the Latin American "receipts" of dollars from third countries may have come about not indirectly, from the building up of balances as a result of trade or service transactions, but directly, from the transfer of dollar balances from third-country to Latin American ownership through a simple change in residence of the holders of the balances. This may have happened in 1940 on a fairly extensive scale.

The War Period, 1941-44

In 1941, the expansionist effect of the war on our trade with the American Republics began to be apparent. During this year, the United States was playing in earnest its role of "Arsenal of Democracy." The stepping-up of production for our own defense and for aid to Britain required greatly increased imports of strategic materials and of raw materials in general. The American Republics, being among the world's greatest storehouses of such materials (other than the basic minerals, iron and coal), benefited greatly from this expanded import program.

Imports Rise

United States payments to Latin America on account of merchandise trade went up from $670 million in 1940 to $1,075 million in 1941, an increase of 61 percent. Though imports continued to grow year by year throughout the war years, including 1945, this was by far the largest annual increase, both relatively and absolutely. In terms of volume, furthermore, comparatively little increase occurred after 1941; in 1942, indeed, when the shipping shortage was particularly acute, import volume fell off heavily. The continuous rise in import values after 1941 appears to be due mainly (in some years perhaps entirely) to rising import prices.

As would be expected, there was a shift in the composition of imports toward materials essential for war production. The greater degree of concentration on such commodities was observable throughout the war years, but was especially marked in the critical year 1942, when the shipping shortage made it imperative to confine imports as far as possible to the essential category. In that year, three-fifths by value of our imports from the American Republics were classified as strategic or critical materials, compared with only 46 percent in 1939. Moreover, since European and Asiatic sources of these materials had been largely cut off, the Latin American share in our global imports of these commodities also increased. After 1942, imports from the region began to increase once more, not only because of the easing of the shipping situation but also because programs begun in that year for increasing production of rubber and many other strategic and critical materials got well under way only in later years.

Rise in Exports Less Marked

The rise in United States exports to Latin America was much more moderate during this period. The value of exports in 1941 was 32 percent higher than in 1940, but in 1942 it was 20 percent lower than in 1941. This drop corresponded to a precipitous decline of about onethird in export volume, which was below the volume which had been reached in 1940. The value of exports did not reach the 1941 level even in 1943. By 1944 it had advanced considerably beyond the 1941 level, however.

The principal reason for the small increase in United States exports, compared with the increase in imports, was the tight supply situation for many of the manufactured goods which constitute the greater part of our exports to the area. As mentioned elsewhere, a licensing system was instituted for all exports, in order to curtail their volume and to ration equitably the permitted quantity. A deliberate effort. was made in many instances to supply the American Republics with many scarce commodities, lest their economies collapse altogether; nevertheless, it was often not possible to maintain exports even at prewar levels, let alone to meet the vastly expanded Latin American demand.

One result of this scarcity of manufactured goods which will doubtless prove beneficial to these countries in the long run was the expansion of domestic manufacturing industries. Brazil-to take a particularly striking example-built up its cotton textile industry to the point where it was able not only to supply the home market but in addition to export to other countries whose normal sources of supply had also been cut off. Developments of this sort in turn led to a great expansion of trade among the Latin American Republics, themselves. It is hardly an exaggeration to say that inter-Latin American trade was nonexistent before the war, with the exception of a few pairs of contiguous countries, like Argentina and Paraguay, Chile and Peru, or Mexico and Guatemala. In 1940 imports of the American Republics from one another were only a little more than one-tenth of their total imports; by 1944 this fraction had risen to about one-fourth.

Mexico and Panama Experience Deficits

While a heavy deficit on merchandise-trade transactions characterized our account with the American Republics as a group, our trade balance was not negative with every country individually (see table 34). The chief exceptions were Mexico and Panama.

United States trade transactions with Mexico resulted in fairly substantial surpluses in every year except 1943. In compensation, however, there were net United States payments to Mexico on certain other accounts (e. g., travel and personal remittances) to an extent that did not exist in connection with other Latin American countries. The existence of the Panama Canal Zone puts the Republic of Panama in a very special balance-of-payments situation vis-à-vis the United States. Panama always had an enormous deficit on recorded merchandise-trade transactions with the United States, and no change. in the situation occurred during the war years, except for roughly proportionate increases in both imports and exports. This trade deficit was offset by large net receipts on service transactions with the Zone. A large part of these "services" actually consisted of unrecorded exports of merchandise to the Zone, through purchases by Zone residents in Panamanian shops, and similar transactions. In addition, there are large United States payments of wages and salaries to persons who reside in Panama but work in the Zone. It is believed that by these means Panama during the years 1940-45 more than offset its trade deficits with the United States, and in fact had sizable surpluses on current account.3 36

See p. 17.

We are indebted for much information on Panama-United States transactions to a very valuable unpublished study of the subject made by Findley Weaver, of the United States Foreign Service.

