Office of the Historian

67. Memorandum From the Counselor and Chairman of the Policy Planning Council (Rostow) to President Kennedy0

Washington, February 4, 1963.

SUBJECT

  • Balance of Payments Problem

The full-page table, entitled “Official Gold and Dollar Holdings of Selected Countries in Relation to Their Foreign Trade and Their Total Payment Obligations in 1961,” is in the Supplement.

In confronting the balance of payments problem I thought it might be interesting for you to see the reserve figures of the various nations set out in the form of the attached table.1

The last two columns show that, relative to our current trade and payments obligations, our gold reserve is still relatively large. Except for the Swiss, we lead the field.

On the other hand, we face the two familiar limitations:

  • —Our $12 billion domestic gold cover;
  • —The burdens of maintaining the dollar as a unique reserve currency which leaves us vulnerable to sudden withdrawals; (although the French holdings should not frighten us, if we have a reasonable contingency plan, which is not all that difficult).

My reflection on this table is that we are in a position to sweat out a somewhat longer basic adjustment in our balance of payments position than envisaged some months ago if two conditions are satisfied: the lifting of the domestic gold cover; and the early bilateral negotiation with key European countries (and perhaps Japan) of arrangements for them to hold dollars on longer term (say, in ten year bonds) with an exchange guarantee and with the understanding that we would reciprocate when their balance of payments were under strain. In effect, such arrangements would fund a large portion of our outstanding short-term dollar obligations and spread the burden of maintaining a reserve currency to supplement inadequate world gold supplies. This method would simply be an extension in the trend of Treasury policy; but it is urgent for three reasons.

  • First, we cannot mount the kind of European policy most of us now envisage until the ground is under our feet on balance of payments, and we can separate our policy towards conventional forces from our balance of payments strain.
  • Second, it is difficult to envisage acceptance of the across-the-board tariff cuts Herter aims to negotiate unless we have an environment of relatively [Page 162] full employment at home; and this also requires relief from balance of payments pressure.

Finally, we may have difficulty with the tax bill if, in the face of continued balance of payments deficits, and no offset arrangements, anxiety should develop that prosperity via the tax cut would make our balance of payments situation worse.

If another converging argument is needed, the balance of payments is likely to haunt us—among other things—in a foreign aid battle this year that will be adequately tough without its heavy shadow.

I conclude that a balance of payments move of the kind I suggest here is now of the utmost urgency; and that we would undertake it from a position of greater initial reserve strength than we often grant ourselves.

  1. Source: Kennedy Library, Dillon Papers, Memos to President, 2/62-3/63. Secret.↩