD
- 19 -
U.S. liabilities to foreign reserve holders, shown in Chart 7,
which are already enormous -- some $61 billion at the end of 1972 --
will continue to accumulate this year and next.
It is interesting to consider the question: what would
a satisfactory and sustainable U.S. balance of payments look like
in the mid-1970's in a year not subject to abnormal capital flows
and not characterized by cyclical deviations of economic activity
from long-run trends? I have suggested an answer in the final
column of Table 1, which shows a possible "target" pattern for 1975
compared with the actual results in recent years and the projected
outcome for 1973 not adjusted for the business cycle. My 1975
"target" figures are similar to those submitted by the U.S. delega-
tion to Working Party 3 as a statement of U.S. balance-of-payments
aims.
A satisfactory result for the balance of payments over-all
probably requires balance or a small surplus on the official reserve
transactions basis. This is indicated by the zero on the bottom
line of the last column of Table 1.
Plausible estimates of likely net outflows of private and
government capital in a normal year lead to the conclusion that the
current account balance -- the middle line in the table -- will need
to be in surplus by about $9 billion or so. The nontrade current
items all are reasonably predictable. We are left with the need
FORD is GERALD LIBRARY
Chart 7
U.S. RESERVE POSITION
Billions of dollars at year-end
70
60
50
LIABILITIES TO RESERVE HOLDERS
40
30
TOTAL U.S. RESERVE ASSETS
20
GOLD
10
0
1960
1962
1964
1966
1968
1970
1972
i FORD 076839 LIBRARY
CONFIDENTIAL (FR)
Table 1. U.S. Balance of Payments, 1963-73,
Compared with Possible "Target" Pattern for 1975
(In billions of dollars)
Possible
Pro-
"target"
Average
Average
Actual
jected
pattern
1963-66
1967-70
1971
1972(p)
1973
for 1975
/
Trade balance
+5.2
+1.8
-2.7
-6.8
-5.0
+7
Investment income, net
+4.9
+6.1
+8.0
+7.7
+7.3
+9
Military transactions, net
-2.4
-3.2
-2.9
-3.5
-3.2
-3
Travel, including fares, net
-1.5
-2.0
-2.5
-2.9
-3.2
-4
Other transportation, net
+0.2
+0.2
+0.1
+0.3
+0.5
Other services, net
+0.2
+2
+0.4
+0.7
+0.7
+1.0
BALANCE ON GOODS & SERVICES
+6.7
+3.3
+0.7
-4.5
-2.6
+11
Remittances and pensions, net
-0.9
-1.3
-1.5
-1.5
-1.6
-2
BALANCE ON GOODS, SERVICES
+5.8
+1.9
-0.8
-6.0
-4.2
+9
AND REMITTANCES (Current
Account)
Govt. grants and capital, net
-3.3
-3.9
-4.4
-3.6
-4.8
-5
Private long-term capital, net
-3.7
-0.8
-4.1
-0.6
-1.4
-2-1/2
BALANCE ON CURRENT AND LONG-TERM
-1.2
-2.7
-9.3
-10.2
-10.4
+1-1/2
CAPITAL TRANSACTIONS
("Basic Balance")
Private short-term capital, net
+0.7
+1.5
-10.1
+2.5
(?)
-1/2
Errors and omissions, net
-0.6
-1.2
-11.0
-3.1
(?)
-1
BALANCE ON OFFICIAL RESERVE
TRANSACTIONS
(Excl. SDR allocations)
-1.1
-2.4
-30.5
-10.8
(?)
0
(p) Preliminary.
1/ Assuming no abnormal capital flows and no cyclical deviations of economic
activity in the United States and abroad from long-run trends.
February 5, 1973
GERALD FORD LIBRARY
- 20 -
for a trade surplus -- the top line -- of the order of $7 billion
in 1975.
It is very difficult to see how our trade position can
approach that level by 1975. As we have said, we do expect very
substantial beneficial effects from past exchange rate changes.
Moreover, we expect some wearing off of unfavorable cyclical
pressures of demand after 1973, and we hope for a good price-cost
performance in this country. These favorable effects, however,
seem quite unlikely -- even under the most optimistic assumptions --
to be sufficient. If one looks at Chart 8, showing the trade bal-
ance and its trend over a long period, one can see what a distance
there is to go if the balance is to improve to anything in the
neighborhood of $7 billion. Thus it is our best judgment that a
substantial adjustment problem remains - quite possibly of the
order of $5 billion or more, and almost certainly not less than $2
to $3 billion.
FORD i LIBRARY GERALD
These figures are necessarily very rough. But however
one shades them, the broad conclusion still emerges that an adjust-
ment problem remains, and that it is a sizable problem.
In conclusion, I would like to make two final observations.
First, the size of what I have called the "remaining
adjustment problem" depends critically on the evolution of our domestic
economy and on the course of economic activity abroad. Our current
projections for 1973 assume a significantly better cost-price per-
formance in the United States than in other industrial countries. Our
Chart 8
U.S. FOREIGN TRADE BALANCE
Annual rates, billions of dollars
10
5
QUARTERLY DATA
+01
+
0
16-QUARTER MOVING AVERAGE
5
10
1955
1960
1965
1970
1972
1974
GERALD LIBRARY R. FORD
- 21 -
estimates of the size of the favorable exchange-rate effects to be
expected this year and in 1974 and 1975 also depend on the assumption
that an excessive boom is avoided here at home. If this assumption
were to be proved incorrect, our appraisal of the long-run prospects
for international payments equilibrium -- which in any case points
to difficulties ahead -- would of course have to be revised in an
adverse direction, and by a large amount.
The second observation I want to leave with you follows
directly from our conclusion that, even under the most optimistic
assumptions about a better cost-price performance in the United
States, the United States will still have a remaining adjustment
problem of substantial magnitude. We are going to need -- sooner
or later, and from the point of view of international payments
equilibrium, sooner would be preferable to later -- some further
changes in exchange rates, certainly for Japan, and probably also
for a number of other countries. Increasing perception of this
likelihood has no doubt contributed to the uneasiness in foreign
exchange markets in recent weeks, and can be expected to generate
further market instability in the weeks to come.
LIBRARY GERALD R. FORD
STRICTLY CONFIDENTIAL (FR)
THE U.S. BALANCE-OF-PAYMENTS PROBLEM:
RECENT DEVELOPMENTS AND PROSPECTS
Special Briefing for the Board of Governors
by the Division of International Finance
February 5, 1973
FORDO & GERALD LIBRARY
I. Introduction (Mr. Reynolds)
In recent months, our Division has been reassessing in
some depth the current and prospective state of the U.S. balance
of payments and the whole international payments problem.
It now appears to us that the causes of the deterioration
in the U.S. international trade and payments position during the
late 1960's and early 1970's were more deep-seated and persistent
than was generally realized even as recently as one year ago. The
Smithsonian exchange rate adjustments went a considerable distance
towards correcting international imbalances, and we shall be bene-
fiting substantially from their lagged effects during the next few
years. But it is becoming increasingly clear that the Smithsonian
adjustments did not go far enough.
