Abstract
This Paper examines the concepts of surplus or deficit applied by countries in analyzing their balance of payments position.1 These concepts may be classified into two broad categories, which are here referred to as “basic” and “over-all” surplus or deficit. The ideas underlying “basic” and “over-all” balances are analyzed, and the surplus or deficit concepts applied by a number of countries are related to these two categories. It is found that some countries, e.g., Germany and Japan, apply a concept of surplus or deficit mainly in terms of their “over-all” balance of payments position, whereas other countries, e.g., the United Kingdom, apply a concept that corresponds more closely to the “basic” balance. However, most countries apply a mixture of the two concepts. The varying content of the concept of surplus or deficit is not apparent in public discussion, in which it is often implicitly assumed that the deficit of one country must have a counterpart in a surplus elsewhere.
This Paper examines the concepts of surplus or deficit applied by countries in analyzing their balance of payments position.1 These concepts may be classified into two broad categories, which are here referred to as “basic” and “over-all” surplus or deficit. The ideas underlying “basic” and “over-all” balances are analyzed, and the surplus or deficit concepts applied by a number of countries are related to these two categories. It is found that some countries, e.g., Germany and Japan, apply a concept of surplus or deficit mainly in terms of their “over-all” balance of payments position, whereas other countries, e.g., the United Kingdom, apply a concept that corresponds more closely to the “basic” balance. However, most countries apply a mixture of the two concepts. The varying content of the concept of surplus or deficit is not apparent in public discussion, in which it is often implicitly assumed that the deficit of one country must have a counterpart in a surplus elsewhere.
No such symmetry in fact exists between surplus and deficit.2 Not only are there differences among countries in the definitions they apply, but also these definitions, even when applied consistently, are (and must be) to some extent asymmetrical. All countries, for instance, include the change in their official gold reserves in their measure of surplus or deficit, and, ceteris paribus, total surpluses will, therefore, exceed total deficits by the increase in world monetary gold holdings. In several periods recently, this factor has been outweighed by other asymmetries which have tended to create an excess of deficits. Some of these asymmetries, e.g., those resulting from varying principles for recording transactions with the International Monetary Fund (IMF) appear to be due to perhaps accidental differences in national practices and presumably would be eliminated if the underlying concepts were re-examined. There is, however, at least one aspect of these asymmetries that requires consideration of a more fundamental character. Changes in private foreign exchange holdings (including, in some countries, commercial bank as well as other private holdings) are excluded by virtually all countries from their measures of surplus or deficit below the line (see Section I below), whereas changes in the corresponding liabilities are included in these measures by most countries, including the reserve centers. Accordingly, an increase in private foreign exchange holdings, such as has taken place in recent years, tends to create an excess of deficits over surpluses. The asymmetries in the underlying definitions that create such an excess may be justified by institutional facts, and one cannot, therefore, assume that any problems they may create could be eliminated merely by a change in definitions. Insofar as the recent increase in private foreign exchange assets represents a trend, the resulting excess of deficits may constitute a structural problem. The balance of payments targets set by all countries taken together are likely to add to an excess of surpluses over deficits, and an actual excess of deficits would imply considerable conflicts among such targets, which might create disturbances to international payments. The theoretical possibilities of such conflicts are discussed in the Appendix (pp. 198-99).
The conclusion of the paper, however, is that, although deficits exceeded surpluses in each of the years 1959-61, disturbances of the type that could have been expected on theoretical grounds have not materialized. One reason is that the excess of deficits in any single year has so far been moderate. Another is that the United States has for years tolerated the continuance of a substantial deficit in its balance of payments without taking contractionary or restrictive action, such as is assumed in the theoretical discussion. It is not inconceivable, however, that the difference in perspective between surplus and deficit countries may have impeded the solution of the international payments problem in recent years and that it may later lead to certain disturbances in international payments if these are not forestalled through international cooperation.
While raising (but not answering) these more fundamental questions, the paper is mainly intended to help to clarify the international discussion of payments problems. The Fund can play a constructive role in the diagnosis of these problems by pointing out inconsistencies among countries in the underlying analytic concepts; by discouraging countries from devoting undue attention to a single figure, based on a conventional and arbitrary measure, in appraising their balance of payments position; and by encouraging the attitude that balance of payments problems should be viewed in a world context.
I. Concepts of Surplus or Deficit
Surplus and deficit are statistical measures used in the formulation of policy. For the purpose of determining the size of a surplus or deficit, the balance of payments is divided into two segments, the items “above the line” and those “below the line.” Since the balance of payments as a whole adds to zero, the two components have the same algebraic sum but carry opposite signs. A surplus is a credit balance of the items above the line or a debit balance of those below the line; and vice versa for deficits.
The idea underlying the calculation of surpluses or deficits is that, granted that the surplus or deficit is sufficiently large and persistent, some policy action should be taken in response to it. However, in this respect there is no true parallelism between surpluses and deficits. When a country is in deficit, and the deficit is large and persistent, it will sooner or later be forced to take steps to eliminate the imbalance. When it is in surplus, the inducement to take policy action is much milder. Such action is usually taken not so much because the surplus is in itself considered undesirable as because it permits the implementation of policies (e.g., an acceleration of the rate of growth) to which the balance of payments has previously set limits. The marginal utility of additions to reserves will soon become lower than that of alternative investments at home or abroad, and this may stimulate action to eliminate the surplus. Moreover, if a country’s surplus is so large that it represents a problem to the rest of the world, the surplus country will be under moral pressure to reduce or eliminate its surplus in the interest of the world community and may feel embarrassed by a continuation of the surplus.
