Major Developments Affecting the United States Balance of International Payments

Abstract

THE main purpose of this article is to examine those cyclical and structural developments which affect the United States balance of payments developments such as changes in trade and investment patterns and the rising role of government transactions. Some of the problems and pitfalls encountered in the interpretation of balance of payments data are discussed in the course of the argument. The balance of payments of the United States has been of more interest in recent years to those concerned with foreign economies than to those interested in our own. The direct effects of foreign transactions upon United States business activity have been frequently neglected,' as were indirect effects through changes in gold reserves since these could be offset by the Federal Reserve System, because the reserves exceeded the requirements by a sufficient margin. The lack of concern with our balance of payments is also due to the fact that a substantial part of our foreign expenditures, particularly those on government grants and loans and for military purposes, are sometimes considered of marginal importance and subject to reduction in case a deficit in our foreign transactions should have a serious effect on our reserves. Moreover, the possibility that our foreign expenditures may have to be curtailed for balance of payments purposes is usually dismissed because during most years, since the I930's at least, the foreign demand for dollars seems to have exceeded our expenditures abroad and an increase in our foreign expenditures would merely have made it possible to meet a larger portion of the current foreign dollar demand. On the other hand, for the development and stability of foreign economies the United States balance of payments is usually regarded as one of the most importantif not the decisivefactors. Dollar receipts may limit dollar expenditures and thus the purchases from the United States of raw materials and equipment which are required in the operation of foreign economies. Perhaps even more important, dollar receipts by foreign countries affect their monetary reserves, and thus may permit an expansion or force a contraction of international trade, including trade between foreign countries themselves. Because the dollar is used as an international monetary reserve and as a means of settling international accounts, the indirect effects of changes in foreign dollar holdings on foreign economies can be considerably greater than the changes in trade with the United States alone. Because of the multiplier effect of changes in the United States balance of payments, fluctuations in United States business activity are followed with considerable apprehension abroad. Experience in I954 has not borne out these apprehensions. Foreign economies continued to * The opinions expressed in this article are those of the author and do not reflect the official position of the Department of Commerce. 'The relatively minor role in the domestic economy attributed to foreign transactions is to some extent due to the inclusion of net figures in the Gross National Product presentations. It is obvious that net exports or imports, or net foreign investments generally, have to be rather small figures, since the net movement of capital and of reserves is relatively limited. This applies not only to the United States which exports and imports 4 to 5 per cent of its output, but also to countries such as Canada or the Netherlands which sell and buy abroad 30 to 40 per cent of their production. The mere fact that, ex post, exports and imports have to be more or less in balance does not indicate that the ex ante effect of foreign transactions upon the economy also has to be minimal. Changes in exports may have affected output and consumption which in turn result in a corresponding movement in imports. If only net trade is entered in the GNP data and the rise in GNP is shown as a rise in consumption, the usefulness of the GNP data for the interpretation of economic developments is considerably reduced. On the other hand, if gross sales to the rest of the world are shown together with sales to the domestic sectors of the economy, and purchases from the rest of the world are deducted from total sales, the importance of exports becomes more obvious. In the case of the United States for instance, exports of goods and services, excluding military goods and services supplied under grant-in-aid programs, of $I7.8 billion in I954 substantially exceeded consumer purchases of automobiles and parts ($I2.5 billion) or residential nonfarm construction ($I3.5 billion). Furthermore, the rise in exports of goods and services from the third to the fourth quarter of I954 at an annual rate and after seasonal adjustments of $i billion provided as much impetus to the upswing of the economy at that time as the rise in consumer purchases of all durable goods, or the rise in total new construction.