Let me outline our presentation for you so you can see
how the pieces fit together. Mr. Pizer will review very briefly
the developments that led up to the U.S. emergency actions of
August 1971. Mrs. Junz will discuss the adjustments that were
sought, and those that were achieved, at the Smithsonian. Mr. Clark
will describe developments during 1972, attempting to separate the
effects of exchange rate changes from those resulting from business
cycle swings and special factors. I will conclude with an estimate
of the distance we still have to go to reach reasonable equilibrium
in our international transactions.
I think it will be most useful to you if we speak our pieces
first, and then invite your questions. But you should, of course,
interrupt at any point if it is not clear what we are trying to say.
Mr. Pizer.
FORD & GERALD LIBRARY
- 2 -
II. Background to the Smithsonian Agreement (Mr. Pizer)
In the first half of the 1960's there were persistent
but relatively small overall deficits in our balance of payments.
Even though these deficits were not worsening, liquid liabilities
to foreign monetary authorities were piling up and U.S. reserves
were declining.
At that time the trade balance was strong, as seen in
the top panel of Chart 1, and seemed to be improving. The view
was widely accepted that in consequence of the superior U.S. price
performance after 1959, time was on our side. Rising capital out-
flows did cause some concern, and the IET was enacted. In fact,
there was enough worry about the deficits to produce several Presi-
dential messages on the balance of payments, all listing measures
aimed at alleviating or financing what was thought to be a temporary
problem.
By 1965, with the gap between actual and potential GNP
closed, and the war in Vietnam adding to demands, the U.S. trade
balance began to deteriorate. The worsening was interrupted only
briefly in 1967, and in 1969-70, by slowdowns in U.S. demand rela-
tive to other industrial countries, and the worsening accelerated
in 1971.
Meanwhile, private long-term capital outflows -- shown
in the middle panel of Chart 1 -- which had been steadily growing
larger, were reduced by the voluntary restrictions in 1965 and the
BERALD FORD LIBRAGY
Chart 1
MAJOR BALANCE OF PAYMENTS SECTORS
Billions of dollars
MERCHANDISE TRADE BALANCE
5
+
0
5
+
0
5
PRIVATE LONG-TERM CAPITAL FLOWS, NET
10
o+
+
0
BASIC BALANCE
(CURRENT ACCOUNT PLUS
LONG-TERM CAPITAL)
5
10
1960
1962
1964
1966
1968
1970
1972
1974
TIBRARY GERALD FORD
- 3 -
more stringent mandatory controls imposed in 1968. This checking
of long-term capital outflows offset the weakness of the trade
balance for a time, and the basic balance -- given in the bottom
panel of the chart -- showed only a slow worsening.
The top panel of Chart 2 repeats the plot of the basic
balance. The middle panel of the chart shows recorded net private
short-term capital flows and the errors and omissions item. As you
can see, recorded short-term capital inflows temporarily swelled to
enormous proportions in 1968-69, as U.S. banks reacted to tighter
monetary conditions at home and the ready availability of liquid
funds abroad. For a time, therefore, favorable shifts in capital
flows offset the decline in the trade balance and kept the official
settlements deficit within a relatively narrow band. Indeed, as
shown in the bottom panel of the chart, there were surpluses in
this overall measure in 1968 and 1969, which caused some relaxation
of concern.
This situation changed abruptly in 1970, when the slowdown
in the U.S. economy produced only a mild gain in the trade accounts,
while the accommodating posture of monetary policy resulted in a
reverse flow of dollars borrowed earlier by U.S. banks. Even then,
however, neither we nor other observers, such as the OECD staff,
expected more than minor further worsening in the trade balance in
the period ahead. The course of Federal Reserve staff projections
1843817 GERALD FORD
Chart 2
OVERALL BALANCE OF PAYMENTS
Billions of dollars
+01
+
0
BASIC BALANCE
10
5
5
RECORDED PRIVATE
SHORT-TERM CAPITAL FLOWS, NET
10
+01
+
0
ERRORS AND
OMISSIONS, NET
5
5
10
10+
+
0
OFFICIAL SETTLEMENTS BALANCE
5
10
I
30.5
1960
1962
1964
1966
1968
1970
1972
1974
FORDO & GERALD LIBRARY
- 4 -
of the trade balance is shown in Chart 3. When, in 1971, the trade
balance weakened so much more than had been generally expected --
and when on top of that was piled the final liquidation of U.S.
bank borrowings from the Euro-dollar market -- a massive specula-
tive flow into foreign currencies began.
A central question for us is -- why did the U.S. trade
balance deteriorate so rapidly after 1964? I believe most observers
would concentrate on three factors: (1) relative trends in costs
and prices, (2) the growth of productive capacity abroad and dif-
ferences in attitudes of producers toward foreign markets, and
(3) some specific instances of shifts in trade patterns that re-
flect institutional changes or changes in consumer tastes.
The most important underlying factor in the rapid and
continuing worsening in the U.S. trade balance after 1964 was the
sharp increase in U.S. prices relative to prices in other indus-
trial countries. The change in price relationships is illustrated
in Chart 4 in terms of export unit values of manufactures expressed
in U.S. dollars. In that chart one can also see that revaluations
and inflation are currently pushing up export prices of some of
our main competitors. Nevertheless, there was a sharp break in
our own price performance after 1964, creating opportunities for
foreign producers, and probably still operating to our disadvantage.
FORDO is LIBRARY GERALD
Chart 3
U.S. TRADE BALANCE WITH F.R. PROJECTIONS
Half years, annual rates, billions of dollars
8
6
Nov. '70
4
June '70
2
+
June '71
0
Nov. '71*
ACTUAL
2
PROJECTED
June '72
4
Nov. '72
6
8
1960
1962
1964
1966
1968
1970
1972
1974
*
Included assumption that the import surcharge would continue.
LIBRARY GERALD FORD R:
Chart 4
DOLLAR EXPORT PRICES OF MANUFACTURES
Ratio scale, unit values, 1960=100
150
REVALUATION
DEVALUATION
*
UPWARD FLOAT
140
UNITED STATES
130
120
UNITED KINGDOM
GERMANY
110
CANADA
JAPAN
100
Non-U.S.
data through
90
first half of
1972
1960
1962
1964
1966
1968
1970
1972
GERALD
FORD & LIBRARY
- 5 -
Increased productive capacity abroad did not suddenly
arrive on the scene in 1964, of course, but given its existence
foreign producers were able to take advantage of the U.S. infla-
tion, and of the growing pressures on our own supply capabilities.
Foreign industrial firms usually depend much more on foreign
markets than do their U.S. counterparts, and concentrate consid-
erably greater effort on their export sales. Moreover, U.S.
manufacturers have had a greater tendency to meet growing demand
abroad by building foreign plants, rather than with exports from
the home country. The formation of the European Common Market
is an example of an institutional factor that affected trade --
especially our trade in agricultural products -- and also helped
to convince U.S. firms to produce abroad. All of these influences
have tended to reduce the U.S. share in world trade in manufactures,
while the share of Japan, in particular, has increased sharply from
a very low post-war base.
While U.S. exports have risen more slowly relative to GNP
than has been the case in many other countries, U.S. imports have
been increasing more rapidly relative to GNP than elsewhere. The
faster rise of U.S. imports that began in the 1960's means that
imports are now equal to nearly 5 per cent of GNP, compared to
less than 3 per cent ten years ago -- a very sizable difference
at the current rate of GNP.
