Chapter

I. THE WORLD ECONOMIC SITUATION

Author(s):
International Monetary Fund
Published Date:
September 1951
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A. The Payments Problem and the World Economy

The year 1950 was the first postwar year in which progress towards general balance of payments equilibrium appeared to bring that objective within sight. Many countries outside the United States increased their dollar holdings and were able to make net purchases of gold from the United States. Generally speaking, the world’s payments are now much closer to balance than they were two or three years ago.

This favorable trend became particularly evident after the devaluations of September 1949. In the middle of 1950 the outbreak of hostilities in Korea initiated a series of new trends affecting the size and the composition of production and the quantities and prices of world trade. These events have further strengthened the balances of payments of many countries, but a new set of problems, the full implications of which have yet to be realized, was injected into the world economy. In order to see these new events, and their effects on countries’ balances of payments, in proper perspective it is appropriate to survey briefly the process of postwar recovery up to the middle of 1950, to examine its more significant general tendencies, and to draw attention to the considerable advance towards a better balance made during that period.

The record of the balance of payments of the United States (see Table I) shows clearly the great improvement that has taken place during recent years in its payments relations with the rest of the world. The full effects of the widespread recovery of production, in which postwar investment played an important part, could be realized only gradually, but by 1950 the abnormal demands, which had raised U.S. exports to peak levels in 1947 and 1948, had to a considerable extent subsided. U. S. Government grants and loans, which throughout the period were an important factor in permitting large purchases of U. S. goods, were still however very large throughout 1950. Though during the year policies of restriction and discrimination were substantially relaxed, they were still widely practiced; trade statistics therefore underestimate the magnitude of the real demand for imports, and hence the extent to which the pressure for dollars has been relieved. The regional distribution of U. S. trade since the war is shown in Chart I.

TABLE I.U. S. GLOBAL BALANCE OF PAYMENTS, 1946—FIRST HALF 1950(billions of U. S.dollars)
19461947194819491950

First Half1
Exports11.716.013.312.310.1
Imports—5.2—6.1—7.8—7.1—7.9
Trade balance6.59.95.55.22.2
Services and private donations (net)0.60.90.50.70.4
Total goods, services and private donations7.110.86.05.92.6
Private capital (net) 2—0.20.10.2—0.1
Special official loans and grants (net) 30.10.10.1—0.5—0.2
Total surplus or deficit (—)7.010.96.25.62.3
Compensatory loans and grants 45.46.65.65.64.3
Inflow or outflow (—) of gold and dollars51.64.30.6—2.0
Total7.010.96.25.62.3
Source: International Monetary Fund, Balance of Payments Yearbook, 1949-1950 and U. S. Department of Commerce.

Annual rate. Preliminary data. Quarterly data through the first quarter of 1951 are shown in Table X.

Including errors and omissions, which are believed to represent mainly unrecorded private capital movements.

Developmental loans, military aid, settlements of claims, loan repayments, etc.

Extended by the U.S. Government and by international institutions to foreign countries to cover their dollar deficits.

Foreign official and private short-term dollar balances, and, in 1950, net foreign purchases of U.S. Government long-term securities, reflecting mainly purchases by foreign official institutions. Such purchases in the earlier years are not available separately from purchases of other U.S. long-term securities; they were, however, considerably smaller at that time than in 1950.

Source: International Monetary Fund, Balance of Payments Yearbook, 1949-1950 and U. S. Department of Commerce.

Annual rate. Preliminary data. Quarterly data through the first quarter of 1951 are shown in Table X.

Including errors and omissions, which are believed to represent mainly unrecorded private capital movements.

Developmental loans, military aid, settlements of claims, loan repayments, etc.

Extended by the U.S. Government and by international institutions to foreign countries to cover their dollar deficits.

Foreign official and private short-term dollar balances, and, in 1950, net foreign purchases of U.S. Government long-term securities, reflecting mainly purchases by foreign official institutions. Such purchases in the earlier years are not available separately from purchases of other U.S. long-term securities; they were, however, considerably smaller at that time than in 1950.

TABLE II.EUROPE’S GLOBAL BALANCE OF PAYMENTS,1 1947-50(billions of U. S. dollars)
19471948194919502
Exports6.48.89.49.6
Imports—13.7—14.4—13.5—12.5
Trade balance—7.3—5.6—4.1—2.9
Services (net)—0.10.70.30.4
Private donations (net)0.40.30.30.2
Total goods, services and private donations—7.0—4.6—3.5—2.3
Private capital and special official financing (net)—1.5—0.4—0.7
Errors and omissions (net)—0.3—0.30.50.4
Total surplus or deficit (—)—8.8—5.3—3.7—1.9
Compensatory official financing Grants and loans received (net)5.74.94.42.9
Aid from international institutions (net)1.20.3
Use (—) or accumulation of sterling balances by non-European countries—0.6—0.1—0.50.9
Use or accumulation (—) of gold and U. S. dollar balances by Europe2.50.2—0.2—1.9
Total8.85.33.71.9
Source: International Monetary Fund, Balance of Payments Yearbooks, 1948-49 and 1949-50.

Total Europe, including trade but not other transactions of U.S.S.R.

Preliminary. Complete data for the first half of 1950 are not available separately.

Source: International Monetary Fund, Balance of Payments Yearbooks, 1948-49 and 1949-50.

Total Europe, including trade but not other transactions of U.S.S.R.

Preliminary. Complete data for the first half of 1950 are not available separately.

TABLE III.BALANCE OF PAYMENTS OF MEMBERS OF OEEC WITH UNITED STATES, 1947 AND FIRST HALF 1950(billions of U. S. dollars)
1947First Half

19501
Change
Exports0.81.00.2
Imports—5.7—3.32.4
Trade balance—4.9—2.32.6
Services and private donations (net)—0.10.50.6
Total goods, services and private donations—5.0—1.83.2
Private capital (net)0.30.3
Dollars used for settlement with other areas2—2.8—0.42.4
Total—7.5—1.95.6
Official grants and loans (net) 35.23.6—1.6
Inflow (—) or outflow of gold and dollars42.3—1.7—4.0
Total7.51.9—5.6
Source: U.S. Department of Commerce.

