Table I.-Balance of International Payments of the United States, 1938-1939

1 The item consists roughly of three parts: (1) Commodity exports and imports which are omitted entirely from the official trade figures (e. g., bunker-fuel purchases and sales); (2) exports or imports which are partly omitted from official trade data (e. g., goods smuggled into the country); (3) corrections of certain recorded trade figures for balance-of-payments purposes (e. g., allowances for bad-debt losses).

2 Including receipts on account of intergovernmental debts.

3 Capital items are viewed as "exports" and "imports" of evidences of indebtedness.

4 The item covers the movement of funds in security transactions as reported by the Treasury Department (net inflow of $76,000,000 in 1938 and net outflow of $2,000,000 in 1939) and other transactions, the more important of which affected direct investments.

5 The item covers the net movement of capital in short-term banking funds and in brokerage balances as reported by the Treasury Department ($293,000,000 in 1938 and $1,116,000,000 in 1939) and the net change in Philippine Government accounts with the United States Treasury.

6 See appendix C-IV, table 33.

7 See pp. 36-39.

In point of relative magnitudes, the merchandise trade balance was reduced from $1,134,000,000 in 1938 to $859,000,000 in 1939, or by 24 percent, while net payments to foreigners on service transactions, including interest and dividend items, rose from $133,000,000 to $201,000,000. The influx of capital in 1939, as indicated by available statistical data, was more than four times the volume reported for 1938; and, wholly as a consequence of the increase in the capital movement, the gold inflow reached an unprecedented figure of $3,040,000,000 in 1939 from $1,640,000,000 in the previous year. The structure of the balance of payments in the two periods differed in one significant respect. In 1938, the principal factor affecting the gold flow was the excess of commodity exports; the net capital movement, because of major opposing trends within the year, played a subordinate role. (See fig. 2.) In 1939, the transfer of capital funds to the

United States was clearly the primary influence. By contrast with the preceding several years, however, the results of trade and service transactions in both 1938 and 1939 contributed substantially to the shift of gold to the United States, whereas in the years 1934-37 the inflow of capital was the dominant or sole factor operating to draw gold from other countries.

Figure 2.-Cumulative net movements of gold and of capital funds into the United States from foreign countries and cumulative excess of merchandise exports from the United States, 1935-39,

TRADE AND SERVICE TRANSACTIONS

MERCHANDISE TRADE

As indicated in table II, the increase in total merchandise exports in 1939 as compared with 1938 was entirely the result of larger shipments during the second half of the year. From January through May, exports were below the levels of the preceding year. Beginning in June, they rose above shipments in the corresponding months of 1938 by a margin which widened to 37 percent in December. For the year as a whole, however, as shown in figure 3, the increase in the value of exports was only 3 percent, and the aggregate was smaller than in 1937. Merchandise imports in 1939 were consistently larger than in 1938, as a rising trend, paralleling the course of industrial production, carried import trade up from the low point of mid 1938. The increase for the year was approximately 18 percent. The physical volume of foreign trade rose about 5 percent in the case of exports and about 15 percent in the case of imports. Price changes tended to raise the value of imports throughout 1939 and to depress the value of exports until the sharp rise in export prices during September.

Table II.-Foreign Trade of the United States, by Months, 1937-39

The comparative trends of export and import prices indicate that the terms of international trade have become less favorable to the United States during recent years; that is, the cost of goods imported into the United States expressed in terms of domestic goods exported has risen. This development, which is fairly typical in a period of generally expanding international trade for a country exporting chiefly manufactured articles and importing chiefly crude products (because of the greater variation of raw-material prices), became marked during the last half of 1938 and the first half of 1939 as import and export prices moved in opposite directions the former up, the latter down. In September the sharp rise in the prices of certain export products made the terms of trade temporarily more favorable to the United States.

Lower dollar exchange rates for foreign currencies, notably for the pound sterling and the French franc, contributed to the downward movement of import prices during the first three quarters of 1938. In the early part of 1939, however, the unit value of imports rose, while the prices of foreign currencies in New York remained fairly stable. In September, when rates for the pound and associated units reached levels approximately 14 percent below those of July, import prices nevertheless went up. In both instances, of course, the increase in import prices was the consequence of a rise in the foreign currency prices of imported goods. Relative changes in dollar exchange rates and in wholesale prices at home and abroad during the last half of 1939 suggest that the effect of the depreciation of foreign currencies on import prices and the terms of international trade had been largely or entirely counterbalanced before the end of the year by the rise in internal prices in neutral as well as in belligerent

countries.

Although detailed returns for 1939 reveal significant changes in the character and direction of United States export trade, the outbreak of the war in Europe had considerably less immediate effect upon exports than (to judge by domestic reactions to the events of September) was generally anticipated. Shipments of goods to foreign countries had advanced prior to the outbreak of war, and the increase from September through November was of little more than seasonal

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proportions. In December, however, there was a sharp gain. The increases from September to the end of the year did not occur in trade with the United Kingdom and France (despite their large purchases of aircraft, metals, and other war supplies in the United States), but were almost entirely the consequence of increased exports to the European neutrals and to countries outside Europe. Purchases of United States merchandise by the Scandinavian countries rose by no less than 67 percent over 1938; those by Canada increased approximately 43 percent; and for Latin-American countries the gain was 42 percent. Direct shipments to Germany, already materially reduced during recent years, fell to negligible proportions.8

Exports to the United Kingdom and, until December, to France were on much the same scale as in 1938. The reduced importance of the United States as a supplier of food and raw materials to Europe, the greater self-sufficiency of the British and French Empires, the anticipation of present war needs through the building up of reserve stocks, the absence of destructive land operations, and the speed with which wartime controls were imposed by the belligerent powers accounted for the failure of export trade to expand quickly and for major differences between the outlook for export trade in 1914 and 1939. Before the end of the year, it was apparent that the Allies, in addition to cutting off direct trade with Germany and restricting trade with neutral countries contiguous to Germany, were keeping at a minimum their purchases in the United States of unessential commodities or of commodities which for economic or political reasons could be obtained more advantageously elsewhere. Thus, for example, imports of American tobacco into the United Kingdom, hitherto the principal foreign market for the product, were sharply curtailed and then shut off altogether. On the other hand, Allied demands for manufactures such as airplanes, machine tools, petroleum products, and motor trucks were evident in export returns for the closing months of the year.

In December, shipments (particularly of aircraft) to the European belligerents materially affected the export total, which reached the highest point since March 1930. General imports were larger than in any other month since July 1937, but the balance of exports$120,000,000-exceeded that of any other month since October 1929. Besides the rise in shipments to the United Kingdom and France in December, there were continued substantial gains in export trade with all world areas as compared with 1938 results, or, in the cases of northern North America, Latin America, and Asia, as compared with 1937 returns. The sharp increase in cotton exports in December, together with large shipments during the preceding 4 months, offset the small movement during the first half of 1939 and brought the total for the year to the 1938 level. Exports of agricultural products as a group dropped during 1939 largely as a consequence of reduced shipments of grains, which had been in heavy demand in 1937-38, and of leaf tobacco and fruit, both of which came under wartime restriction. Increases in exports in 1939 as a whole, as well as during the last 4 months of the year, were concentrated largely in manufactured products, especially metals and manufactures, aircraft, machinery, lubricants, and chemicals.

8 The foreign trade of the United States with leading countries and with great trade regions for recent years and for earlier periods is given in appendix A-1, table 1.