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DEPARTMENT OF STATE1964-1968 Volume VIII International Monetary and Trade Policy |
General and Financial and Monetary Policy
26. Memorandum From Secretary of the Treasury Dillon to President Johnson/1/
Washington, January 5, 1965.
/1/Source: Johnson Library, Bator Papers, Balance of Payments Message, February 10, 1965, Memos [2 of 2], Box 16. Confidential.
SUBJECT
The U.S. Balance of Payments SituationThe improvement since 1960:
Last year's deficit on regular transactions is now estimated at about $2.8 billion--$500 million below the 1963 level and about $1 billion below 1960 but well above the $2 billion target we had established earlier. The improvement over 1960 was the net result of
--A commercial trade surplus up by $500 million.
--Investment income up over $1.5 billion.
--Effect of Government expenditures overseas down over $1 billion.
--Net losses on tourist account up $500 million./2/
/2/A handwritten notation presumably by Bator in the left margin reads: "no real objection."
--U.S. purchases of foreign securities unchanged (but only because of the announcement of interest equalization tax in July 1963).
--Longer term bank lending to foreigners up sharply by over $500 million./3/
/3/A handwritten notation presumably by Bator in the left margin reads: "no real objection."
--Short-term capital outflows up by $400 million.
--Direct investment higher by $500 million./4/
/4/A handwritten notation presumably by Bator in the left margin reads: "no control proposed."
In brief, improvement has been substantial in those areas which our previous programs targeted--but this improvement has been offset by sharply increased bank lending and continually heavier tourist spending abroad.
Current problems:
The fourth quarter 1964 deficit was particularly large, running at an annual rate of over $4 billion. The sterling crisis has impaired confidence in the dollar. Losses of gold have resumed, $172 million being lost in the fourth quarter with still larger losses expected in the coming months. Details regarding the gold situation are covered in a separate memorandum./5/
/5/Not found, but see Document 25.
Foreign exchange markets continue extremely uneasy both because of the sterling crisis and a general cautionary attitude toward both sterling and the dollar. The gold price in London stands at the highest level since the Cuban crisis despite substantial official intervention. Gold losses of about $250 million are foreseen for January and perhaps $600 million for the January-July period.
To sustain confidence in the dollar and avoid further substantial gold losses, it is essential to take steps to insure a reduction in the 1965 deficit to well under $2 billion.
The suggested program:
A special balance of payments message to the Congress reviewing developments since 1960, reaffirming that a change in the price of gold is out of the question and pinpointing the measures required to achieve further improvement. These steps will include:
--Announcement that the Gore amendment to the Interest Equalization Tax has been imposed by the President so that the tax falls on bank loans with maturities of one year or more to foreigners (other than loans directly associated with the financing of U.S. exports)./6/ Imposition of the tax would affect bank lending now running at about $1 billion annually, cutting the outflow by up to perhaps $300 million.
/6/The Gore Amendment to the Interest Equalization Tax (see Document 12), gave the President standby authority to apply the tax to the acquisition of foreign debt obligations by commercial banks, which had been exempted by the IET law.
--Recommend a two-year extension of the Interest Equalization Tax, thus continuing to curb foreign security sales in the United States capital market by developed countries abroad.
(To minimize the possibility of heavier bank lending of less than one year, the Federal Reserve should be encouraged to amend Regulation A affecting commercial bank access to the Federal Reserve's discount window, to deter short-term lending to foreigners.)
--Recommend imposition of a travel tax of $100 per person per trip, applicable to trips outside the United States in excess of an appropriate minimum time period (or, alternatively, exclusive of travel to Canada, Mexico, and the Caribbean Islands). The tax would be designed to effect savings of around $250 million. In the absence of this measure U.S. travel expenditures can be expected to increase again by some $300 million in 1965. (This proposal has not been discussed with other Government agencies but, initially at least, will be opposed by the State Department. The proposal is nevertheless essential to provide a rounded attack on the serious balance of payments problem.)/7/
/7/A handwritten notation presumably by Bator in the left margin reads: "Will be violently opposed by traveling public."
--Recommend extension for two years of legislation limiting tourist exemption to $100 which otherwise would expire on June 30./8/
/8/A handwritten notation presumably by Bator in the left margin reads: "OK."
--Recommend legislation to improve the tax treatment of foreign portfolio investment in the United States and further encourage other efforts to make foreign long term investment here more attractive./9/
/9/A handwritten notation presumably by Bator in the left margin reads: "OK."
--Some further reductions, beyond those already planned, in Government expenditures abroad, particularly military. This will involve difficult political decisions but is an essential element in any meaningful balance of payments program./10/
/10/A handwritten notation presumably by Bator in the left margin reads: "Strongly disagree."
--Reemphasis of need for price stability and improved exports./11/
/11/A handwritten notation presumably by Bator in the left margin reads: "Where is control over internal investment?"
The measures respecting tourism and Government expenditures abroad will require policy decisions by you before the message to the Congress can be fully developed. In addition, Commerce may recommend legislation to undertake an expanded guaranty program on export credits to be administered by the Export-Import Bank (the Eximbank will oppose this) and consideration of some incentive to U.S. exports along the lines announced recently by the British Government (this latter aspect is aimed primarily at bargaining with European governments regarding competitive equality of treatment for exports rather than a balance of payments measure).
From previous experience I am reasonably certain that it will be impossible to obtain agreement of interested Departments and agencies on the elements of a useful program. Final decisions will have to be taken by you in a number of instances. This may well require several meetings with you, which should be undertaken in the near future. These meetings must be kept in complete confidence since advance leaks regarding the program could have seriously adverse repercussions. If you desire, I can hold a preliminary meeting of the Cabinet Committee on the Balance of Payments to clarify the issues.
We have so far made real progress against a background of a stable price level. But the improvement remains inadequate--if, as must be the case, a dollar of unquestioned integrity at home and abroad is to go hand-in-hand with progress in establishing the Great Society.
Douglas Dillon/12/
/12Printed from a copy that indicates Dillon signed the original.
27. Memorandum by the Chairman of the Council of Economic Advisers (Ackley)/1/
Washington, January 11, 1965.
/1/Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. 2 [2 of 2], Box 2. Confidential. A copy was sent to the Chairman of the Board of Governors, Federal Reserve System.
MEMORANDUM FOR
Cabinet Committee on Balance of Payments:
Secretary of the Treasury
Secretary of Defense
Secretary of Commerce
Under Secretary of State
Administrator of AID
Special Representative for Trade Negotiations
Director, Bureau of the Budget
Mr. Bundy, the White HouseSUBJECT
Balance-of-Payments ProgramSecretary Dillon's memorandum of January 8 calls for further steps to improve our balance of payments./2/ The program recommendations contained in his memorandum, however, do not appear to exhaust the possibilities. Set out briefly below are additional or alternative steps that should be considered before decisions are reached.
/2/Not printed. (Ibid.)
Many of these possibilities involve the area of direct investment, one of the largest and most steadily expanding drains on our balance of payments. Governments of most of the developed countries would be happier if this flow were reduced; indeed the current magnitude of such investment (at a time when the U.S. is running large deficits and asking surplus countries to hold enlarged low-yielding liquid claims against us) appears to be impairing their willingness to cooperate with us in other areas. Since at least a temporary reduction in this flow is also in the U.S. interest, it would seem that this is a promising area in which to move.
