Speech

INTERNATIONAL FINANCIAL PROBLEMS OF OUR ECONOMY Member Board of Governors of the Federal Reserve System Delivered before Fifty-Third Annual Convention Maryland Bankers Association Atlantic City, New Jersey Opening Session, 9:30 A.M,, May 9, 1949 For Release in Newspapers at Time of Delivery INTERNATIONAL FINANCIAL PROBLEMS OF OUR ECONOMY iiig our international as well as in our domestic economy we are vitnoss- 5ft . aAdjustment from deficit to surplus conditions. This readjustment is an er ind Infth.of our inflationary postwar boom. Crippling bottlenecks in production ? Pro^QUoying scarcities of consumers' goods have now largely disappeared. The «c * we_currently confront is one of sustaining a high level of economic U y without the questionable benefit of inflationary supports. Ikclj ° ^UL-S. Export Surplus in 19^ 6n% In the domestic field, the readjustment has been reflected in a soft- f Cf prices, a slight decline in industrial production, and some increase in spent ;?fteiJt« The backlog demand of the immediate postwar period has largely ^Ved^t force« The country's plant and equipment have been expanded and im- p5s peacetime needs. Inventory pipelines have been filled. The ex- s ^s ^ effective demand over available .supply at prevailing prices and incomes dec disappeared. Reduction in the level of prices without substantial rer Plie U.e 111 consumers' incomes may be essential to avoid accumulation of sup- s -ri evcecs of effective demand. JUcti • the international field, readjustment is indicated by a sharp re- Q ln °ur export surplus. During the early postwar period the problem of einand heen much more acute than -n the United States; in countries •ientj^^^y affected by the war, goods had been far more scarce end a suffi- k e% snci rapid increase in production was far more difficult to achieve ^t ' c°untries were ? nxious, therefore, to receive any amount of exports, Ve r tj0 suPP1y their foxier customers with corresponding quantities SUffici In however, the output of many war-devastated countries rose ^y to make it possible for them to replace shipments from the United ^ti *th domestic commodities, and at the same time to send increasing quan- eg their products to us as well as to other markets. As a result, our 3dined and our imports rose. killi In we exported goods and services valued at &16.8 billion, or Muea than in 194-7; on the other hand, we imported goods and services denv l0#5 billion, or billion more than in 1947. Our export surplus CUned by $5 billion, from $11.3 billion in 1947 to $6.3 billion in 1943. Pla decline becomes even more significant when we consider that it n te ^Ce desPite an increase in our average price level of about 9 per cent. rrn o f.VoluniQ—that is to say, in terms of constant prices—our exports Per declined by about 13 per cent and our imports increased by about ^* Should similar changes occur in 1949, our export surplus would ' ^ disappear. i^0 relat^10 most imP°5'tant single factor influencing our international econ- thi ons iri 1943 was the recovery progress in Western Europe. Countries B r.tQciUctiarea received in 194.8 about one-third of our total commodity exports. ^Coilonii 0p in moet countries which are members of the Organization for European c ^o ^°Peration has now reached or surpassed the prewar level. Industrial nst e Messed n' hastened by assistance under the European Recovery Program, has ^ i p m* to the Point where the most important gaps in the need for capital °8®th ,and rav mc-terials have been filled. 'Agricultural rehabilitation, er U. s. aid, has so improved living standards that the productivity of ^-Port^t^5 risen almost prewar level. As a consequence, production of five c°al in tu^00^' namely, foodstuff a, textile products, ships, motor cars, and the ^ese European countries has increased so much that our exports of Se Uhig oui° 'S declined by a total of more than $1.6 billion in 194-8. At the same ^Uon iinports of machinery, motor cars, and textile products rose by $300 tio ; iloreover, the rehabilitation of the merchant marine of seafaring na- ns b ?ught about a decline in our net revenue from transportation from $1 k&st to ler,s 'than $500 million in 1948. Altogether, we find that at °an be tit 1:ifon> or almost one-half of the total decline in our export surplus, aced directly to the success of our assistance to Western Europe. f^er -^creased production in Canada, Latin America and the Middle East, to- v 6 size^hi the large volume of outPu"t in the United States, was responsible for Hub ^ Xe.rise in our imports of raw materials—like oil, metal ores and sem^Xt,:i''l efibers> dumber and wood pulp, meat, coffee, cocoa, tea, and Hlii J'""luxury *,f)odstuf f a• The increase in these imports amounted to about 0 the cr one-fifth of the decline in our export surplus. The improvement ^ co ^^ional economic situation is, therefore, responsible for'about 70 nt 01 the drop in our 194-3 export surplus. 