Chapter

III Developments in International Payments and Domestic Finance: General Survey

Author(s):
International Monetary Fund
Published Date:
September 1959
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Industrial Production, Employment, and Prices

IN 1958, for the first time since World War II, world industrial production (outside the centrally planned economies) was lower than in the previous year. From 1954 onward its annual rate of increase had diminished year by year. In 1958, however, world industrial output was less than in 1957 by about 21/2 percent.

During previous postwar recessions in the United States industrial production continued to rise in most other countries, and there was thus no decline in world production as a whole. In 1958, total industrial output dropped because recession in the United States was accompanied by slower growth or mild decline elsewhere.

Industrial production in the United States was 7 percent lower in 1958 than in 1957; in the other industrial countries taken as a whole, it was slightly higher (Table 6). In Belgium, Canada, and Norway, output was lower than in 1957; in Denmark, Japan, the Netherlands, Sweden, and the United Kingdom, it was about the same; and in Austria, the Federal Republic of Germany, France, and Italy, it was higher, though in all these countries the increases were less than in previous years.

Table 6.Industrail Production, Manufacturing Employment, and Cost of Living, Selected Countries,1957, 1958, and 1959(Average percentage changes from corresponding period of previous year)
Industrial ProductionManufacturing EmploymentCost of Living
195719581958,

2nd

half
1959,

1st

quarter
195719581958,

2nd

half
1959,

1st

quarter
195719581958,

2nd

half
1959,

1st

quarter
Australia11115223
Austria632–222–22–224211
Belgium-Luxembourg–6–5–513–73–83311
Canada–26–5–54222
Denmark7134234323
France942–231–1–4314147
Germany, Federal Republic of634233234383232
Italy82361–14132
Japan191535165122123113
Netherlands235–3–262–2–2
Norway5–3–213–13–1333465
Sweden31–1–2–4–34541
Switzerland15–3–4–52211
United Kingdom2–1–2–2–1–23321
United States–7–211–12–82–72123321
Source: Based on data from International Monetary Fund, International Financial Statistics, and United Nations, Monthly Bulletin of Statistics.

No index of industrial production is compiled in Australia or Switzerland.

Industrial employment.

Nonagricultural employment.

Period ended November 1958.

Manufacturing production.

Source: Based on data from International Monetary Fund, International Financial Statistics, and United Nations, Monthly Bulletin of Statistics.

No index of industrial production is compiled in Australia or Switzerland.

Industrial employment.

Nonagricultural employment.

Period ended November 1958.

Manufacturing production.

In the United States both downswing and recovery were more marked than in most other industrial countries. In April 1958, industrial production in the United States was some 13 percent below the prerecession peak; by May 1959, it had risen to 5 percent above that peak. In most other industrial countries, with the partial exceptions of Belgium, Japan, and Canada, there was neither a marked downswing nor a pronounced upswing in economic activity in 1957-58. Toward the end of 1958, some countries, such as Japan, Italy, and Germany, showed signs of renewed expansion, but there was no such decisive upward trend as in the United States.

Developments in 1958 again suggest, as did the recession of 1953-54, that the level of activity in other industrial countries may not depend upon the ups and downs of business in the United States, provided that these are moderate. The approximate synchronization between recession in the United States and a reduced rate of growth or stagnation in other industrial countries was largely the result of the generation of boom conditions in both areas in earlier years. It is doubtful whether developments in the United States had any material—as distinct from psychological—influence upon developments in other industrial countries, since U.S. imports from those countries increased in both volume and value.

In most industrial countries the slowing down in activity first became evident in a reduction in the accumulation of inventories and in private fixed investment, particularly investment in plant and equipment. In the United States, the fall in exports was also a factor in the recession. In most other industrial countries exports remained fairly stable.

The decline in investment demand which characterized the recession or the temporary cessation of economic growth was due to the appearance of surplus capacity in many countries and hence to a reduction in the anticipated profitability of new investment as well as to a rise in the cost, and decline in the availability, of investible funds. The first factor was related to the considerable expansion in the stock of capital in the investment boom of 1955 and 1956 and to a tendency for the prices of capital goods to rise relative to other prices. The monetary stringency which was increasingly felt in 1956 and 1957 was in most countries the result of efforts by the authorities to check an excessive rise in prices which persisted for some time after the pressure of demand on resources had relaxed considerably. Prices of industrial products and services have probably always shown some degree of sluggishness in their response to the varying pressures of demand. There can be little doubt, however, that present practices in wage negotiations and in the pricing of many products have made the relationship between price movements and changes in demand looser than formerly—a fact which makes it more difficult for monetary authorities and governments to control price developments without unwanted repercussions on output.

The fairly rapid recovery in output in the United States from the low point in the second quarter of 1958, which was facilitated by the maintenance of consumer expenditures at a high level, was marked by a reduction in, and later a reversal of, inventory liquidation, by increased government expenditures, and by an upturn in private residential construction. These developments were stimulated by an increased budgetary deficit and by a temporary decline in interest rates. Up to the end of 1958 few other industrial countries had had much success in restoring a marked upward trend of production, though in most of them liquidity had increased and interest rates had fallen, and in some of them the budget was making an increasing contribution to the maintenance of demand. During the first few months of 1959, production continued to rise in the United States. Japan resumed a rapid rate of expansion. With increases in residential and public construction, and to some extent in exports, rather than in industrial investment, most European countries showed in varying degrees signs of renewed, though moderate, growth.

In the United States, both the fall in industrial employment during the recession and the rise during the recovery were less marked than the corresponding movements of industrial production. The increase in output per man in the upswing was more marked than the decrease in the downswing. In May 1959 unemployment still exceeded the prerecession low of April 1957 by an amount equal to 1 percent of the labor force.

In other industrial countries, employment in manufacturing in 1958 was lower than, or about the same as, in 1957. In the countries where industrial production rose most, employment also fell least, or, in some of them, actually increased (Table 6). The behavior of the two series was influenced in most countries by a tendency for production to vary more than employment and by a rising trend of output per man. In several countries there was a more than seasonal decline in unemployment in the first quarter of 1959.

In most industrial countries, the reduction in the degree of utilization of industrial capacity and of the labor force which took place from 1957 to 1958 did not result in any absolute decline in either prices or wages between the two years. While wholesale prices moved down a little, or remained fairly stable, the cost of living, wage rates, and even money wage costs per unit of manufacturing output were generally higher in 1958 than in 1957. Both the cost of living and wages generally rose more slowly during 1958 than during 1957, but even in 1958 they probably rose more or fell less in most countries than on previous occasions when demand conditions were similar.

Main Trends in World Trade

The value of world exports in 1958 was 5 percent less than in 1957 (Table 7). Rather more than half of this decline reflected a fall in prices. The volume of trade, which had been growing at the rate of 10 percent, 8 percent, and 6 percent, respectively, over the three preceding years, fell from 1957 to 1958 by 2 percent, i.e., by much the same proportion as world industrial production. Apart from seasonal variations, the volume of trade turned downward from the third quarter of 1957, rose again from the second to the fourth quarter of 1958, and declined to the first quarter of 1959, when it was approximately the same as in the first quarter of the previous year.

Table 7.Value of World Trade, 1956-58
Value, f.o.b.

(billion U.S. dollars)
Percentage Change from

Preceding Year
195619571958195619571958
World exports192.199.494.3108-5
Exports of United States217.319.516.32112-16
Exports of other manufacturing coun-
tries338.342.041.91110
Exports of primary producing countries436.537.936.174-5
Trade of manufacturing countries
With each other
Total26.529.527.516-11-7
Exports of United States5.66.65.02719-25
Exports to United States3.23.33.722511
Trade between other manufacturing
countries17.719.518.81210-4
With primary producing countries
Exports of United States11.712.811.2199-12
Exports of other manufacturing coun-
tries16.117.717.6710-1
Exports of primary producing coun-
tries5
To United States9.49.59.17-4
To other manufacturing countries16.616.916.162-5
With Soviet area
Exports of manufacturing countries1.31.51.8321717
Exports of Soviet area61.41.51.62676
Source: Based on data from International Monetary Fund, International Financial Statistics, and Statistical Office of the United Nations, International Monetary Fund, and International Bank for Reconstruction and Development, Direction of International Trade.

Excluding exports of the Soviet bloc and Mainland China, and U.S. military exports.

Nonmilitary exports.

Countries exporting mainly manufactured products, viz., the United Kingdom, Austria, Belgium-Luxembourg, Denmark, France, the Federal Republic of Germany, Italy, the Netherlands, Norway, Portugal, Sweden, Switzerland, and Japan.

Countries exporting mainly primary products and semimanufactures, i.e., all countries other than those classified as “manufacturing countries,” and excluding the Soviet bloc and Mainland China.

1958 figures partly estimated.

Including Mainland China. Estimated from import statistics of manufacturing countries.

Source: Based on data from International Monetary Fund, International Financial Statistics, and Statistical Office of the United Nations, International Monetary Fund, and International Bank for Reconstruction and Development, Direction of International Trade.

Excluding exports of the Soviet bloc and Mainland China, and U.S. military exports.

Nonmilitary exports.

Countries exporting mainly manufactured products, viz., the United Kingdom, Austria, Belgium-Luxembourg, Denmark, France, the Federal Republic of Germany, Italy, the Netherlands, Norway, Portugal, Sweden, Switzerland, and Japan.

