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Each country must put its own economic house in order before there can be improvement in the . . .
Foreign Currency Situation W. FEUERLEIN, Treasury Division, E. /. du Pont de Nemours & Co., Inc., Wilmington, Del. JToR the past few years there has existed earnings that may be remitted abroad what is generally called a world-wide promptly in any one year. (Promptly "dollar shortage." Citizens in practically means as soon as reached in the chronoall foreign countries would like to spend logical queue of applications in a parmore dollars in the United States for the ticular exchange category.) The excess purchase of goods, payment of interest over %% is supposedly remittable in anand dividends, travel, and perhaps cernual installments of one fifth of the excess —for example, Anglo-American loan oi tain short-term and long-term investbut the exchange priority for this type of 1945, ratified by the U. S. Congress in ments, than the countries have available payment is so low that no payments have the spring of 1946—and substantial dollar exchange. The result is that a been made for some time. grants—ECA appropriations since early great number of controls have had to be A more encouraging situation exists in 1948—the United Kingdom and sterling introduced in most foreign countries to Peru. During 1949, and particularly in area countries still have to restrict severely curtail the demand for dollars by their November of that year, the government their purchases of American goods. Paycitizens. It is the purpose of this paper abolished practically all foreign exchange ments for financial services, such as into investigate briefly the underlying controls, partly based on the recommendaterest and dividends, are permitted at the reasons why this situation exists, and to tions of a U. S. Economic and Financial official exchange rate under present reguindicate in a few words what the outlook Mission, of which the author had the lations. However, it is impossible to is a t the present time and whether there honor t o be a member. Dollar exchange liquidate American prewar or wartime is a solution to the problem of bringing is now freely available for all purposes. investments in the United Kingdom and about greater freedom in the international However, until the over-all economic and the sterling area at this official rate; flow of funds for trade and financial transmonetary problems have been fully solved, liquidation can be accomplished only in actions. the exchange rate is subject to fluctuations the sterling security market in Mew York In order to obtain a better perspective so that a considerable element of uncer(Switch Sterling), where sterling is curof t h e present situation a brief description tainty still exists. rently quoted at approximately $1.60 to of certain controls in various parts of the $1.85 per pound as compared -with the In Mexico where American business has world is given. At the outset, it should be official rate of $2.80 per pound. a large stake, the situation is also relatively noted that a few countries still have plenty encouraging, although various import proThe situation with respect t o contiof dollars and therefore do not impose hibitions and import licensing requirenental European countries is very similar, many controls on trade and financial relaments are in effect to prevent a recurrence and thus no further details a r e given. tions with the United States. Among these of the serious depletion of dollar exchange These examples should illustrate sufficountries are Switzerland,- Saudi Arabia, of the Central Bank which occurred durciently the point that American trade and Cuba, Venezuela, and a few other relaing the past three years. finance is hampered greatly by a large tively unimportant ones; however, all these variety of controls, which make the work Turning t o countries outside the Westcountries account for only a small portion of the foreign trader and investor much ern Hemisphere, we find that all trade and of world trade. financial transactions of the United King- more difficult and in addition a d d many It will be no surprise to anyone to hear dom and other 'sterling area countries extraordinary risks. Considerable risk is that most countries in Latin America have involved in the frequent changes in reguwith t h e U. S. are subject to strict imin operation various types of exchange port and exchange licensing requirements. lations, some of which are arbitrary. and /or import controls. The Argentine No dollar exchange permits for imports Changes of exchange rates provide an case is probably the most serious. All are given when the products can be ob- element of uncertainty, although undollar transfers were suspended on May doubtedly many of them are not only tained within the sterling area, even 14, 1948. Since that time small payments necessary but long overdue; however, exthough the price quoted