1. The IET could be extended, in some form, to direct investment, with or without an exemption for that portion of direct investment associated with the export of machinery and equipment from the United States. A somewhat higher tax rate might be needed, given the higher return from direct than from portfolio investment. As a minimum, the definition of direct investment in the IET could be changed so that the tax would apply to all purchase of stock in (or other means of taking over) existing foreign enterprises.
2. Moral suasion could be tried in the field of direct investment. This could be done by a strong general Presidential appeal, or directly with key firms. Or one or more business groups could be encouraged to set up a voluntary self-policing effort.
3. Taxation of income from private foreign investment could be strengthened. In the new climate of opinion, tax measures such as those proposed but not enacted in 1962 might be reintroduced with perhaps greater chance of enactment. In any case, a renewal of these proposals might cause prospective investors to hesitate.
4. Additionally or alternatively, the Europeans could be quietly encouraged to use their existing controls on investment to cut back on American direct investment in their jurisdictions. In fact, our official posture has been just the opposite.
5. In the area of bank loans, moral suasion might be even more effective than extension of the IET, particularly because it could be applied to loans of any term. But any effort to use either moral suasion or the IET runs into both political difficulties and possible ineffectiveness unless the Canadian loophole is closed. Canadian authorities should be willing--as a part of the price for their continued IET exemption--to close this loophole themselves if we move to reduce the foreign lending of our own banks.
6. If the IET is extended to banks, the definition of a loan of over one year should be altered to include renewals of shorter-term loans, and an increase in the tax rate should be considered.
7. If American travel is to be taxed (and I am not convinced it should), some effort should be made to reduce its highly regressive character. Regressivity would be lessened if the tax were applied to the sale (or purchase) of international ship and airline tickets, with perhaps a higher rate on more expensive accommodations. (The Treasury suggestion for an exemption on short trips would appear to make the tax more regressive.) We should certainly consider reducing the customs exemption to $50, and eliminating the liquor allowance.
8. On the price stability front, a request that Congress enact a concurrent resolution affirming the principles of the price-wage guideposts might be considered, in order to give greater moral sanction to these principles. Perhaps there is an alternative and less difficult way to strengthen the authority of the guideposts.
Gardner Ackley/3/
/3/Printed from a copy that bears this typed signature.
28. Memorandum From Secretary of the Treasury Dillon to President Johnson/1/
Washington, January 15, 1965.
/1/Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. 2 [2 of 2], Box 2. Limited Official Use.
SUBJECT
Balance of Payments Problems with CanadaWe have one balance of payments problem with Canada which it would be important for you to mention to Prime Minister Pearson./2/ This is the necessity for continued reasonable restraint by the Canadians in the sale of new security issues in the American market, under the exemption which you have given them from the provisions of the Interest Equalization Tax./3/
/2/Canadian Prime Minister Lester B. Pearson met with President Johnson at the LBJ Ranch January 15-16. For an exchange of remarks between the President and the Prime Minister on January 16 prior to their signing of a U.S.-Canadian agreement on trade in automotive products, together with the text of the agreement, see Department of State Bulletin, February 2, 1965, pp. 191-194.
/3/A handwritten notation in the left margin reads: "See also p. 3."
In 1963, when the principle of the exemption was agreed with the Canadians,/4/ they indicated that they could and would control the volume of their borrowings in the United States by lowering their long-term interest rates so that Canadian sales of new issues in our markets would not lead to any increase in overall Canadian monetary reserves. Measuring from the introduction of the Interest Equalization Tax in July 1963, Canada has generally fulfilled this obligation with the exception of a $180 million repayment of their debt to the International Monetary Fund. They have claimed that this did not add to their reserves while we felt that it should be included. However, an honest misunderstanding was certainly possible on this item, and in any event it is now water over the dam. We now have a clear agreement with the Canadians that any further transactions with the IMF will count as additions to their reserves.
/4/See Foreign Relations, 1961-1963, vol. IX, p. 180, footnote 2.
When we look at the year 1964, however, the situation is different. Overall Canadian reserves did rise by $81 million during the calendar year, without counting the IMF repayment of $180 million which served to hold down the rise in published reserves. During this period the outflow of dollars into new Canadian issues amounted to $676 million which is much too high for a permanent level. This situation became particularly acute in the fourth quarter when the new issue outflow to Canada rose sharply to $359 million or an annual rate of over $1.4 billion. The reason for this sudden burst was that some Canadian borrowers had held up their borrowings pending final approval of the Interest Equalization Tax and assurance by the President of a Canadian exemption. The Canadians now assure us that they expect a sharp decrease in new issues in the coming months. This is in accord with our own best information.
I raised this matter with Finance Minister Gordon in Tokyo in early September,/5/ and we stressed its importance to the Canadians during November and early December when the Governor of the Bank of Canada, Mr. Rasminsky, who negotiated the original exemption, came to Washington to talk with me.
/5/Secretary Dillon was in Tokyo for the joint annual meeting of the IMF and the IBRD September 5-11, 1964. His meeting with the Canadian Finance Minister has not been identified.
As a result of these conversations, Finance Minister Gordon informally suggested to the Canadian Provincial authorities that it would be helpful, in the coming months, if they maximized their use of the Canadian market for new borrowings and avoided the New York market. At the same time, and for the first time since July 1963, the Bank of Canada by its operations in Canadian government bonds lowered the interest rate differential between long-term Canadian bonds and U.S. government bonds to approximately .80 percent from the 1 percent differential which had long been customary. Early in January, in accord with this policy, the Ontario Hydroelectric Commission successfully sold a $79 million new issue in Canada which under other circumstances would undoubtedly have been done in New York.
While the Canadians are now cooperating reasonably well, one reason for their cooperation is their knowledge that the Interest Equalization Tax will probably have to be extended later this year. They wish to build a record in the coming months that will give assurance to our Congress that the Canadian exemption can be safely maintained. There is a danger that renewal of the Act will again be followed by a burst of Canadian borrowing in New York.
It is important for you to indicate to Prime Minister Pearson your awareness of this problem, and its importance to our over-all balance of payments situation. It would help if you could stress the need for Canada to reduce her dependence on the New York market to the maximum extent possible not only prior to Congressional action on the extension of the Interest Equalization Tax but also thereafter. You could tell Prime Minister Pearson that any new bulge in Canadian sales in the New York market after the extension of the tax would put great pressure on you to set a ceiling on Canadian borrowings under the terms of the law.
Prime Minister Pearson may reply that Canada will make every attempt to carry out her agreement, but that the prospects are for a deterioration in the Canadian current account balance during 1965 which will have to be made up by borrowing abroad. The Canadians have a habit of being unduly pessimistic about their trade prospects. They expected their 1964 trade balance to be worse than the 1963 results. In fact, it turned out better. If Pearson should answer in this vein you might tell him that we are more optimistic than they regarding Canadian balance of payments prospects, and that, in any event, borrowing in our market should be held down until actual results in other areas of their payments clearly indicate a necessity for some increase in order to maintain the level of their overall monetary reserves.
