pean capital. Of the major countries only the United Kingdom showed a substantial reduction in its bank balances here. The retarding effect of the "freezing" orders on withdrawals of foreign funds partially accounted for the high level of short-term balances of the major invaded countries at the end of the year. Foreign deposits payable in dollars comprised 98 percent of total balances, compared with 97 percent in 1939 and 94 percent in 1938. The continuing tendency to concentrate foreign assets in demand deposits emphasized the unstable character of these funds. Of the deposits at the close of the year, $1,133,000,000 were for the account of foreign central banks and governments with the Federal Reserve banks, an increase of 178 percent for the year, compared with an increase of 96 percent during 1939. Official deposits in New York commercial banks and trust companies totaled an additional $142,000,000. Income to foreigners on dollar balances was estimated at only $4,000,000 inasmuch as demand deposits draw no interest. At any particular time, foreign short-term investments or cash balances reflect the net effect of other movements, such as the sale of assets, whether securities or gold, and the actual dollar expenditures for goods and services or benefits under contract. The countries that increased their dollar accounts during the first year of the war were (with the major exceptions of France and Canada) nonbelligerents during the year. In many cases the proceeds of gold shipments exceeded the limited use to which existing balances could be put under wartime conditions. However, to the extent that the proceeds of gold imports were in effect immediately expended, movements of gold tended only to maintain the volume of outstanding balances. Official Funds Replacing Private Capital. One immediate consequence of the war was the replacement, in international transactions, of private capital by official or government capital. Following a similar trend in 1939, foreign government and central bank funds on deposit with the Federal Reserve banks and other depositaries were increased by $683,000,000 in 1940 while the net inflow of foreign short-term funds, government and private, as reported by the Treasury Department, amounted to $682,000,000,61 indicating almost no net change in the volume of private foreign funds in this country. Of the changes in official funds, deposits with the Federal Reserve banks rose by $725,000,000 and absorbed a decline of $35,000,000 in similar deposits with New York commercial banks and trust companies. The total of these official foreign funds on deposit in United States banks at the end of 1940 reached $1,275,000,000, or 32 percent of the total foreign liabilities of the banks of this country, as contrasted with 18 percent a year earlier. At the start of the war the various parts of the British Empire required their nationals to register all foreign assets, and instituted exchange controls to prevent the flight of capital. The Government of the United Kingdom immediately requisitioned the short-term foreign assets of its nationals except amounts needed for the conduct of ordinary business. Furthermore, it required that the proceeds of all sales of securities abroad be turned over to the Government in exchange for the equivalent in pounds sterling. At first, these con 51 See note to table VIII, p. 46. trols permitted a considerable leakage of funds from the United Kingdom but, by degrees during 1940, the regulations were effectively tightened. The net result was a greater concentration of funds in the official accounts. Control measures in the Dominions were more stringent from the first and did not require so much revision. The Dominion of Canada did not requisition the short-term dollar assets of its citizens until in May 1940, but did severely restrict purchases of foreign securities. Australia in 1940 and India in 1941 requisitioned part of the dollar assets of their nationals. More complete mobilization of securities by Australia was decreed on May 29, 1941. France also required the registration of foreign assets and set up control systems, although the control measures were never very seriously enforced. During the early months of the war there seemed to be a return movement of previously expatriated private funds which made the usual prohibitions on the export of capital unnecessary. Although French dollar expenditures for airplanes were quite large, the Government maintained its dollar balances at a high level by shipping a large part of its gold reserve to the United States. One large shipment came direct from France to this country. It arrived about the time of the Franco-German armistice and the proceeds were blocked along with other French assets in June. The central banks and governments of several of the nonbelligerent European countries were forced in 1940 to establish or strengthen their exchange control systems to prevent or discourage the flight of private capital. There was a considerable outflow of private as well as official capital from the Scandinavian countries during the Russo-Finnish war and again about the time of the German occupation of Denmark and Norway. Those countries soon found a tightening of exchange controls to be desirable. At the time of invasion, Belgium and the Netherlands adopted similar measures, although previously they had succeeded with difficulty in avoiding those controls. All of these countries had sent a large part of their gold reserves to this country, some to be placed under earmark and some for the creation of official dollar deposits. These operations resulted in the accumulation of a large amount of gold, currency, and deposits in the United States which subsequently became subject to the official freezing orders. (See Appendix A-VI, table 5.) During the fighting in France and Belgium, the constant fear of an attack on Switzerland led to a flight of capital from that country to the United States. After the signing of the Franco-German armistice, a return flow of funds developed-a movement which was stimulated at various times later in the year by rumors that the United States would "freeze," or block, Swiss and other "neutral" funds. The Swiss National Bank penalized the return movement by allowing the franc to appreciate from its May low of about $0.2113 to approximately $0.2323 by the end of October. The Bank, nevertheless, supplied the necessary francs and added to its dollar assets, thus contributing to the increase in foreign official deposits in United States banks. At the year-end, total Swiss banking funds in the United States were about $140,000,000 higher than at the