Chapter

Chapter 4. World Trade, Payments, and Reserves

Author(s):
International Monetary Fund
Published Date:
September 1968
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World Trade

Principal Changes

THE value of world trade rose by 5 per cent in 1967, about one half the growth rate achieved in the three previous years (Table 1) and close to the lowest annual increase in this decade. The unit value of trade declined slightly from 1966 to 1967, reversing the trend that had prevailed since 1962, and the deceleration in the growth of trade was therefore less pronounced in volume terms than in value. It is estimated that the volume of trade increased by 5½ per cent from 1966 to 1967, compared with 7½ per cent in the previous year.

Table 1.Growth in Value of Imports and Changes in Trade Balances of Major Areas, 1964-67

(Changes from preceding period, at annual rates) 1

19661967
1964196519661967First halfSecond halfFirst halfSecond half
Growth in value of importsPer cent
World 21291058952
Industrial countries12911610845
North America1015196201433
Continental Europe129937515
United Kingdom141372131
Japan183172217242022
(Industrial countries’ imports from primary producing countries)(11)(4)(8)(4)(9)(5)(3)(5)
Primary producing countries129744105—5
Changes in trade balances3Billion U.S. dollars
Industrial countries 40.80.6—1.3—0.3—1.20.62.1—4.7
Primary producing countries—1.4—2.1—0.10.6—1.5—1.34.0
Total, industrial and primary producing countries 4,5—0.6—1.5—1.3—0.4—0.6—0.90.8—0.7
Sources: International Monetary Fund, International Financial Statistics; Organization for Economic Cooperation and Development, Over-All Trade by Countries; Fund staff seasonal adjustments.

Half-yearly figures are seasonally adjusted changes from the previous half year, and the average of these changes will therefore differ from the annual changes shown in the left-hand part of the table.

Excluding CMEA countries, mainland China, etc. (see footnote 1, p. 27).

Trade balances are based on customs data, exports f.o.b. less imports c.i.f.

Excludes U.S. Department of Defense shipments.

Figures reflect changes in balances of trade with CMEA countries, mainland China, etc., changes in expenditures on insurance and freight, and miscellaneous statistical discrepancies.

Sources: International Monetary Fund, International Financial Statistics; Organization for Economic Cooperation and Development, Over-All Trade by Countries; Fund staff seasonal adjustments.

Half-yearly figures are seasonally adjusted changes from the previous half year, and the average of these changes will therefore differ from the annual changes shown in the left-hand part of the table.

Excluding CMEA countries, mainland China, etc. (see footnote 1, p. 27).

Trade balances are based on customs data, exports f.o.b. less imports c.i.f.

Excludes U.S. Department of Defense shipments.

Figures reflect changes in balances of trade with CMEA countries, mainland China, etc., changes in expenditures on insurance and freight, and miscellaneous statistical discrepancies.

Chart 4.Industrial Countries: Value of Imports and Industrial Production, 1964–First Quarter 1968

(1963 = 100; seasonally adjusted)

1Country indices weighted by total imports in 1963.

The slowdown of trade, which was particularly marked from the third quarter of 1966 until the third quarter of 1967, can be traced largely to the easing of demand conditions in Europe and, later and more briefly, in North America. In total, industrial-country imports rose by 6 per cent in value from 1966 to 1967, a smaller increase than in any year since 1961. The exports of industrial countries increased at about the same rate as their imports, inasmuch as the slowing of their imports from primary producing countries was matched, for 1967 as a whole, by a slowing of their exports to these countries. The value of total imports of primary producing countries rose by 4 per cent from 1966 to 1967, about the same as the increase in their exports.1

Although the annual trade balance of industrial countries and of primary producing countries, taken as groups, thus changed little from 1966 to 1967, there were major swings in the balances of the two areas during this period of slowdown in world trade. The trade balance of industrial countries improved considerably in late 1966 and the first half of 1967, when the growth of their imports from primary producing countries was slackening and their exports to these countries continued to rise at a faster pace. In the second half of 1967 and early 1968, the renewed growth of industrial-country imports from primary producing countries, together with an abrupt fall in the imports of those countries, led to a large decline in the industrial countries’ trade balance and a corresponding reversal of the earlier deterioration in the balance of the primary producing countries.

Impact of Economic Activity on Trade

The development of imports into industrial countries was clearly related to underlying shifts in economic activity, as indicated in Chart 4 by seasonally adjusted industrial production. German imports reached a peak in the early part of 1966 and then declined well into 1967 in line with the fall in industrial production. In most other continental European countries, production and imports grew more slowly or declined during this period, although the changes were generally later and less marked than in Germany. During the second half of 1967 and the first part of 1968, the renewal of economic growth led to a strong recovery of imports into Germany and most of the European countries that had experienced stagnant or declining output in 1966 and earlier in 1967. The main exceptions in Europe to this cyclical pattern were Italy and the United Kingdom. In Italy the rapid growth of industrial production continued until mid-1967 and then became erratic; imports increased through 1967 and declined in the first quarter of 1968. The development of imports into the United Kingdom was greatly influenced by the removal of import surcharges in November 1966; this caused imports to be postponed and to rise sharply in the first part of 1967 despite the relatively flat trend of industrial production. U.K. imports rose again in late 1967 and early 1968.

In Japan strong economic growth continued in 1967 and supported a further rapid increase in imports throughout the year. However, the strong rising trends of production and imports have been interrupted in 1968 under the impact of the policies of restraint adopted by the Japanese authorities.

Import demand in the United States had also expanded with domestic activity during 1966, but during the first half of 1967, when total output was rising more slowly and industrial production fell below the level of late 1966, a decline in U.S. imports was added to the weakness that had already developed in European markets. In the fourth quarter, U.S. imports again began to rise strongly and continued to do so in the early months of 1968. Although this rise, like that which had emerged in Europe, mainly reflected the renewed upsurge of output, the U.S. import level was inflated at the end of 1967 and early in 1968 by some temporary influences, particularly an unusually large volume of metal imports related to the copper strike and to anticipation of a possible strike in the steel industry.

Chart 5.Trade Flows Between Selected Industrial Countries and Areas, 1964–First Quarter 19681

(1964 = 100; seasonally adjusted)

1 Based on export data.

2 Excluding the United Kingdom and Portugal.

3 U.K. seamen’s strike.

4 Removal of U.K. import surcharge.

5 U.S. dock strike.

The earlier downturn of imports in Germany and the United States strongly conditioned the pattern of trade flows among the industrial countries (Chart 5). The slowdown of demand in Germany—which was of central importance in European developments—led to a striking decline in its imports from other EEC countries from mid-1966 until late 1967. Other flows of trade among EEC countries, including exports from Germany, continued to increase but at a less rapid pace than before, reflecting not only the impact of the German recession on economic activity in the other EEC economies but also the slow growth of domestic demand in France, Belgium, and the Netherlands. As trade among EEC countries slowed down, exports from the continental EFTA countries to the EEC also tended to decline; trade in the opposite direction had increased in late 1966 but drifted downward through the first three quarters of 1967.

