Abstract

DEVELOPMENTS in the United States have for many years been a factor of continuing significance in the evolution of the world payments position. Industrial production in North America has on three occasions since the end of World War II undergone declines, albeit moderate and short-lived. In all three an important part was played by inventory reductions resulting from a flattening out or temporary setback to the upward movement of final demand; the first, associated with the transition from war to peace economy, took place in 1945-46, the second, in 1948-49, and the third, in 1953-54. While incomes in some primary producing countries were adversely affected—in 1949 at any rate—on none of these occasions did the recession spread to any substantial extent to other industrial areas. This was scarcely surprising in the first two cases in view of the strength of the investment and other demand arising from the need to reconstruct the economies of Europe and Asia. The third recession began in the summer of 1953, at a time when the special needs both of postwar reconstruction and of post-Korean rearmament had been largely met; it is encouraging that it was checked, without great difficulty, as early as the spring of 1954, and that it did not spread to other parts of the world. Indeed, industrial production outside North America,1 which was equal to some two thirds of North American output, expanded at least as much in 1954 as in 1953, and this expansion was sufficient to maintain the level of world industrial production as a whole.

DEVELOPMENTS in the United States have for many years been a factor of continuing significance in the evolution of the world payments position. Industrial production in North America has on three occasions since the end of World War II undergone declines, albeit moderate and short-lived. In all three an important part was played by inventory reductions resulting from a flattening out or temporary setback to the upward movement of final demand; the first, associated with the transition from war to peace economy, took place in 1945-46, the second, in 1948-49, and the third, in 1953-54. While incomes in some primary producing countries were adversely affected—in 1949 at any rate—on none of these occasions did the recession spread to any substantial extent to other industrial areas. This was scarcely surprising in the first two cases in view of the strength of the investment and other demand arising from the need to reconstruct the economies of Europe and Asia. The third recession began in the summer of 1953, at a time when the special needs both of postwar reconstruction and of post-Korean rearmament had been largely met; it is encouraging that it was checked, without great difficulty, as early as the spring of 1954, and that it did not spread to other parts of the world. Indeed, industrial production outside North America,1 which was equal to some two thirds of North American output, expanded at least as much in 1954 as in 1953, and this expansion was sufficient to maintain the level of world industrial production as a whole.

Even more surprising than the absence of any important effect of the North American recession of 1953-54 on economic activity elsewhere is the slightness of its repercussions on the over-all payments situation. The conjunction of a downswing in the dollar area with an upswing in non-dollar industrial areas might have been expected to curtail world trade and to cause a recrudescence of payments difficulties in the non-dollar world. In fact, the value of world trade increased throughout 1953 and 1954; in 1954 it was 4.5 per cent larger than in the year before (Table 1). Since the unit values of goods moving in world trade probably fell a little, the increase in the volume of world trade was rather more than 4.5 per cent. International capital movements also were greater in 1954 than in 1953. Not only did the volume of international transactions increase, both absolutely and in relation to world activity, but also, with some significant exceptions, the reserve positions of non-dollar countries continued to improve. The reserves of the group as a whole increased by approximately $2.2 billion, compared with the increase of $2.6 billion in 1953. This unexpected outcome, though favored by special circumstances, is evidence of the strength of the underlying trend toward world economic and payments equilibrium.

Table 1.

Value of World Trade, 1953 and 19541

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Sources: Direction of International Trade (New York); International Financial Statistics (Washington); OEEC Statistical Bulletins, Foreign Trade, Series I (Paris); and national trade statistics.

Data on the trade of the areas listed in the table do not add to total world trade. Trade between primary producing countries and trade between the U.S.S.R. and other countries of the Soviet bloc are not included. Also, the sources of data for the trade of individual areas contain differences that create statistical discrepancies of coverage and timing.

Export data excluding exports of Mainland China, U.S.S.R., and nonreporting countries of Eastern Europe, U. S. exports of special category goods, and Canadian military exports under aid to NATO.

Excluding U. S. exports of special category goods.

Excluding Canadian exports of military equipment under aid to NATO.