Annual rate.

Including errors and omissions.

Received from U.S. Government and international institutions.

Foreign official and private short-term dollar balances and, in first half of 1950, net foreign purchases of U.S. Government long-term securities (annual rate of $0.1 million), reflecting mainly purchases by foreign official institutions. Such purchases (or sales) for 1947 are not available separately from purchases of other U.S. long-term securities.

Source: U.S. Department of Commerce.

Annual rate.

Including errors and omissions.

Received from U.S. Government and international institutions.

Foreign official and private short-term dollar balances and, in first half of 1950, net foreign purchases of U.S. Government long-term securities (annual rate of $0.1 million), reflecting mainly purchases by foreign official institutions. Such purchases (or sales) for 1947 are not available separately from purchases of other U.S. long-term securities.

TABLE IV.EXPORTS FROM UNITED STATES TO MEMBERS OF OEEC, 1947 AND 1950(millions of U.S. dollars)
19471950Reduction
Grain and preparations1,086448638
Meat products1091495
Coal3348326
Steel mill products20596109
1,7345661,168
All other commodities3,4872,1981,289
Total5,22112,76412,4571
Source: U.S. Department of Commerce, Bureau of the Census.

These totals are lower than those shown for imports from the United States in Table III, as the latter include also surplus property and similar goods not covered by trade statistics.

Source: U.S. Department of Commerce, Bureau of the Census.

These totals are lower than those shown for imports from the United States in Table III, as the latter include also surplus property and similar goods not covered by trade statistics.

TABLE V.LATIN AMERICA’S GLOBAL BALANCE OF PAYMENTS, 1947–50(billions of U.S. dollars)
19471948194919501
Exports5.46.05.16.0
Imports—5.0—4.9—4.5—4.4
Trade balance0.41.10.61.6
Services (net)—1.1—1.2—0.9—1.2
Total goods and services—0.7—0.1—0.30.4
Private capital and special official financing (net)0.50.40.5
Errors and omissions (net)—0.3—0.2—0.1—0.1
Surplus or deficit (—) 2—0.50.10.10.3
Source: International Monetary Fund, Balance of Payments Yearbook, 1949-50 and data reported to International Monetary Fund.

Preliminary.

As measured by compensatory official financing, i.e., movements in gold reserves and dollar holdings, repurchases of foreign debt, certain credits received from or granted to other countries, and other financing operations designed primarily to balance the accounts.

Source: International Monetary Fund, Balance of Payments Yearbook, 1949-50 and data reported to International Monetary Fund.

Preliminary.

As measured by compensatory official financing, i.e., movements in gold reserves and dollar holdings, repurchases of foreign debt, certain credits received from or granted to other countries, and other financing operations designed primarily to balance the accounts.

TABLE VI.LATIN AMERICA’S TRADE AND SERVICES ACCOUNT, 1947 and 1950(billions of U. S. dollars)
With

United States
With

Europe
With

All Other
Total
19471950194719501947195019471950
Exports2.33.12.11.81.01.15.46.0
Imports—3.7—2.7—1.0—1.3—0.3—0.4—5.0—4.4
Trade balance—1.40.41.10.50.70.70.41.6
Services (net)—0.7—0.7—0.4—0.5—1.1—1.2
Total—2.1—0.30.70.70.7—0.70.4
Source: Table V and data reported to International Monetary Fund.
Source: Table V and data reported to International Monetary Fund.
TABLE VII.PRODUCTION OF IMPORTANT EXPORT COMMODITIES IN CERTAIN FAR EASTERN COUNTRIES
Prewar11949/501950/51
Rice (millions of metric tons)Burma7.15.25.2
Indo-China6.55.55.0
Thailand4.46.16.1
Tea (thousands of metric tons)India
188
264274
Pakistan2123
Ceylon104135136
Indonesia74.82734
1950 (Annual Rate)
Prewar1First HalfSecond Half
Tin (thousands of metric tons)Malaya785958
Indonesia383233
Thailand16912
Rubber (thousands of metric tons)Malaya510655778
Indonesia458597799
Ceylon72100132
Sources: United Nations, Monthly Bulletin of Statistics, F.A.O. and U.S. Department of Agriculture.

Rice, 1935/36 to 1939/40 average; tea, 1934-38 average, tin and rubber, 1937.

Sources: United Nations, Monthly Bulletin of Statistics, F.A.O. and U.S. Department of Agriculture.

Rice, 1935/36 to 1939/40 average; tea, 1934-38 average, tin and rubber, 1937.

TABLE VIII.ESTIMATED GOLD AND DOLLAR HOLDINGS OUTSIDE THE UNITED STATES, END OF YEAR 1949 AND 1950(millions of U.S. dollars)
19491950Increase
GoldDollars1TotalGoldDollars1TotalTotalPer Cent
Continental OEEC countries4,0751,9256,0004,2742,3386,61261210
Sterling Area1,8828062,6883,50391434,4171,729364
Canada4968691,3655901,3991,98962446
Latin America1,6551,4013,0561,8801,5823,46240613
Asia7427711,5136921,1901,88236924
All other countries2545193738575190765274
Total9,3955,96515,36011,5147,613319,1273,767325
Source: Federal Reserve Bulletin, March 1951.

Dollar holdings include private and official balances as well as holdings of U.S. Government securities with original maturities of up to 20 months.

Largely Eastern Europe, but not including U.S.S.R. gold holdings.

Part of the increase in sterling area and in total dollar holdings reflects the inclusion of private U.K. balances reported for the first time in 1950.

Source: Federal Reserve Bulletin, March 1951.

Dollar holdings include private and official balances as well as holdings of U.S. Government securities with original maturities of up to 20 months.

Largely Eastern Europe, but not including U.S.S.R. gold holdings.

Part of the increase in sterling area and in total dollar holdings reflects the inclusion of private U.K. balances reported for the first time in 1950.