Countries exporting mainly primary products and semimanufactures, i.e., all countries other than those classified as “manufacturing countries,” and excluding the Soviet bloc and Mainland China.

1958 figures partly estimated.

Including Mainland China. Estimated from import statistics of manufacturing countries.

The decline in export volume, like that in industrial production, was confined largely to exports from the United States. These fell by 16 percent from 1957 to 1958, after rising by 9 percent from 1956 to 1957. For the rest of the world, the volume of exports rose by less than 1 percent, against 5 percent in the previous year.

The movement of imports classified according to area showed no comparable relationship to changes in either industrial activity or aggregate demand. The volume of U.S. imports actually increased by 4 percent, while that of the imports of other manufacturing countries (i.e., countries exporting mainly manufactured goods) declined by 2 percent (Table 8). Both of these movements were the result of factors affecting trade between the United States and other manufacturing countries. The volume of U.S. imports rose largely because of an increase of more than 10 percent in its imports from other manufacturing countries; and a reduction of about one fifth in the volume of the imports of the other manufacturing countries from the United States, which had been abnormally high in 1957, was the principal cause of the slight decline in their imports. The volume of exports from primary producing countries (i.e., countries exporting mainly primary products), both to the United States and to other manufacturing countries, remained roughly constant.

While primary producing countries were able to avoid any significant decline in the volume of their exports, the average price and value of their exports declined by some 5 percent, the rate of decline for exports to the United States being slightly less than for exports to other manufacturing countries. The imports of primary producing countries in general, however, though not those of most of the independent members of the sterling area, declined even more steeply than their exports. Moreover, the decline of imports was primarily in volume, which may have fallen as much as 5 percent. Usually any change, and particularly any reduction, in the export earnings of primary producing countries takes time to react upon their imports. In this instance a decline in exports was followed quickly by a decline in imports, partly because the flow of capital from manufacturing countries was also slightly less than in the previous year but mainly because in many countries reserves, which had been drawn upon in preceding years, were running short and some curtailment of imports was imperative.

The United States provided a reduced proportion of the total volume of goods supplied by manufacturing countries in the markets of the United States itself, of the other manufacturing countries, and of the primary producing countries as a whole. Indeed, the U.S. share in the total exports of manufacturing countries fell in most of the major groups of primary producing countries, in Canada, dollar Latin America, non-dollar Latin America, the sterling area, and the dependent overseas territories of European countries. To some extent, this may be attributed to the increased competitiveness of other manufacturing countries. The greater part of the shift in relative exports was, however, probably due to other causes. In the markets of the other manufacturing countries (which accounted for some two thirds of the decline in the U.S. share in the exports of all manufacturing countries), an important factor was the disappearance in 1958 of the abnormally high demand for U.S. exports, and especially for exports of petroleum, after the events of Suez. Another factor was the slackening of activity in Europe, which had an influence on the demand for the types of goods that constitute a large proportion of U.S. exports to manufacturing countries. The very high demand for cotton, coal, steel, and other semimanufactured goods disappeared, and the demand for capital equipment was also reduced.

Table 8.Changes in Volume of Exports and Imports, in Terms of Trade, and in Volume and Unit Value of Manufactured Exports of Countries Exporting Mainly Manufactured Products, 1957 and 1958(Percentage changes from previous year)
Volume of

Exports
Volume of

Imports
Terms

of Trade1
Volume of

Manufactured

Exports
Unit Value of

Manufactured

Exports
1957195819571958195719581957195819571958
Netherlands5103–4–23792–1
Denmark79–17–669101–1
Japan13272262–192–471561–6
France1056—1–241281–2
Germany134127291642
Belgium-Luxembourg–222–3–324–4
Italy1922102–62–5816412
Sweden9–182–351252
Switzerland7–17–946–321
Norway–2–15–3–6
Austria15–415215
United Kingdom2–44373–432
United States93–163244493–1434–l
Total48–46–169–23
Total, excluding U.S.4827–26932
Source: Data on volume of imports and exports and terms of trade from International Monetary Fund, International Financial Statistics. Data on manufactured exports, except for Denmark, Japan, and the United States, were supplied by the Statistical Office of the United Nations; U.S. figures relating to nonmilitary exports of semifinished and finished manufactures are based on data from the U.S. Department of Commerce, World Trade Information Service, Statistical Reports, and figures for Denmark are estimated from data published in Statistiske Efterretninger. Japanese figures for unit value of manufactured exports show changes in unit value of total exports, and volume figures are derived from value of manufactured exports deflated by this series.

Export price index divided by import price mdex.

Estimated from value and price data.

Nonmilitary exports.

Changes in weighted averages of countries listed. Changes in terms of trade derived from average export and import unit values implied by changes in volume and value of exports and imports.

Source: Data on volume of imports and exports and terms of trade from International Monetary Fund, International Financial Statistics. Data on manufactured exports, except for Denmark, Japan, and the United States, were supplied by the Statistical Office of the United Nations; U.S. figures relating to nonmilitary exports of semifinished and finished manufactures are based on data from the U.S. Department of Commerce, World Trade Information Service, Statistical Reports, and figures for Denmark are estimated from data published in Statistiske Efterretninger. Japanese figures for unit value of manufactured exports show changes in unit value of total exports, and volume figures are derived from value of manufactured exports deflated by this series.

Export price index divided by import price mdex.

Estimated from value and price data.

Nonmilitary exports.

Changes in weighted averages of countries listed. Changes in terms of trade derived from average export and import unit values implied by changes in volume and value of exports and imports.

The adverse effects on U.S. exports to primary producing countries associated with the decline in direct investment from the United States, which is discussed below, probably exceeded the favorable effects exercised by the somewhat smaller increase in other forms of private and public lending. In countries especially affected by the decline in U.S. direct investment—such as Canada, Cuba, and Venezuela—the decline in imports from the United States was particularly marked. The U.S. share in total exports to primary producing countries was also likely to fall in view of the fact that the markets where the decline in total imports from manufacturing countries in 1958 was greatest were Canada, dollar Latin America, and certain countries in the Far East, all of which normally receive a particularly large share of their imports from the United States.

Developments in the export of manufactures by countries other than the United States varied widely (Table 8). The Netherlands and Denmark increased the volume of their exports from 1957 to 1958 by about 10 percent, the rate of growth being actually higher than from 1956 to 1957. The volume of exports from Japan, France, and Germany continued to increase, though at a reduced rate. Exports of manufactures from Italy and Sweden also rose, although the total volume of their exports did not increase. Exports from the United Kingdom and Switzerland, on the other hand, declined. The differences between the changes in the volume of exports from different manufacturing countries are probably to be explained in part by differences in the movements of their prices (Table 8), but other factors were also at work. Thus increased exports to North Africa as a consequence of political events within the French Union, and the recovery of exports to the Middle East from the exceptionally low level of 1957, were important influences in determining total French exports. Denmark and the Netherlands had favorable positions as exporters of consumer goods for which there was a ready market in other industrial countries. On the other hand, Sweden and Belgium-Luxembourg were handicapped in 1958 because a large proportion of their export trade consists of capital goods and semimanufactures, and the United Kingdom and Japan, because a large proportion of their markets is in primary producing countries whose importing power was declining.

Prices and Export Receipts in the Primary Producing Countries

The decline in the prices of primary products, some of which had begun to weaken in the second half of 1955, though with a brief recovery after the Suez events, gained momentum as demand slackened in the industrial countries, and continued through the greater part of 1958. In the early months of the year, the decline was severe and extensive, becoming less strong and less uniform thereafter, with considerable diversity between the price movements of different commodities. Though reflecting to some extent the gradual recovery of activity in industrial countries, price movements in the second half of 1958 and the early months of 1959 were determined largely by special conditions affecting individual commodities.

For 1958 as a whole, the prices of most primary products were well below their 1957 level. The average price (unit value) received by countries exporting primary products declined from 1957 to 1958 by some 5 percent, and the average price of their imports (c.i.f.) by 1-2 percent, so that the terms of trade of these countries deteriorated by roughly 4 percent. On the other hand, the terms of trade of the Western European manufacturing countries with the countries exporting primary products improved by more than 6 percent, the discrepancy between these two figures being explained mainly by the sharp reduction of freight costs. The decline in the average prices received by primary producers was reflected in a similar reduction of their export earnings (Table 9); the total volume of their exports showed little, if any, change between 1957 and 1958. Differences in commodity composition, however, produced a wide variety in both the price and the volume movements of the exports of different countries.

Table 9.Trade of Primary Producing Countries,1 1957 and 1958(Value figures in billions of U.S. dollars)
Exports f.o.b.Imports c.i.f.
19571958Percentage

change
19571958Percentage

change
Major countries exporting
Tropical foods
Coffee2.422.19–102.582.28–10
Other foods23.233.25+ 13.953.81–3
Other agricultural products36.755.87–137.767.70–1
Metals and rubber3.202.64–183.212.60–19
Petroleum6.496.87+64.664.50–4
Major countries with diversified
exports13.4913.05–318.3417.08–7
Total35.5833.87–540.4537.97–6
Source: Based on data from International Monetary Fund, International Financial Statistics.

