TABLE 16.

Financingl
(millions . -

FXANCINGTI{E U.s.DEFICIT(SURPLUS}

in U,S.ollicial recodeassets,nsl
A. Transactions
- t . Gold
t z IMF gold dopoditli.bility
a 3 U.S.dr.wings trom the IMF

l' ft |.cheduled rcpayrnent of U.S. Govemhent crcdits

r G, Ece in U.S. liquid lisbilitiesto tor€ign official ggencies(O.B.E.TEble7, line 3l

o l. 8y commsrcialbanks(O.8.E.Tabl€ 7, lines4,5,6)
6l Z 8y U.S.TrBaiurv {O,B.E.Table 7,lino! 7,10,11}

6l o' ttin nominally nonliquid lisbilitiesto {oreignolfici.l rgencies

6l L Lng.term liabilitiesreportedby bank (andother priv.ie U.S. relidents)
6a Z (hh€r nonmarkalable,nonco\rertiblo,m€dium-termsgcdrities

G.& and IMF Drawings

In 1967 the U.S. Government sold $1.2 billion of gold to foreign
c€dtal banks, while the IMF deposited some $22 nillion of its gold in the
Udbd States. The latter gold of course remains the property of the IMF
m€mber nations and is therefore not pafi of. the U.S. gold stock, altlough
it is io fact reported as representingpart of this gold stock in the Federal
Reserve'sweekly statistics.At present more than $500 million of IMF gold
sutscriptions are deposited with the U.S. Treasury, a factor which has
mitigat€d reported net U.S. gold sales over the years. These deposits are
netted out of autonomousU.S. gold salesin the above tables. In 1968 the
United States again sold $1.2 billion of gold while liquidating a modest
$100 million of its indebtednessto the IMF.

NonschcduledPrepayment ol U.S, Gwernrnent Credits

Nonscheduledrepajment of U.S. Governrrent credits dwindled to

virtually nil in 1967, although it increasedagain to $300 million in 1968.
Most of this advaoce repayment came from surplus nations desiring to
return some portion of thet dollars to the United States.

74
roo.B.E.
T.bl. 1 ugs 1961 !.9€e 1963 1364 r965 r966 re67 19q8
3,205 2,43 2,277 2,413 1814 2,258 829 4,559 803

2,ffi 857 890 461 650 2.19 1,428 1,192 t,OA6

|,703
gx)
a: orl 125 1,665 571 1,170 1,173
- 34 177 22 (3)
: 5i25 435 680 - (84)

695 680 326 123 221 429 6 269

1,144 691 456 1,673 1,076 l52l 11,7721 1,998) {3,097)

604 461 t€2l 733 781 214 12291 190 t5201
*4 2N 748 940 E4 (266' (1.543) 1,908 12,5771

(47t 126 __(49I 1,363 2,9t5

I 149 (381 793 @4 535
- 251 (561 l23l l7l (49) 46€ 2,010

In easein U,S, Liabilities to Foreign Offitial Agencics

Foreign governmentsand official institutions lent some $3.3 billion
to the United Statesin 1967 by holding dollar deposits and money market
instruments rather than cashiag these funds in for go1d.Of this sum, $2.0
billion was overtly liquid in naturc (i,e., of t maturity of less than one
year), most of it investedin U.S. Treasury bi1ls.fhs lsmaining $1.3 billion
comprised nominally nonnarketable, nonconvedible, medium-term U.S,
Treasury securities ($500 million), plus $800 million in nominally long-
term claims on U.S. banks. These U.S. Treasury securities, while non-
marketable and nonconvediblq in fact, require ftom only two to nine
days to become completely marketable, liquid securities, and thus con-
vertible to gold. A tbree-day waiting period to become converted into
a convertible security is required, plus another three-day period to be
converted into a marketable security, and finally another tbrce days to be
marketed or exchangedfor a more expresslyliquid security or gold.
In 1968 foreign governmentsdrere dow:r their liquid U.S. deposits
by some $3.1 billion to help tide over their international payments prob-
lems. Surplus nations (particularly Canada) were largely responsible for
the $2,5 billion ia buildup of nominally nonliquid funds owed by the U.S,
Govemment to foreisn central banks.

75
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78
 XI. Conclusionsand Proposalsfor Change
It has been the primary purposeof this monographto investigate
the accountingconceptsunderlying U.S. balance-of-payments statistics,
not the quality of thesestatistics.Nonetheless,it has been shown in the
foregoingchaptersthat error and confusionhave crept into the data and
their presentation,most often in a way which tends to lower reported
balance-of-paymentsoutflows or increasethe inflows. With certain changes
in procedureand reportingformat, most of theseerrors and confusioncan
be alleviated.The changesrequired fall into three cateSories:
1. proposalsfor supplementaryaccountingformats to segregate
non-paymenttransactions(wash transactionsand other directly ofisetting
payments) from the actual financial payments-flowsassociatedwith U.S.
international transactions;
2. proposalsto weedout erroneousreportingprocedures,particu-
larly the overstatementof U.S. commercialexports;and
3. proposalsto clarify the definition of categoriesof accountsin
caseswhere the present accountingformat tends to mislead all but tbe
most alvareobselveras to the U.S. balance-of-payments position, particu-
larly in the area of "transactionin ofrcial reserveassets."