QERALD FORD LIBRARY
- 6 -
A major feature of the growth of U.S. imports has been
the steep rise in finished manufactures; these now account for
over half of the total compared to about 25 per cent in the late
1950's. This growth has been quite general, but the most spectacu-
lar shift has been in automotive products, where our trade balance
has worsened by $4 billion since 1964. More recently, we have
seen the beginnings of a steep rise in imports of fuels; such
imports rose only about $1 billion over the whole decade of the
1960's, but are now expected to rise by $1-1/2 billion or more
annually.
All these questions of just how fast our trade balance
and basic balance were worsening, and what would be needed to
reverse the trend, came to a head in August 1971.
Mrs. Junz will now pick up the story of the Smithsonian
realignment.
FORD is LIBRARY GERALD
- 7 -
III. The Smithsonian Adjustments (Mrs. Junz)
The three main questions that needed to be resolved in
August 1971 were: first, how large was the U.S. payments imbalance?
second, how was its counterpart distributed among other countries?
and third, what pattern of exchange rate changes would correct
these imbalances?
Most analysts focused on a rather short-range disequilib-
rium in considering the needed size of the U.S. adjustment. That
is, we within the Fed as well as others tried to estimate the under-
lying disequilibrium --- apart from cyclical fluctuations -- that
would exist in 1972. It is important to note that no allowance
was made for the fact that large U.S. deficits would continue after
1972, while conditions leading to the adverse trend were being
reversed. This omission resulted in part from the difficulty of
reaching agreement even as to the size of the disequilibrium in
1972, let alone as to what the shape of the underlying trend would
be two or three years hence. In part, it also reflected the assump-
tion that future exchange rate changes, if needed, could be more
easily obtained than before. Finally, it was judged that the full
adjustments really needed were probably not negotiable.
In this connection, you will perhaps recall the shock
reaction foreign officials had to the Treasury's estimate of a
$13 billion required swing in the U.S. payments balance.
QERALD FORD LIBRARY
- 8 -
The $13 billion figure was derived from an estimate that
the basic balance, cyclically adjusted, and in the absence of ex-
change rate changes or equivalent policy measures in 1971, would
be in deficit by $10 billion in 1972. To this $10 billion figure
was added a goal of an official settlements surplus of $2 to $3
billion a year, to replenish reserves and establish confidence.
Given the trends in capital flows and government expenditures
abroad, U.S. analysts arrived at the conclusion that virtually
all of the adjustment would have to come in the current balance.
If the requirement of a surplus was relaxed, this implied a needed
improvement in the trade accounts of about $10 billion. Although
some observers, notably the OECD and, to a lesser extent the IMF,
started out with much lower estimates, a compromise consensus was
eventually reached that an adjustment of about $8 billion should
be aimed at.
From the point of view of the United States, the easiest
way to achieve the desired improvement in our balance of payments
would have been to get the highest possible rate of devaluation
vis-à-vis our main competitors in the domestic market and in third
markets. But such a devaluation pattern, while yielding the right
amount for the United States, would not necessarily also have
yielded a sustainable equilibrium for each of the other countries
involved. Therefore, we had to form a view of how the counterpart
of the U.S. disequilibrium was spread among our trading partners
BERALD FORD LIBRARY
- 9 -
and translate this into an exchange rate pattern that was sustainable
and negotiable.
Calculation of such an exchange rate pattern is an
enormously difficult jigsaw puzzle. It involves taking account
of the effect of the exchange rate changes on domestic cost levels
of each of the countries, on the one hand, and the changes in
countries' imports and exports that would result from the shift
in competitive positions, on the other hand.
Putting all the elements of the puzzle together as
best we could, we did derive a desired exchange rate pattern that,
in fact, turned out to be not too different from the one that was
finally negotiated at the Smithsonian meeting in December 1971.
The main differences between our estimated pattern and that which
finally resulted was that we had calculated a somewhat greater
adjustment for the Japanese yen, a higher rate for the Canadian
dollar than it has floated to, and a somewhat smaller rate increase
than Great Britain agreed to and indeed, was unable to maintain.
Looking back now, a little over a year later, we
recognize at least three important aspects in which our analysis
fell short - First, it was generally assumed that non-OECD
countries would not change their exchange rates vis-à-vis the
dollar and that they would respend any extra earnings that might
result from their implied devaluations against the OECD area.
However, a number of these countries, notably the oil countries
GERALD FORD LIBRARY
- 10 -
but also some others like Brazil, have been accumulating reserves
for some time and are continuing to do so. Second, we failed to
allow for the fact that revaluations by many industrial countries
force up the dollar prices of primary commodities. This raised
U.S. import values significantly in 1972. Third, and perhaps
most important, too little attention was paid to the fact that
lags are long in the adjustment process.
These lags should be thought of in terms of years
rather than quarters because it takes time for importers, exporters,
and domestic producers to become convinced that the changed profit
opportunities are there to stay. And then it takes time to follow
through with new investments and marketing programs. Of course,
the effect of any specific exchange rate change is crucially
influenced by the cyclical constellation at the time. The ideal
cyclical position for a devaluing country would be for it to be
on the downswing, while competing countries are near the top of
their cycle. For example, the French devaluation of August 1969
was effected under near ideal circumstances in this respect. The
Smithsonian agreement, unfortunately, came at a time when cyclical
circumstances were particularly unfavorable for quick reactions:
the United States was moving into a vigorous upswing, while demand
abroad was slack.
GERALD FORD LIBRARY
- 11 -
Last year's misreading of the likely time path led to
false expectations of how soon the adjustment results should become
visible and consequently to some disenchantment with the efficacy
of exchange rate changes as an adjustment instrument. But it
should be clear that any lasting adjustment -- that is any funda-
mental change in the underlying trends -- can hardly take less
than three years. During that time U.S. deficits continue --
albeit at a diminishing rate -- and liabilities cumulate.
In summary, we do not doubt that the exchange rate
changes of 1971 have created the potential to arrest and reverse
over the next few years the adverse trend in the U.S. trade posi-
tion. But whether or not the full potential will be realized,
depends upon demand management policies here and abroad; moreover,
even if the full potential is realized, it will give us something
less than we thought was needed.
Mr. Clark will now continue the story into 1972.
QERALD FORD LIBRARY
- 12 -
IV. Developments in the U.S. trade account since the Smithsonian
Agreement (Mr. Clark)
When appraising the effects of the December 1971 Smith-
sonian Agreement, it is important to remember that the dollar began
to be effectively devalued more than a year earlier. This can be
seen in Chart 5, which depicts the value of the U.S. dollar in
terms of foreign currencies, measured from the second quarter of
1969. The Canadian dollar was allowed to float upward in 1970 by
about 5 per cent. There were further adjustments in the first
part of 1971 as various other currencies appreciated or floated
upward. While the Smithsonian exchange rate adjustments were
ratified only at the end of 1971, they were in fact occurring
throughout the year.