The countries in each category are listed in Tables 19, 21, 23, and 25.

Cocoa, tea, sugar (cane), bananas, oilseeds, and vegetable oils.

Textile fibers, livestock products, grain, and tobacco.

Source: Based on data from International Monetary Fund, International Financial Statistics.

The countries in each category are listed in Tables 19, 21, 23, and 25.

Cocoa, tea, sugar (cane), bananas, oilseeds, and vegetable oils.

Textile fibers, livestock products, grain, and tobacco.

The impact of slackening activity in industrial countries upon countries exporting mainly tropical foodstuffs was confined to arresting the growth of minor exports. The demand for their majorproducts was hardly affected, market developments for these products being largely determined by supply conditions.

As the disparity between output and demand widened, coffee prices declined steadily during 1958 and continued to fall slowly through the first months of 1959. Heavy stockpiling by Brazil and Colombia, and to a lesser extent by other countries, under the terms of the informal agreement concluded by the major Latin American producers in October 1957 with the intention of maintaining orderly market conditions, and renewed on a more comprehensive basis in October 1958, did not prevent a downward movement of prices. Save in Brazil and one or two other countries, however, the effect of the price decline on export receipts was offset in part by increases in the volume of shipments. Cocoa was one of the few commodities whose prices rose markedly from 1957 to 1958. Despite reduced output and a reduced volume of exports, the advance in prices raised the export receipts of the major producers. Civil strife in Cuba and the ensuing uncertainty with respect to the sugar cane harvest kept the price of sugar in the free world market throughout 1958 well above the floor price set by the International Sugar Agreement, though it was much below the high average of 1957. Expanded shipments to the United States at the protected U.S. price provided countries supplying the U.S. market with some compensation for the fall in the free world price.

The widespread recession in textile manufacturing kept prices of fibers depressed throughout the year. Wool prices declined steadily from mid-1957 through 1958, the average for 1958 being about one-third less than the average price in 1957. Expansion of volume and/or increased prices of other livestock products partly or wholly offset the effect of this decline on the export receipts of some of the exporting countries, and there was some recovery in wool prices in the early months of 1959. Pressure of rising sur pluses led to a reduction in the price of long-staple cotton by well over 30 percent; as a result of an expanded volume of shipments, however, the export receipts of the Egyptian Region of the United Arab Republic and the Sudan were comparatively well maintained. The prices of other types of cotton, though weakened by slackening demand, were not more than 6 percent lower than in 1957. Wheat and tobacco prices changed even less, and receipts of major exporters of these commodities varied mainly with the volume of their exports. Poor crops caused an advance of rice prices but reduced exportable supplies, so that the receipts of Burma and Thailand, the two main exporting countries, fell sharply.

Exports of nonferrous metals declined sharply between 1957 and 1958 in both price and volume. The downward movement of copper prices in recent years, caused primarily by expansion of productive capacity, was accelerated after mid-1957 by a slackening of demand. It was reversed in mid-1958 through deliberate cuts of output in major producing countries and some revival of inventory accumulation. Subsequent strikes in Rhodesian and Western Hemisphere copper mines reduced supplies further and contributed to the strengthening of prices. The average price for the year, however, was some 10 percent less than the average for 1957 and the receipts of major exporters fell by some 15 percent. In spite of reduced demand and increased sales by the U.S.S.R., the average price of tin, supported by buffer stock operations and export quotas under the International Tin Agreement, remained in 1958 close to the 1957 average. The drastic restrictions imposed on the volume of exports, however, brought about a sharp reduction of export earnings. Early in 1959 the prices of both copper and tin showed considerable gains. Lead and zinc prices followed, by and large, a similar pattern: they weakened in the earlier, and to some extent recovered in the later, part of 1958, despite import quotas imposed by the United States in October. The depressing effect of reduced U.S. demand on the price of natural rubber was lessened by increased purchases by the U.S.S.R., and total shipments of rubber were only slightly less than in 1957. Recovery of U.S. demand toward the end of 1958 led to a gradual rise of prices.

As in previous postwar recessions, exports of petroleum and products were not visibly affected by the slackening of industrial activity. Prices in 1958 were much the same as in 1957, and the total volume of exports continued the upward trend of earlier years. The advance was heavily concentrated in Middle Eastern countries, where progress had been hampered in 1957; Venezuela’s exports, after rising sharply in 1957, showed some contraction in 1958. U.S. imports of petroleum and products increased somewhat from 1957 to 1958; a slight decline in imports of crude petroleum, curbed by voluntary quotas, was outweighed by a considerable rise in imports of refined products. There was some reduction in petroleum prices, particularly in the Middle East, in the early months of 1959.

Balance of Payments Developments

The principal changes from 1957 to 1958 in world balance of payments relations were the re-emergence of a large payments surplus of the rest of the world with the United States, a rise to unprecedented levels in the aggregate surplus of other countries exporting manufactures, and an increase in the aggregate deficit of countries exporting mainly primary products; this deficit would have been even greater had not many of these countries been forced, by shortages of reserves and of other sources of finance, to curtail their external expenditures.

The transfer of gold and dollars from the United States to other countries, which had continued each year after 1953, though at a diminishing rate, until the twelve months following the Suez events, began again late in 1957 and continued on a large scale through 1958. In 1958 the surplus of the rest of the world in transactions with the United States, as measured by transfers to official holders, amounted to $2.9 billion, compared with a deficit of $1.4 billion in 1957. Though economic activity in the United States was less in 1958 than in 1957, U.S. imports and foreign expenditures generally were well maintained. The great improvement in the balance of payments of other countries with the United States was attributable in large measure to declines of $3.6 billion in U.S. receipts from exports and of nearly $0.8 billion in U.S. receipts from capital inflow. In part these declines were due to the cessation of the special factors which had expanded U.S. exports in 1957 and to the cessation, and partial reversal, of speculative capital movements from Europe. In part the decline in exports may be attributed to a flattening out in the upward trend of output and aggregate demand in other industrial countries—a flattening out in marked contrast to the continued growth of activity in these countries during the previous U.S. recession, when the rest of the world’s expenditures in the United States, far from falling, had risen by $700 million from 1953 to 1954. The balance of payments between the United States and other countries appears to have been more sensitive to the relatively slight slackening of demand in the overstrained European economies than to the more substantial decline in demand and output from a moderately high level in the United States.

The aggregate payments surplus of the other manufacturing countries, which had been declining in each year since 1954 until 1957, when there was a deficit of more than $0.6 billion, reappeared in 1958 at about $4.1 billion, the highest surplus in the postwar period (Table 10). The payments balance improved in all the other manufacturing countries except Germany. The German surplus, which in recent years had greatly expanded, was reduced in 1958 but was still substantial. Only in France was there still a deficit, which, however, was much smaller than in 1956 or 1957.

Table 10Payments Balances of Countries Other Than the United States, by Major Groups, 1957 and 1958(In millions of U.S. dollars)
19571958
Countries exporting manufactures
United Kingdom–554776
Germany1,353742
France–1,019–150
Others–4252,718
Total–6454,086
Countries exporting primary products
Exporters of
Coffee–155–262
Other tropical foods–231–147
Other agricultural products–39–557
Metals and rubber–299–7
Petroleum429–299
Others–1,007–136
Total–1,302–1,408
Total excluding Venezuela–1,806–1,066
Source: Based on data from Tables 18, 20, 22, 24, and 26.
Source: Based on data from Tables 18, 20, 22, 24, and 26.

In the first four months of 1959 the aggregate surplus of the manufacturing countries other than the United States declined to some $250 million. There was a deficit in Germany because of certain nonrecurrent factors described later in this Report, and the other manufacturing countries together had a relatively smaller surplus than in 1958.

Three fourths of the improvement from 1957 to 1958 in the balance of payments of the manufacturing countries other than the United States (with imports valued f.o.b.) may be attributed to a change in the balance of trade. Much the greater part of the improvement in the trade balance took place vis-à-vis the United States, for reasons already discussed (page 41). There was also some increase in the trade surplus with the primary producing countries. The deterioration in the terms of trade of the primary producers with all the manufacturing countries was a principal factor compelling them to curtail their total imports of industrial products. The fact that this contraction affected their imports from the United States rather than those from the other manufacturing countries, which were thus enabled to improve their trade balance with the primary producers, must be attributed to a variety of causes also discussed above.

The improvement in the trade balance was particularly large in Japan—where it was equal to nearly 30 percent of 1957 imports—the Netherlands, Italy, Switzerland, France, and Denmark. The favorable shift in the trade balance in all these countries, supplemented in France and Italy by an improvement in service items, was primarily responsible for the sharp improvement in the balance of payments. In the United Kingdom and Belgium, however, both the capital balance and the trade balance improved substantially.

Among the countries showing a substantial improvement in the balance of trade, a large expansion of exports was particularly important for Denmark and the Netherlands; Japan, Italy, and Switzerland owed their improvement primarily to reductions in both the volume and the unit value of their imports. In Japan and Switzerland, as well as in the Netherlands, where imports also decreased significantly, the improvement in the balance was fostered by a decline, greater than in most other industrial countries, in real home demand and economic activity.

In the manufacturing countries generally, imports were much influenced by the decline in the rate of inventory investment—a natural consequence of the decline in the rate of industrial expansion and the downward trend of primary product prices. In Italy this led to a considerable decline in the volume of imports, though there was no similar movement in real demand and output.