AccountingFormats
A. Supplementary
Supplementarytables analogousto the OBE'S "gold budget" for
U.S. Governmentoperationsshould be publishedon a quarterly basis, at
least for the sectorsof foreign trade, direct investmentand international
transportation.These tables should net out the wash transactionsamong
U.S. internationaltrade and direct investmentflows, leaving as a residual
figure the value of this trade and investment that does involve direct finan-
cial settlement.
l. Foreign Trade. For the foreign trade sectorthe supplementary
table would provide a conversionof U.S. trade statisticsfrom a "customs
clearance"basis (that is, the "transactions"basis as currently published)
to a "bank clearancebasis," netting out aid-financedexports,private gifts
and donations,transfers of goods from U.S. parent companiesto their
overseasafrliates "on account," and any other classesof exports whose
financingis settledexclusivelyamongU.S. residentsin the given period.
A supplementarypresentationof this kind is suppliedin Table 18
(basedon Table 5, p. 34 above), and indicatesthat the foreign trade sector
has been in deficit since 1965 for those transactionsthat involve actual
international payments (i.e., after netting out the wash transactionsenumer-
ated above, plus the pseudo-exportsat present erroneously included in the
statistics).For 1968 this financial deficit for foreign trade amountedto
some $5.0 billion. Related payments-flows(mainly transport and bank
financing) slightly increasedthis deficit to $5.1 billion.
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81
 2. Direa Inyestngnt. A similar financial re-presentation of U.S.
direct investment abroad (based on Table 7, p. 52) indicates that during
1960-1968,lessthan half of new U.S. foreign direct investmentas presentty
defined by the Departnent of Commerce threw dollars onto world foreipn
exchangemaxkets(see Table 19). In other words, most U.S. investment
abroad during this period representedpurchasesof goods and services in
the United States by parent companies transferred abroad in the form of
capital equipment, inventories, and various forms of contractins and other
services,as well as by simple "swaps" of common stocksaud 6onds.This
tendencyto spendthe bulk of direct investmentproceedsin the U.S. seems
to have characterizedthe entire postwar period.l
It would of course be desirable to integrate in a distinct sector-
account the many international transactions associated with U.S. direct
investmentabroad.This accountwould include estimatesfor those wases
earnedby U.S. employeesabroadwhich are remitted to the United Staies
(not prcsentlycoveredin the U.S. paymentsstatisticsand estimatedhere
at about $25 million), for servicetransactionsbetweenforeisn affiliates
and U.S. residents(both parent companiesand other). and iriports from
U.S. residents(both "capitalized" and those paid for directly). Further-
more, interest receipts, dividends, and earnings from foreign affiliates
might also be shownseparately,as they were until the 1950,s.
3, International Transportation. Finally, the international trans-
port accounts should be re-presented to explicate the many ofisetting
payments-flows(such as port expenditures,charter-hirepayments,freight-
car rentals, etc.) associatedwith U.S. foreign trade, travel, and direct
investment operations and third-country trade. Furthermore, figures cover-
ing international transport should provide a greater breakdown of vessel
registry as between (1) U.S.-flagships, (2) U.S.-ownedships registered
under foreign flags of convenience (currently treated as "foreign resi-
dents"), (3) U.S.-charteredforeign-flagships (currently treated as ,,U.S.
residents"),and (4) all other foreign-flagships.Only those shipsbelong-
ing to category 4 should be treated as bona fide "foreign residents,' in
the U.S. intemationaltransportaccounts.
The new format for U.S. international transDort statistics detailed
in Table 6 (p. 46 above) indicatesthat rhe net balance-of-payments effect
of transportation associatedwith U.S. foreign trade and travel are much
smaller than would be indicated by a cursory review of the gross-flow
statistics as now published. Port expenditures,charter hire pa)'ments, etc.,
offset the major portion of nominal receipts. On balance in 1968, for
instance, the United States sufiered a net deficit on merchandisetransport
of only $50 million, with a further net $291 million deficit on passenger
transport. Against these deficit entries was a net payments inflow of 939
million earned by U.S.-flag ships on third-country trade. These sums are
comparativelynegligiblewhen placed againstthe simple gross$2.9 billion
"credit" on intemational transport and the $3.2 billion ,.debit."
l See The Balan.e ol International Patments ol the Udte.t States,1916J948,p. t4O.

82
 These relationships(discussedin chapterV) ildicate that "c'i'f'"
as the
valuations of irnports are essentially meaninglessil defined simply
foreigners on tles€
value of importi plus gross transport payments to
to balance-
imports.In order for a c.i.f. measureto have distinctrelevance
trans-
of+ayments analysis, the inevitable offsetting charges against gross
'port 'payments
-4. must be nettedout.
Other Sectors'Washtransactionsalso occur on other U'S' inter-
by
national service transactions. Some of these, tor instance, are financed
U'S'
U.S. Government"aid," so that actual paymentsdo not passthrough
foreign exchange markets.
In the banting sector a substantial portion of new U'S' -bank lend-
thrown
ing abroad may be th-oughtof as "financed" by the interest receips
past lending. In this area (as in other investment sectors) an integra-
o{i'by "and
tion oi "capital" "current" account payments-flowsis highly useful to
the balance-of-PaYments analyst.

