Michael W. Keran

English

Research Papers in Economics

Summary of U.S. Balance of Payments, 1969
by MICHAEL W. ICERAN
The Balance of Payments Accounts are a double-entry
record of commodity and financial transactions between
United States and foreign residents. Because it is based
on double-entry bookkeeping principles, the balance of
payments always balances in the sense that receipts
equal payments. The double-entry nature of the balance
of payments is illustrated on the lefthand side of the
table on the next page. This accounting balance must
not be confused, however, with a meaningful economic
balance, because the economic behavior underlying some
of these transactions may not be sustainable. For exam-
ple, the receipt of $.8 billion in 1969 from the sale of
convertible currencies (IV.3.b) can only continue as
long as the United States’ stock of convertible currencies
lasts. There are two officially recognized measures of
the economic balance of payments: the Liquidity Bal-
ance and the Official Settlements Balance. They repre-
sent alternative ways of arranging the balance of
payments accounts, and are shown on the righthand
side of the table.
The Accounts are divided into four categories: Goods
and Services, Private Capital, Government, and Other.
These accounts are, of course, interrelated; an export
of goods can be financed by private capital, a Govern-
ment loan or grant, or by a private transfer.
(I) Goods and Services — Merchandise exports and
imports (1.1.) are a measure of physical goods which
cross national boundaries. The demand for imports de-
pends largely upon domestic income, while the demand
for exports depends largely upon the level of income
abroad. Because of excess demand in the United States,
the trade balance of $.7 billion is unusually small by
historic U.S. standards. However, there was a pattern
of improvement during the year due to the slowdown in
the United States economy which reduced import growth,
while exports continued to grow rapidly in response to
high levels of demand in Europe and Japan.
In spite of the decline in U.S. troops in Vietnam,
military spending abroad increased $.4 billion in 1969 to
a level of $4.9 billion (I.2.a). Other components of
services were relatively unchanged from 1968.
(II) Private Capital — Long-term capital (11.1.) rep-
resents changes in United States private assets purchased
from foreigners (payments column) and liabilities to
foreigners (receipts column). There was a long-term
capital outflow of $7 billion in 1969 versus an inflow
of $1.9 billion in 1968. This turnaround is attributed
largely to a decrease in foreign private and official port-
folio investment in the United States.
For short-tenn capital (11.2.), the payments column
represents changes in all private United States assets,
while the receipts column records only changes in pri-
vate nonbank liabilities, and thus does not record Euro-
dollar transactions. Changes in bank liabilities are listed
with changes in short-term Treasury liabilities under
IV.4, to facilitate analysis of the distinction between
the Liquidity Balance and Official Settlements Balance.
(III) Government — The net outflow of Government
loans, grants, and transfers was $4.0 billion in 1969, up
$1.5 billion from 1968. Foreign official institutions, which
had purchased $1.8 billion of U.S. Government bonds
in 1968, sold $.2 billion in 1969. This $2.0 billion turn-
around more than explains the deterioration in the
Government capital account.
(IV) Other — Private transfers (IV.1.) represent gifts
and similar payments by American residents to foreign
residents. Errors and Omissions (IV.2.) is the statistical
discrepancy between all specifically identifiable receipts
and payments. The importance of this item is discussed
below. Changes in U.S. Reserve Assets (IV.3.) represent
official transactions of the U:nited States Government
with foreign governments and the International Mone-
tary Fund (IMF). The $1.2 billion increase in reserve
assets is recorded with a minus sign because dollars
were “spent” to acquire them. Changes in U.S. Liquid
Liabilities (IV.4.) represent increased foreign holdings
of liquid dollar liabilities of U.S. banks and the Treasury.
The major difference between the Liquidity and the
Official Settlements Balances is in the different cate-
