Abstract

THE recession of economic activity in the United States which set in after the second quarter of 1953 fell into two phases. Between the second quarter of 1953 and the first quarter of 1954, gross national product declined by just under 4 per cent (after allowing for seasonal influences) and manufacturing production by a little more than 9 per cent. Thereafter there was a six months’ lull, which brought neither a significant further deterioration nor yet a recovery. A distinctive feature of the recession was the stability of domestic prices throughout 1953 and 1954.

United States

THE recession of economic activity in the United States which set in after the second quarter of 1953 fell into two phases. Between the second quarter of 1953 and the first quarter of 1954, gross national product declined by just under 4 per cent (after allowing for seasonal influences) and manufacturing production by a little more than 9 per cent. Thereafter there was a six months’ lull, which brought neither a significant further deterioration nor yet a recovery. A distinctive feature of the recession was the stability of domestic prices throughout 1953 and 1954.

The initial relatively sharp downward adjustment of manufacturing production was followed by a fall in imports in 1953. Though final demand recovered in the fourth quarter of 1954 and manufacturing output responded with a sharp rise, imports did not turn upward again until December 1954. As further expansion of domestic demand early in 1955 raised the index of manufacturing production fully 6 per cent above the corresponding figure for 1954, imports continued to recover and in the first quarter of 1955 were higher than in the corresponding quarter of the previous year.

While the effects of the U. S. recession upon the balance of payments of the rest of the world were sustained without serious difficulties, this was not because its direct effects on international trade were abnormally small. In contrast to 1948, however, many countries outside the United States were in a far better position in 1953 to absorb the impact of a U. S. recession, for the foundations of their balances of payments had been greatly strengthened in recent years. Whereas gold and dollar reserves outside the United States had been falling in 1948, they were rising at an annual rate of more than $2 billion during the year preceding the 1953-54 recession. U. S. Government expenditures abroad did not increase, as they had done in 1948-49, but there was a considerable expansion in the net outflow of private capital funds from the United States—a development which was related only in part to the U. S. recession.

The impact of the recession on the balance of payments is best measured by comparing, not the calendar years 1953 and 1954, but the years ended September 1953 and September 1954. It is then seen that the recession, measured by a contraction of about 2.5 per cent in gross national product and of 7 per cent in manufacturing production, was accompanied by a decline of some 9 per cent in import volume and, since import prices rose by about 2 per cent, of a little more than 7 per cent in the value of imports.

The effect of the recession on the value of imports was clearly not inconsiderable. When these figures are compared with data for the recession of 1948-49 (Table 4), it is seen that the volume of imports fell proportionately more in 1953-54 than in 1948-49. But as unit values in 1953-54 either rose, or fell less rapidly than in the earlier recession, the proportionate decline in the value of imports was much the same on both occasions. The rapid advance in industrial production outside North America no doubt accounts for the absence of any decline in the prices of manufactured imports and also in part for the maintenance of the prices of some raw materials. Threatened shortages of coffee and cocoa helped raise the price level of primary foodstuffs imported into the United States. The decline in import volume was accentuated by consumer resistance to high prices for coffee and cocoa.

Table 4.

Changes in U. S. Manufacturing Production, Prices, and Imports, 1948-49 and 1953-54

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Sources: U. S. Department of Commerce, World Trade Information Service, Statistical Reports, Total Export and Import Trade of the United States (Washington); Survey of Current Business (Washington).

The fall of 7 per cent in the value of imports is equivalent to an absolute decline of about $850 million. The total supply of U. S. dollars1 to the rest of the world fell, however, by only $300 million. At the same time, the continuance of economic expansion and the relaxation of restrictions on dollar imports abroad raised expenditures on U. S. exports and net expenditures on services by approximately $300 million. The combined effect of these movements was a decline of $560 million, from $2,090 million to $1,530 million, in the net receipts of gold and dollars by the rest of the world from transactions with the United States (Table 5).

Table 5.

Summary of U. S. Balance of Payments, 1953-551

(Annual rates in billions of U. S. dollars)

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Sources: U. S. Department of Commerce, Balance of Payments of the United States, 1919-1953 (Washington, 1954); “The First Quarter Balance of Payments,” Survey of Current Business (Washington), June 1955, pp. 5-14.

Transfers of military goods and services under aid and the corresponding grants are excluded No sign indicates credit; minus sign indicates debit.

Preliminary.

Total merchandise imports less military imports.

Net U. S. private capital plus net long-term foreign capital (direct and portfolio) investments other than transactions in U. S. Government securities.

Total merchandise exports less exports financed by military aid.

Gold movement, short-term foreign capital (net), and transactions in U. S. Government securities.

The effects of the recession on imports were not offset by any increase in net U. S. Government expenditures abroad; in fact, these expenditures declined slightly as a result of a fall in government grants and loans. On the other hand, the increase in the net outflow of private capital from the United States—estimated at about $820 million (or if “errors and omissions” are excluded, $710 million)2—was roughly equivalent to the total decline in U. S. private merchandise imports. The volume of U. S. direct investment abroad was indeed smaller than in the previous year, but the flow of private portfolio long-term and short-term capital, which on balance in 1952-53 had been in the direction of the United States, reverted in 1953-54 to a net outward movement (some of which corresponded to the accumulation of payments arrears). In part, this may have been due to movements in interest rates. The rapidly improving reserve position in many other parts of the world had stimulated repayment of debts to the United States in 1952-53; but following a half year in which the liquidity of the banking system had been increasingly curtailed, credit conditions in the United States became easier in the early summer of 1953, and lower interest rates probably had some influence on the renewal of the net flow of capital funds from the United States in 1953-54.

In the fourth quarter of 1954, while the recovery of U. S. imports was still delayed, there was a further expansion of the net outflow of U. S. private capital, especially on short-term and medium-term, to Europe and Latin America. On the other hand, the continuing liberalization of dollar imports by major European and some sterling area countries, and the further expansion of production and consumer demand in Europe, again increased U. S. exports, which were greater by about 10 per cent than in the fourth quarter of 1953. As a result, the annual rate of net earnings of gold and dollars by countries outside the United States fell by about $200 million, to $1.3 billion.

This decline was accelerated in the first quarter of 1955. Though U. S. private imports were almost 7 per cent, and net U. S. Government expenditures abroad almost 30 per cent, above the levels of 1954, the annual rate of receipts of gold and dollars by the rest of the world from transactions with the United States fell to $300 million. U. S. exports were at a rate some 10 per cent above that for the first half of 1954. A more important explanation of the fall in the rate of receipts of gold and dollars, however, was the reversal of the net outflow of private portfolio and short-term capital.