B. CorreclingEftoneousAccounlingProcedures
!. OverstatementoJ U S Exports' US export statistics erro-
involve
neously include a class of goods whose transfer abroad does not
puy^int ot any time from residents of one nation to those of another'
ani which are for this reasonnot really internationaltransactionsat all'
and
Primary among this classof goodsare the transfersof aircraft parts
airlines to their overseas air terminals
componentsbi U'S. int"rnati'onal
discussed
io. i'*"oto.y ti"." and installation on their aircraft as needed'As
into the host country under bond
in chapterIV, thesetransfersare brought
and aie therefore excluded from their import statistics' Unfortunately'
credit To
however,their value is inclutledin the U'S export statisticsas a
justify this practice, these pseudo-exports would have to be debited else-
aircraft - perhaps as "over-
wherein the accountsonce installedon U.S.
when
seasport expenditures,"or even more clumsily, as pseudo-imports
parts return to the United States'
the airplaoes flying these newly installed
more
This cLss ot gooas is a prime example of the need t9-p-t9:id: some
direct financiai meu.rr." of th" pu5-ents associated with U'S' foreign trade'
Debate has already tleveloped over the treatment of these pseudo-
exports. The problem hai in fact becorre so complex that it has spilled
parts
ov^erto the foieign direct investment accounts' Becausethese aircraft
as bona fide exports, the anrl1d'alincrease in
and components-arerecorded
U.S. uittio"t' overseasinventodes of these parts was, until 1968, charged
as a "foreign direct investment outflow" against,the airlines' .investment
of
euitleline fi;rits. The Air Transport Association brought the absurdity
ihis treatment to the attention of the Deparfinents of Commerce and
Treasury and succeededin having such "investment outflows" exempted
has
ftom the guideline progam. However, the Department of Commerce
pseudo-investmenls from the
not yet rJmoveA these-pseudo-exports and
-.S.'balao""-olpayments statistics. It is important that they be removed'
(which will
however, because the present changeover of airplane models
83
 extend through 1970) will probably contribute over $0.5 billion to U.S.
exports, possibly making the diflerence between surplus and deficit for the
U.S. balanceof trade under presentaccouDtingconcepts.
2. Estimates ol "Tied Ai.d." As discussedin chapter III, the
amount of U.S. 'Toreign aid,' which is reported as being ,,iied,, to U.S.
purchasesof goods and servicesseemsto be overestimatJdin the O.B.E.
"Gold Budget" table, with the sourceof error attributablemainly to inter-
national transport and miscellaneous services.
C. Clarilying Category Defi.nitions
7. Trawactions in Official ReserveAssets-Existing statisticson
"transactionsin U.S. official reserve assets.'are quite co-nfusing.
They
representan amalgamof two distinct analytic categories:(1) transactions
to fnance the U.S. balance-of?aymentsdeficit, ani (2) dollar borrowings
by other countries to finance their defictts-
Transactionsto financa(i.e., ofiset) the U.S. deficitare by definition
pa-y-ments-credits; therefore,any debits (such as U.S. loans to foreigners)
which come to be amalgamatedinto this category tend to reduce the
t-"pltj"j category balance.Strictly speaking,transactionsto finance
i"1
the U.S. deficit generallycomprisesuch credit ia;ms as U.S. salesot
sold
to foreign central banks, U.S. borrowing from foreign central banks, and
advancerepaymentson foreign governmentdebts io the United States.
However.dollar loansto foreigncentralbanks,both by the FederalReserve_
Treasuryswap systemand by the IhternationalMonetary Fund, represent
dollar outflows,and they reducethe sector'snet credit baiance.
This treatment of the debit items in question as transactionsin
U.S. monetary assets(rather than those of foreign countries) is thus in
the nature of window dressing,and should be ,"g."gut d into a separate
category in order to distill a measure of the actual foreign exchange
pressuresderiving from the ,,normal',course of U.S. interna-tionaltrani_
actions.The inclusionof U.S. swaplendingas ,,transactions in U.S. official
reserveassets,"for instance,has almost entirely offset U.S. gold lossesin
recentyears.Such dollar-outflowsdo nor belongin any resiJualindicator
of the U.S. paymentsposition.Their inclusion iimply iends to reduce the
sizeof the reportedU.S. paymentsdeficit by the amount of foreign dollar
borrowingsurrderswap agreements(mainly to Britain) and foreign
dollar
borrowings from the IMF. This produces rhe curious result that
the
reportedU.S. deficit appearsto be reducedby Britain's deficit.
As has been discussedin the previous chapter, these holdings of
foreign currencydo nol consistof bona fide rp"ndubl" U.S. international
reserves,and havenot accruedto the U.S. monetaryauthoritiesas a result
of U.S. Governmentand private sectortransactions,but are an exocenous
responseby foreign nations to their own paymentsdeficits. As a result,
while the O.B.E.'S current presentationshowed the category of ..trans_
actions in U.S. official reserveassets.'to have resultedin- a g0.9 billion
surplus for 1968, that portion of these transactionsserving to finance