The improvement of the balance of payments of the franc area in 1958 was due largely to the fall in the value of French imports from foreign countries, which was the result of lower prices, increased supplies from franc area sources, and the continuation of the import restrictions imposed in 1957. Although pressure of internal demand was reduced by a series of disinflationary measures in 1957 and 1958, both the volume and the value of exports to foreign countries failed to expand between 1957 and 1958, while the volume of imports from all sources remained approximately the same. The success of stabilization measures in promoting confidence was, however, reflected in gold dishoarding by French residents and the restoration to the ordinary exchange market of many of the transactions which had previously bypassed it, both of which served to reduce the payments deficit in 1958.

The notable improvement from 1957 to 1958 in the United Kingdom’s payments balance, which followed the adoption of a stricter credit policy, was due partly to an improvement in its trade balance. There was a favorable movement in the terms of trade. While, for reasons discussed elsewhere, the volume of exports fell, the volume of imports was maintained, there being little decline in the volume of activity and some increase in real consumption. Moreover, net earnings from oil and shipping increased. In addition, there was a considerable improvement in the capital balance, principally because overseas sterling holdings rose in 1958 after falling sharply in 1957. Part of this followed the reduction of the deficits of countries which hold their reserves in sterling; a larger part, however, was accounted for by the considerable rise in the sterling holdings of OEEC countries, reflecting in part the recovery of confidence in sterling which previously had shown some temporary weakness. Relatively high interest rates in the United Kingdom helped to strengthen the balance of capital transactions.

While Germany’s exports continued to increase more than those of most manufacturing countries, the rise in the volume of its imports was equaled only in Denmark, and the improvement in its balance of trade was relatively modest. This was, moreover, outweighed by a substantial increase in net capital exports. To some extent, the increase was the result of a reversal of the influx of short-term funds which had arisen from the difficulties of the United Kingdom, the Netherlands, and France in 1957. In considerable part, however, it resulted from the relative reduction of interest rates which the German monetary authorities helped to bring about.

While the decline in primary product prices reduced their export earnings, the trade balances of the majority of countries exporting primary products improved from 1957 to 1958, for their imports were reduced even more. The aggregate trade deficit for the countries whose trade is summarized in Table 9, where imports are valued c.i.f., fell by nearly $0.75 billion, after increasing by $1 billion from 1955 to 1956 and by $2 billion from 1956 to 1957. While the value of their exports declined by about $1.7 billion, their aggregate imports fell by nearly $2.5 billion, or 6 percent. Although the falling off in export income would of itself tend to reduce import expenditures, the main reason for the rather severe contraction of imports was the intensification of import restrictions and the depreciation of exchange rates which the diminution in reserves and in the possibility of further drawing on the resources of the International Monetary Fund compelled several countries to adopt. Especially in the countries exporting mainly metals and rubber, whose exports fell more sharply than those of any other country group listed in Tables 9 and 10, imports had to be curtailed to roughly the same extent as exports, so that their trade was balanced and their aggregate payments deficit was reduced.

In some countries, particularly India, Peru, Uruguay, and Burma, imports were sharply reduced, and both the trade and the payments balances improved. In India the improvement was due in part to an inflow of foreign capital, which increased from $370 million in 1957 to $628 million in 1958, and India’s payments balance improved from a deficit of nearly $700 million in 1957 to one of about $200 million in 1958. Despite considerable reductions in exports, Colombia, Peru, Burma, and Thailand were able to maintain or increase their foreign exchange holdings. Some countries whose payments balance deteriorated from 1957 to 1958, such as Australia—whose reserves had increased substantially in the previous year—and Guatemala, were able to maintain or increase their imports by drawing heavily on reserves. Other countries, including Brazil, Turkey, and New Zealand, covered their payments deficits largely by borrowing abroad.

In considering the significance of the net inflow of capital and grants into the primary producing countries in 1958, Venezuela should be distinguished from the other countries in this group. In Venezuela, purchases of oil concessions had been responsible for a large inflow of foreign capital in 1957, while in 1958 there was a similarly large outflow of capital. The net flow of capital and grants, excluding credits intended to finance deficits, received by primary producing countries other than Venezuela appears to have been little smaller in 1958 than in 1957. Some decline in U.S. direct investment was largely offset by increased loans from government agencies. The net flow of capital from the United Kingdom to the sterling area may have been slightly greater in 1957 than in 1958. Disbursements to primary producing countries by the International Bank for Reconstruction and Development amounted to nearly $500 million in 1958, some $125 million more than in 1957.

Of the aggregate deficit of the primary producing countries (including Venezuela), amounting to $1,400 million in 1958, some $475 million appears to have been financed by official borrowing, against some $130 million in the previous year; $125 million was financed by net borrowing from the Fund, compared with $350 million in the previous year; and in each of the two years about $800 million was financed by drawing on reserves. If Venezuela with its large reserve movements is excluded, the payments deficit of the other primary producing countries fell from $1.8 billion in 1957 to less than $1.1 billion in 1958, and their drawings on reserves from $1.3 billion to $460 million. This was not because there would have been no additional demand for imports if the means to pay for them had been available, but because the reserve positions of many countries had already been seriously weakened.

Reserve Developments

Total official gold and foreign exchange reserves held by national monetary authorities (excluding the U.S.S.R. and the countries associated with it), which had risen by $1.3 billion in 1956 and by $0.8 billion in 1957, rose by almost $1 billion, or slightly less than 2 percent, in 1958. Gold reserves and foreign exchange reserves increased in 1958 in roughly the same proportion (Table 11).

Table 11.Official Gold and Foreign Exchange Reserves, 1955-58
Official Reserves

at End of Year

(billion U.S. dollars)
Official Reserves

as Percent of

Imports c.i.f.1
19551956195719581955195619571958
United States221.7522.0622.8620.58185178170147
United Kingdom2.162.172.373.1122212128
Germany, Federal Republic of3.084.295.646.3265768588
Other manufacturing countries11.0310.479.6412.2253443644
All other countries13.8214.1313.3812.63
Total351.8353.1253.8954.8663595553
Of which gold435.4636.1037.3638.07
Reserves of countries other than
the United States
Gold413.7114.0414.5017.49
Foreign exchange316.3717.0216.5316.79
Dollars7.878.568.208.48
Credit balances in EPU0.991.091.271.37
Currency deposits with
BIS50.260.270.270.50
Other reserves67.247.116.806.43
Total gold and foreign
exchange330.0831.0631.0334.2743403639
Source: Based on data from International Monetary Fund, International Financial Statistics, and Board of Governors of the Federal Reserve System, Federal Reserve Bulletin.

Annual average of imports in three years ended with the year shown.

Gold reserves.

Totals may not equal sums of items because of rounding.

As reported from national sources.

Excluding deposits in terms of gold.

Including errors and omissions.

Source: Based on data from International Monetary Fund, International Financial Statistics, and Board of Governors of the Federal Reserve System, Federal Reserve Bulletin.

Annual average of imports in three years ended with the year shown.

Gold reserves.

Totals may not equal sums of items because of rounding.

As reported from national sources.

Excluding deposits in terms of gold.

Including errors and omissions.

The net addition to national gold reserves in 1958, amounting to $715 million, or 1.9 percent, fell short of the very high figure of $1,260 million for 1957, but was not unusually low. The decline of $545 million in the growth of these reserves may be regarded as the net result of the other factors bearing upon demand and supply for gold as shown in Table 12. The principal element was the change in the movement of the gold holdings of the Fund and the EPU, which declined in 1957 when the Fund sold $600 million of gold to the United States to replenish its dollar holdings. The effects of these movements on the gold holdings of individual countries were, of course, matched by an opposite effect on their rights to draw on the resources of the Fund and the EPU.

Table 12.Disposition of Gold, 1957 and 19581(In millions of U.S. dollars)
19571958Change from

1957 to 1958
Net supplies available2
Production1,0201,050+30
Soviet sales260210–50
Total1,2801,260–20
Disposition of gold
1. Industrial consumption and
private hoarding3540570+30
2a. Increase in BIS holdings–15175
2b. Increase in central bank
gold deposits with the BIS
presumed included in na-
tional reserves3–20225
2c. Item 2a minus item 2b5–50–55
3. Increase in Fund and EPU
holdings–52525+550
4. Total of 1, 2c, and 320545+ 525
5. Increase in national reserves1,260715-545
Total of 4 and 51,2801,260–20

Excluding gold retained in the U.S.S.R. and countries associated with it.

In markets outside the U.S.S.R. and countries associated with it.

The estimate of industrial consumption and private hoarding is calculated by subtracting, the increase in the gold holdings of national authorities and international institutions from the known value of gold production plus the estimated value of U.S.S.R. gold sales. On the assumption that countries generally include in their reported gold reserves that part of their deposits with the BIS which is expressed in gold, a deduction has been made from total official gold holdings in order to avoid double counting. To the extent that these deposits are not included in reported national gold holdings, the deduction required for this purpose would be smaller, and the residual figure would have been less than $570 million in 1958.

Excluding gold retained in the U.S.S.R. and countries associated with it.

In markets outside the U.S.S.R. and countries associated with it.