What has been said about the course of U. S. transactions with the rest of the world as a whole is not true without important qualification of its transactions with each one of the major trading areas. Exports to the United States by Canada, by several northern Latin American countries, and also by the West African dependencies declined very little, or actually increased (Table 6). Some of these countries export mainly such raw materials as newsprint, petroleum, and aluminum, for which the U. S. demand has shown a strongly rising trend. Others are mainly exporters of coffee and cocoa.

Table 6.

Value of U. S. Imports, 1953 and 1954

(Values in billions of U. S. dollars)

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Source: U. S. Department of Commerce, World Trade Information Service, Statistical Reports, Total Export and Import Trade of the United States (Washington).

Based on figures in millions of U. S. dollars.

Brazil, Central America, Colombia, Cuba, Venezuela, i.e., countries exporting mainly coffee, petroleum, and sugar.

Argentina, Bolivia, Chile, Ecuador, Paraguay, Peru, Uruguay.

Continental OEEC, Finland, Spain, Yugoslavia.

On the other hand, there was a considerable decline in exports to the United States by countries supplying raw materials more sensitive to recession, such as raw wool, rubber, and several nonferrous metals (tin, lead, zinc), or manufactured products which are marginal to U. S. total consumption. The marked decrease in U. S. imports from southern Latin America in 1954 was in part a result of the fact that 1952-53 shipments of wool had been abnormally large. The figure for continental West European countries was affected by a 50 per cent decline in shipments of steel mill products from the abnormally high figure of 1953. U. S. imports from Australia and New Zealand (largely wool) and from Malaya, Thailand, and Indonesia (rubber and tin) also fell considerably.

The increase of about $150 million in total U. S. exports between the years ended September 1953 and September 1954 was the net effect of a decline in shipments to Canada of over 10 per cent, and increases of various magnitudes in exports to all other areas.

Of the total increase in the net outflow of private capital from the United States in the year ended September 1954, net lending to international institutions (mainly the International Bank for Reconstruction and Development) accounted for some $180 million. The increase in the net movement to Canada is estimated at about $250 million. Though U. S. direct investments were some $40 million less than in 1952-53, the net outflow of other private long-term and short-term funds—both U. S. and Canadian—of some $100 million in 1953-54 replaced inward movements of almost twice that magnitude in the previous year. U. S. direct investment in Latin America declined sharply, but there was a considerable outflow of short-term capital funds from the United States in 1953-54, which contrasted with a net inflow in the previous year. In 1952-53 substantial repayments of short-term loans (including accumulated payments arrears) had been made to U. S. exporters by Latin American countries largely from the $300 million Export-Import Bank loan to Brazil that was made at that time, but in 1954 there was a renewed increase in short-term indebtedness which accompanied rising U. S. exports to Latin America, including the refinancing of payments arrears by short-term and medium-term private bank credits.

Private capital movements between the United States, on the one hand, and the sterling area and continental Western Europe, including dependencies, on the other, resulted in a decline in the net inflow to the United States in the year ended September 1954. While on balance the net movement of long-term funds (U. S. and foreign) was still toward the United States, the net flow of U. S. short-term capital to Western Europe increased by $150 million, much of which may be attributed to interest rate motivations and increases in working balances associated with the reopening of European gold and commodity markets.

The net flow of private capital funds from the United States continued in the fourth quarter of 1954, especially to the United Kingdom, the continental OEEC countries, and Latin America. It partially offset the increases in U. S. surpluses on private current account with these areas, which were due mainly to a further expansion of U. S. exports, especially to continental Western Europe, where the increase was almost 35 per cent. This was attributable to the continued expansion of European demand, which for such items as coal and steel was outstripping European supplies, to an inferior crop which increased the demand for cereals, and to the further removal of restrictions on dollar imports.

The increase of U. S. imports in the first quarter of 1955, which was in part seasonal, favored mainly raw material exporting countries. Since U. S. exports to these countries began to fall, to some extent because of intensified restrictions, the U. S. current account surpluses with Latin America, the sterling area, and other primary producing countries declined. The reversal of the flow of private capital, however, affected all trading areas. The gold and dollar reserves of the Latin American countries fell, despite the improvement on current account, and the rate at which continental Western Europe as a whole earned gold and dollars from the United States was substantially reduced. On the other hand, a decline in the U. S. surplus on private current account with the sterling area, due chiefly to seasonally larger U. S. imports from the overseas sterling area, somewhat more than offset the reversal of the net movement of capital funds, and the sterling area received a small balance of gold and dollar funds from its transactions with the United States.

Canada

In Canada, as in the United States, there was a decline in economic activity which began in the second half of 1953. This was brought about mainly by a downward adjustment of production and inventories to declining fixed investment outlays, and was aggravated by a drop in farm production. The fall in gross national product was much the same in proportion in both countries. Despite the decline in U. S. activity, exports to the United States fell by only 4 per cent, being sustained by a growing demand for newsprint, nickel, and aluminum. Overseas demand for wheat fell, but other exports were well maintained. The value of Canada’s total exports in 1954 fell by 6 per cent and of total imports by 7 per cent.

As in 1953 the current account deficit which was much the same as in the previous year was offset by a capital inflow (Table 7). The effects of these movements upon the Canadian balance of payments and their relations to fluctuations in the rate of exchange are examined in a later section of this Report.

Table 7.

Summary of Canadian Balance of Payments, 1953 and 19541

(In millions of Canadian dollars)

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Source: Dominion Bureau of Statistics, Quarterly Estimates of the Canadian Balance of International Payments (Ottawa).

Excluding military exports of goods and services provided under aid to NATO and corresponding grants. No sign indicates credit; minus sign indicates debit.

Western Europe

Internal economic conditions in Western Europe during 1954 were, in general, highly prosperous. Compared with 1953, manufacturing output rose by 12 per cent or more in Austria and Western Germany, between 9 and 11 per cent in the Netherlands, France, and Italy, and between 7 and 8 per cent in the United Kingdom and Norway. The increases were largest in the chemical and engineering industries, and more modest in textiles, roughly in line with long-run developments since the war.

This expansion of domestic activity was responsible for a rise in European imports, especially from primary producing areas. In conjunction with increased trade liberalization within Europe, it also gave rise to a remarkable expansion of intra-European trade. As a result of other factors discussed below, Western Europe’s trade balance showed a further improvement in 1954 over 1953 vis-à-vis all principal areas other than North America. The over-all external position as measured by the movement of gold and dollar reserves remained virtually unchanged.