While most countries apply only a single concept of surplus or deficit to their balance of payments, it is possible to classify the existing concepts into two broad categories which shade into one another, “basic” and “over-all” surplus or deficit. Within each of these two categories, there can again be distinguished various gradations from the most fundamental “basic” to the most extreme “over-all” surplus or deficit. A “basic” surplus or deficit is intended to cover (above the line) the transactions that determine the course of the balance of payments in the longer run; it is itself influenced by seasonal and cyclical influences and by special transactions of a nonrecurrent character, for which allowance must be made to determine whether the balance of payments is in “basic” equilibrium.3 In national statistics, the “basic” balance is sometimes defined as the balance of goods and services, transfer payments, and long-term capital transactions. Negatively, and perhaps more meaningfully, it may be defined as excluding the items that constitute the financing of “over-all” surplus or deficit and the (other) types of capital (here referred to as volatile capital) that fluctuate in the short run but are of a swing character in the longer run, say over the business cycle. The “over-all” surplus or deficit may be defined as the balance that is matched by financing by monetary authorities in response to the balance of payments. When movements of volatile capital are limited in scope, the “basic” and “over-all” surplus or deficit tend to coincide; it is, therefore, mainly since the introduction of convertibility by a number of major countries in recent years, and the resulting increase in the flows of private capital, that it has become essential to distinguish between the two types of balance. A “basic” surplus or deficit may require some fundamental adjustment in the economy; but if the basic accounts are in balance and there is an over-all surplus or deficit, a country may be able to eliminate the latter by relatively modest measures of monetary policy, particularly if they are coordinated with similar measures abroad. In certain circumstances, an over-all surplus or deficit that is not accompanied by a basic imbalance may require no action at all, except compensatory financing.
The most extreme formulation of “over-all” surplus or deficit would include (below the line) only the change in gross gold and foreign exchange reserves—excluding changes in a country’s position with the IMF and in (other) foreign liabilities. Because of the importance attached by the public to gross reserves, this balance will often be a major factor determining the strength of the national currency in exchange markets. However, from the standpoint of the monetary authorities, a change in a country’s position with the Fund must be regarded as almost equivalent to a change in reserves; and the change in the country’s gross reserves and IMF position is, therefore, a more reasonable measure of over-all surplus or deficit than the change in gross reserves alone. Among liabilities (other than to the IMF), those due to foreign monetary authorities can be distinguished from those due to other foreigners (changes in which reflect mainly commercial operations). Only the change in the former would be included in the measure of over-all surplus or deficit, if, as suggested here, it is defined as the balance that is matched by financing by the monetary authorities at home or abroad.
As more items are included in the financing of the surplus or deficit, the concept of “basic” surplus or deficit is approached more and more closely. One may include changes in (1) the foreign liquid assets of the domestic commercial banks, (2) other liquid foreign assets and liabilities, and (3) other forms of volatile but less liquid capital, e.g., commercial credits and portfolio capital.
The assumption underlying the definition of “basic” surplus or deficit is that the transactions that constitute the difference between basic and over-all surplus or deficit tend to cancel over a period of years. But it is difficult to determine statistically whether this is true. For instance, even though the statistics may show that certain types of capital flow have tended to cancel out in the past, there is no assurance that they will continue to do so. The formal distinction between short-term and long-term (referring to objects with no maturity or a maturity of one year or more, on the one hand, and to those maturing in less than one year, on the other) is not necessarily a good guide in this determination. For instance, in the United States, both private short-term assets abroad and short-term liabilities to foreign private holders appear to have shown a rising trend for a number of years. In such instances, some allowance must be made for the trend element in volatile capital movements (and in errors and omissions) in evaluating the underlying balance of payments position; in other words, it must be assumed that, under conditions of equilibrium, the basic balance, as measured in the statistics, should be positive or negative by a certain amount, rather than zero, where such a trend element is present.
Somewhat similar considerations may apply even to those definitions of “over-all” surplus or deficit which include below the line changes in liabilities to foreign monetary authorities. Changes in such liabilities may not tend to cancel in the long run but exhibit a rising trend (as U.S. liabilities to foreign monetary authorities have had for many years) or a falling trend (as sterling balances had in the immediate postwar period). It may, therefore, be consistent with equilibrium that the country concerned has an “over-all” deficit of a certain moderate size, or it may be necessary that the country should run an “over-all” surplus. This problem is further discussed in Section III below.
II. Transactions Entering Measures of Surplus or Deficit
Gold
Changes in official gold reserves are universally included in measures of surplus or deficit. Therefore, an increase in world monetary gold holdings will ordinarily4 bring about a corresponding excess of total surpluses over total deficits. An increase in world monetary gold holdings arises from an excess of world gold production over world gold consumption in industry and the arts and net gold hoarding. When the gold holdings of countries in the Soviet area are excluded from the world total, changes in this total may also arise from transactions with Soviet countries. The net annual addition to world monetary gold holdings has averaged about $550 million during the last ten years but has varied considerably from year to year. Large variations from year to year have been attributable mainly to changes in hoarding.
The necessary asymmetry between surpluses and deficits that arises through changes in world monetary gold holdings has, in general, been a factor supporting the world payments structure.5 Conversely, gold hoarding is a destabilizing element, in that it directly reduces the combined surplus, or increases the combined deficit, of all countries. Gold hoarding tends to be concentrated in periods when the world payments system is for other reasons under stress and adds impetus to the disturbances due to other causes.
Foreign exchange assets
Important asymmetries between national calculations of balance of payments surplus and deficit have, in recent years, arisen from differences between countries in the manner in which changes in foreign exchange assets enter these calculations. A foreign exchange asset of one country is the liability of some other country. Symmetry in calculations of surplus and deficit would require that the countries holding the foreign exchange assets and those whose liabilities they represent should follow identical principles in recording them, i.e., that changes in assets recorded above the line by creditor countries should be recorded as changes in liabilities above the line by the debtor countries, and that changes in assets recorded below the line by creditor countries should be recorded as changes in liabilities below the line by the debtor countries.
