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DEPARTMENT OF STATE1964-1968 Volume VIII International Monetary and Trade Policy |
General and Financial and Monetary Policy
140. Telegram From the Department of State to the Embassy in the United Kingdom/1/
Washington, August 24, 1967, 0345Z.
/1/Source: Department of State, Central Files, FN 10. Confidential; Priority; Limdis. Drafted by Willis on August 22 and approved by John F. L. Ghiardi (E/IMA).
26200. For Griffin from Treasury. Following text of confidential letter from Secretary Fowler to Chancellor Callaghan. Request you arrange delivery soonest. Signed original being pouched./2/
/2/Not found. A similar message from Deming to Schoellhorn was transmitted in telegram 26201 to Bonn, August 24. (Ibid.)
Begin text
Dear Jim:
I hope it will be possible for the two of us to meet before the Ministerial meeting at 10:00 a.m. on August 26, possibly at 8:30 or 9:00 in the morning. As you know, I will not be arriving in London until about 11:00 p.m. on the evening of the 25th. It would be helpful to exchange views on the Ministerial meeting beforehand. However, there would probably not be time to go into any other matters on Saturday morning,/3/ and I would be happy to have a further session with you at some time on Sunday on other subjects, if this would be convenient to you. In the meantime, you might be interested in the present state of our consideration of some of the major questions.
/3/August 26.
The Deputies have done yeoman work in trying to implement the package which you assigned them at our last meeting in London./4/ In addition to resolving a good number of the brackets in the Outline,/5/ they made considerable progress in narrowing differences on the big issues. I understand that if the French representative had had more flexible instructions, it might have been possible to reach almost complete agreement on the Outline--with acceptance of the average net use formula as the centerpiece.
/4/Reference is to the London meeting July 17-18; see Document 134.
/5/Following a meeting in Paris July 27-28, the Deputies of the Group of Ten agreed on a version of an Outline, which has not been found, but is summarized in De Vries, The International Monetary Fund, 1966-1971, vol. I, pp. 157-158.
As it turned out in London, the major issues were left unresolved. Voting provisions, reconstitution, the right to purchase a country's own currency, the name of the asset, the magnitude of acceptance limits, and a satisfactory resolution for adoption by the Governors at Rio must all be considered by the Ministers this weekend.
One of the important accomplishments of the Deputies at the Paris meeting in July was to narrow and clarify the alternatives on reconstitution. Although there are five alternatives in the Emminger redraft of Chapter V, 4, the results of the Paris meeting--where agreement was almost achieved on the basis of Alternative A--would seem to justify concentration on Alternative A in our forthcoming discussions on reconstitution. In Paris Ossola indicated that the Italians would not want their harmonization proposal to stand in the way of the agreement on Alternative A. In large part this attitude seemed to reflect the fact that the harmonization principle was very difficult to define and apply practically. Whether or not this is the official Italian position, I cannot say. Governor Carli seems to be very closely attached to the harmonization principle.
You will recall that the first paragraph of Alternative A is really based on a French suggestion. In brackets, it contains also the elements of Minister Schiller's proposal of 75% over six years. At the same time, our version of Alternative A sub-paragraph (ii) would maintain the principle of harmonization as a general guide. (The Emminger formulation in paragraph (ii) A seems to us much too rigid. By emphasizing disproportionate use, without any qualification with respect to "over time", it would undesirably constrain the asset as a freely usable reserve.)
I would like you to know that, for our part, we could under no circumstances consider any operative combination of harmonization and average use such as is represented by the Emminger variant of Alternative A, paragraph (ii), or by Alternative C. Needless to say, the new French Alternative D is also outside the range of what is negotiable, since it combines the most stringent form of harmonization with average use.
All in all, our general view is that we could support Schiller's average use proposal of 75% over six years, supplemented by Fred Deming's language in paragraph (ii) of Alternative A. This seems to be the most reasonable of the formulae on the table. Of course, the 75% figure is an essential feature of the proposal.
On a different point, I would like to draw your attention to the fact that the right of a member to purchase balances of its own currency has been bracketed by the French. You will recall that the substance of this provision has been changed in an important respect since it was discussed at our July meeting. Previously it was provided that a country meeting the needs test could obtain balances of its currency held by another country if the latter country was eligible to receive the new drawing rights and was within its acceptance limits. Provided these conditions were met, a country could exercise this right without the consent of the country receiving the drawing rights. The provision has now been modified so that the right to obtain one's own currency from another country can be used only if the other country consents. Thus, for example, the U.S., if it meets the needs test, can obtain dollars held by another country if that country is eligible to receive special drawing rights, is within its acceptance limits, and agrees to take special drawing rights in return for dollars. We are fully in accord with this modification of the provision since it removes any possibility that it might be misconstrued to indicate that the U.S. was modifying its commitments to convert dollars into gold. Although this construction was completely unfounded even under the previous provision, the requirement of consent of the other country eliminates any possibility of misinterpretation.
Even as modified, this provision is of vital importance to the U.S. Under the regular rules of holding and use, in order to use 100 drawing rights we would have to obtain a basket of foreign currencies including, for example, 25 SDR in Deutsche Marks, 25 in Guilders, 25 in Lire and 25 in Sterling. However, all but one country contributing to this basket might be perfectly happy to be holding dollars. Thus, drawing down dollars from the other countries would be of no particular use to us. What we would like to be able to do is to use all 100 drawing rights with countries that want to exchange dollars provided they consent to accept drawing rights. Without this provision the drawing right scheme has a limited utility to us. Therefore, acceptance of this provision is a sine qua non to our agreement to new package proposals. I believe you share our interest in this provision, as your own needs might not always be covered efficiently by a straight package drawing.