The expansion of imports was supported not only by the high level of final demand and the extension of import liberalization, but also by some restocking. Thus the increase in the volume of imports in 1954 generally exceeded that of domestic production, especially during the second half of the year (Table 8). The excess was larger in Germany and the Netherlands, where import liberalization and restocking were more pronounced; it was smaller in France, where better harvests made it possible to reduce food imports but imports of durable consumer goods increased in response to liberalization, and there was some restocking of industrial raw materials and semifinished products. The United Kingdom was the only OEEC country whose imports increased proportionately less than domestic production. Stocks of staple foodstuffs, imports of which had been large in 1953, were reduced considerably; stocks of some imported raw materials appear to have fallen as well.

Table 8.

OEEC European Countries Volume of Production and Trade

1953 = 100

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Source: OEEC Statistical Bulletins, General Statistics (Paris).

Exports of OEEC countries as a whole also increased sharply in 1954 under the stimulus of an improvement in the competitive position of European, and more especially of continental, exportable production and an increase in export financing made available by several countries. The increase in volume was sharpest in Germany (23 per cent), France (22 per cent), and the Netherlands (16 per cent). On the other hand, the volume of U. K. exports increased by only 6 per cent for the year as a whole; and in the fourth quarter, when trade was affected by the dock strike in October, it was actually less than in 1953.

In Western Europe a slight deterioration of the terms of trade began early in 1954; it amounted to less than 1 per cent when the two full years are compared. Improved productivity and intensified competition in home and export markets, which may have reduced profit margins, together with the delayed effects of previously falling raw material prices, caused export unit values to decline throughout the year. Unit values for total imports, which, despite an increase in the prices of imported foodstuffs, had been declining through the summer of 1954 (together with export prices), started to rise in the autumn.

OEEC trade in 1954 was influenced by liberalization measures, both among the OEEC countries themselves and in other directions, notably the dollar area. The expansion of intra-OEEC trade was considerably greater than that of West European trade with the rest of the world (Table 9). From the first quarter of 1953 to the last quarter of 1954, the volume of intra-OEEC trade grew by 38 per cent, that of exports to other destinations by 29 per cent, and that of imports from other sources by 15 per cent.

Table 9.

OEEC European Countries Value of Trade, Selected Areas

(In billions of U. S. dollars)

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Source: OEEC Statistical Bulletins, Foreign Trade, Series I (Paris).

Overseas sterling area, Latin America, non-sterling countries of the Middle East, Far East, and Africa, and continental dependencies.

Between January and December 1954, the percentage of intra-OEEC imports freed from quantitative restriction rose in France from 18 per cent to 65 per cent, although this was accompanied by the imposition of a compensatory tax on imports; in the United Kingdom the percentage rose from 75 per cent to 83 per cent. At the beginning of 1955, the OEEC decided to raise the trade liberalization target, from 75 per cent to 90 per cent; by April 1, 1955, the percentages for each of the 13 countries committed to the OEEC liberalization program had reached 75 per cent, 6 of them being as high as 90 per cent. In the expansion of intra-OEEC trade, however, the change in the composition of internal demand and production in OEEC countries was more important: production of such products as chemicals, machinery, and durable consumer goods, which figure largely in intra-European trade, expanded much faster than that of textiles, which require a relatively high proportion of materials of non-European origin. The greater competitiveness of European industry and increased output in European agriculture also help to account for the higher proportion of European imports drawn from European sources.

The trade balance of the OEEC European countries with the rest of the world deteriorated somewhat during the second half of 1954, as imports increased more rapidly than exports. For the year 1954 as a whole, the apparent trade deficit (i.e., imports, c.i.f., less exports, f.o.b.) was $300 million higher than in 1953 (Table 9).

This deterioration is more than fully accounted for by the increase of approximately $450 million in the deficit with the United States and Canada. The North American recession depressed OEEC exports, and the European boom, coupled with a significant relaxation of dollar import restrictions, increased OEEC imports. The magnitude of the effects of dollar import liberalization cannot, as yet, be exactly measured. They were probably greatest in Western Germany and the Netherlands. In Germany, the value of total imports was 20 per cent greater in 1954 than in 1953, and the value of imports from the United States rose by 35 per cent. In the Netherlands, the value of imports from the United States rose by some 40 per cent, while total imports increased by about 22 per cent. Most of these increases appear to have occurred after liberalization measures had been taken by these two countries.

The decline in Western Europe’s trade with North America in 1954 was far more than offset by the expansion of its trade with the rest of the world. Excluding East-West trade, the volume of which is still small, and trade with Japan, which expanded in 1954 but is still comparatively unimportant for Western Europe, the value of Western Europe’s imports from countries outside North America rose by over 6 per cent. But while continental Europe’s imports from primary producing countries increased by over 7 per cent, the corresponding U. K. imports fell by 1 per cent. The difference can be explained partly by the more rapid expansion of industrial production in continental Europe (10 per cent) than in the United Kingdom (7 per cent), and partly by a substantial increase in continental imports of foodstuffs, which was not paralleled in the United Kingdom. The value of Western Europe’s exports to these primary producing areas increased by as much as 9 per cent from 1953 to 1954, that of continental Europe by 12 per cent, and of the United Kingdom by 5 per cent.

The balance of payments of the United Kingdom is presented elsewhere in a summary of the balance of payments of the sterling area as a whole. That of continental Western Europe and dependencies is given in Table 10.

Table 10.

Estimated Balance of Payments of Continental West European Countries and Dependencies with Rest of World, 1953 and 19541

(In millions of U. S. dollars)

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Sources: U. S. Department of Commerce, Balance of Payments of the United States, 1919-1953 (Washington, 1954); “The First Quarter Balance of Payments,” Survey of Current Business (Washington), June 1955, pp. 5-14; United Kingdom Balance of Payments, 1946 to 1954 (Cmd. 9291 and 9430); Direction of International Trade (New York); Federal Reserve Bulletin (Washington); International Financial Statistics (Washington); and communication from the International Bank for Reconstruction and Development.

Continental OEEC countries, Finland, Spain, and Yugoslavia, and dependencies unless otherwise indicated. No sign indicates credit; minus sign indicates debit.

Excludes military transfers and military grants throughout. Private balances cover goods and services, excluding government aid and military expenditures on imports, but including private donations, private U. S. capital, and long-term foreign capital other than transactions in U. S. Government securities.

See page 39. Data cover transactions with continental OEEC countries and dependencies only.

Estimated trade balance of West European countries combined with areas other than the sterling area and the United States.

Net movement of funds, i.e., subscriptions, loan disbursements, repayments, purchase of IBRD bonds, payments on purchases of borrowers’ obligations, and change in IBRD holdings of West European currencies.

