Journal Issue

International Payments

International Monetary Fund. External Relations Dept.
Published Date:
September 1964
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RECENT developments in international payments have taken place against a background of vigorous world economic expansion, with industrial production and world trade increasing rapidly, and with many primary commodity prices holding much of their earlier gains. These favorable conditions have facilitated two helpful developments. On the one hand, the United States has been able to achieve substantial economic growth while at the same time considerably reducing its payments deficit with the rest of the world. On the other hand, higher commodity prices have brought a distinct improvement in the export earnings of the primary producing countries. As a group they were thus able not only to increase their imports substantially, but also to achieve a surplus in their international transactions.

The high level of economic activity in the industrial economies, however, has given rise to new problems, as over-all demand in some countries, particularly in Europe, has approached or even exceeded the limit of available productive resources. The varying strength of domestic demand and differing upward pressures on domestic costs and prices have been reflected in the changing payments position of the individual industrial nations. An outstanding example of the outcome of these varying demand pressures has occurred in Europe, where a striking resurgence of the surplus in German external payments occurred at the same time as a serious weakness in the Italian payments position. Other industrial nations, with the exception of the United States, have not been free from these problems, and as a result, there has been a general resort to restraining measures, including higher interest rates and an extension and intensification of rigorous fiscal and monetary policies.

Expanding Production and Rising Costs and Prices

The recent phase of industrial expansion has taken place against differing backgrounds. In North America, a relatively high rate of unemployment and the existence of surplus productive capacity have enabled expansion to occur without significant increases in wages or domestic prices, thus allowing the U. S. authorities to pursue liberal fiscal and monetary policies. In the United Kingdom, initial excess capacity was largely absorbed by a rapid rise in output, and in the new year, with pressures on available resources mounting, the British authorities introduced measures to help moderate the rate of expansion to a more sustainable level. In Japan, where expansion was particularly vigorous in 1963, inflationary pressures re-emerged during the course of the year and led the Japanese authorities also to take measures from the middle of the year to prevent the expansion from becoming excessive.

In continental Western Europe, the economies of most countries were already operating at close to full capacity in 1962 and, consequently, the subsequent rise in final demand exerted strong pressures on domestic costs and prices. In Italy, the authorities began adopting measures from the middle of last year onwards to restrain inflation, and in France disinflationary measures were taken from the beginning of 1963 and a fuller anti-inflation program was announced in September. In the Netherlands, where the growth in production was less rapid, the pressure on prices and wages became increasingly felt toward the end of 1963. Credit restraints were reintroduced in September, and in the early months of 1964 wages underwent a considerable increase. In April prices showed a much more than seasonal increase. In the Federal Republic of Germany, prices remained relatively stable, despite a pronounced rise in wage costs, but from the end of 1963 the economy began to be subjected to some tension, which arose mainly from a large inflow of capital and from a sharp expansion in exports to other countries in the European area with more intense demand pressures. This led the German authorities to pursue monetary and banking policies which were designed to help neutralize the effect upon the German economy of pressures originating abroad.

By the end of the first quarter of 1964, there were signs that the monetary and credit policies that were being pursued by the various national authorities were beginning to influence domestic economic conditions. Under the impact of widespread tax cuts, expansion in the United States was picking up further momentum, without seriously endangering domestic price stability; in the United Kingdom, where total demand was running at a high rate, only modest pressures on prices existed; while in Japan, the reduction in the sharp rate of expansion last year was accompanied by an abatement of the pressures on internal costs and prices. Within the countries of the European Economic Community (EEC), the measures taken in France and Italy were tending to bring about an easing of demand pressures, although for the EEC as a whole the rate of growth was well maintained, primarily because of an acceleration of expansion in Germany.


World-Wide Trade Gains

The high level of industrial activity brought, in its turn, a rapid growth in international trade. Last year, the value of world trade, including exports of the Soviet countries and Mainland China, grew by about 8Vi per cent, or nearly twice the rate of increase recorded in the previous two years. For the first time for several years, this over-all rate of expansion was representative of trade in both manufactures and primary commodities, with exports of the primary producing countries rising nearly as sharply as those of the industrial nations.

Trade of Manufacturing Countries

The principal factor in the faster growth of exports from manufacturing countries last year was a 6 per cent expansion of their exports to primary producing countries. At the same time, trade among the manufacturing countries themselves continued to grow strongly, reaching an increase of nearly 11 per cent last year, slightly higher than that recorded in 1962.