Another important point that may come up is the resolution for Rio. A question may be raised as to whether it is advisable for the Ministers to take up the resolution which has not been discussed in advance by the Deputies, and on which discussion has begun in the Executive Board. As you know, I consider it essential that instructions be given at the Annual Meeting to authorize the task of drafting an amendment to the Articles to implement the provisions of the Outline. At the same time, I do not want to be placed in the position where agreement to the EEC proposals for changes in the present operations of the Fund, particularly in the voting majorities, becomes a condition to a report by the Executive Directors and an agreement by the Governors on an amendment implementing the Outline. As the French have indicated an interest in linking the two as part of the package, and the EEC have been meeting on their substantive proposals, the question may have to be faced in some way at London. There is no logical connection between these EEC proposals and the Outline. A linking of the two seems to me to be simply a case of placing a precondition on final action by the Board of Governors on the Outline.
From this point of view, the Fund Staff draft of the Rio resolution seems deficient. The implementation of the Outline and formulation of amendments to the Articles to allow the Fund to hold and use the new asset should be treated in one resolution and a second resolution, if desired by the EEC, should treat their proposals for changes in present operations of the Fund.
Since implementation of the Outline should be given priority, we should ask for proposed amendments establishing the plan and making other changes in the Articles in connection with the plan to be submitted to the Board of Governors not later than the end of February 1968. A separate report containing any agreed proposals on changes in the other operations of the Fund, such as those proposed by the EEC, could also be submitted in February or as soon as possible thereafter.
I hope that on Saturday morning we can have a quick review of reconstitution, the acceptance limits, the conversion right, and the resolution question, as well as other elements of the package. As you know, I feel very strongly that we cannot move on voting majorities unless we have a satisfactory solution of all the other problems that still remain open.
With best regards.
Sincerely, Henry H. Fowler
End Text.
Rusk
141. Editorial Note
At a meeting in London on August 26, 1967, the Finance Ministers and Central Bank Governors of the Group of Ten considered a revised Outline of a Contingency Plan for creating a new entity in the form of special drawing rights, which was intended to meet future needs for a supplement to existing reserve assets. A 32-page detailed "informal report" of the meeting, undated, prepared by George H. Willis, is in the Johnson Library, National Security File, Fried Papers, Group of Ten Ministerial Meeting, London, August 1967 (ERF), Box 1. Copies of Francis Bator's handwritten notes passed to Fowler during the meeting, together with Willis' report, provide a blow-by-blow account of the negotiations. In addition, Bator in August 1996 prepared "Notes" explaining his notes written at Lancaster House. All are ibid., Bator Papers, Box 5. At the conclusion of the meeting, the Ministers and Governors issued a communique announcing that they had agreed on a text of an Outline of a Contingency Plan. For text of the communique, see Department of State Bulletin, September 25, 1967, page 396. The Outline Plan agreed to at the London meeting on August 26 has not been found but is summarized in the communique and in De Vries, The International Monetary Fund, 1966-1971, volume I, page 158.
The Outline was then considered by the IMF Executive Directors, who were expected to endorse the Outline, or a revised version of it, for approval in a resolution at the forthcoming annual meeting of the International Monetary Fund in Rio de Janeiro.
President Johnson welcomed the return of the U.S. delegation, which had been chaired by Secretary of the Treasury Fowler, at the White House on August 28. For text of the remarks by the President commending the work of the delegation as well as a statement by Fowler on this occasion, see Department of State Bulletin, September 25, 1967, pages 392-393. On the following day, August 29, Fowler issued a lengthy statement to the press reviewing the incremental progress on the creation of a monetary reserve asset; text is ibid., pages 393-396. Much of the background information in Fowler's statement was made public earlier at the conclusion of the London Ministerial meeting on July 18 (see Document 134). Fowler's August 29 press statement was also transmitted in circular telegram 29397 to all diplomatic posts, August 30. (Department of State, Central Files, FN 10) Telegraphic communications regarding the preparations for and results of the August 26 London meeting are ibid. Miscellaneous press materials as well as a copy of an undated letter from Fowler to Canadian Finance Minister Mitchell Sharp thanking him for his key role in resolving a serious impasse during the monetary discussions at Lancaster House are in the Johnson Library, Bator Papers, International Monetary Matters, Box 10.
142. Letter From French Finance and Economic Affairs Minister Debre to Secretary of the Treasury Fowler
Paris, September 7, 1967.
[Source: Johnson Library, Bator Papers, International Monetary Matters, Box 10. No classification marking. 4 pages of source text not declassified.]
143. Memorandum From the Secretary of Commerce's Assistant (Simpich) to Secretary of Commerce Trowbridge/1/
Washington, September 8, 1967.
/1/Source: Washington National Records Center, RG 40, Executive Secretariat Files: FRC 74 A 30, Balance of Payments Background Material. Confidential.
S UBJECT
Balance of Payments Advisory CommitteeHere for the record and for your talks with Secretary Fowler are the positions taken yesterday by your Advisory Committee:
1. The Committee will support a target figure for 1968 that is $300 million below the projected level of capital outflows for 1967, i.e., it will support a 1968 target figure of $1.3 billion--subject to the caveat that the recalcitrant companies can be brought $200 million closer to their target level.
2. The Committee offered to form a small group to help persuade recalcitrant companies to cooperate. This offer was neither accepted nor rejected.
3. The Committee asked for and was promised an opportunity to review the Administration's decision on the target figure before it is announced in order to determine whether the Committee will publicly support the decision.
4. The Committee reiterated its position that LDC's should be treated as "program countries."
5. The Committee raised again the proposal that credit should be given for investments in kind. You promised that you would have Bill Shaw look into this matter once again.
6. The Committee reiterated its view that the Administration cannot count on business support of the voluntary program much longer unless it also comes forward with a long range plan to supplement the "short term" voluntary program.