6!er> mny fh° remaining 30 per cent of the decline .in the export surplus, how- fi o ascribed mainly to effects of the war that' have not yet been com- peted jlef^0me' The continuing poverty of a large part of the world is re- d^^res* so~cclled dollar shortage, namely, the progressive exhaustion of our" 0rves of 1710st foreign countries. For instance, this shortage holds nj^ies *ports of industrial and electrical machinery although virtually all i r ati11 badly in need of further modernization and expansion of of^uTl ^nipment. In fact, the entire output of such machinery in all nations could not satisfy the over-all demand if the purchasing power ° c°nntries were equal to their needs. p"rtioular, the decline of more than $700 million in our exports to 1 $ the Probably was due to the depletion of their dollar resources dur- Postwar years rather than to a reduction in their need for our in ^y'i nbries like Venezuela which still hod emple -j oiler reserves have to °Ur their purchases in this country. A decline of $>400 million rec° t0 the sterlinS f-rea outside of Europe, while in part attributable overy of the United Kingdom, was in part due to the "dollar shortage". ^3ettl pother part of the decrease in our exports can be attributed to the ed v/j ^he F 2 ical situation in the countries bordering on the Soviet Union and ar th 0Hi> p ,af: The unwillingness to remain dependent upon the West, coupled r §3r S°viet n 7bition of exPorU? of strategic materi-Is to the area dominated by by millio 0n> resuited in a drop in our exports to Eestem Europe of about ab°ut <iiContinued strife in the Far East reduced our exports to that area ^00 million. ^ eXpo^+Se dev0lopments account in the main for the sharp decline in 1948 ti?0lnic conr ^rplus< They indicate substantial progress toward more stable to finH ions* In thc financing of the export surplus, however, we con- ^oI less th £vidence of the decisive role of the aid given by the United SSttoa tes. ^ by r'n billion, only about 20 per cent less than in 1947, was -y Government loans and grants and by advances by the International - 3 - ^diV*^ anc^ International Bank for Reconstruction and Development. An Priv-.+°na^ ^^0 million, or about the same amount as in 194-7, was financed by Eu e reinittances, occasioned mainly by the continuing sorry plight of the ro br ^GJn rNatives and friends of our citizens. Private capital invested a- 0a th xj °talfcd &900 million (net), a small increase over 1947. Sales of gold to e nime<? S^tes amounted to $1.5 billion, or almost 50 per cent less than in itig * .decline probably reflects the heavy liquidation of foreign gold hold- s forei»ri°r ^94-8. Sales of gold .in 1943 were largely offset by an increase in holdings of short-term assets in this country. "^^^^ChanRes in Export Surplus From the point of view of our international relations, the decline in ex *ehabiv+ furplus is welcome, especially insofar as it indicates progress of thi abroad. In 1948, when inflationary pressures still prevailed in s c cial n it was also welcome from the point of view of our domestic finan- export surplus is financed—apart from private relief contribu- ari innei^ler U. S. Government funds, private extension of credit, or °f gold* A11 three methods have inflationary effects. The largest to achi nal exPen<iiture—Government grants and loans—made it more difficult extend !T/e a budget surplus of decisive anti-inflationary proportions. Credits e the finance purchases by foreigners contributed to further expansion in Vol C°u34 of our money. Gold inflow provided additional bank reserves which come the basis of a multiple expansion of credit. sirab]_ ^ further decline in our export surplus, however, might have less de- e ^hen dom^°n!3eqUences ^ dovnward pressures developed in the domestic economy. H p ®stic deman^ contracts, a strong foreign demand is beneficial because r C°nstru ^as teen argued, by opponents of the joint program of European re- ^nefit° ^^ ^at our was intended less to help Western Europe than to ^ serv°Ur °Wn economy by opening otherwise unavailable markets for our goods t tiCeS* This contention does less than justice both to our motivation 0 -actual situation in 1948. In that year domestic demand could have ^aift virtually all our exported products, and the export surplus was a u futu ** 0llr economy. Moreover, the possibility that we might benefit in the re ^ harmj0111 increased sales abroad would not mean that foreign countries would to our —unless grossly mismanaged—would in any case con- %eig a positive contribution to foreign economies. In fact, the needs of n C°uId °0Un"tries for additional goods and services are so immense that they n ° be satisfied for a long time to come by the output of their rehabili- °uuctive systems and all our aid combined. ^ Ve i assistance to foreign countries could harm their economies only thgr. 8l3"t,ed on exporting goods that would compete with their industries and % rn a t i o ns o u were unable to shift their production to other, more advan- mat a^ivi"bies* Actually, our aid consists overwhelmingly of foodstuffs, e ^ t i ^ + u> and capital equipment and the most biased protectionist could + -m a i n t ain that such shipments diminished the opportunities for the<^ in recipient countries. On the contrary, they make it possible i^6 countries to increase employment, production, and consumption at the k - - f In any case, our export surplus probably will net decline as rapidly r0!n 1n(rt vi ^8 to 