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DEPARTMENT OF STATE1964-1968 Volume VIII International Monetary and Trade Policy |
General and Financial and Monetary Policy
170. Telegram From the President's Special Assistant (Rostow) to President Johnson, in Texas/1/
Washington, January 3, 1968, 1426Z.
/1/Source: Johnson Library, National Security File, Memos to the President, Walt Rostow, Vol. 56 [2 of 2], Box 26. Secret.
CAP 80060. Herewith Nick's first contact with London. They are sympathetic but worried about the direct and indirect effects on the U.K.--direct via reduced U.S. direct investments; indirect, via higher European interest rates./2/
/2/Numbered paragraphs 1-6 below are taken verbatim from telegram 6778 from Bonn, January 2. (Department of State, Central Files, FN 12 US)
1. Fred Deming, Bill Roth, David Bruce and I met for two hours this morning with Roy Jenkins and senior officials of British Treasury, Board of Trade, Foreign Office and Bank of England. I began my presentation by putting President's strong action on balance of payments in its broad political context. I stressed that President is faced with many pressures to reverse U.S. political and economic policies and that these pressures would certainly have been exacerbated by news of our worsening balance of payments. Failure to act would have increased the possibility that our recent successes in the Kennedy Round would be lost and would probably also have led to increased demands to reduce troops abroad with a subsequent effect on our security and the security of our allies. The President's decision to take these difficult actions was motivated by his keen desire to avoid this reversal of all that we have stood for in the post-war period. It is our hopes that the success of this program will enable us to avoid these consequences.
2. I also emphasized that the President feels very strongly that the longer term solution to the kind of problem we face in our balance of payments must be greater cooperation and a sense of responsibility, not just on the part of deficit countries, but more particularly by the surplus countries.
3. Throughout subsequent discussion, Jenkins and British officials stressed their sympathetic attitude and understanding for the problem we faced. They welcomed these measures as strengthening the dollar and therefore ultimately benefitting all trading nations. Jenkins recognized that such measures were bound to have unpleasant effects, even for those countries in a weaker balance of payments situation, but that this was certainly preferable to a return to protectionism. He welcomed the differentiation we were able to introduce into program in order to minimize effects on countries like the U.K. who have their own balance of payments difficulties, but he did not wish to hide from us the concern which Her Majesty's Government feels. The more they studied measures, the more pessimistic their assessments became of the effect on the U.K. He stressed that they had not yet reached any definitive conclusion, but wished to maintain the closest consultation with us as they went through their calculations.
4. Main substantive concern appears to be with effect of investment controls, where British calculation shows higher effect than our estimate of $150-$160 million in 1968. British thinking in terms of possibly as high as 100 million pounds, but Deming felt that this calculation on direct effect was too high. However, British are already beginning to think of indirect effects due to drying-up of available capital in Europe and consequent out-flows from London Eurodollar market. Effect on European interest rates also stressed.
5. Jenkins agreed U.K. would not reach firm conclusions until they have opportunity discuss again with us results of our talks on continent. Tentatively we plan return next Saturday/3/ for talks with Harold Wilson.
/3/January 6.
6. Full report being sent by Embassy London./4/ Fessenden.
/4/Telegram 5143 from London, January 2. (Department of State, Central Files, ORG 7 U) A later report of discussions with British Treasury officials is in telegram 5269 from London, January 5. (Ibid., FN 12 US)
171. Telegram From the President's Special Assistant (Rostow) to President Johnson, in Texas/1/
Washington, January 5, 1968, 1639Z.
/1/Source: Johnson Library, National Security File, Subject File, 1968 Balance of Payments Program, Memos and Miscellaneous [2 of 2], Box 4. Secret. The telegram was received at the LBJ Ranch Communications Center on January 5 at noon (CST).
CAP 80116. Herewith Nick and the Germans. On the whole, positive./2/
/2/Numbered paragraphs 1-10 below are taken verbatim from telegram 6782 from Bonn, January 3. (Department of State, Central Files, FN 12 US)
1. We met Tuesday afternoon/3/ with Foreign Minister and Vice Chancellor Willy Brandt in a large meeting attended by six of the German Government. An obvious effort had been made to bring together this leading group of officials, some of whom had been on their holidays. The atmosphere was friendly and began with my presentation along the lines of the one I reported from London./4/ The two-hour meeting covered a series of detailed questions on specifics of the President's program. Most of the meeting was conducted by Lahr in highly methodical fashion moving through the program point by point. The questioning centered on possible effects of the U.S. investment actions which the German side clearly felt would tighten their capital market (although at one point Lahr seemed to be saying that very little American capital had come to Germany directly from us--a point refuted by facts). I welcomed their assurances that they were interested in promoting a high growth rate, which they considered to be a responsible position for a surplus country to take.
/3/January 3.
/4/See Document 170.
2. On border taxes, the German side made an effort to disclaim that German actions have a serious trade effect, but listened attentively to my strong political arguments that regardless of whether and how much we can show trade effect to be, the fact of their rebates was a potential political issue in the U.S. which would enhance protectionist pressures. Bill Roth explained in detail that we wish to discuss in GATT and related this to the adjustment process.
3. I would summarize the large initial meeting as revealing the Germans to be sympathetic to our goals of avoiding a resurgence of protectionism and of wishing to do all that is required to assure the continued presence of U.S. forces for the security of Europe. On offset, the Germans were interested in my mention of possible multilateral arrangements in the longer term, but agreed that we should concentrate on bilateral discussions to meet the immediate problems of the next several years.
4. Following the large meeting, I asked Brandt for a more restricted session attended only by Fred Deming, Bill Roth, Russ Fessenden and me and on the German side by Brandt, Lahr, Harkort and Duckwitz.
5. I explained to Brandt that, in political terms, two steps from the Germans are really essential to us.
(A) First, I stressed the prime importance which we attach to maintaining our commitments for the common defense. In this context I said, it is essential that we have full neutralization of the foreign exchange costs of our troops in Germany. I did not mention a specific figure, but spoke in terms of a two-year agreement that would cover us fully.