7. The Committee observed that if the target is below a figure it believes industry can meet, it would rather have a shot at controls. (Weinberg/2/ probably dissents.)
/2/Probably Sidney J. Weinberg, General Partner, Goldman Sachs & Company.
FS
144. Letter From the President of General Electric Company (Borch) to Secretary of Commerce Trowbridge/1/
New York, September 14, 1967.
/1/Source: Washington National Records Center, RG 40, Executive Secretariat Files: FRC 74 A 30, Balance of Payments Background Material. No classification marking.
Dear Sandy:
To put it mildly, I was quite discouraged by the trend of events at the Balance of Payments Advisory Committee meeting last week,/2/ to the point of asking myself whether it is any longer meaningful for such a group of businessmen to attempt to meaningfully advise the Administration on this very important subject.
/2/See Document 143.
There seem to be some in the Administration who profess to believe that if business would stop exporting dollars into direct foreign investments the balance-of-payments problem would be solved. This attitude reflects itself in a constant hammering to reduce this relatively minor element of the balance-of-payments deficit. It further overlooks what all the businessmen on the Advisory Committee keep repeating; namely, that direct investments are a very significant element in maintaining or improving the US trade balance.
The voluntary program has served a major useful purpose; namely, in educating businessmen generally to the importance of the US balance-of-payments position to the health of our economy, and this has been reflected in results that some in the Administration said could not possibly happen. The record will show that the voluntary program has done an outstanding job by any measurement, and in my opinion this is because it was initially properly focused on the overall contribution that a business could make. This originally was the prime target, and properly so. In the last two years, emphasis has turned from the overall contribution to the matter of direct investments--in other words, from the "dog to the tail," as someone expressed it.
Now the year 1967 shows still further progress, both in terms of trade balance and direct investments to the program countries. The fact that direct investments to lesser developed countries has increased should surprise no one, since such investment has been encouraged by the Administration. Now to attempt to further reduce the target on program countries to offset the increase to lesser developed countries strikes me simply as game playing.
To the point that some companies are not cooperating, the fact that the program is voluntary would make this inevitable. This does not mean that the Administration cannot use person-to-person persuasion on this score, which has heretofore been lacking.
However, the main point is that business under the voluntary program has done an outstanding job, in the opinion of many of us, in serving the country in both its short- and long-term interests. The Administration, on the other hand, still seems to be unwilling to face up to the admittedly difficult political problems associated with the other more critical aspects of the balance-of-payments problem, among which foreign travel is often cited as an example, although many aspects of the import situation are much more important.
Overall, Sandy, it appears to me that businessmen have evidenced by their actions their understanding of the seriousness of this problem, both short- and long-term, and some of us are extremely discouraged that the efforts being made by business are not being matched in results by the public sector, which is where the deficit is created.
Thanks for taking the time to read this--it's more helpful to me to get it off my chest than it can possibly be to you!
Sincerely,
Fred
145. Memorandum From Secretary of the Treasury Fowler to President Johnson/1/
Washington, October 6, 1967.
/1/Source: Johnson Library, National Security File, Fried Files, Chron, September 1, 1967-November 20, 1967 [2 of 2], Box 2. Limited Official Use. Attached to the source text is a memorandum from Rostow to the President, October 9, summarizing Fowler's memorandum.
S UBJECT
Report on the 22nd Annual International Monetary Fund and the International Bank for Reconstruction & Development Meeting in Rio de Janeiro, BrazilThe key decision taken at the Rio meeting was the adoption of the resolution approving the outline plan for a new international monetary asset--Special Drawing Rights in the Fund/2/--as originally agreed to in London by the Group of Ten./3/ The fundamental importance of this new undertaking was recognized both by industrial and developing countries, and the resolution was approved without dissent. The action taken by the Governors at Rio initiates the next stage--the preparation of the formal legal text by the IMF Board of Executive Directors for final legislative action by all member countries. The resolution directs the Executive Directors to proceed with their work on the basis of the outline "in order to meet the need, if and when it arises, for a supplement to existing reserve assets," and to submit their report to the Board of Governors as soon as possible but not later than March 31, 1968.
/2/For text of the September 29 resolution on Special Drawing Rights, see American Foreign Policy: Current Documents, 1967, pp. 189-193.
/3/Regarding the London agreement, see Document 141.
The resolution approved in Rio also provided for a parallel report by the Executive Directors on proposals for modification of the present IMF rules. This is an area where the clearest issue will shape up. While we go along with the parallel study of the present operations of the Fund, the study or the approval of the study's recommendations, if any, cannot be a pre-condition to action on the Special Drawing Rights facility. My statement on this point is shown in the attached copy of my IMF speech./4/ We will study new IMF reform proposals on their merits and I will consult with the Dillon Committee and members of Congress in the formulation of the U. S. position. We may have suggestions of our own. The fact that this parallel study is not a pre-condition to action on the SDR was clearly agreed to in London by the EEC countries. The Finance Minister of France took a different position, namely that "The parallel execution of these two reforms is, I would recall, one of the conditions of the agreement of the French Government."/5/ Only time and future negotiations will reveal to what extent France or any of the other Common Market countries will hold to this position.
/4/None of the attachments is printed. An excerpt from Fowler's September 26 speech at the meeting is printed in American Foreign Policy: Current Documents, 1967, pp. 186-189.
/5/For an excerpt from Debre's September 26 address, see ibid., pp. 182-186.