TABLE IX.ESTIMATED STERLING BALANCES, END OF YEAR 1946–50(millions of £ sterling)
19461947194819491950
Countries outside the Sterling Area Sterling Area:1,3041,3091,0631,0731,023
Dependent Territories495502554583752
Other Members1,9221,7861,8071,7691,982
Total3,7213,5973,4243,4253,757
Source: U.K. Balance of Payments, 1946-1950, No. 2, Cmd. 8201.
Source: U.K. Balance of Payments, 1946-1950, No. 2, Cmd. 8201.
TABLE X.U. S. GLOBAL BALANCE OF PAYMENTS, QUARTERLY, 1949–51(millions of U.S. dollars)
1949195019511
IIIIIIIVIIIIIIIVI
Exports3,4553,4362,7742,6722,4392,6152,4983,10623,4082
Imports—1,939—1,713—1,577—1,819—1,960—2,007—2,533—2,815—3,199
Trade balance1,5161,7231,197853479608—35291209
Services and private donations (net)193164711321258548215251
Total goods, services & private donations1,7091,8871,26898560469313506460
Private capital (net)3—107177477—22756—100—672—282—84
Total surplus or deficit (—)1,6022,0641,745758660593—659224376
Official grants and loans1,6701,6671,4831,1481,1051,1619021,1161,097
Inflow or outflow (—) of gold and dollars4—68397262—390—445—568—1,561—892—721
Total1,6022,0641,745758660593—659224376
Source: U. S. Department of Commerce.

Preliminary.

U.S. exports include items covered by Military Defense Assistance Pact expenditures. These amounted to about $300 million in the fourth quarter of 1950 and $325 million in the first quarter of 1951.

Including errors and omissions, which are believed to represent mainly unrecorded private capital movements to the United States.

Foreign official and private short-term dollar balances and, in 1950 and 1951, net foreign purchases of U.S. Government long-term securities. The securities were purchased mainly by foreign official institutions. Such purchases in 1949 are not available separately from purchases of other U.S. long-term securities; they were, however, much smaller then than in the later years.

Source: U. S. Department of Commerce.

Preliminary.

U.S. exports include items covered by Military Defense Assistance Pact expenditures. These amounted to about $300 million in the fourth quarter of 1950 and $325 million in the first quarter of 1951.

Including errors and omissions, which are believed to represent mainly unrecorded private capital movements to the United States.

Foreign official and private short-term dollar balances and, in 1950 and 1951, net foreign purchases of U.S. Government long-term securities. The securities were purchased mainly by foreign official institutions. Such purchases in 1949 are not available separately from purchases of other U.S. long-term securities; they were, however, much smaller then than in the later years.

Chart I

Europe

By 1950 the payments position of most European countries showed a great improvement, both with the rest of the world as a whole and more particularly with the United States (see Tables II andIII). For the members of the Organization for European Economic Cooperation (OEEC) a dollar deficit of $7.5 billion in 1947 was reduced to an annual rate of $2.0 billion in the first half of 1950, as a result of smaller imports, less need for dollars to pay other areas, an improvement in the services balance, and a small increase in exports. Indeed, since the fourth quarter of 1949, several European countries were able again to build up their gold and dollar reserves.

The lack of balance in Europe’s payments constituted the major postwar disequilibrium in the international pattern of payments. The marked reduction in this imbalance constitutes a major achievement in the history of postwar recovery. It is of particular importance, therefore, to survey briefly some of the main factors responsible for it.

The improvements shown in balances of payments have been associated in Europe with persistent increases in output and real national income. Output increased considerably more than the decline in the net resources obtained from abroad, thus permitting increases in personal consumption and the maintenance of a high rate of capital formation while balance of payments deficits were being eliminated or reduced.

It was not possible, however, to bring payments into balance merely by increases in the volume of output in general. The great need for imports in Europe after the war was due not only to a shortage of resources in general, but more particularly to acute shortages of certain goods of the highest degree of essentiality. Consumers’ goods, such as wheat, fats and meat, and industrial goods, such as coal and steel, were among the most critical; heavy imports of these materials, often at high prices, would have been necessary even if total national income as shown by the statistics had apparently been satisfactory.

Much of the improvement in balances of payments has been the result of increased production of these critical materials. The improvement was most striking in countries that were normally exporters of, or nearly self-sufficient in these commodities, but where postwar deficiencies had increased import needs. France, for instance, normally approximately self-sufficient in wheat and meat, was a heavy importer of these foods in the years 1946 through 1948; in 1949, however, it became a net exporter of meat and in 1950 of wheat. Similarly, increased output enabled Belgium to become a net exporter of coal in 1949 and of sugar in the 1949–50 crop year. A pattern of recovery of production, reduction of imports, the resumption of exports, accompanied by a steady increase in domestic consumption, could be observed generally in Europe for several major international commodities.

Most of these critical materials could be obtained only in the Western Hemisphere, and a large proportion actually were secured from the United States. To that extent the so-called “dollar shortage” was directly connected with the shortage of critical materials. The effects of the improved supply situation in Europe on certain dollar import needs are illustrated in Table IV.

The abnormal reliance on U.S. imports which characterized the reconstruction period has now been considerably reduced and provided reasonable success is achieved in increasing European exports to the United States, in the creation of surpluses with third areas, and in attracting adequate and sustainable flows of capital from the United States to Europe, there should not be much further decrease, but rather an increase, in U.S. exports to Europe. Progress in this direction will be determined not only by the efforts of European countries, but also by the extent to which countries in the dollar area adopt appropriate tariff policies.

The improvement of Europe’s payments position vis-à-vis countries outside the dollar area was achieved not primarily by cutting imports, but rather by a rapid increase in exports, imports also generally increasing, though at a slower rate. Between 1947 and 1950, the volume of exports trebled in the Netherlands, doubled in Italy and France, and increased by fifty per cent or more in the Scandinavian countries and the United Kingdom. These improvements were made possible by increased output and by a decrease of inflationary pressures. The increase in output helped to create the economic conditions in which more effective monetary and fiscal policies became possible. But deliberate, often unpopular, government measures were required to take advantage of improved economic conditions to put the necessary financial policies into effect.

