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All claims in foreign official hands – government central banks and treasuries – can, of course, call for payment in gold, if they choose, and this is what has been happening. A fundamental reason why the U. S. has been losing gold is the unfavorable balance of international payments we have been accumulating. High interest rates abroad, which have attracted substantial amounts of short-term capital from this country, have also been an important factor in our overall deficit.

Economic authorities emphasize that to maintain confidence in the dollar the U. S. Government must slow the gold outflow by reducing the payments deficit.

substantial accumulating. High inte balance of internati why the U. S. has

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Effect of Foreign Aid Programs There is no single explanation for our balance of payments deficit, but one obvious reason is stiffer competition from abroad. The competitive position of our export trade is weaker because other countries, particularly Western Europe and Japan, have recovered economically. They have built new modern plants, which, combined with lower wage and living standards, have reduced our productivity advantage. As a result, many of our foreign competitors have been able to undercut our prices in numerous world markets.

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IN THE DECADE of the 50's, the U. S. balance of payments account
showed a deficit in every year except 1957, the year following the Suez
crisis, when there was a net surplus of approximately $500 million.

U.S. Flag Ships Cut Payments Deficit $1 Billion

After World War II, in an effort to narrow the former "dollar gap”, the United States purchased much of its mutual security aid and military support products from foreign countries - and paid for them in dollars.

To an important degree, the extraordinary recovery of many countries abroad is due to the success of the U. S. foreign aid programs – both economic and military – following the war. These were fundamental and essential steps in alleviating the crucial “dollar shortage” abroad; the only way - as events proved – to help those nations, decimated by war, to rebuild their economies.

Without dollars, war-torn countries would not have been able to buy the materials they needed from the United States to rebuild their industries, shipyards and ships. But with such aid, they have been catching up technologically with the United States at an increasing rate. This enabled them to compete in world markets and to resume their traditional roles as exporters.

Basic Economic Changes This revolutionary change in the international economy, coupled with continued dollar expenditures by the U. S. Government for foreign supplies and equipment and for shipment via foreign flag ships, are the primary reasons why the foreign “dollar shortage” has been changed to a foreign “dollar surplus” – and why our balance of payments has been transformed into a critical deficit.

Up to a point, according to monetary authorities, an outflow of funds would not be serious. Continued large deficits, however, would inevitably affect the confidence that other countries have in the integrity of the American dollar. Such deficits would also severely limit the degree of freedom open to both the Administration and the Federal Reserve in their domestic monetary and fiscal policies.

Today the dollar is the standard money in world trade. Maintenance of a sound dollar – both here and abroad – is essential to our national economy, to the whole structure of world trade and finance, and to our ability to meet the threat of the Soviet Union to “bury us” in the field of trade.

U.S. Flag Ships Cut Payments Deficit $1 Billion

MERCHANT MARINE'S CONTRIBUTION RESULT
OF «SALE OF SERVICES”

TV HILE MANY INDIVIDUAL ITEMS comprise

America's balance of payments, it is not

generally realized that the “sale of services” through our Merchant Marine is a vital contributing factor to maintaining a favorable balance of payments. Such services, tantamount to “invisible exports”, make a substantial contribution to the nation's well-being.

In an effort to determine in dollar terms the importance of these maritime operations, the Committee of American Steamship Lines commissioned a study of the subject in September, 1960, by economists of The American University in Washington, D. C. The Committee is composed of 15 American Alag companies - operating over 300 ships under Government contracts -- serving U. S. foreign trade.

This is believed to be the first time that a basic American industry has sought to document in dollar terms the contribution it makes in maintaining a favorable U. S. balance of payments.

Dr. Frank M. Tamagna, professor of economics at The American University, and Dr. W. Donald Bowles, assistant professor of economics at the university, prepared the study.")

... This was accomplished in 1959 when our share of U. S. export and import trade carried in American flag ships was only an average of 10 per cent.

... The merchant fleet's contribution to the balance of payments is understated because unrecorded items could not be estimated.

Representing pioneer research in the field of water transportation, the study by The American University economists is unique in its approach and its thoroughness. Every possible effort was made to obtain comprehensive, pertinent data, despite the lack of uniformity encountered in world transportation accounts and the diversity of their treatment by individual countries.

Reviewing the Merchant Marine's contribution by specific years, the report shows that in 1959 net foreign exchange available from U. S. flag maritime operations amounted to $851,000,000, compared with $937,000,000 in 1958. In 1957, the year our export trade was sharply expanded because of the closing of the Suez Canal, foreign exchange

1) Dr. Tamagna was formerly chief of the financial operations and policy section of the international finance division of the Federal Reserve System, and an economist with the Federal Reserve Bank of New York, Dr. Bowles has served frequently as a consulting economist for government and private industry in addition to his association with The American University.