In 1963, the trade of the various manufacturing countries was influenced by their diverging trends in output and by the pressures which the level of activity and demand exerted on domestic prices. In Denmark, Germany, and the United States, where growth in over-all demand least affected internal prices, imports rose last year more slowly than those of the other industrial economies. Imports into Denmark, in fact, remained relatively stable, while those into Germany and the United States rose by only 5–6 per cent. On the other hand, imports into the United Kingdom and other countries of the European Free Trade Association (EFTA) rose by 8–9 per cent, those into EEC countries other than Germany increased by more than 15 per cent, while those into Japan increased by nearly 20 per cent (see Chart 1).


(In billions of U.S. dollars)

As a reflection of the expanding import demand exerted by their trading partners, Denmark, Germany, and the United States achieved a substantially faster growth in exports than in imports and, consequently, recorded marked improvements in their foreign trade balances. Exports of most EFTA countries, including Switzerland, kept pace with the growth in imports of these countries, which in general experienced little change in their trading positions. On the other hand, most EEC countries (excluding Germany) and Japan expanded their exports considerably less than imports and suffered a deterioration in their trading accounts.

In general, the diverging trends emerging in 1963 continued in the first quarter of 1964. Thus, U. S. exports in the first three months of this year, aided by some special factors, were running at an annual rate of about 25 per cent above the level of the corresponding quarter of 1963 and had far outstripped the growth in imports. The United Kingdom experienced a sharp expansion in its trade deficit in the first four months of this year, with imports advancing strongly, reflecting in part a substantial rate of stock building, and exports growing relatively slowly. On the other hand, there were signs that the growth in the Japanese trade deficit was leveling off.

There were at the same time few signs of a reduction in the imbalance of the EEC countries. During the first quarter of 1964, the growth of imports into France, Italy, and the Netherlands exceeded the increase in exports from these countries, while Germany’s trading position remained outstandingly strong, the favorable trade balance being some four times that recorded in the first quarter of 1963. It seemed likely, however, that a tendency toward an evening of demand pressures in the EEC was beginning to become apparent, and would in due course be reflected in a moderation of the divergent trends in trade.

Trade of Primary Producing Countries

The strong recovery in commodity prices was the most significant development of 1963 for these countries. Prices first began to rise toward the end of 1962 and continued to move upward throughout 1963, producing for that year an average level some 10 per cent above that for 1962. Further increases in the first two months of this year pushed the average price up to the level of 1957—the last year before the general downturn in commodity prices (Chart 2).


(Excluding Petroleum) (1957 = 100)

However, exports of primary producing countries include certain commodities, such as manufactures, prices of which did not rise. Moreover, there is a time lag between changes in market prices and those received for exports; thus the rise in the latter in 1963 compared with 1962 was much more moderate than the advance in market prices.

Nevertheless, only a few countries failed to increase their export earnings last year, as the high level of industrial demand and the tendency to build up stocks in the consuming centers created world-wide buoyant trading conditions. Among the countries with substantially increased export earnings were the United Arab Republic with an increase of 26 per cent, Australia with 21 per cent, Brazil with 16 per cent, India with 14 per cent, and Argentina with 12 per cent. On the other hand, those failing to increase the value of their exports included Peru—a country which has had outstanding success in doubling export revenue in the past five years—Colombia, and Ghana, where the main crop was sold before the increase in prices.


The Industrial Countries

Some of the recent trends in the payments positions of the industrial countries, individually and in groups, are indicated in Chart 1 and the Table on page 122. During 1963 there was a continued reduction in the surplus which has persisted for several years in industrial continental Europe on goods, services, and private transfer payments (here referred to as “current account”). However, although this current surplus was nearly eliminated, an acceleration in the inflow of capital into the area prevented a reduction in the area’s total, or over-all, surplus, which was even slightly higher than the year before. There was a small rise in the current account surplus of both the United Kingdom and the United States, accompanied by a slightly larger increase in the net outflow of long-term capital. While the over-all balance of payments of the United States did not change much between 1962 and 1963, a distinct worsening in the United Kingdom’s over-all position was brought about primarily by a change from a net inflow to a net outflow of short-term capital. In Japan, a deterioration on current account was more than offset by a rise in the inflow of capital.