It was clear from what I said that we were not speaking only of continuance of this year's arrangements. I also made clear that we needed an understanding on this in the very near future.
(B) Second, I described the heavy protectionist pressures in the U.S. and our political need to have something which could forestall these pressures. I then referred to our consideration of new legislation which would give a 2 percent-2-1/2 percent tax rebate to American exporters as something positive which could enable the administration to contain protectionist pressure. What we needed, I stressed, was a German commitment to stand still if we put into effect such legislation. If German and other countries were to retaliate, obviously the whole effect would be lost. I added that in addition we need to have a full exploration in GATT of the whole question of inequalities in the tax field as far as international trade is concerned. The 2 percent-2-1/2 percent border adjustment plus re-examination of the GATT rules could provide a means for keeping protectionism under control.
6. I stressed that, in making these two requests of the German Government, I hoped consideration would be given to the politically courageous steps the President was taking in the balance of payments program, especially in an election year. I pointed out that the 10 percent tax increase, the stoppage of all direct investment to Western Europe and the tourist measures are all of them politically very difficult.
7. In his reply, Brandt said that serious and urgent consideration would be given to these request by the German Government. He commented sympathetically on the principle of the first in particular, and fully understood the significance of the second. He added that these matters would be considered at the next Cabinet meeting, January 10, after which the German Government would be in contact with the Embassy.
8. In a later conversation at the dinner which he gave for us, Brandt told me that the two requests which I had outlined to him in the private meeting presented "no real problem." Lahr, in somewhat more cautious terms, made similar comments to Fred and Russ Fessenden.
9. Brandt's toast at the dinner was unusually warm. He dwelt at some length on German appreciation and sympathy for President as he carries immense burdens of free world leadership. Brandt also spoke of high regard for you and asked that I send best wishes for the new year.
10. Full report being sent septel on large meeting./5/
/5/Telegram 6792 from Bonn, January 3. (Department of State, Central Files, ORG 7 U)
172. Telegram From the President's Special Assistant (Rostow) to the President, in Texas/1/
Washington, January 6, 1968, 0044Z.
/1/Source: Johnson Library, National Security File, Subject File, 1968 Balance of Payments Program, Memos and Miscellaneous [2 of 2], Box 4. Secret. The telegram was received at the LBJ Ranch Communications Center on January 5 at 8:12 p.m. (CST).
CAP 80132. Subject: Reactions to balance of payments program.
Market--quiet again yesterday and today.
Gold pool made no sales yesterday. Took in $4 million today.
Dollar and sterling quiet.
Official Reactions
1. Katzenbach Mission
A. Belgium--great concern over prospective cut in U.S. investment. Want to work out special arrangement with us. Non-committal on border tax but recognize problem. Accepted principle neutralizing U.S. military spending./2/
/2/Reports of Katzenbach's meeting with Belgian leaders on January 4 are in telegram 3856 from Brussels, January 4, and telegram 3493 from Rome, January 4. (Both in Department of State, Central Files, ORG 7 U)
B. European Community (President Jean Rey)--Commission reaction sympathetic and positive but made no commitments. Agreed Europeans suffer from surplus psychology. Fear moves toward protectionism in U.S. Rey is interested in more regular U.S.-European Community consultations and will probably raise this subject with you during his visit in February./3/
/3/Reports of Katzenbach's meetings with Rey and other EC Commissioners on January 3 and 4 are in telegram 3855 from Brussels, January 4, telegram 3861 from Brussels, January 5, and telegram 3499 from Rome, January 5. (All ibid.)
C. Berlin problem--Germans worried effect investment moratorium on new U.S. investments in Berlin, which they believe necessary to keep up morale in city. (Berlin Mayor Schuetz coming here in February to promote U.S. investment in Berlin.)/4/
/4/No report on this issue has been found.
D. Netherlands--Dutch worried about discrimination in investment and tourism but attitude cooperative. Said we should make IMF drawing and discuss question outstanding U.S. dollar balances in IMF. Katzenbach believes Dutch will accept border tax if we can make GATT justification./5/
/5/Katzenbach's report of his meeting with Netherlands leaders on January 4 is in telegram 3500 from Rome, January 4. (Department of State, Central Files, ORG 7 U)
E. Italy--Foreign Minister Fanfani in effect told Italian press that deficit and program linked to Vietnam. Nick Katzenbach in airport press conference on leaving Rome rebutted Fanfani statement. Said U.S. would have balance of payments problem without Vietnam./6/
/6/This statement has not been found. A summary of the Rome discussions on January 5 is in telegram 8727 from Paris, January 5. (Ibid.)
2. Rostow Mission
A. Japan--Further reporting emphasizes concern others would follow border tax move by U.S. Japan has raised discount rate as defense measure against balance of payments pressures./7/
/7/See Document 169 and footnote 2 thereto.
B. Australia--Accepts need for U.S. action but expressed strongest concern yet received over serious consequences program could have on domestic economy. Requested special treatment insuring that capital inflow into Australia should not fall below 1966 levels, semi-annual Ministerial consultations, recognition that reserves should not fall below June 1966 level, exemption from 5 percent cut in lending by banks and financial institutions, expansion of EXIM arrangement enabling Australia to float loans in U.S. free from IET, and assurance that the U.S. trade policy will attempt avoid injure Australian exports. Said restrictions on capital flow could make it difficult for Australia to continue its efforts in aid and defense fields, including participation in Vietnam. Reacted negatively to U.S. consideration of border tax and indicated Australia likely emulate any such U.S. action./8/
/8/A memorandum of Eugene Rostow's meeting with Australian Prime Minister McEwen and other Australian officials, January 7, is in Department of State, Conference Files: Lot 69 D 182, CF 270.
McEwen told press Australia supports program and said both countries consulting on problems posed for Australia.
3. Trezise Mission
A. Norway--Worried about cut in U.S. investment and effect of U.S. program on European interest rates. Want to be put in category of countries heavily dependent on U.S. capital. Said U.S. could count on Norwegian support and cooperation./9/
/9/No other report on the Norwegian reaction has been found.