Douglas Dillon
29. Memorandum of Conversation
Washington, January 19, 1965.
[Source: Department of State, Central Files, FN 16 US. Limited Official Use. 2 pages of source text not declassified.]
30. Memorandum From the Acting Director of the U.S. Travel Service (Black) to Secretary of Commerce Connor/1/
Washington, January 21, 1965.
/1/Source: Washington National Records Center, RG 40, Records of the Office of Fred Simpich, Assistant to Secretary of Commerce, 1965-1968: FRC 70 A 7017, Secretary's Staff Meetings, 1965. No classification marking.
SUBJECT
U.S. Travel Service--Priority ItemsThere are only two matters affecting USTS which require your immediate attention:
1. Proposed Travel Tax. We discussed this briefly at Tuesday's staff meeting./2/ In summary, Treasury has proposed the imposition of a $100 tax per person on travel abroad by U. S. citizens as a means of cutting down our balance-of-payments losses in the travel sector. This has been considered at the Cabinet level and a final decision should be made within the next week or so. If approved, this tax would be announced in a special balance-of-payments message to Congress by the President early next month. Assistant Secretary Holton has the action on this problem and can give you more details.
/2/The minutes of the Secretary of Commerce's staff meeting on Tuesday, January 19, refer only briefly to the Tourist Tax. (Ibid.)
USTS is strongly opposed to the tax on outbound travel, as we believe it would have repercussions on our own program to attract more foreign visitors here. We think the timing is bad, inasmuch as our "travel deficit" has not increased during the past year. However, if savings on our travel account are required, we propose instead that the duty-free allowance for returning U.S. residents be cut and that the Government officially promote the use of U.S.-flag carriers by U.S. citizens. These measures, we believe, would effect the savings required by Treasury and would be far more acceptable politically here at home.
I have discussed this problem in detail with Under Secretary Roosevelt, and he has a memo from us outlining our position at length./3/
/3/Not further identified.
2. Travel Advisory Committee. At our staff meeting, you mentioned the need for close consultation with industry in shaping the Commerce Department's policies. In the travel field we have a formal advisory group--the Travel Advisory Committee--composed of 36 representatives of carriers, hotels, travel agents and other business interests concerned with international travel. The Committee meets quarterly in Washington, and our first meeting of this year should be held early next month, if possible.
I would like to set a meeting date rather soon--but would like to fix a day when you could join with us and at least say "hello" to the group. Secretary Hodges customarily attended at least the first meeting of the TAC every year.
Attached is the press release listing the TAC members, including those newly appointed./4/
/4/This Department of Commerce press release, G 65-7, January 15, is not printed. Secretary Connor announced the appointment of 36 members to the 1965 Travel Advisory Committee, of whom 16 were members of the 1964 Travel Advisory Committee. All members served without compensation for a 1 or 2-year term.
31. Memorandum From the President's Special Assistant for National Security Affairs (Bundy) to President Johnson/1/
Washington, January 22, 1965.
/1/Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. 2 [2 of 2], Box 2. Personal and Confidential.
SUBJECT
Balance of Payments Committee WorkThis morning we had the best meeting yet of the Cabinet Committee on the Balance of Payments, but there is still several days' work before we will be in shape to talk with you.
There is now a pretty general agreement on a number of specific items. The most important are:
a. The Gore Amendment to tax bank lending of one year or more, imposed at the present rate basis (a large item).
b. Encouragement of foreign investment in the U.S. (a small but useful item).
c. Limitations on free imports by U.S. tourists (also small but useful).
d. Increases in the interest equalization tax on capital outflow (middle-sized).
e. A quite general effort in partnership with the Fed and perhaps with an additional tax to control both bank and non-bank short-term capital movements. (This may be a quite substantial item, since there appears to be a large pool of short-term funds of U. S. corporations which is held abroad for very small interest advantages.)
f. A further intensification of savings on the military dollar account. This is more for show than for use, and it has important budgetary costs because U.S. oil is more than twice as expensive as Middle East oil for some of our forces, but we all agree that it is worth including for appearances sake.
g. Finally, there is agreement, at least for the moment, that we should open an attack on overseas investment in the developed countries, but not by proposing legislation this year. The idea is that with John Connor as your Chief of Staff you should mount a major campaign of personal leadership with the top business leaders whose firms do most of this investing. Connor and McNamara believe that this would have a very substantial effect for a year or so, and that then we could ease up if conditions improve or move to legislation with less business opposition than we would be sure to get now.
The ways and means of some of the more complex parts of this program--notably the limitations on short-term capital movement--are being examined over the week end. We are also trying to get harder figures on projected savings, though there is inevitably a lot of guess work in all this. We should have a further report for you then.
The one item which is losing ground in the Cabinet Committee is the tax on tourist travel. An interesting coalition led by Rusk, Ball, Connor and Herter is strongly opposed. Their arguments turn on the damage to our own citizens of a regressive tax, the bad political impact abroad, the damage to our own tourist program, and effects on the Kennedy Round.
All of this will culminate in recommendations next week for a Presidential message. In addition, it looks as if you would be asked to take on three particular tasks:
1. The work with the business leadership on overseas investment already explained.
2. A message to Mike Pearson to emphasize to the Canadians the importance of limiting their very heavy borrowing in our market. (This would then be followed up hard by Treasury and State.)
3. A personal word from you to Bill Martin which would have two components:
a. You care even more about confidence in the dollar than he does, and this program is designed to prove it.
b. You expect to hold him to the promise he gave in the Committee today--that if confidence can be sustained, U.S. domestic credit will be kept easy. This is regarded by Gordon, McNamara and Ackley as very important in the light of the strong possibility that we may need even easier credit before the end of this year.
The clearly dominant judgment of your Committee now is that we must have a strong widely based program. We don't have it yet, but we are getting there.
McG. B.
32. Memorandum of Conversation
Washington, January 22, 1965.
[Source: Department of State, Central Files, FN 16 US. Confidential. 2 pages of source text not declassified.]
33. Report From the Cabinet Committee on Balance of Payments to President Johnson/1/
Washington, undated.
/1/Source: Washington National Records Center, RG 40, Records from the Office of Franklin D. Roosevelt, Jr., Under Secretary of Commerce, 1963-June 1965: FRC 68 A 5947, Correspondence: The President, 1965. Confidential. The source text is attached to a February 1 memorandum from Secretary Dillon to the Cabinet Committee on Balance of Payments in wich he requested "final comments, if any, to Acting Assistant Secretary Trued by noon on Tuesday, February 2, 1965, so that we may transmit the report to the White House on Tuesday afternoon." A copy was also sent to Martin, Chairman of the Board of Governors, Federal Reserve System.
REPORT TO THE PRESIDENT ON BALANCE OF PAYMENTS
I. Situation and Program
Fourth Quarter Results.
Preliminary data for the fourth quarter show a sudden and substantial worsening of our payments position. As compared with a November projection of about $900 million, the actual fourth quarter deficit is now estimated to have been almost $1.6 billion. Most of the $700 million difference is apparently accounted for by larger than projected outflows of short-term funds and long-term bank loans and by a failure to receive the British debt repayment of $138 million.