One of the important pieces of unfinished business at the Rio meeting on the World Bank side was IDA replenishment. George Woods/6/ and I made clear that there has not yet been a satisfactory response to the offer which you approved last March--to join with other developed countries in a very substantial increase in IDA under suitable balance-of-payments safeguards. There were a number of attempts, some inadvertent and some conscious, to imply that our balance-of-payments safeguards would subject IDA to tied procurement at the expense of the principle of international competitive bidding in the World Bank. I laid that to rest in my own statement and Mr. Woods did the same in his. In his concluding statement, Mr. Woods surfaced, for the first time officially, the size of the U.S. replenishment proposal. He also made it clear that the U.S. proposal was completely consistent with the operations of the Bank, including international competitive bidding. (Attached is an underscored copy of Mr. Woods' concluding remarks.) In an effort to reach agreement on the replenishment he also called for a ministerial meeting of donor countries in the near future.
/6/President of the International Bank for Reconstruction and Development.
In addition to our primary mission in Rio which took place in the plenary sessions, I had the senior members of the delegation lead in bilateral meetings with over 40 countries. About half of these were requests to go over matters of mutual concern between our two countries and about half were designed for political good will, including meetings with almost all the Latin American countries in regional grouping and individually in cases such as Brazil, Argentina, and Mexico. In most of these sessions the Congressional members of our delegation were invited to participate, acting in an observer role generally, and participating helpfully on a number of occasions. These bilaterals provided the Congressional delegation with very useful background on the Special Drawing Rights plan, which will be submitted for Congressional action in the next session. It also afforded them an opportunity to see first hand a wide-range of our international financial problems--ranging from balance of payments cooperation and international financial policy, to multilateral and bilateral assistance problems.
Under Secretary Rostow, in addition to his work on the delegation, handled the launching of the Convention for the Settlement of Investment Disputes--the World Bank facility to promote arbitration and conciliation by private investors in their disputes with governments. He also participated actively in a series of bilaterals, especially with the Middle Eastern countries.
One potential disruptive feature at the plenary was the introduction by the French speaking African countries of a resolution dealing with the establishment of a mechanism for dealing with commodity price fluctuations. The proposal was handled by generalizing it and referring it to study by the IMF and the World Bank.
All in all the meeting was extremely gratifying, particularly the unanimous reception given by the non-Group of Ten to the Outline Plan for Special Drawing Rights. It was well understood and welcomed with enthusiasm by them. Only some of the less sophisticated expressed the hope that the SDR would be more generously allocated to the developing countries as an economic aid device. This was not a substantive issue, however, and even they wholeheartedly supported the proposal.
Henry H. Fowler
146. Memorandum From the Secretary of Commerce's Assistant (Simpich) to Secretary of Commerce Trowbridge/1/
Washington, October 13, 1967.
/1/Source: Washington National Records Center, RG 40, Executive Secretariat Files: FRC 74 A 30, Balance of Payments Background Material. No classification marking. A handwritten note on the source text reads: "Put with notebooks on BOP program."
SUBJECT
Balance of Payments Advisory Committee Meeting, October 9Here, for future reference, is a summary of how we left matters at the October 9 BOP Advisory Committee Meeting:
1. The "target" is acceptable, subject to our promise to seek to squeeze $200 million from recalcitrant companies.
2. The responsibility for working on recalcitrants lies with the Department of Commerce, not the Advisory Committee.
3. The "goal" suggested to the Committee was rejected on the ground that it was largely attributable to what, in the Committee's view, was an overly sanguine estimate of exports for 1968. The Committee will agree to whatever goal we derive by polling the 50 or so largest exporters, determining an average anticipated percentage increase in exports, and using that average as the basis for our calculation of the goal.
4. There will be no "advisory group" on foreign borrowing.
5. Although credit will not be given for exports in kind, we will encourage such exports in our statements, letters, speeches, etc. and give informal recognition of efforts of this kind.
Fred
147. Memorandum From the President's Special Assistant (Rostow) to President Johnson/1/
Washington, October 19, 1967, 7:05 p.m.
/1/Source: Johnson Library, National Security File, Subject File, Monetary Crisis, November 1968, Cables and Memos, Vol. 1 [1 of 2], Box 22. Secret; Sensitive. A handwritten "L" at the top of the source text indicates that the President saw the memorandum. Rostow's handwritten note on the right margin, dated October 20, indicates that Fried, Fowler, and Ben Read had been notified.
S UBJECT
Contingency Support For SterlingAt Tab A is Joe Fowler's memo recommending an increase of $100 million in the funds he has available for market operations to support sterling.
What it comes down to is this.
Today's increase in the discount rate is part of the last ditch British effort to hold the sterling rate. As you know, they moved strongly last year to support the pound: they deflated their economy, cut down foreign commitments and borrowed heavily abroad.
The program worked well through the first quarter of this year. They were able to pay off more than $1 billion in debt. Then they ran into bad luck:
--disappointing exports, largely because of the recession on the continent;
--the Middle East crisis and the closure of the Canal;
--rising interest rates elsewhere while theirs were going down.
They began to lose reserves and had to draw heavily on their line of short term credits.
The increase in the bank rate is designed to draw funds back to London. The market's initial reaction was slightly disappointing because some expected a higher increase in the rate. But sterling is holding steady because of support operations.
Through selective and carefully timed actions, we have operated successfully in the market in the past to keep the rate from worsening on bad news or to strengthen it on good news. We do so at our own discretion but in cooperation with the British.
We now have $160 million available for this purpose. Fowler recommends that you authorize him to make $100 million more available out of the Exchange Stabilization Fund. This would give the necessary leeway to have a maximum impact on the market--either to continue defensive operations or to take advantage of favorable opportunities.
These funds are guaranteed against loss from devaluation. There is no balance of payments effect. If the funds are used, it would in effect amount to an increase in our lending to the U.K.
This is a contingency investment that could be used very effectively to support sterling. I believe Fowler's proposal makes sense. Deming, Okun, Daane and Fried who have gone into it carefully concur in the recommendation.
