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securities and other investments of its nationals, but it has not vested them. The Government has attempted to induce private holders of dollar investments voluntarily to liquidate them. It has attempted to stimulate such liquidation by offering a Netherlands bond in dollar denominations and payable in guilders at the rate of exchange at the due date, which may be purchased with the proceeds of sales of United States dollar securities. According to reports received from the Netherlands only nominal amounts of this offering have been taken up. It appears that net sales of these United States securities for Netherlands accounts have been at the rate of less than $100,000,000 a year. It is understood that the Netherlands Government has agreed with the Export-Import Bank to liquidate United States dollar securities or other obligations owned by its nationals in such amounts as shall be necessary to liquidate outstanding advances under the credit of $200,000,000 which was granted to that Government on January 1, 1946.
It is felt that results of the census taken by the Dutch authorities, which correspond closely to the results obtained by the United States census, are reliable. Also the Dutch foreign-exchange controls are effective and, therefore, the $28,000,000 annual income which the Department of Commerce estimates is earned on these assets is available to the Dutch Government as well as the dollar proceeds from sales of these assets.
OTHER EUROPEAN COUNTRIES
The third largest holder in this group of countries is Switzerland, with total United States assets of $870,000,000. It is believed, however, that a substantial portion of these assets is beneficially owned by nationals of other countries. In particular, it has been frequently alleged that French citizens have invested capital in the United States through the intermediary of Swiss banks. The French Government has made efforts to secure information on this matter, but because of the strictness of banking secrecy code in Switzerland, no progress has been made. Most of the investments held in Swiss names are in stocks and bonds which are listed on one or more United States securities exchanges and enjoy an active market.
All Swiss dollar investments are privately owned. The Swiss Government has not taken a census of these assets or any other steps to utilize them. An agreement has been reached with United States authorities whereby the Swiss Government through accredited banks certify to the nonenemy ownership of United States securities as a condition to their being unblocked for transfer and withdrawal of the proceeds. The Swiss exchange controls permit the free transfer of these securities by its nationals. The Department of Commerce estimates the annual income received by Swiss nationals on these investments is about $21,000,000.
Of the $465,000,000 of long-term assets estimated for France, a study of available data indicates that perhaps half may be assets which were reported to the United States Treasury but have not been declared to the French authorities.
The French Government authorized a census and mobilization of foreign assets held by its citizens in January 1945. The census was
taken shortly thereafter and in July 1947 an order was issued vesting in the Government the dollar securities of French citizens. French citizens were compensated in francs for their property on the basis of July 1947 prices. As it was indicated above, it is generally believed that the results of this census and vesting order were incomplete due to the failure of some French citizens, in reliance upon the protection of Swiss and United States authorities, to disclose their holdings, particularly those held outside of France.
The French Government has in discussion with the United States on several occasions indicated its intention of utilizing the vested United States securities by sales in the open market. According to the Department of Commerce estimates, France receives income of about $6,000,000 per year on these investments. It may be that even this small amount of dollar income is not altogether available to the French Government.
Italian holdings of United States assets are relatively unimportant. As of the middle of 1947 they are estimated to have a total value of $63,000,000. Of this amount $40,000,000 is estimated to represent utilizable forms. Holdings of stocks are estimated about $12,000,000 and bonds at $2,000,000. It is not known that the Italian Government has made any efforts to mobilize or utilize these assets of its nationals. According to the Department of Commerce estimate, the income received on these investments is about a half million dollars per year and even this amount may not be available to the Italian Government.
In October 1947 the Swedish Government took steps to mobilize all private holdings of short-term foreign assets held by its nationals. According to available data, Swedish nationals own about $115,000,000 of United States assets in the form of stocks, bonds, and direct investments. The Swedish Government has taken a census of these longterm assets but has not taken steps to vest or mobilize them.
Of the remaining countries participating in the European recovery program, only Belgium holds United States assets of an appreciable amount. The holdings of this country in the form of stocks, bonds, direct and miscellaneous investments had an estimated value as of the middle of 1947 of $185,000,000. A census of foreign assets was taken shortly after the liberation, but the Government has not sought authority to acquire the assets.
