Russia devoting more of its energy to serving its people, and less to war supplies: Who could read the report and fail to realize that motels, highways, service stations will be built--with less going to war supplies.

The Soviet Fiat plant will be built: Our shortsighted action of Congress will not prevent the plant being built. Their actions does damage America's chance to sell nonstrategic goods, at a profit, with resultant taxes for our Government.

Now, let's look at history-and how isolation has damaged the United States: Here are the irrefutable facts:

At the turn of the century: As the 20th century opened, we had world trade, both exports and imports, of $2 billion.

After World War I: Total trade, both exports and imports, was $12.6 billion.

The famous Hawley Smoot days-isolation rampant-the depression: Total trade, exports and imports, dropped to $5 billion. How many Americans did that throw out of a job?

1966: Total trade, both exports and imports, $48 billion. With a favorable trade balance of $5.2 billion (exports over imports) that permitted us to help the rest of the world in economic and military aid. It also caused a $2 billion payment deficit. We have had since 1959 a dollar payment deficit.

How can this deficit be corrected? No better way than to increase exports. Can we do that with isolationism rampant in Congress? If any-yes, any-import restrictions are enacted, exports will not only not increase, they will materially decrease.

Other ways to cure deficit: They are:

Stop American tourists: There is a $2 billion deficit in tourism. Stop economic aid: Much of it should be stopped, but we have become an altruistic nation, determined to save the world-with chance of destroying our great country. How can any country in 15 years give $1,500 billion (yes, $112 trillion) away? Are we loved or hated for such givings?

Military aid: Our military says it's necessary to survive.

Is America a failure at exporting? If any more obstacles are put in the way of the American international trader we will do worse than we are.

Are we doing good? Who would say so, when our exports of gross national product (GNP) amount to the following in comparison with other countries: United States, 5 percent; Canada, 17 percent; Japan, 9 percent; West Germany, 15 percent; United Kingdom, 14 percent; Italy, 12 percent; France, 11 percent; Netherlands, 35 percent.

Would you be disgusted? If you were any one of the 1,200 businessmen serving on the national and regional export expansion councils, would you continue to give gladly of your time to help exports if your Government and Congress take steps to make your goal unattainable?

I, personally, am about fed up: I was originally appointed on the Regional Export Expansion Council by President Eisenhower in 1960, and subsequently by President Kennedy and President Johnson. I, in June, accepted another 2-year term expiring in June 1969. Why should I give 90 percent of my time to think I am helping the country I love to increase its exports when it is such a discouraging job?

I have spent 4 hours of my time typing this letter. I hate to type. I can't type. Please pardon errors. How many retired men, 72 years old, would go to the trouble that I have to give you my honest opinion and views, which I firmly believe should be advantageous to your committee.

Statements should be limited to 20 pages-and a one-page summary: I have limited my remarks to six pages, one-third of the permissible number. I have not made a one-page summary. Who could summarize what I have said on 18 subjects in six pages.

I regret that this report will reach you 1 day late. Meetings and other commitments prevented me from writing you before this evening.

I hope that I have been helpful. I have been honest.
Sincerely,

W. H. LUKENS,
Drexel Hill, Pa.

TRADE AND THE BALANCE OF PAYMENTS

(By Dr. Lewis E. Lloyd, Economist, the Dow Chemical Co.)

Discussions relative to and following the Kennedy round of GATT negotiations have centered attention largely on technical factors and the mechanics of trade and trade barriers. These gain relevance as they are projected against the fundamental economics of trade. For a full evaluation of U.S. present trade relations, and particularly for projecting into the future, it is essential that careful attention be given to the fundamentals involved. Accordingly, this paper will address itself to the U.S. balance-of-payments problem, its basic cause, and its impli cations for foreign trade policy.

For several years the U.S. negative balance of payments has been a mattter of concern, both in government and financial circles. The subject has been widely discussed in the press. It has been a regular subject of discussion at the regular meeting of the central bankers of the major industrial nations. It, along with the problems associated with the British pound, has raised many questions of international liquidity and schemes for coping with continuing balance-of-payments problems for the two major trading currencies in the world.

Already the United States has taken several actions to minimize the outflow of dollars and improve the short-term balance of payments. These include, among other things, reduction of duty-free imports which travelers may bring home, guidelines for control of the outflow of capital investments in overseas plants, and a foreign investment tax on portfolio investments. Moreover, in recent years, to minimize the outflow of gold and the overseas dollar balances, we have borrowed extensively in foreign currencies from several European countries.

How big, then, is this balance-of-payments problem? How did it suddenly come to the front as a major concern? What are the fundamental causes?

