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Postwar Drain on Foreign Gold and Dollar Reserves

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Postwar Drain on Foreign Gold and Dollar Reserves April 1948 FEDERAL RESERVE BULLETIN VOLUME 34 April 1948 NUMBER 4 THE POSTWAR DRAIN ON FOREIGN GOLD AND DOLLAR RESERVES Foreign gold and dollar reserves were built liquid gold and dollar resources. Only a few up to an unprecedentedly high level during countries now hold gold and dollar reserves the war, when Lend-Lease operations were in an amount sufficient to provide them with taking care of a large proportion of foreign reasonable liquidity in their international requirements, especially in Europe, and when transactions. many countries in the Western Hemisphere The gold inflow into the United States and and elsewhere found it impossible to spend the liquidation of foreign dollar balances in their current dollar earnings because of sup- the United States have had significant ex- ply shortages. Since the end of 1945, how- pansionary effects upon the domestic mone- ever, these reserves have had to be liquidated tary and credit situation. on a large scale, mainly to pay for United States exports which could not be financed UNITED STATES EXPORTS AND SOURCES OF in other ways. Total foreign holdings of FINANCING central gold reserves and of banking funds Since the end of the war foreign countries in the United States, which increased from have had to rely upon the United States to 15 billion dollars to nearly 23 billion during an unprecedented degree as a source of sup- 1939-45, declined again during 1946 and 1947 ply for food, raw materials, and manufac- to around 18 billion. tured equipment and supplies. United States Although still larger in money terms than exports of goods and services amounted to before the war, in terms of purchasing power 15 billion dollars in 1946 and reached 20 bil- foreign holdings of gold and dollars at the lion in 1947. Relief and reconstruction in end of 1947 were less than half what they large areas of Europe and the Far East have had been in 1938. Furthermore, the large absorbed immense quantities of these exports. concentration of reserves among a few coun- In addition, countries which escaped war tries, from which the world was already damage and disruption, notably those in the suffering before the war, has been accentu- Western Hemisphere, have made heavy de- ated in some respects by war and postwar mands upon United States production be- developments. Despite the additional source cause of their high levels of domestic income, of funds which has been provided to foreign their large deferred demands for many prod- countries through the creation of the Inter- ucts, and the slow recovery of other sources national Monetary Fund, most of the world of supply. finds itself very inadequately equipped with Less than half of total exports could be APRIL 1948 371 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 1948 THE POSTWAR DRAIN ON FOREIGN GOLD AND DOLLAR RESERVES paid for currently by funds derived from made possible by the expanded physical ca- foreign sales of goods and services to the pacity of the United States to produce for United States. The balance, amounting to export, but it also reflected a substantial rise over 19 billion dollars during the two-year in export prices. Merchandise imports, on period, placed a heavy strain upon the vari- the other hand, were only slightly larger in ous sources of dollar financing available to 1947 than in 1946, and the entire growth was foreign countries. A summary table of the accounted for by increased import prices. international transactions of foreign coun- In relation to national income, imports into tries in 1946-47 affecting their gold and dol- the United States have been much smaller lar holdings is given at the end of this article than before the war. This lag in imports (p. 381). is primarily a reflection of production and United States exports, imports, and the supply difficulties abroad, particularly in export surplus in the eight quarters of 1946 Europe. Merchandise imports from Europe, and 1947 are shown in the accompanying which in the interwar years accounted for chart. Exports of goods and services were between 40 and 50 per cent of all imports 28 per cent larger in 1947 than in 1946. At of goods by the United States, amounted to the peak in the second quarter of 1947, they only 15 per cent of the total in 1947. The export surplus has been financed in UNITED STATES EXPORTS AND IMPORTS large part by grants and credits extended by OF GOODS AND SERVICES the United States Government, as may be seen in the chart on the following page. In fact, Government aid programs covered nearly one-third of total United States exports - TOTAL EXPORTS during the two years 1946-47. Of the net ex- ports not financed from this source, some part has been paid for by an outflow of pri- vate gifts and investments from the United States; by loans from the International Bank, which commenced active operations in 1947; and by the liquidation of miscellaneous for- eign-owned assets in the United States. Much the larger part, however, has necessitated drafts upon the gold and dollar reserves of foreign countries: i.e. their central gold re- serves, their holdings (both official and pri- vate) of banking funds in the United States, and—since early in 1947—their drawing 1946 1947 rights upon the International Monetary SOURCE.