MEMORANDUM Re: U.S. Balance of Payments As I visualize the international monetary system, if a central bank creates monetary liquidity (note that I did not use the term money supply as usually defined, because, I am thinking of the whole spectrum of monetary liquidity) faster than other central banks are creating monetary liquidity, money will run out--what economists call a balance of payments deficit. If a central bank stops creating monetary liquidity, the money will stop running out and the payments deficit will disappear. Conceivably, the United States could have a payments deficit even though the Fed was not creating monetary liquidity if other central banks taken together were actually destroying monetary liquidity. But this is certainly not the situation today and it is highly unlikely that we should have it. In my view, the money runs SO fast that there are virtually no lags in the adjustment process. To put it another way, the lags are SO small they are hardly worth taking into account. If money creation stops, the payments deficit stops. The Fed has just about stopped creating monetary liquidity; in fact, we may have moved into a period when it is actually being destroyed. In my view, therefore, the U.S. payments deficit has ceased to be a problem. It may have disappeared. We may even be in surplus. The reason I say "may" is that I do not think we can ever measure our balance of payments satisfactorily. When my wife andI balance our personal check- book each month, it is difficult enough for us to know for sure whether we have been in surplus or in deficit for that month. How much more difficult for the country as a whole. To get an indication of how the country stands, therefore, I take the simplest possible figures, what the economists call the settlement items. They are comparable to the balance in one's personal checking account and one's short-term lending and borrowing. From December 29, 196.5 to October 19, 1966 U.S. Government securities held by foreign central banks at the Federal Reserve fell by $1.036 billion. Of this amount $475 million was used to buy gold, leaving us, as far as these two most important settlement items alone are concerned, ahead by $561 million. Through October 12, 1966 foreign deposits in U.S. weekly reporting member banks were down $372 million, which puts the U.S. ahead on these three items by $933 million. In addition to that, through August Treasury and Federal Reserve holdings of foreign exchange increased by $518 million, bringing the improvement to $1,451 million. There has also been a decline of $21 million in foreign central bank deposits at the Federal Reserve Bank of New York. On the other hand, our position in the International Monetary Fund through August had worsened by $207 million. So the total surplus from all of these settlement items, if all of the figures were available for as recent a date as October 19, must today be somewhere in the area of $1,265 million.