European Press
Program continued to draw voluminous comment abroad. Many found U.S. measures justified in spite of "painful consequences". Press opinion was divided over whether measures would achieve the desired effect. These major themes emerged:
--U.S. was determined to defend the dollar and with it the international financial system.
--Measures might slow down world economic expansion.
--Action was in response to European criticism and pressure.
--Vietnam war was a main cause of the U.S. deficit.
--Impact on the developing countries was uncertain.
--Those advocating reduced U.S. investment in European industry might soon be eating their words.
173. Telegram From the President's Special Assistant (Rostow) to President Johnson, in Texas/1/
Washington, January 6, 1968, 2056Z.
/1/Source: Johnson Library, National Security File, Subject File, 1968 Balance of Payments Program, Memos and Miscellaneous [2 of 2], Box 4. Secret. The telegram was received at the LBJ Ranch Communications Center on January 6 at 4:25 p.m. (CST). A handwritten note at the top of the source text reads: "Jones told B. Smith."
CAP 80157. Herewith Nick has a civilized talk with the French./2/
/2/Numbered paragraphs 1-8 below are taken verbatim from telegram 5277 from London, January 6. (Department of State, Central Files, ORG 7 U) A much longer account of this meeting is in telegram 8738 from Paris, January 6. (Ibid.)
1. Fred Deming, Bill Roth, and I met with Debre and some of his senior officials and then later I made courtesy call on Couve. I would describe atmosphere as one of friendly, if studied, understanding. I think this best typified by Couve's remark that having argued for us to take action, it would be difficult for French now to complain. Except for rather brief references to doctrinal differences, all the remarks and comments made by the French seemed positive and uncontentious.
2. Debre stressed one point several times--although he said he did not want to moralize. He said that measures will be accepted or rejected outside the United States in direct relation to the understanding of both govts and public opinion that the U.S. is also dealing effectively with its domestic economy. Both Couve and Debre emphasized the necessity of President getting his tax measures exactly as introduced, as well as the U.S. taking steps to control internal credit and stabilize prices and wages. They seemed to accept my point that outsiders should not wish U.S. deflation and Couve replied that, on contrary, French wish see stability in U.S. economy. The Embassy will report our conversations in detail but I think that the following points are worth noting here.
3. Debre stated position of French Govt that they accepted measures in principles and recognized the strong and determined efforts of the President in both the domestic and international areas. They put usual stress on responsibility of deficit countries to take action, but rather surprisingly indicated that surplus countries too had at least a secondary responsibility. They emphasized that overwhelming position of U.S. economy in world economy presents special problems and calls for U.S. to exercise special care.
4. Debre said on investment measures he was perplexed by discriminatory treatment. Particularly, he could not understand why oil countries had been included in Group B. He was careful to say that this discrimination could not be whole-heartedly, or for long accepted by the French Govt, but did not appear to reject measure for the time being. He questioned how U.S. could regulate foreign affiliates of American companies if the U.S. continued to wish them treated equally in countries such as France. I responded to these remarks by pointing out that any regulation is inherently discriminatory since situation differs from one country to another and one company to another. I stressed that we had acted responsibly in not wishing to put burden of our adjustment on less developed countries or those in weaker B/P position.
5. Debre expressed some concern that we might be about to start a credit war. He warned that this would lead to organized disorder. Both Fred and I attempted to reassure him on this and said we had no intention of beginning competition on export credit.
6. Debre's general conclusion was that he admired U.S. action. "France had hoped too long for this action to criticize it now." He recalled that the United States had led the world in eliminating exchange controls, liberalizing trade and freeing both capital and movements of people. He said the French recovery had taken its cue from this leadership as they reduced protection, supported the Kennedy Round, eliminated exchange control, and opened their doors to investment. The present French Govt had done more in the last few years than in the past 50 to eliminate French protectionism. He then went on to say that they could accept temporarily these measures but, aside from their doctrinal differences with the U.S., they would find it difficult to convince their public opinion unless the U.S. internal measures were perhaps stronger than those proposed. (I am not sure that he fully understood U.S. internal measures.) He also thought we should examine our investment measures to see whether they could be less discriminatory and possibly re-examine all our measures to make sure that they would have their desired effect and not be quite so inequitable. Couve also expressed approval for continuing exchange of views, particularly on effects of measures, in OECD economic policy discussions.
7. I think it was right for us to go to Paris and I think we now have a record from the French on which we can build. I have no doubt that they will use different arguments with their European colleagues and others. But it seems to me the correct position for us to take with France is one which emphasizes our determination to act responsibly and to take account of our own strength and not jeopardize others who are in a weaker position.
8. Debre made a very strong statement at the beginning that he and the French Govt were "scandalized" by some of the things appearing in the foreign press. He said that these had completely misrepresented the actions and intentions of the French Govt. Fred observed that we too had been shocked by some of the things said in the press and that we could only assume that the French Govt had not inspired these things as we had not inspired the stories in our own press. Fred pointed to last night's "Le Monde" story which talked of a tax on gold. He said that he had denied that there was any consideration of a move of this nature but pointed to this story to indicate that it is very difficult, if not impossible, to control what the press says. Bruce.
174. Report by the Under Secretary of State (Katzenbach), the Under Secretary of the Treasury for Monetary Affairs (Deming), and the Special Representative for Trade Negotiations (Roth) to President Johnson/1/
Washington, January 7, 1968.
/1/Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. V [2 of 2], Box 3. Secret. No drafting information appears on the source text. The text of this report was sent to the LBJ Ranch in telegram CAP 80173, January 7. (Ibid., 1968 Balance of Payments Programs, Memos and Miscellaneous [2 of 2], Box 4) Katzenbach also prepared a country-by-country summary of his European meetings, which was derived from his telegraphic messages. This summary was transmitted under cover of a letter from Katzenbach to Representative Mills, January 16. (Department of State, Central Files, ORG 7 U)
SUBJECT
Report on Our European Balance of Payments TripIntroduction
This report contains the principal findings of our European trip. (We have also taken into account Phil Trezise's talks in Scandinavia and Luxembourg.) Our conclusions are based on the preliminary reactions of the people with whom we talked. Obviously, the President's B/P program cannot be easily or quickly comprehended, nor could the effects of the measures on individual countries be thoroughly analyzed in the short time between the announcement and our visits.