With respect to assets, the prevalent practice is to include below the line only changes in those assets that are available, or considered to be potentially available, to the authorities for defense of the national currency. This means that changes in foreign exchange assets held by central monetary institutions (central banks, stabilization funds, etc.) are universally included below the line in national surplus or deficit calculations, and that changes in private nonbank holdings are generally included above the line. (A few countries, however, include below the line the changes in certain private nonbank assets that are subject to control by the authorities.) Changes in assets held by banks take an intermediary position; they are included above the line by some countries (e.g., the United States, Germany, and Japan) but below the line by most of the other industrial countries. In most countries, the authorities have full knowledge of bank assets abroad. They therefore have some possibility of mobilizing them in defense of the national currency by means of monetary policy, moral suasion, or, in an emergency, by vesting, although this may require legislation. Such measures can also be applied to private nonbank assets, but they are likely to be less effective. Since the power of the authorities to mobilize bank and other private foreign exchange assets varies from country to country, it is understandable that their treatment in calculations of surplus or deficit is not uniform.
In the treatment of changes in liabilities, there is also considerable variation in national practices. However, most foreign exchange assets, whether private or official, take the form of liabilities of institutions in the United States and the United Kingdom, both of which include below the line changes in all liquid liabilities, independent of who the foreign claimant is. Therefore, changes in virtually all the foreign exchange assets of private parties other than banks, and in the holdings of the banks of those countries that do not include changes in bank assets below the line, are likely to produce corresponding differences between the total surpluses and total deficits of all countries. In some recent periods (e.g., 1959 and the first half of 1961), this has been a major factor contributing to an excess of world deficits over world surpluses, as calculated by the countries themselves, in spite of a simultaneous increase in world monetary gold holdings.
The treatment of changes in liabilities by countries other than the two reserve centers is not uniform. Most countries include changes in the short-term liabilities of central monetary institutions below the line; and, in general, those countries that include, below the line, changes in the foreign exchange assets of the commercial banks also include there changes in the liabilities of these institutions. Insofar as bank liabilities are mainly to banks abroad, a symmetrical treatment of bank assets and liabilities is likely to lead to greater symmetry among national estimates of surplus or deficit. However, some of the liabilities are due to private nonbank holders, the change in whose foreign exchange assets is not included in the measures of surplus or deficit employed by the countries concerned.
Other transactions
There are several other asymmetries among countries’ calculations of surplus and deficit. First, many countries include subscriptions to the IMF, and several even include Fund drawings and repayments, above the line. When transactions with the Fund are entered above the line by some countries, and below the line by others, the result is a corresponding difference between surpluses and deficits of all countries.
Another source of discrepancy between surpluses and deficits arises from transactions with the International Bank for Reconstruction and Development (IBRD). Most transactions with the Bank are entered above the line by the countries concerned. However, some countries hold IBRD bonds as foreign exchange reserves, and the change in such bonds (except some held by Germany which are not marketable) is entered below the line by the countries that hold them. The United States enters changes in liquid liabilities to the IBRD and other non-monetary international organizations below the line in its measure of over-all surplus or deficit. Most of the increase in U.S. liabilities to international nonmonetary organizations has arisen from the accumulation over several years of more than $1 billion of liquid dollar assets by the IBRD to cover loan commitments. The accumulation of these assets can scarcely be viewed as posing any balance of payments problem to the United States and, in any case, is not associated with a surplus in any other country (except perhaps to the limited extent that the increase in the IBRD’s liquid assets is related to an increase in IBRD bonds held as official reserves). In a formal sense, one could argue, of course, that, to the extent that the IBRD accumulates dollar assets, the U.S. balance of payments deficit had been matched by a surplus of that organization. It would be unreasonable, however, to view the surplus of the IBRD as a balance of payments problem and to expect the Bank to take action to eliminate its surplus in the same way as a country that accumulates reserves. In analyzing the balance of payments of the United States, it seems best to consider these transactions as similar to an inflow of foreign long-term capital into that country, i.e., to include them above the line in measuring basic as well as over-all balance.
While the European Payments Union (EPU) was in operation, members of that organization classified, in their balances of payments, changes in EPU credit and debit balances below the line in calculating their surpluses and deficits. The financing of balance of payments surpluses and deficits through EPU was thus classified symmetrically below the line, which seems reasonable. However, when EPU was dissolved and the outstanding balances were consolidated, the repayments of these balances were to some extent treated asymmetrically by the countries concerned. The major debtor countries entered the repayments above the line, but the major creditor countries entered them below the line. These different procedures, like the asymmetrical treatment of transactions with the IMF, have tended to create an excess of deficits over surpluses. However, EPU repayments are now practically past history.
III. A Note on the Rationale of Including Changes in Liabilities
In calculating surplus or deficit in the balance of payments, the two reserve centers offset changes in liquid liabilities against those in reserve assets. An increase in foreign dollar holdings (or in sterling balances) of a certain size is thus treated as having the same significance as a decrease in U.S. gold holdings (or a decrease in U.K. reserves) of the same size.
It is evident, however, that changes in assets and liabilities cannot always be equated in the formulation of policy. Suppose, for instance, that a large proportion of sterling balances were withdrawn, causing the loss of all the gold and foreign exchange reserves of the United Kingdom, while all other transactions below the line were in balance. This situation, as conventionally analyzed, would imply that there was neither a surplus nor a deficit in the balance of payments. Yet the United Kingdom would be experiencing a severe crisis, calling for adjustment of economic policies. Suppose, on the other hand, that all countries in the sterling area decided to increase their sterling balances substantially over a period of years (and took adequate steps to bring about such an increase). It would not be necessary for the United Kingdom to add an equivalent amount to its gold and foreign exchange reserves; presumably, a much smaller increase would suffice. Similar reasoning applies to changes in foreign dollar holdings in the United States.