The estimate of industrial consumption and private hoarding is calculated by subtracting, the increase in the gold holdings of national authorities and international institutions from the known value of gold production plus the estimated value of U.S.S.R. gold sales. On the assumption that countries generally include in their reported gold reserves that part of their deposits with the BIS which is expressed in gold, a deduction has been made from total official gold holdings in order to avoid double counting. To the extent that these deposits are not included in reported national gold holdings, the deduction required for this purpose would be smaller, and the residual figure would have been less than $570 million in 1958.

Reserves of foreign exchange, mainly U.S. dollars and sterling, which had risen from 1951 to 1956 at an average rate of $750 million per annum, declined in 1957 by $490 million and rose in 1958 by $260 million. The proportion of the world’s reserves held in the form of foreign exchange at the end of 1956 was 32 percent; at the end of 1957, and again at the end of 1958, it was about 30.7 percent.

The stability in this proportion during 1958 was the outcome of a number of divergent tendencies. Countries other than the United States, many of which hold a high proportion of their reserves in foreign exchange, had a large payments surplus with the United States, which holds reserves in gold and not in foreign exchange. However, outside the United States there was a decline from 53.3 percent to 49.0 percent in the proportion of countries’ reserves held in the form of foreign exchange. Almost one fourth of this decline was attributable to the fact that a large part of the increase in reserves accrued to industrial countries such as the United Kingdom, Belgium, the Netherlands, and Switzerland, which usually hold a particularly small proportion of their reserves in foreign exchange, while the reserves of the primary producing countries, most of which are in foreign exchange, declined.

The remaining three fourths of the decline is attributable to the fact that in most, though not all, European countries where reserves increased, the gold component increased more than proportionately. This was particularly marked in the United Kingdom, where the gold component of reserves increased during 1958 from a little less than 70 percent to about 90 percent, and in Italy, where it rose from 30 percent to about 45 percent. In the United Kingdom, the amount of total reserves held in the form of dollars was unusually high at the end of 1957, when reserves were being replenished by foreign credits; and during 1958, when total reserves increased materially, the dollar component declined to a more normal level.

Of the surplus of $2.9 billion which the rest of the world earned in transactions with the United States in 1958, $2.3 billion was settled through gold sales by the United States, and the remainder, some 20 percent, by transfers of dollars to official holders. The very large gold sales in 1958, however, were not due to any great extent to any change in the composition of reserves of other countries. The proportion of total reserves held in the form of dollar balances in the United States fell only slightly, from 26.4 percent at the end of 1957 to 24.8 percent at the end of 1958, and the proportion of U.S. dollars in the foreign exchange reserves of other countries in fact increased appreciably during 1958.

Of the foreign exchange reserves held in forms other than balances with the United States, currency deposits held with the Bank for International Settlements (most of which were probably denominated in dollars) rose by $230 million, or by 85 percent; reserves held with countries other than the United States appear to have declined—though the calculation is uncertain—by some 5 percent. The exchange reserves, which are predominantly in sterling, of the independent countries of the sterling area other than the United Kingdom declined in 1958 by the equivalent of some $390 million, or more than 10 percent.

With the decline in the value of world trade from 1957 to 1958, the fall recorded since 1954 in the ratio of world reserves to world imports was checked. If, as in Table 11, imports are recorded in terms of a three-year moving average, this ratio shows a continued decline during 1958, though for the world excluding the United States it increased during that year from 36 percent to 39 percent. The reserves of primary producing countries have become increasingly inadequate. There was a substantial improvement in 1958 in the reserve position of manufacturing countries other than the United States, and especially of the United Kingdom. At the end of 1958 the United States had about 38 percent of the total reserves and 54 percent of the gold reserves of all countries, and the ratio of U.S. reserves to U.S. imports was more than three times that of other manufacturing countries.

Measures to Deal with Payments Disequilibrium

The problems of payments disequilibrium in the manufacturing countries became less acute in 1958 with the marked change in the business climate that was apparent in that year, and to some extent as a result of the corrective measures taken earlier. In many primary producing countries, on the other hand, payments difficulties increased; but more frequently than in previous years, these were of external rather than domestic origin, and the steps that would be effective in remedying them were more difficult to determine.

Among the manufacturing countries, only France was still in 1958 under the necessity of adopting measures to arrest a payments deficit; in several of these countries, however, notably Japan, the Netherlands, Denmark, and the United Kingdom, as well as France, the improvement which occurred from 1957 to 1958 was in part a result of strenuous corrective measures initiated in 1957 and continued in 1958. In most of the manufacturing countries the improvement was such as to enable them, without risk of serious pressure on the balance of payments, to lessen the severity of fiscal and monetary restraints, while the falling tendency of market and official interest rates helped to counteract the slackening of external demand and economic activity.

The slackening in demand pressure on domestic resources made it easier to continue the policy of lowering interest rates adopted in the Federal Republic of Germany in order to encourage capital exports and thus to reduce the payments surplus. The favorable payments situation of the European industrial countries also was an important factor in the adoption of nonresident convertibility in December 1958, and in the other steps, described elsewhere in this Report, to reduce discriminatory restrictions and, in some countries, to give greater freedom to capital exports. In Japan, while most of the 1957 measures designed specifically to restrict import financing were withdrawn in 1958, steps were taken to encourage exports. In France, the anti-inflationary measures adopted in the second half of 1957 were reinforced in 1958 by further measures of credit control and by tax increases. With the extension of convertibility the franc was devalued by 14.9 percent, and a new par value was declared. The devaluation was followed, in January 1959, by the relaxation of regulations concerning foreign investment in France and by the reintroduction of liberalization of imports, which had been suspended since mid-1957.

Those exporters of primary products which had sizable exchange reserves continued to draw upon them substantially in 1958; there was also an increase in official borrowing to finance deficits caused by declining earnings from exports. However, shortages of reserves and limited borrowing capacity compelled many primary producing countries to adopt other measures to reduce external disequilibrium. In most of these countries the measures took the form of adjustments of exchange rates or taxes which raise exporters’ returns and importers’ costs in domestic currency; some countries reimposed or tightened import controls. These measures were combined, as a rule, with some degree of restraint on domestic credit creation. Few countries, however, have found it possible to make use primarily or solely of fiscal and monetary measures to establish equilibrium.

In Indonesia, where economic conditions were affected by political disturbances, severe import restrictions were reimposed early in 1958. In Australia and New Zealand, where attempts were made to preserve internal stability and employment in the face of declining export receipts, there was not only considerable use of reserves and of official borrowing but import restrictions were maintained or intensified. Import restrictions were also continued in India, in conjunction with other measures, largely in order to curtail less essential imports in favor of those considered essential for the “core” of the development program. Peru and Greece were among the countries that raised duties on imports; in Greece, the limitation of import demand was also sought by restricting import credits and reducing government expenditure. The Union of South Africa, where import liberalization in 1957 was followed by a substantial rise in imports in the first part of 1958, made use of fiscal and monetary restraints to correct the trade balance, and also intensified its controls of sterling transfers.

In several Latin American countries with fluctuating exchange rates the rates were permitted to depreciate in the course of the year. The value of the Chilean peso declined by some 36 percent from the end of 1957 to the end of 1958, and during the same period the boliviano depreciated by 28 percent. The Peruvian sol, which had been held stable for several years, was unpegged in January 1958, and by the end of the year it had fallen by some 30 percent. The most common exchange devices which affected exports, however, were adjustments of multiple rate structures, including exchange premiums, surcharges, etc., and changes in export taxes. Argentina replaced its previous exchange system by a greatly depreciated single fluctuating rate. Adjustments in export rates were more frequent than in earlier years. Colombia and Brazil depreciated both their effective export rates for coffee and certain import rates; Colombia also maintained import prohibitions. Nicaragua abolished the tax on coffee exports. Argentina and Uruguay adjusted both their effective export rates for wool and other export commodities and their import rates. Afghanistan depreciated the export rates for karakul, wool, and cotton. In Turkey, a simplification of the rate structure in August 1958 was accompanied by a considerable depreciation of both export and import rates. The United Arab Republic (Egyptian Region), the Sudan, and Peru reduced export duties on extra-long-staple cotton.

Domestic Financial Developments and Policies in Industrial Countries

The authorities in practically all the more industrialized countries were confronted in 1958 with the problem of checking the slackening of activity and inducing a renewed expansion without sacrificing the objective of price stability. This task was made more difficult nearly everywhere by the fact that prices, though rising more slowly than before, had not entirely leveled off. On the other hand, the adoption of antirecession measures was facilitated in most of these countries by favorable balance of payments conditions.

In many countries, the authorities believed that the slowing down or even temporary cessation of growth was not entirely unhealthy after the inflationary pressures of earlier years. A too energetic reflationary policy, designed to continue a high rate of growth, might, it was feared, give rise to unsound developments, intensify inflation, and make necessary even more severe adjustments at a later stage. Accordingly, the authorities did not quickly reverse their earlier anti-inflationary policies. In most countries, they found it unnecessary to apply over-all expansionary measures, other than the relaxation of credit restrictions and permitting a gradual lowering of the rate of interest—a result which in many countries required no active intervention on their part. Save in one or two countries fiscal action was confined to specific measures designed to affect particular sectors of industry or particular depressed areas. It was hoped that these policies would succeed in inducing an adequate revival in economic activity in 1959 within an environment of monetary stability and a satisfactory balance of payments position.