8,1
the U.S. balance-of-payments indicateda $1'1 billion defitit. The balanca'
a $2.0 billion outflow of funds from the United States, representqdbor-
rowings of U.S. dollars by other countries; $1.2 billion under swap
asreements with the United States, and $0.8 billion in foreign dollar
tliawingsfrom the IMF. (SeeTable L6, p 74.)
2. Mis-allocation ol Military Credits into tke "Foreign Aid"
Accounts.U.S. Governmentloans to loreign governmentsfor their arms
purchases arranged through the Department of Defense are at present
chargedagainstthe "foreign aid" account(line A.29 : B'4 in the O.B.E,'s
Tabl; 5). A preferredprocedurewould be to net such purchasesagailst
military exports, which are presently $edited in lull to lhe "military"
account despite the tact that these exports do not result in 3 correspondfutg
balance-of-paymentsinflow. Indeed, although the nominal flow of these
expo s has increasedin recent years, on a net payments-flowbasis the
funds receivedfor theseexportshave held stable.
Other areasof "foreign aid" are also military in naturg, especially
in U.S. Governmenttransactionswith the southeastAsian countries.
3. Definition ol "Liquid" .rs. "Illiquid' Capital Movements.Ote
cannot simply identify "liquid" (i.e., marketable) securitieswith those
bearing original maturitiesof lessthan one year, and "illiquid" securities
with dose bearing original maturities of over one year. Common stocks
and bonds,for instance,are currentlytreatedas transactionsin "long-term"
assets,although they are generally readily marketable.Similarly' "non-
marketable,nonconvertible,U.S. Governmentliabilities" (O,B.E. Table 1,
lines 56 and 57) are readily convertibleinto gold or egually liquid assot$
under the "special condition" of a few days' notice beilg given to the
U.S. Treasury.

Conclusion
Balance-of-paymentsaccounting concepts have generally been the
product of historical circumstances.Once adopted,however, they come
to serve the function of thgory itself, shaping the views of the observer to
conform to the existingcategories.Thus, once a theory becomesexpressed
through a statistigal format, it works via this format to influence the con'
ception of "what is lrappening." What is found in interwax and postwar
balance-of-paymentsaccounts is therefore not merely a difterent statistical
quantification of intemational paytnents (in the interwar statistics) ald
trqnsactions(iq the postwar statistics), but the outline! oI two quite
difterent views of international economic relations.
This study has argued that the transactionsformat has becomg out-
dated as the sole view of U.S. international economic relations. The set
of accounts tlevelopedhere - which representsan integration of the post-
and interwar approaches- leads to a difterent view of U'S. international
relationships. The existing "official" accounting format should thus be
viewed as a special case- the product of unique historical circumstances
- which requires conversion to the "payments-flow" corcepts in order to

85
 becone applicable to many of today's balance-of-paymentsproblens and
analyses.In adtlition, certain existing accounting procedures and category
definitions could well be improved with a minimrim of effort (althoueh with
some degree of embanassment as the trade batance will be shoin less
favorable). lbe result would be balance-ot-paymentsdaIa,wi0r an enhanced
usefulnessfor economic analysts and policy-makers.

*l
*r

86
 Appendix A: Balance-of-Pa)mentsAccounting and
-Balance-of
-PaymentsAdjustment
-A HistoricalReview
This appetrdix relates the evolution of balance-of-paymetrJs accounting theory
-,i.1it'.oiv
a out oi oi internationat trade and investuent lt will also explain some
policy implications of the accounts develop€d in the text'

The lnteru)ar Period

glverded by
Prior to World War II, U.S' balance-of-paymentsstatisticswere
tl" 'no-"iut-oE""i' upproach to balance-of-payments theorf, most p-articularly by the
;;:Jil"d "il* of Proniotions anal Detractions." formulated iD the-1920's' This rheory
of iDtemational equilibrium -*1;iate stated that iDteroational payments_llows !r afly grven
;"6;-i.-;dJ t compersating pavments elsewbere in the .acco,nts' The
for
rlJ,iit .iir.-"r.., i"a piiocipat i.om euioie on its war debt to the Udted states'
'absorb" Europe's ability to purchaseU S exports'
insta;ce, was held ro
prospects
This theory was developedprimarjly iD an atlempt to evaluate the.
into dencit
of whether the U.S. trade balance would remair in surplus or would move
; ;;;;;; tdciot"iog t"""ipt of Inter-Allied debt service' Department of com-
merce ecotromists believed that the surplus on trade account that th;Udted Stat6 had
ttr-
enioved sirce 1873 had been "6Da[ced'' mainly by US payments to EuropeaD
* ttt"ii capital holdings in the Uniled Stales. BalaDcing lbe receipl o[ Dew
investment funds from EuroPe against the reciprocal ffow of remitted eamings on
""ii.i*
i""".t-"ot. in the Uited States, they hypothesized that this measure "has
"*lri"*
iJT"ti i.n""ta" than any other itr determining the nature and a$outrt of our trade
available
balance." 1 Although this view rr". erroo.ous in light of the statistics now
I-"iiri tni p"iioi ooa"t discussion,2 the theorv teoded to domin-at€ thinkidg for a
yiars. Massive arms and raw mate als shipmetrts and loans -to Europe
"u-iii.f
a".iri-W"tfii W". t had enabled the United States to liquidate its net indebtedness to
So-iuot' The oarion had entered the \tar a net debtor of some $3'7 billiotr; it
o"t by this same amounl. and by 1924had-incr€asedils.Det invest-
"-"iiJl
m"nt-oo"itlon to some $?.0 billion. There was general belief that it must either move
"t"aitor
iti" L'"a" J"t"it or inctease its flow of investment abroad in order to provide Europe
;; il;"];;il;"iis growing indebtedness to the United states'3 (onlv in unofrcial
was it re.commended ahat the united States solve the problem simply by
yer
"ii"ter
cuo""iiog tn" Inter-Allied debts.) "If the European GovernmeDts-that ba.ve not
ihe 1923
i*i;ar._. p"v ,t"tt debts to the United states bouernmest should do so,"
t"..Jro"irflt"a, "there can be little doubt that imports of merchandise-would regu-
a
ffi;;;;J
-'- ---il"-ds. or exceeal exports, as is usually the case with creditor countti€s "
tu-tuo"" or tmde itr laca declided from $4'0 billion id 1919 to $0 7
uiuion in-isif;a $0.4 billion iu i923. Thereafter, however, it b€gatr to increase' and
''that our Natiot
U" fS26 ttt" DepartmeEt of Commerce challenged the earlier vieeir
#rir.o"oii" enlter a long era characterized by a constatrtly unfavomble tmde balance'
. .-,'*l* tt" vi"ta of 6ur foreign investgreots actually do€s exceed the. volume of
;;"';;;;;;;; auro.a." o wlile it ackoowledsed that "so-called creditor nations