2) This summary is an interpretation of the facts by the Committee of American Steamship Lines, based on the methodology adopted by The American University economists. They examined carefully the various factors that have a bearing on measuring the contribution of maritime operations to the payments account and their approach is a plained in detail in the study itself. Copies of the study are available without charge on request to the Committee

What the Study Shows

The hard facts pointed up by the study can be summarized as follows:2)

... U. S. flag ships annually earn or conserve foreign exchange of from $800 million to $1 billion, thereby contributing favorably to the U. S. balance of payments.

eamings applicable to the balance of payments account totaled $1,238,000,000. In 1956 the figure was $959,000,000; in 1954 it was $684,000,000; and in the peak post-war year of 1947 it was $1,452,000,000.

were encountered as the survey progressed. It is obvious, for example, that the total should include in the contribution of the American flag vessels, not only recorded receipts balanced against recorded payments of foreign exchange, but also the unrecorded sums.

How Computations Were Made The study by The American University economists was limited to investigating the relationship between the transportation account and the balance of payments, and statistics used in the calculations are those specifically recorded in the balance of payments accounts, plus relevant figures that do not appear in these accounts.

In computing the dollar value of the Merchant Marine's contribution on this basis, the authors of the study totaled all revenues from shipping operations. These included revenues produced by American ships as a result of carrying U. S. exports, passenger fares, freight earnings on shipments between foreign countries, and receipts from charter hire operations. From this gross figure was subtracted port and other expenditures of U. S. ships abroad.3)

Various technical factors, difficult to assess,

Unrecorded Items Not Included One of the most important of these is the nonrecorded item of proprietary shipping – the cargoes carried by oil, steel and other companies in their own ships. It was impossible to include this item in the report because of the complications involved in trying to ascertain the full saving of foreign exchange resulting from such operations.

In addition, the authors explain, reliable data were not available on the amount of the contribution earned by the carrying of certain strategic cargoes and earnings of U. S. flag ships which are foreign operated.

3) Imports and defense cargoes are not recorded in the balance of payments as they represent dollar payments to U. S. firms.

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U.S. Flag Ships Cut Payments Deficit $1 Billion

"Therefore," the authors maintain, "our measure of the contribution of U.S. merchant shipping understates the true contribution."

In a broader sense, the report makes a much more powerful point with respect to the understatement of the conclusions. The figures are understated, it says, because they exclude “a major contribution of maritime operations related to our national security, such contribution to our national 'life' being invaluable."

period. Thus, 1938 was considered to be the last relatively normal year prior to World War II, and 1947 was regarded as the first relatively normal year after the war. The year 1954 was chosen as the year that reflected average conditions after World War II but before the sharp changes in world shipping conditions that began in late 1954. (These changes were reflected in greatly changed ocean shipping accounts for 1955.) The period 1954 to 1959 was included because it reflected the new post-1954 trend in world shipping, plus the abrupt changes associated with the Suez crisis in 1957.

This table summarizes details of the Merchant Marine's operations that are germane to its balance of payments contributions:

Selected Years Give Accurate Picture Selected years were used in the balance of payments study in order to reflect more accurately the scope of maritime and economic developments over a specific

NET FOREIGN EXCHANGE EARNINGS AVAILABLE FOR U. S. BALANCE OF PAYMENTS

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Earnings from carrying U. S. exports ............ Earnings from carrying U. S. imports........... Earnings from commercial carrying of U. S. Dept.

of Defense cargoes ................... Passenger fares, freight earnings on shipments

between foreign countries, and receipts from charter hire operations ........ .. . ...

Total Earnings Less: Port expenditures of U. S. ships abroad Net foreign exchange available to U. S. from U. S.

flag operations'' (balance of payments contribution) .......... SOURCE: Department of Commerce

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(a) Item ) is not recorded in the balance of payments. As presented here, it represents the sum of foreign exchange saved by U. S. flag operations expressed in dollars. These figures bave not been published by the Department of Commerce since 1957. Figures for 1957, 1958 and 1959 were supplied by the Departmear on an informal basis.

(b) This item includes Department of Defense controlled export shipments such as Mutual Security Program, etc. and non-Department of Defense controlled shipments of Special Category" commodities. These amounts, supplied by the Military Sea Transportation Service are not normally included in statistics of the Department of Commerce. Estimates for years 1938 through 1956 have not been included.

(e) These figures do not fully reflect Det foreign exchange available because of three exclusions. First, the proprietary shipping of U. S. firms in oil, steel, and other boes has not been calculated. Second, the carnings of U. S. flag ships which are foreign operated are not included. Third, earnings from carrying certain strategic cargoes are not shown. Inclusion of these items would increase the amount of net foreign exchange available.

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