beginning of the year. The China Incident led to similar measures of government control in China and Japan before 1940, and, likewise, added to the growing volume of official funds in foreign capital transactions. In the face of large expenditures by the governments of those two countries, their balances have been maintained at high levels-China's, partly with the assistance of loans from the United States Government, and Japan's through extensive sales of gold in this country. Only in the case of Latin American assets in the United States does it seem likely that private capital movements remained first in volume. The increased dependence of that area on the United States, in the commercial sphere, necessitated the accumulation of larger dollar balances and there is good reason to believe that some Latin American private as well as official balances in London were converted into dollar balances during the early months of 1940. Furthermore, some private European capital is thought to have reached this country through Latin American accounts. Outlook for 1941. The outflow of foreign capital from the United States, which was expected when the war started, did not materialize in 1939 or 1940. As explained earlier this was the result, first, of the large-scale transfers of short-term funds in this country by nonbelligerents, second, of the slow tempo of purchase by the United Kingdom and France (which subsequently appeared to have been overcautious), and, third, of the reliance of those countries upon sales of gold to finance their necessary expenditures. In addition, United States capital that had previously been invested abroad was repatriated in some volume. Again at the end of 1940 conditions indicated a reversal of the flow of capital. On the one hand, the British had used up their existing gold reserves while the estimated new production was insufficient to meet more than a small part of the large dollar expenditures in 1941. It appeared certain that the liquidation of British investments in the United States would have to proceed much further in order to supply the needed dollar funds. On the other hand, the President's freezing orders prevented the outflow from this country of the large stores of gold, dollar balances, and long-term investments which some of the wealthier countries of continental Europe had accumulated here over several years. The extension of those orders to all of continental Europe in June 1941 effectively blocked any substantial reductions of a large part of the foreign investments in the United States. At the same time it was virtually impossible for those countries, or their nationals, to build up dollar balances, either by the shipment of gold or by other means. New factors entered into these calculations with the passage and approval of the Lend-Lease Act on March 11, 1941, and the amendments to the Reconstruction Finance Corporation Act (Public Law 108), approved on June 10, 1941. The former, and the subsequent appropriation bill, provides $7,000,000,000 that can be used to supply any defense articles to "the government of any country whose defense the President deems vital to the defense of the United States." Transactions under the terms of this act are, in effect, loans to foreign governments and constitute a type of capital export. The amendments to the RFC Act supplement the Lend-Lease Act by giving that Corporation power to make loans to foreign governments "for the purpose of achieving the maximum dollar exchange value in the United States for the securities or property of any such government." Such loans are to be made only upon the security of United States governmental obligations, or corporate bonds, debentures, and stocks. This act relieved the British Government of the necessity of liquidating the dollar assets of its nationals, and also freed the market of the necessity of absorbing such a large volume of securities. It was under its provisions that the $425,000,000 loan to the United Kingdom was made in July 1941. The loans of the Export-Import Bank to Latin America and other areas likewise involve an outflow of capital. As a result of the large undisbursed commitments of the Bank at the end of 1940 and possible new loans, such exports of capital may become important in 1941. These may be offset to some extent, or perhaps rendered unnecessary, by the increase in foreign assets in this country arising out of the proceeds of defense purchases of raw materials from, and preclusive buying in, foreign countries. A further factor, of perhaps limited significance, is the establishment of priorities on the use of certain materials needed in defense production. These may lead to the limitation of exports of capital goods to United States-owned enterprises in Latin America and elsewhere, or the diminution of other exports by reason of the difficulties of obtaining export licenses. Although the various factors conflict to some extent, the major forces indicate an outflow of capital from the United States during 1941. This outflow would have the effect of reducing British investments in the United States and of increasing British indebtedness to our Government. Probable declines in United States private investments abroad would be offset by the increase in amounts due to the ExportImport Bank and the Stabilization Fund. APPENDIXES A. DATA RELATING TO CREDITOR-DEBTOR POSITION I. CAPITAL MOVEMENTS Table 1.-Summary of Long-Term Capital Transactions Between the United States and Foreign Countries, 1938-40 1 These figures are estimates of the actual amounts involved during 1938 in refunding bonds held by Americans. They differ from the amounts shown in the schedule of "Foreign capital issues publicly offered in the United States" for that year, because, in the latter, the outstanding "American share" of the issues to be refunded was carried as "refunding to Americans" even though part of the bonds were held by foreigners, and regardless of the fact that the retirement of the old issue or issues did not occur until the following year. 2 Data were available for the first time in 1938 relating to the net change in advances and intercompany accounts as they affect American direct investments in foreign countries. There was an indicated net outflow of $100,000,000 during 1938, some of which may be considered as net investments and some as offsets to dividends declared by the foreign affiliate out of funds previously transferred to the United States as advances to the parent company. (See section, "Interest and Dividends.") The revised data for 1939 indicated a net outflow of $25,000,000, while in 1940, the apparent outflow was $10,000,000. |