If the United Kingdom and the United States—and other potential reserve centers—were to aim strictly at avoiding deficits in their balance of payments in accordance with the statistical measures they employ, it would be impossible to increase world reserves beyond the increments in world monetary gold holdings. As a matter of fact, the policies of the United Kingdom and the United States have been much more flexible. In particular, while the official U.S. statistical presentations have equated movements in U.S. gold holdings with opposite movements in foreign dollar assets, official and private, the policy has not always been to avoid a balance of payments deficit so defined. Rather, for a long time it was held that the United States could afford a moderate deficit that would permit the rest of the world to add to its dollar reserves. As long as other countries’ foreign exchange holdings in the reserve centers increase only within moderate limits and confidence in the reserve currencies is maintained, the effect of an increase in world reserves in the form of foreign exchange supports the structure of world payments in much the same way as an increase in monetary gold holdings.6 Thus, when the world payments situation during the first half of the 1950’s is analyzed, it seems reasonable to assume that there was an excess of surpluses over deficits corresponding to the increase in world gold and dollar holdings. This viewpoint was implied in the analysis, commonly applied at the time, of the world payments problem in terms of the surplus or deficit of the rest of the world with the United States, without any consideration of a balance of payments problem for that country. The difficulty with that approach is that it can be applied only in an atmosphere of confidence, which may disappear overnight. Also, while it could be applied to the one-centered payments system of the early postwar period, it cannot necessarily be applied to the multicentered system that exists today.
IV. Review of Some National Concepts
The methods followed by the industrial countries in calculating surplus or deficit are summarized in Table 1. Most of the asymmetries in national calculations of surplus or deficit arise from this group of countries, inter alia, because changes in the privately held assets of the nonindustrial countries, and in liquid assets held by nonresidents in these countries, are, in general, quite moderate. Therefore, the examination of national concepts of surplus or deficit is here confined to the industrial countries.
Industrial Countries: Treatment of Major Items in National Definitions of Balance of Payments Surplus or Deficit1
A “b” indicates that the item is included below the line and an “a” that it is included above the line.
Covers drawings and repayments both by the country concerned and in that country’s currency by other countries.
Includes government obligations, but only a few private liabilities.
Includes incomplete information on private assets and liabilities.
Industrial Countries: Treatment of Major Items in National Definitions of Balance of Payments Surplus or Deficit1
| Gold and Foreign Exchange Assets | Transactions with IMF | Other Liquid Liabilities of: | ||||||
|---|---|---|---|---|---|---|---|---|
| Monetary institutions | ||||||||
| Nonmonetary sector | Subscriptions | Drawings and repayments2 | Central monetary institutions | Commercial banks | Nonmonetary sector | |||
| Central institutions | Commercial banks | |||||||
| United States | b | a | a | b | b | b | b | b3 |
| United Kingdom | b | b | a4 | a | b | b | b | b3,4 |
| Belgium-Luxembourg | b | b | a | b | b | b | b | a |
| France | b | b | b4 | b | b | b | b | b4 |
| Germany | b | a | a | a | a | b | a | a |
| Italy | b | b | a | b | b | b | b | a |
| Netherlands | b | b | a | b | b | b | b | a |
| Austria | b | b | a | a | a | b | b | a |
| Denmark | b | b | a | a | a | b | b | a |
| Norway | b | b | b4 | a | a | b | b | b4 |
| Sweden | b | b | a | a | a | b | b | a |
| Japan | b | a | a | a | a | a | a | a |
A “b” indicates that the item is included below the line and an “a” that it is included above the line.
Covers drawings and repayments both by the country concerned and in that country’s currency by other countries.
Includes government obligations, but only a few private liabilities.
Includes incomplete information on private assets and liabilities.
Industrial Countries: Treatment of Major Items in National Definitions of Balance of Payments Surplus or Deficit1
| Gold and Foreign Exchange Assets | Transactions with IMF | Other Liquid Liabilities of: | ||||||
|---|---|---|---|---|---|---|---|---|
| Monetary institutions | ||||||||
| Nonmonetary sector | Subscriptions | Drawings and repayments2 | Central monetary institutions | Commercial banks | Nonmonetary sector | |||
| Central institutions | Commercial banks | |||||||
| United States | b | a | a | b | b | b | b | b3 |
| United Kingdom | b | b | a4 | a | b | b | b | b3,4 |
| Belgium-Luxembourg | b | b | a | b | b | b | b | a |
| France | b | b | b4 | b | b | b | b | b4 |
| Germany | b | a | a | a | a | b | a | a |
| Italy | b | b | a | b | b | b | b | a |
| Netherlands | b | b | a | b | b | b | b | a |
| Austria | b | b | a | a | a | b | b | a |
| Denmark | b | b | a | a | a | b | b | a |
| Norway | b | b | b4 | a | a | b | b | b4 |
| Sweden | b | b | a | a | a | b | b | a |
| Japan | b | a | a | a | a | a | a | a |
A “b” indicates that the item is included below the line and an “a” that it is included above the line.
Covers drawings and repayments both by the country concerned and in that country’s currency by other countries.
Includes government obligations, but only a few private liabilities.
Includes incomplete information on private assets and liabilities.
Among the major industrial countries, Japan applies the most extreme formulation of “over-all” surplus or deficit. It includes (below the line) the change in gross reserves, but excludes changes in Japan’s position with the IMF and all other liabilities, as well as commercial bank and other privately held assets. A similar concept is applied by Germany, whose balancing item includes, however, changes in the foreign liabilities of the Bundesbank (virtually all German transactions with the IMF are carried out by the Government). These are the only two countries among the major industrial nations that apply a rather extreme concept of over-all surplus or deficit.