The purpose of our trip was to convey at the highest possible political level the rationale behind the program, and seek whatever cooperation was appropriate and possible. We put particular emphasis on the President's desire to maintain our commitments to European security and to a liberal trade policy. We emphasized that European leaders must not judge our measures on the basis of narrow technical considerations, but rather in terms of the high political stakes involved in maintaining a healthy and strong American economy.
As an over-all impression, we feel that the President's program is regarded as necessary and desirable. The central bankers approved in general of the total program and its parts--a domestic tax increase, reduction of expenditures and B/P measures. They seemed prepared to see their reserves fall somewhat and agreed that activation of the new special drawing rights in the IMF would have to come more quickly. The government people, while approving the strength of the total program, and specifically its domestic parts, were more critical about the B/P aspects--with the criticism varying from country to country.
We sought both understanding and, to the extent feasible, undertakings not to retaliate against our measures. Nobody, however, was prepared to give us a firm commitment until they had studied the program and weighed the possible consequences. We sought, therefore, to set a favorable political climate for the decisions they will have to make.
U.S. Domestic Policies
We were met with one common response--although with varying emphasis--everywhere we went, i.e., a successful program depends on our ability to get additional taxes and to cut Government expenditures. European reactions clearly will be strongly influenced--and tempered--if we can demonstrate that we can carry through tough measures to bring our own house in order. If we are to get European cooperation and understanding--and we must make the Hill understand this--we will have to move ahead on the domestic front.
Border Taxes
There was no immediate indication that a modest border tax--if it could be justified under the GATT--would face retaliation. There are, however, risks. The overwhelming size of our economy places a special responsibility on us for maintaining the health of the world economy. Thus, whether we like it or not, our conduct is judged by a set of standards substantially different than those applied to others. While European political leaders recognize and understand our domestic problems, what we do is likely to set the tone for the entire world trading community.
We must, therefore, weigh the domestic political and economic benefits of introducing a modest border tax against the reactions of others. One thing is certain--we must justify the border tax within existing GATT rules. If we keep the rate at something between 2-2-1/2% we can, we believe, stay generally, although not necessarily strictly, within the rules. Then the Europeans, who understand the political nature of our domestic problem, will probably be able to overcome the doubts of their technicians and, at least in the Common Market and in Switzerland, will be able to avoid counter measures. This is predicated on the assumption that our tax will be announced as a temporary measure pending further discussions in the GATT on the general questions of border taxes and of the B/P adjustment process. It also assumes that legislation can be controlled and that it will dampen rather than enlarge protectionists' fires.
In Bonn, Brussels and The Hague, we raised the possibility of a suspension of recent or contemplated actions in the tax field. While some effort might be made to explore compensating measures for the border tax effect of the new TVA tax system, the legislative problem is so great that we do not feel this is a realistic possibility in our time frame.
Harold Wilson clearly indicated that he could not suspend the British export rebate at a time when the United States was introducing a similar system./2/
/2/Katzenbach's report of his conversation with Wilson is in telegram 5279 from London, January 7. (Department of State, Central Files, ORG 7 U)
Both the Swiss/3/ and the British made the point that the imposition of a border tax implies that a currency is overvalued and warned us that this might be a conclusion drawn in certain business and banking circles. None of the Common Market countries made this point.
/3/Katzenbach's account of his conversation with Swiss Government officials and bankers on January 3 is in telegram 3831 from Brussels, January 3. (Johnson Library, National Security File, Subject File, 1968 Balance of Payments Programs, Cables [1 of 2], Box 4)
Tourism
The uniform European reaction--although everyone agreed that the President could not ignore such a large element in our B/P deficit--is that any U.S. action to restrict tourism would hit unfairly at airlines and hotels and probably would not achieve the desired purpose. They were happy to learn we were not contemplating exchange controls. Again they will probably accept some modest limitations--particularly if they are part of a broader B/P program.
There is real substance to the European view that we should do much more to encourage tourism in the U.S. Greater emphasis, for example, on package tours, which give the middle income traveler a better idea exactly how much he will have to spend, would do a lot of good. We should also urgently examine the feasibility of persuading airlines to give lower preferential air fares to round trips originating in Europe.
Two other suggestions are worth studying:
--If we decide to put a small tax on passports, impose a ticket tax or a head tax, we might earmark the income to promote foreign travel to the U.S. (this would do much to make the tax more politically acceptable at home);
--We should take a very hard look at ways to simplify or eliminate our tourist visa requirements.
Investment
There was almost uniform (if at times grudging) approval of our decision to control U.S. investment outflows, but several countries expressed concern. Belgium, in particular, was quite worried; Holland was concerned about its North Sea oil and gas; Italy by its problems in the south. The UK also had some worries but accepted the program as necessary. The Commerce Department should be prepared to exercise some flexibility in administering the program. Obviously we cannot grant so many exceptions that we fail to reach our target. But we should at least encourage American business overseas to attempt, as far as possible, to meet this highly political need as they make their investment decisions.
While in Paris we met with a group of American businessmen, who raised an issue that deserves Commerce's urgent attention. They pointed out that U.S. business has found it indispensable, when raising money in Europe, to offer a parent company guarantee. In some cases they have gone so far as to incorporate in Delaware simply to make their issues more appealing to European investors. These guarantees very rarely come into play, but their existence apparently is important.
We asked the businessmen to get their comments and suggestions about the particular effects of these measures into Washington quickly. It will be of the utmost importance to work closely with the business community in order to meet their legitimate concerns, while at the same time assuring that the program is not frustrated by their ingenuity.