Thus, the mild recession did not induce the governments of industrial countries to relax their watchful concern over the trend of prices. As soon as the recovery in production was well under way, as in the United States, or whenever fiscal measures gave rise to renewed concern over inflation, as in Norway in early 1959, the monetary authorities discontinued their easing policies.

Monetary Policies

The most overt manifestation of antirecession policy was a widespread, though mostly moderate, reduction in discount rates. From the beginning of 1958, Belgium, the Netherlands, and the United Kingdom reduced the rate five times, Ireland four times, and the Federal Republic of Germany and France thrice. Denmark and Japan reduced it twice, while Austria, Finland, Italy, Sweden, Switzerland, and the Union of South Africa reduced the rate once. In early 1959, the lowest discount rates were in Switzerland (2 percent) and in Germany and the Netherlands (2.75 percent). The United States, after reducing the rate twice in the first half of 1958, raised it four times thereafter, to 3½ percent. In Canada, also, where the rate is tied to the weekly average tender rate for treasury bills, it fell to a low of 1.12 percent in July 1958 and then rose to 5.42 percent in June 1959.

In many of the European countries, the reductions in official discount rates were to a large extent adjustments to a prior fall in money market interest rates. In the United States and, to a still greater extent, in Canada the declines in official and in market rates were practically simultaneous. The fall in market rates which began in some industrial countries in the latter part of 1957 and in others in early 1958 (Table 13) reflected an increase in liquidity. In the United States, this was brought about largely by Federal Reserve policies, in spite of the outflow of gold reserves, and in most European countries, by the influx of gold and foreign exchange, with little or no need for active intervention by the authorities. Indeed, in Germany and the Netherlands, the authorities undertook open market sales in order to moderate the effects of the increase in liquidity of the commercial banks; in the Netherlands, the reserve requirements for banks were raised by degrees to 10 percent, being again reduced in April 1959 to 7 percent.

Table 13.Market Interest Rates, Selected Countries, 1957, 1958, and 1959(In percent per annum)
195719581959
Sept.Dec.Mar.JuneDec.Mar.
United States
Treasury bill rate3.583.101.35.882.812.85
Government bond yield (medium-term)3.992.952.402.023.693.94
Government bond yield (long-term)3.643.223.253.193.803.92
Canada
Treasury bill rate3.803.622.271.723.494.30
Government bond yield (long-term)4.423.753.713.894.764.88
United Kingdom
Treasury bill rate5.446.435.774.463.163.30
Government bond yield (short-term)5.385.915.064.644.304.06
Government bond yield (long-term)5.845.885.695.535.455.25
Corporate bond yield (debentures)6.596.476.266.136.025.95
Australia
Government bond yield (short-term)4.444.414.304.254.234.00
Government bond yield (long-term)4.985.004.984.944.934.89
New Zealand
Government bond yield4.834.985.014.984.884.86
Union of South Africa
Treasury bill rate3.253.253.503.503.683.53
National Finance Corporation (deposit) rate3.123.123.383.503.50
Government bond yield4.754.755.005.255.255.25
Belgium
Treasury bill rate4.254.003.502.502.25
Government bond yield4.824.944.804.644.294.28
Denmark
Government bond yield5.765.745.435.195.225.13
France
Government bond yield6.105.916.115.135.445.39
Call money rate, public3.263.343.523.453.703.74
Call money rate, private5.775.725.967.516.074.36
Germany, Federal Republic of
Call money rate4.283.843.633.722.692.75
Mortgage bond yield5.465.104.764.373.833.56
Mortgage bond yield (fully taxed)6.16.16.16.05.55.5
Italy
Government bond yield6.896.846.456.305.805.40
Netherlands
Treasury bill rate4.864.643.142.902.261.68
Government bond yield4.824.864.404.124.314.07
Sweden
Government bond yield4.394.464.424.294.274.26
Industrial bond yield5.185.285.285.055.075.06
Commercial banks’ discount rate (three-month bills)5.755.755.755.255.255.25
Switzerland
Government bond yield3.923.673.373.043.002.87
Source: International Monetary Fund, International Financial Statistics; Central Statistical Office, Monthly Digest of Statistics (London); Institut National de la Statistique et des Etudes Economiques, Bulletin Mensuelde Statistique (Paris); Skandinaviska Banken, Quarterly Review (Stockholm); Konjunkturinstitutet, Konjunkturjournalen (Stockholm); and Deutsche Bundesbank, Monatsberichte.
Source: International Monetary Fund, International Financial Statistics; Central Statistical Office, Monthly Digest of Statistics (London); Institut National de la Statistique et des Etudes Economiques, Bulletin Mensuelde Statistique (Paris); Skandinaviska Banken, Quarterly Review (Stockholm); Konjunkturinstitutet, Konjunkturjournalen (Stockholm); and Deutsche Bundesbank, Monatsberichte.

While reductions in discount rates were generally preceded by reductions in market interest rates, they were also a signal for reductions in the rates paid and charged by commercial banks, with possible reactions on domestic investment and international capital movements. In Germany, Switzerland, and the Netherlands, one purpose of the official rate policy was to reduce deposit rates, and thus to discourage a net inflow of short-term capital. Some countries, such as Austria, France, and the Scandinavian countries, kept their interest rates relatively high with a view to their influence on capital movements. In the United Kingdom, the bank rate was reduced in accordance with the marked improvement on external account and the change in domestic economic conditions. Long-term rates, however, declined only moderately owing to continued public funding operations and to sales of investments by commercial banks since the last quarter of 1958, and possibly to some feeling on the part of investors that a substantial rise in bond prices might not be sustained in the longer run. In Belgium, efforts to reduce long-term interest rates by open market purchases met with resistance owing to an increased Treasury demand in the money and capital markets. In France and the Netherlands, long-term market rates rose during the second half of 1958, without, however, reaching the level of the earlier part of the year. This moderate rise appears to have reflected increased recourse of governments to the capital market. Interest rates declined again in the first quarter of 1959.

Although discount rates in the United States moved parallel to market rates, their changes were less sharp. After a sharp decline in late 1957 and early 1958, brought about by open market purchases and reductions in reserve requirements, market rates began to rise. This increase, following a period of relative credit ease, was associated with the fact that, as economic activity and the flow of monetary transactions increased, the supply of money increased more slowly. Long-term bond yields varied, though to a lesser extent, along with short-term rates. Heavy selling of U.S. Government securities occurred in the market during June; in mid-July, the situation was complicated by the emerging crisis in the Middle East and by announcements of a major Canadian Government refunding operation and of two large U.S. Treasury financing operations. These developments led the Federal Reserve System in the latter part of July to operate in medium-term and long-term government securities, and in the “rights” in a Treasury refunding, neither of which is ordinarily included in the transactions of the Federal Reserve System. The yields of long-term government securities rose by the early months of 1959 to a level which, though still lower than in most other industrial countries, was higher than the prerecession peak in the United States. Here the forces tending to raise the general level of interest rates were clearly being reinforced by anticipations regarding the future of government bond prices. Toward the end of 1958 and in early 1959, U.S. interest rates continued to rise, but less rapidly and less evenly. In view of the rather precipitate rise in stock prices from the end of 1957 onward, margin requirements on new stock purchases were raised in August to 70 percent and in October to 90 percent.

In addition to reducing discount rates, many countries relaxed restrictions on bank credit in 1958, though slowly and selectively. In a few countries, legal reserve requirements for commercial banks were altered. In the United States, there were four reductions of legal reserve ratios between February and April 1958. Effective April 1, 1959, Germany lowered the reserve requirements for foreign-owned deposits to the same level as is required for residents, since a net inflow of funds from abroad had, from the beginning of the year, been to an increasing extent succeeded by a net outflow. During 1958 and again in February 1959, the Commonwealth Bank of Australia, in order to sustain domestic spending in the face of falling export incomes and thus to maintain employment at a satisfactory level, eased the minimum reserve requirements which in Australia are imposed by the obligation to maintain Special Accounts with the Commonwealth Bank. The South African Reserve Bank, in an effort to improve the external reserve position, imposed supplementary reserve requirements which were raised by several steps to 8 percent in October 1958; then, in view of the slackening in economic activity, these supplementary requirements were twice reduced. The Swiss National Bank ended its gentlemen’s agreement with commercial banks under which the latter had agreed to maintain certain minimum reserves. On the other hand, the Reserve Bank of New Zealand raised its legal reserve requirements, mainly to reduce pressure on the balance of payments.

The gradual lifting of other, more specific, types of restriction on credit also had considerable importance. For instance, several countries, including the United Kingdom, France, and the Netherlands, repeatedly relaxed restrictions on hirepurchase transactions in order to stimulate purchases of consumer durable goods. Especially in the United Kingdom, where restrictions were suspended in October 1958, the resulting rise in consumer outlays was a major reason for the moderate upturn in activity toward the end of the year. The United Kingdom also first eased, and in early 1959 suspended, most of the controls over borrowing by residents which had been in effect since 1939. Italy took steps to encourage private investment in a similar manner. In Germany, the large increase in new capital issues was aided by reductions in maximum rates on time and savings deposits.