Factors contributing to the fourth quarter deterioration appear, in part, to have been temporary, but
--the sudden change for the worse, plus
--the failure to achieve a more rapid reduction in our stubbornly large deficit that has persisted for seven years, plus
--the resumption of large gold outflows
have revived serious concern about the strength of the dollar.
Prompt action is needed to deal with the situation. This can best be announced by a special balance-of-payments message in early February. This message should contain a strong reaffirmation of your determination to defend the dollar and a description of actions which you have ordered or are requesting from Congress to improve the situation.
Trend in the Deficit.
Some improvement has been made in our balance of payments since 1960, our worst year.
--Our commercial exports in 1964 were $4.4 billion above the 1960 level, thanks to an exceptionally large increase ($2.8 billion) last year, partly due to unusual agricultural exports to the Soviet zone.
--Our imports were only $3.8 billion above the 1960 level, showing a percentage increase lower than the growth of our national income.
--Private investment income was $1.9 billion higher in 1964 than in 1960, with an exceptionally large increase during 1964 due to several special transactions.
--Government expenditures abroad last year had a $1 billion lower net balance of payments impact than in 1960. Included in the decline was about $675 million of net military expenditures.
--The adverse balance on travel on the other hand, was almost $400 million larger in 1964 than in 1960, although it showed no deterioration from the 1963 level.
--Long-term bank credits to foreigners were some $850 million higher in 1964 than in 1960 and direct investment abroad was almost $500 million higher.
--Short-term capital outflows (presently estimated at about $2.2 billion) were also about $850 million higher than in 1960, but this outflow is highly variable, having been as low as $550 million in 1962 and as high as $1,550 million in 1961.
--Net purchases of foreign securities in 1964 were at about the 1960 level, but would have risen by a substantial amount in the absence of the Interest Equalization Tax. As it was, the tax discouraged all U.S. security flotations by the advanced countries at which it was directed.
These various changes were reflected in the regular transactions deficit which showed the following trend:
1960: $3.9 billion
1961: $3.1 billion
1962: $3.6 billion
1963: $3.3 billion
1964 (est.): $3.1 billion
The $500 million reduction in the last two years combined is much too slow a rate of improvement to ensure the avoidance of a serious crisis of confidence in the dollar. A reduction in the 1965 deficit significantly below $2 billion, with clear prospects for further substantial improvements in 1966, must be our objective.
Outlook for 1965.
Table 1 shows the composition of our estimated $3.1 billion deficit on regular transactions for 1964--final figures of this breakdown will not be available until early March--and a projected range of $2.5 billion to $3.2 billion for 1965./2/ (The upper limit of the range would have been raised by several hundred million dollars by one agency representative and the lower limit would have been lowered by several hundred million dollars by another agency representative, but the majority favored the range shown.)
/2/Table 1 is not printed.
This range is to be interpreted as follows:
--The upper limit of $3.2 billion indicates that under our present program the deficit could well be greater than the 1964 deficit, even in the absence of a crisis of confidence in the dollar.
--The lower limit of $2.5 billion indicates that the deficit, under the most favorable circumstances, will probably not show more than a moderate decline from the 1964 level.
--The mid-point of $2.85 billion indicates that, in the absence of a crisis of confidence, the deficit will most probably show only very slight improvement from the 1964 level.
But in absence of marked improvement from the 1964 position there is no assurance against a crisis of confidence, particularly in view of resumption of gold losses. To get assurance, we must adopt measures which can be expected to reduce the deficit by more than $1 billion in 1965 (bringing our probable deficit well below $2 billion), and by an additional amount in 1966.
Program and Possible Savings.
Table 2 shows nine agreed measures and potential savings for 1965./3/
/3/Table 2 is not printed. The nine measures are discussed in detail in Section II below.
These measures do not offer equally firm prospects for savings. (There is not sufficient experience with moral suasion to afford confidence in estimating results. There is also no sound basis for checking individual banker's judgments as to how much in additional exports would be achieved in 1965 by expanded export financing facilities.)
They also differ in respect to the time-pattern of the expected savings. (In case of moral suasion, for example, effect is likely to be rather quickly achieved but could be short lived.)
Finally, indirect effects of measures--particularly in stimulating possible evasions--vary greatly. A tax on one form of capital will lead to some increase in outflow through untaxed channels. Allowance was made for this in estimated savings by keeping them on conservative side, rather than by showing more optimistic amounts accompanied by partially offsetting increases in other forms of outflow.
II. Agreed Program of Immediate Measures
The agreed measures provide total estimated savings of $1,470 million in 1965. These measures, however, as noted above, are not of equal firmness as far as savings anticipations are concerned. The first six measures in Table 2 which are the firmest in this respect total only $630 million. Each of the measures is commented on in the following paragraphs.
If the measures finally adopted should not constitute an effective program, the only alternative would be a considerable tightening in bank credit availability, with inevitable repercussions on our domestic economy.
Apply and Broaden Gore Amendment.
Gore Amendment. Application of the Gore Amendment by Executive Order on the data of your message to the Congress is expected to reduce the $1,300 million of projected disbursements under long-term bank loans to advanced countries to about $1 billion. Net disbursements (after estimated repayments) to advanced countries would then be about $300 million.
Despite the tax Japan will probably want to borrow $200-$300 million in view of its high domestic rates and customary recourse to the U.S. for financial capital. At the present schedule of tax rates, a number of other advanced countries will also want to continue borrowing here. Their residents even now are reportedly committing themselves to reimburse the lending U.S. bank for the tax, if it is applied.
Higher IET Rates. If Congress were to raise the schedule of tax rates and make it applicable to all U.S. long-term bank loans made after the date of the message--measure number 3 of Table 2--some of these borrowers would drop out of the U.S. market and an additional $200 million of savings for the balance of payments would probably be achieved.
Non-Bank Long-Term Lending. The above savings estimates make an allowance for some leakage through other channels, although as noted below such leakage might be somewhat restricted through a strong moral suasion effort. One of these channels of leakage which it seems appropriate to restrict by application of the tax is non-bank long-term lending to foreigners--measure number 2 in Table 2. Such lending has not been sizable (apart from a special transaction last year in connection with the British Columbia Hydroelectric Project); but it could grow as an escape channel from the tax on long-term bank lending unless it also were subject to the tax. A modest saving of $20 million is projected in 1965 from applying the tax to long-term non-bank loans--for example, loans by insurance companies, trust funds, etc. The export and less developed country exemptions to bank loans would also apply to non-bank loans.
Military Expenditures Abroad.
In view of the previous actions taken by Defense, further substantial reductions in expenditures could be effected only through a major realignment of our forces overseas. Possible additional actions by Defense include cutting purchases of petroleum abroad with substantial increases in budgetary costs (increases range from 25% for returning Av Gas to approximately 100% for jet fuels and roughly 200% for Navy special fuel oil), holding Army strength overseas generally below author-ized levels, thinning out of personnel in certain selected countries and other economies which are also likely to increase budgetary costs. Further savings in 1966 are possible through similar actions. No withdrawal of combat units per se is contemplated under these strength restrictions. Balance of payments savings are estimated at $50 million in 1965 and $100 million in 1966, excluding contingencies which may arise in Southeast Asia.