As far as magnitude is concerned, the U.S. devaluation
as calculated in Chart 5 was about 10 per cent if measured against
other G-10 countries, and only about 6-1/2 per cent against all
currencies. There are other methods of calculation which would
indicate somewhat larger magnitudes for the devaluation.
Mrs. Junz has described the anticipated long-run impact
of the dollar devaluation and she has emphasized that its effects
will be observed only with a considerably greater lag than was
generally recognized a year ago. In analyzing the U.S. experi-
ence in 1972, it should be pointed out that the path of adjustment
of the trade balance to a devaluation is usually "J-shaped," that
GERALD FORD LIBRARY
Chart 5
INTERNATIONAL VALUE OF THE U.S. DOLLAR
2nd quarter 1969=100
100
-
-
/
IN TERMS OF ALL
FOREIGN CURRENCIES
95
IN TERMS OF OTHER
G-10 CURRENCIES
90
1969
1970
1971
1972
1973
GERALD FORD LIBRARY
Note: Market exchange rates weighted by foreign trade in 1969.
Assumes no change in average exchange rates of non-G-10 countries against the dollar.
- 13 -
is, an initial perverse effect from an increase in import prices
is only later followed by a shrinkage in import volume and growth
in exports. As I shall explain in a moment, we believe that the
United States has passed the bottom of the "J"; the net impact of
the 1971 exchange rate changes on U.S. trade was unfavorable
early in 1972, and had probably become favorable by the end of
1972. For the year as a whole, the net effect was approximately
neutral.
I should emphasize that it is very difficult to separate
out the early effects of exchange rate changes from the much
larger effects of cyclical swings and special events such as
dock strikes. Different assumptions and techniques, none of which
can be rejected out of hand, lead to different results. Neverthe-
less, alternative calculations are consistent in that they do not
point to large gross effects on export and import volumes and
prices for 1972 as a whole, and what effects there are tend to be
offsetting. Thus there is little dispute that the net effect of
the currency realignment on the U.S. trade account in 1972 was
minor.
With respect to exports, we estimate a positive effect
in volume terms only for finished manufactures amounting to $1/4
to $1/2 billion. It appears that the dollar unit values of these
FORD LIBRARY
- 14 -
exports -- which of course lag behind new contract prices -- did
not rise in 1972 measurably more than they would have in the
absence of the dollar devaluation. Thus there was a relative
decline in the foreign currency prices of these goods which
induced an increase in the quantity sold to foreigners. There
was probably no significant increase in the volume of exports
other than finished manufactures as a result of the 1971 exchange
rate changes. But we believe that the dollar prices of some of
these goods rose as a result of the dollar devaluation, so that
the value of these other exports increased from $1/4 to $1/2
billion. Thus we estimate that the increase in value of total
exports in 1972 which can be ascribed to the dollar devaluation
ranges from $1/2 to $1 billion.
With respect to imports, it should be pointed out that
there will be a reduction in the dollar value of imports only if
the decline in the quantity imported exceeds the increase in
expenditures on imports caused by higher dollar prices. For
imports of finished manufactures it appears that in 1972 the
reduction in quantity imported roughly offset the rise in import
prices resulting from the dollar devaluation. Thus the 1971
exchange rate realignment probably did not cause either a signi-
ficant increase or decrease in the value of finished manufactured
imports in 1972. However, for other goods, namely foods, materials,
LISAREY GERALD
- 15 -
and semimanufactures, there was an increase in import prices asso-
ciated with the realignment which was apparently not offset by a
reduction in the quantity imported. Consequently dollar expendi-
tures for these imports increased. Our overall estimate is that
the value of total imports may have increased by $1/2 to $1 billion
in 1972 because import prices had risen as a result of the dollar
devaluation.
In summary, we find that the rise in export earnings of
$1/2 to $1 billion was roughly offset by larger expenditures on
imports, and that therefore the trade deficit in 1972 was not
materially affected by the exchange rate changes of 1971.
Why did the trade balance deteriorate by $4 billion
between 1971 and 1972? We think there were four main factors:
(1) an abnormally high rate of growth in this country compared to
most other countries; (2) increased expenditures on imports due
to the steep rise in the dollar prices of primary commodities,
much of which would have occurred even without the devaluation;
(3) the lagged impact of the rapid inflation of 2-3 years ago,
coupled with continued growth in the capacity of foreign coun-
tries to exploit the resulting cost-price differentials; and
(4) a $1 billion increase in oil imports, partly offset last
year by a temporary surge in agricultural exports.
GERALE FORD LIBRARY
- 16 -
It is important to note that the large worsening in the
trade deficit in 1972 does not itself call into question the
general efficacy of parity changes. We have already observed in
1972 the beginnings of the anticipated responses in exports and
imports to the 1971 exchange rate changes. We anticipate that
for the year 1973 as a whole there will be an overall positive
impact on the trade balance ranging from $1-1/2 to $2-1/2 billion,
and we expect the beneficial effects in 1974 and 1975 to be sub-
stantially larger.
The question remains, however, whether they will be
sufficient. Mr. Reynolds will discuss this question.
GERALD FORD LIBRARA
- 17 -
V. Outlook and Concluding Observations (Mr. Reynolds)
Mr. Clark has explained why the exchange rate changes of
1971 had little net effect on our trade and payments position in
1972. Mrs. Junz has explained why we expect that those rate changes
during the next two or three years will be substantially improving
our trade balance compared with what it would otherwise have been.
Chart 6 presents a schematic, highly simplified, diagram of the
way in which these exchange rate effects may work themselves out.
This diagram, I should note, has become the object of
much controversy among those in the International Division who
are working on this subject. No two economists would draw it in
exactly the same way. Yet its general shape is agreed to by all,
and illustrates four major points.
(1) First, the United States entered the 1970's with a
large underlying payments deficit. By underlying deficit we mean
the deficit on official reserve transactions adjusted for cyclical
fluctuations and for abnormal capital flows.
(2) Second, this underlying deficit was tending to
increase rapidly, primarily because of the deterioration on
merchandise trade account. There is some uncertainty about what
the trend actually was in 1970-72, and, of course, great uncer-
tainty as to how the trend might have developed beyond 1972 if
FORD LIBRARY
Chart 6
SCHEMATIC DIAGRAM
Billions of dollars
+OI
+
0
UNDERLYING PAYMENTS DEFICIT AFTER
1971 EXCHANGE RATE CHANGES
5
10
UNDERLYING 1 PAYMENTS DEFICIT
WITHOUT 1971 EXCHANGE RATE CHANGES
15
1970
1971
1972
1973
1974
1975
1976
FORD is LIBRARY 07V839
- 18 -
there had been no exchange rate changes. The width of the lower
shaded area in the diagram illustrates this uncertainty. We saw
no point in extending what might have been beyond 1974.
(3) Third, all Division economists agree that the exchange
rate changes of 1971 will work in the direction of reducing the under-
lying payments deficit below what it would otherwise have been, mainly
by reducing the trade deficit below what it would otherwise have been.
The amount of that improvement remains very uncertain, partly because
we are not sure of our techniques of analysis, but even more because
other developments in the United States and abroad are only dimly
foreseeable. To encompass the full range of views of all the econo-
mists in the International Division, the upper shaded area in Chart 6
would have to extend from about -$1 billion to about -$9 billion in
1975, rather than the narrower range shown.