In the countries of continental Europe, other than Germany, it is customary to measure surplus or deficit by the change in the net gold and foreign exchange position of the monetary authorities and the commercial banks;7 however, like Germany and Japan, several of these countries exclude from this measure the change in their position with the IMF. The monetary authorities in many of these countries may, by tradition, be able to lay their hands on the foreign exchange assets of the commercial banks in an emergency; if so, it may be natural to regard these assets as in effect second-line reserves. However, the changes in the foreign assets and liabilities of the commercial banks of these countries have in recent years been governed increasingly by market factors, and therefore the measure of surplus or deficit of the countries includes a growing element of volatile private capital. Thus, the concepts applied by these countries refer to a mixture of “basic” and “over-all” surplus.
The United Kingdom employs two concepts of surplus or deficit: (1) the balance on current and long-term capital account, and (2) “monetary movements,” i.e., the change in gold holdings and official and private short-term assets and liabilities, including all changes in sterling balances. Conceptually, these two balances are identical (except that one is defined in terms of the transactions above the line and the other in terms of those below the line); in practice, they differ because of errors and omissions. Either measure must be regarded as a formulation of basic rather than over-all balance. The treatment of transactions with the IMF in the two measures deserves mention. Changes in sterling liabilities to the IMF are included in monetary movements, but for 1959 the additional subscription to that institution, which had a counterpart in a reduction in gold holdings and an increase in sterling liabilities below the line, was itself entered as a movement of long-term capital. The effect of the subscription on the measure of surplus or deficit, however, was explained away in the note accompanying the published balance of payments statement for that year.
In the United States, the concept of surplus or deficit in the balance of payments has for some time been subject to a re-examination. Traditionally, the U.S. statistics have focused attention on an over-all balance measured as the change in U.S. official gold holdings (and foreign exchange assets) net of the change in liquid liabilities to all foreigners, official and private. Transactions with the IMF have either been eliminated (subscriptions) or included in this measure as changes in foreign liquid liabilities; accordingly, this measure includes the change in the net IMF position of the United States. Recently, this measure has been supplemented, on an experimental basis, by a concept of basic balance covering goods, services, transfer payments, government capital, and private long-term capital.8 The difference between the basic and the over-all balance is represented by movements of U.S. short-term private capital, commercial credits received, and errors and omissions. Further, the over-all balance has been divided into two components. One covers the change in U.S. liquid liabilities to foreign private holders, including banks, and to nonmonetary international and regional institutions. The other covers changes in U.S. official holdings of gold and convertible currencies and changes in U.S. liquid liabilities to foreign and international monetary authorities. The second balance is thus a formulation of over-all surplus or deficit in accordance with the “pure” definition discussed here, whereas the first component includes elements of volatile capital of the same general character as those which are added to the basic balance to derive the over-all balance.
The official U.S. measure of “over-all” balance thus treats movements of private short-term capital (including commercial bank funds) differently, according to whether it is domestic or foreign. With the exception of commercial credits granted by foreigners, changes in foreign private short-term assets held in the United States by foreigners are included in the balancing item, whereas similar assets held abroad by U.S. residents are classified above the line. The reason for this has been stated to be that foreign private short-term capital in the United States is for the most part liquid, whereas U.S. private short-term assets abroad are for the most part nonliquid. While in the past there have undoubtedly been typical differences between the movements of U.S. and foreign short-term capital, these differences have been diminishing since the introduction of convertibility by a number of the other industrial countries; as U.S. and foreign private short-term capital respond, to a considerable extent, to the same market factors, it is questionable whether the asymmetrical treatment of these items in the over-all balance is justifiable.
V. Some Major Asymmetries and Their Effect
The effect during the years 1959-61 of the asymmetrical classification of the various balance of payments items discussed above is shown in Table 2. This calculation includes the effect of most, but not all, of the asymmetries discussed in this paper. In particular, it does not include, for lack of a basis of accurate estimation, figures for that part of the increase in U.S. bank and other private assets which is included in foreign measures of surplus or deficit as increases in liabilities.
Effects of Some Major Asymmetries in the Classification of Various Balance of Payments Items, 1959-611
(In billions of U.S. dollars)
No sign indicates that the item contributes to an excess of surpluses, and a minus sign that it contributes to an excess of deficits.
The U.K. subscription in sterling, as well as in gold, to the International Monetary Fund (IMF) in 1959 has been omitted from this item, because it was specifically allowed for in the official evaluation of the balance of payments for that year as a special factor affecting surplus or deficit.
Partial estimate covering only changes in post-EPU claims and government short-term assets not included in reserves.
This calculation disregards all asymmetries between surpluses and deficits that result merely from defective statistics. In practice, the purely statistical asymmetries can be quite significant.
Effects of Some Major Asymmetries in the Classification of Various Balance of Payments Items, 1959-611
(In billions of U.S. dollars)
| 1959 | 1960 | 1961 | ||
|---|---|---|---|---|
| Transactions in monetary gold | 700 | 335 | 570 | |
| Transactions with the IMF2 | −248 | −42 | −409 | |
| Change in assets of commercial banks of Japan and Germany | −419 | 91 | −351 | |
| U.S. liabilities to private nonbank and international nonmonetary organizations | −320 | −225 | −630 | |
| Other items3 | −514 | −457 | −215 | |
| Total effect4 | −801 | −328 | −1,035 | |
No sign indicates that the item contributes to an excess of surpluses, and a minus sign that it contributes to an excess of deficits.
The U.K. subscription in sterling, as well as in gold, to the International Monetary Fund (IMF) in 1959 has been omitted from this item, because it was specifically allowed for in the official evaluation of the balance of payments for that year as a special factor affecting surplus or deficit.
Partial estimate covering only changes in post-EPU claims and government short-term assets not included in reserves.
This calculation disregards all asymmetries between surpluses and deficits that result merely from defective statistics. In practice, the purely statistical asymmetries can be quite significant.