The over-all sluggishness of industrial markets on the European continent during most of 1967 was an important part of the export picture for many countries outside this area—but most especially for the United Kingdom, whose exports to Europe declined throughout 1967 while its imports from Europe were rising sharply. The steep upward trend of Europe’s exports to the United States during 1965 and 1966 was abruptly reversed during the first three quarters of 1967 and, in line with the easing of demand pressures in the United States at that time, U.S. exports to Europe (to the EEC as well as to the United Kingdom) rose markedly during the first half from their low level in late 1966. These developments produced a substantial but temporary improvement in the U.S. balance of trade with Europe, but they also added to the deflationary tendencies on the European continent and aggravated the United Kingdom’s external difficulties. Japan’s exports to the United States slowed down early in 1966, coinciding with the upsurge of domestic demand in Japan, and declined during the first half of 1967. Trade between the United States and Canada leveled out or declined through most of 1967.

The recovery in the trade of industrial countries that began during the second half of 1967 and continued into 1968 was, like the earlier slowdown, particularly marked in the imports of the United States and Germany. However, the imports of most other industrial countries recovered more or less simultaneously in an unusually strong surge of industrial-country trade. The imports of Japan and Italy continued to rise strongly in the second half of 1967 but the growth was interrupted in early 1968.

The value of industrial-country imports from primary producing countries had leveled off toward the end of 1966 and increased relatively little for almost a year (see Chart 20). The slackened intensity of demand in the industrial countries cut back the growth in volume of their imports, and there was also a tendency for commodity prices to decline through most of 1967 (see Charts 21 and 22). The latter development, in turn, was reflected in the unit values of exports from primary producing countries and in their terms of trade, which from 1966 to 1967 deteriorated substantially in most primary producing areas. The year-end upswing of demand in the industrial countries brought with it some strengthening of commodity prices, and the value of industrial-country imports from most primary producing areas increased strongly in the fourth quarter of 1967.

The movement in total exports of primary producing countries (Chart 6) was broadly similar to that in their export trade with the industrial world. There was little change in the level of their exports from the third quarter of 1966 through most of 1967, except for a sharp increase in exports from the Middle East after the hostilities there. The increase from 1966 to 1967 in exports from all primary producing countries was only 3 per cent, compared with 8 per cent in the previous year. These data reflect mainly the behavior of exports from the less developed countries; by and large, the more developed primary producing countries fared much better, and the rise in their total exports from 1966 to 1967, amounting to 8 per cent, was almost as large as that in the previous year.

Chart 6.Trade of Primary Producing Countries, 1963–First Quarter 1968

(1963 = 100; seasonally adjusted)

There was a tendency for imports of primary producing countries to decline in the second half of 1967, bringing about a marked improvement in trade balances during the year. The developments on the import side reflected, to a considerable extent, adjustments to declines in export earnings. This was especially so for some countries in Africa and Latin America, where the authorities attempted to meet deteriorating payments situations by measures ranging from devaluation to import controls. But in many of the primary producing countries the upward movement of imports through the first half of 1967, and the subsequent decline, can be attributed to other factors: abnormal food shipments to Asia in the first part of 1967, fluctuations in U.S. strategic shipments to Southeast Asia, and, during the second half of 1967, the disruption of Europe’s trade with many developing countries caused by the closing of the Suez Canal and the U.K. dock strike. The U.S. dollar value of imports into primary producing countries was also reduced late in the year as a consequence of the devaluation of sterling and certain other currencies.

Chapter 6 includes a fuller discussion of the trade of primary producing countries in 1967.

Exports and Trade Balances of Industrial Countries

As a consequence of the much reduced rate of industrial expansion and the slower growth or decline in the imports of primary producing countries, the export markets of almost all industrial countries rose considerably less from 1966 to 1967 than from 1965 to 1966 (Table 2). Disparities in the growth of different countries’ export markets were much smaller than from 1965 to 1966, ranging from 4 per cent to 7 per cent, compared with 6 per cent to 17 per cent. The growth of export markets from 1966 to 1967 was particularly small for countries that direct a large part of their exports to Germany. Germany’s own export markets increased relatively rapidly, and the strong increase in the United Kingdom’s imports that followed removal of import surcharges was an important factor in the favorable market growth experienced by Sweden and Denmark.

Table 2.Industrial Countries: Gowth of Export Markets and Exports, 1966 and 1967(Percentage changes from preceding year; countries ranked by growth of exports in 1967)
1965 to 19661966 to 1967
Market

growth 1
Increase

in exports
Market

growth 1
Increase

in exports
All industrial countries 210.310.35.65.6
Norway68511
Canada1718510
Germany111378
Italy91248
Netherlands8658
Japan131667
Austria8567
Switzerland111157
Sweden9876
United States 2111065
France8844
Belgium-Luxembourg9743
Denmark7673
United Kingdom976—2
Source: International Monetary Fund and International Bank for Reconstruction and Development, Direction of Trade.

For the purpose of calculating average growth in geographic markets, the world has been divided into 24 markets, consisting of 14 industrial countries, 9 groups of primary producing countries, and CMEA countries, mainland China, etc. The average growth in the market confronting each exporting country is taken to be the growth in each market weighted according to the share of the country’s total exports going to that market. Except for CMEA countries, mainland China, etc., the growth in each market is taken to be the growth in the total exports of industrial countries to that market area. For each exporting country, the growth of the market in CMEA countries, mainland China, etc., is taken to be the actual growth in its exports to those areas.

Excluding U.S. strategic exports, mainly to Southeast Asia, for which data on the country of destination are withheld. Such exports increased sharply from 1965 to 1966 and fell sharply in 1967. Including such shipments, the actual growth of U.S. exports was 11 per cent from 1965 to 1966 and 4 per cent from 1966 to 1967.

Source: International Monetary Fund and International Bank for Reconstruction and Development, Direction of Trade.

For the purpose of calculating average growth in geographic markets, the world has been divided into 24 markets, consisting of 14 industrial countries, 9 groups of primary producing countries, and CMEA countries, mainland China, etc. The average growth in the market confronting each exporting country is taken to be the growth in each market weighted according to the share of the country’s total exports going to that market. Except for CMEA countries, mainland China, etc., the growth in each market is taken to be the growth in the total exports of industrial countries to that market area. For each exporting country, the growth of the market in CMEA countries, mainland China, etc., is taken to be the actual growth in its exports to those areas.

Excluding U.S. strategic exports, mainly to Southeast Asia, for which data on the country of destination are withheld. Such exports increased sharply from 1965 to 1966 and fell sharply in 1967. Including such shipments, the actual growth of U.S. exports was 11 per cent from 1965 to 1966 and 4 per cent from 1966 to 1967.

For most countries, the smaller rise of exports from 1966 to 1967 than from 1965 to 1966 was roughly in line with the decline in the rate of growth of their export markets, with little evident change in export performance. The large increase in Norway’s exports relative to the growth of its markets was accounted for by the timing of ship deliveries. There was an unusually rapid increase in Canada’s exports from 1966 to 1967, as a consequence of larger exports of automobiles and parts under the agreement with the United States. The agreement also led to a sizable increase in U.S. exports to Canada, but this was not sufficient to arrest the moderate declining trend in the U.S. share of industrial-country exports.