by t h e sterling on old commercial debts are being made change rate adjustments that take place area supplier is higher than that of a every month, but no remittances of inU. S. competitor. Notwithstanding sub- practically overnight alter many existing terest and of dividends constituting profits financial relationships. stantial loans made to the United Kingdom earned in that country (if any are earned under the present "welfare" program of President Peron) have been authorized. Furthermore, new imports from the U . S. have been restricted to a minimum level. ILLY FEUERLEIN, an economist at E. I. du Pont de Nemours & Co.'s I n Brazil a rather severe import licenstreasury division, is Swiss-born, with a Ph.D. from Yale University. He ing program was instituted in the middle came to this country as a student from Zurich in 1933 and did his underof 1949, when it became evident that graduate work at George Washington University. In the fall of 1949 he was given leave from his company to go as a member of the economic the import and exchange permit system and financial mission of the TJ. S. Government to Lima, Peru. Before already in effect had proved ineffective in 1944, when he joined t h e Du Pont Co., he had worked in the foreign preventing accumulation of a large backresearch division of the Federal Reserve Bank of New York, and had log of unpaid dollar debts, both commerbeen chief of the finance unit i n the blockade division, Foreign Economic cial and financial. In addition, compliAdministration. cated regulations are in effect, restricting to 8 % of registered capital the amount of
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COMMERCIAL CHEMICAL DEVELOPMENT It should be repeated here that t h e foreign currency problem seems to b e primarily a dollar problem. T r a d e a n d financial relations within the sterling area a r e practically free from control; t h e same is true of t h e movement of funds b e t w e e n various other "soft currency" countries, including some in South America. I n other words, it would appear t h a t t h e American trader a n d investor is at a distinct disadvantage in comparison with traders and investors in other parts of t h e world. Although the dollar problem is n o t the only major international financial problem, it certainly is one of the most difficult ones. The dollar problem can b e analyzed quantitatively by examining the United States' balance of international payments. This statistical device is a summary of all transactions of o n e country with t h e rest of the world during a certain period of time. T h e balance of payments of t h e U . S. for any year shows all international financial a n d economic transactions of t h e U. S. with t h e rest of the world. F o r t h e year 1949 this balance of payments Ls estimated approximately as follows: Total U. S. exports of goods and services Total imports of goods and services Net credit (surplus) on current account Net unilateral transfers (lJlrKt*b' U. S. Government "gifts" to foreign countries ) Net long-term capital investments Errors and omissions Net debit (deficit) oa other accounts
$16 billion _10 billion
Money Supply End of 1938
Australia Belgium Brazil Chile France [ndia Mexico Sweden Union of South Africa United Kingdom ' Millions of
Bfrs. Cr. P. Frs. Rs. P. Kr.
E n d of June In1949 crease (in billions of national currency) % 375 902.0 190.0 282 157.5 41.2 353 11.3 51.2 2.1 629 15.3 192.0 1,190 2,285.0 4.38 345 19.5 0.75 3.96 428 2.18 6.11 118
350.7 97.5 £SA" 4.98 1.64 £ national currency.
260 204
$ 6 billion — $ 6 billion — 1 billion -f1_ billion — $ 6 billion
This table shows that in 1949 t h e Government and people of t h e U. S. m a d e available to other countries approximately $16 to 17 billion for t h e purchase of American goods and services. Figures of this magnitude "would not lead one to believe that there exists a world-wide dollar shortage; foreign countries have available and use now a far larger amount of dollars than in prewar,years. However, since t h e balance of payments shows only transactions that have been carried out in any one year, t h e balance of payments problem boils down to the point that if foreign countries h a d n o w available more than $16 t o 17 billion per a n n u m they would b e willing to purchase in t h e U. S. even larger amounts of goods than they d o now. Since it is a truism that both sides of the balance of international payments a r e always equal, it follows that U. S. exports of goods and services in any o n e year can be only as large as the amount of dollars m a d e available to other countries through imports (goods and services), investments, and gifts. The analysis of t h e dollar problem therefore c a n b e reduced to the following two major questions: ( 1 ) W h y is t h e demand for American goods so large in foreign countries? ( 2 ) W h y cannot t h e U. S. m a k e more dollar funds available to foreign countries?