Effects of Some Major Asymmetries in the Classification of Various Balance of Payments Items, 1959-611
(In billions of U.S. dollars)
| 1959 | 1960 | 1961 | ||
|---|---|---|---|---|
| Transactions in monetary gold | 700 | 335 | 570 | |
| Transactions with the IMF2 | −248 | −42 | −409 | |
| Change in assets of commercial banks of Japan and Germany | −419 | 91 | −351 | |
| U.S. liabilities to private nonbank and international nonmonetary organizations | −320 | −225 | −630 | |
| Other items3 | −514 | −457 | −215 | |
| Total effect4 | −801 | −328 | −1,035 | |
No sign indicates that the item contributes to an excess of surpluses, and a minus sign that it contributes to an excess of deficits.
The U.K. subscription in sterling, as well as in gold, to the International Monetary Fund (IMF) in 1959 has been omitted from this item, because it was specifically allowed for in the official evaluation of the balance of payments for that year as a special factor affecting surplus or deficit.
Partial estimate covering only changes in post-EPU claims and government short-term assets not included in reserves.
This calculation disregards all asymmetries between surpluses and deficits that result merely from defective statistics. In practice, the purely statistical asymmetries can be quite significant.
Several items in the calculation have only a temporary or nonrecurrent influence on surpluses or deficits. They cannot, therefore, be assumed to have any persistent effect on the balance of payments policies of the countries concerned. Transactions with the IMF fall into this category. Drawings and repayments must be expected to tend toward canceling one another in the long run, and subscriptions are nonrecurrent. It is possible, of course, that some countries may have genuinely felt that their subscription payments reduced their surpluses (or added to their deficits) and that they should not scale down correspondingly whatever target they might have set for their reserves. Similarly, some surplus countries that have made their currencies available for Fund drawings may have considered that these transactions made it less urgent for them to adjust their balance of payments (even though such transactions did not reduce other countries’ deficits).
The asymmetry arising from different treatment of post-EPU repayments is even less significant. When the major debtor countries made these repayments, they considered that they added to their deficits (or reduced their surpluses) above the line, whereas the countries receiving them considered the claims to be part of their foreign reserves. Repayments thus reduced the reserves of the debtor countries without increasing those of the creditor countries (whose reserves changed only in form, becoming more liquid). However, since these repayments were to extend only over a few years, it is difficult to see how their asymmetrical treatment in balance of payments accounts could have had much influence on policies (even though, as in the case of the other asymmetries, it has helped to confuse the international discussion of payments problems).
The remaining transactions included in “other items” refer mainly to changes in German prepayments for armaments. Increases in these prepayments have been treated by Germany as reducing its surplus above the line but are believed to have been entered by the recipient countries below the line, as changes in liabilities to foreign official holders, i.e., not as reducing their deficits or adding to their surpluses. They were particularly large in 1959 and, with other transactions, may have been responsible for a difference of view between surplus or deficit countries in that year as to the magnitude of the international payments problem.
Whatever effect on the balance of payments policies of the countries concerned may have arisen from asymmetrical recording of the items discussed hitherto appears to have been erratic and temporary. But the different recording of private short-term assets by creditors and debtors appears to have been more significant; if the increase in such assets that followed the introduction of convertibility by the major countries in Europe proves to represent a trend, it is likely to remain significant. The calculation in Table 2 is based on the actual treatment of such assets in balance of payments accounts. It may, however, tend to understate the effect on policies of the total increase in private, including commercial bank, foreign exchange assets. It is quite conceivable that, despite the official measures of surplus or deficit that are applied, the authorities in many countries are in fact guided by the change in their official reserves in formulating their balance of payments policies. They may feel that, although the commercial banks of their countries are building up their foreign exchange assets, whatever targets they may have set for the size of these reserves should not for that reason be modified.
Therefore, although this problem is suggested by a comparison of statistical concepts of surpluses and deficits, it should not be regarded as the result of the application of certain statistical definitions with the corollary that it can be removed merely by changing these definitions. It may be much more deep-seated. The question is whether an increase in privately owned foreign exchange assets (including in some cases those of the commercial banks) reduces international liquidity in the sense that the country whose residents are holding the assets, and that in which they are held, must together hold larger international reserves than before in order to maintain the same international liquidity. Strictly speaking, the question is only whether the authorities of the two countries believe this to be necessary. If they do, a substantial increase in private foreign exchange assets could cause the kinds of disturbances to international payments that are described in the Appendix.
On the other hand, it may be argued that, given sufficient understanding of this problem and coordinated action to deal with it, an increase in private foreign exchange assets need not have such effects. First, in the absence of persistent disequilibria in international payments, movements of private short-term capital can be expected to be equilibrating to a large extent, and hence to reduce rather than increase the need for reserves. Second, even if, for the world as a whole, an increase in private foreign exchange assets does, or is generally believed to, increase the need for official reserves, any disruptive effects this might have on international payments could be prevented through appropriate international cooperation. The Fund borrowing arrangements constitute one institutional method of serving this purpose. Indeed, they were devised to deal specifically with payments problems arising from the increasing freedom for movements of private capital.
So far, no disruptive effects on international payments of the kind one could expect on the theoretical grounds discussed in the Appendix appear to have resulted from the recent tendency for deficits to exceed surpluses. One reason may be that the excess of deficits so far has been relatively moderate (although the underlying conflicts in the balance of payments targets may have been considerably larger than the realized excess of deficits over surpluses). A more important reason has probably been the attitude of the United States toward its deficit, as mentioned above. If the asymmetries between surpluses and deficits discussed here reflect a potential problem, it is likely to come to the surface only when the United States has eliminated, or very substantially reduced, its deficit as it sees it, if some of the other major industrial countries are not at that time prepared to incur deficits.