(4) Nevertheless, and this is the fourth point, we all
agree that the probabilities are that the United States will still
have a substantial underlying payments deficit in 1975 and beyond if
no further adjustment actions are taken. And we are virtually
certain that there will be large underlying deficits in the inter-
vening period, 1973 and 1974. This will be so, as the schematic
diagram indicates, in spite of the large beneficial effects we
expect to result from the exchange rate changes of 1971. Hence,
FORD & 07V.839 LIBRARY
- 19 -
U.S. liabilities to foreign reserve holders, shown in Chart 7,
which are already enormous -- some $61 billion at the end of 1972 --
will continue to accumulate this year and next.
It is interesting to consider the question: what would
a satisfactory and sustainable U.S. balance of payments look like
in the mid-1970's in a year not subject to abnormal capital flows
and not characterized by cyclical deviations of economic activity
from long-run trends? I have suggested an answer in the final
column of Table 1, which shows a possible "target" pattern for 1975
compared with the actual results in recent years and the projected
outcome for 1973 not adjusted for the business cycle. My 1975
"target" figures are similar to those submitted by the U.S. delega-
tion to Working Party 3 as a statement of U.S. balance-of-payments
aims.
A satisfactory result for the balance of payments over-all
probably requires balance or a small surplus on the official reserve
transactions basis. This is indicated by the zero on the bottom
line of the last column of Table 1.
Plausible estimates of likely net outflows of private and
government capital in a normal year lead to the conclusion that the
current account balance -- the middle line in the table -- will need
to be in surplus by about $9 billion or so. The nontrade current
items all are reasonably predictable. We are left with the need
FORD i LIBRARY GERALD
Chart 7
U.S. RESERVE POSITION
Billions of dollars at year-end
70
60
50
LIABILITIES TO RESERVE HOLDERS
40
30
TOTAL U.S. RESERVE ASSETS
20
GOLD
10
0
1960
1962
1964
1966
1968
1970
1972
GERALD FORD
CONFIDENTIAL (FR)
Table 1. U.S. Balance of Payments, 1963-73,
Compared with Possible "Target" Pattern for 1975
(In billions of dollars)
Possible
Pro-
"target"
Average
Average
Actual
jected
pattern
1963-66
1967-70
1971
1972(p)
1973
for 19751/
Trade balance
+5.2
+1.8
-2.7
-6.8
-5.0
+7
Investment income, net
+4.9
+6.1
+8.0
+7.7
+7.3
+9
Military transactions, net
-2.4
-3.2
-2.9
-3.5
-3.2
-3
Travel, including fares, net
-1.5
-2.0
-2.5
-2.9
-3.2
-4
Other transportation, net
+0.2
+0.2
+0.1
+0.3
+0.5
Other services, net
+0.2
+0.4
+0.7
+1.0
}
+2
+0.7
BALANCE ON GOODS & SERVICES
+6.7
+3.3
+0.7
-4.5
-2.6
+11
Remittances and pensions, net
-0.9
-1.3
-1.5
-1.5
-1.6
-2
BALANCE ON GOODS, SERVICES
+5.8
+1.9
-0.8
-6.0
-4.2
+9
AND REMITTANCES (Current
Account)
Govt. grants and capital, net
-3.3
-3.9
-4.4
-3.6
-4.8
-5
Private long-term capital, net
-3.7
-0.8
-4.1
-0.6
-1.4
-2-1/2
BALANCE ON CURRENT AND LONG-TERM
-1.2
-2.7
-9.3
-10.2
-10.4
+1-1/2
CAPITAL TRANSACTIONS
("Basic Balance")
Private short-term capital, net
+0.7
+1.5
-10.1
+2.5
(?)
-1/2
Errors and omissions, net
-0.6
-1.2
-11.0
-3.1
(?)
-1
BALANCE ON OFFICIAL RESERVE
TRANSACTIONS
(Excl. SDR allocations)
-1.1
-2.4
-30.5
-10.8
(?)
0
(p) Preliminary.
Assuming no abnormal capital flows and no cyclical deviations of economic
activity in the United States and abroad from long-run trends.
February 5, 1973
GERALD
- 20 -
for a trade surplus -- the top line -- of the order of $7 billion
in 1975.
It is very difficult to see how our trade position can
approach that level by 1975. As we have said, we do expect very
substantial beneficial effects from past exchange rate changes.
Moreover, we expect some wearing off of unfavorable cyclical
pressures of demand after 1973, and we hope for a good price-cost
performance in this country. These favorable effects, however,
seem quite unlikely -- even under the most optimistic assumptions --
to be sufficient. If one looks at Chart 8, showing the trade bal-
ance and its trend over a long period, one can see what a distance
there is to go if the balance is to improve to anything in the
neighborhood of $7 billion. Thus it is our best judgment that a
substantial adjustment problem remains -- quite possibly of the
order of $5 billion or more, and almost certainly not less than $2
to $3 billion.
These figures are necessarily very rough. But however
one shades them, the broad conclusion still emerges that an adjust-
ment problem remains, and that it is a sizable problem.
In conclusion, I would like to make two final observations.
First, the size of what I have called the "remaining
adjustment problem" depends critically on the evolution of our domestic
economy and on the course of economic activity abroad. Our current
projections for 1973 assume a significantly better cost-price per-
formance in the United States than in other industrial countries. Our
GERALD FORD (18RAB)
Chart 8
U.S. FOREIGN TRADE BALANCE
Annual rates, billions of dollars
10
5
QUARTERLY DATA
+01
+
0
16-QUARTER MOVING AVERAGE
5
10
1955
1960
1965
1970
1972
1974
FORD i LIBRARY GERALD
- 21 -
estimates of the size of the favorable exchange-rate effects to be
expected this year and in 1974 and 1975 also depend on the assumption
that an excessive boom is avoided here at home. If this assumption
were to be proved incorrect, our appraisal of the long-run prospects
for international payments equilibrium -- which in any case points
to difficulties ahead -- would of course have to be revised in an
adverse direction, and by a large amount.
The second observation I want to leave with you follows
directly from our conclusion that, even under the most optimistic
assumptions about a better cost-price performance in the United
States, the United States will still have a remaining adjustment
problem of substantial magnitude. We are going to need -- sooner
or later, and from the point of view of international payments
equilibrium, sooner would be preferable to later -- some further
changes in exchange rates, certainly for Japan, and probably also
for a number of other countries. Increasing perception of this
likelihood has no doubt contributed to the uneasiness in foreign
exchange markets in recent weeks, and can be expected to generate
further market instability in the weeks to come.
FORD is LIBRARY 9ERALD
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
DATE: April 16, 1973
TO:
Chairman Burns
FROM: RALPH C. BRYANT
For your information.
GERALD FOND JBRANK
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date April 12, 1973
To
Mr. Samuel Pizer
Subject: Graphs on U.S. Balance-of-
From
Sujin Shin
payments, S.A. : 4-quarter moving averages.
Attached are the charts on U.S. balance-of-payments, seasonally
adjusted, from 1960-1Q to 1972-4Q. This time, at the request of
Mr. Pizer, a 4-quarter moving average trend line has been drawn through
the data.