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The answer to these two questions may give us a clue to t h e solution of t h e dollar problem. There will be a b a l a n c e of payments problem as long as foreign countries h a v e to keep in effect limitations on the amount of dollars that may be spent b y their citizens in the U. S. or other dollar areas. It is highly desirable that the b a l a n c e of payments equilibrium be maintained without the use of such controls. Investigating t h e factors which cause such a large demand for American goods, w e find that in t h e first place practically all countries in t h e world have experienced a tremendous inflationary expansion in their money supply since 1939. T h e following table illustrates this point:
There are many reasons for this expansion o f notes in circulation a n d of deposits in commercial banks. W a r activities are o n e reason. I n the postwar period the reconstruction of devastated areas led to large monetary expenditures. In addition, large governmental "welfare" a n d "socialization" programs have been put into effect almost universally. Many of these programs c a n be carried out only through deficient financing, and in every case these programs have caused a n increase ot monetary media in the hands of the p u b lic. This additional purchasing power results in larger d e m a n d for domestic and foreign goods. However, this increased purchasing power does not necessarily result immediately in new productive capacity for exportable products which would e n a b l e the country to pay for the larger import requirements. At the same time prices of existing export goods usually become inflated a n d thereby less competitive i n other countries. A serious disequilibrium is created. Orthodox methods of government financing a r e not in vogue today. W h e n I recently visited Chile it was indicated to me b y responsible government officials that i t is almost impossible t o stop the trend of inflationary expansion. In Brazil 1 was even told that continued inflation will prevent a depression. Such inflationary policies in so m a n y countries all over t h e world create serious dislocations and a r e partly responsible for the worldwide dollar shortage. In the second place, t h e drive for more industrialization also seems to be world-
CHEMICAL
wide. In Europe, reconstruction from the devastation of the war is combined with the policy of creating larger industrial capacity and thereby of raising the standard of living above prewar levels. In Latin America, the drive for industrialization is motivated b y the desire to raise the rather low standard of living and to make the countries less dependent on raw material exports a n d imports of finished products. This industrialization policy immediately results in larger d e m a n d for machinery and industrial equipment from the U. S. notwithstanding t h e fact that any increased production or increased dollar earning capacity will not be evident for many years to come. Thus the attempt to accomplish a lot in a short period of time puts a serious strain on t h e smooth functioning of the international financial mechanism. In the third place, many countries are clinging to the idea that a fixed and overvalued currency is desirable. In fact until the recent devaluation of t h e p o u n d sterling many of them have been unwilling to recognize that the arbitrary level of exchange rates w a s a deterrent to an orderlv adjustment of the international financial mechanism. Since the inflationary increases in purchasing power had not been compensated b y altered exchange rates, most foreign nations w e r e compelled to keep in check the inflated d e m a n d for foreign exchange b y imposing rigid controls over imports and exchange movements. I n other words, many of t h e impediments to a smooth flow of funds between countries were created b y the deliberate governmental policy of maintaining exchange rates which h a d long lost their economic reality. Only one major example need b e cited here. In July 1946 Sweden appreciated its currency by approximately 1 4 % , hoping thereby to avoid t h e postwar inflationary impact. Developments d i d not bear out this theory. I n fact, during t h e subsequent year a n d a half Sweden lost practically all its gold and foreign exchange holdings and h a d great difficulty in keeping u p exports of wood pulp and other products to t h e U. S. Although t h e appre• ciation of t h e currency seemed to have been a major "mistake," t h e Swedish government was unwilling to change its policy until 1949 when the krona was devalued following sterling devaluation; between 1946 and 1949 drastic import and exchange controls had t o be enacted in order to keep the effective d e m a n d for goods from t h e U. S. at a low level. In the fourth place, foreign countries desire the p u r c h a s e of American goods because of their outstanding characteristics. They are frequently superior in quality to products m a d e abroad. T h e y are sometimes cheaper a n d t h e delivery period is usually far shorter. W h e r e service is required, t h e performance of t h e American seller is frequently better t h a n that of suppliers in other countries. T h u s , foreign countries look t o t h e U. S. for many essential products, trying to take