87
 have usually had unfavorable balancesof trade,,'the outstanding case being England,
it pointed out that the United States traditionally ran a deficii in matry ..invisible,,
services,_ compared to England,s net inflow on seivice accouot. U.S. resiients tended
to
^tralel.€nd spend more abroad, resulting in a travel and iourist deficit of some
r)ur m,,rron:lts rmmLgrantpopuiationremitted sizablesnms to their families
in the
Old Country, averaging some $250 million annually; its ^.rchant muriie-*"s
not n.
remunerative as that of England, showing a modesi net deficit from iSZS
oo*n.d;
and U.S. enterprisesstill remitted a subsiantial flow of dividend anctinteresr payments
to foreign_investom. The reporter concluded that,,When our investmentsairoaa yield
us more than we aelend- and the time may or may not be soon. . the
ellect may
again be absorbedentirely by other invisibl€s or it may not. It is theretoie
rmpossible
to predict with assurancethat the United Stateswill ever have an unfavorable
balance
of trade."
Nonerheless. omcial speculationas to broad movementsin the U.S. balance
.
or pajments contrnuedto fotlow the.,law,,of promotions and detractions,
which
represented an attempt at geneml equilibrium analysis in that it
held that every
inrernalionalpaymenr and receipt ex;rted a "promotive" oiIa"i.u"iii",'intiu.n""
respecrveryon the natron'sinternarionaltrade, so that "no single
item is without
some beadng upon all the othels." payments to foreign residenis
for-"ny purpo."
enabled them to spend more on U.S. goods, servicesl and .upiiui-u,Jr,
''promoting" tfr.r"tv
theseexport items.
Underlying this theory was an unrealistic behavioral assumption
pensaung movements among the ,,basic', long{erm trends would that com_
work to maintain
-eold rese es at a fairly modest rate of growth. What was added io ini"rnutronrt
receipts on the "basic" account of goods, iervices, ond lont_t";;;;piui
_ou.rn.rr*
mu\r be balencedby internatjooalpaymentsamong these transactions.(Were
r e a o r n inr o t t h e c d . e .t h e r h e o r y -\ ^ o u l dh a v e6 q s n , m e r ea c c o u n L i n g this
t r u i . m ,i n t h e
sense.thatthe_balanceof paymentsnrrt balance.) wfr",
,oi"."-ujitv_p.r"",u"a
,1 ngt. p^r."nt.. o. receipts among these "u. basic catee'oriesmieht
l:?.) :li l:91:l::1
rarc tne rorm or substa_ntLal changesin gold reserves, and that thesemight indeerlset
rn morron a centfltugataccelerationinto disequilibriumderiving
largely from shor!
term banking movements, rather than a
_centripetal tendency tow:ard equilibrium
1f :_lr^j" By te32it hadbecome
apparent
thatU.s.1etreceipt
oI Lncome-!,j1"-: !lii"l:li:i.
trom abroacl would not in fact be offset by service transactions.investment
oulflows. or a movement into trade deficit: after devaluation of ifr. Ooii",
in fq:+,
European capital and gold moved at an acceleratingpace into the Unit"JStutes.
The theory was, nonetheless,highly important in its impact upon
paymenls ctccounting.To measure the ,,promotive', balance_of_
and.,detra;tive,,eflects of U.S.
international transactions,the balance-of1ayme"t. u"*unt, foif.rv"a
,-',ii]",rv finnn,
nor invorrins currenrinrernarionalpalmenrcor ..i",p,, *"..
::"], f:lT:l:lii:.:]lon\
e\cruoeorrom the statLsttcs. on the groundthat they did not set in motion_compensating
payments-flowsin the international accounts_. .An internatlonat
balance J ayments,..
the 1926 Department of Commerce report defined, ,,is a statement oi-ihe f
cimpitea or
estrmatedamountsof th€ invisibleand.visibfeexports and imports
oi .o
arranged as to show their comparative size, the;r i;ffuence i.."li. " "oun,.y,uno
upon the international gold m;vement, uni tt" ,a.t.^"iiu.;'-a "pon :"pr-oi.,oiuii
"rJirung.
..tu,ion,
ships betweenthem."
Tl: shortcoming.of this appaoachto international trade and
-" coufse lts investment was
or atmost exclusiveemphasison balance_of_payments
. flows, which were
related by Department of commerie econombts onry to one another and not to their
eqeg! upol their respective countries, ddmerrlc *.""rni"r. ii*". i^.i"i,'u, u ."rur,
of this limitation in the scope of their in"ternarional..ono-i. tt.ory
t'n-"i tiey
'."prrution.
tenoed
to underestimatethoroughly the efiect of Europe,s war a.Uts anA
C'e.-"n
on their domestic economic life: the magnitud; of U.S. receipts
of its- aifi".: iu. c.ot,
war dismissedas.beingcompararivetysma| retariverc *"',otoi rii,,"
ii u.s. in,"r.
narlona! nnaucratlrantactionr. rather than to Lhe value of Europe.s
internatlonal
tmnsactions,or, even moae important, to the imbalance i" Cu..pauripuy_"nt*
\'fri.f,
rt caused,and to the effect of this imbalance on Europe.s Aomesiic
m6nltary policles.
In retrospect, the Department of Commerce's trr"J*iJ ^."rvri-i' o-.linuruuon.
paymentsmust be deemed self_seryingi

88
 Pe$ons utrfamiliar rr'.,ith the magnitude of itrternational transactions
fitrd it difficult to put the 'lvar-debt paymetrts into proper penpective. Many
have feared that these payments would have to be rcceived itr imported
merchandisein quantities that would swamp domestic productioo. Last year's
war-debt rcceipts were about $210,000,000; while our receipts from for-
eigners totaled over $10,000,000,000.Graphically reprcsented, if our total
cash receipts from abroad covered the 52 squarc inches of this page, the
space covered by the war debts would be considerably less than that of two
ordinary American postagestamps.6
The following is an excerpt from the 1928survey:
There has been much loose reasoningas to the influence of the war-
debt receipt upon our merchandisetrade. It is a sedous error to say that the
debtor natiors can pay us only by shipping us merchandise.Our war-debt
rcceipts are an invisible export. As such, they tend (1) to detract from all
our other expo s-including not only merchandise exports but invisibles
and (2) to promote every import, whether visible or invisible. The numerous
invisibles will absorb a large part of the influence of the debt receipts, and
reduction in oul merchandise expolts may absorb even more. No great in-
crease in merchandise imports is thus to be expected as the result of debt
receipts, and a part of such increase would be in noncompetitive goods on
the free list. The reduction itr our merchandise exports through war-debt
receipts will injure us precisely as a labor-saving device would injure us;
imports, visible and invisible, will come to us without future effort; that is,
without our being compelled to produce again a corresponding value of
visible and invisible exports to exchangefor them. A nation is not impover-
ished by receiving wealth.?
The Postvar Peiod
While the interwar pe od's approach to balance-of-paymentsaccounting
tended to treglect the relationship between intemational financial flows and domestic
economic activity (above all, the efiect of balaDce-of-paymentsdeficits otr the
domestic money supply), the postwar Keynesian period saw the reve$e: almost
exclusive emphasiswas placed on the role of "real" intetnational transactionsrelative
to "real" domestic economic activity and productive capacity, at the expenseof tacing
the balar,c€-of-paltne/rtr aspects of these transactions.
The historical factors necessitatinggreater emphasis on the volume of inter-
national tmnsactions,whether or not thesewere accompaniedby direct financial setde-
ment, have been discussedin chapter IL During the war the country faced the problem
of allocating its income and product between government and pdvate sectors,between
wartime production and civilian consumption. In order to contain domestic price
prcssures,it was necessaryto measure that portion of national product transfered
abroad, which had been prcduced at a cost involviDg domestic wage and other produc-
tion payments but which was not available to be consumed at home to absorb the
domestic demand engenderedby these production costs. The new accountilg concepts
also followed from the increasing influence of Keynesian income aoalysis, which moved
the analysis of foreign trade into a relationship with ovemll national income and
product, relating it to changesin domestic production and consumptiotrrather than to
balance-of-paymetrtsconstraints. Irnpo projectio[, for instance, was computed as a
prcportion of GNP, rather than as a function of export-proceedsor other "promotive"
or "detnctive" factoN.
The grossbalance of trade in "real" terms was by far the major aspectof U.S.
trade discussedby Departmetrt of Commerce economistsuntil the 1960's,Only gradu-
ally did the financing of these exports become matters of ofrcial policy, such as the

o 1926report, p. 52.

89
 role played by "foreign aid," commercial bank financing, and forcign investment in
increasing export markets. ID relating these credit-flows to the volume of U.S. foreign
tmde, the Department of Commerce implicitly began to return to the "promotions and
detractions" approach of the interwar period, reintegrating "capital account" and
"current account" items. Here too, therefore, it found that the "tra$actions" accounting
format did not readily lend itself to this form of financial analysis, or to the policy
requirements of the international financial dislocations that were developing
The "profitability" of U.S. direct investment abroad was measured as the
sum of earnings plus appropriate "service" fees,8 relative to the total "transactions"
cost of this direct investment abroad (that is, its costs in terms of foreign exchange
plus domestic U.S. dollar expenditureson equipment and servicestransferred in kind
to the foreign afrliate). Until about 1964 corporate profitability on foreign direct
investmentsremained the major factor officially analyzed concerning U.S. international
investment flows. Only after this time were "payback" periods to become essential
consideralionsfor U.S. policy-makers - somelhing for which the exisling .'trans-
acrionq accountingformal providedlirtle guidance.
Policy Implications ol the Net PaJments-Flow Analjsis lor 1960-1968
The net payments-flow analysis constructed here represents a synthesis of
interwar and postwar accounting methods. From the Department of Commerce's
"gross flow" or "transactions" accounting format, it has nitted out the wash trans-
actions to derive a measure of the actual international financial Davments-flowsasso-
ciaredwilh theselransactions.
Two quite different pictures of U.S. economic telations are thus provided.
With the existing Department of Commerce "transactions" statistics. the volume of
U.S. internatioDal trade, investment, and servicesmay be related to the overall output
and consumption of U.S. goods and se ices, to domestic productive capacity, em"
ployment, and effective demand. With the payments-flow tables, the net balance-of-
payments effects of these sectors are indicated and the sources of external financial
imbalance illuminated. In addition, by providing a more rational measureof ,.financing
the U.S. deficit," the aggregate size of this disequilibrium may be more accurately
portrayed than in the Department of Commerce's residual item confusingly termed
"lransactionsin U.S. official reserveassets.,'
This study shows the U.S. balance of payments to be characterized bv a
heavy and chronic net deficit on government operations (93.4 billion in 196g). which
has increasedsubstantially since the war in SoutheastAsia was escalatedin mid-1965.
The paivate sector, while showing a growing payments surplus in the aggrcgate, shows
strllctural weakening on its "basic" or long-term transactions (i.?., on transactions
excluding "indirect investmenf' flows - purchases and sales of stocks, bonds, and
other debt instruments). As shown in Table 20 below, these.,basic" transacuons
moved into deficit in 1967. On indirect investment account, however, the pflvare
secto. has moved frorn deficit status during 1960-1965to strong surplus durint 1966-
!968, mainly from the somewhat tenuous source of essentially short-term capital
inflows from abroad. These inflows have taken the form mainly oi Eurodollar borrow-
ings by U.S. banks from their foreign branches (g2.7 billion in 1968), and an inflow
of foreign funds into the U.S. common stocks and other secudties ($4.2 billion in
1 9 6 8) .
What is clear from Table 20 is that while the U.S. Government sector has
been in deficit throughout 1960-1968, the private sector as an aggregate has been
in surplus, although the quality of this surplus is deterioralins.e Durins 1964-1968the
"basic" balancedeterioratedby nearly $1.2 bjllion annually-this nar-urallyposesthe
question of what "adjustment process" (if any) the nation should take io risht its
growing deficit. Should it act to reduce the net outflow on government account-to the
constraints of the surplus generatedby the private sector? Should it introaluceforeisn
3 "Sen i.€ ciresory receiprs are $jdely received by U.S. parent companies fiom their foreisn affliaies.
ssentra y a torm of income that_the corporate afrliate chooses to ..expense.,
o r n b u r e a s e a r n i n g s ,m a i n t y a s a r e s u l r o t i n c o m e t a x c o n \ i d e r a r i o n s ,
e'lhis dererioralionot rhe qudtily in rhe privare
s € , L o r ' ! b a t a n c e o t p a l m e n r s , s i m u t l a n e o u sw u n a .
rncrcare In |l(o.era n € l D a y m e n t ( c o n l r i b u r i o n . i s n o t a t t o g e l h e r u n e x p e c r e d .A s p r o , e * o r J o b n
''we.uere
brouCht up to say rhaL if. for example. prices se In counrrj A,
r F r m p o n < N I t I n c r e a s ea n d e x p o r r s d e c r e a s e ,a n d E o t d o u t f l o s $ i l l c o r r e c l r h e D r i L e r i s e , B u L i l
c o m m o d ' t i e s o r s e c u r i t i e s ) c a u s e s p r o f i L st o r i s e , a n d ( a D i r a t l s a | r a c r e o m o r e
cooos, gord wllr aow in and prices wiu ri.e fuirher. \post|'ar Uonenrv ptans and
othet E'sa)s [New York, 1944], p.20t.J

90
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91
 exchaDge cotrtrols and expo$ bounties_to inctease the private sector,s net
surplus to
rEatch that of the U.S. covernment deffcit? Or should it c;rii;;;-J"t"it
in tt"
expectation that foreign ceqtlal banks will continue to finatrce it either directb them_
selvesor through the IMF?
This set of alternatives is much more complex than that which i.aced the
lation and its economists id the 1930,s, when goveinmenr piuv"A Urt u
small iole in internatioqal traqsactions. Specifically o.""f i" "p"rution,-
ifr" po.i*i. world has
been. rhe fact.thal rhe major .,key
cu.rency.. narioo tras come r6-sufir a cnrooic
rli*".derrvrng not from any imbalaDcein tbe traDsacrions of its pfivate secror,
::l"lt
nor rrom marxetpraceconditiotrs,trot from differe'tial movementsoi internationar
pices. srpply and demand, and intere_strates, but from government-military
expendi_
turcs. These expenditureshave been the result of priorit-iesa..*"
out-
side the sphereof economic considerationsand priorities_ "p "ii"ntiuffv
a variety of.causesof balince-of_paymenb disequilibrjumamong
_^,,^- J:d:Ll
nauons T
bas devetoped. jt would seem that a muhiplicity of..adjusiment
processes.,
should come into cotrsideration. The classical adjustment process woikec
priee movemeDtsvia tie marketplace, afiecting private sectbr ttrrougtr
transactions. It would
appearJnowever.tbat lt lhe source of todays interflarionaldisequiribrium
is ro be
rhan, merety. -financed.. by rhe priuate secror'_ the approprrate
:l:::..:"_*:-,h"1
aojusrment process would eDtail a reevaluation of the desirability of government
overseasspending.
Does econ^omic theory,havea role to play in such a situarion,given that lhe
u.r. .paymenlsoefictt stems trom actions deriving es:eotially from noneconomic
criteria, e.g., "defense of the Amgricatr sphere-of inifluence.,?a"^fy.i.
*-n f,rgfrfiglt
the adjustment process, which if it is to work oL the cause oi t6iuv.i-'tutuo""_of-
paymentsdisequilibrium, must work not so fiuch ..through the
markerpla'ce,.as tnrougtr
self-controlling policies by the governments of the .,kIy
urnerwlse.Orsequtlltrrrum "urrun"y;-J"iiit'"oun,.r...
must continucto be financedthrough compensating diplo_
matic armngemenrs(for'example. troop offset_cosragreern.nr".i"h ui t'*"
U..o Oru*n
up wrr'' (ierman_y), swap lending, and a restructudng of the IMF to increase
U.S, credit
rrnes.Lrarance-or-paymenls evolulionin this eveDtbecomesa funcrionof internarional
power politics.
With the private sector unable to finatrce the growing deflcit on government
account, foreign centtal banks have been '.induced'. to bear b-y far the mijor
ourOen
gl,lb"^U S paymenrsdeficil. by exlending credit in rbe torm oi do a;i;-;ces ro rhe
to,hetp compeDsatefor its. ourffow of milirary and special agency
":.:,y_"-*TT"ll
spenorDg. tt ts targety rn responseto this sjtuation that rhe U.S. Coiernment has
soughr ro promote the mechadsm of_ -special drawing rights,, within the IMF,
-for- in
order to substitute borrcwing from this organization torro*inj- tt
governments. The financial effect is esseolially the same, "peciti"
however: n'ations enloyrng
surpluses wiII provide i;ternationai i" t t"
9ll.an:e-:rf-paymenrs
or, rn orher words, to help finance a part "*"t" "tp-i.,an"e
of U.S. polirical/military
-"j.',,!ln.tl
actrvrtres.
Economic theory can specify what will happen if the solution to the
_ U.S.
to be solgbr.,tbrough rhe markerptace.,.Whaiif. for insrance,
rne oolar 1:1",t."lre
l:lT:lll. were to be clevaluedrelative to other currencies to lhat poitrt ar which
privale secror woutd be given a .,comperirive its
l" ti; ;;tJ ]umcient to
Increasetrs net surptus to aD amount capable of "duaorage:a
covering the deficit olr government
opemtions? In practice this would mea' that producers nu"stoi, in Jtl".
tries. some of already find themselvei in balance_of_paymenr
"i.ra
_whom. a"nair "ourr_
,rurra
relallve ro tbe Uniled Slates, would find themselvesat even more
of a comperrflve
disadvantase. (Dollar devatuation would pr€sumably h;r; ;;;tr;;;
Ji i;il cou"rn-
ment operations, since these are undetaken_not on ihe basis of ,.competiiive,,
factors,
but in responseto noneconomic citeria.., In efiect, rherefoie, rfri-ai1'"_pl
io nnunce
the deficit on government account through rn"""or;, d;;i;;;;
-U.S. io'in"-."*5'rl" p"ruu,"
sector's surplus is to transfer the burden of fidancing Coui.nrn""i ou"aa"u.
spending from foreign central baaks to the pri,ate sectJrs oi foreig,
Unless the central banks of oth€r couotri€s react financijiy "o""t.i".,
to US. expan_
sionary policies, it is unlikelv that the u.S. authorities wiiih"Jln"--ri,ru!.
ion.tru,o"a
to slow. or revene present balance_of-paymentstrends. Until this point
is reached,
International--fi^nancialcontroversy will continue to center arouod the'ir,u"^ot noro to
tlnanccrne U.J. paymenlsdehcit,rather than on how ro c?r? it.

ot