Your decision is needed as soon as possible so that our people in the exchange market will know how much ammunition they have and plan their operations accordingly from tomorrow on.
Walt
Approve/2/
No
See me/2/This option is checked.
Attachment
Memorandum From Secretary of the Treasury Fowler to President Johnson/3/
Washington, October 19, 1967.
/3/Secret; Limited Distribution.
SUBJECT
Additional Assistance to the U. K. in Support of Sterling1. The austerity program imposed by the British last year brought sterling out of its summer crisis and very considerable gains were made in restoring British reserves and repaying short-term credits. This favorable picture prevailed through the fourth quarter of last year and into April of 1967. The British predicted a sizable balance of payments surplus for the year.
A sharp reversal took place in May, following poor April trade figures, accentuated by the Mid-East crisis. The British reserves suffered from some movement of Mid-East funds accompanied by other speculative flight from sterling and more fundamentally due to closure of the Suez canal and related aspects of the Mid-East crisis. In addition, the hoped for resurgence in U. K. exports did not take place, due in large part to the stagnation in Germany and slow downs elsewhere, including the U. S. in the early part of the year. Finally, interest arbitrage relationships were turned against the British as interest rates in the United States rose.
As a result, the British again find themselves with reserves depleted and large debts on their short-term lines of credit.
Their reserves at the end of September stood at $2,733 million, down $425 million from a year earlier and short-term credits drawn at $2,072 million, up $250 million from a year earlier. This $2.1 billion of credits drawn is out of established short-term lines totaling $2,690 million leaving about $620 million remaining. Of the $2,690 million in credit lines, $1,750 million have been extended by the United States and the balance of $940 million by other, largely European, countries. The worsening of the short-term credit position has to a large extent been offset by reestablishment of medium-term facilities with the International Monetary Fund, but these latter are not as readily available and publicity surrounding an IMF drawing could be counterproductive.
At present the United States has two credit lines, one a swap line by the Federal Reserve amounting to $1,350 million of which $800 million is drawn and a $400 million agreement shared $200 million by the Federal Reserve and $200 million by the Treasury Exchange Stabilization Fund./4/ Under this latter agreement the U.S. extends support by purchasing sterling generally in the market, subject to an exchange guarantee granted by the British. There is no fixed maturity at which the sterling will be resold to the Bank of England or the market. The Exchange Stabilization Fund also extends, on occasion, overnight assistance at month end.
/4/This agreement has not been further identified.
2. The drain on the British position in the past few months, after the Mid-East crisis settled down, seems to be largely related to the fact that interest rates elsewhere, particularly in the Euro-dollar market, are more attractive than rates on sterling investments when the cost of forward cover is taken into account. In addition, their trade figures have not been a cause of encouragement. Given the other problems of sterling, this drain is unsustainable. The increase today in the Bank of England rate of 1/2 percent is designed to reestablish the interest relationship which existed earlier. It may well prove to be not enough and another 1/2 percent increase could be around the corner.
In response to an inquiry by the Chancellor of the Exchequer, I have indicated the United States would not stand in the way of or retaliate to such a move. We could not, of course, make any promise as to the general trend of our own rates. The Bank of England had moved its rate down by 1-1/2 percent to 5-1/2 percent earlier this year (1/2 percent each in January, March and May). The United States reduced its rate by 1/2 percent in April.
3. We wish to take advantage of what may be a favorable psychological moment to assist in a strengthening of the exchange rate for the pound sterling or at the least to lend sufficient support to avoid a worsening of the outlook. To this end we would propose to engage in market operations by buying guaranteed sterling under the aforementioned $400 million agreement of September 1965.
4. With your approval, we agreed to extend the further $400 million assistance in September 1965. At that time we succeeded in obtaining additional pledges of assistance, known as the Basle agreement, from the European central banks. This is the present credit line of $690 million of which the British have now used $540 million.
A further credit package in the amount of $300 million, of which a group of foreign central banks would supply $275 million, is being currently discussed to assist the U.K. to make a repayment due to the International Monetary Fund this December. It is not sure as yet, however, whether this additional credit will materialize. Therefore additional assistance by the United States may not be matched by others.
5. In connection with any current market operations, it would be helpful to have some more ammunition available now to reinforce their position. At present the Exchange Stabilization Fund has only $50 million left unused from its pledge of $200 million under the September 1965 agreement. The Federal Reserve has $110 million left but, as noted, already has undertaken assistance of $800 million under its swap line.
6. Following the weekend developments, I convened a meeting Tuesday morning/5/ of the ad hoc group we normally call on to consider the U.K. problems and our role in dealing with them. It included, in addition to Treasury personnel, Mr. Fried of your staff, Chairman Martin and Governor Daane of the Federal Reserve Board, Mr. Okun of the Council of Economic Advisers, Assistant Secretary Solomon of the State Department, and Mr. Charles Coombs of the Federal Reserve Bank of New York, who acts as our agent in the market. We reviewed the overall U. K. situation, the various alternatives open, the risk of devaluation, and the situation in the gold market. After pooling our information and views, this ad hoc group referred a general proposal along the lines of this paper to the Interagency Steering Group operating under the Chairmanship of Under Secretary Deming of the Treasury. That group met on Wednesday and considered the problem at some length.
/5/October 17.
In light of the above, I recommend that you authorize me to increase the Exchange Stabilization portion of the September 1965 agreement by $100 million to $300 million. Sterling purchased under this authority would, of course, have to be subject to guarantee so that no exchange risk would be incurred. There would be no adverse balance of payments effect from the transaction.
Henry H. Fowler
148. Department of Commerce Paper/1/
Washington, November 7, 1967.