The most recent data correspond to the March 1973 Survey of
Current Business, Table 3.
The graphs appear in the following order:
1. Trade balance
2. Balance on goods and services
3. Balance on goods, services, and remittances
4. Balance on current account
5. "Basic balance"
6. Net Liquidity balance
7. Changes in U.S. short-term private liabilities
8. Changes in U.S. short-term private assets
9. Errors and omissions
10. Official settlements balance
cc: Messrs. Bryant, Reynolds, Hersey, Siegman, Roxon, Truman,
Miss Morisse
GERALD FORD LIBRARY
1. TRADE BALANCE
QUARTERLY, 1960-1 TO 1972-4, SEASONALLY ADJUSTED
2000
2000
1600
Q
1600
00
D
1200
B
a
1200
00
DO
006
800
00
9
400
400
MILLIONS OF DOLLARS
C
C.)
-400
400
-800
DOE
1200
1200
1600
1500
2000
2000
1960
1961
1962
1963
1964
1955
1965
1967
1968
1969
1970
1971
1972
1973
1974
GERALD FORD LIBRARY
2. BALANCE ON GOODS AND SERVICES
QUARTERLY, 1960-1 TO 1972-4, SEASONALLY ADJUSTED
2400
2400
0002
2000
Q
DOS!
S
1500
Q
1200
1200
300
800
MILLIONS OF DOLLARS
400
400
0
0
-400
400
-800
800
-1200
-1200
-1500
-1500
1950
1951
1952
1963
1964
1955
1955
1957
1968
1969
1970
1971
1972
1973
1974
FORD & GERALD LIBRARY
3. BALANCE ON GOODS, SERVICES, &REMITTANCES
QUARTERLY, 1960-1 TO 1972-4, SEASONALLY ADJUSTED
2200
2200
1900
1900
1400
Doh!
1
100000
+
1000
DOOD
1000
500
500
MILLIONS OF DOLLARS
200
200
200
200
500
600
1000
1000
1400
1400
1800
1800
1950
1951
1952
1953
1954
1955
1956
1967
1953
1959
1970
1971
1973
1974
-
1972
GERALD FORD LIBRARA
4. BALANCE ON CURRENT ACCOUNT
QUARTERLY, 1960-1 TO 1972-4, SEASONALLY ADJUSTED
2500
0000
2000
0081
1500
0001
1000
0000
500
MILLIONS OF DOLLARS
000
0
500
-500
0001-
1000
-1500
-1500
-2000
2000
-2500
-2500
1950
1961
1952
1953
1954
1955
1955
1957
1968
1969
1970
1971
1972
1973
1974
FORD i 076939 LIBRARY
5. BASIC BALANCE
QUARTERLY, 1960-1 TO 1972-4, SEASONALLY ADJUSTED
0001
0001
DOS
500
00
10
0
C)
0
X
A
500
X
X
B
500
P
X
1000
1000
MILLIONS OF DOLLARS
1500
-1500
2000
2000
-2500
-2500
3000
3000
3500
3500
-4000
-4000
1950
1951
1952
1963
1954
1965
1956
1967
1969
1959
1970
1971
1972
1973
1974
FORD is LIBRARY 076839
6. NET LIQUIDITY BALANCE
QUARTERLY. 1960-1 TO 1972-4, SEASONALLY ADJUSTED
Bil.$
0.6
009
009
-0.4
Don-
00
400
000
00000
0
0000
X
00
200
DO
-1.4
Dohl-
-1400
-2.4
2400
2400
3400
3400
-3.4
D
-4.4
MILLIONS OF DOLLARS
-4400
4400
-5,4
5400
5400
-6.4
5400
5400
-7.4
-
7400
0042
-8.4 -
8400
8400
-
-9.4
9400
9400
1960
1961
1952
1953
1954
1955
1955
1957
1968
1959
1970
1971
1972
1973
1974
FORD LIBRARY is DERALD
7. CHANGES IN U.S. SHORT-TERM PRIVATE LIABILITIES
QUARTERLY. 1960-1 TO 1972-4, SEASONALLY ADJUSTED
2066
cost
4000
4000
3200
3200
2400
2400
1500
1500
MILLIONS OF DOLLARS
800
1
006
DD
C
0
300
800
1500
1500
2400
2400
3200
3200
1950
1961
1952
1953
1964
1955
1955
1957
1963
1959
1970
1971
1972
1973
1974
-
GERALD e FORD
8. CHANGES IN U.S. SHORT-TERM PRIVATE ASSETS
QUARTERLY. 1960-1 TO 1972-4, SEASONALLY ADJUSTED
1500
1500
1200
1200
800
800
400
400
C
MILLIONS OF DOLLARS
30h-
400
03
-300
-800
-1200
1200
1500
1500
-2000
2000
2400
2400
-
1960
1961
1952
1953
1954
1955
1966
1957
1959
1959
1970
1971
1972
1973
1974
BERALD FORD ENTRARY
LIBRARY
GERALD
FORD
*
1974
1973
1972
1971
1970
6961
1953
1967
1956
1965
h961
1963
1362
1961
0961
-
5600
-5500
0061
-4900
4000
-4000
-3200
-3200
SI
2400
2400
MILLIONS
1500
1600
OF DOLLARS
800
300
00
H
C
QOO
00
0
006
008
1600
1500
2400
2400
QUARTERLY. 1960-1 TO 1972-4, SEASONALLY ADJUSTED
9.ERRORS & OMISSIONS
10. OFFICIAL SETTLEMENTS BALANCE
QUARTERLY, 1960-1 TO 1972-4, SEASONALLY ADJUSTED
Bil.$
009
500
4.0
00h
00h
2.0
200
200
1000
0
0
00
X
C
00
O
00
*10
*
2.0
200
-200
e
4.0
MILLIONS OF DOLLARS
-400
-400
*10
6.0
500
500
00
8.0
800
006-
10.0
1000
1000
2.0
1200
1200
1400
Dohl
14.0
1960
1961
1962
1963
1954
1965
1956
1967
1958
1959
1970
1971
1972
1973
1974
FORG & GRAMED LIGRARY
WPEA Section/H.B.Junz
December 1, 1973
Notes of Effects of Oil Supply Cutbacks
on Industrial Countries' Output and Trade
The first approximation of the effect of an average 20 percent
cutback in world supplies to Europe, Japan and Canada from those Arab
countries that participated in the boycott, shows a shortfall in
industrial output for these countries combined of 4 percent below what
otherwise would have been in the first half of 1974 (see Table 1).