When the postwar period is viewed as a whole, substantial advances toward monetary stability are evident. The budget position has greatly improved. The latent inflation carried over from the war years was, it appears, generally eliminated by the middle of 1950, as a result of the early postwar monetary purges, of budgetary surpluses in some countries, and of postwar price increases. This indication of an approach toward monetary stability is confirmed by other facts. In many countries internal rationing was abolished, or its scope greatly reduced, though it continued to be important in the United Kingdom, Norway, and Yugoslavia. Price controls were either abolished or greatly relaxed. In 1949, prices tended down rather than up, and despite the devaluations, they rose only a little, if at all, in the first half of 1950. Such inflationary problems as presented themselves in Europe in the first half of 1950 were increasingly the results of policies and factors peculiar to individual countries, rather than of a general postwar situation affecting the continent as a whole.

The development of intra-European trade has been an important element in the recent evolution of Europe’s balance of payments with the outside world. On the one hand, it has not for the most part been found possible to rebuild the trading connections between Eastern and Western Europe. Already in 1948 the volume of East-West European trade was less than half what it had been before the war, and by 1950, Western European trade with the U.S.S.R. and the five Eastern European countries associated with it had declined still further. The volume of trade among the OEEC countries, on the other hand, increased from two thirds of prewar volume in 1947 to 117 per cent of prewar in the second quarter and 140 per cent in the last quarter of 1950. As production expanded, this increase was also made possible in part by the policy of trade liberalization sponsored by the OEEC, and by the facilities for intra-European credit and for currency transferability created by the establishment of the European Payments Union (EPU) in the summer of 1950.

As a result of changes in economic conditions and policies, the pattern of intra-European debtor and creditor positions has indeed undergone considerable change in the past two years. The United Kingdom, with the rest of the sterling area, which had tended towards a deficit position in 1949 in its payments relations with the EPU countries as a whole, partly as a result of the sharp increase in the prices of raw materials produced in the overseas sterling area, developed a considerable surplus in its European payments position. France, Belgium, and Portugal have also had substantial surpluses. Western Germany, on the other hand, developed a large deficit, part of which was financed by a special credit. Restrictive fiscal and monetary policies, as well as administrative import cuts, were also applied in order to restore Germany’s position. The Netherlands, Denmark, and Austria have also had considerable deficits in their European trade.

Latin America

The Latin American countries as a group have also improved their payments position in the postwar period. In 1950 the balance of payments of the area showed an over-all surplus tentatively estimated at $300 million, as compared with a deficit of $500 million in 1947 (see Tables V and VI). The pronounced recovery of exports in 1950, when total exports increased by about $900 million over the preceding year (exports to the United States alone accounted for $570 million of this increase), was in some measure due to improved production and export volume. Very largely, however, it was a result of the sharp price increases for Latin American primary products. The price of coffee rose sharply in the fall of 1949, while some other price increases became particularly marked following the outbreak of hostilities in Korea.

There has also been a noticeable shift in the sources of Latin American import supply. In the immediate postwar period, Latin America had to rely mainly on imports from the United States, but by 1950 European goods had become more readily available. Imports have declined from their postwar high, but the reduction was confined to trade with the United States and imports from other areas increased. Nonetheless Europe’s share in Latin America’s imports, which had been about 50 per cent prior to the war, had recovered to only about 30 per cent in 1950.

There has also been a significant shift in the regional distribution of Latin American exports, sales to the United States increasing while they declined to other areas. This development has been accentuated since the end of the war, partly because some exporting countries found it necessary to maximize dollar earnings, and partly as a result of intensified import restrictions in Europe. While in 1938 the United States had absorbed about 31 per cent of Latin American exports, the proportion rose to 43 per cent by 1947, 48 per cent in 1949, and 50 per cent in 1950. Exports to Europe, which accounted for roughly 50 per cent of all Latin American exports in 1938, declined to 39 per cent in 1947, to 31 per cent in 1949, and to 30 per cent in 1950.

Programs of development have occupied an important place in the postwar economic policy of practically every Latin American country. Some progress has been made in this field, but the scale of operations has not yet been such as to cause any radical change in Latin America’s balance of payments position. Increasing attention has been given to the problem of the more effective mobilization of domestic capital markets, and, where credit expansion has been made an important instrument for increasing the supply of capital and thus accelerating the rate of development, to the problems of inflationary pressure which such a policy often implies. If development is to proceed at anything more than a very modest pace, there must, however, be a considerable influx of foreign capital into the underdeveloped areas.

Other Regions

Canada’s surplus on goods and services with non-U.S. countries of about $800 million in 1949 nearly disappeared in 1950, largely through a decrease in exports of nearly $400 million and a rise in imports of more than $200 million. Trade with the sterling area was responsible for a large part of these changes.

The elimination of the surplus was accompanied by a decline in net gold and U.S. dollar receipts from countries other than the United States, from $674 million in 1949 to $138 million in 1950. Canada’s global balance on goods and services shifted from a surplus of nearly $200 million in 1949 to a deficit of $300 million in 1950. This change, however, was much more than offset by the large capital inflow from the United States of about $1 billion. This inflow was largely concentrated in the third quarter of the year in anticipation of an appreciation of the Canadian dollar. (All figures in this paragraph are in Canadian dollars.)

In many parts of the Far East there has been a substantial recovery in production since the end of the war. Important basic production problems, however, remain to be solved, and the output of certain export commodities, such as rice in Burma and Indo-China, tea in Indonesia, and tin in the three major exporting countries in the area, is still well below prewar levels. (See Table VII.)

There has, however, been an improvement in the balance of payments of the majority of countries, which was particularly noticeable in 1950. During the year the exchange holdings of Ceylon, Japan, and Thailand increased. In India, the substantial payments deficits of previous years were converted into a surplus. The factors contributing to these changes varied from country to country. The amelioration of Japan’s payments position was due primarily to the recovery of production. The improvements in the trade balances of Ceylon, India, Indonesia, Pakistan, the Philippines, and Thailand, were mainly due to increasing world demand and higher prices for their products, as well as, in some countries, to the 1949 devaluations, and, in the Philippines in particular, to restrictions.