D. FOREIGN COUNTRIES' GOLD AND SHORT-TERM DOLLAR RESOURCES
At the end of June 1947, the gold and short-term dollar resources of all foreign countries totaled around 19 billion dollars. Out of this total, sterling-area countries held 4.2 billion dollars. Among the other countries that participated in the Paris European recovery program discussions, Switzerland, Portugal, and Turkey held about 2.4 billion dollars and the remaining participants 3.1 billion dollars. Other European countries (including the U. S. S. R.) are estimated to have held somewhat less than 4 billion dollars, Asiatic countries about 1.7 billion dollars, Latin America about 3.3 billion dollars, and
Canada 0.9 billion dollars. Table 29 gives the available figures for individual countries.1
Most of these resources constituted reserves needed by their holders to finance the current flow of international trade or to back their currencies. Holdings not so required may be estimated roughly as follows: (a) About 1.5 billion dollars held by Switzerland, Portugal, and Turkey and about 1 billion dollars held by some LatinAmerican countries constituted reserves which might be judged to be over the holders' minimum needs; (b) if there were applied to the Philippine Republic the same general standards applied to other countries, its dollar holdings would seem to be about 250 million dollars over minimum requirements; (c) the holdings of South Africa as of June 30 may have been over that country's minimum needs by 300 million dollars or more, but there has since been announced a loan by South Africa of 325 million dollars of gold to the United Kingdom.
Foreign countries' total resources included about 14 billion dollars in gold stocks held abroad or earmarked in the United States and 5.3 billion dollars in short-term dollar assets held on the books of banks and bankers in the United States. Of these resources, the entire gold stocks and 2,160 million dollars in dollar balances were -held officially (by foreign governments, their agencies and central banks), while the remaining dollar balances-3,170 million dollars— were held privately (by commercial banks, business firms, individuals, and others).
It may be noted that private dollar balances are considerably larger than official dollar balances. This represents a change from the situation which prevailed before February 1946, and is the result of an accelerated contraction of official balances and a gradual expansion of private balances. In large part these private balances actually represent the working funds of foreign commercial banks and business firms engaged in international finance and trade activities, and their increase reflects the expansion of the volume and value of their transactions after the war. The remainder (probably a small part only) consists of "refugee" funds held in the United States for safety and stability by private individuals; and their use in financing foreign needs will depend on the degree of control which foreign governments can exercise, or the willingness of private holders to repatriate them.
Net sales of gold to the United States and drawings on official dollar balances by foreign governments amounted during 1946 to 1,835 million dollars, and during the first half of 1947 they amounted to 2,275 million dollars. For the 12-year period as a whole, the liquidation of gold and dollar balances proceeded at approximately equal rates: Net gold sales came to 2,085 million dollars and net drawings on official balances to 2,020 million dollars. The net decline in gold stocks and official balances during the period was 4,000 million dollars (inclusive of addition from gold production and deduction for contribution to the International Monetary Fund). A further loss of gold and dollars of around 650 million dollars has occurred in the third
1 These figures cover all official gold stocks (using available estimates where figures are not officially published) and both official and private dollar balances as reported by bankers in the United States to Federal authorities. The figures do not, however, include gold and United States dollar notes that may be privately hoarded in foreign countries or short-term liabilities of brokers, commercial concerns, and the Commodity Credit Corporation. Thus they do not include $1,510 million carried as "undistributed” short-term assets in table 28. No deduction has been made for foreign countries' gold and dollar liabilities.
quarter of 1947. This contraction of gold and dollar resources has been unevenly distributed, with the result that a number of foreign countries have already reduced their reserves below the levels that prudence would require them to keep, although a few countries, as noted above, continue to hold resources which might be regarded as over their minimum needs. Even these latter countries, with but a few exceptions, have recently been losing reserves, and they could hardly be expected to supply any great amount of loans of gold or dollars of the type needed to overcome other countries' dollar shortages.