The United Kingdom’s exports have grown less rapidly than its export markets for a number of years. In 1967, the decline of 2 per cent in the United Kingdom’s exports, while its markets expanded by 6 per cent, was to a considerable extent attributable to the impact of the dock strikes, the closing of the Suez Canal in the second half of the year, and to the effect of the devaluation of sterling in reducing the U.S. dollar value of exports in November and December. However, apart from these special factors, some weakening of the U.K. export performance in industrial markets had already become evident in the latter half of 1966 and intensified in the first half of 1967, as export availabilities in Germany, the United States, Sweden, and some other countries improved.

As a result of the various changes in the pattern of world trade, there were major shifts in the trade balances of Germany, Japan, and the United Kingdom from 1966 to 1967 (Table 3). The widening of Germany’s merchandise surplus by $2.3 billion was more than matched by reductions of $1.5 billion in the trade positions of both the United Kingdom and Japan. Among the other EEC countries, there was virtually no change in the trade balance of France, and a decline of $0.4 billion in the Italian balance was nearly equaled by increases in those of Belgium-Luxembourg and the Netherlands. There were also small changes among the other European industrial countries.

Table 3.Industrial Countries: Growth in Value of Exports and Changes in Trade Balances, 1966 and 1967(Changes from preceding year or half-year; half-year figures seasonally adjusted and expressed as annual rates)
19661967
19661967First

half
Second

half
First

half
Second

half
Per Cent
Growth in value of exports
United States 11057610—4
Canada1810171417—6
EFT A countries 272497—13
of which United Kingdom7—2141—23
EEC countries1018914
of which Germany138131565
Japan161231256
Total106998—2
Changes in trade balancesBillion U.S. dollars
United States 1—1.80.2—1.5—0.81.2—0.9
Canada0.20.10.10.3—0.3
EFTA countries 20.3—1.40.6—0.5—2.1
of which United Kingdom0.4—7.5—0.11.0—1.0—1.9
EEC countries0.22.21.21.9—0.5
of which Germany1.72.30.81.91.4—0.1
Japan—1.50.3—0.5—0.7—1.0
Total—1.3—0.3—1.20.62.1—4.7
Sources: International Monetary Fund, International Financial Statistics, and staff seasonal adjustments.

Excludes U.S. Department of Defense shipments. Including these shipments, the U.S. trade balance declined by $0.2 billion from 1966 to 1967.

Excluding Portugal.

Sources: International Monetary Fund, International Financial Statistics, and staff seasonal adjustments.

Excludes U.S. Department of Defense shipments. Including these shipments, the U.S. trade balance declined by $0.2 billion from 1966 to 1967.

Excluding Portugal.

In the early months of 1968 the Japanese trade balance improved substantially as the policies of restraint began to take hold, and there was also an improvement in Italy’s trade balance. In the United Kingdom, however, imports continued to rise, and, despite a strong recovery in the dollar value of exports from the very low fourth-quarter level, the trade balance in the first five months of 1968 was little different from its average level in the second half of 1967. In the United States a striking decline in the trade balance in the last quarter of 1967 was extended into 1968. In the first five months of 1968 the trade surplus (seasonally adjusted) was at an annual rate of $1.0 billion, in contrast to a rate of $4.7 billion for the first three quarters of 1967. While the level of imports in early 1968 was inflated by special factors, it was evident that the trade position of the United States had undergone a sharp deterioration, thus posing a new and substantial problem for the achievement of equilibrium in the balance of payments.

Balance of Payments Developments

Although there was little change in the merchandise trade balance of the group of industrial countries from 1966 to 1967, a deterioration in their balance on services and private transfer payments and a substantial increase in the net outflow of capital led to a widening of their over-all deficit from $0.6 billion in 1966 to $3.3 billion in 1967 (Table 4).2 The surplus recorded by primary producing countries was $0.7 billion in 1967, virtually unchanged from the previous year, and thus over-all deficits exceeded surpluses by $2.5 billion in the combined statement for all reporting countries. The statistical treatment of the liquidation of the United Kingdom’s portfolio of dollar securities accounted for $0.5 billion of this discrepancy, and a further $1.6 billion resulted from the decline in world monetary gold holdings.

This reduction of $1.6 billion in gold holdings, stemming from private gold purchases in excess of supplies to the market in the form of new production and sales by the U.S.S.R. less purchases by mainland China, was a major feature of world monetary developments in 1967. In 1966, there was virtually no change in world monetary gold holdings; in earlier years, there had been a net increase in these holdings that was reflected in a moderate excess of surpluses over deficits averaging some $0.6 billion a year.

Primary Producing Countries

Among the more developed primary producing countries, over-all positions were not greatly changed from 1966 with the exception of South Africa, where a $0.2 billion deterioration in the balance resulted largely from a surge of imports following removal of most import restrictions. Australia’s current account balance worsened, but an enlarged inflow of capital served to keep the over-all position close to balance. New Zealand’s current account deficit remained at about the same high level as in 1966, and the pressure on its reserve position was again alleviated by borrowing abroad. There was a tendency for the merchandise trade positions of European primary producing countries to strengthen, as a result of continued increases in the exports of most countries while imports generally declined. The flow of capital to these countries declined by slightly more than the improvement in their current account balance so that the small deficit in their over-all position widened somewhat.

The payments position of the less developed countries showed a modest improvement from 1966 to 1967, but this was concentrated in a few countries that benefited from rather special circumstances. Among the primary producing countries of the Western Hemisphere, the most usual pattern was one of a worsening in merchandise trade balances that was not quite offset by an increase in receipts of capital. The over-all surplus of the area was concentrated in Argentina, where gross reserves were increased by the proceeds of large foreign borrowings and by a favorable swing in short-term flows, and in Venezuela, where oil sales increased in the wake of the Middle East crisis. In the Middle East, most countries were in over-all surplus in 1967. The surpluses recorded by Jordan and Israel were particularly high. Imports fell off sharply in both countries during the third quarter, and reserves were further strengthened by emergency capital assistance to Jordan and unusually high private remittances to Israel following hostilities. Most of the African countries were in weaker payments positions than in 1966 as a result of the rapid drop in their exports to industrial countries that has been noted in the previous section. There was also a tendency for payments balances to deteriorate in the Asian countries, the principal exceptions being Korea and the Republic of China.

Table 4.Balance of Payments Summary, 1966 and 1967 1(In billions of U.S. dollars)
Current Balance 2Capital BalanceOver-All Balance 3
196619671966196719661967
Industrial countries7.37.3—7.9—10.5—0.6—3.3
Primary producing countries—6.3—7.87.18.50.80.7
Australia, New Zealand, and South Africa—0.7—1.11.01.10.2—0.1
European countries—1.2—0.91.10.7—0.1—0.2
Total, more developed countries—1.9—2.02.11.80.2—0.3
Western Hemisphere—1.2—1.61.12.00.4
Africa—0.7—0.60.80.50.1—0.1
Middle East—0.5—0.30.70.70.20.5
Asia—2.0—3.32.43.50.40.2
Total, less developed countries—4.4—5.95.06.80.61.0
Excess of deficits (—)1.1—0.6—0.8—2.00.2—2.5
Change in monetary gold—1.6
Treatment of U.K. portfolio liquidation 4—0.5—0.5
Other asymmetries and errors0.2—0.4
Sources: Data reported to the International Monetary Fund and staff estimates.