State notes that in light of our existing situation abroad, particularly in the Far East, these proposals would require careful consideration in detail to assure that our political military interests abroad are not undercut.
Tourist Duty-Free Imports.
Request Congress in extending tourist duty-free exemption for two years to reduce amount of exemption from $100 to $50 and confine it to items accompanying tourist; also remove the special exemption for liquor.
Possible savings: approximately $40 million in 1965 if put into effect by May 1; $50 million to $60 million in 1966. The combined savings from these actions have been estimated conservatively to allow for possibility that reduced expenditures for foreign goods may be offset to some extent by increased expenditures for services within the foreign country.
Such action would leave U.S. policy still as liberal or more liberal than that of other advanced countries. Some increase in administrative cost would be necessary to make reductions effective but most, if not all, would be offset by additional revenue earned.
Encourage Foreign Portfolio Investment in U.S.
This measure would involve new legislation permitting easier tax treatment of foreign portfolio investment in the United States. Modest savings are projected for 1965 since the bulk of the effect would be expected to accrue only with a lag. Effects in later years could be substantial.
Moral Suasion.
After extensive discussion, there was unanimous agreement that, under present circumstances and at the present time, a strong across-the-board campaign of moral suasion over all forms of direct investment and bank and non-bank lending will produce as favorable results as tax action and would avoid the very real dangers of attempting to secure legislation in this area.
As Applied to Non-Banking Business Community. The business community strongly believes that direct investment abroad benefits the balance of payments in the long run because of the repatriated profits and because of the exports which many direct investment projects generate. Large balance of payments savings could result if firms were consciously to consider the impact of their total operations on our immediate balance of payments problems. They should be urged
--to reduce over the coming months their holdings of short-term investments abroad;
--to exercise restraint in financing their direct investments abroad with U.S. funds;
--to avoid or postpone direct investments in projects which do not promise clearly to be profitable, i.e., marginal projects should be avoided;
--to increase the repatriation of income earned abroad;
--to increase their exports to and through their manufacturing and sales affiliates abroad; and
--to open up new export markets in countries where they are not now active.
A special White House meeting of the operating heads of the two or three hundred non-banking corporations most involved in direct investments and in exporting would be arranged, at which you could give a frank statement on our balance of payments situation.
--You would appeal to them to assess carefully the impact of their decisions on the balance of payments.
--To measure the degree to which such cooperation was forthcoming, you would request that each corporation send to the Secretary of Commerce a quarterly report on changes in their short-term investments abroad, changes in their direct investments, their repatriated earnings and their exports, and a report on actions taken to reduce the outflow of funds from the United States or increase the inflow of funds to the United States.
Large outflows of direct investment, particularly to Western Europe, as Table 3 shows, suggest the possibility of large balance of payments savings by some form of restraint, without serious short-run reduction in net income from accumulated direct investment abroad./4/
/4/Table 3, entitled "U.S. Direct Investments, 1963 and 1964," is not printed.
In addition to their direct investment in foreign subsidiaries, many large U.S. companies make investments in liquid assets abroad (bank deposits, foreign Treasury bills, etc.) directly out of the U.S. head office. Also, firms that do not have subsidiaries frequently keep deposits or holdings of money market instruments abroad as a form of short-term investment.
--Such liquid funds held in advanced countries as of the end of last September amounted to over $2 billion of which over $1.5 billion was in Canada, $300 million in the U.K. and about $125 million in Japan.
--A small part of these holdings represent working balances for operations abroad; the great bulk of them represents short-term investment.
It is recommended that in your address to business leaders you also exert moral suasion for a reduction in these short-term foreign investments in the interests of helping our balance-of-payments position.
--The small number of companies which hold a large portion of these funds abroad may be even more receptive to reducing these holdings than to cutting back their plans for direct investment abroad over the next few years.
--The short-term investments yield only slightly higher interest earnings than what they could earn in the U.S., whereas direct investments generally offer much wider profit differentials over a period of time.
A fairly substantial response to moral suasion on this item might, therefore, be expected from the large corporations.
Substantial withdrawal of funds on their part may well exert some upward pressure on interest rates in foreign money markets which would tempt other U.S. firms or individuals to add to their holdings abroad. Hence, we have estimated a net saving of only about $200 million from this moral suasion effort.
Care would have to be exercised in this effort to avoid disrupting the money and exchange markets in countries from which funds might be withdrawn by U.S. corporations.
--If large amounts were actually transferred back to the United States, repercussions would undoubtedly be felt on both the London and Japanese markets; there would, in fact, be a substantial risk of aggravating the sterling crisis and of creating difficulties for Japan.
(U.S. funds held in Canada are either reinvested back in the U.S. or in London, so that no serious repercussion on the Canadian domestic money market is foreseen although the banks there would lose some profitable middleman business. To the extent Canadian banks respond by reducing their own American investments, our balance of payments as presently calculated would be improved, but the change would not affect the net flow of dollars into official hands abroad or pressure on our gold stock.)
--Since we do not want to aggravate the weakness of sterling or create a crisis atmosphere in the Japanese money market, an abrupt "across-the-board" withdrawal of funds from abroad would be dangerous, and this must be considered in implementing this measure.
As Applied to Banking Community. In addition to the application of the IET to long-term bank loans, moral suasion on banks to reduce their loans to foreigners would be exercised through the Federal Reserve, the Comptroller of the Currency, and the FDIC. This moral suasion would be accompanied in the case of banks by some reduction in credit availabilities (lower level of net free reserves) so as to reinforce the moral suasion effort.
The Federal Reserve could also be encouraged to consider amending Regulation A so that extension of rediscount facilities to a member bank could be based in part on whether or not that bank is expanding its total foreign lending activity.
Savings from this operation are estimated at $100 million.
Moral suasion would be particularly effective if it also involved a Federal Reserve request to banks to limit the increase in loans to foreigners, both short- and long-term, to 5 percent a year. (It was 36 percent in 1964.) An additional $100 million of savings, or more, could be achieved.
Note: With taxation of long-term bank loans to foreigners--intensified if the schedule of tax rates is raised by Congress, at our request, as recommended above--and with application of moral suasion on both long-term and short-term bank lending to foreigners, we will want to give particular attention to any resulting problems affecting Japan because of both political and economic considerations. Any recommendations in this area will be forwarded in a separate memorandum to you.
As Applied to Canadian New Issues. Canadian security issues in this country have for nearly a decade fluctuated between $200 million and $700 million a year. Before 1963, the annual totals of such issues did not exceed about $450 million; only in 1963 and 1964 were the record totals of about $700 million reached. Canadian issues promise again this year to reach a large volume unless restraint is exercised.
It is essential that the volume of new issues of Canadian securities sold in the U.S. during 1965 be significantly reduced from the 1964 level. This will require, at the least, strong representations to the Canadians, including a further conversation on your part with the Prime Minister, or, as an alternative, the exercise of your authority to set an over-all limit on Canadian borrowing here. (Savings in either event should total at least $100 million.)
Export Measures
Long-range health of our payments balance depends in large measure on our success in this area. A one per cent increase in our commercial exports over the 1965 forecast would reduce the deficit by about $225 million.