/1/Source: Washington National Records Center, RG 40, Executive Secretariat Files: FRC 74 A 30, Balance of Payments Cabinet Committee. No classification marking. Drafted by Gerald A. Pollack, Deputy Assistant Secretary of Commerce for Economic Affairs, and Mark Feer, Deputy Assistant Secretary of Commerce for Financial Policy. Attached to the source text is a November 7 note from William H. Shaw to Secretary Trowbridge, which reads as follows:
"The attached report on the Status of Proposals for the 1968 Balance of Payments Program would seem to suggest--
"a. that final agreement on a complete program is not likely at the November 9 meeting, and
"b. that when such agreement is achieved, those points of the program intended to increase exports will be relatively weak as compared with the initial hopes in this area."
No record of the November 9 meeting has been found.
STATUS OF PROPOSALS FOR THE 1968 BALANCE OF PAYMENTS PROGRAM
1. Commerce Voluntary Program
Our package is approved.
2. Federal Reserve Voluntary Program
Secretary Fowler is scheduled to meet with Chairman Martin to resolve the remaining difference of opinion regarding the placing of Exim "associated loans" under the 109% ceiling. All other Agencies oppose this Fed proposal. Such loans refer in particular to financings undertaken by commercial banks for the export of jet aircraft. These are made in conjunction with direct loans by the Eximbank for the same transaction. In these instances, commercial banks take the early maturities without Exim guarantee.
Treasury has not yet given up hope that export financing, together with LDC loans, can be excluded from the Fed ceiling altogether. While such a drastically revamped Fed Program cannot be devised in time for the mid-November announcement of the 1968 BoP Program, Treasury is determined to keep up the pressure on the Fed to revamp its program./2/
/2/A handwritten note in the margin next to this paragraph reads: "Not issue today--Study to be conducted on how to do it." The handwritten comments, here and elsewhere on the source text, are presumably Shaw's.
3. Tax Incentives for Exports
The following have been rejected, principally because of Treasury and State opposition.
(1) A credit against total income tax liability calculated as a flat percentage of export sales.
(2) A lower rate of corporate income tax for profits derived from exporting.
(3) A credit against income tax liability based on accelerated depreciation of plant and equipment used in the production of export goods.
(4) An investment tax credit applicable to plant and equipment used for the production of export goods.
(5) Exemption from income tax of remitted income of U.S. sales subsidiaries abroad.
(6) Rebate of property tax and indirect taxes for exported goods.
(7) Overexpensing for increases in export promotion expenditures.
Treasury is now considering administrative rulings to:
(1) clarify Section 482 regulations of the Code dealing with inter-company pricing
(2) establish alternative procedures under Section 863 for defining foreign-source income
(3) liberalize regulations concerning the amount of reserves for bad debts that banks may establish in connection with their financing of U.S. exports.
In addition, Treasury is now examining a series of technical, administrative and legislative changes to liberalize the scope of Export Trade Corporations.
No details on any of these matters have been provided. No agency is opposed at this general level. It is clear that any tax incentive which might become part of the final program will be very weak in relation to some of the proposals which were seriously considered at the outset.
4. BIC's Export Promotion Budget Supplemental
This supplemental for $7.1 million has survived several BOB reviews and still forms part of the overall Government supplemental request which we expect to be submitted to Congress in November.
5. "Joint Export Associations" for Export Expansion
The Executive Committee of the Balance of Payments Committee at its November 2 meeting/3/ endorsed in principle this new form of export promotion which calls for cost sharing by Government and industry of certain designated export associated expenditures (advertising, participation in trade fairs, market research, overseas travel, cost of overseas sales offices, warehouses, etc.).
/3/No record of this meeting has been found.
The Commerce Department would provide funds under contract to: (1) groups or firms, (2) trade and industry associations, and (3) export intermediaries. In order to avoid anti-trust complications, the Secretary of Commerce would be given the authority to issue charters to trade and industry associations or groups of firms that wished to form Joint Export Associations. Enabling legislation and appropriations would be needed for this new form of export promotion.
Many details remain to be worked out, including whether Commerce should enter into cost sharing contracts with individual export firms. No detailed budget estimates have been developed to date. Earlier studies indicated an expenditure level of $6 million in FY 1969.
This item is scheduled to be considered at the BoP Cabinet meeting of November 9.
6. Expanded Rediscount Facility at the Eximbank
A meeting was held towards the end of October with Harold Linder./4/ Presented on this occasion was the proposal for a liberalized rediscount facility which was prepared by the Art Okun Committee on export financing and endorsed by the BoP Executive Committee. Larry McQuade who attended this meeting believes that Linder will go along with the suggestions after having "revamped" them somewhat in order to give them the "Linder imprint." The expanded facility calls for, among other things, rediscount loans of more than one year (present limitation) and for reduced lending rates.
/4/Chairman and President of the Export-Import Bank of Washington.
7. Export Expansion Fund
The concept of an Export Expansion Fund was endorsed in principle at the Cabinet level meeting of the BoP Committee on October 23./5/ State/6/ and AID still have certain misgivings about the proposal and a meeting is scheduled between Treasury, State, Commerce and CEA for November 7.
/5/No record of this meeting has been found.
/6/A handwritten note in the margin, with a line drawn to this word, reads: "Worried about impact on AID budget."
Our current proposal calls for a Special Account to be set up at the Eximbank for National Interest Export Financing which would not exceed 5% ($675 million) of the Exim's requested lending authority of $13.5 billion. The Exim could have special P & L and balance sheet statements covering this Special Account. Loan or guarantees to be made with funds from this Special Account would need certification by a committee. This would be chaired by the Secretary of Commerce and would include the Secretaries of Treasury and State and the Chairman of the Eximbank./7/
/7/A handwritten note in the left margin next to this paragraph reads: "Slice of new lending authority--Special Comm. revisits & recommends--Can't force Ex-Im."