Certain restrictions on bank advances were lifted in the United Kingdom and in France. Individual rediscount ceilings were raised in France, and penalty rates were lowered three times. The authorities in Norway eased the regulations governing commercial bank lending activities. In early 1959, however, increasing concern over the effects of fiscal measures on prices and on the external balance led to a new agreement with private banks designed to limit credit expansion in 1959.

Bank credit to the private sector (Table 14) increased at a higher rate than in 1957 in Australia, Germany, Sweden, the United States, and the United Kingdom (mainly in the latter part of the year when the increase was particularly marked in loans to retail trade, to personal and professional borrowers, and to hirepurchase companies). In Canada, France, Italy, Japan, and Switzerland, on the other hand, bank credit to the private sector rose at a lower rate, and it declined in Belgium, the Netherlands, New Zealand, and the Union of South Africa. In the United States, it increased at the same rate as in 1957, as a decline in business loans was more than offset by an upswing in real estate and farm loans, mainly in the second half of the year.

Table 14.Percentage Changes in Money Supply and in Bank Credit, and Index of Income Velocity, Selected Countries, 1957 and 1958
Money Supply1Bank Credit to

Private Sector1
Net Bank Credit

to Government1.2
Index of Income Velocity3

(1956= 100)
19571958195719581957195819571958
Australia5–3391310841074
Austria81113752026103100
Belgium-Luxembourg67–16–56103
Canada4134343510698
Denmark414468610396
France9614625310298
Germany, Federal Republic of121311149892
Italy610975111007987
Japan41323172271027957
Netherlands–2126–3–813112108
New Zealand–613–29–31028
Norway1443–3104104
Sweden2126254103106
Switzerland311543327101
Union of South Africa2–314–410
United Kingdom–12–19199610–110105111
United States–1445113105103
Source: Based on data from International Monetary Fund, International Financial Statistics; Monatsberichte des Österreichischen Instituts für Wirtschafts-forschung,. March 1959 (Vienna); Dominion Bureau of Statistics, Weekly Bulletin, March 26, 1959 (Ottawa); Økonomiske Sekretariat, Economic Survey, 1959 (Copenhagen); Ministero del Tesoro, Relazione Generate Sulla Situazione Economica del Paese, 1957 and 1958 (Rome); The Bank of Kobe, Ltd., Monthly Survey, December 1958; Centraal Planbureau, Centraal Economisch Plan, 1959 (The Hague); Statistisk Sentralbyra, Statistiske Meldinger (Oslo); Ministry of Finance, Preliminary National Budget for 1959 (Stockholm).

Changes are from end of one year to end of following year.

Monetary system’s claims on government less government deposits is used to measure net borrowing of the central government from the banking system. In Austria, credit from the Treasury to the banking system is treated as government deposits, and transactions of official entities are included. In Canada Japan the Netherlands, Norway, the Union of South Africa, and the United States, transactions of local government authorities are also included.

Income velocity is the ratio of gross national product to money supply (average of end-of-month data).

Year ended June 30.

Change from September 1957 to August 1958.

Bank credit to private sector and to government.

Money supply is average of end of quarters.

Year beginning April 1.

Changes in “other” banks’ (London clearing banks) claims on business and individuals.

Bank of England domestic loans and investments to government plus “other” banks’ domestic loans and investments to government.

Source: Based on data from International Monetary Fund, International Financial Statistics; Monatsberichte des Österreichischen Instituts für Wirtschafts-forschung,. March 1959 (Vienna); Dominion Bureau of Statistics, Weekly Bulletin, March 26, 1959 (Ottawa); Økonomiske Sekretariat, Economic Survey, 1959 (Copenhagen); Ministero del Tesoro, Relazione Generate Sulla Situazione Economica del Paese, 1957 and 1958 (Rome); The Bank of Kobe, Ltd., Monthly Survey, December 1958; Centraal Planbureau, Centraal Economisch Plan, 1959 (The Hague); Statistisk Sentralbyra, Statistiske Meldinger (Oslo); Ministry of Finance, Preliminary National Budget for 1959 (Stockholm).

Changes are from end of one year to end of following year.

Monetary system’s claims on government less government deposits is used to measure net borrowing of the central government from the banking system. In Austria, credit from the Treasury to the banking system is treated as government deposits, and transactions of official entities are included. In Canada Japan the Netherlands, Norway, the Union of South Africa, and the United States, transactions of local government authorities are also included.

Income velocity is the ratio of gross national product to money supply (average of end-of-month data).

Year ended June 30.

Change from September 1957 to August 1958.

Bank credit to private sector and to government.

Money supply is average of end of quarters.

Year beginning April 1.

Changes in “other” banks’ (London clearing banks) claims on business and individuals.

Bank of England domestic loans and investments to government plus “other” banks’ domestic loans and investments to government.

Net bank credit to the public sector showed substantial increases over 1957 in many countries. In France and Sweden, however, the rate of public borrowing from the banking system declined significantly, and in the United Kingdom and Norway net government borrowing declined. In the United States, public sector net borrowing from the banking system was negative in the first quarter; in the second quarter it rose by $4.4 billion, in the third quarter by $5.8 billion, and in the last quarter of the year by $3.2 billion. In the first quarter of 1959, it fell by $3.6 billion.

In most industrial countries the money supply expanded more rapidly during 1958 than during 1957. In Denmark the rate of expansion was the highest since the war, in the Netherlands since 1947, and in Canada since 1950. Only in France and Sweden was the rate of increase lower than in 1957. In New Zealand, the Union of South Africa, and Australia, the money supply declined. The income velocity of money, however, after increasing in 1956 and 1957, declined in many industrial countries during 1958, thus offsetting to some extent the effect of increased money supplies on the demand for goods and services.

Fiscal Policies

The recessionary tendencies appearing in many countries in 1957-58 were to some extent counteracted by the “built-in stabilizers” of the fiscal system. While government revenues tended to decline, expenditures on unemployment benefits increased automatically. Both tendencies helped to sustain private expenditures. New tax measures designed to combat the slackening in activity were generally selective rather than sweeping, and frequently aimed not only at maintaining demand but also at supporting some particular sector or enhancing the efficiency or competitiveness of the economy. On the other hand, in many countries there was a more than normal increase in government expenditures, though there was no large-scale recourse to public works.

Tax reduction, including a 9 percent reduction in income taxes, was a part of Canada’s program for budgetary stimulation of the economy. Increases in income and indirect taxes, however, were imposed by the Canadian budget of 1959-60. No other industrial country granted broad tax concessions until 1959. In Germany, a number of tax reforms were designed to contribute to a revival of the capital market and ultimately to stimulate investment. In order to encourage private fixed investment, the Netherlands reinstituted rebates on new investment outlays that had previously been abolished, and the United Kingdom raised its initial depreciation allowances. It was not until the budget presented in April 1959, however, that the U.K. authorities felt that sufficient progress had been made in restoring the strength of the balance of payments and the stability of the domestic price level to permit tax reductions over a broad front.

In the United States, increased government expenditures for public construction, unemployment compensation, agricultural price support, and defense were strategic factors in the recovery. In Canada, there was a considerable expansion of housing loans and welfare expenditures. Other countries also, e.g., the Netherlands, Norway, Austria, and Italy, accelerated public expenditures, mostly for purposes for which they had been held back during the boom. Belgium planned to increase public investment and welfare expenditures in 1959, and also to grant some fiscal concessions to weak sectors of the economy.

These fiscal developments resulted in enlarged over-all budget deficits in most of these countries. As the private sector demanded fewer funds while liquidity increased, it became possible in some countries to finance these deficits to a large extent without recourse to central banks. In the United Kingdom, an increase in public expenditures in 1958-59 was more than matched by a rise in revenues, so that the over-all budget deficit for the year was slightly smaller than in the previous year. In Germany, there was a substantial cash deficit in the federal budget, because of substantial payments to foreign countries; however, there continued to be a surplus in domestic cash transactions.

In several countries taxes were increased and subsidies were reduced or eliminated to prevent increased expenditure for public investments and unemployment relief from giving rise to unduly large budget deficits. In Sweden, for example, increased public investment and welfare expenditures resulted in an increased overall budget deficit, and in consequence the Government envisaged higher indirect taxes for the fiscal year 1959-60.

Domestic Financial Developments and Policies in the Primary Producing Countries

Since the end of World War II, many of the primary producing countries have been subject to strong and persistent inflationary pressures. In the endeavor to accelerate the growth of their productive resources, many of them have permitted money and credit to expand much faster than current real output. Of some 40 less developed countries, for which comparable records are available, there are 25 in which, during the period from 1948 to 1957, the average annual increase in the money supply was 10 percent or more, and 19 in which the average annual increase in the cost of living exceeded 5 percent. In several countries, both rates were in excess of 20 percent. Moreover, in most of these countries, with a few exceptions such as Venezuela and Mexico, the increase in the money supply developed despite a substantial decline in their gold and foreign exchange reserves, and despite the foreign financial assistance which many of them received.

The urge for rapid economic growth, of which these inflationary tendencies are often a by-product, is very powerful in many parts of the world today. Some of the less developed countries have made substantial progress, even in a few cases when hampered by the distortions created by inflationary pressures. In others, however, inflationary pressures have resulted in little more than an appearance of feverish activity, while real output and income were actually stagnating, or were expanding only at an unsatisfactory rate. Experience has shown that one of the foremost problems that confronts such countries is the establishment of financial stability, both internal and external, as a necessary—although not a sufficient—condition for sound and accelerated economic development.