For balance of payments details, see Supplementary Note B, Tables 37-46.

Balance on goods, services, and private transfers; government transfer payments are included in capital account.

In this statistical presentation the over-all balance of payments is generally that financed by changes in net Fund positions and in official gold and foreign exchange holdings, as shown in International Financial Statistics. In most cases foreign exchange holdings are net of liabilities arising from swap transactions with other central banks and with the Bank for International Settlements. Advance repayments of foreign debt by governments are also treated as a financing item. For the United Kingdom the over-all balance is that financed by the official monetary movements included in item H of Table 44 in Supplementary Note B; for the United States it is that financed by “official reserve transactions” as published by the U.S. Department of Commerce, and by advance repayments received on foreign debt; for Germany the constituent figures comprise the “change in over-all central reserve position” as published in the Monthly Report of the Bundesbank, and, in 1966, the advance repayment made on foreign debt.

Discrepancies that become evident when all countries’ balances are added together result not only from errors in reporting and the lack of balance of payments data for a number of countries, but also from changes in world monetary gold holdings and from inconsistencies in the treatment of some important transactions, principally in reserve currencies, in the balance of payments statistics of the countries concerned. See, for example, footnote 4, below.

Of the excess of deficits over surpluses in 1967 shown in this table, $0.5 billion reflects asymmetrical treatment of the liquidation of the U.K. portfolio of U.S. securities. This transaction gave rise to a capital outflow and an increased overall deficit in the U.S. accounts, but does not affect the accounts shown for the United Kingdom.

Sources: Data reported to the International Monetary Fund and staff estimates.

For balance of payments details, see Supplementary Note B, Tables 37-46.

Balance on goods, services, and private transfers; government transfer payments are included in capital account.

In this statistical presentation the over-all balance of payments is generally that financed by changes in net Fund positions and in official gold and foreign exchange holdings, as shown in International Financial Statistics. In most cases foreign exchange holdings are net of liabilities arising from swap transactions with other central banks and with the Bank for International Settlements. Advance repayments of foreign debt by governments are also treated as a financing item. For the United Kingdom the over-all balance is that financed by the official monetary movements included in item H of Table 44 in Supplementary Note B; for the United States it is that financed by “official reserve transactions” as published by the U.S. Department of Commerce, and by advance repayments received on foreign debt; for Germany the constituent figures comprise the “change in over-all central reserve position” as published in the Monthly Report of the Bundesbank, and, in 1966, the advance repayment made on foreign debt.

Discrepancies that become evident when all countries’ balances are added together result not only from errors in reporting and the lack of balance of payments data for a number of countries, but also from changes in world monetary gold holdings and from inconsistencies in the treatment of some important transactions, principally in reserve currencies, in the balance of payments statistics of the countries concerned. See, for example, footnote 4, below.

Of the excess of deficits over surpluses in 1967 shown in this table, $0.5 billion reflects asymmetrical treatment of the liquidation of the U.K. portfolio of U.S. securities. This transaction gave rise to a capital outflow and an increased overall deficit in the U.S. accounts, but does not affect the accounts shown for the United Kingdom.

Industrial Countries

In most industrial countries the changes in current account positions (Table 5) from 1966 to 1967 were dominated by the evolution of their merchandise trade. Changes in aggregate net flows of service payments and private transfers were relatively small and, in most cases, were in line with the trend of recent years. One significant exception occurred in North America, where the U.S. travel account deteriorated by some $450 million and Canada’s improved as much, mainly because of travel to Expo 67. Despite the pronounced slowdown of trade from 1966 to 1967, the industrial countries’ total receipts and payments on transportation account appear to have recorded much the same increase as in the previous year, reflecting in part the higher ocean freight rates that prevailed in the second half of 1967. An interruption in the rising trend of outpayments for tourism and workers’ remittances from Germany and some other European industrial countries had unfavorable repercussions on the payments positions of Italy and of the southern European primary producing countries.

Table 5.Industrial Countries: Balance of Payments Summary, 1966 and 1967 1(In billions of U.S. dollars)
Current BalanceCapital BalanceOver-All Balance
196619671966196719661967
United Kingdom0.4—0.9—2.0—0.4—1.6—1.3
United States4.13.5—4.3—6.9—0.2—3.4
Total4.52.6—6.3—7.3—1.8—4.7
Germany0.83.2—0.3—3.10.60.1
France0.10.10.40.20.50.3
Italy2.21.9—2.0—1.30.30.6
Belgium-Luxembourg0.30.10.2
Netherlands—0.10.20.20.2
Total, EEC countries3.05.4—1.6—4.11.41.3
Canada—0.9—0.20.60.2—0.3
Japan1.4—1.4—0.1—0.1
Austria—0.2—0.10.20.30.2
Switzerland0.10.2—0.1—0.10.10.1
Denmark—0.2—0.30.20.2—0.1
Norway—0.1—0.20.20.30.10.2
Sweden—0.2—0.10.3—0.10.1—0.2
All industrial countries7.37.3—7.9—10.5—0.6—3.3
Sources: Data reported to the International Monetary Fund and staff estimates.

The classification of items differs in some cases from that used in national publications and other sources. For definitions of “current,” “capital,” and “over-all” balances, see notes to Table 4. Detailed balance of payments statements are given in Supplementary Note B. For France the figures above relate to transactions with countries outside the French franc area, for which 1967 details are given in the first column of Table 39.

Sources: Data reported to the International Monetary Fund and staff estimates.

The classification of items differs in some cases from that used in national publications and other sources. For definitions of “current,” “capital,” and “over-all” balances, see notes to Table 4. Detailed balance of payments statements are given in Supplementary Note B. For France the figures above relate to transactions with countries outside the French franc area, for which 1967 details are given in the first column of Table 39.

Japan’s over-all payments position was close to balance in 1967 as in 1966, inasmuch as the deterioration in its current account was just about offset by a major reversal of short-term capital flows. In Europe, Germany’s current account surplus was nearly matched by a capital outflow of $3.1 billion, much of it in long-term forms, compared with an outflow of $0.3 billion in 1966. The over-all surplus declined from $0.6 billion in 1966 to $0.1 billion in 1967. Changes in the capital flows of other continental European industrial countries were considerably smaller. These changes led to a net outflow of $0.3 billion from these countries (compared with an outflow of $0.6 billion in 1966) and to an improvement of $0.4 billion in their over-all surplus, offsetting most of the reduction in Germany’s surplus. That is to say, the increase in continental Europe’s current account surplus was slightly more than matched by an increase in the outflow of capital, and the over-all surplus of the area declined moderately to $1.5 billion.