The most basic requirement is for maximum emphasis on, and success in, the maintenance of continued cost and price stability in our domestic economy.
Combined with this, reinforcement of our export promotion program is needed. Here relatively inexpensive measures can pay off in a substantial way. The export expansion program, with a fiscal year 1965 budget of less than $10 million, clearly earns many times this amount in additional foreign exchange.
--The Administration should press Congress vigorously to grant the full fiscal year 1966 export expansion budget request of somewhat over $12 million. If the export promotion measures made possible by the expanded budget combined with the trade development proposals in the Magnuson Bill (establishing trade development corps of private businessmen, use of local currencies for trade promotion and establishment of sales and service centers abroad) were put into effect, the estimated gain in exports during 1965 would be $20 million and much more in later years.
--Support Federal Maritime Commission's efforts to investigate and eliminate apparent discrimination against U.S. exports in shipping rates. (Requires no legislation.) No savings are estimated from this action during 1965.
Commerce Department consulted with a group of major banks involved in export financing. Each bank gave its estimate of the minimum total figure per year in export financing business that, in its judgment, is lost to that bank because of the inflexibility of the present export financing program and the lack of a program of the kind contemplated by the Magnuson bill. Each bank has also given what it thinks is a minimum estimate of the total business being lost each year by all the banks on short and medium-term credit. The consensus of the banks with whom this was discussed was that a minimum of $300 million of desirable export business on short and medium terms is not now being done because of present Exim Bank limitations. With a 20 per cent down payment by foreigners on $300 million of additional purchases in the U.S. and a $40 million installment payment by foreigners later in the year, the gain in balance of payments receipts during 1965 is estimated at $100 million. In view of the above
--current Export-Import Bank procedures should be eased to assure fully competitive risk-taking in financing of U.S. products and services and in extension of export guarantees.
"See the U.S.A."
Vigorous implementation of a program to persuade Americans to travel more at home and less abroad would achieve some savings for the balance of payments during 1965. The savings would be small, however, due to the fact that many spring and summer travel plans are made in January and February. A promotional program may divert to domestic attractions some of the travel which otherwise would go to Mexico and Canada. But it seems unlikely that the bulk of the contemplated trips to Europe would be affected during 1965. A substantial travel tax would be required for this purpose, as discussed below.
--You should appoint an administrator of the "See the U.S.A." program who would launch measures designed to reduce American over-seas travel in 1965 and 1966. (Estimated savings in 1965--$20 million; in 1966--$100 million.)
III. Other Measures
Travel Tax.
--Legislation establishing for 2 years a travel tax to all foreign countries outside the Western Hemisphere, with an exemption for students and teachers (including those covered by Government programs--e.g., Fulbright scholars) departing the U. S. for at least a nine months' period of study abroad, and for Government personnel on official business.
(Estimated 1965 savings @ $100 per trip--$140 million.)
(Estimated 1965 savings @ $200 per trip--$275 million.)
Arguments for:
Travel outlays by Americans, including fares, are one of the largest outflow items in the balance of payments and are expected to total over $3 billion in 1965 in absence of any action. While U. S. receipts from foreign tourists began to rise in past two years and our net tourist deficit in 1964 appears to have remained constant, further large increases in American travel abroad are expected.
The tax would be directed at an expenditure item which for the most part is in luxury category, and can be postponed with relatively little hardship. At same time, reduction in this category, perhaps more than in any other, will be at the expense of the countries of continental Western Europe in the best position to absorb the reduction.
Reduction in expenditures contemplated would still leave total payments for tourists for 1965 and 1966 at about the same level as in 1964, thus would not be significant reduction in earnings of activities depend-ent on tourist industry such as U. S. or foreign airlines and shipping lines. In addition, no significant effect on U. S. aircraft sales to foreign countries seems likely since (a) the tax is for only 2 years, (b) the bulk of the savings will not come from reduction of the number of travelers (but from shorter stays and less spending per trip) and (c) the effects which are expected on the number of travelers will largely be limited to potential increases.
Tax on this item would broaden balance-of-payments program
--by having a favorable psychological effect on the million U. S. military personnel and their dependents serving overseas who are well aware that previous programs have omitted any actions relating to tourism, and feel very strongly that they have had to bear a major burden of previous action programs.
--and tending to lessen opposition and adverse reaction of financial community to variety of measures restraining investments, which, in contrast to tourist expenditures, offer eventual large return.
It would bring sizeable needed savings in a way that cannot easily be affected by leakages.
Arguments against:
Many countries look on all current account transactions as basically same in nature and would argue that restriction on tourism contradicts U. S. stand on liberalizing international trade. Some feel could compromise our position in current Kennedy Round negotiations under GATT.
The tax would be regressive. Lower income travelers, who spend relatively small amounts on their trips abroad, would not be able to afford the tax. The big spenders would; and would spend as much abroad as before.
Less developed countries outside the Western Hemisphere might make protest since many of them trying to build up their tourism business.
In longer range context, there is also the question of the merit of curtailing international travel and contacts with foreigners. Private travel may have important long run benefits to our international relations, and U. S. citizens may feel that freedom of movement is being challenged.
Some retaliation by foreign countries may occur. This could both reduce net effect of tax by reducing our tourist receipts, and raise problems involving our political relations abroad. Some believe there is a possibility of repercussions on the trade account--e.g. aircraft sales. The increase in costs to American tourists from the tax could bring added pressures by air and shipping lines to reduce fares.
Taxes on Direct Investment and Short-Term Investments.
The Cabinet Committee on Balance of Payments unanimously agrees that present circumstances do not require action in these areas. Vigorous efforts at moral suasion offer the best hope of gain in the immediate future and run far less risk of triggering widespread anticipation of comprehensive controls which, by inciting heavy outflows of funds, could defeat the entire program. The State Department and Council of Economic Advisers however believe that consideration should be given to a tax in these areas if a tax on tourist travel is to be adopted.
As regards direct investment, some suggest that it be limited to so-called "takeover" transactions; this would involve serious technical problems of definition and administration. Application of the tax would also raise difficult technical questions of how to exempt exports, associated with direct investments abroad, without either virtually losing deterrent effect of tax, on the one hand, or taxing many direct investment operations which possibly would create additional U. S. exports, on the other hand. The Department of Commerce feels that the business community would strongly resent such action and would continue their projects despite the tax.
34. Memorandum From the President's Special Assistant for National Security Affairs (Bundy) to President Johnson/1/
Washington, February 1, 1965.
/1/Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. 2 [1 of 2], Box 2. No classification marking.
SUBJECT
Cabinet Committee Meeting on Tuesday/2//2/February 2.
1. Douglas Dillon now agrees to a balance of payments meeting on Tuesday, and I enclose the almost final draft of an agreed paper from the Cabinet Committee to you, for your reading this evening./3/
/3/Document 33.
2. As you will see the principal divided issue that remains is the travel tax.
3. In the background there are also latent differences about the effectiveness that "moral suasion" has on those who control short-term capital controls and overseas equity investments, but I myself see no way around a trial period on this, in the light of Jack Connor's determination to make them work. If he fails, your position in going for legislation will be that much stronger. If he succeeds, even for a year or so, we have done something important.