These estimates are based on the following set of rather simplified
assumptions:
(a) The flow of oil from Arab countries will again equal
September, 1973 levels by June, 1974 for all countries
other than the United States and The Netherlands;
(b) Oil shortages will produce mainly supply problems and
adequate levels of aggregate demand will be maintained;
(c) Inventories of petroleum and petroleum products will not
be drawn down below current levels, nor will inventories
of finished goods;
(d) No bottlenecks, aggravating the general situation, will
appear on the supply side;
(e) Assumption (a) implying a relatively short duration of
the cutbacks also implies that there will be no switching
to alternative sources of energy except to those that can
be effected very quickly.
of GERALD FORD
- 2 -
Under these assumptions it was possible, on the basis of the data of
oil utilization for industrial purposes, shown in Table 2, and of
certain additional assumptions about by how much oil consumption of
households and for industrial and commercial heating purposes could
be cut, to calculate approximate effects of oil shortages on industrial
output. The calculation of shortfall in output was then related to
import requirements of industrial materials. This yielded an estimated
decline in imports of such materials from the United States of $3/4
billion for 1974. Because of the assumption that final demand would not
fall beyond the amounts directly related to the shortfall in industrial
output, demand for finished goods (both for domestic consumption and
for exports) would outrun supply capabilities to an estimated amount
of $1-3/4 billion for the period of the boycott. At the same time,
U.S. import demand for goods from the industrial countries was estimated
to fall by about $1/2 billion for the year as a whole, reducing pressure
on supply capabilities somewhat.
It is clear that these assumptions are essentially very
optimistic. It is likely that the uncertainties caused by the current
situation will affect the investment climate in the industrial countries.
It would appear reasonable to assume that those investment projects that
can be postponed would at least be put off until the situation becomes
clearer. This is particularly so because already appropriated funds
can currently be employed at relatively high rates of return.
GERALD FORD LIBRARY
- 3 -
Also, the assumption that no bottlenecks would appear
tending to reduce output further than the general effects of the oil
shortages would indicate, is not realistic. Finally, the differential
effect on various sectors of the economy, notably effects on the auto-
mobile industry, travel and hotel business, implies at least some
fall off in demand. But, so far, the governments in the countries
concerned seem to feel that they are still faced with a situation of
supply shortages, exacerbated by shortfalls of energy, rather than
by shortfalls of demand.
Taking all these considerations together, one would conclude
that the estimates cited above probably represent the most optimistic
constellation of facts. A more realistic set of assumptions would
imply greater declines in output and a greater shrinkage in world trade.
GERALD FORD LIBRARY
Table 1. EFFECTS OF OIL CUTBACK ON INDUSTRIAL PRODUCTION
(Index number, 1963 = 100)
Canada
Japan
France
Germany
Italy
U.K.
Orig
New
Orig New
Orig New
Orig
New
Orig
New
Orig New
1973 - Q1
182.3
304
183
173
156
137
Q2
184.6
315
184
175
162
138
Q3
182.8
320
188
174
168
138
Q4
189.5
329
191
179
174
141
1974 - Q1
191.3
337
193
181
179
142
190
318
190
175
176
A
M
139
Q2
193.7
347
195
183
181
144
Percent change
First half 1974 new/
-1
-7
-2
/ -4
-2
-3
originally projected
GERALD FORD LIBRARY
Table 2. IMPORTANCE OF PETROLEUM TO INDUSTRIAL OUTPUT
(Ratios)
Imports of Crude from
Industrial Consumption
Industrial Consumption
Boycotting Arab Countries
of Petroleum
of Petroleum
Total Supply of Crude
Total Industrial Energy
Total Consumption of
Consumption
Petroleum
BELGIUM
.65
.31
.26
FRANCE
.46
.42
.35
GERMANY
.37
.38
.33
ITALY
.33
.39
.32
NETHERLANDS
.58
.19
.14
UNITED KINGDOM
.50
.47
.40
JAPAN
.39
.74a/
.44
CANADA
.03
n.a.
n.a.
a/ Petroleum consumption as a percent of total energy consumption by all sectors of the economy
GERALD FORD
CONFIDENTIAL (FR)
N.S.Fieleke:gjj
December 1, 1973
Possible Balance-of-Payments Impacts of Cutbacks in Arab Oil Production
The balance-of-payments projections presented in the November
19 Chart Show allowed for a temporary constriction of U.S. petroleum
imports near the close of this year, but assumed a resumption of steady
import growth toward the end of the first quarter of next year. This
note considers the effect on the U.S. balance of payments of the following
set of assumptions about the oil situation: (1) during the whole of 1974
the United States will receive no oil originating in Arab countries; (2)
the United States will experience no oil shortages in production, but
aggregate demand will be weakened by a reduced supply of petroleum products
for consumption purposes; (3) by the middle of 1974 the flow of oil from
the Arab countries to Western Europe and Japan will be restored to the
rate of the third quarter of 1973; (4) ocean freight will not be constrained.
The shortage of oil assumed for Western Europe and Japan in the
first half of 1974 would temporarily restrict output in these areas, so
that European and Japanese demand for U.S. industrial materials would be
weaker than was assumed / in the November Chart Show. On the other hand, it
is unlikely that final demand would be depressed to the same extent as
output, so that European and Japanese demand for U.S. finished goods might
well increase. On balance, it is estimated that U.S. merchandise exports
in the first half of 1974 would be somewhat more than $1 billion (annual
rate) above the level projected in November, but that the November pro-
jection for the last half of the year would still obtain.
-
FORD is LIBRARY GERALD
CONFIDENTIAL (FR)
- 2 -
Under the new assumptions, U.S. merchandise imports in 1974
would probably be significantly lower than the level projected in November.
The reduced flow of petroleum would lower imports by nearly $2 billion,
and weaker aggregate demand in this country would induce a further reduction
of about $0.9 billion.
Because of these estimated changes in exports and imports, the
trade surplus for the year would be about $7.5 billion, more than $3 billion
higher than, projected in November. On the other hand, the balance on
services would probably be less favorable than projected in November,
since receipts of income, royalties, and fees would likely be appreciably
lower. Consequently, the surplus on goods and services in 1974 might be
about $2.5 billion higher than projected in November, amounting to more
than $11 billion.
In November it was estimated that net capital flows in 1974
would be such as to yield a surplus in our basic balance (the balance on
current account and long-term capital). Although the course of capital
movements is now even more uncertain >a surplus on the basic balance still
seems highly likely.
11
The dollar has appreciated significantly in the foreign-
exchange markets since October of this year, at least partly because of
the oil crisis, which the markets interpret as potentially more trouble-
some for many other countries than for us. If this appreciation were not
reversed, the increase in the trade surplus would probably be somewhat
less than the projection presented in this note.
QERALD FORD LIBRARY
CONFIDENTIAL (FR)
- 3 -
Frequent revisions in balance-of-payments projections may be
called for to take account of the emerging effects of oil shortages and
of changes in oil policy throughout the world.
