central bank interventions, current account
deficits must be offset by capital account
surpluses. The floating exchange rate is the
equilibrating mechanism that forces a bal-
ance in total payments.
The current account deficit in the United
States in 1984 was around $120 billion, and
is projected to be the same in 1985, as com-
pared to a surplus of $6 billion in 1981. The
United States will therefore be importing a
large amount of capital from abroad. By his-
torical standards, the dollar is priced high
relative to trade weighted averages of other
currencies. The basis for this situation is
largely a change in investment preferences
(Feldstein) and relative savings rates, thus a
new importance has been placed on the cap-
ital account in the balance of payments. The
effect is that the dollar is strong, but not
overvalued. The reasons for the increased
attractiveness of U.S. investments has been
lower perceived risk, lower expected infla-
tion, and large budget deficits in the United
States.
What are the implications of this new in-
ternational order for U.S. agriculture? First,
the potential supply of capital to agriculture
is greater than it would have been if capital
markets were not internationalized. The
budget deficits, instead of only crowding out
domestic capital, also influence the larger
pool of international capital. This includes
U.S. investments abroad. U.S. banks claims
abroad were $25 billion in 1983, down from
$111 billion in 1982. Without the infusion
of foreign capital, interest rates would be
higher and financial stress in agriculture
would be more severe than now.
The increased importance of the capital
account in the balance of payments is a two-
edged sword. The demand for capital in the
United States has forced a high value of the
dollar by historical standards, but not over-
valued vis-a-vis other currencies. Thus, U.S.
agricultural exports are less competitive in
international markets. While the agricultural
trade balance in fiscal 1984 was up slightly
from the 1983 level, it was far below the
level in 1981, and the U.S. share of agricul-
tural trade was down.
An increase in net national savings in the
United States will be necessary to reduce the
exchange rate of the dollar and simultane-
ously balance the capital and current ac-
counts. Increasing the supply of capital to
the private sector by decreasing federal budget
deficits would help, but the present outlook
is that it will take some years for these deficits
to decline to the $100 billion range. In the
long run, an increase in private savings will
be required to eliminate trade deficits. A
surplus of capital funds abroad, largely from
petrodollars, from Japan whose maturing
economy and high savings rates will increase
their net international investment, and from
less demand by developing countries who
must resolve their current debt repayment
problems first, may help keep the U.S. capital
account in balance.
One disturbing facet of the high value of
the dollar is the resurgence of a protectionist
climate in the United States. Protectionism
could be detrimental to U.S. agriculture since
other countries will retaliate against our ex-
ports and spur foreign countries on to self-
sufficiency in food production, thus further
diminishing U.S. agricultural exports. In ad-
dition, it could slow the flow of capital into
this country, thereby exerting upward pres-
sure on interest rates.
DOMESTIC FINANCIAL MARKETS
The late 1970,s and early 1980’s have
brought unparalleled changes in U.S. finan-
cial markets. Financial institutions, instru-
ments, and practices comprise financial
markets at local, national, and international
levels. The function of financial markets is
to provide for a system to channel savings
into investments, bear risks, and provide for
efficient transactions and payments (Barry).
In the public interest, financial markets have
long been subjected to close scrutiny by a
variety of regulatory agencies. Regulations
and legislation affecting financial markets have
traditionally restricted geographic expansion
of financial institutions, limited the scope of
services provided by the different institu-
tions, controlled interest rates paid on the
various classes of deposits, established cap-
ital and liquidity requirements, and set loan
limits.
From an uncontrolled industry in the early
history of the country, restrictions were im-
posed gradually on financial markets. During
the crisis depression years, in order to sta-
bilize financial markets, restore public con-
fidence, and improve the survival probabilities
of financial institutions, financial markets were
subjected to an array of regulations and sev-
eral new financial institutions were estab-
lished. Social, economic, and technological
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