4. Still one major aspect of the "moral suasion" problem is whether we are really ready to act if it fails. You may remember that Don Cook/4/ emphasized this point to me very hard. It may be worth your while to press Connor and Dillon on this point. They will assure you of their readiness to recommend stronger measures if, against their expectations, moral suasion does not work. It may be important for you to have those assurances in hand.
/4/Don Cook, President of the American Electric Power Company, was nominated to succeed Secretary Dillon as Secretary of the Treasury but did not accept the nomination.
5. Douglas Dillon wants you to know that he talked to Don Cook for 45 minutes this afternoon, and he thinks that Cook is on board on this program. He admits that Cook does not like the travel tax but says that Cook emphasized the necessity of doing "enough." Douglas thinks that this constitutes a tacit acceptance of the travel tax. I myself doubt this very much in the light of my own talks with Cook, so I plan to have an informal chat with him tomorrow morning and will pass the results on to you.
6. The overall descriptive tone of this memorandum is gloomier than your Economic Advisers and your Budget Bureau would wish, but we have agreed not to fight over the mood music. I have not yet heard final January figures (and one thing certain is that monthly figures do not prove much), but it remains interesting that the heavy December outflow was overbalanced by the inflow of the first three weeks of January.
7. Let me offer one final, more general point: the immediate balance-of-payments problem is troublesome and can even become dangerous, but the underlying position of the dollar is as strong as the economy of the United States. It is only in the world of central bankers that the U. S. monetary position is "weak." It is much better to defend the dollar, as we are now doing, than to have to show the bankers who is boss, but it is always worth remembering that Franklin Roosevelt did not weaken his eventual place in history by his refusal to let gold be his master.
8. I believe Don Cook shares the basic conviction in the paragraph last above. That is one reason I was so greatly impressed by him.
McG. B./5/
/5/Printed from a copy that bears these typed initials.
35. Memorandum From the Chairman of the Council of Economic Advisers (Ackley) to President Johnson/1/
Washington, February 1, 1965.
/1/Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. 2 [1 of 2], Box 2. No classification marking. The source text was attachment 1 of 2 to a February 2 note from Francis Bator to McGeorge Bundy. Attachment 2, telegram 204 from the Embassy in Luxembourg, February 1, is not printed.
SUBJECT
The New Program for the Balance of Payments1. You will be receiving a report tomorrow from Secretary Dillon, containing the Cabinet Balance of Payments Committee's recommended program./2/ This memorandum is by way of background for your consideration of this program.
/2/Document 33.
2. The fourth quarter worsening of our payments is a definite source of concern. But it may not be quite as bad as it looks on the surface. Several temporary factors were at work (in addition to British non-payment):
--some of the increase in bank lending was done to beat the application of the Gore amendment (one top N.Y. banker admits to me that this was a big factor);
--new Canadian security issues were bunched up to follow passage of the interest equalization tax;
--some U.S. corporations apparently delayed bringing back their foreign earnings in order to take advantage of the 2 point cut in the corporate tax rate for 1965;
--some of the outflow of short-term bank credit was related to year-end "window dressing," as suggested by the fact that we had a big surplus in the first two weeks of January.
3. The public knows that the fourth quarter wasn't good, but not just how bad it was. There could be an adverse business and public reaction, here and abroad, when the official figures become public in the middle of February. That alone is good reason for prompt and decisive action.
4. There is danger in too small and too weak a program. But there is also danger in too strong and restrictive a program.
It can cause dislocations here and abroad that would be worse than our deficit--for example, this is no time to be pulling funds out of the U.K.
It can look as though we are desperate or panicky, and thereby cause loss of confidence.
5. The list of measures on which everyone agrees seems about right as a program. We can't be sure that additional measures won't be needed in the future, but the odds are good that this package will do the trick, both in its effects on confidence and its direct effects on payments and receipts.
6. However, if you think the agreed-on package is not enough, there are 3 major possibilities for more:
A tax on tourists;
A tax on "take-over" investments (where an American company buys out an existing business abroad--which is the kind most resented and which does the least to help our exports);
A tax on short-term business "investments" abroad (where corporate treasurers deposit temporarily idle funds in foreign banks, or buy short-term paper overseas to make an extra 1/4 to 1/2% more than they can get here).
We would oppose the tourist tax as a means of enlarging the package unless it is combined with one or both of the other two. However, these are complicated actions which would take some time to prepare.
7. If the Fed works at it seriously, "moral suasion" on bank lending could save us much more than the $200 million estimated by the Treasury. Last year, bank loans to foreigners increased 36% or nearly $2 billion; that should not be permitted to happen again. Most of this business is done by a handful of banks. The Fed can set a quantitative guideline for each bank, backed up by its various controls (including especially the discount privilege), and by its detailed and frequent reports on every foreign loan.
8. Confidential conversations with the New York Federal Reserve Bank convince us that they know how to run a "moral suasion" policy. But Bill Martin must take the lead. I think it is important for you to talk to him about his role in making moral suasion on the banks really effective.
9. The Fed plans to tighten money a little as part of the balance of payments program. Monetary conditions have been kept easier in the last couple of months than we could have expected. I can't object to a modest tightening, even though it will certainly do the domestic economy no good.
10. But it's important for our prosperity that the tightening be modest. This is another matter for discussion between you and Bill Martin. (In the past, such discussions have involved the "quadriad"--which would mean Martin, Dillon, Gordon and Ackley meeting with you. But, if you prefer, a private meeting with Martin could provide the opportunity. In either case, I'll be happy to supply briefing material.)
11. Secretary Connor will be in charge of the "moral suasion" on businesses other than banks to restrain direct investment and short-term lending. This can be quite effective if it's handled right. We should make sure, though, that we have some clear rules of the game. Most businesses will cooperate if they know exactly what we want them to do, and know that all other firms are being asked to do the same thing.
Gardner Ackley/3/
/3/Printed from a copy that bears this typed signature.
36. Editorial Note
On February 4, 1965, in response to a question at a press conference, French President Charles de Gaulle called for a gradual return of the world monetary system to the gold standard. De Gaulle called for nations having international financial responsibilities to consider paying off their balance-of-payments debts solely in gold. Gold, he said, was the only "unquestionable monetary basis which did not bear the mark of any individual country," and therefore the most equitable standard upon which to conduct international financial transactions. For text of his statement, see American Foreign Policy: Current Documents, 1965, pages 219-221.
A February 4 Treasury Department statement objected to President de Gaulle's proposal to revert to the full gold standard, arguing that such a monetary system had "collapsed" in 1931 and was "incapable of financing the huge increase of world trade" that marked the 20th century. For text, see ibid., page 221. Secretary Dillon sent a copy of the press release under cover of a February 4 memorandum to President Johnson. (Johnson Library, Bator Papers, Balance of Payments Message, February 10, 1965, Memos [1 of 2], Box 16)
37. Notes of Telephone Conversation/1/
Washington, February 5, 1965, 10:30 a.m.
/1/Source: Kennedy Library, Dillon Papers, History File 1965, 1/65-3/65, Box 44. No classification marking. Drafted by Robert Carswell, Dillon's Special Assistant.