For the United States, an increase in capital outflows from $4.3 billion in 1966 to $6.9 billion in 1967, combined with some deterioration on current account, led to the large over-all deficit of $3.4 billion; this was in contrast to the deficit of $0.2 billion in 1966, when the tightening of credit conditions led to a massive inflow of banking funds and contributed to a substantial reduction in the net outflow of capital. The “liquidity” deficit of the United States widened by somewhat less, from $1.4 billion in 1966 to $3.6 billion in 1967. The deterioration on this basis was held down by an increase in net foreign official investment in non-liquid U.S. liabilities from $0.8 billion in 1966 to $1.3 billion in 1967 (Supplementary Note B, Table 45). In the United Kingdom, a reversal of short-term capital flows in the early part of 1967 led to a reduction of the capital outflow from $2.0 billion in 1966 to $0.4 billion in 1967—an improvement that more than offset the deterioration of $1.3 billion on current account but still left the United Kingdom with an over-all deficit of $1.3 billion for the year as a whole. Moreover, the United Kingdom was in surplus during the early months of 1967 when there were large short-term capital inflows. Beginning in the spring, however, the trade balance deteriorated and short-term capital began to leave the country on an increasing scale. In the second half of 1967, the over-all deficit amounted to $2.7 billion, about one half of which arose from short-term capital outflows despite official support of sterling in the forward market.

Chart 7.Selected Countries and Areas: Current, Capital, and Over-All Balances, 1963-67

(In millions of U.S. dollars)

1 Austria, Canada, Denmark, Japan, Norway, Sweden, and Switzerland.

These unsatisfactory developments in the external accounts of the two reserve currency countries engendered the major disturbances in the payments system that came to a head in the latter part of 1967 and early 1968. The crisis of sterling and the subsequent emergency measures to protect the dollar were products of a disequilibrium that had persisted for many years—a disequilibrium involving continuous balance of payments deficits in the reserve currency countries matched in the main by surpluses of EEC countries (Chart 7).

In the first quarter of 1968 the payments positions of the United Kingdom and the United States reflected continuing difficulties. The U.K. current account was in substantial deficit, although at a much lower level than in the fourth quarter of 1967. There were also large outflows of long-term capital during the first quarter as well as continued short-term outflows, with the result that the overall deficit was running at much the same rate as in the fourth quarter of 1967. The most striking feature of U.S. balance of payments developments in early 1968 was the deterioration of the trade account, but there was an unusually large improvement on capital account, which served to bring the over-all deficit in the first quarter down to an annual rate of about $2 billion, from the $3.4 billion recorded for 1967. The impact of the U.S. balance of payments program on capital flows in the first quarter was evident in a $0.4 billion reduction in the claims of banks on nonresidents, in a $0.4 billion increase (over the average for 1967) in net sales abroad of securities by U.S. corporations to finance their foreign operations, and in a decline in the outflow of funds for direct investment abroad. There was an improvement in the short-term capital position in the first quarter, reflecting in part the difficulties encountered by Canada.

Canada’s external position during the first quarter was subjected to severe speculative pressures. The current account balance was at about the same level as in the first quarter of 1967, but a reduced inflow of long-term capital and a large short-term outflow resulted in a deficit of $0.7 billion financed by losses of reserves and official short-term borrowing, compared with a roughly balanced position in 1967. During the second quarter there was a large return flow of funds to Canada.

In continental Europe, the principal change in current account positions in the first quarter was the sharp increase in Italy’s surplus. The capital outflow from Italy continued on a substantial scale, and there was also a further increase in the outflow of private long-term funds from Germany. The French balance of payments position appears to have been strong in the first quarter, but in May and June the wave of strikes led to large capital outflows and reserve losses.

Long-term capital. Except in the United States and Germany there was little change in the long-term capital flows of industrial countries from 1966 to 1967 (Table 6). Canada was once again the main long-term borrower. Japan exported long-term capital on about the same scale as in 1966 despite the much weaker performance on current account, much of this capital outflow reflecting deferred payment credits and the increase in economic assistance to developing countries. There were relatively small alterations in the long-term capital accounts of the United Kingdom and of continental European countries other than Germany.

The long-term capital transactions of the United States resulted in an outflow of $7.0 billion—$1.1 billion larger than in 1966, with official transactions accounting for most of the increase. There were virtually no advance debt repayments to the United States by foreign governments in 1967, whereas the U.S. capital account had benefited from $0.4 billion of advance repayments in 1966. In addition, loans by the Export-Import Bank rose sharply in 1967. The smaller deterioration in the private long-term capital position was the net result of a $0.5 billion reduction in direct investment outflows (undoubtedly influenced by the voluntary balance of payments program) and a larger increase in the outflow of funds from other private transactions, including an increase of some $0.4 billion in net U.S. investment in foreign securities as well as the sale by the United Kingdom of the remaining $0.5 billion of its portfolio of dollar securities. The latter transaction was roughly matched by foreign purchases of U.S. securities.

Table 6.Industrial Countries: Balances on Long-Term Capital Account, 1965-67(In billions of U.S. dollars)
PrivateOfficial 1Total
196519661967196519661967196519661967
United Kingdom—0.4—0.1—0.1—0.7—0.7—0.6—1.2—0.8—0.6
United States—4.8—2.4—2.8—3.4—3.4—4.2—8.2—5.9—7.0
Germany0.60.4—0.5—1.3—1.2—1.1—0.8—0.8—1.7
France0.40.20.1—0.3—0.2—0.10.1—0.10.1
Italy0.2—0.2—0.1—0.3—0.20.2—0.5—0.4
Belgium-Luxembourg0.10.1—0.2—0.1—0.2—0.1—0.1
Netherlands0.1—0.1—0.1—0.1—0.2
Canada0.81.01.3—0.1—0.2—0.20.70.81.1
Japan—0.3—0.7—0.6—0.2—0.3—0.4—0.5—0.9—1.0
Other industrial countries0.40.30.70.30.30.6
Total—3.0—1.4—1.9—6.2—6.6—7.2—9.3—8.1—9.0
Sources: Data reported to the International Monetary Fund and staff estimates.

Includes aid and other central government transfer payments.

Sources: Data reported to the International Monetary Fund and staff estimates.

Includes aid and other central government transfer payments.

The United States has for many years been the main exporter of direct investment funds, although there have been fairly large outflows from the United Kingdom and a substantial increase since 1965 in the outflow of such funds from Germany. The restraint on the outflow of direct investment capital from the United States in recent years has been associated with a major increase in borrowing in Europe for the account of U.S. corporations. Such borrowing amounted to about $650 million in 1967 (see Table 12) and has been at a much higher rate in 1968. In some cases borrowing from European financial institutions has been facilitated by official credit policies.

The rapid increase in recent years in sales of international securities is described in Chapter 5. Although the funds raised in this way are often used in the country where they have been borrowed, a substantial part does give rise to net flows of long-term funds between countries. The flows cannot be traced precisely in the available statistics, but some of the pattern can be discerned. For instance, there was a substantial increase in the volume of bonds issued by Scandinavian borrowers from 1966 to 1967, and French borrowers entered the market for the first time with issues totaling $150 million. It is particularly noteworthy that borrowers in primary producing countries raised a record total of over $500 million from European sources in 1967, compared with an average of $200 million in the three preceding years.