BALANCE-OF-PAYMENTS SITUATION

First, it will be desirable to clarify the relation between trade bal ance and balance of payments. Foreign trade and foreign trade balances refer to the shipment of commodities and manufactured goods

across borders. The balance of payments, in addition to including the trade balance, includes also all the other economic relations between a nation and its trading partners. More specifically, the balance of payments consists of

1. The net of foreign trade.

2. The net of foreign services-shipping, insurance, et cetera. 3. The net of tourism.

4. The net of capital flow, including payment of interest, dividends, et cetera.

5. The net of gifts-foreign aid, as well as private gifts.

A "negative" balance of payments means that more dollars have left our shores than have returned in a given year. A "positive" balance would mean the reverse. Obviously, over an extended period of time it would be desirable to have the balance of payments net out at zero. This would indicate that, on the average, our total outflow of goods and services of all types precisely balance the inflow.

It is clear that the flow of capital, either short term because of differential interest rates or longer term in response to investment opportunities, can substantially affect the balance of payments. It is also clear that our massive foreign aid program has had an important influence on the outflow of dollars which has given us a negative balance of payments even when the trade balance was favorable.

A look at the record clearly shows why there is concern about the position of our balance of payments. Chart 1 shows that we have had a negative balance of payments every year since 1949, except for the year 1957 when the Suez crisis forced Europe to buy quantities of oil from the dollar area. This means that year after year more dollars have left our shores than have returned. This continuing and growing deficit exists because foreigners who get dollars from our imports, from tourism and from gifts, can on the average use these dollars to buy elsewhere more cheaply than in the United States.

Since 1958 the Federal Government has taken several actions in order to minimize the size of the reported negative balance of payments. They have induced the French and others to prepay long-term debt; they have obtained prepayment for military equipment before delivered; and they have borrowed foreign currencies. The solid line in the chart shows the official reported balance of payments; the dashed line shows the current account negative balance of payments before adjustment for the above-mentioned special transactions.

As a result of the continuing outflow of dollars, foreigners have increased their short-term claims against the dollar, and in addition, have exchanged dollars for about half of the gold that we had at the end of the war. Chart 2 shows the U.S. gold reserve and the net claims against the dollar-that is, foreign claims against the dollar less our claims against other currencies. In 1948 and 1949 our gold reserve was at $24.6 billion. It has now been reduced to about $13 billion. The gross foreign short-term claims against the dollar at the end of June 1967 were $33.6 billion, but our claims against foreign currencies are only $7.9 billion, so the net is something like $25.7 billion.

As a result of the continued growth of claims against the dollar, there has for some time been concern about our ability to meet our promise that we will exchange gold for any dollars that foreign central banks present for gold. Chart 3 shows the amount of gold we would have had left during the 1950's and early 1960's had the claims

all been tendered. Since mid-1962 we have not had enough gold to meet the net foreign claims. We are now short by more than $15 billion of being able to cover all the claims against our gold.

As shown by the dashed line in the chart, gold is also required as backing for the dollar. Formerly, a 25 percent reserve was required for both Federal Reserve notes and Federal Reserve deposits. By early 1965, however, the gold required to support our bank credit had risen to almost $14 billion, and this left only about a billion of free gold to meet any foreign claims that might be tendered for gold. The administration then asked and Congress authorized the removal of the gold cover from Federal Reserve deposits. The domestic banking require ments dropped to about $8 billion when the gold cover was removed from deposits, but has now increased to a level of about $10 billion. This leaves only about $3 billion of free gold against net claims of $26.9 billion by the end of July 1967.

It is clear that since 1960 we have not had enough gold to meet all of our foreign commitments, let alone our domestic banking requirements. It is this shortage of gold that has reduced foreign confidence in the dollar and toppled it from its former position as the most sought after currency in the world.

Source: American Institute for Economic Research

The seriousness of our international monetary position is the fact that many of the dollar claims held by foreigners are used to support credit in their country as though the dollar claims were gold itself. As a consequence, both foreign central banks and the U.S. banking system have each extended extensive credit, based on the same gold. If at some point confidence slips, there will not be enough gold to go around and this is precisely why many people are concerned about international liquidity.

The U.S. balance-of-payments situation has worsened again this year. It is clear to all that we cannot continue to run such a large negative balance of payments indefinitely. The problem has become so important that it becomes the matter of first concern in all of our foreign economic relations. What are some of the consequences of our unfavorable balance-of-payments position? What can be done to alleviate the problem?

Ideally, it would seem that we should plan to move from a negative to a positive balance-of-payments position for a few years so as to win back equilibrium. The administration has mounted a massive