Trends in 1963

The annual figures, however, obscure important trends which developed in 1963. During the course of the year, the U.S. balance of payments strengthened markedly, both on capital and current account. From a peak rate of $5 billion in the first half of 1963, the outflow of private U.S. capital fell to a rate of $2.8 billion in the second half of the year. This fall was caused, in part, by the steps taken by the U.S. authorities to staunch the outflow of private capital in proposing a tax (to be called the interest equalization tax) on income derived from certain foreign investments, excluding, however, issues by the less developed countries, as well as some other transactions. This was not immediately enacted by the U.S. Congress, but since it was to be retroactive, it helped in reducing the outflow of U.S. capital to other industrial nations. At the same time, there was a strong improvement in the U.S. current account surplus. A sharp expansion in exports and a merely marginal increase in imports combined to raise the trade surplus in the final quarter of 1963 to an annual rate of nearly $6 billion, compared with a surplus of $4.3 billion in the whole of 1962. A continuation of these trends in the first quarter of 1964 achieved for the first time in five years an approximate quarterly balance in U.S. over-all payments.

Much of this recent improvement has been due to transitory factors: poor harvests in several European countries in 1963 led to increased exports of U.S. agricultural commodities, while the outflow of capital had been limited by the proposal of the interest equalization tax. Moreover the considerable rise in costs in many other industrial countries strengthened the U.S. competitive position; U.S. markets abroad were expanding rapidly; and rising economic activity at home seemed likely to reduce the comparative attraction of investments overseas.

The year 1963 also saw a gradual deterioration in the United Kingdom’s balance of payments. The surplus on current account dwindled and the net outward flow of long-term capital rose markedly. These developments changed the combined balance on current and capital account from a surplus to a deficit in the first and second halves of the year. Despite the continued buoyancy of world trade, and the strengthening of the United Kingdom’s competitive position that took place during 1963, the trend in exports, though apparently upward, was somewhat erratic in the early months of 1964, in decided contrast to a strong expansion of U.K. imports.

In spite of these strains, and the over-all deficit in the United Kingdom’s payments since the middle of 1963, U.K. gold and foreign exchange reserves showed only moderate alterations, as a result of a strengthening of the payments position of several countries in the overseas sterling area, mainly Australia. The slight increase in these reserves recorded in the early months of 1964 reflected the strength of prices of commodities supplied by the sterling area, combined with a continued inflow of capital to the area.

Continental Europe

In continental Europe, the final quarter of 1963 saw a worsening of the imbalance within the area; a large surplus emerged in German external payments, and, obversely, a serious deterioration occurred in the payments position of Italy. Last year the deficit in Italy’s payments became formidable, amounting to about $600 million on the country’s current account and as much again on capital account. These difficulties, which emerged after several years of marked strength in the Italian economy and balance of payments, were connected with the very process of Italy’s economic growth. Powerful and sustained industrial expansion, together with a substantial migration of Italian labor abroad, has not only reduced the high level of unemployment, but also provided new jobs for rural workers who were formerly underemployed in agriculture. The resulting upward pressure on costs and prices, and the sharp increase in real incomes, combined to produce a level of demand, and a shift in the nature of that demand, for which Italian industry and agriculture were not yet prepared. Moreover the 1963 crops had again been disappointing. In consequence, there was a sharp rise in imports, particularly of foods and manufactured articles. These difficulties on current account were compounded by large and increasing outward flows of private capital, stimlated in part by political uncertainties.

The Italian authorities began introducing monetary and tax measures to restrain this growth in demand from the middle of 1963. To support the country’s declining foreign exchange reserves, the authorities also negotiated, early in 1964, a total of about $1 billion in foreign credits and similar facilities, and drew $225 million within the gold tranche from the Fund. Preliminary figures for the first quarter of 1964 suggest that Italy’s position has not deteriorated further, with the deficit on the combined current and capital account running at about the same level as in the final quarter of 1963. In the following months there were signs of considerable improvement.

Germany’s over-all balance of payments position strengthened in 1963, as a result of a massive inflow of private capital and a progressive improvement in the favorable balance of the country’s current account. These developments reflected inflationary pressures in the economies of some of Germany’s main European trading partners. As a result, German exports to these countries rose sharply while the rate of growth in German imports slowed down. There were some signs of a modification in these trends early in 1964, when a relatively faster rate of industrial expansion was accompanied by a quickening in the pace of German imports. Some weakening of the country’s surplus position on capital account may also be in progress. The inflow of long-term private capital was less strong in the first quarter of 1964 than in the final quarter of 1963, and in April there was actually a net outflow of such capital. The high yields obtainable on German securities had been very attractive to foreign capital, and the new trend resulted in part from German measures to discourage an undue flight of capital into the country, and also from measures to encourage German investments abroad. These measures included a proposed tax of 25 per cent on income accruing to nonresident investors and tax exemptions for German investments in developing countries.