Residual; equals line II.c less the sum of lines I.a to I.d.

Estimated changes in official gold and dollar holdings. Basic data from International Financial Statistics and Board of Governors of the Federal Reserve System.

For EPU, change in balance of credit extended over credit received; for IMF, paid subscriptions less IMF holdings of member currencies.

The decline of some $600 million in continental Western Europe’s3 balance on goods and services with the United States, which accompanied the U. S. recession, was offset by an increase of some $170 million in U. S. Government expenditures on goods and services overseas, a decline of over $300 million in the goods and services deficit with the sterling area, and a rise of over $200 million in the trade surplus with other parts of the world. Thus there was an apparent increase of some $60 million in the goods and services surplus with all areas. The amount of U. S. Government grants remained roughly unchanged. The deterioration in the goods and services account vis-á-vis the United States was especially large in countries which had suffered from a decline in U. S. demand for their exports (France, Belgium) as well as in countries where dollar import liberalization had important effects (Netherlands, Germany). France and Italy were the main beneficiaries of the increase in U. S. Government military expenditures.

On identifiable capital account there appears to have been an increase, from $120 million in 1953 to $380 million in 1954, in the net outflow from continental Western Europe. The net outflow to the United States declined, but there was a swing of $350 million in capital movements, particularly on private account, vis-á-vis the United Kingdom (including the movement of sterling balances), a net inflow to continental Europe in 1953 being succeeded by a net outflow in 1954.

The rate of reserve accumulation (excluding bilateral and sterling balances) in continental Europe appears to have declined slightly, from over $1,600 million in 1953 to over $1,450 million in 1954. The improvement was greatest in France. In Italy a decline in 1953 was followed by an increase in 1954. West German and Netherlands reserves continued to rise in 1954 though at a slower rate. The reserves of Belgium and the Scandinavian countries declined.

Reported official reserves in France increased by almost $500 million in 1954. The volume of exports rose by some 22 per cent and their value by 14 per cent, owing to an improvement in the supply of agricultural products and some improvement in the French competitive export position. About two thirds of French exports, however, were still subsidized in various forms. The value of imports was 5 per cent larger than in 1953. With a reduction in the trade deficit, continued large receipts ($470 million) from foreign military expenditures in the franc area, and further improvement in the deficit on other invisibles, the franc area achieved a goods and services surplus of almost $100 million, compared with a deficit of almost $200 million in 1953. At the same time, substantial U. S. Government grants and loans (some $500 million) were received, largely in connection with war expenditures in Indochina.

The reduction in the rate of reserve accumulation in Western Germany was due mainly to an increase, from about $50 million to about $315 million, in the net adverse balance in respect of capital transactions and interest payments (which include payments under the London debt agreement and payments out of liberalized capital account). Despite an increase of 25 per cent in the volume of Western Germany’s imports, the export surplus rose from $614 million in 1953 to $662 million in 1954. The improvement in the trade balance was concentrated largely on EPU countries. There was a deterioration in the balance both with the United States—imports from which were swollen by liberalization—and with bilateral agreement countries, where the position was influenced by the curtailment of bilateral credits.

European Payments Union

The arrangements made in June 1954 at the time of the renewal of EPU for another year produced significant changes in the EPU positions of several countries. At that time the debtor countries, with one exception, concluded bilateral arrangements with creditor countries, providing for the regular repayment or funding of a large part of their outstanding debts. The total repaid immediately by the debtors amounted to $224 million, an additional $634 million being left for settlement in monthly or quarterly installments. Creditors further received a total of $130 million from the Union’s own convertible assets. These payments by the debtors and by the Union restored a considerable part of the settlement facilities within the Union. Moreover, the creditor countries agreed to increase their lending obligations by the amounts agreed to be amortized bilaterally, and by the payments received from the convertible assets of the Union.

The decision for the renewal of the EPU also provided for a modification of the settlement rules according to which surpluses and deficits were to be settled, within the agreed settlement facilities, 50 per cent in gold and 50 per cent in credit. Previously, the average gold credit settlement ratio within the quotas had been 40:60.

The settlement facilities as restored by the arrangements associated with the renewal of the EPU proved adequate during the first ten months of the fiscal year 1954-55. Moreover, additional credit facilities were restored in January 1955, through a voluntary repayment of $80 million by France to the EPU, which in turn apportioned this amount among the creditor countries. Turkey remained a “post-quota” debtor, but by the end of April 1955 no other country had exceeded its upper credit limit, although Denmark, Italy, and Norway were fairly close to it.

In June 1955 the OEEC Council of Ministers decided in principle to renew EPU for another year, subject to agreement on certain outstanding issues, and with the proviso that the gold credit ratio for settling monthly surpluses and deficits was to be increased as of August 1, 1955 to 75 per cent in gold and 25 per cent in credit.

Japan

Under the influence of a policy of disinflation inaugurated late in 1953, the increase in Japanese industrial production in 1954 (7 per cent) was considerably smaller than the increase (22 per cent) from 1952 to 1953. As a result of the leveling off of the rate of expansion of industrial production and of the effects upon consumption of Japan’s contractive monetary policy, the value of imports, on a payments basis, fell by some 7 per cent. At the same time, the value of exports rose by almost one third, and the Japanese trade deficit was cut by more than half, to $420 million. The balance of payments moved from an over-all deficit of almost $200 million in 1953 to a surplus of $100 million in 1954, though there was also an increase in liabilities (“usance credits”), which was not much less than $100 million. Receipts from Japan’s Government transactions, including expenditures by U. N. forces in Korea and by U. S. security forces in Japan, were less than in 1953 by more than $160 million.

Japanese exports to the sterling area, stimulated by the Anglo-Japanese Agreement of January 1954 (which reduced quantitative restrictions on Japanese exports to the United Kingdom and its colonies) and by lowered restrictions in independent overseas sterling area countries, increased by about 55 per cent in 1954. Shipments to Latin America nearly doubled; those to the continental OEEC countries rose by about 12 per cent; and those to the United States expanded by almost 22 per cent, despite the U. S. recession. Exports to neighboring Far Eastern non-sterling countries increased in the first half of 1954, but fell in the second half as exports to Indonesia were reduced in order to check any further increase in “frozen credits.”

Apart from the decline of domestic consumption and the fall in export prices, this remarkable increase in exports derived some of its impetus from an extension of the “link system” (the association of especially profitable imports with high-cost exports) and from other methods of providing finance on favorable conditions for exports. The link system has now been abolished, except for transactions directly related to physical production processes.