194.9 as it did between 194-7 and 1948. We may hope that imports U ( to increase, both because of large demand at home and because cf to suPPly abroad. We also can expect exports of a number cf commodii. Lies 6f5sarv Our foreign responsibilities, however, will make it nec- 6:'port Us f>or S0Iue time to come ship certain amount of "unrequited" that is exports not paid for by imports. ? QUl» first of these responsibilities concerns the areas occupied by f?rces' 1n contrary to the general trend, our exports to Ger- th^1*3'^ anci Korea were considerably larger than in 1947. While it is ic to c/dfc no *u-ther rise in aid will become necessary, it would be unrealist- °Urit upon too rapid a decline in the needs of these countries. second responsibility relates to countries threatened by foreign ^e o^0n* 19^3, that responsibility resulted in increased exports to Ce ^ce ^nci Turkey. Under the North Atlantic Pact, further increases may be Gsa 'u y enable the European members to fulfill their treaty obligations. - h responsibility exists in respect to countries which have l'Hh the1^'0 ^onS-term plans for reconstruction and development in connection k^rarv fUr°^ean Heconstruction Program. It would be wasteful, as well as 1. °Ur economic and political interests, to leave that work unfinished ns at +f ?ur assistance below the amount required by the participating na- ^P-ital , leil' current state of recovery, We have just started to deliver g f°0ds r'-ther than foodstuffs, and a decline in domestic demand for cap- 0o ^ Qvn -S possible an increase in deliveries without deprivation of 41 -^dustrv. dem&nd for capital goods. Such a development would be most 0ur own economy if it were timed so that increased demand for CQUntries urecic would coincide with declining needs of the Western European V Cl>eHe considerations do not imply, however, that we should p.rtificial- Gn export surplus not warranted by the needs of the recipient na- 'ie>i\y° *,d7e r to pprroovviiddee mmaarrkiecetxss fioorr oouurr ggoooodess.. E.veevenn iifi darraasst^iicc aunntai--daeefiliaa-- 0 Q rPPoi>tnnI+/°ns should become necessary here, che Government would have ample 0 >Ti&g ^tyhe It +t"o' 0t.^aakl ce domestic measures that would expand incomes and expenditui / ^t ?W~incoIue groups. Moreover, the sums involved in any prospective ^ti Plus probably would not be large enough to be decisive in anti-de- 0n Qgeign Trade J^noe ^ea^"thyinternational economic system requires equilibrium in our tional payments, apart from those commodities sent to foreign ^ther • Equilibrium does not mean equality of exports and imports eciuality of our export surplus—apart from the relief shipments - 5 - mervtioned—.and the amount of our voluntary foreign investment. nation Such.an equilibrium, however, would not restore satisfactory inter- ne re}ations unless it accompanied a high and expanding level.of world gr&-nts - cjuilibriuni as cuch could be achieved any day by cutting out Government pr®ssi loans and permitting trade to decline to the low levels of the de- 0 in devel years* However, progress in rehabilitation of war-devastated areas and ly, °Pment of backward areas would be halted, our exports would drop violent- und ^an thafUP imports from these areas could not increase further. This would the benef•+°reiSn countries aG wcl1 as the United States would have to forego its of buying and selling goods in the most advantageous markets. not so mu >At R hlgh level of world trade, however, equilibrium would be reached Voulci benCrby reducin£ ©sports as by increasing imports. Such a development fruit of!^ a11 Parties making it possible for them to enjoy fully the s the international division of labor. beco C°nGUIaers generally welcome the added quantities of goods and services rodUcer m\aVailable f°r domestic consumption through an increase in imports. s fined to „ ovever> frequently favor additional imports only if they are con- n°t rW materials or other producers' goods or to such consumers' goods as Co import?ete With doniestic products, it so happens that the greater part of ^eriaig i>iS that type* In our largest import items were industrial /°0ffee, . , oil> ruhher, "ool, wood pulp, copper and tin, and foodstuffs like c Per' ^tG sugar> and cocoa; these nine commodities alone accounted for about ce !ctinty °f 0ur entire trade. If we maintain our high level of economic at Prod We Can probably absorb ever-increasing quantities of the commodities u i h°me on!erS favcr? inclading high-quality goods which could be manufactured d labor at Prohibitive costs because of the large amount of highly special- necessary for their production. ^Porti It 1S unlikely> however, that we can maintain a high level of trade by ng 1 a^cts °r y those commodities and services which do not compete with domestic i0lne rav% + faCt' progress in synthetic production has reduced our demand for mn h 8e Part fnalS' especially silk and rubber, which before the war formed a vhVe to inol imports* We must face the fact thrt our imports will also lch are ^ T SOme consumers' goods which could be produced domestically bat produced at greater advantage abroad. !?