In France, after a period of several years in which the balance of payments remained exceptionally strong, there were signs in 1963 and early in 1964 that an adjustment was in progress. This weakening of the French surplus position was associated with inflationary tendencies in the economy, and these tendencies became stronger in the course of 1963. As domestic prices tended to rise under increasing pressure, the current account of the balance of payments changed from a surplus to a deficit. For the year as a whole, the surplus amounted to about $400 million, or about half what it had averaged over the preceding four years. Last year, however, the reduction in the current account surplus was accompanied by an increase in the net inflow of private capital which, together with a reduction in the net outflow of official capital, resulted in a greater increase in French reserves of gold and foreign exchange than in 1962. The over-all surplus was tending to fall throughout 1963, however, and in the first four months of this year the increase in reserves was only one fourth of that recorded in the corresponding period of 1963. In the following two months French reserves rose again at a higher rate.

Other Countries

During the first few months of 1964, Japan experienced some pressure on its reserves, mainly as a result of a continued weakness on current account during a period when seasonal factors are unfavorable in any event. Last year, the total goods and services account was in deficit, but was covered by a larger inflow of capital. The proposed U.S. interest equalization tax, however, has limited the possibilities of long-term funds. To cover its deficit on current account, therefore, Japan has resorted to further borrowing from U.S. banks, and has also placed some important issues of securities in Europe.

Changes in the balances of payments of other manufacturing countries have generally been quite small. The main exception was Denmark, whose balance of payments improved substantially from 1962 to 1963, but was weakening by the end of the year.

Payments of Primary Producing Countries

The most notable development in the balance of payments of the primary producing countries in 1963 was the striking reduction in the current deficit to a level which was considerably lower than that for the inflow of long-term financial resources, including all economic aid. The primary producing countries, as a group, had a surplus on account of current and long-term capital transactions of some $2.0 billion. Compared with the outcome in 1962, this was an improvement of about $2.2 billion.

The main reason for this improvement was a sharp increase, of about $1.5 billion, in their combined trade balance, caused by an increase in export earnings which was accompanied by a more moderate increase in imports. Most of this improvement accrued to the less industrialized nations. Considerable variations in the goods and services balances of individual members of the more industrially advanced group of countries tended to cancel out, although a net improvement of about $100 million was recorded.

In contrast to the general prosperity that most of the more industrially advanced members of the group of primary producing countries enjoyed in 1963, the over-all improvement in the payments position of the less industrialized countries in this group concealed marked differences for individual members. Last year, in spite of the general improvement, many of the less industrialized countries were still in deficit, and others had achieved a surplus only through intensive application of import and payments restrictions or similar expedients, by depreciating their currencies, or by maintaining domestic activity at an unsatisfactory level.

First half 1962Second half 1962First half 1963Second half 1963
A. Countries exporting mainly manufactured products
United States-131-2,791-1,469-864
United Kingdom74797-124-334
Common Market countries2491,2521,043606
Germany, Federal Republic of-354135243477
Denmark, Norway, Sweden2239101104
Total, Group A839-776-305-21
B. Countries exporting mainly
primary products
New Zealand49-1465-91
South Africa222337940
Subtotal, more industrialized countries-4281,132359521
Latin American Republics-353-6854303
Miscellaneous sterling countries-1317514116
Other Europe812-4523
Other countries156-118421148
Subtotal, less industrialized countries-320-99571490
Total, Group B-7481,0339301,011
C. Excess of surpluses91257625990
1. Owing to increase in world monetary gold185155285560
2. Owing to errors and omissions-94102340430
D. Memorandum items
United States and Canada-1,078-1,807-1,314-882
Continental Europe in Group A3101,6001,0051,199
Group B, excluding Canada199497751,029

For most countries, over-all balances have been measured by changes in official gold and foreign exchange assets, in payments agreement credit and debit balances, in net IMF positions, and in (other) liabilities to foreign monetary authorities (the latter being entered in fact only for the United States, the United Kingdom, and Canada). For some countries, however, balances so measured have been adjusted for certain advance debt repayments between governments and, in the case of Japan, for drawings and repayments on short-term credits negotiated by Japanese authorities in connection with the 1961–62 balance of payments difficulties.

For most countries, over-all balances have been measured by changes in official gold and foreign exchange assets, in payments agreement credit and debit balances, in net IMF positions, and in (other) liabilities to foreign monetary authorities (the latter being entered in fact only for the United States, the United Kingdom, and Canada). For some countries, however, balances so measured have been adjusted for certain advance debt repayments between governments and, in the case of Japan, for drawings and repayments on short-term credits negotiated by Japanese authorities in connection with the 1961–62 balance of payments difficulties.

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