The amount of reserves that a country needs depends upon a complex set of considerations including not only financial and economic but also psychological factors involving confidence in the country's currency, as well as political and historical factors. When a country's reserves are reduced below the amount that a prudent man would consider safe, the country may be fortunate and be able to maintain its financial stability; however, it subjects itself to the risks of economic and possible political dislocation arising from external and internal doubts and lack of confidence. A country may have to weigh the question of maintaining a safe level of reserves against the immediate need of imports vital to its economy, and in such a case may decide to hold a lower level of reserves than prudence at other times would dictate. For all these reasons, it is not possible to devise any simple general formula for determining the needs of different countries.
Neither can the amount of reserves needed be judged by a simple comparison with levels prevailing before the war. The erratic price rises since then and the shifts in composition of foreign trade would alone nullify the usefulness of such comparisons. More important, however, is the fact that throughout the thirties most countries already suffered from reserve deficiencies, and it was these deficiencies that led to their imposing restrictions on foreign trade and exchange. The longer-term objective of the United States-freer multilateral world trade requires the avoidance of such restrictions.
Hence, in the last analysis, the amount of reserves needed by a given country at a given time is a matter that requires determination on the basis of the most expert and responsible judgment.
For purposes of the present discussion, the needs of each country have been estimated very roughly by taking a figure based on the country's volume of current payments to other countries for goods and services, to represent the amount of working balances needed, and adding a second figure based on its volume of currency in circulation, to represent the amount needed for domestic monetary reserves. Even though such approximations cannot represent any real judg ment as to the need of any particular country, it is quite apparent that, even allowing for a considerable margin of error, there are few if any countries, outside of the groups previously listed as having surplus holdings, that are in a position to make further drafts on their gold and dollar resources without serious danger to their future financial stability.
The implicit assumption that each country needs to hold working balances proportional to its volume of current payments to other countries arises from normal business practice and procedures. The particular figure used in the present calculations-3 months' payments to other countries-is an arbitrary figure which is undoubtedly too high for some countries and too low for others. Most working balances
for trading purposes have in the past been privately held separately from monetary reserves; government participation in foreign trade and monopoly of exchange resources has tended to shift trade working balances from private to official accounts and to add them to the monetary reserves of central banks or exchange authorities. In normal times such working balances would be distributed among the various currencies of the major trading countries. Nowadays, however, for most imports of foreign countries, settlement is ultimately made in gold or dollars.2
The particular figure used for monetary reserve requirements-25 percent of the notes and other demand liabilities of the central bank (or other issuing institution)—corresponds to the level to which the legal requirement in the United States (for Federal Reserve notes and deposits) was lowered in June 1946. This figure is considerably lower than the 40 percent ratio which was required as a standard for purposes of currency stabilization in the period after World War I. The monetary laws of most countries still provide for reserve requirements in gold and exchange at levels between 25 and 50 percent, or even higher. However, because of the decline in their reserves and the expansion of their currencies, many countries have been forced to suspend legal-reserve requirements and currency convertibility, and to introduce rigorous exchange controls.
In view of the general abandonment of the gold standard and the adoption of managed currency systems, a gold reserve is no longer technically_required to meet demands for gold payments within any country. In these circumstances monetary reserves may logically be considered not as internal reserves, but as funds (supplemented, to a limited extent, by the possibility of drawing upon the International Monetary Fund) for meeting contingencies in international payments and for the stabilization of exchange rates. It is clear that the amount of international currency a country needs is not directly related to the volume of its central bank's sight liabilities, or even to the amount of its domestic money supply (currency plus demand deposits). While the traditional reserve ratios of central banks are open to this technical criticism, they nonetheless command the attention and respect of the general public in the countries concerned. Hence, governments continue to regard seriously any decline in the reserve ratio and to impose increasingly stringent restrictions on foreign payments whenever this ratio tends to fall below what is customarily regarded in the country concerned as a safe or minimum level.
While, in the present crisis, many foreign countries have already drawn their reserves below what would ordinarily be regarded as a prudent level, it is clear that such use of monetary reserves for meeting current deficits must in the long run delay and jeopardize the restoration of international convertibility of currencies. The depletion of reserves of foreign countries makes it impossible for them to relax import and exchange controls, and thus ultimately runs counter to the United States objective of expanded multilateral trade.
2 For purposes of this discussion, trade between countries within the same monetary area (such as the sterling area) is regarded as internal trade, not foreign trade.