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CuMrAtKCiAL c H E M i c A L PtVELOPMENT advantage of American technology a n d efficiency. They w o u l d like to buy more American goods b u t frequently are forced for exchange reasons t o b u y them in t h e British E m p i r e or in E u r o p e . Inconvertibility of currencies is frequently cited as another reason for t h e dollar shortage. This i s true only in so far as a few countries a r e concerned; for instance, Australia and Argentina in prewar years generally relied o n t h e convertibility of their sterling earnings into dollars for the purchase of American goods. Since sterling now is not convertible these a n d some other countries a r e forced to divert their purchases t o nondollar areas. Basically, t h e reasons for t h e unconvertibility of sterling are t h e same as those applicable generally to t h e world shortage of dollars. If those countries having traditionally a dollar surplus would now have such an excess a n d could sell i t to those countries which normally are short of dollars, t h e problem of convertibility w o u l d not exist. Since practically no countries have a surplus of dollars some countries are more affected by the world-wide 'dollar shortage t h a n others. T h e various factors cited generally explain w h y there is such a large d e m a n d for American goods, larger than t h e amount of dollars earned a n d available to foreign countries. In order to complete the analysis of t h e dollar problem one must also examine w h y t h e amount of dollars earned b y s o m e countries is not larger t h a n it is now. American imports of goods and services in 1949 amounted to about $10 billion; of this amount, merchandise imports accounted for approximately $7 billion. It is claimed frequently t h a t t h e U. S. should purchase larger quantities of goods abroad and should therefore substantially reduce its tariffs. It would g o beyond the scope of this p a p e r to discuss all the pros a n d cons of tariff reductions. It is, however, a fact that a large portion of American imports enter this country free of duty; this group includes many raw materials a n d practically all tropical foodstuffs. An increase in t h e importation of these products does not depend on changes in t h e American tariff b u t is subject, primarily, to swings in the American business cycle and in t h e consumptive capacity of t h e U. S. (increase in the standard of living). There a r e probably finished a n d semifinished products on which d u t y reduction may be granted; however., it is highly questionable whether the resulting increased imports w o u l d be large enough to bring about a fundamental change in the a m o u n t of dollars available to foreign countries. I n other w o r d s , no large expansion of imports n o w seems probable, although a long-term expansion is possible. O n t h e same side of t h e balance of international payments is t h e item " n e w capital investments." Again time does n o t permit investigation of all the factors which contribute to the low level of new foreign investments on t h e p a r t of American business. T h e r e are political difficulties, V O L U M E
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threats of nationalization and expropriation, restrictive social laws, arbitrary taxes, a n d odiers. Although many attempts are now being m a d e to remove these impediments a n d to give additional incentives to n e w foreign investments, w e cannot count on this source of dollars for an immediate easing of the international shorta g e of dollars. As a long-term project, however, it has considerable possibilities. Since imports and new foreign investments put at the disposal of foreign countries only about $11 billion a year, t h e present volume of exports of goods and services really d e p e n d s on the amount of government "gifts" (unilateral transfers) to foreign countries. It is estimated that all such aid used in 1949 amounted to about $ 6 billion. If this amount had been smaller our exports probably w o u l d have declined proportionately, and therefore t h e world dollar shortage ( d e m a n d for U. S. goods) would have b e e n more serious. However, our foreign assistance program should never b e considered as an export promotion program. T h e assistance given is for t h e reconstruction and rebuilding of industries in various parts of t h e world. This is its primary purrpose, resulting, t h o u g h temporarily, in