789867-48

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137

TABLE 34.—United States trade with the American Republics: exports, including reexports, and general imports of merchandise, 1940–45

United States Investments Prosper

The greatly expanded demand for the mineral and agricultural products of the American Republics-and the inflation which usually resulted from the influx of foreign money-naturally brought financial prosperity to business enterprises located in the American Republics. As a consequence, remittances of interest and dividends to foreign owners or creditors of those enterprises increased, in spite of the restrictions imposed by some_Latin American countries on the transfer of investment income. Just as in the case of merchandise trade, there was a sharp upward movement between 1940 and 1941, United States receipts of income on investments rising from $170

million to $198 million, or 16 percent. Investment income remained approximately stable at this level through 1942 and 1943, but shot up in 1944, primarily as a result of increased income of Americanowned petroleum companies.

The increase in investment income is attributable entirely to the profits of United States direct investment. Interest on dollar bonds did not rise on the contrary it fell during the latter part of the period as various bond issues were redeemed or otherwise repatriated without an equivalent volume of new issues taking their place.

Receipts of interest on Government (Export-Import Bank) loans to Latin America have varied with the Bank's expanding or contracting loan program, which was at its pre-1945 height in 1943. The sums involved in these interest receipts were small, never running higher than $4 million per annum.

Payments to Latin America on account of interest and dividends have never been of major significance, and they tended to decline during the war years.

Other Private Service Transactions

Just as commodity prices increased during the war years, so did the "prices" of transportation services-a phenomenon which led to great increases in expenditures on transportation services. This factor alone would have brought about parallel changes in both receipts and payments, leaving the net balance, which had been small in 1940, almost unchanged. In reality, however, other factors came into operation (see p. 49), as a result of which our payments to Latin America actually fell during this period. They reached a low point in 1942 of less than two-thirds of what they had been in 1940, and not until 1944 did they pass the 1940 level. Receipts, on the other hand, rose steadily in every year except 1942, when they declined concomitantly with the merchandise-trade decline of that year. By 1944, United States receipts on account of transportation services had risen to more than $200 million, or 220 percent of the 1940 receipts.

The travel picture remained comparatively static during the war years. The new prosperity of 1941 brought a spurt in travel payments, which totaled almost $100 million, but in the next year travel restrictions (especially gasoline rationing) counteracted the influence of high incomes in this country and travel payments dropped abruptly. Thereafter, they gradually recovered; in 1943 they were approximately equal to the 1940 figure of $84 million, and in 1944 somewhat above it. Receipts varied only between a high of $39 million and a low of $33 million. As in the past, most of these travel transactions took place between the United States and Mexico.

Government Service Payments Expanded

In contrast with the behavior of payments for services by private persons, United States Government payments to Latin America for various kinds of services increased greatly. These consisted of military expenditures and of expanded outlays by civilian agencies for various programs connected with the war (including work on the Pan-American Highway). The amounts involved in this account were small by comparison with the corresponding figures for other areas, because the American Republics were not the scene of any largescale fighting. Still, Government expenditures for services rendered

by Latin Americans were more than $125 million in each of the years 1942, 1943, and 1944.

Receipts for services rendered by this Government to the American Republics also rose as a consequence of various war-inspired activities, but not as much as did payments; net payments consequently went up. Moreover, a considerable part of our "receipts" actually consisted of services rendered gratis-i. e., the receipts are offset by equivalent amounts of unilateral transfers in the balance-of-payments statement. Role of Lend-Lease Not Dominating

While unilateral transfers became much more significant after 1940 than they had been previously, they never assumed the predominant status that they did in our transactions with many other areas. This again is traceable to the fact that Latin America was not a battleground, and consequently its needs for military equipment were limited in comparison with those of European and Asiatic countries. Nevertheless, the American Republics were involved in the war; many of them had declared war on the Axis Powers and the remainder had broken relations with them. The problem of the defense of the Americas was urgent-both for its own sake and because of its connections with the defense of the United States proper.

The American Republics did therefore receive considerable quantities of lend-lease goods and services necessary for building up the security of the Western Hemisphere. During the 3 years 1942-44, transfers of lend-lease materials to the American Republics on a nonreimbursable basis were estimated at $235 million. In addition, there were $93 million in nonreimbursable lend-lease services, so that total unilateral transfers on lend-lease account were about $328 million.

Further lend-lease transfers to Latin America valued at $59 million were reimbursable on cash or credit terms, and thus are not offset by an equivalent value of unilateral transfers.

The United States Government also made moderate unilateral transfers of cash, consisting of expenditures in the area by the Coordinator of Inter-American Affairs, and small sums for pensions and annuities to persons resident in the area, totaling $38 million through 1944. The Office of the Coordinator of Inter-American Affairs was established for the purpose of fostering good will between the United States and the Latin American countries by promoting closer cultural relationships. It provided considerable aid to Latin American countries through various cultural, educational, and health and sanitation projects.

Remittances to Mexico Expand

There was also some growth in private unilateral transfers in the period 1941-44, especially beginning in 1943, when personal remittances to Latin America rose sharply, being more than double the 1942 estimate of $13 million; by 1944 they were more than $85 million. This tremendous growth was due primarily to the presence of laborers imported from Mexico. The dollars earned by these workers and remitted to their families at home were a major source of foreign exchange to Mexico during this period.

No Trend in Long-Term Capital Movements

Long-term capital movements were somewhat erratic. Over the entire period, there was an excess of United States receipts amounting