The further development of its natural resources is also of crucial importance for the whole of the Far East and the Middle East, where nearly everywhere the average level of production is extremely low.

The Devaluations of September 19491

One important factor affecting balances of payments and in particular the world dollar position in 1950 was the devaluations of September 1949. Last year’s Annual Report gave an account of the first effects of these devaluations. The numerous other far-reaching changes in the world economic situation and in national policies which have occurred since that time make it difficult to appraise their effects for 1950 as a whole. The changes in trade movements which are relevant in this connection are the result, first of the increased ability of the devaluing countries to earn dollars by increased exports to the United States and other dollar countries, and second of their increased ability to save dollars by reducing dollar imports.

In the first half of 1950 the value of U.S. imports from OEEC Europe as a whole rose to $482 million. This was $43 million, or 11 per cent, greater than in the first half of 1949 (before the devaluation), and $20 million greater than in the first half of 1948. For the Western European countries that devalued their currencies by 20 per cent or more, the increase between the first half of 1949 and the comparable period of 1950 was $40 million, or 16 per cent. Part of these increases in the first half of 1950 were, however, attributable to improved business conditions in the United States. There was a further sharp rise in U.S. imports from Europe after the outbreak of the Korean war, which affected generally both the countries that had devalued and those that had not (or had devalued only a little).

The effects of the devaluations appear more clearly in Europe’s exports to the rest of the Western Hemisphere (excluding Argentina, whose trade with many European countries was disrupted pending the conclusion of protracted negotiations). These exports from the nine major Western European countries were $280 million higher in 1950 than they had been in 1949, while U.S. exports to this region declined by $100 million. Moreover, while from countries with substantial devaluations these exports increased by about $250 million (or 25 per cent), the exports of Belgium, Italy, and Switzerland increased by $30 million (or 11 per cent).

The effects of devaluation on the imports of the devaluing countries cannot be found exclusively in the record of import statistics. Where import controls had kept dollar imports below what the public was willing to buy at the official rate of exchange, it was to be expected that devaluation, by raising the price of dollar goods in terms of domestic currency, would eliminate part of the demand thus kept in check, and would thus lessen the pressure on the controls, and reduce the need for them. Actually, the imports of OEEC Europe from the United States declined sharply, from $4.1 billion in 1949 to $2.8 billion in 1950, or by about 30 per cent. One important cause was the improvement in the European supply situation for basic materials to which reference has been made above. Intensification of dollar import restrictions contributed to the decline of U.K. imports, but this factor was probably not significant for most other European countries whose imports from the United States nonetheless fell sharply.

The devaluation of sterling, and of the currencies of most other sterling area countries, would by itself have tended to lower the dollar prices of the raw materials exported by those countries to the United States and Canada. In fact, however, the increase in U.S. demand in 1950 actually raised the dollar prices of such commodities as cocoa, burlap, wool, and rubber above their predevaluation levels, and as U.S. imports of these commodities also increased in volume, the total value of exports to the United States and Canada from the outer sterling area increased by 35 per cent, from $1.1 billion in 1949 to nearly $1.5 billion in 1950.

The imports of the sterling area outside the United Kingdom from the United States and Canada were reduced by 36 percent, from $1.4 billion in 1949 to $0.9 billion in 1950. The decline was caused, in large part, by the measures taken in the sterling area in accordance with the agreement of July 1949 to reduce imports from the dollar area, but the effects of these measures were reinforced by the increase in prices of dollar imports consequent upon the devaluations.

The devaluations also achieved the objective of stemming and reversing the outflow of capital that had been taking place as a result of anticipations of and delays in current payments to and from the United Kingdom and other countries, despite rigid controls on capital movements. Perhaps more important, the devaluations restored the confidence in European currencies that had been lacking since the end of the war and thus reduced the desire to circumvent capital controls.

Changes in International Reserves Positions

These balance of payments developments have caused important changes in international reserves. The tendency for U.S. gold holdings to increase was reversed in the last quarter of 1949; they declined from $24.7 billion in September 1949 to $24.3 billion in June 1950, and $21.9 billion in March 1951. The dollar holdings of other countries increased by $1 billion during the first half of this period and by a further $800 million in the second half. When account is also taken of accretions to reserves from newly-mined gold, the gold and dollar reserves of countries other than the United States increased by around $5 billion in the eighteen-month period. The share of the United States in the world’s total monetary stock of gold (outside the U.S.S.R.) fell from nearly 70 per cent in 1948 to about 60 per cent in March 1951; however, it was still greater than the 1937-38 average of 52 per cent.

The increase in gold and dollar holdings in 1950 was widespread, with only a few countries showing a decline. As is shown in Table VIII, the largest increases, both absolute and relative, were in the sterling area as a whole and in Canada. In Continental Europe and Latin America, the increases were much smaller proportionately. In appraising the significance of the increases in reserves over the past eighteen months, the general rise of prices in international trade during the same period, which has tended to reduce their purchasing power, should be borne in mind.

Postwar changes in sterling balances (see Table IX) also reflect important changes in balance of payments positions. The sterling holdings of countries outside the sterling area have substantially declined since the end of 1946, while those of sterling area countries in general have increased to roughly the same extent.

Conclusion

In the foregoing survey of postwar international payments relations, little has been said about the short-run disturbing elements, such as harvest failures, the abnormal winter of 1947, the recession in the United States in 1949, abnormal short-term capital movements, and other factors of a similar kind, which at particular times naturally attracted much attention. In retrospect the striking fact is that these special factors, important as they were, were merely interruptions of a general postwar trend toward recovery in the volume of world production and trade and substantial improvement in the international payments position, in which nearly all countries shared.

While the favorable trends deserve to be emphasized, the still persistent difficulties of individual countries should not be overlooked; serious dollar problems have continued in some countries and shortages of other currencies have emerged elsewhere.