#
7 /
GERALD FORD LIBRARY
CONFIDENTIAL (FR)
December 1, 1973
Goods & Services Projections: 1969-74
(billions of dollars, seasonally adjusted annual rates)
Goods & Services
Merchandise Trade
Services
Exports
Imports
Net
Exports
Imports
Net
Exports
Imports
Net
Years:
1969
55.5
53.6
+1.9
36.4
35.8
+0.6
19.1
17.8
+1.3
1970
62.9
59.3
+3.6
42.0
39.8
+2.2
21.0
19.5
+1.5
1971
66.3
65.5
+0.8
42.8
45.5
-2.7
23.5
20.0
+3.5
1972
73.5
78.1
-4.6
48.8
55.7
-6.9
24.7
22.4
+2.3
1973
100.8
96.1
+4.6
69.7
69.0
+0.7
31.0
27.2
+3.9
1974
118.6
107.3
+11.4
84.8
77.2
+7.5
33.8
30.0
+3.9
Quarters:
1971 - 1
65.9
62.1
+3.8
43.5
43.0
+0.5
22.5
19.2
+3.3
2
67.1
66.6
+0.5
43.2
46.8
-3.7
24.0
19.8
+4.2
3
69.1
68.0
+1.1
46.1
47.6
-1.5
23.0
20.4
+2.7
4
63.0
65.5
-2.2
38.3
44.4
-6.1
24.6
20.8
+3.9
1972 - 1
70.3
75.8
-5.5
46.6
53.9
-7.3
23.7
21.9
+1.8
2
69.9
75.6
-5.7
46.2
53.3
-7.1
23.7
22.3
+1.4
3
74.0
77.7
-3.8
49.4
55.7
-6.3
24.5
22.0
+2.5
4
79.7
83.2
-3.5
52.9
59.8
-7.0
26.8
23.3
+3.5
1973 - 1
90.4
89.8
+0.6
61.3
65.1
-3.8
29.2
24.7
+4.4
2
97.1
94.6
+2.5
67.0
67.9
-0.9
30.1
26.7
+3.4
3
104.9
97.8
+7.0
72.7
69.8
+2.9
32.0
28.0
+4.1
4
110.8
102.3
+8.4
78.0
73.2
+4.8
132.8
29.3
+3.5
1974 - 1
115.3
103.6
+11.7
83.3
74.2
+9.1
32.0
29.4
+2.6
2
118.6
106.8
+11.8
85.3
76.8
+8.5
33.3
30.0
+3.3
3
119.1
108.5
+10.6
84.5
78.3
+6.2
34.6
30.2
+4.4
4
121.4
110.1
+11.5
86.0
79.7
+6.3
35.4
30.4
+5.1
Note: Details may not add to totals because of rounding.
QERALD FORD LIBRARY
CHAIRMAN BURNS
For Information Only
December 5, 1975
TO:
Board of Governors
FROM:
Edwin M. Truman EMT
CONFIDENTIAL (FR)
After Jeff Shafer's November 17 Pre-FOMC board briefing
on recent and prospective U.S. international transactions, Governor
Wallich sent him two questions:
1. Can the estimated relationship between the change in the
dollar's exchange rate and the change in the U.S. trade balance be
extended to larger exchange rate changes?
2. In light of the staff current account projection
why is only a small depreciation of the dollar expected over the
next five quarters?
We thought that you might be interested in the answers that
Jeff supplied to these questions.
FORD is LIBRARY GERALD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date December 5, 1975
To
Governor Wallich
Subject: Answers to your questions
Jeff Shafer
From
concerning November 17 briefing
Can the estimated relationship that predicts an $840 million
increase in the U.S. trade balance after 7 quarters for a 1 per cent
depreciation of the dollar be extended to larger exchange rate changes
The functional forms of the equations from which this figure
was derived do imply a proportionate response; that is, an X per cent
depreciation or appreciation leads to an eventual increase or decrease in
the trade balance of $840 million times X. Some alternative functional
forms were tried in estimating the equations and did not provide as
good a fit. However, the search over alternative functional forms
was limited and the differences in explanatory power were not large.
Moreover, one should not extrapolate the results for exchange rate
changes to changes larger than those we have experienced.
The error in this type of prediction is proportional to the
size of the exchange rate change, so that the width of a 95 per cent
confidence interval for a 10 per cent exchange rate change is 10 times
as wide as that for a 1 per cent exchange rate change. Moreover, since
the trade balance forecast is derived from separate volume and value
equations for exports and imports, the standard error of the trade
balance response is a nonlinear function of the correlations of the
errors across the individual equations. A direct computation of the
1/ The estimate excludes agricultural exports for which we have
no satisfactory measure of exchange rate sensitivity. The figure of
$800 million was given in the briefing as a rounded off value.
BERALD FORD LIBRARY
Governor Wallich
-2-
standard error is impossible, but an impression of the accuracy of the
prediction is given by the attached graph prepared by Peter Hooper
(who has done the empirical work on which I am relying). The graph
gives the widest and narrowest confidence intervals of 1 standard
deviation that could arise depending on the correlations of errors
across equations.
The size of the response depends somewhat on the initial
trade balance position since the equations for exports and for imports
have constant elasticities. We took September figures as the starting
point.
Why do I expect only a small depreciation of the dollar if
a substantial decline in the trade balance occurs next year?
As you point out, without changes in exchange rates the net
capital outflow next year would likely be larger than the projected
current account balance of approximately zero. In the absence of
official intervention, I would therefore expect the exchange rate to
depreciate until portfolio balance effects and, perhaps, the expectation
of a subsequent appreciation of the dollar reduced the net capital
outflow to equality with the current account (i.e., approximately zero).
The reason that my point estimate for the size of the likely
depreciation over the next several quarters is small is that a declining
trade balance next year is already widely anticipated by the market.
The trade outlook depends heavily on the outlook for aggregate demand
in the United States relative to the outlook for other countries and
GERALD FORD VIBRARY
Governor Wallich
-3-
specific judgments about relative prices and U.S. agricultural exports.
There is a rough consensus on this. For example, Morgan Guaranty's
"World Financial Markets" forecasts a decline in the current account
that is only half as large as the decline we project, but the Morgan
Guaranty projection is billed as optimistic. Other public forecasts
are scarce, but our projection is in line with those of other govern-
ment agencies. It seems reasonable that current exchange rates are
based on widespread expectations that the U.S. current account balance
will decline substantially and that the resulting pressures for a
capital outflow, which you point to, must already be at work. I would
conclude that the dollar would be even stronger right now if these
cyclical developments were not widely expected to lie ahead. Although
I would expect the pressure for further depreciation of the dollar
arising from the outlook for the current account to be reduced to
GERALD FORD LIBRARY
the extent that this pressure is reflected in the value of the
dollar today, some scope for further downward pressure should remain.
As I mentioned in my briefing, unanticipated developments
are likely to have an impact on the value of the dollar that are large
relative to the effects of the projected trade balance swing. Not the
least of the unanticipated developments could be the failure of our
projection to materialize.
Another reason not to expect too large a decline in the
value of the dollar by the usual measures is that the current account
swing vis a vis small OECD countries and non-oil LDC's is likely to be
larger than the swing vis a vis major industrial countries. The average
values for the dollar that we normally look at are measured in terms of
only the currencies of the large industrial countries.
Long Run Direct Impact of Alternative Exchange Rate Changes on the Trade Balance
Change in Trade Bal.
($ billions, SAAR)
+8
One Std. Deviation
Minimum Error Band
+7
One Std. Deviation
+6
Maximum Error Band
+5
Point
+4
Estimate
+3
+2
+1
% Change Effective $
Exchange Rate
$ Depreciation
0
+1%
+2%
+3%
+4%
+5%
+6
+7%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0
$ Appreciation
-1
-2
-3
-4
-5
Summary:
A 1% dollar appreciation
(depreciation) will reduce (increase) -6
the trade balance by $840 million,
with a minimum standard deviation
of $80 million, or 10%, and a
-7
DERALD FORD (IBRARY
maximum standard deviation of $280
million, or 33%.
-8-