APPENDIX: How Can the Asymmetry of Concepts of Imbalance Affect Stability of Payments?
To analyze the effect on world payments which asymmetries between countries in concepts of surplus or deficit can have, we shall first examine the effect of conflicting national balance of payments targets under simplified hypothetical conditions. Suppose, first, that all payments imbalances among countries are settled in gold by the monetary authorities and that the world supply of monetary gold is constant. If, under these conditions, all countries pursue a policy of avoiding disequilibrium in their balance of payments, deficit as well as surplus, then any imbalance in international transactions would give rise to measures to restore equilibrium in both surplus and deficit countries. Such symmetry in the policy reactions to payments disturbances would make the payments structure fairly stable.
Now suppose that, while the majority of countries are satisfied merely to avoid a balance of payments deficit, some countries are taking measures to run a surplus in order to increase their international reserves. Under these circumstances, there is a conflict among the national balance of payments targets. By algebraic necessity, the sum of surpluses and deficits of all countries must be zero, but their policy targets imply an aggregate net surplus. Ex-ante surpluses will exceed ex-ante deficits, whereas ex-post surpluses and deficits must be equal; therefore, for all countries the aggregate ex-ante surplus (which is positive) exceeds the aggregate ex-post surplus (which is zero). In this situation, countries in general will experience a balance which is less favorable than they consider desirable, and there will be a tendency for contractionary or restrictive measures of balance of payments adjustments to gain the upper hand over expansionary or “derestrictive” ones.
A similar situation will exist where all countries aim at mere equilibrium in their balance of payments, if for some reason (e.g., as a result of private hoarding) there is a reduction in world gold reserves. Also, in that situation, there will be an excess of the aggregate ex-ante surplus (zero) over the aggregate ex-post surplus (negative) for all countries taken together. The opposite situation will exist if all countries, as before, are aiming at a mere equilibrium in their balance of payments, but there is an addition to the world supply of monetary gold. In this situation there is also a conflict among national balance of payments targets, but one that tends to ease rather than strain international payments. In general, countries will experience a more favorable balance of payments than they plan, and there will be a tendency for expansionary and “derestrictive” measures of balance of payments adjustment to gain the upper hand over contractionary and restrictive ones. A similar situation will exist even if all countries taken together are aiming at increasing their reserves (are planning an aggregate balance of payments surplus), if the increase in world gold reserves (the aggregate ex-post surplus) exceeds the planned aggregate (ex-ante) surplus of all countries; or, with constant world gold reserves, if some countries with ample reserves plan to run balance of payments deficits, but other countries aim at mere equilibrium. In all these situations, there is an excess of the aggregate ex-post surplus over the aggregate ex-ante surplus.
In recent years, the major asymmetries among countries in the definitions of surplus or deficit have tended to create (ex-post) an excess of deficits over surpluses, or to reduce the aggregate balance of payments surplus of all countries taken together below the increase in world monetary gold holdings. If the policy targets for all countries imply an aggregate surplus at least as large as the increase in these holdings (which seems a reasonable assumption), the tendency toward a smaller aggregate surplus, or toward an aggregate deficit, imposes strains on the payments system of the type discussed above. The situation is similar to that in which countries aim at maintaining gold reserves unchanged, although there is a reduction in world monetary gold holdings.
RESUME
Cet article examine les concepts de l’excédent ou du déficit que les pays appliquent pour analyser l’état de leur balance des paiements. On peut classer ces concepts dans deux catégories générales dites excédent ou déficit “de base” et excédent ou déficit “global”. Il appert que certains pays, par exemple l’Allemagne et le Japon, appliquent un concept de l’excédent ou du déficit surtout en fonction de l’état “global” de leur balance des paiements, alors que d’autres, tel le Royaume Uni, préfèrent un concept qui se rapproche davantage de la balance “de base”. Toutefois la plupart des pays emploient une combinaison des deux concepts.
Non seulement il existe des différences quant aux définitions employées par les pays, mais de plus ces définitions même appliquées uniformément, sont asymétriques (et doivent l’être) dans une certaine mesure. Par exemple, tous les pays incluent dans leur calcul de l’excédent ou du déficit le changement dans leurs réserves en or officielles, et ceteris paribus, les excédents totaux dépasseront les déficits totaux du montant de l’accroissement des avoirs mondiaux en or monétaire. (Dans cet article, pour des raisons de simplicité, les expressions “excédent” et “déficit” s’appliquent—sauf indication du contraire—aux mesures statistiques que les pays emploient pour analyser l’état de leur propre balance des paiements.) Au cours de plusieurs périodes récentes, d’autres asymétries l’ont emporté sur ce facteur et ont eu tendance à provoquer un excès de déficits.
Certaines d’entre elles semblent résulter peut-étre de différences accidentelles dans les procédures nationales et seraient probablement supprimées si les concepts de base étaient reexamines. Toutefois, il existe au moins un aspect de ces asymétries qui mérite d’étre examiné de plus prés. Pratiquement tous les pays excluent les changements dans les avoirs privés en devises de leur calcul de l’excédent ou du déficit, alors que la plupart d’entre eux y compris notamment les centres de reserves incluent dans ce méme calcul les changements dans les engagements correspondants. C’est pourquoi un accroissement des avoirs privés en devises tel que celui qui est intervenu ces recentes années, tend á amplifier les déficits par rapport aux excédents. Comme il est probable que les objectifs de la balance des paiements fixés par tous les pays impliquent un dépassement des déficits par les excédents, un excés effectif de déficits comporterait de fortes contradictions entre ces objectifs qui pourraient perturber les paiements internationaux. Les possibilités théoriques de telles contradictions sont analysées dans un appendice.