The fall in total imports was largely the result of the restrictive monetary policy which was directed mainly to import financing and to a reduction of inventory accumulations which was associated with a temporary slackness in domestic output and a decline in domestic consumption. The sharp reduction in wool imports, resulting from a decline in domestic consumption, and the shift of cotton imports from sterling area sources to the United States, where prices had become lower and U. S. cotton enjoyed the support of export credits, were the factors mainly responsible for a decline of almost 30 per cent in imports from the sterling area. There was a rise in imports both from dollar sources and from Latin America, where they were supported by newly concluded trade agreements with Argentina and Brazil.

Primary Producing Countries

The export earnings of primary producing countries in 1954 were greater than in 1953 by some 2 to 3 per cent (Table 11).4 The most important factors affecting these earnings were the relatively low U. S. demand for industrial raw materials, rising import demand in Western Europe, and sharp movements in the prices of coffee, tea, and cocoa. Other significant features included the steady increase in demand from all quarters for imports of crude oil, and the expansion in some countries of import-saving staple food production.

Table 11.

Exports, Imports, and Trade Balances of Primary Producing Areas, 1953 and 1954

(Exports f.o.b., imports c.i.f.; in billions of U. S. dollars)

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Source: International Financial Statistics (Washington).

Mainly non-sterling area countries in the Middle East, Far East, and Africa.

The receipts of primary producing countries (excluding Canada) from their exports to the major industrial countries changed very little between 1953 and 1954, the expansion in purchases by OEEC European countries being slightly greater than the decline in purchases by the United States and Japan (Table 12).

Table 12.

Changes Between 1953 and 1954 in Expenditures of Major Industrial Areas on Imports f.o.b. from Primary Producers

(Value figures in millions of U. S. dollars)

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Sources: Direction of International Trade (New York); OEEC Statistical Bulletins, Foreign Trade, Series I and II (Paris); Economic Commission for Europe, Economic Survey of Europe in 1954 (Geneva, 1955).

Mainly non-sterling area countries in the Middle East, Far East, and Africa.

The increases in European expenditures on imports from the primary producing areas did not compensate exactly in each area for declines in U. S. expenditures. The value of the imports of the major industrial areas from the overseas sterling area declined in part because of a diversion of Japanese imports from sterling area to other sources of supply, but more because of special factors affecting specific export products; there was, however, a substantial increase in the value of imports from the continental European dependencies and a moderate increase in imports from Latin America. Much of the additional European import expenditures was for similar reasons directed toward countries whose sales to the United States declined little, if at all; other primary producers suffered losses in all markets.

Both the earnings of primary producers as a group and of particular regions and countries were determined largely by the way in which the prices of primary products responded to the influences mentioned above. Price developments were, on the whole, favorable for primary producers. Industrial raw material prices, on the average, remained virtually the same as in 1953, the weakening of prices for textile raw materials (which was most pronounced for wool toward the end of the year) being offset by firmer prices for metals and rubber. Throughout the year, prices of staple foodstuffs, notably rice and wheat, were lower than in 1953, while sugar prices recovered slightly in the last quarter. The most pronounced price movements—sharp rise and subsequent decline—were those for coffee, cocoa, and tea. Coffee prices reached their peak in the second quarter and continued to decline thereafter; the break in cocoa prices came in the late summer; while tea prices continued to rise through the end of the year and then turned sharply downward early in 1955. At the same time there was a slight weakening of the prices of manufactured goods. While market prices do not reflect precisely movements in the export and import unit values of primary producing countries, the general price trend suggests that the terms of trade of these countries have probably improved somewhat.

The total import expenditures of primary producing areas rose between the two years by $1.3 billion, or twice the increase in their export earnings. Since import prices probably declined slightly (about 1 per cent), the volume of imports probably expanded by about 6 per cent. Imports increased for all areas generally, except the Far Eastern, Middle Eastern, and African countries included under “Others” in Table 11. This group includes Indonesia, whose imports were cut sharply in 1954. The value of the imports of the continental OEEC dependencies rose by the same substantial amount as the value of their exports. Nearly one third of their additional exports were directed to the United States, but most of their additional imports came from the metropolitan areas, and their imports from the United States were unchanged. The imports of Latin America and of the overseas sterling area in general, on the other hand, rose considerably more than their exports; for the overseas sterling area a small trade surplus in 1953 was transformed into a deficit in 1954. In each region the increase in imports was concentrated in a small number of countries, where the continued rise was in part at least a delayed reaction to an earlier increase in export earnings.

Several factors made it possible for primary producers to finance an expansion of some 5 per cent in their total import expenditures, and of 9 per cent in their expenditures on imports from industrial countries. First was the sustaining effect of the expansion of European demand for primary products; also additional capital imports were obtained, mainly through an increased outflow from the United Kingdom to the rest of the sterling area, and from the United States to Latin America. The accumulation of reserves which had gone on in 1953 also ceased and, particularly in Latin America, Australia, and New Zealand, previous accumulations were drawn on to a considerable extent.

Latin America

The export earnings of Latin American countries whose main exports are cocoa, coffee, or petroleum were larger in 1954 than in 1953. The earnings of countries that export mainly cotton or nonferrous metals were, in most cases, much the same as in 1953, while the export receipts of Argentina, Cuba, and Uruguay, which export meat, sugar, wheat, or wool, declined (see Table 13). For Latin America as a whole, export earnings increased by some 3 per cent.

Table 13.

Value of Exports of Major Latin American Countries, 1953 and 1954

(In millions of U. S. dollars)

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Source: International Financial Statistics (Washington).

Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, and Nicaragua.

Honduras, Panama, and Paraguay.

The increase in receipts from cocoa, coffee, and petroleum accrued mainly in the first half of the year. Developments in the second half of 1954 were affected by the sharp cut in coffee exports.

The effects of the weakening of U. S. import demand were felt particularly by countries exporting mainly nonferrous metals and cotton, and especially in the first half of 1954. These effects were mitigated but not fully offset by higher demand in Europe. Increased U. S. stockpiling demand and the revival of U. S. industrial activity were largely responsible for the improvement in the position of metal and cotton suppliers in the second half of the year.

The export earnings of Argentina, Cuba, and Uruguay were affected by weaker demand and lower prices for their products. The sharp decline in the exports of Argentina and Uruguay to the United States, however, was due mainly to the fact that U. S. purchases in 1953 of large wool stocks accumulated in the two countries were followed by only moderate buying in 1954. Similarly, Cuban exports in 1953 had included large shipments of sugar to the United Kingdom sold under a special agreement from surplus stocks; as a result, the 1954 import requirements of the United Kingdom were reduced.