The substantial swing in Germany’s long-term capital position from 1966 to 1967 also reflected international bond transactions. The progressive easing of monetary policy in Germany during 1967 brought about a striking decline in the level of long-term interest rates (see Charts 17 and 18), both absolutely and in comparison with yields on Euro-bonds and other securities. This change in the relative attractiveness of German bonds induced German investors and others to sell such securities and acquire other issues, including Eurobonds, that offered more attractive returns. At the same time, Germans were borrowing less in the international bond market. Thus, the striking reversal of Germany’s private long-term capital account in 1967 and the continued long-term outflow in early 1968 were evidence of the working of yield incentives in international long-term capital movements. There was also a substantial flow of Italian investment funds into the Eurobond market in 1967 and early 1968, and here again the change in relative yield indicated in Charts 17 and 18 was the moving force.3

Private short-term capital flows. Short-term capital flows shown in Table 7 were, of course, strongly influenced by differences in the levels of short-term interest rates among the industrial countries. In Germany, the marked easing of financial conditions in 1967 reduced domestic money market rates below the comparable rates in other important international money markets (see Chart 15). Moreover, late in the year, when funds were tending to flow to the European continent, the Bundesbank encouraged the export of short-term capital by offering concessional rates for forward cover. In the fourth quarter of 1967 the Bundesbank entered into swap transactions with commercial banks in the amount of $632 million, under the stipulation that the swaps were not to be reversed before the end of the year, that is, not before the seasonal peak in the banks’ liquidity needs had been passed (Table 8). For the whole of 1967 there was an outflow of short-term capital from Germany of $1.5 billion, which together with the outflow on long-term account almost offset the very substantial current account surplus. In Japan, on the other hand, the tightening of credit conditions led to a rise in domestic interest rates relative to short-term rates abroad, with the desired result that Japanese enterprises switched to foreign financing, borrowing almost $1 billion of short-term funds largely from U.S. banks and on the Euro-dollar market; this inflow enabled Japan to maintain a closely balanced position in its external accounts. Over 1967 as a whole the United States did not succeed in attracting a substantial flow of short-term funds, whereas in 1966, when U.S. financial conditions became extremely tight, a short-term inflow of about $2 billion had brought the over-all payments position close to balance. Italy, which had been the major exporter of short-term capital in 1966, lent less in 1967 as yields on domestic money market assets became more attractive than those on foreign claims. In 1967 the Bank of Italy did not enter into swap transactions with commercial banks on anything like the same scale as in 1966 (Table 8).

Table 7.Industrial Countries: Private Short-Term Capital Movements (Including Errors and Omissions), 1966–First Quarter 1968(In millions of U.S. dollars)
196619671968
19661967Third

quarter
Fourth

quarter
First

quarter
Second

quarter
Third

quarter
Fourth

quarter
First

quarter
United Kingdom—1,196126—624—3161,332199—827—578—451
of which
Commercial banks—944
—424—641—110733—160—433
—676—292
Other identified—215—90—12146143—17852
Balancing item—37550107—194453216—21698—211
United States1,991991,672—91—662—3681,502—373700
of which
Commercial banks3,0789971,362335—654—2141,318547829
Germany497—1,461115188—449—527—136—34938
of which
Commercial banks—97—805—117366—819—245—46305—462
Japan—493943—335—16337433439196354
of which
Commercial banks—389510—309—25301185—6387206
Other industrial countries—511—989—603380—265183—804—102
of which
Commercial banks 1—628230—20610354238—554192
Sources: International Monetary Fund, Balance of Payments Yearbook, and staff estimates; Bank of England, Quarterly Bulletin; U.S. Department of Commerce, Survey of Current Business.

Excludes Switzerland.

Sources: International Monetary Fund, Balance of Payments Yearbook, and staff estimates; Bank of England, Quarterly Bulletin; U.S. Department of Commerce, Survey of Current Business.

Excludes Switzerland.

The international pattern of short-term capital flows was strongly influenced in the course of 1967 by the ebbs and flows of confidence in sterling as well as by interest rate levels. It is therefore appropriate to focus closer attention on the evolution of the United Kingdom’s short-term accounts (Table 7 and Chart 16).

Table 8.Germany and Italy: Changes in Central Bank Swap Commitments with Commercial Banks, 1965–First Quarter 1968 1(In millions of U.S. dollars)
Germany 2Italy 3
1965
I152294
II—80293
III—144585
IV—1731
Year—891,202
1966
I203
II24
III125
IV—4
Year348
1967
I3
II14
III12
IV63213
Year63242
1968
I2268
Sources: Deutsche Bundesbank, Monthly Report, May 1968; Bank of Italy, Annual Reports, 1965-67.

No sign indicates increase; minus sign indicates decrease.

U.S. dollar swap commitments of Deutsche Bundesbank to German credit institutions.

Includes swaps with and without guaranteed rates and foreign exchange deposits with the Italian Exchange Office.

Sources: Deutsche Bundesbank, Monthly Report, May 1968; Bank of Italy, Annual Reports, 1965-67.

No sign indicates increase; minus sign indicates decrease.

U.S. dollar swap commitments of Deutsche Bundesbank to German credit institutions.

Includes swaps with and without guaranteed rates and foreign exchange deposits with the Italian Exchange Office.

During the fourth quarter of 1966, the distinct improvement in the U.K. trade balance led to a resurgence of confidence in sterling, a narrowing of the discount on forward sterling, and a sharp reduction in short-term capital outflows from the high level of the third quarter. During the first quarter of 1967, when monetary conditions eased abroad, particularly in the United States and Germany, the United Kingdom experienced an inflow of private short-term capital amounting to $1.3 billion. The U.K. external accounts continued to benefit from an inflow of short-term funds into the second quarter of 1967. By April the United Kingdom had repaid all short-term debt to other central banks, and in late May it repurchased almost one half of the 1964 drawing from the Fund, six months ahead of schedule.

Beginning during the second quarter of 1967, there was a growing realization that the expected improvement in the U.K. external trading position was not materializing. This was the underlying factor that weakened confidence in sterling and led to a reversal in the course of the second quarter in the direction of short-term capital flows. In the following months the continued deterioration in the trade balance, coupled with the lingering uncertainties engendered by the Middle East crisis, further eroded confidence in sterling. Another factor contributing to the pressure was the rising level of short-term rates in the United States. The main counterpart of the United Kingdom’s substantial outflow seems to have been an inflow to the United States, where there was a very large increase during the third quarter in commercial banks’ liabilities to their foreign branches and to other nonresidents.

The U.K. trade deficit widened ominously in September and October, and expectations concerning exports sagged with the continuation of the dock strike. In these circumstances, increases in Bank Rate taken in concert with action by other central banks to hold down rates in the Euro-deposit market could do little to restore confidence in sterling.

The 14.3 per cent devaluation of the pound sterling on November 18 left in its wake continued uncertainties about the stability of currencies generally and of the U.S. dollar and the pound sterling in particular. Although there was some return flow of funds to the United Kingdom, it was not as large as the outflows prior to devaluation and for the fourth quarter as a whole there was a $0.6 billion outflow of short-term funds. The serious weakening of confidence was also manifest in other substantial short-term flows as speculators moved funds from U.S. dollar assets into the major continental currencies and into gold.

