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Summary of U.S. Balance of Payments, 1970
Bclance-, of Paqments an/tc/e/nlgs
The Balance of Payments Accounts are a double--entry
record of goods, services, and financial transactions be-
tween United States and foreign residents. Be-cause it
is based on double-entry bookkeeping principles, the- bal-
ance of payments always balances in the sense that re-
ceipts 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 eco-
nomic balance, because the economic behavior underly-
ing some of these transactions may not be sustainable.
For example, the receipt of $2.2 billion in 1970 from the
sale of convertible- currencies (IV.4.c) can only continue
as long as the- United States’ stock of convertible cur-
rencies lasts,
The-re are- two officially recognized measure-s of the
economic balance of payments: the Liquidity Balance
and the- Official Settlements Balance-. They represent
alternative- ways of arranging the balance-of-payments
accounts, and are shown on the righthand side of the
table-, In re-cent years the appropriateness of both meth-
ods of measurement has be-en questioned, because tem-
porary factors have obscured more basic economic trends.
These measurement problems caution one not to rely
solely on summary statements about the balance of pay-
ments of a reserve currency country like the United
State-s.
The accounts are divided into four categories: Goods
and Services, Private- Capital, Government, and Other.
The-se accounts are of course, interrelated; an export of
goods can be financed by an import of goods, private
capital, a Government loan or grant, or by a private
transfer,
(I) Goods and Services — The surplus of receipts over
payments in the goods and service-s account increased to
$3.7 billion in 1970 from $2.0 billion in 1969 and $2.5
billion in 1968. A reduced rate of U.S. economic expan-
sion in late 1969 and 1970 slowed the rate of import
growth, while continuing strength in foreign economic
activity encouraged export gro’vth. In addition, a faster
rate of price- increase of internationally traded goods
manufactured by foreigners, and a slower rate of price
increase of internationally traded goods manufactured
by U.S. residents, we-re also conducive- to an improved
goods and services balance in 1970. Merchandise exports
rose 15 per cent, or $5.5 billion, to $42 billion while mer-
chandise imports rose 12 per cent, or $4.1 billion, to $39.9
billion in 1970 (1.1). There was little- change in the se-n’-
ice-s account surplus from the preceding year (1.2).
(II) Private Capital — A larger deficit on capital ac-
count in 1970 offset the increased surplus on goods and
services account. The private capital balance was in
deficit by $2.6 billion, compared to a deficit of $1.3 billion
in 1969 and a surplus of $1.6 billion in 1968. The primary
reason was continuing net long-term capital outflows, par-
ticularly direct investment. Direct investment by U.S.
corporations (mainly plant and equipment expenditures
for their foreign affiliates) was $4 billion in 1970, $.9
billion higher than in 1969 (lIla). Portfolio investment
resulted in a net capital inflow of $1.3 billion in 1970,
slightly less than in the- previous year (II.1.b).
(III) Government — The net outflow of government
loans, grants, and transfers was slightly lower in 1970
than in 1969. Special liabilities (net sales of $.5 billion of
nonconvertible- U.S. Treasury securities to foreign official
institutions) produced an offsetting inflow of funds
(111.2), and thereby lowered the government capital
deficit in 1970 from $4.1 billion to $3.6 billion.
(IV) Other -‘-‘—Private transfers (lvi) represent gifts
and similar payments by American residents to foreign
residents. The allocation of special drawing rights (IV.2.)
represents the receipt of a new international monetary
re-serve- asset that can be- used in settling international
accounts. Errors and Omissions (IV.3) is the statistical
discrepancy between all specifically identifiable- receipts
and payments. The significance- of this item is discussed
below. Changes in U.S. Reserve Assets (IV.4) represent
official transactions of the United States Government
with foreign governments and the International Mone-
tary Fund (IMF). The- $2.5 billion decrease in reserve
assets (mainly a decrease in convertible currencies) is
re-corded with a plus sign because the- United States re-
ceived dollars when foreign governments exchanged their
dollar holdings in order to reacquire their national cur-
rencies. Special drawing rights are analogous to any
other reserve asset; a minus sign implies an addition to
the- stock of reserve assets. Change-s in U.S. Liquid Lia-
bilities (i\T.5) 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 categoriz-
ing of U.S. Liquid Liabilities.
Batonart 0I~ V.//;/././(/ Measures
The Net Balance columns show the- source and overall
size of the deficit or surplus, while the Financing columns
show how 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.5), both private and official, are a potential
claim on United States reserve assets. The- liquidity bal-