—Department of Commerce. Fund. The drafts upon these reserves may were moving at an annual rate of 21 billion be regarded, from the point of view of for- dollars. eign countries, as the final balancing item The marked increase in the dollar vol- in their transactions with the United States. ume of merchandise exports last year was In addition, foreign countries have had to 372 FEDERAL RESERVE BULLETIN Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 1948 THE POSTWAR DRAIN ON FOREIGN GOLD AND DOLLAR RESERVES make drafts upon their gold reserves in the as a potential resource for making inter- process of setting up the Fund and establish- national payments, and in any case reliable ing their drawing rights upon that institu- data regarding them are not available. tion. Foreign banking funds in the United States MEANS OF FINANCING UNITED STATES NET EXPORTS represent a regularly reported statistical series OF GOODS AND SERVICES covering all short-term claims, i.e. deposits, short-term commercial paper, Treasury bills, etc., held by foreign residents with banks in the United States. They comprise both offi- cial funds (those held by foreign central banks and governments, including as a spe- •*— NET EXPORTS cial item certain foreign government deposits with the United States Treasury) and funds held for private foreign account. While pri- DOLLARS DRAWN FROM INTER-" vate banking funds may not always be readily NATIONAL MONETARY FUND available to a foreign country for the settle- ment of international payments, most coun- SALES OF GOLD TO UNITED STATES AND DRAFTS ON tries are at present enforcing exchange con- BANKING FUNDS IN UNITED STATES (NET) trols which in effect accomplish this purpose. In any case, it is necessary to combine official and private funds for purposes of the present GOVERNMENT AID (NET) survey since these categories are not shown separately for individual countries in the 1946 1947 regularly published data. * The broken horizontal line in the third quarter of 1947 in- In addition to banking funds in the dicates net exports for the quarter. In this quarter, the esti- mated net drafts by foreign countries upon various sources of United States, foreigners hold relatively small dollar financing considerably exceeded estimated United States net exports. amounts of other short-term claims upon t Includes private United States donations and investments abroad, disbursements on International Bank loans, liquidation of other foreign assets in the United States, and errors and this country, e.g. advances to Government omissions. corporations and private enterprises, bal- SOURCE.—Based largely upon Department of Commerce data. ances with brokers and security dealers, and NATURE OF FOREIGN GOLD AND DOLLAR holdings of actual United States currency. RESERVES Private citizens abroad also hold large long- The specific categories of resources in- term investments in this country, some of cluded in "foreign gold and dollar reserves" which could be mobilized by foreign coun- form a convenient grouping for purposes of tries in case of need to settle balances with analysis even though they cannot be sharply the United States. Ordinarily, however, for- distinguished from other types of gold and eign countries are most reluctant to requi- dollar assets. sition and liquidate such assets, especially Central gold reserves, i.e. gold holdings of since they are the source of current dollar foreign monetary authorities, may be supple- income to the individual owners and to the mented in some cases by private gold hoards. country concerned. Under present conditions, however, foreign The advent of the International Monetary countries can scarcely rely upon such hoards Fund as an operating institution early in APRIL 1948 373 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 1948 THE POSTWAR DRAIN ON FOREIGN GOLD AND DOLLAR RESERVES 1947 established a new category of inter- case of need—subscribed by member coun- national reserves, the conditional drawing tries. Total dollar and gold subscriptions rights of member countries upon the re- so far amount to about 3.4 billion dollars, sources of the Fund. One of the basic pur- including 2,750 million in dollars and gold poses of the Fund as expressed in its Articles from the United States and about 670 million of Agreement is "to give confidence to mem- in gold from other member countries.
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