Changes in International Reserves

The major forces underlying changes in international reserves in recent years have been the deficits in the payments balances of the United Kingdom and the United States. The strains to which these deficits gave rise became much more pronounced in 1967 and, in the effort to meet them, there was greater recourse to techniques which themselves affect the size and composition of world reserves. The transactions employed—principally swaps between central banks—added to countries’ holdings of foreign exchange. These increased by $3.7 billion in 1967, despite the reduction of about $0.6 billion in the dollar value of sterling reserves which resulted from the devaluation. However, the total of countries’ reserves increased in 1967 only slightly more than in 1966 because of a very large movement of gold from official to private holders and a reduction of reserve positions in the Fund (Table 9). During the first quarter of 1968, the drain on official gold holdings continued and the total of countries’ reserves declined by $1.0 billion.

The reserves data considered here exclude facilities in the form of conditional credit available in the Fund and of unactivated central bank swaps.4 With regard to the latter, it may be noted that the unused portion of swap lines rose during 1967—despite increased recourse to them—and again in March 1968, when the lines were further increased.

Table 9.Summary of Changes in Countries’ Official Reserves, 1965–First Quarter 1968(In billions of U.S. dollars)
19671968
196519661967First quarter
Foreign exchange—0.51.43.7—0.70.8
U.S. liabilities0.1—0.93.30.2—1.1
U.K. liabilities—0.30.8—1.21.1
Other—0.31.50.40.30.8
Reserve positions in IMF1.21.0—0.6—0.1
Countries’ holdings of gold1.0—1.0—1.4—0.5—1.7
Supply 11.81.41.40.40.4
Less private purchases—1.6—1.4—3.0—0.4—1.8
Transactions with IMF, BIS, and the European Fund0.8—0.90.2—0.4—0.3
Total1.71.41.7—1.2—1.0
Sources: International Monetary Fund, International Financial Statistics, and staff estimates.

New production plus sales by the U.S.S.R. ($550 million in 1965, $15 million in 1967, and $11 million in the first quarter of 1968) less purchases by mainland China ($150 million in 1965, $75 million in 1966, and $20 million in 1967).

Sources: International Monetary Fund, International Financial Statistics, and staff estimates.

New production plus sales by the U.S.S.R. ($550 million in 1965, $15 million in 1967, and $11 million in the first quarter of 1968) less purchases by mainland China ($150 million in 1965, $75 million in 1966, and $20 million in 1967).

Reserve Components and Policies

Details of changes in the components of reserves of most industrial countries and of other regions of the world in 1966 and 1967 are given in Table 10. The increase of $3.7 billion in holdings of foreign exchange during 1967 largely reflected transactions undertaken by industrial countries as part of the effort to cope with the pressures that developed on the reserve currencies. Thus, most of the gain of more than $1.0 billion in U.S. foreign exchange holdings stemmed from swap transactions with the Bank of England undertaken to provide funds required for the defense of the pound. Also, the increase of nearly $2 billion in the foreign exchange component of the reserves of continental “Industrial Europe” was influenced by the policies of countries prepared to hold U.S. dollar assets, rather than to present dollars to the United States for conversion into gold—as happened in 1966, when net U.S. gold sales to Europe amounted to $0.7 billion, and especially in 1965, when such sales totaled $1.3 billion.

Table 10.Countries’ Official Reserves, 1966 and 1967 1(In millions of U.S. dollars)
Net Changes in Reserves 2Totals, End of 1967
GoldForeign exchangeReserve position in IMFTotalGoldForeign exchangeReserve position in IMFTotal
19661967196619671966196719661967
Industrial Countries
United States—830—1,1705401,024—27894—569—5112,0652,34542014,830
United Kingdom—325—64942024596—4051,2911,4042,695
Total, reserve centers—1,155—1,8199601,269—27894—473—45613,3563,74942017,525
France532—4—246367104 -—1023902615,2348748866,994
Germany 3—118—64537393181—2056001244,2282,8721,0528,152
Italy 410—14—235609336—431105532,4002,2218425,463
Belgium-Luxembourg and Netherlands—59—64—6575113 -—100484113,1971,3386835,218
Switzerland—201248281—17802313,0894663,555
Other Industrial Europe 51—2606379—9140551,0292,1393683,537
Total, Industrial Europe1651003901,990811—4591,3651,63519,1759,9103,83032,915
Canada—105—31—3246193—15—334161,0151,2604332,709
Japan19—100—1568—82—33—893381,4542392,030
Total, industrial countries—1,095—1,7409253,305694—4625251,10533,88516,3754,92255,185
Other Developed Countries
Other European countries 68547—134646—186—1—1321,9061,562593,529
Australia, New Zealand, South Africa205—4714—1504745266—1538141,2632652,341
Total, other developed countries290—120—14593—141265—2852,7202,8253245,870
Less Developed Countries
Western Hemisphere—7015—1352457736—1302961,0002,2052293,435
Africa160120—120138135482951,360951,750
Middle East—559519033032—31704228202,350963.265
Other Asia—25604309044—194501317103,185823,975
Total, less developed countries—150340605540167206259002,8959,09550112,490
Grand Total—950—1,4001,4103,700954—5821,4151,71539,50528,2955,74873,545
Source: International Monetary Fund, International Financial Statistics.

Excluding CMEA countries, mainland China, etc. Totals may not add because of rounding and because some area totals include unpublished data.

Positive figures are credits; negative figures are debits.

Includes the Bundesbank’s investment in U.S. Treasury paper ($250 million in 1967) acquired in accordance with the U.S.-German agreements of May 1967.

Includes swap claims and nonmarketable U.S. Government securities.

Austria, Denmark, Norway, and Sweden.

Finland, Greece, Iceland, Ireland, Portugal, Spain, Turkey, and Yugoslavia. Also includes unpublished gold reserves of Greece and an estimate of gold to be distributed by the Tripartite Commission for the Restitution of Monetary Gold.

Source: International Monetary Fund, International Financial Statistics.

Excluding CMEA countries, mainland China, etc. Totals may not add because of rounding and because some area totals include unpublished data.

Positive figures are credits; negative figures are debits.

Includes the Bundesbank’s investment in U.S. Treasury paper ($250 million in 1967) acquired in accordance with the U.S.-German agreements of May 1967.

Includes swap claims and nonmarketable U.S. Government securities.

Austria, Denmark, Norway, and Sweden.

Finland, Greece, Iceland, Ireland, Portugal, Spain, Turkey, and Yugoslavia. Also includes unpublished gold reserves of Greece and an estimate of gold to be distributed by the Tripartite Commission for the Restitution of Monetary Gold.