Primary producing areas include overseas sterling area, Latin America, continental OEEC dependencies, and other primary producing countries, mainly non-sterling countries in the Middle East, Far East, and Africa. The export data in this group are based on imports reported by the United States and Canada and by OEEC Europe and Japan; and the import data are based on exports reported by those countries.

The absence of any serious payments difficulties attributable to the U. S. recession cannot be explained in terms of any diminished sensitivity of U. S. imports to business conditions in that country. As shown in detail in later sections of this Report, the volume of U. S. imports declined more in proportion to the decline in production than in 1948-49. The fact that the value of U. S. imports declined in 1953-54 with something less than normal severity is to be explained by the behavior of import prices. On the average, these prices did not decline but actually rose slightly. The prices of raw material imports fell by some 3 per cent; the prices of some foodstuffs, notably coffee, however, [rose] substantially. The maintenance of U. S. import prices for primary products was no doubt largely responsible for the somewhat greater decline in the volume of U. S. imports. This is clearly visible in the case of coffee. But on balance the effect was definitely to hold in check the decline in the value of U. S. imports, and thus in the supply of dollars to the rest of the world.

The stability in the average level of prices of primary products helped not only to maintain the supply of dollars to the rest of the world, but also to sustain the terms of trade of the primary producing countries. This was due in part to the substantial expansion in output and real income in industrial countries outside North America, and hence in their demand for primary products. On the other hand, in several of these countries, particularly the United Kingdom and Japan, inventories of imported materials were reduced in 1954. Furthermore, there was a rather general decline in the relative importance of textile production, which relies heavily on raw material imports. On the supply side, the actual or anticipated reduction of output of certain commodities, notably coffee and cocoa, also helped to keep up primary product prices. At certain periods, policies of price maintenance in some exporting countries also affected the prices of coffee and of some other commodities for which demand conditions were less favorable. These policies were often carried out by means of stock accumulations in the exporting countries, where the process of stock disposal which had been frequent in 1953 was reversed. In addition, the high level of internal demand in primary producing countries may have helped in some cases to support the prices of their own products.

While the stability of prices of primary products tended to sustain North American import expenditures, a variety of conflicting forces operated on North American exports. Full employment and rising real income in Western Europe naturally tended to increase the demand for these exports. Most of the primary producing countries also spent more on imports (see Table 1), a factor which affected the balance between these countries and the industrial areas as a whole even more than the balance between the former and North America. Moreover, the fairly widespread reduction, especially in Europe and European currency areas, of discriminatory restrictions against dollar imports also tended to expand North American exports.

The effects of these factors were offset, to a considerable extent, by a marked increase in the competitiveness of some non-dollar industrial countries, in comparison with the United States. This increased competitiveness tended to limit the increase in U. S. exports both to Europe itself and to primary producing countries. Declines in the prices of foodstuffs and materials exported from North America—declines somewhat intensified by good European harvests in 1953-54—also helped to keep down the increase in North American export proceeds to rather modest amounts until the second half of 1954. At that time the effects of dollar liberalization in Europe began to appear, and scarcities of coal and steel provided an inducement to purchase more from the United States.

All these influences bearing on the current account acted to reduce the deterioration in the over-all payments balance of the rest of the world with North America in 1954. Another important favorable influence was the expanded net outflow of capital funds from the United States. This outflow, which is difficult to measure statistically, covers a variety of miscellaneous transactions. Much of it was short-term money, and the direction of its movement could easily be reversed; but in the aggregate these movements had a substantial effect upon the international payments position in 1954. The expansion of U. S. exports to Latin America brought with it a normal expansion of short-term credit, and there was also some accumulation of payments arrears in that area. The increased outflow of U. S. capital to the sterling area, through the International Bank for Reconstruction and Development and other channels, and the reduced inflow from continental Europe were, however, to some extent a response to movements in relative interest rates and greater confidence in national currencies. There was little change in the aggregate movement of long-term capital funds from the United States to Canada; the movement of short-term money from Canada, which had been quite large in the two preceding years, was not significant in 1954.