In the second half of 1950 there were further far-reaching changes in payments relations initiated by the consequences of the outbreak of hostilities in Korea, and preparations for extensive rearmament programs. Sharp increases in demand have produced raw material shortages and sharp changes in the terms of trade of many countries. The more important aspects of this situation will be further examined below.

B. Rearmament and Inflation

While notable progress had been made by the middle of 1950 toward getting the war and postwar inflationary forces under control, the monetary situation at that time was still generally uneasy, with tendencies toward inflation tending to outweigh tendencies toward deflation. In such a situation the outbreak of hostilities in Korea gave a sharp impetus to the rearmament programs of the Western countries, and raised fresh inflationary problems since something close to full employment had been realized in many countries.

The immediate impact of the events of mid-1950 upon demand—and hence on business activity and more strongly on prices—was the result of anticipations of increased government spending and of shortages and higher prices. On account of the liquidity both of the public and of the banking system in many countries, the monetary restraints which might otherwise have kept this sudden outburst oi additional demand in check were inadequate. Speculative buying in many countries accentuated raw material shortages, and as their prices rose sharply, a further impetus was given to the building up of inventories.

The increases in the prices of raw materials and foodstuffs at once placed strong upward pressure on the general level of prices in both exporting and importing countries. In the former the rising incomes of producers increased the demand for domestic goods and services, as well as for imports. While higher prices for exports increase the exporting countries’ foreign exchange earnings and raise real income, they are a threat to domestic price and wage stability and may lower the real income of important groups. In the importing countries, on the other hand, the rising costs of raw material and foodstuffs imports tend to lower real income; and to the extent that wage adjustments to cost of living increases are made, upward pressure on the internal price and wage level is generated. Direct government rearmament expenditure has only gradually been making a more sustained demand effective. Even in the United States, where among Fund members the planned expansion of military expenditures is largest, government expenditure in the second half of 1950 was no greater than in the first half of the year. For the year that lies ahead, however, military expenditures will show sharp increases.

In the United States, wholesale prices, which had fallen by 7 per cent in 1949 and then risen by 4 per cent in the first half of 1950, increased by 12 per cent in the second half of that year. While in most European countries wholesale prices had either declined or increased very little in the first half of 1950, they increased in all countries from 10 to 20 per cent in the second half of the year.

In order to finance rearmament programs government expenditures for civilian purposes are being pared in some of the rearming countries, and budgets are generally increasing, the increase in most countries being met in part by heavier taxes. Nonetheless, budget deficits are expected in a number of countries, and elsewhere the budget surpluses of previous years will be considerably reduced.

The effects of the deterioration of terms of trade in many manufacturing countries constitute a burden additional to that of rearmament. The increase in total output that may be expected as the result either of the employment of unused resources or of increased productivity will, however, constitute an important source of additional resources, though the effects of shortages of specific raw materials and skilled labor are already being felt. Even if increases in output are adequate to meet rearmament requirements, anti-inflationary policies will be needed to offset the increases in money income.

According to present plans some countries envisage that rearmament requirements will be met in part by some reduction in civilian consumption. In some of these countries steps have also been taken to reduce private investment. Lastly, many European countries expect to receive material aid from the United States for the fiscal year 1951-52 under that country’s program of mutual defense assistance.

The Terms of Trade

Recent price trends have caused substantial changes in the terms of trade in all parts of the world. In general the movement has been against the more industrialized countries in America and in Western Europe. During the eighteen months from the autumn of 1949 to the spring of 1951, the majority of the Western European countries saw their terms of trade deteriorate twice, once at the time of devaluation and again after the outbreak of hostilities in Korea. In 1949 the terms of trade improved only for Switzerland, which did not devalue, and in 1950, only for Finland, Norway, and Sweden, all exporters of raw materials. The significance of the changes in 1950 was, however, quite different from that of the earlier changes. The deterioration in 1949 was effected by a lowering of export prices in terms of dollars. One of the purposes of the devaluations was to restore by this change in relative prices the competitive power of European countries, and thus to improve their general balance of payments positions. The deterioration of the terms of trade in 1950-51, on the other hand, was brought about by a rise in world market prices of the principal raw materials and foodstuffs which Europe imports from the rest of the world, and which it does not, for the most part, produce itself. The effect of this change is, therefore, not to improve Europe’s competitive position but merely to raise the cost of its imports. The cost of this second worsening of Europe’s terms of trade may be estimated for the first quarter of 1951 as having been at an annual rate of about $2 billion. The cost to the United States of the worsening in its terms of trade would be about $1.4 billion.

Anti-inflationary Measures

The re-emergence of strong inflationary pressures has led in most countries to the adoption of counter-measures. Reference to budgetary action has already been made. This has been supplemented in some countries, including the United States, by plans for the imposition of price and wage controls and for the allocation of scarce materials. But in their endeavor to cope with a situation that in many respects differs from that of World War II, governments have tended to employ also a variety of other policies that deserve discussion.

Some countries have turned to weapons of monetary policy that for many years had been left unused or given only a minor role, while others have developed further their systems of monetary control with a view to checking credit expansion. This has meant some modification, or even reversal, of the policies of cheap money that had been widely practiced during the postwar period. While rearmament has also made necessary the reimposition of certain direct controls, experience since the end of the war has shown the practical limitations of some of these controls, especially in situations where it has not been felt desirable or necessary to impose very large cuts upon civilian demand, and has also made clear the importance of adequate monetary and fiscal measures. The policies upon which emphasis is thus again being placed embrace a wide variety of measures. Increases in interest rates, which have in most cases been only moderate, have often been supplemented by other devices, such as higher reserve requirements for commercial banks, limits on certain types of loans, or fixing the general terms of credit in certain selected fields.

During the second half of 1950 the central bank discount rate was raised, for the first time since July 1945, in Canada, in the Netherlands, and in Sweden—in each country by one half per cent. In the Netherlands there was a further increase of 1 per cent in April 1951. Up to June 30, 1951, there had also been increases in central bank discount rates in Belgium (½ per cent), Chile (2 per cent), Denmark (1 per cent), Finland (2 per cent), Western Germany (2 per cent), and the United States (¼ per cent). Long-term interest rates also have tended to rise in many countries as a result of new issues or conversion operations at a higher rate, or of the partial or complete withdrawal of support of the market for government bonds.