The largest increase in foreign currency reserves recorded for an individual country other than the United States was that of $609 million for Italy, almost entirely in U.S. dollars. In 1966 Italy’s official foreign exchange holdings had declined by $235 million, but the Bank of Italy had encouraged an outflow of funds by selling a net amount of $348 million of foreign exchange to commercial banks under advantageous swap contracts. In 1967 the net increase in such swap commitments was only $42 million (Table 8). In order to counter a heavy flow of dollars to the Bank of Italy in the third quarter of 1967, the Federal Reserve System drew $0.5 billion in lire on its swap line with that Bank and used the lire to repurchase dollars. Similar drawings, although on a much smaller scale, were undertaken with the central banks of Belgium, the Netherlands, and Switzerland. All these transactions had the effect of providing an exchange guarantee on the European countries’ holdings of the amounts of dollars involved in the swaps. The bulk of the addition to Germany’s foreign exchange holdings was also in the form of U.S. dollars. However, under the U.S.German agreements of May 1967 on the equalization of the foreign exchange cost of U.S. troops in Germany, the United States substituted $250 million in the form of 4½-year DM-denominated treasury notes for liquid dollars; further German purchases of two notes of $125 million each were made in the first and second quarters of 1968. In 1967 the Bundesbank sold a net amount of $632 million to commercial banks at concessional swap rates, and a further $226 million was sold in the first quarter of 1968. For France, the $367 million increase in foreign currency holdings during 1967 was mainly the reflection of a speculative inflow of dollars in November estimated at $330 million. The French authorities held the dollars although this meant a deviation from the earlier customary ratio of foreign exchange to gold in French reserves. U.K. holdings of U.S. dollars increased toward the end of the year, when dollars were acquired in exchange for gold in the London market and the United Kingdom liquidated the remaining $490 million of its dollar portfolio.

Full details of the swap transactions with the Bank of England are not available, but it is known that U.S. holdings of sterling, which had declined from $0.9 billion at the end of 1966 to $0.2 billion in March 1967 as a result of repayments by the Bank of England of indebtedness incurred during the 1966 sterling crisis, rose again to $0.5 billion at the end of June and to $1.1 billion by September, and reached $1.8 billion at the time of the devaluation of sterling. However, the dollar value of sterling held as official reserves—other than that acquired through official support of the pound—was reduced by some $0.6 billion by the devaluation, and for 1967 as a whole there was virtually no change in this component of world reserves.

The $0.6 billion decline during 1967 in members’ reserve positions in the Fund—which contrasts with an increase of $1.0 billion in 1966, largely caused by gold subscriptions to the Fund—mainly reflected the repurchases totaling $655 million made by the United Kingdom in May and November.

The gold subscriptions to the Fund were the major factor in the 1966 decline of countries’ gold holdings. Even in the absence of gold sales by the U.S.S.R., the supply of newly available gold roughly matched the private demand for industrial and hoarding purposes.

In 1967 and early 1968, however, the private demand for gold dramatically outstripped new supply for the first time in the postwar period. Gold production was of about the same magnitude as in 1966, but private demand for gold increased from $1.4 billion to $3.0 billion. As purchases of gold for industrial use may be assumed to have risen rather moderately, most of the increase in the drain on official reserves is attributable to purchases by private hoarders and speculators. Such purchases were heavily concentrated in the final quarter of the year, notably in the week following the devaluation of sterling in November and in the second week of December.

Most of the private demand in the last two months of 1967 and up to March 15, 1968 was met by the seven actively participating members of the gold pool who continued to make gold available at prices close to $35 an ounce. Their losses are estimated at about $1½ billion in 1967, and about the same amount in 1968. Of the total loss in 1967, roughly $0.8 billion was borne by the United States and the remainder by the European members of the pool. As a rule, the gold pool members settled a particular month’s transactions with the Bank of England in the following month. However, the United States chose to make a transfer in December to cover its share of the losses sustained in both November and December, so that the $1,170 million decline shown for that country for 1967 includes in full its contribution to the year’s operations. Details on other transactions affecting U.S. gold holdings in 1967 are given in Chapter 7.

The decline in U.K. gold holdings, shown as $649 million for 1967, overstates that country’s loss (perhaps by some $0.2-0.3 billion) as it includes the share of other European members of the gold pool in the pool’s losses in December, which remained to be settled in January 1968. The gold losses incurred by Germany, Belgium, and the Netherlands largely stemmed from sales undertaken through the gold pool. The effects in 1967 of similar sales on the gold holdings of Italy and Switzerland were reduced by purchases of $85 million and $30 million, respectively, from the United States.

The increase in Switzerland’s gold holdings during 1967 reflected mainly temporary swap transactions. There were also increases in the gold holdings of a number of less developed countries. The net acquisition of gold by all less developed countries amounted to $340 million in 1967, and there have been further increases in 1968.

Official Transactions and the Euro-Dollar Market

Swap transactions were the principal technique employed during the summer and fall of 1967 in the effort to preserve the parity of sterling. Large-scale operations by the monetary authorities in industrial countries, together with the Bank for International Settlements (BIS), were required at the time of the Middle East crisis to counter speculative flows of funds stemming from heavy sales of sterling that coincided with precautionary shifts of funds from the Euro-dollar market to continental centers, notably to Switzerland. To this was added the seasonal increase in the liquidity needs of commercial banks, a factor which in several countries causes transfers of foreign assets to the monetary authorities at the middle and end of each year. Concerted action, largely based on the activation of swap lines, proved effective in neutralizing the influx of funds into official reserves and in relieving shortages in the Euro-dollar market. As on earlier occasions, the BIS supported the central banks’ operations and drew dollars on its swap lines with the Federal Reserve System in order to place them in the market. The Federal Reserve System also cooperated with European central banks by offering forward cover through swap drawings of dollars. For Germany such drawings in the amount of $300 million were made in connection with the swap transactions between the Bundesbank and German commercial banks. Taken together, these central bank operations amounted to some $1.4 billion during late 1967 and went far toward calming the Euro-dollar market.

For convenience of analysis this Report employs the classification, industrial countries and primary producing countries. Industrial countries in this grouping are Austria, Belgium, Canada, Denmark, France, the Federal Republic of Germany, Italy, Japan, Luxembourg, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the United States; primary producing countries are all of the remainder with the exception of CMEA countries, mainland China, etc., generally not covered in the Report because of the absence of data. (Members of the Council for Mutual Economic Assistance are Albania, Bulgaria, Czechoslovakia, Eastern Germany, Hungary, Mongolia, Poland, Rumania, and the Union of Soviet Socialist Republics. In addition to these countries and mainland China, the territories generally not covered include Cuba, North Korea, and North Viet-Nam.) The category of primary producing countries is subdivided into more developed countries (Australia, Finland, Greece, Iceland, Ireland, New Zealand, Portugal, South Africa, Spain, Turkey, and Yugoslavia) and less developed countries (all others).

It is recognized that no simple classification, such as that adopted in this Report, can reflect the full nature of each economy. For example, industrial countries, such as Canada and the United States, are also important producers and exporters of primary products; some countries classified as primary producers, such as Australia, have significant industrial capacity; and, in a few instances, some less developed primary producing countries may have relatively high per capita incomes.

For some purposes in this Report, it has also been useful to distinguish between developed countries and less developed countries. When this is done, the term developed countries covers both industrial countries and more developed primary producing countries.

The external positions of particular industrial countries are discussed below, but it may be noted here that the main component of the change in their over-all balance was the serious worsening in the position of the United States.

Much of this outflow of funds from Italy appears to have been reflected in the short-term capital item “Repatriation of Italian banknotes” in the Italian balance of payments. See Supplementary Note B, Table 41.

For comment on these “supplements” to world reserves, see Annual Report, 1967, page 11.

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