additional purchases of American goods. As the objectives a r e being accomplished and t h e amount of dollars m a d e available is gradually decreased, our exports or the d e m a n d for our goods will probably decline. Our thinking should n o t b e influenced by the desire to maintain large exports by such grants. In view of the great number of factors involved in the present unstable international financial situation, no quick solution is possible. I n fact, it must b e recognized that since the financial situation is merely a p a r t of a m u c h larger international economic and political problem, there is no single financial action which can bring t o a n end this unsatisfactory state of affairs. However, that should not lead us to b e overly pessimistic. There a r e some financial steps that can be taken b y governments to encourage a more orderly international financial situation. The adjustment of exchange rates to more realistic levels is one possibility. It was pointed out previously t h a t many countries h a v e h a d the tendency to maintain fixed a n d overvalued exchange rates. This has resulted in an indirect subsidy of imports and has e n c o u r a g e d a n d increased the d e m a n d for products from the dollar area; at t h e same time these exchange rates discouraged the flow of capital investments. During 1949 a number of major currency adjustments took place. T h e most noteworthy was the depreciation of the p o u n d sterling from $4.03 to $2.80 per pound. This was followed by similar depreciations of almost all currencies tied to sterling. I t is h o p e d that this currency adjustment will make prices of sterling goods more competitive in world markets a n d therefore encourage t h e exports of
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British products to t h e U. S. and other countries. In Latin America certain exchange rate alterations are probably still needed. Argentina depreciated her currency in 1949 b u t further devaluation is probably inevitable. Brazil, Chile, Colombia, a n d some other countries w i l l also have to face further adjustments i n their currencies. T h e sooner this is accomplished, t h e better it will b e for creating more stable international financial conditions. It should b e noted, however, that even though needed currency adjustments are now being m a d e , continued inflationary policies in foreign countries may necessitate further exchange rate alterations. It is difficult for a c o u n t r y to maintain an overvalued currency w i t h o u t having to p u t into effect severe import a n d / o r exchange controls; the latter usually are a deterrent to a smoothly working international financial system. The task of b r i n g i n g about a d e q u a t e exchange rates w a s partly turned over t o t h e International Monetary F u n d which w a s agreed u p o n at t h e United Nations Monetary and Financial Conference, Bretton Woods, in July 1944. Some of t h e purposes of t h e fund w e r e stated t o b e as follows: ( 1 ) "to facilitate t h e expansion a n d balanced growth o f internationl trade, a n d to contribute t h e r e b y to t h e promotion a n d maintenance of h i g h levels of employment and real income a n d to t h e d e velopment of t h e productive resources of all members as primary objectives of economic policy;" a n d ( 2 ) "to promote exchange stability, to maintain orderly exchange arrangements among members, a n d to avoid competitive exchange depreciation." It would a p p e a r t h a t u p to this time t h e Monetary F u n d h a s been very slow in accomplishing t h e s e a n d other stated purposes; in fact it frequently appears that foreign nations take steps independently of the F u n d . T h e criticism is voiced that t h e F u n d has not t a k e n a sufficiently strong initiative in bringing about changes in exchange rates a n d other policies now creating disturbed international financial conditions. In defense of t h e F u n d it may p r o b a b l y be said t h a t the clause in t h e Articles of Agreement which states the F u n d "shall not object t o a proposed change (of exchange r a t e s ) because of the domestic social or political policies of t h e member proposing the change" is a rather serious d e t e r r e n t to positive action b y the Fund. In any case, t h e F u n d , for o n e reason or another, h a s so far not been successful in the objectives for which it w a s originally i n t e n d e d . The key to t h e solution of t h e international financial problems probably lies in the willingness of e a c h country to put its economic a n d financial affairs in order a n d to help in establishing relationships with other countries t h a t are conducive to a freer flow of t r a d e and finance. The views expressed herein are not necessarily those of the company with which the author is associated.
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