This proposal has not yet been presented to Linder and probably will not be until after the November 9 meeting of the Cabinet Committee. He is likely to resist it, as he wished to have appropriated funds for the Export Expansion Fund in lieu of a "set aside" of his existing lending authority./8/
/8/A handwritten note at the end of this paragraph reads: "New legislation? Review with Committee for Congress. Could do administratively--but criteria question is difficult."
8. Reexamination of GATT rules concerning the treatment of direct and indirect taxes, subsidies, and countervailing duties.
This proposal emerges as an alternative to a strong tax incentive for exports. All agencies agree that reexamination is desirable, but tactics remain to be worked out.
9. Tightening Gold Budget Procedures
No specific proposals have yet been made. Indeed, the Budget Bureau, which is responsible for the Gold Budget, was not aware that Treasury planned any initiatives in this area before the agenda for the October 31 Executive Committee meeting was distributed.
149. Memorandum From the President's Special Assistant (Rostow) to President Johnson/1/
Washington, November 11, 1967.
/1/Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. IV, January 1967 [2 of 2], Box 3. Confidential.
SUBJECT
Balance of Payments Program AnnouncementAttached is Secretary Fowler's memo recommending a schedule of announcements and actions regarding the balance of payments.
The main immediate issue is the announcement of 1968 guidelines for the Commerce and Federal Reserve voluntary programs restraining foreign direct investments and bank credits. These should be announced as soon as possible so as to affect planning for next year by corporations and banks. Fowler proposes to do so at a press conference he would hold on Friday, November 17, with Trowbridge and Governor Robertson of the Fed. At the same time he will release the third quarter balance of payments figures--which will not make good reading./2/ I believe you should also announce earlier the same day, as Fowler suggests, appointment of the new Travel Task Force/3/ so that Fowler at his press conference can refer to it as another action designed to help our balance of payments.
/2/These figures were related at a press conference on November 16. A transcript of the press conference is ibid., Fowler Papers, International Balance of Payments: 1968 B of P Questions and Answers [2 of 2], Box 6. A summary analysis of these figures is in Current Economic Developments, Issue No. 793, November 21, 1967, pp. 14-16. (Washington National Records Center, RG 59, E/CBA/REP Files: FRC 72 A 6248, Current Economic Developments)
/3/See Document 153.
Fowler also proposes for possible release by December 1 a special report on the Balance of Payments--what we have been doing, where we are, and where we propose to go in dealing with the balance of payments./4/ Your Cabinet Committee briefly discussed and supported the general idea.
/4/No record has been found that this special report was released.
I believe the third recommendation--to defer a message recommending elimination of the gold cover--makes sense at this time. But we will have to look at this one carefully over the next two months in conjunction with developments in dealing with current pressures on sterling and with unsettled conditions in the gold market.
The fourth recommendation asks you to defer a balance of payments message now and submit it early next session. The message would be built on a good export expansion package--which is now being developed.
I concur in the four recommendations in Secretary Fowler's cover memo.
W. W. Rostow/5/
/5/Printed from a copy that bears this typed signature.
Attachment
Memorandum From Secretary of the Treasury Fowler to President Johnson/6/
Washington, November 9, 1967.
/6/Confidential.
SUBJECT
Balance of Payments Program AnnouncementThis memorandum deals with the proposed schedule for handling our 1968 balance of payments program announcements.
It involves somewhat of a revision of the plans discussed at the time of my August 8 memorandum to you./7/
/7/Document 137.
In the light of intervening developments and current circumstances, to be discussed, I would recommend now that:
(1) There be an announcement on Friday, November 17, of the Commerce Department guidelines for 1968 as well as the new Federal Reserve Board guidelines in a joint press conference in which Secretary Trowbridge, Governor Robertson and I would participate. At the same time I am planning to announce the third quarter balance of payments figures. This is a quarterly release and I only have a one or two day leeway on the date. On September 21 you met with Secretary Trowbridge, Mr. Field and me and approved the Commerce Department program for 1968./8/ I do not believe we will find it necessary to involve you in any meeting on the Federal Reserve Board voluntary program which we expect to iron out finally at a Cabinet Committee meeting on Thursday, November 9./9/
/8/No record of this meeting has been found.
/9/No record of this meeting has been found. The agenda for the meeting is in a memorandum from Knowlton to the Cabinet Committee on the Balance of Payments, November 8. (Washington National Records Center, RG 40, Executive Secretariat Files: FRC 74 A 30, Balance of Payments Cabinet Committee)
If you wish, there could be a simultaneous release on the day of the press conference announcing the voluntary programs and the new Travel Task Force.
Approve with simultaneous announcement of Travel Task Force
Approve without simultaneous announcement of Travel Task Force
Approve
Disapprove/10//10/None of these options is checked.
(2) As Chairman of the Cabinet Committee on Balance of Payments, I submit on December 1 for public release a rather lengthy, detailed report:
(a) reciting in some detail all that we have been doing and are doing to deal with our balance of payments problem, and
(b) describing in some detail the background and elements of a long-range program on which the Cabinet Committee has been working which would serve as a backdrop for a later Presidential Balance of Payments Message featuring concrete proposals on an export expansion program early in January.
Approve
Disapprove
Approve as modified/11//11/None of these options is checked.
(3) That you defer sending a Message at this time recommending the elimination of the gold cover requirement.
Approve
Disapprove
Approve as modified/12//12/None of these options is checked.
(4) That instead of submitting a Balance of Payments Message this fall toward the end of this session, you submit it as a separate Message very early in the next session.
Approve
Disapprove
Approve as modified/13//13/None of these options is checked.
For your information in considering these recommendations, I am submitting an attached background memorandum.
Henry H. Fowler
Attachment/14/
/14/Confidential.