ance in 1970 was in deficit by $3.8 billion (including the
allocation of SDR), compared to a $7.0 billion deficit in
Page 28FEDERAL RESERVE BANK OF ST. LOUIS
1969 and a $.l billion surplus in 1968. Much of the- im-
provement in 1970 represented the absence of factors
which enlarged the liquidity deficit in 1969. With the-
absence of tight money conditions in the U.S., the re-
moval of some- interest rate ceilings on domestic deposits,
and a current yield on short-term money market paper
well below remaining ceilings, U.S. banks were no longer
forced to turn to the Eurodollar market where- the-in
branches could bid freely for funds and transfer them
to the home office as nonde-pository advances not subject
APRIL 1971
to the usual cash reserve- requirements. Additional re-
serve-s and sources of nondeposit funds were available in
the United State-s to help banks meet a reduced loan
demand in 1970. As U.S. banks re-paid $6.3 billion of
liabilities to their foreign branches in 1970, liquid claims
on the United States were reduced. Simultaneously, er-
rors and omissions, ~vhich had picked up some- of the
unrecorded Eurodollar flo\vs which were outside the
normal Department of Commerce reporting channels,
declined from an outflow of $2.8 billion to an outflow of
U. S. BALANCE OF PAYMENTS, 1970*
(In Billions of Dollars)
Transactions
Balance of Payments Accounts
Receipts Payments 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 Investment
b. Portfolio Investment
c. Bank and Other Loans (Net)
2. Short term
Ill. Government
1. Loans
2. Special Liabilities* *
3. Grants and Transfers
IV. Other
1. Private Transfers
2. Allocation of Special
Drawing Rights (SDR)
3. Errors and Omissions
4. Changes in U.S. Reserve
Assets
a. Gold (outflow is receipt)
b. Special Drawing Rights
(SDR)
c. convertible currencies
d. IMF Gold Tronche
5. Changes in U.S. Liquid
Liabilities
a. Foreign Official Holders
b. Foreign Private Holders
c. International Organizations
Other than IMF
Total
* Preliminary
* ‘certain non-liquid liabilities to foreign official agencies.
Note: Figures may not add because of rounding.
63.0 59.3 + 3.7
42.0 39.9 + 2.2
21.0 19.4 + 1.6
1.5 4.8 — 3.4
9.6 5.1 + 4.5
2.3 3.9 — 1,6
7.5 5.6 + 1.9
3.8 6.4 — 24
3.1 5.3 — 2.2
.9 4.0 — 3.1
2.2 .9 + 1.3
.0 .4 — .4
.7 1.1 — .4
1.8 5.4 — 3.6
1.3 3.3 — 2.0
.5
....~. 2.1
+ .5
— 2.1
.9 —
.9 +-9
1.3 — 1.3
3.4 .9 + 2.5
.8 + .8
2.2
.9 — .9
+ 2.2
A + .4
7.8 6.4 + 1.4
7.6 ± 7.6
6.4 — 6.4
± .2
80.6 80.6 .0
Balance of Payments Measures
Official
Liquidity Balance Settlements Balance
N Financing N Financing et of Net e of Net
Balance Balance Balance Balance
+3.7 +3.7
— 2.6 -
—3.1
± 1.3
+ .4 — .8
— .4
—3.6
—2.0
+-5
— 2.1
— .9 — .9
+ .9 + .9
— 1.3 — 1.3
±2.5 +2.5
+1A
+ 7.6
— 6.4
___ + .2 ___
— 3.8 + 3.8 — 9.8 + 9.8
Page 29FIDERAL !ES!RVE SANK or ST. L.OUIS APRIL 1971
$1.3 billion, a figure much closer to historical levels. An
increase in special liabilities, which is recorded as a capi-
tal inflow, improved the liquidity balance of $.5 billion in
1970 compared to a reduction of $.2 billion in 1969, which
‘vas re-corded as an outflow. The source-s of improve-me-nt
in the- liquidity balance in 1970 indicate- the-re- has been
little- fundamental change- in the- liquidity position in the
past two years, even though the- re-corded liquidity bal-
ances fluctuated widely.
Official Settlements Balance — The- underlying assump-
tion about economic behavior is that only official holdings
of dollars represent a meaningful potential claim on U.S.
reserve assets, The official settlements balance was in
deficit by $9.8 billion (including the allocation of SDR)
in 1970 compared to a surplus of $2.7 billion in 1969 and
a surplus of $1.6 billion in 1968. In 1968 and 1969 the-
rapid increase in Eurodollar borrowings by U.S. banks
resulted in a drain of dollar holdings from foreign central
banks as foreign private holders converted local ctmrren-.
cies into dollas’s at their central bank and deposited them
its institutions ahroacl. Foreigss cesstral banks tried to re-
build their dollar position by selling gold to the United
State-s and drawing dollars from the International Mone-
tary Fund. In 1970, when monetary conditions at home
and abroad induced U.S. banks to repay to their foreign
branches many of their Eurodollar borrowings, foreign
private holders presented the dollars to their central
banks for conversion hack into local currencies. Foreign
central banks financed the official settlements deficit in
1970 primarily by accumulating $7.6 billion of liquid
claims on the- United State-s.. Only $2.5 billion of the-
deficit ‘vas financed by drawing on U.S. re-serve assets,
and $.5 billion by special liabilities. As with the
liquidity balance, the- shift in the- official settlements
balance between 1969 and 1970 was the result of the
reversal of Eisrodollar flows, and reflected little basic
change in the- underlying strength of the- official U.S.
external position.
Page 30

Summary of U.S. balance of payments, 1970

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Summary of U.S. balance of payments, 1970

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Research Papers in Economics