Finally, we are all a bit concerned by Debre's remarks that he wondered how the U.S. could regulate American affiliates and still want them to receive equal treatment "in countries such as France" (see Secun 30)./4/ He may well be preparing the ground for later GOF moves against U.S. affiliates in France--where and when it suits the French. But such action will be difficult technically to devise.
/4/Another series indicator and number for telegram 5277 from London, January 6, sent to the President in Document 173.
Export Expansion
All of us--and Phil Trezise on his swing through Scandinavia--reassured the Europeans that the President's proposed export expansion measures would not set off a credit race. It is important that we explain publicly and repeatedly that we want to increase the efficiency of Ex-Im in the credit field--not to move toward a system of subsidized interest rates.
Neutralization of Military Expenditures Abroad
Every NATO partner we talked with was grateful for the President's determination not to play into the hands of those in the U.S. who want, for other reasons, to see substantial American troop cuts in Europe. For bargaining purposes (particularly in Bonn)--and despite the fact that we realized it would probably not be possible--we emphasized the need for full neutralization of our foreign exchange costs. The trilateral talks last year bought us some time, but it is important that we begin discussions with the FRG as soon as we can on arrangements for the next two years.
During each visit we mentioned the need for future multilateral arrangements. Everyone expressed interest, but recognized that we would probably have to proceed on a bilateral basis for the next two years. State and Treasury have already begun consideration of a multilateral system which we might propose in NATO; we will now make it a priority SIG agenda item.
The importance of the British problem must not be underestimated. If the U.K. fails to get a 100 million pound off-set agreement (or very close to it) and, as a result, cuts the BAOR, pressure for cuts of our own may well reach intolerable proportions. Harold Wilson made very clear that he would withdraw troops without the off-set.
Gold
Everywhere we went the question of the 25 percent gold cover was raised--not nervously, but with a question as to why we had not yet acted on it. We explained the Federal Reserve powers to suspend--a point already known to the central bankers--and said any legislative action would in any event have to await a propitious time.
Conclusions
At a time when both the U.S. and British Governments are trying to improve their payments positions by an aggregate figure of over $4 billion, we cannot ignore the possible cumulative effects of the measures taken by the two countries on our own economies and the economic fortunes of the world at large.
We must put our best economic brains to work on this problem--and soon. We recommend that the President appoint an advisory committee, or perhaps use the existing Dillon Committee (which includes people such as Walter Heller, Francis Bator, Bob Roosa and Kermit Gordon), to undertake an immediate examination of the measures we have taken or are likely to take. If these experts conclude that the US/UK program may cause serious economic problems, the U.S. should call for a conference--perhaps sponsored by the Economic Policy Committee of the OECD--to propose ways of ameliorating conditions arising from UK/US balance of payments measures. We must, for psychological reasons even more than technical ones, demonstrate our determination to create conditions for an expanding world economy--with deficit countries assuming their responsibilities, surplus countries playing their proper role, and both responsive to the needs to LDCs.
Also, as many of our European friends seem to recognize, the reduction or elimination of our deficit makes it even more important that we proceed as quickly as possible to approve and implement the special drawing rights mechanism. While this may be a modest step, it will have an important bearing on developing a sense of purpose and responsibility.
It is important that we continue to analyze the domestic and international consequences of various legislative proposals--particularly their net effect on the B/P.
How we handle ourselves in dealing with our partners abroad is almost as important as the measures themselves. It is extremely important that the USG speak with one voice, and that we handle our negotiations with the utmost skill. There will naturally be differences of view between the various Washington agencies concerned with specific aspects of the program, but the political stakes are high and we must find some way to settle our differences quickly and constructively.
We were heartened, but at the same time sobered, by the recognition abroad of the importance of US leadership and responsibility. Without exception, the people we talked to are aware of the tremendous burdens the President carries, and all (except France) spoke with admiration that forceful and positive action had been taken.
175. Memorandum From the Under Secretary of State for Political Affairs (Rostow) to Secretary of State Rusk/1/
Washington, January 8, 1968.
/1/Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. V [2 of 2], Box 3. Secret. The source text is a copy sent to Walt Rostow at the White House, whose handwritten notation on the source text directed Lois Nivens, a secretary at the White House, to provide a copy for Fried "for urgent comment & discussion." In a January 8 memorandum to Fowler, Sam Y. Cross and Robert G. Pelikan, two Treasury officials who accompanied Rostow, provided another report on this trip. (Johnson Library, Fowler Papers, International Balance of Payments--Classified Material: 1968 Balance of Payments--Cables, Box 44)
SUBJECT
The Balance of Payments Program: Next Steps after the First Round of TalksThese observations were written on the plane coming back. They reflect reactions of the talks we had in Japan, Australia, and New Zealand, and to what we read of Nick Katzenbach's talks in Europe.
The first reactions to the announcement of our balance of payments program on January 1 have been constructive. The speculative pressure on the dollar through the gold pool has stopped, for the moment at least. The governments and central bankers, by and large, have said two things: (1) the American action was necessary, courageous, decisive, and useful, but (2) they are also worried about its possible impact not only on their own economies, but on the world economy as a whole. They are concerned about the prospect of an acute shortage of funds, credits, and reserves, causing higher interest rates; about the risks of an outbreak of protectionism, especially if we decide to move for border tax legislation; and about an atmosphere of uncertainty which could express itself in the postponement of investment decisions, and a rising tendency to sell securities and hold assets in liquid form. Such a tendency could break some of the weaker currencies, and even lead to a pell mell for liquidity, in the pattern of 1931.
Action by the United States has an entirely different psychological effect from that of any other country. If we take limited protective steps which other countries take as a matter of course men react altogether differently. The fact that we have undertaken a mandatory balance of payments program is in itself a shock. That we are considering a border tax adjustment as part of the program--effectively a devaluation pro tanto or an increase in tariffs--is a double shock, and a doubly disturbing one.
It is not yet clear whether the increase in confidence stemming from the announcement of the program outweighs the increase in anxiety, and whether the reduction in our own balance of payments deficit will work towards equilibrium or disequilibrium in the world economy as a whole.