£stic rn,increase in such imP°rts will, of course, be resisted by competing D si, ntage of x,°erG- The resistance will become more stubborn as the comparative ef? ^port" forei8n exporter increases. In some cases, an increase* in 0t uPon°im i? actually lead to hardship. Even in those cases, however, the VQ °ts on un i d u al industries would not be more drastic and the over-all t thUla *esui+ ? economies abroad and at home less severe than the damage that e P°int. m fallure to maximize foreign trade. An example will illustrate Of • If li ^Porto Ve were to reach equilibrium by reducing exports to the 19^3 level if> Wr GXport industries would have to curtail sales by about $6 bil- ^ ei of Her> we were to reach equilibrium by raising imports to the 19^8 e ^t. x/? aoinestic industries would have to curtail sales by the same ° cases, it is assumed for simplicity's sake that other domestic - 6 - Sales anr) e: p .Pur<chases would remain unchanged. If we used the method of cutting ( 0r+ their ^ vould hit those producers that have proved to be more efficient than good °rei£n competitors. However, the method of cutting sales of domestic leoo s J0IJlPeting with imports from abroad would curb those enterprises that are v°rld than foreign producers. From the point of view both of the Prefp>,ef?noiny and the domestic consumer, the second solution would be far •arable to the first. exPect ma^ hazard a forecast on the basis of past experience, wo may period ^llibriuin to be reached after the end of the European Recovery Program ti 'dt_a point somewhat in between the two extremes posed by our illustra- on< (iricl j.> n s our economy should suffer serious recession, a level of imports Uc Since th^vServices) of 10 to 20 Per cent above 19/,S would seem feasible. du /ie bulk oi' these imports would be in the fields of crude materials, pro- Cerg ^lesti^00^ Qnc^ °tiier commodities end services which do not compete with finest! ^ ^ t s, such an increase would not involve appreciable hardship for nr producers* *At the same time, the recovery of the rest of the world v The result-an export Ievel of 10 to 20 per cent below 194-8 seem attainable. 1948^ p vlng exP°rt surplus of about $.2 billion, or almost 70 per cent below r 6asUy b , ly could be covered by private investments alone, or even more eign trad-lnVeStment3 pluS moderate relief contributions. Such a level of for- get .e represent about the same proportion of our gross national pro- as ' rst World ^ ^ a somewhat lower ratio than prevailed either before the a war or during the inter-war period. Pect "j;he hope for achieving such a balance is based primarily upon the ex- ation p^n b i-1" WG sha11 not repeat the mistake of the last interwar period, Ve st expe 16Ved we could expand exports and at the same time restrict imports. aS Ve Perm>nCe"""that in the long lun forei£ners can bu/ from us only as much eVerywhere them t0 Cel1 t0 us"~is already repeating itself since our exports are restricted by the so-called dollar scarcity. j^th' . ^ortunately, the main trading nations of the world are ready to join Us 2° Minium Un- international program which would help us expand foreign trade ^ °Pe, ' The regional commissions set up by the United Nations for an unio AlT10rica> the Near East, and the Far East, as well as the Pan-Amer- n to-a nd the Organization for European Economic Cooperation, are all Uci ^v ^ard this end. In addition, the International Bank for Reconstruction e elo h^le ther +nt has Gtarted to grant credits to undeveloped nations, which will Jtiorial n expand their production and to participate more actively in inter- c Ustirig Jmerco* The International Monetary Fund is tackling the problem of * lift nrealistic exchange rates so that the main trading nations can grad- ^ed i s°me of their most irksome exchange restrictions• Finally, the pro- nt V- nati national Tra^e Organization should become an important forum in Varyi^*5 °Perating at different stages of economic maturity end struggling lVergent problems of balance-of-payments disequilibrium can reconcile their nterests and substitute cooperation for international economic warfare. tSVe °ur q11 those organizations, however, can work successfully only if we than t^ international economic problems in a manner designed to expand ra- ti ^ternav re3t"rict commerce. Our economy, which has become the largest source "^the SuPPlies of goods and services, cannot escape being at the same international market. Neither regional organizations, Uriited States i - 7 - P^act wtuwi^ ux wxcnange rams, nor prom, dj.^ ion 01 umair excnange inu or a ab^ x?es can restore equilibrium in international economic relations if we Q Sxdud ^ Cti^3e make our financial resources available to our customers or cretf^6,again "their poods from our territory. It is fortunate indeed that a adapted8?* "trade Policy aimed at international cooperation will also be best vO meet. +.Vl£> fnflir-o r>onili yamM+c f nnv Amap+ ! r\ 0Ar,tinmw

M.S. Szymczak (1949, May 8). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19490509_szymczak

@misc{wtfs_speech_19490509_szymczak,
  author = {M.S. Szymczak},
  title = {Speech},
  year = {1949},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19490509_szymczak},
  note = {Retrieved via When the Fed Speaks corpus}
}