Other measures have also been used to limit the expansion of bank credit, both quantitatively and qualitatively. In several European countries provisions for compulsory bank holdings of government securities have been introduced or reinforced in order to prevent banks from expanding business loans by reducing their portfolio of government debt. Reserve requirements have been raised, or special reserve requirements introduced for banks against increases in deposits, in the United States, the Netherlands, Mexico, and Peru. Controls over credit have been further intensified in Germany, and many countries have instituted measures of qualitative credit control. Thus, for example, credit for durable consumer goods and for residential construction has been regulated and tightened and margin requirements for stock exchange loans increased sharply in the United States and Canada, and capital issues have been brought under control in Italy and Australia.

Some of the raw material producing countries have endeavored to protect their price structure from the disruptive effect of rising prices by export duties or other taxes designed to limit the expansion of producers’ money incomes. In the present circumstances, such export duties are intended to absorb some of the effects of foreign price fluctuations and to transfer to the government, or in some instances to compulsory saving, part of the increased income of the export industry. Increases in export prices have been so great that export taxes are not likely to check seriously any tendency toward increase in supply.

India, which had raised its export duties considerably after the devaluation of the rupee in September 1949, has since further increased such duties on most major exports. Export duties have been raised in Ceylon on tea, rubber, copra, and other commodities, in Indonesia on rubber, in Pakistan and Egypt on cotton, and in El Salvador and Guatemala on coffee. A sliding scale export duty, rising with the export price, has been introduced in Malaya for rubber and in Sweden for wood products. In both Sweden and Norway, where export duties on wood products were also raised considerably, most of the proceeds are reserved for the benefit of the industry but will not be paid out for a number of years. Similarly, wool growers in New Zealand have agreed to freeze for the time being one third of their receipts, and Australia has levied a 20 per cent tax, which is in the nature of a prepayment of income tax, on the proceeds of wool sales.

The big increases in demand for raw materials, which have sharply increased their prices, have also led to scarcities, which threatened to create serious difficulties for production programs. Early in 1951 the Governments of the United States, the United Kingdom, and France took the initiative in convening an International Materials Conference in which subsequently the responsibility was shared with the Governments of Australia, Brazil, Canada, India, and Italy and representatives from the OEEC and the Organization of American States. The Conference has operated through a series of commodity committees, each of which deals with one or several related scarce commodities and on which the chief producing and consuming countries are represented. It is the function of these committees to make recommendations to governments on methods which should be adopted to increase supply, on ways in which demand can be reduced, for example, by the substitution of other materials, and, wherever the full demand cannot be satisfied, on methods of allocating the available supplies. At the time of the preparation of this Report the deliberations of most of the commodity committees had not reached the stage where formal recommendations could be made to governments, and the effects of these efforts on inflationary pressures cannot yet be foreseen.

In any assessment of the international payments problem that the Fund and its members will have to face in both the immediate and the more distant future, the current inflationary potential must be given a dominating position.

It has been shown in the present chapter that balance of payments difficulties are no longer as acute as they have been, but it must be recognized that the emergence of world-wide inflationary tendencies has created new problems of a different nature carrying the seeds of future payments difficulties.

The Fund cannot but be concerned that the present inflation has been accompanied by widespread scarcities of essential goods and violent swings of prices and terms of trade. In this respect, measures of direct control over the distribution of scarce materials are necessary in some circumstances, especially when these materials are the object of a greatly increased demand arising out of rearmament or strategic stockpiling. In comparison with over-all monetary measures, direct controls have a more precise and direct stabilizing effect on the prices of the very materials which are in acute demand; but their existence involves the risk of uneconomic use of resources in the civilian sector, which in present circumstances remains of great importance.

Therefore, in the face of a pervasive price increase caused by a generalized excess of effective demand, reliance should, as far as possible, be placed on monetary and fiscal measures, in order to counteract inflationary tendencies.

Furthermore, it should be borne in mind that extensive measures of direct control, unless they are accompanied by fiscal and monetary measures, carry with them the risk of building up anew situations of latent inflation, which would threaten for a long time in the future to impair again the effectiveness of monetary policies.

The relative degrees to which countries are successful in containing or even reversing inflationary pressures will directly affect the balance of international payments. Experience has shown that deficits tend to emerge in countries where the inflation is greatest.

C. The Payments Position since the middle of 1950

In appraising balance of payments developments since the outbreak of hostilities in Korea and assessing future prospects, it is necessary to bear in mind both the longer-run trend toward improvement in economic conditions in many parts of the world which has been evident since 1946, and the great increases in demand and the associated changes in both absolute and relative prices since the middle of 1950.

These latter changes have naturally tended to render less favorable the balances of payments of the countries where additional demands originated, that is, primarily the United States and to a lesser extent some of the European countries. On account of their disproportionate effect on raw material prices, they have also tended to weaken the balances of payments of industrial countries in general, while they improved the balances of payments of most raw material and food producing countries. At the same time, they tended to improve the position of other countries whose own armament expenditures were relatively small or which had substantial unused resources.

Any estimate of the balance of payments situation during the next year or two must necessarily be highly conjectural. How far national and international policies will be effective in halting further upward price movements has still to be determined. The amount of U.S. foreign aid is yet to be decided and the realization of the export plans of industrial countries must depend on a continued flow of raw materials and a satisfactory balancing with rearmament demands, neither of which can be taken for granted in all countries. These uncertainties have been illustrated by events in recent months when, for example, the earlier series of U.K. surpluses and German deficits in the European Payments Union have been reversed, and there have been movements in the prices of raw materials and manufactured goods which have modified the movement in the terms of trade of some countries.