The value of Latin American imports in 1954 is estimated to have been greater than in 1953 by more than 10 per cent. This, in conjunction with the increase of 3 per cent in export earnings, resulted in a deterioration of about $435 million in the Latin American trade balance. The decline in Latin American exports to the United States and the increase in Latin American imports from the United States were together almost sufficient to account for this deterioration (see Table 14). Both exports to and imports from countries other than the United States rose, and the balance with these countries showed very little change.

Table 14.

Summary of Latin American External Transactions, 1953 and 19541

(In millions of U. S. dollars)

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Sources: International Financial Statistics (Washington); “The United States Balance of Payments in 1954,” Survey of Current Business (Washington), March 1955, pp. 9-13.

No sign indicates credit; minus sign indicates debit.

Data on trade and multilateral settlements based on U. S. balance of payments with imports (U. S. exports) adjusted to include freight.

Residuals of two preceding columns.

Includes intra-Latin American trade, estimated at $600-700 million in each year.

Each figure is a residual of other figures in the column.

Data on total changes based on IFS figures, adjusted to include net IMF position. Data in U. S. columns: acquisition of gold from United States plus IFS estimate of increase in official dollar holdings.

Latin America’s balance of payments vis-á-vis the United States did not deteriorate until the latter part of 1954 when exports were affected by both the comparatively low demand for raw materials and the sharp cut in U. S. coffee purchases, while imports from the United States continued their steady upward movement. The Latin American deficit on goods and services with the United States, which had amounted to some $350 million in 1953, and practically disappeared with the coffee boom in the first half of 1954, increased again in the second half of 1954 to an annual rate of $1 billion. At the same time, however, there was an inflow of capital, mainly short-term funds, which exceeded the inflow in 1953 by some $300 million. In 1953 the liquidation of short-term private indebtedness to the United States, particularly by Brazil, had been made possible by an extension of Export-Import Bank loans, but in the second half of 1954 there was a renewed accumulation of short-term indebtedness.

The deterioration in Latin America’s trade and payments position was concentrated on a few of the larger countries (see Table 15). There was a marked worsening in both the trade balances and the reserve positions of Argentina, Cuba, and Uruguay, whose export earnings declined throughout 1954. The decline in the Cuban trade surplus resulted entirely from lower export earnings. In Argentina and Uruguay, however, imports continued to increase, following after an interval the sharp rise in export earnings and reserves in 1953; in neither country was the deterioration sufficient to lead to payments difficulties. Argentina actually added a little to reserves in 1954.

Table 15.

Trade Balance and Reserve Movement of Selected Latin American Countries, 1953 and 1954

(In millions of U. S. dollars)

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Source: International Financial Statistics (Washington).

Reserve changes refer to gold and net foreign exchange.

The situations in Brazil and Colombia, whose problems were associated largely with fluctuations in earnings from coffee exports, and in Chile and Peru are examined elsewhere in this Report. Exporters of coffee and cocoa, other than Brazil and Colombia, maintained or improved their trade and payments positions in 1954. Payments developments in Bolivia were affected by reduced tin exports and continued inflationary pressures. Reserves were halved in the course of 1954, and at the end of the year were equal to only some 10 per cent of normal imports. The decline continued in the early part of 1955. The Mexican reserve position, which was under severe strain in the first half of 1954, aggravated by capital outflows, improved later in the year. The devaluation in April 1954 and, perhaps more important, favorable crops which increased exportable surpluses of cotton and reduced the need for food imports resulted in a considerable improvement in the trade balance, a reflux of funds, and a recovery of reserves.

Overseas Sterling Area

The total export earnings of the overseas sterling area in 1954 were about $150-200 million, or roughly 1½ per cent, greater than in 1953 (Table 16). Earnings from exports of petroleum, coffee, cocoa, and tea increased substantially, and proceeds from nonferrous metal and rubber exports also rose. Exports of countries exporting mainly textile fibers, wheat, and meat declined throughout the year. The impact of the decline in demand and in prices for wool was felt most severely by Australia, and was further aggravated by reduced demand and prices for wheat. The decline in South African earnings from wool exports was more than offset by increased sales of uranium and of some foodstuffs. New Zealand, whose wool clip consists preponderantly of the coarser grades, which were much less affected by the weakening of demand, maintained the volume and value of wool exports that had been realized in 1953. Burma’s export receipts were maintained, as the effects of a sharp reduction in prices of rice exports were offset by a greatly increased volume.

Table 16.

Exports of Overseas Sterling Area Countries, 1953 and 1954

(In millions of U. S. dollars)

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Source: International Financial Statistics (Washington). The IFS figures for the Federation of Rhodesia and Nyasaland and those on total trade for 1953 have been corrected to exclude the intra-trade of the three federated countries.

Bahrein, Brunei, Qatar, Sarawak, Trinidad and Tobago, and Trucial Oman.

Gambia, Gold Coast, Kenya, Nigeria, Sierra Leone, Tanganyika, and Uganda.

Including British West Indies (except Trinidad and Tobago), Hong Kong, and South West Africa.

The imports of the overseas sterling area were greater than in 1953 by about $550 million, or well over 5 per cent. Since export receipts rose by only $150-200 million, there was a deterioration of nearly $400 million in the area’s trade balance. This deterioration was concentrated in a few of the independent sterling area countries; the trade balance of the dependent territories showed a marked improvement, mainly because of an increase of exports.

The deterioration in the overseas sterling area’s trade balance was more pronounced in trade with non-sterling countries, particularly Japan and Indonesia, than in trade with the United Kingdom. Earnings from exports to North America declined (Table 17) as a result of the recession in the United States; increased import restrictions imposed by Indonesia and the cessation of inventory accumulation in Japan reduced exports to these two countries. Furthermore, there was a withdrawal in Japan of special sterling import financing facilities, which had been extended in an earlier period when Japan had considered its sterling balances too high. Except for Australia, most sterling area countries increased their earnings in the United Kingdom and continental OEEC countries.

Table 17.

Changes From 1953 to 1954 in Exports and Imports of Selected Overseas Sterling Area Countries, by Main Regions

(In millions of U. S. dollars)

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Source: Direction of International Trade (New York). Figures may differ slightly from those in other tables because of slight discrepancies in coverage of data for which geographical distribution is available.

Including dependent overseas territories.

Overseas sterling area imports from continental OEEC countries and Japan generally increased, reflecting the rising competitive power of these countries and, for Japan, the relaxation of import restrictions in the overseas sterling area which followed the Anglo-Japanese Agreement of January 1954. Imports from the dollar area changed little save for the virtual disappearance of abnormal food imports by India and Pakistan. Imports from the United Kingdom were well maintained in Australia and New Zealand, but in the dependent areas they were affected by the diminution of the discrimination previously applied against imports from Japan and the dollar area.