We shall need to move rapidly during the next few months if the opportunity implicit in the crisis is to be used effectively, and the several major risks of the situation avoided.
This memorandum attempts to deal with some of the substantive problems of the period immediately ahead, and with procedures to be considered in dealing with them.
I. Managing the adjustment between the US deficit and the E.C. surplus.
For several years, we have advanced the thesis that the balance of payments relationship between the United States and Europe was a joint responsibility of the surplus and the deficit nations, to be handled cooperatively.
Actually, our thesis requires some qualifications. Both we and the Europeans have recently lost some reserves to the Less Developed Countries. The situation is no longer ours alone to control. And only Germany and Italy of the Community countries have significant current surpluses. What we are really thinking about is a move towards equilibrium which would involve (1) a cut in our deficit; (2) a reduction of current surpluses for Germany and Italy; and (3) a reduction of reserves on the part of France, Belgium and the Netherlands.
One key to the success of our present effort is whether Europe can provide the world economy with $1.5 billion in additional capital this year, to replace that amount in American credits and investments covered by our mandatory action. Last year, European sources increased the availability of capital to foreign borrowers by approximately 100% over 1966.
Will the increase continue, and if so, at what rate? Should international action be taken to help stimulate the response of supply to increasing demand, or should the process be left to the market? If international consultations are indicated to guide the adjustment process, through what procedure, and to what ends?
The magnitude and abruptness of the adjustments envisaged, and the nature of the political and economic risks if things go badly, make it essential to utilize existing (or new) procedures of consultation for the purpose of harmonizing policy with respect to the adjustment process as a whole, and to its several interrelated parts as well. In fact, I suggest that this cooperation be organized on a Crisis Management basis, both within our government and internationally, and handled for the next few months by a small, high level, international working party, in continuous session, probably in Washington.
Viewing the adjustment process in all its aspects, governments should act at the level of political responsibility to lay down certain agreed policy guidelines for their officials in the areas of trade, finance, and banking who will have day-to-day responsibility. The general object of these guidelines should be cooperation to achieve balance of payments equilibrium at high levels of employment and investment.
This sentence should not be regarded as a cliche.
It should explicitly mean a willingness on the part of surplus countries to lose reserves if necessary, within a pattern of cooperative reserve surveillance, to sustain existing levels of investment at home and abroad, and correlatively to offset tendencies towards excessive credit restriction or liquidity in the coming months, due to severe competition for existing funds.
Secondly, this principle should mean cooperation to maintain existing parities, through the gold pool or otherwise. In this connection, the Solomon plan/2/ should be discussed and negotiated.
/2/Not further identified.
Thirdly, it should mean a willingness to examine all problems that bear on the viability of the monetary system--issues relating to sterling, the availability of reserves during a period of contracting dollar supply, and so on.
I have put the issues relating to the impact of our balance of payments program on the monetary system first because they are primary. If the dislocations of this period start another round of monetary turbulence, the damage may be harder to contain, and more fundamental.
We should explore with Secretary Fowler and Chairman Martin how monetary cooperation of the types mentioned should be organized and handled. To launch the process, I suggest a carefully prepared meeting--conceivably of the Chequers type, or a Special Session of the OECD Ministerial Council--either before or after the meeting of Working Party 3 scheduled for January 22-23rd, and the Honolulu meeting of the same period.
II. The Issues of Trade Policy.
We have taken the view that flexibility in trade policy should be part of the armory with which governments handle the balance of payments adjustment process.
To this end, we have proposed a change in GATT rules to authorize such flexibility. This proposal must imply either movable tariff rates or balance of payments surcharges as an alternative to import quotas.
Point 6 of the President's Seven Point Program of January 1, 1968, is "Non-Tariff Barriers". Reaffirming that trade liberalization remains the basic policy of the United States, it calls for long range post-Kennedy Round negotiations to tackle non-tariff barriers in general. It calls also for discussions about the possibility of "prompt cooperative action among all the parties to minimize the disadvantages to our trade which arise from differences among tax systems". Mr. Katzenbach explored the possibility of these discussions in Europe last week. One of our most urgent tasks, beyond cooperative surveillance of the workings of the monetary system, will be to appraise the results of these explorations--that is, the chances of success in quick negotiations to reduce border taxes, and perhaps other non-tariff barriers, as an alternative to American legislation to establish border tax adjustments of our own. On the trip another way to reach the same end--that is, the end of reducing the level of European tariffs or tariff equivalents--was suggested: that some of the chief surplus countries put their Kennedy Round tariff cuts into effect in advance of the agreed schedule. The feasibility of this idea is now being staffed out. If it seems promising, it could be examined in the same negotiating format.
From our talks in Japan, Australia and New Zealand there is no doubt that a decision by the President to propose border tax adjustments would cause profound and far-reaching concern. These governments would expect such a move on our part to trigger a world-wide series of protectionist steps, and they are convinced such a process would be nearly impossible to contain. They would strongly prefer prompt negotiations to reduce European border taxes (and perhaps some other non-tariff barriers) as an alternative to American border tax legislation. The Japanese specifically offered to make a contribution to such a process of reducing non-tariff barriers, if we chose that course rather than its alternative.
It is nearly certain--however irrational this thought may be in fact--that a border tax proposal on our part would be taken as signalling a profound change in the direction of trade policy.
I believe that the announcement of our program and the first reaction to it have given us some time. If we get the tax bill through soon, international opinion will be even calmer, and the risk of a new round of gold fever (absent trouble for sterling) will be correspondingly reduced.
I suggest that we use this period of time--a couple of months at most--to follow this course urgently--the course, that is, of prompt negotiations to reduce European border taxes and other non-tariff barriers, while we mark time on the decision to initiate border taxes.
Such a course would improve our chances for success in organizing monetary cooperation along the lines indicated in Part I.
176. Telegram From the Department of State to the Embassies in Germany, Belgium, France, Italy, and the Netherlands/1/
Washington, February 5, 1968, 0041Z.