The President
Robert CarswellThe President said he was calling because he was very upset about leaks out of the Treasury about the balance of payments. It has hurt us and more than that it has hurt my pride. Anybody over there who can't be loyal to us ought to leave. I took over a lot of people and thought they were loyal. I don't know whether we have any Harry Dexter Whites over there or not, but I have direct evidence that it is coming out of Treasury. Both Treasury and State are leaking and I want it stopped. You tell the Secretary I want it stopped. Mr. Carswell said we would see there were no leaks. The President said that if the Normandy plans were handled the way this balance of payments message was handled, Eisenhower would have never crossed the channel. And what's worse, some of these leaks are mischievous. Check your doors and see who is coming in to see these people. They tell me they don't have time to say anything about de Gaulle and then they turn around and simultaneously issue a statement and talk to reporters. The reporters tell me they are quite busy at Treasury and have a lot of speculative stories coming out of there, but always from people who won't let themselves be quoted. Mr. Carswell said we would see there are no leaks. The President said Mr. Carswell should make it his personal assignment. The President said he wanted that balance of payments message out as soon as he can get it. If you have to work round the clock to get it out, we are going to get it out. The President said he did not want to read about this conversation in the press the way he had read about a conversation he had with the Budget Bureau last week. Mr. Carswell said that would not happen.
38. Memorandum From Francis M. Bator of the National Security Council Staff to President Johnson/1/
Washington, February 7, 1965.
/1/Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol 2. [1 of 2], Box 2. No classification marking.
Mr. President:
Bill Moyers suggested that, despite the hour, I send in the attached draft of the Balance of Payments Message this evening./2/ Gardner, Walter and I finished it this afternoon, and I have gone over it with Secretary Dillon./3/ He liked it, and made only minor suggestions, all incorporated in the draft.
/2/Presumably a draft of the President's message on the balance-of-payments problem. No drafts have been found. For text of the February 10 message, see Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1965, Book I, pp. 170-177.
/3/Dillon does not know about Heller. [Handwritten footnote in the source text.]
The only issues on which your Government is still divided are:
1. The rate schedule under the Interest Equalization Tax (page 10).
Ackley, as you know, wants us to ask for an increase in the tax rate. He feels that without an increase the whole package lacks punch. Dillon and Martin want to keep the rate where it is. They are worried about making the bankers angry just when we are asking their help.
2. What you say in the Message about tightening money.
The draft contains two alternative paragraphs on monetary policy, on pages 12 and 13.
--Alternative A is Ackley's preference, but according to Dillon it will be unacceptable to Martin and, if for no other reason, Dillon himself is opposed.
--Alternative B is acceptable to Dillon and, he thinks, probably to Martin. Ackley feels it represents a retreat from your position in your Economic Report./4/
/4/The Annual Message to the Congress: The Economic Report of the President was delivered on January 28. For text, see Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1965, Book I, pp. 103-117.
There is a chance for a sensible compromise which will make it clear that you are against a general tightening of credit, such as would hurt us at home, yet leave Martin satisfied that he has enough flexibility. At any rate, Ackley, Dillon and Gordon will try to work something out tomorrow, before the issue is brought to you for a decision.
Apart from the above, there is one more important and new issue. Martin, Connor and Dillon believe that to insure the effective cooperation of Connor's businessmen and Martin's bankers they will have to be assured of some protection from the anti-trust laws. This would require legislation. Katzenbach is uncomfortable but willing, and pending your decision, is drafting some language for insertion in the Message on pages 4 and 12.
One last point concerns the Canadians. Dillon recommends that you call Pearson to get him to agree that they will sharply cut down on their borrowing. A memorandum on this will be over first thing in the morning./5/
/5/Presumably a reference to Document 41.
Also first thing tomorrow I will get copies of the draft Message (on an eyes-only basis) to Gordon, Connor, Ball, McNamara and--he just walked in--Bundy, none of whom have yet seen it. We should be ready to present to you all outstanding issues and to ask for your final decision on the entire package by mid-afternoon.
I apologize that this is so late and that the draft is not in perfect order, I did not finish with Dillon and then Katzenbach until 9:30 p.m. and then had to make changes in the draft.
Francis M. Bator/6/
/6/Printed from a copy that bears this typed signature.
39. Memorandum From Francis M. Bator of the National Security Council Staff to the President's Special Assistant for National Security Affairs (Bundy)/1/
Washington, February 8, 1965.
/1/Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. 2 [1 of 2], Box 2. No classification marking.
Mac,
We settled both outstanding issues--see the attached memorandum/2/--at a session this morning with Dillon, Gordon and Ackley.
/2/Not attached and not found.
On the Canadian business (see p. 2 of the memo) I am holding Dillon's much too long memorandum,/3/ and will ask him to raise the matter with the President at the meeting. If the President agrees to call Pearson, we can do the necessary staff work. All the President will have to do is to read Pearson what he proposes to say about Canadian borrowings in the Message/4/ (p. 3, para. 4) and tell Pearson that if he is not agreeable, there will be enormous pressure on the W.H. unilaterally to impose a quantitative limit on Canadian flotations, which the President can do under the Act,/5/ or, as a second step, to lift the Canadian exemption.
/3/Tab A to Document 41.
/4/Reference is to the balance-of-payments message.
/5/Reference is to the IET.
A clean copy is being typed now for the President's use this afternoon. If you agree, I will attach a note that there is agreement among the principals, both on the monetary policy language (see p. 13) and against raising the tax rate. (On the latter, Gardner is reluctant but will go along.)
I have asked Nick Katzenbach to the meeting in case the President has any questions about the antitrust provisions (see last para., p. 1, of my memorandum to the President,/6/ and point Six on p. 4, and p. 12 of the draft).
/6/Document 38.
In your absence I am afraid I have had to move in hard during the past three days to make all this come off. I don't think I brought dishonor to your office--and the Message is in pretty good shape, both in substance and in terms of interdepartmental politics. Incidentally, I have O.K.s on the Message from Dillon, Ackley, Connor (with one minor quibble which I settled with marginal assistance from Dillon), McNamara, Gordon and Bell. I am expecting calls momentarily from Ball--who will be happy--and, most important, Bill Martin, with their reactions. I told Martin that if he has any serious objections, we shall call off the meeting with the President and have it out with the principals./7/ With Dillon in accord, I expect that Bill will fall in line.
/7/This meeting with the President was held on February 8 at 6:26 p.m. (Johnson Library, President's Daily Diary) to discuss the final draft of his message on balance of payments which was delivered on February 10. No record of this meeting has been found. Francis Bator, in a separate note to Secretary of Commerce Connor and the other principals of the Cabinet Committee on Balance of Payments, requested that he receive comments either in writing or by telephone on the draft balance-of-payments message by 3:30 p.m. on February 8, since President Johnson was to meet with them later that afternoon "to review all outstanding issues, as well as the draft." (Ibid., Bator Papers, Balance of Payments Message, February 10, 1965, Memos [2 of 2], Box 16) See also Document 40.
Don't forget that, for the record, the draft was written by Ackley and myself, with suggestions by Moyers.
FMB/8/
/8/Printed from a copy that bears these typed initials.
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