Most of these factors which helped to determine the course of the balance of payments of the United States with the rest of the world in 1954 were also decisive in determining changes in the balance between industrial and primary producing areas. Historically, the adverse effects on other industrial countries of a decline in their direct exports to the United States during a U. S. recession have usually been partially offset by the reduced cost of their imports of primary products, though this offset has itself been weakened by a resulting decline in their exports to primary producing areas. The relative steadiness of prices of primary products in 1953-54 might have been expected to throw on other industrial countries most of the strain on payments balances arising from the North American recession rather than on other primary producing countries.

There were, however, two other developments that improved the balance of trade of the non-dollar industrial countries with the primary producing areas: first, the aggregate imports of the primary producers increased, and second, the increased competitiveness of European and Asian industrial production increased the proportion of the manufactured imports of primary producing countries that was drawn from non-dollar sources. The share of the OEEC European countries as a whole in these import markets was practically the same in 1954 as in 1953 (Table 2), declining in the overseas sterling area but rising elsewhere. But the rate of expansion was greater for continental OEEC exports than for U. K. exports. The share of North American exports diminished, though these exports actually increased by 7 per cent. The share of Japan increased by 12 per cent, Japanese exports to the import markets of primary producing countries rising by 24 per cent. These differences in the trends of export expansion were observed in all recipient areas, except that Japan lost ground in “Other” countries, and the U. K. share in the market of continental European dependencies increased, reflecting perhaps some decline in import discrimination.

Table 2.

Value of Exports from Industrial to Primary Producing Countries, 1953 and 1954

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Sources: Direction of International Trade (New York); OEEC Statistical Bulletins, Foreign Trade, Series I (Paris).

For Japan the expansion of exports to primary producing countries was due mainly to factors other than the relative movement of export costs, such as the removal of discriminatory restrictions in the sterling area, the increasing availability of exportable goods, and the restoration of prewar commercial connections. And while bilateral arrangements were being relaxed considerably by the United Kingdom, some continental European countries and Japan may have gained somewhat, at the expense of the United Kingdom, from the retention of intensification of such arrangements, for example, with Latin American countries. The success of continental Europe in the markets of primary producing countries must, however, be attributed mainly to increased competitiveness, both in price and in the availability of supplies.

As a consequence of all the divergent influences that have been noted above, the over-all balance of continental OEEC countries as a whole was much the same in 1954 as in 1953, and the increase in U. K. reserves, though reduced, was still substantial. The balances of payments of most primary producing areas, however, deteriorated significantly, surpluses in 1953 being succeeded in 1954 by deficits in Latin America and by much smaller surpluses in the independent overseas sterling area. Most of this deterioration is accounted for by developments in a few of the larger South American countries and in Australia and New Zealand.

The improvement in the competitive power of the industrial exporters of continental Europe and Japan is to be explained in part by an increase in productivity, and in part by the maintenance of adequate internal financial stability. In Japan, which still has the support of large U. S. Government expenditures, disinflation played a definite role in the rectification of the balance of payments, which had been in serious difficulties in 1953. The decline from 1953 to 1954 in the rate of growth of U. K. reserves (including changes in net EPU and IMF positions) is partly attributable to an increase in the overseas sterling area’s imports from non-sterling countries. This increase, which was part of an increase in the area’s imports from all sources, was financed by allowing reserves to fall in certain countries, and in part apparently by an enhanced rate of capital import from the United Kingdom. The decline in the rate of growth of U. K. reserves was, however, also partly due to a deterioration in the current account of the United Kingdom itself with non-sterling countries. The immediate cause of the decline of reserves early in 1955 was an expansion of imports which went considerably beyond that of exports. This proved the more serious when considered against the background that throughout 1954 competition with U. K. exports, with the continued recovery of some of its main competitors, became increasingly severe. U. K. exports did not expand as fast as those of some other industrial countries, particularly in non-sterling markets, partly owing to a somewhat slower growth in productivity and partly because of the pressure of internal demand and the upward trend of wage rates. In February 1955 reserves started falling, and the U. K. Government took measures to correct the situation, including raising the bank rate first to 3½ per cent, and on February 24 to 4½ per cent.