gorizing of these U.S. Liquid Liabilities.
The Net Balance columns show the source and overall
size of the deficit or surplus, while the Financing columns
showhow the deficit is financed or the surplus is disposed.
Liquidity Balance — The underlying assumption about
economic behavior is that all foreign liquid dollar hold-
ings (IV.4) both private and official, are a potential
claim on United States reserve assets, especially the
gold stock. The Liquidity Balance was in deficit by $7
billion in 1969, compared to a $.2 billion surplus in 1968.
This great change is partially a statistical illusion re-
sulting from two specific events which in no way re-
flect a weakening in the basic external position of the
United States. First, Federal Reserve Regulation Q,
which imposed an interest rate ceiling of 6¾per cent
or less on deposits in American banks, created an in-
centive for many depositors to switch their deposits to
the foreign branch offices of American banks where Reg-
ulation Q did not apply and interest rates were in excess
of 9 per cent. As the transfers were outside usual De-
partment of Commerce reporting channels, they show
up in Errors and Omissions, which increased from a
billion deficit in 1968 to a $3 billion deficit in 1969.
Second, official institutions switched their dollar reserves
from “nonliquid” Treasury notes and corporate bonds to
“liquid” form by $1 billion in 1969.
Page 28Official Settlement Balance — The underlying eco-
nomic rationale is that only official holdings of dollars
represent a meaningful potential claim on U.S. reserve
assets. Foreign private persons and international organi-
zations demand dollar balances to meet the needs of
international tiade and finance. Thus, an mci-ease in
foreign private holdings of dollars ( lV.4.h ) is treated as
a capital inflow, while changes in foreign official huldings
of dollars ( lV.4.a) is treated as a financing item. The
Official Settlements Balance recorded a surplus of $2.7
billion in 1969, almost double the surplus recorded in
968. This undoubtedly overstates the underlying strength
of the balance of payments, because the $8.8 billion
capital inflow through the Eurodollar market ( IV.4.b
‘vas mainly due to the need of U.S. banks to find sources
of funds not subject to Regulation Q interest rate ceilings.
Conclusion — Regulation () has distorted both of these
measures in 1969. making one look stronger and the
other weaker than it really was. These measurement prob—
lems caution us not to rely on summary statements about
the balance of payments. TIns is especially true of a
reserve currency country like the United States.
ii- S. BALANCE or PAYMENTS- 1969*
(In Billions of Dollars)
Transactions
Balance of Payments Accounts
Balance of Payments Measures
Receipts
Liquidity Balance Official
Settlements Balance
I. Goods and Services
1. Merchandise
Trade (goods)
2. Services
a. Military
b. Investment Income
c. Travel -
d. Other
II. Private Capital
1. long term
a. Direct lnveitment
b. Porlfolio Investment
c. Bank and Other Loans (Net)
2. Short term
Ill. Government
1. Loans
2. Grants and Transfers
IV. Other
1. Private Transfers
2. Errors and Omissions
3. Changes in U.S. Reserve
Assets
a. Gold (outflow is receipt)
b. Convertible Currencies
IMF Gold Tranche
4. Changes in U.S. liquid
liabilities
a. Foreign Official Holders
b. Foreign Private Holders
c. International Organizations
Other than IMF
Total
55.4
36.5
18.9
1.5
8.9
2.1
6.4
3.7
3.7
.7
3.0
.0
.0
1.5
1 .5
.8
.8
8.9
8.8
70.3
iii
S
5
5
* 11
*
5-
5
4
-6
6- 1-i
Ii
S ii
I-
*
5
5:
11
ii
Payments
53.3
35.8
17.5
4.9
4.4
3.4
4.8
5.0
4.4
3.1
1.3
.0
.6
5.5
3.4
2.1
.8
3.0
2.0
I-c
1 .0
.7
.5
.2
70.3
Balance
+ 2.1
+ .7
+ 14
— 3.4
+ 4.5
— 1.3
+ 1.6
— 1.3
—.7
— 2.4
+ 1.7
.0
.6
— 4.0
— 1.9
— 2.1
— .8
— 3.0
— 1.2
— 1.0
+ .8
— 1.0
+ 8.2
.5
+ 8.8
.0
Net
Balance
+ 2.1
— 1.3
— 4.0
— .8
— 3.0
— 7.0
Financing Net
of Net Balance
Balance
±2.1
— 2.4
± L7
± .8
.6
— 1.7
— 2.1
~— .8
—3.0
— 1.2
±8.2
±8.8
±7.0 ±2.7
Financing
of Net
Balance
— .8
— .2
— 1.2
— .5
— 2.7
Note: Figures may not add because of rounding.
*Preliminary
Page 27

Summary of U.S. balance of payments, 1969

http://research.stlouisfed.org/publications/review/70/04/Summary_Apr1970.pdf

Summary of U.S. balance of payments, 1969

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics