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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 up to an unprecedentedly high level during the war, when Lend-Lease operations were taking care of a large proportion of foreign requirements, especially in Europe, and when many countries in the Western Hemisphere and elsewhere found it impossible to spend their current dollar earnings because of sup- ply shortages. Since the end of 1945, how- ever, these reserves have had to be liquidated on a large scale, mainly to pay for United States exports which could not be financed in other ways. Total foreign holdings of central gold reserves and of banking funds in the United States, which increased from 15 billion dollars to nearly 23 billion during 1939-45, declined again during 1946 and 1947 to around 18 billion. Although still larger in money terms than before the war, in terms of purchasing power foreign holdings of gold and dollars at the end of 1947 were less than half what they had been in 1938. Furthermore, the large concentration of reserves among a few coun- tries, from which the world was already suffering before the war, has been accentu- ated in some respects by war and postwar developments. Despite the additional source of funds which has been provided to foreign countries through the creation of the Inter- national Monetary Fund, most of the world finds itself very inadequately equipped with liquid gold and dollar resources. Only a few countries now hold gold and dollar reserves in an amount sufficient to provide them with reasonable liquidity in their international transactions. The gold inflow into the United States and the liquidation of foreign dollar balances in the United States have had significant ex- pansionary effects upon the domestic mone- tary and credit situation. UNITED STATES EXPORTS AND SOURCES OF FINANCING Since the end of the war foreign countries have had to rely upon the United States to an unprecedented degree as a source of sup- ply for food, raw materials, and manufac- tured equipment and supplies. United States exports of goods and services amounted to 15 billion dollars in 1946 and reached 20 bil- lion in 1947. Relief and reconstruction in large areas of Europe and the Far East have absorbed immense quantities of these exports. In addition, countries which escaped war damage and disruption, notably those in the Western Hemisphere, have made heavy de- mands upon United States production be- cause of their high levels of domestic income, their large deferred demands for many prod- ucts, and the slow recovery of other sources of supply. 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
Transcript
Page 1: FEDERAL RESERVE BULLETIN - FRASER | Discover ......FEDERAL RESERVE BULLETIN VOLUME 34 April 1948 NUMBER 4 THE POSTWAR DRAIN ON FOREIGN GOLD AND DOLLAR RESERVES Foreign gold and dollar

FEDERAL RESERVE BULLETINVOLUME 34 April 1948 NUMBER 4

THE POSTWAR DRAIN ON FOREIGN GOLD AND

DOLLAR RESERVES

Foreign gold and dollar reserves were builtup to an unprecedentedly high level duringthe war, when Lend-Lease operations weretaking care of a large proportion of foreignrequirements, especially in Europe, and whenmany countries in the Western Hemisphereand elsewhere found it impossible to spendtheir current dollar earnings because of sup-ply shortages. Since the end of 1945, how-ever, these reserves have had to be liquidatedon a large scale, mainly to pay for UnitedStates exports which could not be financedin other ways. Total foreign holdings ofcentral gold reserves and of banking fundsin the United States, which increased from15 billion dollars to nearly 23 billion during1939-45, declined again during 1946 and 1947to around 18 billion.

Although still larger in money terms thanbefore the war, in terms of purchasing powerforeign holdings of gold and dollars at theend of 1947 were less than half what theyhad been in 1938. Furthermore, the largeconcentration of reserves among a few coun-tries, from which the world was alreadysuffering before the war, has been accentu-ated in some respects by war and postwardevelopments. Despite the additional sourceof funds which has been provided to foreigncountries through the creation of the Inter-national Monetary Fund, most of the worldfinds itself very inadequately equipped with

liquid gold and dollar resources. Only a fewcountries now hold gold and dollar reservesin an amount sufficient to provide them withreasonable liquidity in their internationaltransactions.

The gold inflow into the United States andthe liquidation of foreign dollar balances inthe United States have had significant ex-pansionary effects upon the domestic mone-tary and credit situation.

UNITED STATES EXPORTS AND SOURCES OF

FINANCING

Since the end of the war foreign countrieshave had to rely upon the United States toan unprecedented degree as a source of sup-ply for food, raw materials, and manufac-tured equipment and supplies. United Statesexports of goods and services amounted to15 billion dollars in 1946 and reached 20 bil-lion in 1947. Relief and reconstruction inlarge areas of Europe and the Far East haveabsorbed immense quantities of these exports.In addition, countries which escaped wardamage and disruption, notably those in theWestern Hemisphere, have made heavy de-mands upon United States production be-cause of their high levels of domestic income,their large deferred demands for many prod-ucts, and the slow recovery of other sourcesof supply.

Less than half of total exports could be

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paid for currently by funds derived fromforeign sales of goods and services to theUnited States. The balance, amounting toover 19 billion dollars during the two-yearperiod, placed a heavy strain upon the vari-ous sources of dollar financing available toforeign countries. A summary table of theinternational transactions of foreign coun-tries in 1946-47 affecting their gold and dol-lar holdings is given at the end of this article(p. 381).

United States exports, imports, and theexport surplus in the eight quarters of 1946and 1947 are shown in the accompanyingchart. Exports of goods and services were28 per cent larger in 1947 than in 1946. Atthe peak in the second quarter of 1947, they

UNITED STATES EXPORTS AND IMPORTSOF GOODS AND SERVICES

- TOTAL EXPORTS

1946 1947

SOURCE.—Department of Commerce.

were moving at an annual rate of 21 billiondollars.

The marked increase in the dollar vol-ume of merchandise exports last year was

made possible by the expanded physical ca-pacity of the United States to produce forexport, but it also reflected a substantial risein export prices. Merchandise imports, onthe other hand, were only slightly larger in1947 than in 1946, and the entire growth wasaccounted for by increased import prices.In relation to national income, imports intothe United States have been much smallerthan before the war. This lag in importsis primarily a reflection of production andsupply difficulties abroad, particularly inEurope. Merchandise imports from Europe,which in the interwar years accounted forbetween 40 and 50 per cent of all importsof goods by the United States, amounted toonly 15 per cent of the total in 1947.

The export surplus has been financed inlarge part by grants and credits extended bythe United States Government, as may beseen in the chart on the following page. Infact, Government aid programs coverednearly one-third of total United States exportsduring the two years 1946-47. Of the net ex-ports not financed from this source, somepart has been paid for by an outflow of pri-vate gifts and investments from the UnitedStates; 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. Muchthe larger part, however, has necessitateddrafts upon the gold and dollar reserves offoreign 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 drawingrights upon the International MonetaryFund. The drafts upon these reserves maybe regarded, from the point of view of for-eign countries, as the final balancing itemin their transactions with the United States.In addition, foreign countries have had to

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make drafts upon their gold reserves in theprocess of setting up the Fund and establish-ing their drawing rights upon that institu-tion.

MEANS OF FINANCING UNITED STATES NET EXPORTSOF GOODS AND SERVICES

•*— NET EXPORTS

DOLLARS DRAWN FROM INTER-"NATIONAL MONETARY FUND

SALES OF GOLD TO UNITEDSTATES AND DRAFTS ONBANKING FUNDS IN UNITEDSTATES (NET)

GOVERNMENT AID (NET)

1946 1947

* The broken horizontal line in the third quarter of 1947 in-dicates net exports for the quarter. In this quarter, the esti-mated net drafts by foreign countries upon various sources ofdollar financing considerably exceeded estimated United Statesnet exports.

t Includes private United States donations and investmentsabroad, disbursements on International Bank loans, liquidationof other foreign assets in the United States, and errors andomissions.

SOURCE.—Based largely upon Department of Commerce data.

NATURE OF FOREIGN GOLD AND DOLLAR

RESERVES

The specific categories of resources in-cluded in "foreign gold and dollar reserves"form a convenient grouping for purposes ofanalysis even though they cannot be sharplydistinguished from other types of gold anddollar assets.

Central gold reserves, i.e. gold holdings offoreign monetary authorities, may be supple-mented in some cases by private gold hoards.Under present conditions, however, foreigncountries can scarcely rely upon such hoards

as a potential resource for making inter-national payments, and in any case reliabledata regarding them are not available.

Foreign banking funds in the United Statesrepresent a regularly reported statistical seriescovering all short-term claims, i.e. deposits,short-term commercial paper, Treasury bills,etc., held by foreign residents with banks inthe United States. They comprise both offi-cial funds (those held by foreign centralbanks and governments, including as a spe-cial item certain foreign government depositswith the United States Treasury) and fundsheld for private foreign account. While pri-vate banking funds may not always be readilyavailable to a foreign country for the settle-ment of international payments, most coun-tries are at present enforcing exchange con-trols which in effect accomplish this purpose.In any case, it is necessary to combine officialand private funds for purposes of the presentsurvey since these categories are not shownseparately for individual countries in theregularly published data.

In addition to banking funds in theUnited States, foreigners hold relatively smallamounts of other short-term claims uponthis country, e.g. advances to Governmentcorporations and private enterprises, bal-ances with brokers and security dealers, andholdings of actual United States currency.Private citizens abroad also hold large long-term investments in this country, some ofwhich could be mobilized by foreign coun-tries in case of need to settle balances withthe United States. Ordinarily, however, for-eign countries are most reluctant to requi-sition and liquidate such assets, especiallysince they are the source of current dollarincome to the individual owners and to thecountry concerned.

The advent of the International MonetaryFund as an operating institution early in

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1947 established a new category of inter-national reserves, the conditional drawingrights of member countries upon the re-sources of the Fund. One of the basic pur-poses of the Fund as expressed in its Articlesof Agreement is "to give confidence to mem-bers by making resources available to themunder adequate safeguards, thus providingthem with opportunity to correct maladjust-ments in their balance of payments withoutresorting to measures destructive of nationalor international prosperity." Hence, eachcountry which becomes formally eligible touse the Fund's resources—i.e. which fixes theparity of its currency in agreement with theFund, and thereupon pays up its subscriptionto the institution—is given a qualified right topurchase exchange from the Fund againstpayment in its own currency.

These "drawing rights" are subject tospecified limitations upon the total amountof each country's purchases and the rate atwhich they can be made. Even within thesequantitative limitations, access to the Fund'sresources is not automatic. In the words ofan official interpretation issued by the Fund'sExecutive Board, drawings should be limited"to use in accordance with its [the Fund's]purposes to give temporary assistance infinancing balance of payments deficits oncurrent account for monetary stabilizationpurposes." Thus drawings are expected tobe made only if they can be repaid within areasonable period of time. Subject to thesevarious qualifications, the drawing rights ofmember countries upon the Fund constitutea contingent international reserve supple-menting their independent holdings of goldand foreign exchange.

It should also be noted that the Fund'sability to supply dollars to its members islimited to the amount of dollars—and gold,which could be converted into dollars in

case of need—subscribed by member coun-tries. Total dollar and gold subscriptionsso far amount to about 3.4 billion dollars,including 2,750 million in dollars and goldfrom the United States and about 670 millionin gold from other member countries. Thissum is substantially smaller than the maxi-mum theoretical drawing rights of the for-eign members now formally eligible to usethe Fund's resources. Further amounts ofgold may be subscribed in due course by newmembers or by existing members that havenot yet established the parity of their cur-rencies, but in such case drawing rights uponthe Fund will also increase. Hence aggre-gate drawing rights for dollars will alwaysexceed the Fund's ability to supply that cur-rency. Nonetheless, the Fund's gold and dol-lar resources are certain to last under any cir-cumstances for a period of several years, ifonly because of the quantitative limitationsupon the rate of drawings by individualmember countries. While these limitationscan be waived in specific cases by the Execu-tive Board of the Fund, such waivers arelikely to be granted only in exceptional cir-cumstances.

GOLD INFLOW AND FOREIGN GOLD RESERVES

Net sales of gold by foreign countries tothe United States, as may be seen from thetable on the following page, amounted tomore than 3.5 billion dollars in the twoyears 1946-47. The inflow remained mod-erate during 1946, when Government aidprograms alone covered two-thirds of UnitedStates net exports. In 1947, however, withthe export surplus greatly expanding andwith Government aid programs providingonly half of the necessary financing (orabout the same absolute amount as in 1946),net sales of gold to the United States approxi-mated in each quarter the entire amount

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received in the previous calendar year. Bythe end of the year several countries whichhad been large sellers of gold were approach-ing exhaustion of their holdings. As a result,the inflow slackened considerably in the firstquarter of 1948.

Almost all gold transactions between theUnited States and foreign countries are con-ducted through official channels and conse-

N E T SALES OF GOLD BY FOREIGN COUNTRIES TO UNITED

STATES, 1946-1947

[In millions of dollars]

Period

1946—Jan.-MarApr.-JuneJuly-SeptOct.-Dec

Total, 1946.. .

1947—Jan.-MarApr.-JuneJuly-SeptOct.-Dec

Total, 1947

Total, 1946-47...

1948—Jan.-Mar

Amount

2694694

295

705

632778663763

2,836

3,541

1344

1 Partly estimated.NOTE.—Net sales of gold by foreign countries to the United

States can usually be measured with reasonable accuracy byadjusting the reported net imports of gold into the United Statesfor (a) changes in gold under earmark for foreign account at theFederal Reserve Banks; and (b) gold transactions between theUnited States and the International Monetary Fund, whichhave so far consisted solely of the payment of the United Statesgold subscription to the Fund in February 1947. The reportedimport and export data include gold consigned to, and shippedby, the Fund; but the figures for gold under earmark also includegold owned by the Fund, so that gold transactions by foreigncountries with the Fund, or shifts of gold by the Fund between itsdepositories in this country and abroad, cancel out in this calcula-tion.

This method has been followed in deriving the figures in thistable, except that a special adjustment has been made in thefigures for the last quarter of 1946 and the first quarter of 1947to correct an unusually large distortion arising at that time fromlags in the reported statistics.

quently are reflected in changes in the centralgold reserves of foreign countries. The goldholdings of foreign monetary authorities arealso affected, however, by new gold produc-tion, industrial consumption, and move-ments in private hoards in foreign coun-tries. In addition, there was in 1947 thespecial factor of foreign gold subscriptionsto the International Monetary Fund.

The aggregate gold holdings of foreignmonetary authorities amounted to 16 billiondollars at the end of 1945, but to only 12.9billion by the end of 1947, reflecting a netloss of 3.1 billion within the space of twoyears. During the same period foreign coun-tries derived about 1.8 billion dollars in goldfrom new production, so that there is a grossloss of 4.9 billion to account for. Net salesof gold to the United States came to 3,540million dollars, and foreign gold contribu-tions to the International Monetary Fundamounted to 670 million. The remainingsum of around 700 million presumably repre-sents net industrial consumption and accre-tions to private hoards in foreign countries,but this is a residual figure for which nodegree of precision can be claimed.

At the end of 1945, when the total centralgold reserves of the world amounted toabout 36 billion dollars, some 55 per centwas held by the United States and about 45per cent by foreign monetary authorities.At the end of 1947, the total figure hadreached more than 37 billion dollars. Over60 per cent was then held by the UnitedStates, 35 per cent by foreign monetary au-thorities, and 4 per cent by the InternationalMonetary Fund.

The recent pattern of world gold trans-actions has been dominated by direct trans-fers from foreign central reserves to theUnited States. Hence, although data forsales of gold to the United States are notpublished by countries, the principal foreignsellers can be readily identified from changesin the gold holdings of individual foreigncountries. The table on the following pagepresents data showing the changing distribu-tion of foreign gold reserves during the pasttwo years.

In 1946 France was the only country thatsustained a major loss of gold, and this was

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largely offset by gains on the part of theUnited Kingdom and Canada. Other scat-tered changes, including losses by Mexico,

CHANGE IN FOREIGN CENTRAL GOLD RESERVES, 1946-1947 *

[In millions of dollars]

Area and country

Countries participating inEuropean Recovery Program(other than United Kingdom):

France (and dependencies).SwitzerlandBelgium (and Belgian

Congo)SwedenNetherlands (and N. W.

Indies)NorwayOther ERP countries

Total

U.S.S.R » .Other Continental Europe

United Kingdom4

Union of South AfricaOther sterling area5

Canada

Latin America:ArgentinaBrazil

CubaOther Latin America

Total

Rest of world6

Total for countries withnet gains during year . . .

Total for countries withnet losses during year. . .

Net total

Goldreserveat theend of1945

1,5771,342

749482

421100

1,036

5,707

2 250690

1,966914471361

1,197354294191732

2 768

828

15,955

Increase ordecrease (—)

1946

-68888

2-101

- 5- 9- 3

-716

1502

445- 2 6- 2 6182

-125

-1133522

-181

-107

997

-1 ,223

-226

1947 2

-319- 7 4

-138-276

-161- 1 9

-251

-1 ,238

175- 4

-386-177

1-249

-783

- 8 153

-123

-934

- 3 6

273

-3 ,121

-2,848

Goldreserveat theend of1947

5701,356

613105

25572

782

3,753

2 575688

2,025762446294

289354100279631

1,653

685

12,881

1 Data have been partly estimated in the case of some countrieswhich do not issue full reports concerning their gold holdings.

2 Decreases in 1947 include nearly 670 million dollars of foreigngold contributions to the International Monetary Fund, including210 million by the United Kingdom, 80 million by France,74million by Canada, 69 million by the Netherlands, and 56 millionby Belgium.

3 All the data for the U.S.S.R. are conjectural. Russian goldreserves at the middle of 1947 were estimated very roughly at 2.5billion dollars in a recent report to the Senate Committee onFinance by the National Advisory Council (see BULLETIN forFebruary 1948, p. 164). The figures in this table have beenderived from this base, making allowance for estimated newdomestic production and for such exports of gold from the U.S.S.R.as have been reported.

4 The gold reserves of the United Kingdom have been estimatedby deducting from British reports concerning their combinedofficial holdings of gold and United States dollars, the amount ofBritish official dollar balances as reported by banks in the UnitedStates.

5 Includes Egypt throughout, although Egypt withdrew fromthe sterling area in July 1947.

6 China is known to have been the principal loser of gold reservesin this group in 1946-47, as a result of gold sales in its domesticmarket. There are no published reports concerning China's centralgold holdings, but these holdings at the end of 1947 were estimatedat 96.5 million dollars in a report submitted to the Congress by theDepartment of State on Feb. 20, 1948, in connection with theproposal for a Chinese aid program.

Sweden, and others which were relativelysevere for the countries concerned, resulted ina net loss from foreign central reserves ofsome 225 million dollars during the year.

There was a sharp acceleration of foreigngold losses early in 1947, with gold subscrip-tions to the International Monetary Fundcontributing to the movement. The lossesduring the year were very widespread; onlythe U.S.S.R., as a result of the retention ofmost of its new domestic production, regis-tered any substantial gain. Over 1.2 billiondollars was lost by the countries of Conti-nental Europe which are scheduled to par-ticipate in the European Recovery Program;this amount included a further large loss byFrance, which brought that country's totalliquidation of gold during 1946-47 to morethan a billion dollars. The United Kingdom,South Africa, and Canada all became losersof gold in 1947, in contrast to their gains inthe previous year, accounting together forlosses of over 800 million dollars. Argen-tina, which sustained only a minor loss ofgold in 1946, experienced a major gold out-flow in 1947, none of which represented acontribution to the International MonetaryFund since Argentina is not a member ofthat institution. Other losses in Latin Amer-ica, notably by Mexico, Colombia, and Uru-guay, partly offset by a relatively substantialgain on the part of Cuba, brought total goldlosses by that area during the year to nearlya billion dollars.

In summary, the major changes in thedistribution of foreign gold reserves in thepast two calendar years have been the dis-placement of France and Argentina fromtheir status as major gold holders in theworld, and relatively heavy encroachmentson the reserves of other countries, includingnotably Sweden, the Netherlands, and Mex-ico. On the other hand, the U.S.S.R. added

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moderately to its stocks during the two-yearperiod, while the two other principal goldholders outside the United States—the UnitedKingdom and Switzerland—showed littlechange over the period as a whole. Whereasat the end of 1945 these three countries hadheld only about 35 per cent of foreign centralgold reserves, by the end of 1947 they held46 per cent of a substantially smaller total.

LIQUIDATION OF FOREIGN BANKING FUNDS IN

UNITED STATES

Concurrent with the net flow of foreigngold to the United States, foreign countriesas a whole have been making steady andsubstantial drafts upon the dollar balanceswhich they accumulated during the war inthe form of banking funds in the UnitedStates. As may be seen in the accompanyingchart, official funds (those held by foreignmonetary authorities) declined by 2.5 billiondollars, or 58 per cent, during the two years1946-47. The aggregate amount of privatedollar banking funds, on the other hand, hascontinued a moderate expansion, so that thenet loss in total foreign banking funds in

FOREIGN SHORT-TERM BANKING FUNDSIN THE UNITED STATES

BILLIONS OF DOLLARS END OF MONTH FIGURES

r^^— N - . ,

f-

/TOTAL -r

/rOFFICIAL

V PRIVATE- • ^

A -

/

tf"""* OFFICIAL HOLDINGS

AND CERTIFICATES

\

—ly

* Beginning June 1942, official funds include all short-termfunds held with banks and bankers in the United States byforeign central banks and governments and their agencies, partof which had previously been included in private funds.

the United States came to only about 2.2billion dollars in 1946-47 (something overone billion in each year).

Most of the countries in the world liqui-dated dollar balances during the two years,but these losses were partly offset by gainson the part of a few countries. As shownin the table on the following page, Canadaalone accounted for around 30 per cent ofthe losses; the other principal losers wereChina, the United Kingdom, and France.These four countries accounted for theentire net loss; smaller gains and losses byother individual countries were mutuallyoffsetting. At the same time, many of thesmaller changes were relatively very im-portant to the countries concerned, e.g. thelosses by Sweden, the Netherlands, and Nor-way, and the gain by Cuba. It may be notedthat the changes shown in the table on thefollowing page are roughly representative ofmovements in official balances. The increasein private balances during 1946-47 was dif-fused throughout the world and hence didnot greatly affect the position of any indi-vidual country.1

If the drafts on foreign banking funds areconsidered in conjunction with the changesin gold reserves in 1946-47, the main newpoint which emerges is that Canada and theUnited Kingdom, while avoiding net draftson their gold holdings during the period asa whole, did find it necessary to resort toheavy liquidation of dollar balances. Thesame was true of Brazil and the Philippines.France and China, on the other hand, alongwith Sweden, Norway, and the Netherlands,found it necessary to liquidate relativelysubstantial amounts of dollar balances in

1 While data are not ordinarily published showing the dis-tribution of official and private balances, separately, by countries,an exception was made in a report presented to the SenateCommittee on Finance by the National Advisory Council onDec. 18, 1947. A table contained in that report shows the dis-tribution of these balances for all foreign countries holdingsignificant amounts as of June 30, 1947 (see BULLETIN forFebruary 1948, p. 164).

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addition to gold during this period. Switzer-land, Cuba, and Argentina made the largestnet gains in dollar holdings over the two-year period 1946-47; the first two countriesalso gained some gold, but in the case of

CHANGE IN FOREIGN BANKING FUNDS IN THE UNITED STATES,

1946-1947x

[In millions of dollars]

Area and country

Countries participating inEuropean Recovery Program(other than United Kingdom):

France (and dependencies).SwitzerlandBelgium-Luxemburg (and

Belgian Congo)SwedenNetherlands (and N. W.

Indies)NorwayOther ERP countries

Total

U.S.S.R. .Other Continental Europe

United Kingdom (and de-pendencies)

Union of South AfricaOther sterling area3 . .Canada and Newfoundland....

Latin America:ArgentinaBrazil . . . .MexicoCubaOther Latin America

Total

Philippine RepublicChinaRest of world

Total for countries withnet gains during year

Total for countries withnet losses during year. . .

Net total

Hold-ings

atend of

1945

2 518304

247210

310216275

2,080

2877

7556

10621,366

77195116128492

1,008

629s 768

246

7,069

Increase ordecrease (—)

1946

-22369

-36- 3 7

- 6 9—92211

- 1 7 7

3249

- 2 1 74140

- 4 3 2

36—21

3625

- 4

72

* - 1 8 2- 3 3 6

48

720

- 1 , 7 8 2

- 1 , 0 6 2

1947

- 1 0 073

- 4 3- 1 1 4

- 8 3- 6 8- 6 1

- 3 9 6

1427

- 1 3 9i

7-524

123- 6 9- 1 3

82- 9

114

42-202

- 9 7

554

-1,709

-1 ,155

Hold-ingsat

end of1947

195446

16859

15856

425

1,507

74153

39946

153410

236105139235479

1,194

489230197

4,852

1 For more complete information concerning the movement offoreign banking funds in the United States, see regular tables onpp. 480-81 of this BULLETIN.2 The regularly reported figures for Canada and France at theend of 1945 have been adjusted to allow for the fact that on thatdate certain special funds were being held by Canada on behalf ofFrance. This arrangement was terminated during 1946.3 Includes Egypt throughout, although Egypt withdrew from thesterling area in July 1947.4 Includes the use of 111 million dollars during 1946 for redemp-tion of excess stocks of Philippine currency held by the UnitedStates armed forces in the Philippines. To this extent the declinein^dollar reserves was matched by a reduction in the foreignliabilities of the Philippines.

« The regularly reported figure for China at the end of 1945has been adjusted to include official Chinese holdings on that dateof 186 million dollars of United States Government securitiesmaturing in slightly more than one year and therefore fallingoutside the strict definition of "short-term" banking funds.These holdings were converted into "short-term" United StatesGovernment securities during 1946.

Argentina the increase in dollar balances con-stituted a partial offset to a very heavy lossof gold.

Considering gold and dollar balances to-gether, France and Canada were the heaviestlosers in 1946-47, accounting for 1.3 billionand 1.0 billion dollars, respectively. Argen-tina followed with a loss of three-quarters ofa billion, and Sweden and China with overhalf a billion each. The countries scheduledto participate in the European Recovery Pro-gram, other than the United Kingdom andSwitzerland, accounted together for abouthalf of the net foreign losses of gold and dol-lar balances during the two-year period. Atthe end of 1945 this group held over one-quarter of the outside world's central goldreserves and dollar banking funds, but by theend of 1947 it held less than one-fifth of asubstantially smaller total.

DOLLAR DRAWINGS UPON THE INTERNATIONAL

MONETARY FUND

The International Monetary Fund becamean operating financial institution on March 1,1947, the date upon which it became readyto engage in exchange transactions withmember countries. The following table liststhe dollar drawings that were made uponthe Fund during the remaining ten monthsof the year.

DOLLAR DRAWINGS ON INTERNATIONAL MONETARY FUND[In millions of dollars]

Country

United KingdomFranceNetherlandsBelgiumMexicoDenmarkChileTurkey

Total

Maximum drawingright in any

twelve-month period

325.0131.368.856.322.517.012.510.8

Amountdrawnin 1947

240.0125.046.011.022.53.48.85.0

1461.7

1 The only non-dollar transaction in which the Fund engagedduring the year was the sale to the Netherlands of 1.5 millionpounds sterling (equivalent to 6.0 million dollars).

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THE POSTWAR DRAIN ON FOREIGN GOLD AND DOLLAR RESERVES

The principal drafts, amounting to morethan half the total, were made by the UnitedKingdom. These occurred during the lastmonths of the year, when the United King-dom found itself under particular pressureas a result of the temporary suspension ofdrawings upon its credit with the UnitedStates Treasury. Large drawings were alsomade by France, which has had to resort toa wide variety of sources for dollar financingduring the past two years. Mexico, althoughits drawings were relatively small, was theonly country that exercised its maximumdrawing right during 1947.

In general, the scale of foreign drafts uponthe Fund's resources may be said to havebeen moderate during 1947. After allowingfor member countries that remained ineli-gible to draw upon the Fund because of thelack of an agreed exchange rate, the remain-ing foreign members could have drawn aboutone billion dollars during the year withoutexceeding the quantitative limitations towhich each is subject. But of the 27 membercountries that were formally eligible to drawduring 1947, only eight actually resorted tothe Fund's resources. This may be takenas evidence both of self-restraint on the partof foreign members and of vigilance on thepart of the Fund's Executive Board in seeingthat the Fund's resources are used only forpurposes consistent with the Fund's Articlesof Agreement.

It may be added that during the first quar-ter of 1948 total dollar drawings from theFund amounted to a further 132 milliondollars, of which 60 million was taken bythe United Kingdom. Although by now afew individual countries, notably the UnitedKingdom and France, have made drawingson the Fund in excess of their initial goldsubscriptions, foreign countries as a wholehave still drawn fewer dollars than the

amount represented by their gold subscrip-tions. Hence the Fund's gold and dollar re-sources still exceed the amount initially con-tributed by the United States.

EFFECTS UPON MONETARY FACTORS IN THE

UNITED STATES

The liquidation of foreign gold and dollarreserves in partial payment for United Statesexports has had certain direct expansionaryeffects upon monetary factors in the UnitedStates.

The most obvious example is the net pur-chase of 3.5 billion dollars in gold fromforeign countries in the two years 1946-47.This newly-acquired gold was "monetized'7

through the issuance of gold certificates to theaccount of the Federal Reserve Banks, andhad the effect of expanding by a correspond-ing amount the reserves of the Federal Re-serve Banks, the reserves of commercialbanks, and the deposits of commercial banks.The result was to add substantially to thecapacity of the banking system to extendcredit.

The net reduction in foreign banking fundsin the United States over the two years 1946-47 may be accounted for entirely by the de-cline of about half a billion dollars in depositsheld by foreign central banks and govern-ments with the Federal Reserve Banks and bythe liquidation of about 1.7 billion in foreignholdings of short-term United States Govern-ment securities. Movements in other typesof foreign banking funds were small andmutually offsetting.

A decline in foreign deposits with theFederal Reserve Banks has the same expan-sionary effects upon the commercial bankingsystem as an inflow of gold which becomesmonetized by the Treasury. Commercialbank reserves and deposits increase by an

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equal amount, and a further multiple ex-pansion of bank credit becomes possible.In the case of foreign liquidation of short-term United States Government securities,the results to be anticipated are less clear-cut.As in the case of sales by domestic holders,the effect upon bank reserves and depositsdepends upon whether the net purchasers inthe market are the Federal Reserve Banks,commercial banks, or other holders. Ingeneral, foreign sales during the past twoyears have probably necessitated on mostoccasions additional purchases by the FederalReserve Banks, resulting in further expan-sion of the credit base.

Finally, dollar drawings by foreign coun-tries upon the International Monetary Fundhave hitherto been financed by the Fundthrough the redemption of demand notes ofthe United States Treasury, in which thebulk of its dollar funds are invested. TheTreasury has therefore had correspondingly

less funds available to retire marketable debt,particularly that held by the Reserve Banks,with the result that commercial bank reservesand deposits have tended to remain higherthan might otherwise have been the case.If and when the Fund exhausts the supplyof dollars which it derived from the UnitedStates subscription (something over 2 billiondollars), it could meet further dollar draw-ings by its members only by selling gold tothe United States. Hence in the future theFund may become the source of an additionalgold inflow into this country.

Altogether it is clear that the liquidationof gold and dollar reserves by foreign coun-tries has had important effects upon mone-tary factors in the United States. It hasserved to reduce the effectiveness of fiscaland monetary policies directed to absorbingbank deposits and reserves and to curbinginflationary pressures originating in monetarysources.

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THE POSTWAR DRAIN ON FOREIGN GOLD AND DOLLAR RESERVES

INTERNATIONAL TRANSACTIONS AFFECTING FOREIGN GOLD RESERVES AND BANKING FUNDS IN UNITED STATES, 1946-1947

[In billions of dollars]

Item

Net purchases of goods and services from United States by foreign coun-tries:

United States exports:GoodsServices

Total

United States imports:GoodsServices . .

Total

Net purchases by foreign countries

Sources of financing utilized by foreign countries for these net pur-chases :

United States Government (net):CreditsDonations

Total

United States—private (net):Foreign investment (long- and short-term)Donations

Total

International institutions (net):Dollars disbursed by International BankDollars drawn from International Monetary Fund

Total

Foreign countries' own capital assets (net):Sales of gold to United StatesReduction of banking funds in United StatesLiquidation of other assets in United States (long- and short-term)....

Tota l . . . .

Total sources of financingErrors and omissions

Net gold losses of foreign countries in international transactions:Net sales of gold to United States by foreign countries (repeated from

table above) .Foreign subscriptions in gold to International Monetary Fund

Total

Total

28.26.7

34.9

11.34.1

15.5

19.4

7.04.2

11.1

0.71.4

2.0

0.30.5

0.8

3.52.20.9

6.7

20.6- 1 . 2

3.50.7

4.2

1947

16.03.6

19.6

6.02.3

8.3

11.3

4.01.7

5.8

0.60.7

1.3

0.30.5

0.8

2.81.20.5

4.5

12.3- 1 . 1

2.80.7

3.5

1946

12.13.1

15.

5.31.9

7.1

8.1

2.92.4

5

6 .7

0.71.10.4

2.2

8.3- 0 . 1

0.7

0.7

NOTE.—This table is derived largely from United States balance of payments data compiled by the Department of Commerce. Itomits, however, transactions between the United States and the International Fund and Bank, which for balance of payments purposesmust be regarded as international areas external to the United States as well as to foreign countries, and it includes gold and dollar trans-actions between the Fund and the Bank and foreign countries. Hence in the main table the Fund and the Bank are shown among thesources of dollars to which foreign countries have resorted in order to pay for net exports from the United States; and in the supplementarytable foreign subscriptions in gold to the International Monetary Fund are listed along with net sales of gold to the United States toshow the net gold losses of foreign countries in international transactions. (This presentation ignores the 22 million dollars in gold and75 million in United States dollars paid by foreign countries during 1946-47 upon their subscriptions to the International Bank.)

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