The weakness of sterling exchange rates in the second half of 1954 was accentuated by increased dealings at a discount in transferable sterling against U. S. dollars in markets overseas; the discount at which transferable sterling was quoted widened from under 1 per cent early in 1954 to almost 3 per cent at the end of the year. In February 1955 the Exchange Equalization Account authorities were authorized to use wider discretion in operating in transferable sterling markets so that they might be in a better position to carry out the general exchange policy of the United Kingdom and make the most prudent use of reserves. It is understood that the purpose of this decision was primarily to reduce the use of transferable sterling for commodity shunting and to ensure as far as possible use of the official rate in all international trade transactions. After the decision was announced, the discount on transferable sterling in overseas markets again narrowed to slightly less than 1 per cent.

In informing the Fund of its action, the U. K. Government expressed the view that intervention by the authorities would not only help to maintain the strength of sterling but would also promote the Fund’s objectives of orderliness and stability in exchange arrangements; it marked yet another step in the U. K. movement toward freer trade and payments. The Fund welcomed the United Kingdom’s action as being in the direction of the Fund’s objectives.

The deterioration in the payments positions of primary producing countries as a group was not as a rule attributable to any decline in their export earnings. It was due rather to the aforementioned expansion of their imports. This expansion was mainly a reaction to the abnormally low level to which imports had been restricted in 1953, and to the persistently strong pressure of internal demand generated largely by rapid development and in some countries by other inflationary influences. There was, moreover, a situation of external financial ease, which helped the financing of additional imports. In the overseas sterling area, this was in part a result of increased capital imports from the United Kingdom, the United States, and the International Bank for Reconstruction and Development, but in general it was mainly a consequence of the reserve accumulations of the previous year.

Despite the moderating influences discussed above, the decline in economic activity in North America resulted in an outflow of gold from the United States in 1954 which, though still large, was appreciably smaller than in 1953 (see Table 3). The corresponding changes in the, rate of growth of the reserves of countries outside the United States were, moreover, not uniformly distributed. For Canada and for the “Rest of the World” (see bottom row of Table 3) the movement in 1954 was more favorable than in 1953. For Canada the change appears to have been associated with a cessation of previous short-term capital outflows. For the “Rest of the World” it was partly a result of the policies of domestic disinflation and restrictions followed by some of the countries in the group. However, despite the marked improvement in the movement of reserves of this group—an increase in 1954 in contrast to a decrease in 1953—their total was still less at the end of 1954 than it had been two years earlier. The reserves of the continental OEEC countries as a whole continued to increase in 1954 at much the same rate as in 1953.

Table 3.

World Gold and Foreign Exchange Reserves (Including Net EPU and IMF Positions)1

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Source: Computed from basic data in International Financial Statistics (Washington).

Reserve data include net EPU position (i.e., difference between net credits granted to EPU and net credits received from EPU) and net IMF position (i.e., paid IMF subscriptions less IMF holdings of currency of area or countries concerned).

Excluding U.S.S.R. and Mainland China and countries associated with them.

Japan, Indonesia, and Egypt are among the countries in this group.

For the sterling area and Latin America, on the other hand, the increase in aggregate reserves in 1954 fell short of the increase in 1953 by $1.1 billion. However, except in a few countries, this did not cause any serious payments difficulties. In many cases, there was little more than the slowing down of an earlier rapid rate of reserve accumulation. This was true also for the sterling area as a whole. Even where reserves declined, their level at the end of 1954 was usually close to, and sometimes well above, the level at the end of 1952.

In 1948-49 a recession of a magnitude not unlike that of 1953-54 created considerable payments difficulties and helped to precipitate a series of currency devaluations. Nothing of this kind occurred in 1954; in most non-dollar countries the foundations had, by 1954, been laid for a much stronger balance of payments position than had existed in 1948. In mid-1953, moreover, when the recession began, the total gold and dollar holdings of countries other than the United States were nearly $22 billion, or about 50 per cent larger than at the end of 1948. By the end of 1954, the total had risen to $25 billion.

1

Excluding production in Soviet countries.