Office of the Historian

452. Memorandum of Conversation0

Washington, July 19, 1963.

SUBJECT

  • Canadian Reaction to Proposed U.S. Balance of Payments Measures

PARTICIPANTS

  • Charles S.A. Ritchie, Canadian Ambassador
  • E.R. Rettie, Counselor, Canadian Embassy
  • The Secretary
  • The Under Secretary
  • Delmar R. Carlson, Officer in Charge Canadian Affairs

Ambassador Ritchie called at his request on an urgent basis to discuss our proposed measures to ameliorate the balance of payments problem. The Ambassador said that the news of these measures had caused the Canadian stock markets to plunge. The Secretary asked whether the news of the proposals should legitimately have a drastic effect since the essential development was to equalize the borrowing rate. The Ambassador said there had been insufficient time to assess the impact but he thought the measures would bear most heavily on Canada. [Page 1211] The purpose of his call, however, related to the Canadian Government’s concern over charges of the Conservative Opposition, together with the conclusions being drawn by some of the public and press in Canada that the measures were retaliation for the recent Canadian budget measures.

The Under Secretary informed the Ambassador that earlier in the afternoon the Department had given a statement to the press refuting any suggestion of retaliation or discrimination. In addition, Under Secretary of the Treasury Roosa had held a background briefing for Canadian press correspondents to provide a full explanation.1

The Under Secretary explained that the purpose of the measures was to slow down foreign utilization of the U.S. money markets but not to stop such use. He pointed out that the measures were part of a large package aimed at reducing the deficit in our balance of payments. This deficit had been caused to a considerable extent in the last few years and months by an increasing amount of purchasing of foreign issues by United States nationals. The United States had decided not to employ capital controls but to use a much less restrictive device of equalizing the cost of money through an interest equalization tax. While investment in Canada might be more heavily affected than investment in other countries, this fact was due to the circumstance that the greatest recent increase in capital outflow due to foreign issues was related to investment in Canada. The Under Secretary offered categoric assurance that there was no element of retaliation or discrimination in the development of these measures. Rather they were the consequence of the need to meet an urgent situation.

The Under Secretary also observed that the United States had shown much restraint in reacting to the Canadian budget measures although they would act to exacerbate our balance of payments problem by promoting a tendency to shift from equity investment in Canada to debt investment. In addition, United States assistance to the Canadian Government during the 1962 balance of payments crisis was mentioned. The Under Secretary noted that the United States had taken a number of measures affecting U.S. citizens, e.g., reduction of tourist duty exemptions, and could not simply let the money market go its own way. Finally, he pointed out that if serious defects should come to light, there would be opportunity to correct them during the legislative process.

Ambassador Ritchie expressed his appreciation for the information he had received but reiterated his fears of the effects on the Canadian economy.

  1. Source: Department of State, Secretary’s Memoranda of Conversation: Lot 65 D 330. Confidential. Drafted and initialed by Carlson and approved in S on July 25. For another report of Canadian representations to the United States on the interest equalization tax, see the account by Louis Rasminsky, Governor of the Bank of Canada, of his conversation with Secretary of the Treasury Dillon in Peter Stursberg, Lester Pearson and the American Dilemma, pp. 189–192. For text of the joint U.S.-Canadian statement released following these talks, see Department of State Bulletin, August 12, 1963, p. 256.↩
  2. Neither the statement nor the briefing has been identified further.↩