Cependant, la conclusión de cet article est que malgré le dépassement des excédents par les déficits au cours de chacune des années 1959-61, les perturbations du type auquel on eüt pu s’attendre pour des raisons théoriques ne se sont pas réalisées. Mais il n’est pas in-concevable que la différence de perspective entre les pays excédentaires et les pays déficitaires a peut-étre entravé la solution du probléme des paiements internationaux ces recentes années, et qu’elle peut par la suite engendrer certaines perturbations dans les paiements internationaux si celles-ci ne sont pas prévenues au moyen de la coopération internationale.
RESUMEN
En este estudio se examinan los conceptos de superávit y déficit que los países emplean al analizar la posición de su balanza de pagos. Estos conceptos pueden clasificarse en dos categorías generales, las cuales serán aquí denominadas superávit o déficit “básico” y “global”. La experiencia indica que en algunos países, tales como Alemania y el Japón, el concepto de superávit o de déficit se refiere a la situación “global” de la balanza de pagos, mientras que en otros países, como el Reino Unido, se aplica el concepto que se asemeja más al de la posición “básica”. Sin embargo, la mayoría de los países emplean una combinación de ambos conceptos.
No solamente existen discrepancias en las definiciones de los conceptos entre los varios países sino que aun cuando estas definiciones se aplican con uniformidad son (y deben ser) asimétricas hasta cierto punto. Por ejemplo, todos los países incluyen en el cómputo del superávit o del déficit los cambios ocurridos en sus reservas oficiales de oro y, por consiguiente, ceteris paribus, el total de los superávit será superior al total de los déficit por un valor igual al incremento en las tenencias mundiales de oro monetario. (Por razones de simplicidad de exposición las expresiones “superávit” y “déficit” se refieren—a menos que se especifique lo contrario—a la forma estadística de medir que los países emplean al evaluar su propia posición general de la balanza de pagos.) Durante algunos períodos recientes, este factor ha sido excedido en importancia por otras asimetrías que han tenido la tendencia a crear un exceso de los déficit. Algunas de estas asimetrías parecen provenir de las diferencias accidentales en los métodos empleados por los países y podrían quizá llegar a eliminarse si se reexaminaran los conceptos básicos. Existe, sin embargo, por lo menos un aspecto de estas asimetrías que requiere un estudio más a fondo. Casi todos los países, al calcular el superávit o el déficit de sus balanzas de pagos, excluyen los cambios registrados en las tenencias de divisas extranjeras del sector privado (que en algunos de ellos comprenden tanto las tenencias de los bancos comerciales como otras de carácter privado), mientras que la mayoría—inclusive los centros de reservas monetarias—toman en cuenta los cambios verificados en los pasivos correspondientes. En consecuencia, los aumentos registrados en las tenencias de divisas extranjeras del sector privado, tal como ha sucedido en los últimos años, tienden a originar un déficit mayor que el superávit. Puesto que es probable que los objetivos que todos los países tomados en conjunto persiguen puedan dar un exceso de los superávit sobre los déficit, la circunstancia de que se produzca un exceso real del déficit implicaría que existen discordancias considerables entre esos objetivos, que pudieran traer consigo ciertos desórdenes en los pagos internacionales. En el Apéndice se discuten las posibilidades teóricas de dichas discordancias.
Sin embargo, la conclusión a que llega en este estudio es que aunque durante cada uno de los años de 1959, 1960 y 1961 los déficit fueron mayores que los superávit, no se produjeron los desórdenes que teóricamente era de esperarse que ocurrieran. Pero no sería inconcebible que las diferencias de perspectiva entre aquellos países que muestran un superávit y aquellos que muestran un déficit hubieran impedido la solución de los problemas de pagos internacionales en los últimos años, y que puedan más tarde dar origen a ciertos desórdenes en la estructura de pagos internacionales si no se previenen mediante la cooperación internacional.
Mr. Høst-Madsen, Chief of the Balance of Payments Division, is a graduate of the University of Copenhagen. Before joining the Fund staff in 1946, he was with the Danmarks Nationalbank.
The paper is part of a study on “measures of imbalance in world payments,” the purpose of which is to reconcile the statistics of aggregate balance of payments surpluses and deficits of all countries in accordance with various concepts. While the reconciliation poses rather few problems for the postwar period up to and including 1958, major changes in international payments since 1958—in particular, the emergence of large-scale flows of private short-term capital—have considerably complicated both the statistical and conceptual problems of reconciling the figures for recent periods. To make the larger study more manageable, this paper takes up separately some of the main conceptual problems that have arisen in connection with the study. The paper is exploratory and should not be regarded as an expression either of the views of the Fund or of the definitive position of the author. A second part of the study will appear in the next issue of Staff Papers.
In this paper, for simplicity of exposition, the expressions “surplus” and “deficit” refer (unless otherwise noted) to the statistical measures applied by countries in appraising their own general “balance of payments position.” Similarly, “surplus country” (“deficit country”) should be interpreted, unless there is some indication to the contrary, as a country that is in balance of payments surplus (deficit) according to its own statistical measure of surplus or deficit.
For this reason, the appropriateness of the term “basic” surplus or deficit can be called in question. It is used here in the absence of an alternative term that would be equally convenient and expressive.
If countries do not include their positions with the IMF in reserves in calculating balance of payments surplus or deficit, gold subscriptions to the IMF will reduce correspondingly the combined surplus of all countries (or increase their combined deficit).
An increase in world monetary gold holdings may, of course, under certain conditions stimulate inflationary pressures in the world economy, which, apart from any other undesirable effects, may eliminate its initial impact on international liquidity. However, the increases in world gold holdings during the postwar period cannot be regarded as a substantial source of inflation.
See footnote 5.
In the Netherlands, the measure of surplus or deficit (below the line) excludes loans extended and received by the commercial banks; such loans are treated as movements of private capital above the line.
See Department of Commerce, Survey of Current Business, March 1962.