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States of America his copyrights in all of his unpublished writings in National Archives collections.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