BACKGROUND MEMORANDUM
At the time of my August 8 memorandum to you and our meeting on August 10,/15/ we considered tentatively the presentation of a 1968 and long-range balance of payments program in a mid-September Message to the Congress requesting removal of the gold cover or the separate submission of a Balance of Payments Message later in this fall.
/15/No formal record of this meeting has been found, but see Documents 137, 138, and 139.
Subsequent events have caused a change in that procedure. These include the delay and deferment of action on the tax bill which is a centerpiece for any meaningful balance of payments program in 1968 or the future, the emergence of an increasingly serious threat to the pound and a highly unsettled and precarious condition in the gold market, and the inability of the Cabinet Committee machinery to arrive in timely fashion on agreed recommendations for a truly meaningful and significant expansion of our balance of payments program.
Another consideration which I will relate to you orally also prompted me to defer requesting you to send forward a Message on eliminating the gold cover. It also underscores the desirability of a public report along the lines recommended.
Given these developments it seems wise to change our planned procedure to the pattern outlined in the cover memorandum. These are some of the elements of the background for the recommendations in the memorandum to which this is attached:
(1) Need to make voluntary program announcement no later than middle of November.
It is necessary to release publicly the guidelines for the Commerce Department voluntary program and the Federal Reserve Board voluntary program so that the elements of the private sector affected may crank the guidance into their forward planning for next year. It is desirable to have the Commerce Department guidelines out so that Secretary Trowbridge and his colleagues can begin a series of individual conferences with companies which appear to be out of line. Originally these figures have come out in the first and second week of December and I think this has been late. In fact, November 17--which is the date recommended in the memorandum to which this is attached--is a little later than the date I was originally hoping for.
(2) Balance of payments outlook.
In the first half of 1967 we were running along at a seasonally adjusted annual rate of about a $2 billion deficit. The third quarter has deteriorated and the prospects for the fourth quarter are no better. While in 1965 and 1966 we had liquidity deficits of $1.3 and $1.4 billion, we could double that level this year or end up with a deficit of around $2.6 billion despite the benefit from a sizeable amount of "Special Transactions" we have been able to negotiate on a temporary basis. It may be even worse, depending upon developments with respect to sterling and the impact these developments have on our own position. (In this regard, we may have some option as to whether to take a few hundred million dollars adverse effect of British actions in the fourth quarter of 1967 or in 1968. While it is our general feeling that it might be better to take it this year--and we can attribute it to the British--our thinking has been influenced by what we see as poor balance of payments prospects for 1968 in the $3 billion range.)
These large deficits--a return to the unacceptable levels of 1964 and 1965--underscore as nothing else could underscore the necessity of providing clear and positive stimulants to our industry, that is to those elements which produce the surplus which the Government must have to be able to achieve our international objectives in terms of the defense umbrella we provide, as well as the investment and economic assistance we provide.
These deficits also emphasize the crucial necessity in achieving any long-term equilibrium of neutralizing the foreign exchange costs of our military expenditures in NATO and the Far East to provide financial viability for the long term maintenance of our presence in those areas.
(3) IMF review.
The International Monetary Fund sits down with the Government once a year to go over in considerable detail our economic and balance of payments policies and positions. These sessions are scheduled for November 27-30 this year and starting on the 28th or 29th they will focus primarily on our balance of payments posture and program. I would like very much to have the background elements for our program in the public domain by that time even though the implementing Message to Congress on the export expansion program is not before the Congress.
(4) The special need for a positive export expansion program at the next session.
It has been my position for some time that the whole thrust of our long-term U.S. balance of payments program must concentrate on accentuating the positive; that is, encouraging additional exports as well as receipts from direct investments abroad, increased foreign travel in the United States and increased foreign investment in the United States, while containing excessive balance of payments outflow of both the private sector and the government alike.
You underscored this in your May 23 statement./16/ At that time you asked Secretary Trowbridge and the Cabinet Committee on Balance of Payments to undertake a far-reaching export study. On June 28, I held a meeting of the Cabinet Committee on Balance of Payments at which there were reviewed and approved in the broadest terms the thrust and major areas of the 1968 program./17/ Since that time we have been developing this in detail.
/16/See footnote 2, Document 123.
/17/See footnote 6, Document 137.
In the meantime, with the Kennedy Round behind us and the prospect for five years of periodic tariff reduction and with the increasing pressure of protectionism on the home front which could thwart the advance of the Kennedy Round, it seems very much in our interest to describe now and advance early in the session a positive export expansion program.
The program elements we have developed include:
--Non-tax incentives, administered by the Commerce Department, focusing upon small and medium sized corporations, designed to assist them in selling overseas.
--Tax measures, including both administrative and legislative features, which would make exporting much more attractive. This is the keystone of our program--it would serve to create jobs at home and be the incentive for additional efforts in exporting.
--Financing designed to make export financing more attractive to the private community. We have a couple of administrative measures we can take as well as ones requiring legislative action. The Export-Import Bank figures very prominently in this area and the full cooperation of Mr. Linder will be necessary to achieve these objectives.
--The GATT. It is time for a positive and outward looking re-examination of those provisions of the GATT which are trade restrictive in their nature. These provisions may be trade restrictive in the sense of (1) what a country can do when it is in balance of payments deficits, and they may be trade restrictive; (2) in the area of non-tariff barrier practices; as well as (3) the permissible subsidies which act preferentially for one tax system (EEC, Japan, United Kingdom) and discriminate against a country using another tax system (U. S.).
A review of this type is totally in keeping with the 20th anniversary of GATT and falls in perfect stride with the post-Kennedy Round situation. This would provide another occasion to demonstrate to the world at large and to our protectionists at home that we will use trade expansive and not trade restrictive measures and the rules of the game must be brought up to date to assure this.
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