There was an all round deterioration in Australia’s balance of trade in 1954, resulting from a combination of reduced export prices, high pressure of internal demand, and the delayed effects of import liberalization. While export earnings from butter and meat were well maintained, there were serious declines in wool, grains, and metals, and total exports yielded 15 per cent less than in 1953. As a result of progressive relaxation of import restrictions together with a strong pressure of internal demand, imports increased throughout 1953 and 1954, import expenditures in 1954 being some 20 per cent greater than in 1953. The trade balance, which had shown a substantial surplus in 1953, was in deficit in 1954, part being financed by $53 million from IBRD loans and the remainder, $230 million, by drawing on reserves. There was some tightening of import restrictions in October 1954, and more severe measures were imposed five months later.

In New Zealand, export receipts increased but expenditures on imports, mainly from the United Kingdom, rose proportionately more, by 28 per cent, and for much the same reasons as in Australia. There was a considerable drain on reserves in the seasonally adverse second half of the year.

Export proceeds in the Union of South Africa continued to expand in 1954, mainly on account of expanded sales of uranium, maize, and sugar. Gold production and gold sales also increased and, despite a modest rise in imports, the external deficit on current account, which has been usual in South Africa, declined. Private capital inflows, both recorded and unrecorded, appear to have been considerably higher than in 1953, and may have amounted to $150 million. The recovery in South Africa’s reserves, which had begun after mid-1953, continued throughout 1954.

For India, also, 1954 was a fairly favorable year both internally and externally. Exports to the United States and Japan declined, but the effects of this decline were more than offset, especially toward the end of the year, by increased sales of tea at favorable prices to the sterling area and to Western Europe. Exports of textile manufactures, notably to the United Kingdom, were considerably greater than in 1953. There was a substantial improvement in domestic food production, and the decline in food imports permitted a substantial increase in purchases of raw materials and capital goods.

The decline of almost 20 per cent in Pakistan’s export earnings in 1954 was due mainly to reduced sales of cotton to Japan and other countries. Some liquidation of stocks in 1953 and increased consumption by the rapidly expanding domestic industry led to a decline in exportable supplies in 1954, and prices were kept artificially high. Total export earnings recovered in the last quarter of 1954, mainly on account of larger exports of jute. The conclusion of a trade agreement with Japan late in 1954 and the gradual lowering of export prices made for some recovery of cotton shipments early in 1955. The slight reduction in the value of imports in 1954 was due entirely to improved domestic food production after two years of severe crop failures. The emergency food imports in 1953 had, however, largely been financed from U. S. aid. Excluding government imports, consisting chiefly of foodstuffs received under aid, the value of imports was 40 per cent greater in 1954 than in 1953, largely because of a considerable increase in imports of capital goods.

Other Primary Producing Countries

Trade movements in several other primary producing countries are shown in Table 18. (The changes in official reserves recorded in the same table were also affected in each case by movements in other items of the balance of payments.) The trade and payments position of Indonesia improved considerably in 1954. Throughout 1953 and during the first part of 1954 Indonesian reserves had declined sharply. Falling demand and low prices for rubber adversely affected export earnings while imports remained relatively high. As a result of drastic measures taken in May 1954, however, imports of nonessential consumer goods were reduced sharply in the second half of the year. This cut in imports and some increase in export earnings, as demand for rubber recovered, caused an improvement in the trade balance. Reserves, which had declined to a critically low point, rose steadily throughout the second half of the year. For 1954 as a whole, official holdings showed an increase, but there was some worsening of the net reserve position. In the early months of 1955 there was some further recovery of reserves.

Table 18.

Trade Balance and Change in Official Reserves of Selected Primary Producing Countries, 1953 and 1954

(In millions of U. S. dollars)

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Source: International Financial Statistics (Washington).

While the trade of the Philippines with the United States declined in 1954, the effects of this reduction were more than offset by an increased volume of exports, particularly of coconut products, to other markets, mainly continental Western Europe and Japan. Imports, however, rose more than exports and, as the trade balance worsened, reserves also declined. Developments in Thailand are described in Chapter VIII.

The export earnings of Egypt in 1954 were much the same as in 1953. Higher prices for all types of Egyptian cotton compensated for a reduction in volume. The decline in imports was due to increased domestic production of wheat and sugar.

Disposal of Agricultural Surpluses

The governments of several primary producing countries have expressed concern during the last year lest the U. S. program for the disposal abroad of agricultural surpluses might disrupt the pattern of their agricultural trade. In connection with the legislation described below, the President of the United States has stated that U. S. farm products will be offered at competitive prices, but that the United States will not use these surpluses to impair the traditional competitive position of friendly countries by disrupting world prices of agricultural commodities. He added that emphasis would be placed on the utilization of agricultural surpluses to increase consumption in those areas where there is demonstrable underconsumption and where practical opportunities for increased consumption can be developed in a manner designed to stimulate economic development.

In part because of the reduced dependence of other countries upon North American food supplies, there has been a large increase during the past two years in U. S. Government-held stocks of farm commodities under the Government’s price program. The value of these stocks, which amounted to $2.6 billion at the end of 1953, had risen by more than 60 per cent, to $4.2 billion, by the end of 1954. It has since declined only slightly, and intensified efforts have been made to dispose of these surpluses.

In the summer of 1954, two Congressional Acts were passed with the purpose of disposing of part of these surplus stocks abroad. The Agricultural Trade Development and Assistance Act provided for the sale over a three-year period of $700 million worth of surpluses for foreign currencies. The Act also authorized gifts of surpluses to the extent of $300 million for famine relief abroad. In addition, the Mutual Security Act of 1954 provided for the sale of a minimum of $350 million worth of surpluses. The total available under these acts for financing surplus disposal was therefore at least $1,350 million

At the end of April 1955, agreements had been concluded for the disposal of about $525 million worth of commodities, mostly cotton and wheat. Agreements for disposal under the Mutual Security Act have exceeded the minimum provided in that Act; at the end of April, however, less than one fourth of the financing authorized under the Agricultural Trade Development and Assistance Act had been utilized. The restrictions imposed upon disposals under the Act probably have limited the operation of the program to some extent.

Sterling Area

The outstanding feature in the development of the sterling area’s balance of payments from 1953 to 1954 was the deterioration, concentrated in the second half of 1954, in the current account balances with non-sterling countries of both the United Kingdom and the overseas countries of the area. This was apparently offset to some extent by a considerable increase in net capital inflow, especially to the United Kingdom (see Table 19), much of which is, however, unidentified.

Table 19.