Quarterly data on the balance of payments of the United States (see Table X) indicate not only some of the basic trends through 1949 and 1950, but also recent developments and the short-term irregularities of recent changes. The largest quarterly shift toward equilibrium in the U.S. trade balance recorded since the beginning of 1949 was between the second and the third quarters of 1950. This was due to a sudden sharp upsurge of over $500 million in U.S. imports, while exports declined slightly. In the following quarter, however, exports rose by $600 million and, though imports also continued to increase, the trade balance was again in surplus in the two most recent quarters shown. Erratic changes in speculative private capital movements have played a large role in changes in reserves in the last two years; uncertainties in this regard, as well as concerning international aid programs, raw material market developments, the availability of U.S. export supplies, and import policies outside the United States make hazardous any forecasts of balances of payments and reserve positions even for a short period ahead.

During the first quarter of 1951, U.S imports were running at a rate of nearly $13 billion a year, compared to the 1950 total of $9.3 billion. U.S. exports, at an annual rate of $12.3 billion (excluding military shipments) in the first quarter of 1951, have also been running higher than in 1950, when they totaled $10.2 billion (excluding military aid shipments of about $600 million). With further increases possible in both imports and exports, it is uncertain whether the trade surplus for 19.51 will be larger or smaller than for 1950, when it was about $800 million (again exclusive of military aid). U.S. service income in 1951 will be subject to such divergent influences as increased overseas military expenditure, and the service of the Anglo-American loans which is scheduled to begin during the year.

The largest accumulation of gold and dollar assets from the United States in 1950 occurred during the third quarter of the year, when it amounted to $1.6 billion. In the two succeeding quarters, other countries acquired gold and dollar assets from the United States on a smaller scale, $900 million in the fourth quarter of 1950 and $700 million in the first quarter of 1951, as their imports from the United States again began to rise sharply. For the balance of 1951, these countries may be expected to want to spend a larger proportion of their increased dollar receipts, whether from exports or from U.S. aid; but supply availabilities may limit the extent to which these desires can be realized. On balance, additions to their gold and dollar reserves may well be smaller in 1951 than in 1950.

In 1950 the United Kingdom balance of payments showed an over-all current account surplus of £230 million; official forecasts have, however, stated that, in view of the rising cost of imports, it will not be possible to maintain a surplus in 1951. An increase in the value of U.K. exports of over £500 million, to £2,750 million, has been officially estimated to be necessary to offset the rising cost of imports and to limit the current account deficit to the anticipated value of strategic stockpiling (£100 million). In the first four months of 1951, U.K. imports were running almost at the rate planned for the year as a whole, but exports were 7 per cent below the rate which the Economic Survey estimated as necessary.

In the second half of 1950, the total gold and dollar reserves held by the United Kingdom increased by $878 million, and there were further increases in the first two quarters of 1951, of $458 million and $109 million, bringing the total reserves to $3,867 million by the end of June 1951. Movements in the gold and dollar position of the United Kingdom reflect not only developments in the U.K. balance of payments, but also those in the payments positions of the other members of the sterling area who customarily deposit a large part of their gold and dollar earnings with the United Kingdom in return for sterling balances.

The payments position of the outer sterling area and of Latin America is closely affected by trade movements in commodities such as coffee, rubber, wool, copper, and tin, which accounted for a considerable part of the expansion of U.S. imports in the early part of 1951. If this expansion is maintained, balances of payments for most of the outer sterling area and the dependencies of continental OEEC countries, as well as Latin America and other raw material producing countries, are likely to be stronger in 1951 than in 1950. Outer sterling area and Latin American exports in 1951 of ten important agricultural commodities (wheat, sugar, meat, butter, coffee, cocoa, tea, rubber, cotton, and wool) may well exceed the 1950 level by more than $2 billion.

To some extent balance of payments trends of individual countries in continental Europe are the counterpart of trends in the United States, the United Kingdom, and the raw material producing countries. Their outlook varies widely depending also in part on the extent to which they are able to expand their exports and to develop further their home production, as well as on the magnitude of their rearmament programs and the effects upon their terms of trade of current changes in the international price structure.

The improvement that has recently been taking place in payments relations has been more rapid than that recorded up to the middle of 1950, but it has also been different in character. It has been to a large extent a result of the inelasticity of supply of certain critical raw materials which, in the face of rapidly increasing demand, has driven their prices sharply upward. For example, the 48 per cent increase in the value of U.S. raw material imports between the first half of 1950 and the last quarter of that year was due largely to price increases—the volume of these imports rose by 10 per cent, but their average price by 34 per cent. If for any reason the current abnormal demand for raw material imports were to be reduced, there would be an immediate reaction from the higher price levels that would reverse the current balance of payments trends of raw material producing economies. Even on the most favorable hypothesis, present abnormal demands for raw materials and other goods important for defense programs cannot provide a stable foundation for long-period balance of payments equilibrium.

In estimating the importance of the more significant influences that are likely to determine balances of payments in the immediate future, little need be said about some of the factors that have been emphasized in earlier Annual Reports. This does not, however, mean that from a long-run point of view these factors have lost any of their importance. The fact that everywhere today the risks for the immediate future are much more those of excessive than of inadequate demand does not diminish the fundamental importance of keeping economies operating at a high level. Some of the influences underlying the present favorable trends of many countries’ balances of payments are abnormal, and obligations for debt service will expand during the next few years. From a long-run standpoint, it is therefore proper still to emphasize the importance of steps to ensure that, when the present abnormal flow of imports tapers off, the commercial policies and customs procedures of the United States and other surplus countries do not check the substantial increase of other imports that will be an essential condition for the attainment of a permanent international equilibrium.

The present pattern of world payments is not to be considered as a stable pattern for a peace economy. It will become so only as, over the next few years, production outside the United States increases and some readjustment takes place in the relationship between prices of primary and industrial goods.

Mr. Rooth is expected to assume his duties in August 1951.

In this section the trade data recorded in customs statistics have been used. These do not include certain governmental purchases—for stockpiling, military use, etc for which adjustment is made in the balance of payments statistics quoted in other sections of this report, but which may be assumed to be determined primarily by extra-economic factors.

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