/1/Source: Department of State, Central Files, FN 12 US. Confidential; Immediate. Drafted by Enders (M) on February 3; cleared by Solomon (E), Leddy (EUR), Henry L. Heymann (S/S), Deming, Roth, and Fried; and approved by Katzenbach. Sent to Brussels also for USEC and Paris also for OECD.
109871. Subj: US Balance of Payments Program.
1. Please deliver following message at highest appropriate level governments and EC Commission on February 5:
US wishes to pursue consultations on Balance of Payments Program begun during mission of Undersecretary Katzenbach./2/ Our particular emphasis will be on trade.
/2/Regarding Katzenbach's discussions with European leaders, see Documents 170-174.
Most of the major elements of the President's program are already in train. Proposed income tax surcharge is before the Congress. The programs to reduce direct investment and lending overseas are in effect. Today we are sending up to the Congress legislative proposals on travel. We have begun discussions of ways of neutralizing defense expenditures overseas. And we have already moved to reduce civilian expenditures of the government abroad.
We wish now to move ahead with remaining major portion of President's program: action to improve the trade account. Although action on non-trade accounts will produce a major reduction in the US deficit, there must also be action to improve the trade account if we are to avoid the dangerous consequences of continued large-scale deficits. As the President said in his January 1 message, we must improve our trade position by $500 million in 1968.
To this end, US is considering several alternative proposals. We wish to consult closely with our principal European trading partners.
Ambassador Philip Trezise will undertake these consultations for us and present to members of your government and your senior officials the elements of our thinking. We should be grateful if your government would receive him.
2. For Bonn. Letter from President to Chancellor concerning Trezise mission follows septel for presentation February 5./3/ We hope Trezise could make initial call on Germans no later than February 8. Trezise prepared to stay in Bonn as long as necessary to follow up.
/3/Document 178.
3. For Paris, Rome, Brussels, The Hague. Will be in touch with you on scheduling Trezise visit, which in any case would be no earlier than February 12.
4. For Brussels (USEC). Trezise mission intended to continue process of consultation started by Katzenbach and Rostow/4/ and continued during Rey visit here./5/
/4/In late January Eugene Rostow visited Europe and consulted with EC officials on January 29. A report of their discussion is in telegram 4349 from Brussels, January 29. (Department of State, Central Files, FN 12 US)
/5/For a memorandum of Rey's conversation with President Johnson in Washington on February 7, see Foreign Relations, 1964-1968, vol. XIII, pp. 662-664. Rey also met with other senior U.S. officials. A memorandum of Katzenbach's conversation with Rey on February 7 is in Department of State, Central Files, FN 12 US. A report summarizing a U.S.-EC combined meeting on the afternoon of February 7 and the morning of February 8 was transmitted in telegram 114351, February 13, to eight Western European posts. (Ibid.) A report of Fowler's meeting with Rey on February 8 was transmitted in telegram 113391, February 10, to the same posts. (Ibid., Central Files, EEC 7)
5. Essential to this mission that Trezise meet with responsible ministers at each stop.
6. Washington team accompanying Trezise will consist of John Rehm, Counsel to the Special Representative for Trade Negotiations; Lisle Widman, Director, Office of Industrial Nations, Treasury Department; Thomas O. Enders, Special Assistant to the Undersecretary for Political Affairs.
7. For Trezise. Terms of reference for your mission follow septel./6/
/6/Document 177.
Rusk
177. Telegram From the Department of State to the Embassy in France/1/
Washington, February 5, 1968, 0043Z.
/1/Source: Department of State, Central Files, FN 12 US. Secret; Exdis; Immediate. Drafted by Enders on February 3; cleared by Solomon, Leddy, Henry L. Heymann, Deming, Roth, and Fried; and approved by Enders.
109872. CEDTO. Subj: Balance of Payments Mission./2/
/2/Regarding this mission, see Document 176.
For Trezise. Framework in which you will be operating is laid out in following memorandum from Secretary Rusk dated January 30/3/ which President has approved:
/3/No other text of this memorandum has been found.
"1. The President has indicated his determination to improve our trade account. On the other hand, he does not wish to take any action that might undermine our basic trade policy or unravel the results of the Kennedy Round. He is deeply concerned that any action taken precipitately and unilaterally could begin a downward spiral which could restrict rather than expand world trade.
2. The Administration is still considering several alternatives:/4/
/4/A task force composed of representatives of the Council of Economic Advisers, Commerce, State, Treasury, and the Office of the Special Trade Representative developed these three alternatives, which were summarized as alternatives A, B, and C (instead of B Prime) in a memorandum from Roth to Califano, January 12. (Johnson Library, Fowler Papers, International Balance of Payments--Classified Material: 1968 B/P Operations, Box 45)
A. A 2 percent border tax adjustment on imports and exports based on State indirect taxes;
B. Asking the GATT for a waiver to permit a 2 percent border tax adjustment because of balance of payments reasons;
B Prime. A similar adjustment on the import side only of 2-1/2 percent. This might be done without legislation. Alternatively there is a possibility--although not a strong one--that the Europeans will offer expansionary action themselves in order to avoid restrictive measures by the U.S. This action could be: acceleration of the Kennedy Round, untying aid, reducing border tax adjustments, stepping up domestic economic growth, etc.
3. We propose to go to the Europeans late this week, explain our problem, and describe the trade measures we are now considering (Alternatives A, B and B Prime above). It is essential that we get a better reading than we presently have as to what extent they will stand still without retaliation if the US--and if other countries emulating the US--should go down any of these particular roads.
Germany's attitude will be crucial. We propose to initiate our consultations there with a letter from the President to Kiesinger./5/
/5/See Document 178.
4. Given the unpredictability of possible trade actions by others and the importance and delicacy of what we are trying to achieve, it is clearly in the US interest for the President and the responsible Congressional officials to have these readings before making a final decision on our next move. This move could be either a direct US action, or quite possibly negotiations to carry through on European expansionary action--if we thought that serious and substantial--or to lay a more manageable basis in the GATT for US legislative or executive action.
5. In light of the need for further urgent discussions, both bilaterally in Europe and in the GATT, we will not be prepared to discuss the specific alternative proposals with the Ways and Means Committee next Monday./6/ We would, however, keep in close contact with the Chairman as our negotiations and planning progress."
/6/Fowler and Roth unveiled the administration's balance-of-payments legislative agenda in testimony before the House Ways and Means Committee on Monday and Tuesday, February 5-6. The hearings continued through March 1. See Administration's Balance-of-Payments Proposals: Hearings Before the Committee on Ways and Means, House of Representatives, Ninetieth Congress, Second Session (Washington: Government Printing Office, 1968), Parts 1-3.
Procedure outlined above has been discussed with Chairman Mills, who is in agreement.
Rusk
178. Telegram From the Department of State to the Embassy in Germany/1/
Washington, February 5, 1968, 0046Z.
/1/Source: Department of State, Central Files, ORG 7 U. Confidential; Exdis; Immediate. Drafted at the White House; cleared by Solomon, Leddy, Heymann, Deming, Roth, and Fried; and approved by Enders. Repeated to Paris for the Embassy and OECD.
109873. Paris for Trezise. Please deliver following message from President Johnson to Chancellor Kiesinger at earliest appropriate time on Monday:/2/
/2/February 5.
"Dear Mr. Chancellor:
I thank you for the friendly reception accorded Under Secretary of State Katzenbach during his visit to Bonn early this year to explain our program for dealing with the U.S. balance of payments problem. The ready response of your Government to Mr. Katzenbach's presentation was most gratifying. Now we must move on to the phase of cooperative action.
I fully recognize, as I am sure you do, the serious political issues which face us all as the result of the U.S. balance of payments problem. Every aspect of our relationship--political, economic, commercial and especially security--could be affected by this situation. All our efforts to achieve a stable and prosperous world community will be in jeopardy if we have not the will to act together now--as we have done over the past twenty years.
You and I are old enough to remember how a lack of economic cooperation among the nations plunged us into the depression after 1929--with all its tragic consequences.
Therefore, these are matters of great concern.
I think we are in agreement that both deficit and surplus countries must take measures to restore international payments to equilibrium. These measures will be painful and politically difficult for all of us, but my government is determined to carry through with our program. The effectiveness of what we do--the course of action we follow--will be determined in large measure by the way in which our Atlantic colleagues--and especially Germany--react. With careful cooperation we can move forward to resolve this issue. We must preserve the political and economic gains we have achieved in the last two decades--and go on from there. This is our objective and we seek your cooperation.
It has become apparent to me as I have examined our balance of payments position that the United States--despite the efforts we are making to avoid excessive demand at home and to take action on capital account, tourism, the neutralization of military expenditures overseas and in other ways--cannot reach equilibrium without improving its trade account. I believe the consequences of continuing large-scale deficits are so dangerous that we must take action in this sector as in others.
To this end we are seriously considering a number of possible steps, including the introduction of border tax measures of our own or the use of measures available under GATT to countries with balance of payments problems.
It will, of course, be most desirable to find solutions which will result in trade expansion, rather than trade restrictions. I am sure you know that I--like others who believe in liberal trade principles--must deal with strong protectionist pressures.
We propose to consult closely with our European trading partners, of which Germany is of first importance. I have therefore asked Ambassador Philip Trezise to visit Bonn as my representative. I hope it would be possible for your Ministers and senior officials to receive him during the week of February 5.
Ambassador Trezise will convey our views on the need for trade adjustment and the possible alternative means of bringing it about. He will explain our urgent concern with the tax adjustments at the border of your country and other countries. He will present our views on the kinds of actions Germany and other European countries could take to contribute to a general expansion of world trade and income as we move toward balance of payments equilibrium and a stronger international monetary system.
I know that you agree with me on the importance of resolving our balance of payments problem in an environment of expansion.
I hope that the visit of Ambassador Trezise will help achieve that objective.
Lyndon B. Johnson"
Rusk
179. Memorandum From the President's Special Assistant (Rostow) to President Johnson/1/
Washington, February 7, 1968.
/1/Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. V [2 of 2], Box 3. Confidential. A handwritten notation next to the dateline on the source text reads: "Rec'd 12:28 p."
SUBJECT
Report on Our Balance of Payments Negotiations with JapanAt Tab A is Secretary Fowler's memo giving you the results of our negotiations to get some balance of payments offsets for our military expenditures in Japan./2/ When Prime Minister Sato visited you in November/3/ he said Japan would take cooperative actions that would have the effect of helping our balance of payments by $300 million in 1968, and if possible go up to $500 million.
/2/Fowler's attached memorandum to the President, February 3, is not printed.
/3/Prime Minister Sato held discussions with President Johnson and other U.S. officials November 14-15, 1967. Extensive documentation on the talks is scheduled for publication in Foreign Relations, 1964-1968, volume XXIX.
In negotiations just completed by Treasury and State, Japan agreed to a package amounting to $350 million:
-- increased purchases of time deposits in the U.S.: $210 million;
-- increased military purchases and direct investments in the U.S. combined: $100 million;
-- other: $ 40 million
Total: $350 millionJapan also agreed to shift some of its borrowing from banks in the U.S. to the Eurodollar market.
We could not get the Japanese to take trade actions--such as removing some of their restrictions--but this is still under consideration. In any event, they will not move in this area until they know what we will do on the border taxes.
The Japanese asked us for assurances that we will continue our present policies on their $100 million IET exemption, on Export-Import loans, and on bank lending under the Federal Reserve program. Secretary Fowler plans to give them these assurances and, at the same time, tell their Finance Minister we want to meet with them again in the late spring to see if they can do more--particularly if their balance of payments position improves.
Fowler is disappointed over the Japanese offer and believes it shows that Japan has not yet accepted a clear responsibility to offset our military expenditures there.
My comments is that we are making progress and Fowler has a good series of consultations going. Japan had a balance of payments deficit of over $600 million in 1967 and they face a deficit of $400 million this year. This puts some limits on what they can do. We also have to remember that their reserves are low and they keep them almost entirely in dollars, not gold.
Walt
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