During 1958, for a variety of reasons, including the inadequacy of foreign exchange resources, several countries, such as India and the Philippines, found it necessary to scale down their development expenditures. For many of the other less developed countries, the continued though partially abating fall in the prices of primary products and the consequent deterioration in their terms of trade increased during the last two years the difficulties of promoting economic development in conditions of monetary stability. Under such circumstances, moreover, the servicing of past foreign borrowing is likely to become increasingly burdensome. These price trends not only reduced the volume of real resources available for consumption and investment, but also affected adversely the financial position of governments. Much of the public revenue of these countries comes from import and export duties and similar charges, and any decline in the value of exports and any corresponding reduction in imports required in order to maintain balance of payments equilibrium also tend to reduce the resources available to the government. Similar consequences followed the efforts made in a number of countries, such as India, Peru, and the Sudan, to soften the impact of declining prices on domestic producers by cutting export duties. In some countries, particularly those which produce coffee or tin, the expenditure required to finance stockpiling in an effort to prevent sharp price declines further reduced the resources available for other purposes. The revenue effects of reduced imports were offset, wholly or in part, in some countries by increasing existing import duties or imposing new ones or by depreciating the import exchange rate. Some countries revised upward their income and other taxes.

Despite the handicaps under which they labored in 1958, several of the less developed countries actually reduced their government deficits, and in some of them, notably Bolivia, India, Pakistan, and Turkey, the rate of monetary expansion was less than in previous years. In Ecuador, Nicaragua, and the United Arab Republic (Egyptian Region), the money supply was reduced (Table 15). The cost of living rose less than in previous years in Israel and Paraguay, and in several countries, e.g., Burma, Ceylon, Ecuador, and Pakistan, it declined.

Table 15.Percentage Changes in Cost of Living, Money Supply, and Bank Credit, Selected Countries, 1953-581
Net Bank Credit toBank Credit to
Cost of LivingMoney SupplyGovernmentPrivate Sector
AverageAverageAverageAverage
1953-56195719581953-56195719581953-56195719581953-5619571958
Argentina102650191246112389201832
Bolivia220–1419127511153653781123242
Brazil211423203421264521182323
Burma48–1623–1819–7121037–21
Ceylon5–16–84–7271716179
Chile6217335025373647232444221
Colombia62381614217834822431615
Ecuador2–174–154–47–5017157
India24564313312113152
Indonesia14551820415528455020–746
Israel9541911141910–25241926
Korea–7575163513520101034843
Mexico5148147743929121019
Nicaragua61311–2–344428–53
Pakistan112–101165142391232
Paraguay2215434320148356134
Peru48911479351715133
Philippines–11167918431613215
Turkey914262129652162161756
United Arab Republic (Egyptian Region)3–13—62517–2101412
Venezuela12103210–8072234416
Source: International Monetary Fund, International Financial Statistics.

Changes are from end of one year to end of following year.

Change from November 1957 to November 1958.

Average of percentage changes from 1954 to 1956.

In Nicaragua, the Government is a net lender to the banking system. Only in 1956 and 1958 did bank indebtedness to the Government decrease; in the other years, it increased.

Change from end of 1957 to November 1958.

Total bank credit.

Source: International Monetary Fund, International Financial Statistics.

Changes are from end of one year to end of following year.

Change from November 1957 to November 1958.

Average of percentage changes from 1954 to 1956.

In Nicaragua, the Government is a net lender to the banking system. Only in 1956 and 1958 did bank indebtedness to the Government decrease; in the other years, it increased.

Change from end of 1957 to November 1958.

Total bank credit.

A few countries—Argentina, Haiti, Honduras, Israel, and the Philippines—endeavored to limit the expansion of bank credit by raising bank reserve requirements; Mexico extended these requirements to both the peso and the foreign liabilities of private finance companies. Ecuador, on the other hand, reduced reserve requirements in order to make more credit available to the private sector, but at the same time contracted bank credit to the Government. Advance deposit requirements for imports were increased in Chile, Paraguay, and Indonesia; and in some countries, advance deposit requirements denominated in local currency were automatically increased by depreciation of the exchange rate. India and a number of other countries, with varying degrees of success, restricted credit by maintaining general or selective credit ceilings and directives for banks. Some countries, e.g., Mexico and Turkey, took steps to eliminate or reduce the use made by state enterprises of central bank credit and government subsidies. Only a few of the less developed countries raised their official discount rates in 1958 or early 1959—Brazil to 8 percent, Pakistan to 4 percent, and the Philippines to 6½ percent.

Notwithstanding the realization that is now fairly general that sound economic development is not compatible with the distortions that rapid or chronic inflation always creates, a number of the less developed countries have had great difficulty in abating or slowing down the rate of inflation (Table 15). Some of these countries have adopted comprehensive integrated plans for stabilizing the economy in order to create a climate more likely to stimulate domestic saving and to attract an inflow of foreign capital. Several of these programs were designed in close cooperation with the Fund, and their implementation was usually facilitated by financial assistance from both the Fund and other sources, any assistance from the Fund being necessarily, in accordance with its Articles of Agreement, of a short-term character. Thus the Fund’s role in connection with such programs is twofold. First, if it is requested by a member country to do so, it gives technical advice in the formulation of the program. Second, the Fund agrees to the use of its resources in support of programs which, if resolutely carried out, appear likely to be reasonably effective in restoring economic and financial stability.

At every stage of development, fiscal policy, credit policy, exchange policy, and wage policy all have a direct impact on the rate of growth that can be sustained. Most stabilization programs accordingly call for simultaneous reforms in all these fields. Fiscal reform aims at reducing or holding the level of expenditure while taxation is increased, with any remaining budgetary gap financed either from noninflationary domestic borrowing or from the domestic currency proceeds of foreign grants or credit. Monetary reform is directed primarily at limiting bank credit to an order of magnitude that can be safely absorbed without inflation or chronic disequilibrium in the balance of payments. Reserve requirements may be increased, central bank credit to commercial banks curtailed, or credit ceilings imposed on commercial banks.

In most of the stabilization programs, new exchange systems have been established which are intended to permit wider scope for market forces in determining a realistic exchange rate and in allocating foreign exchange between different uses. The effective operation of these systems is sometimes hampered by the existence at the time of their establishment of very large central bank commitments to deliver foreign exchange in accordance with contracts already negotiated.

The difficulties in the way of sustained economic development are particularly acute in countries which have to start from a very low average level of income, and where therefore the scope for domestic capital formation is very limited. Also, as a result of their past history, there are often psychological and institutional factors in the less developed countries which impede the adoption of some of the measures that are essential for satisfactory development. Moreover, in general, stabilization programs have been adopted by countries where prolonged inflation has already caused serious dislocation in the structure of their economies. In such countries, stabilizing measures are likely to encounter special difficulties. During periods of prolonged inflation, investment in certain sectors, which from a long-run standpoint usually are relatively less productive sectors, tends to be overexpanded, and certain groups accordingly acquire a vested interest in inflation. Sectional resistances to the readjustments and sacrifices that are involved have been an important obstacle to the successful operation of some of the stabilization programs. The resistance may actually be so strong as to make it difficult for the monetary authorities to enforce restrictive credit policies on private banks, or even, in some countries, on state banks. Weaknesses of administration and in the legal framework for monetary and fiscal policy have impeded the operation of some programs, and some countries have taken steps to improve the legal and administrative framework within which stabilization measures have to be applied.

A sympathetic understanding of the objectives of a stabilization program by both business and trade union groups is essential if the resistances to stabilization measures are to be overcome. The difficulties are particularly great where, prior to adoption of the program, the standard of living has been maintained by depleting the real capital of the economy. The temporary deterioration of the standard of living, which in such circumstances is inevitable, may be interpreted by some sections of the public as an indication of the failure of the program, and give rise to claims for prompt upward adjustments in wages and salaries and for more liberal credit terms, which, if granted, will again generate inflationary pressures. Nevertheless, there is a growing awareness of the importance of monetary stability. Governments have intensified their efforts to impress the urgency of temporary austerity upon the public, who have now had a long experience of the disruptive effects of inflation, and these efforts have begun to yield positive results, with a stronger legal and institutional framework for monetary policy and more effective central bank control of the financial system. Even when initial attempts to stabilize the economy have been less successful than was anticipated, or when setbacks have occurred, governments have continued their efforts.

The experience of all the less developed countries where stabilization programs have been adopted—such as Argentina, Bolivia, Chile, Nicaragua, Paraguay, Peru, and Turkey—suggests that the most important requirement for credit policy is to ensure that credit creation, for either the public or the private sector, will not be carried beyond permissible limits. A crucial condition for the lasting success of these programs is the ability of governments to refrain from inflationary deficit financing and to maintain credit restrictions until inflation psychology has given way to confidence in monetary stability. Once this confidence has been established, pressures on governments are likely to diminish. The enforcement of stabilizing financial policies will then become less difficult, especially since the establishment of monetary stability should stimulate domestic production after the first shock reaction to austerity measures has been overcome.

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