Summary of Sterling Area Balance of Payments with Non–Sterling Countries, 1953 and 1954

(In millions of pounds sterling)

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Sources: United Kingdom Balance of Payments, 1946 to 1954, No. 2 (Cmd. 9430); International Financial Statistics (Washington); Survey of Current Business (Washington), March 1955, pp. 9-13; and communication from International Bank for Reconstruction and Development.

No sign indicates credit; minus sign indicates debit.

Estimated as the difference between inter-area transfers with overseas sterling area (Cmd. 9430), plus change in overseas sterling area official gold and dollar holdings (IFS), plus change in net IMF position of overseas sterling area (IFS), and net capital movements to overseas sterling area from United States and IBRD, as described in footnote 3.

Sum of net capital (private and government) movement to overseas sterling area from United States (U. S. balance of payments data) and net movement to overseas sterling area from IBRD (i.e., net amounts of subscriptions to IBRD, IBRD loan disbursements, repayments to IBRD).

United Kingdom:—£56 million (1953) and—£40 million (1954), from Cmd. 9430. Overseas sterling area:—£4 million (1953) and—£25 million (1954), from IFS.

From reserve statistics published in IFS.

Reference is made in other parts of this Report to the more general aspects of the trade both of the United Kingdom and of the overseas sterling area. The value of exports from the United Kingdom to non-sterling countries was much the same in 1954 as in 1953, while exports from the overseas sterling area declined slightly; exports from the sterling area as a whole to non-sterling destinations fell by about £45 million. On the other hand, U. K. imports from non-sterling sources were greater than in 1953 by some 7.5 per cent, and, partly because of a substantial reduction of quantitative restrictions, the overseas sterling area also increased its non-sterling imports, especially those from continental Europe and Japan. For the sterling area as a whole, imports from non-sterling countries increased by some £130 million. There was thus a deterioration of some £175 million ($490 million) in the trade balance of the area.

There was also some decline in 1954 in sterling area net receipts from transactions on account of invisibles, while defense aid, at £50 million, was about one half of what it had been in the previous year. As a result, the current account balance with non-sterling countries changed from a surplus of £290 million in 1953 to a deficit of £35 million in 1954. Practically all of the deterioration of about £325 million ($910 million) was concentrated in the second half of the year, when the current balance was less favorable than in the second half of 1953 by almost £270 million.

This weakening of the sterling area current account was not fully reflected in reserves (including the net position vis-á-vis the EPU and the Fund) which, over the year as a whole, continued to rise though at a slower rate than in 1953. This was largely due to an increase in the net inflow on investment account from non-sterling countries into the United Kingdom, together with some increase in sterling liabilities. Not all of this net capital inflow can be clearly identified. There were, however, considerable official repayments of debt by continental countries, especially the Netherlands, which on total were almost as large as the U. K. repayments of official debts to Canada and the United States. There was also, especially in the last quarter of the year, an inflow of short-term capital from the United States and Canada.

Part of the increased inflow of capital into the United Kingdom in 1954 took the form of an increased rate of accumulation of sterling balances by non-sterling countries. This increase was particularly marked in non-sterling countries in the Far East and the Middle East, whose over-all balance of payments improved markedly in 1954. The sterling holdings of non-dollar Latin American countries declined.

The weakness in the balance of payments of the sterling area in 1954 did not become evident until the second half of the year, when there was a more than seasonal deterioration in the current account balance both of the United Kingdom and of the overseas sterling area with the non-sterling world. This deterioration was attributable to an increase in imports toward the end of the year. Non-sterling countries accumulated sterling balances during that period, and there was an increased inflow of capital in other forms to the United Kingdom. However, the reserves of the area as a whole (including the net IMF and EPU positions), which had increased by £228 million ($638 million) in the first half of the year, rose by only £10 million ($28 million) in the second half.

Concurrently with the decrease in the payments surplus of the sterling area in the second half of 1954, the dollar exchange rate for transferable sterling in foreign free markets fell from the high level which had prevailed in the spring of the year. There were several reasons for this decline. These included increased facilities for selling transferable sterling in free markets, which resulted from the extension of automatic transferability in March 1954; the cessation of anticipations of early convertibility which had been prevalent in the first half of the year; and the increased supply of transferable sterling becoming available in certain parts of the world. The increased discount on transferable sterling (a decline shared by other EPU currencies) provided a stimulus in the last months of 1954 and the opening months of 1955 to commodity switch operations such as involved losses of dollar export earnings for the sterling area.

Partly as a result of these developments, countermeasures were taken by the U. K. authorities in January and February 1955. There were two successive increases in the bank rate, and other measures were also taken to curtail installment credit. In the first three months of 1955, U. K. reserves of gold and dollars fell by $95 million, to $2,667 million. Partly in response to seasonal influences, there was a rise in April of $19 million.

While for the sterling area as a whole the current account balance deteriorated in 1954, there was an improvement—limited, however, to the first half of the year—in the current account balance of the United Kingdom with the overseas sterling area. This improvement resulted largely from an increase in overseas sterling area imports from the United Kingdom, roughly proportionate to that in imports from other areas.

The deterioration in the current account balance of the overseas sterling area with the United Kingdom, together with the even greater deterioration in its over-all balance with the non-sterling area, was made possible in part by a large increase in capital imports from the United Kingdom.5 This, however, was not sufficient to prevent a decline in the rate of increase of sterling holdings, from £253 million in 1953 to £115 million in 1954. At the end of 1954 total holdings amounted to £3,049 million. The decline was concentrated in the independent sterling area countries; colonial holdings, which were influenced by increases in such exports as coffee, cocoa, and oil, rose much more in 1954 than in 1953.

1

As measured by private U. S. imports, net private capital outflow (including “errors and omissions”), net government economic grants and loans, military expenditures on goods and services, and other net government payments.

2

The relevant figures in Table 5 include “errors and omissions” as capital movements. Though by their nature the transactions so labeled are not clear, it is believed that changes in “errors and omissions” in fact largely represent unidentified capital movements.

3

The following discussion and the estimates in Table 10 refer, with the exception of the data relating to transactions with the sterling area, to continental Western Europe and its dependencies as defined by the U. S. Department of Commerce, i.e., to continental OEEC countries plus Finland, Spain, and Yugoslavia.

4

Slight discrepancies such as appear between the export earnings of primary producing areas, shown in Table 11, and the imports from these areas by the major industrial countries, shown in Table 12, are to be expected in view of (a) the inclusion in Table 11 of the intratrade of primary producing countries, (b) the time lag between exports and imports, and (c) statistical inaccuracies.

5

Including errors and omissions; these increased from £145 million in 1953 to £268 million in 1954.