Office of the Historian

100. Memorandum From the President’s Deputy Special Assistant for National Security Affairs (Bator) to President Johnson1

Washington, July 6, 1966.

SUBJECT

  • Balance of Payments

At Tab A is a complicated memorandum from the Secretary of the Treasury reporting on actions to limit the 1966 payments deficit.2 We have been unexpectedly successful in arranging for about $1.5 billion of debt prepayments and long-term investment by foreign governments. About $600 million of this took place during the first half of ′66. $900 million will be the gain during the 2nd half.

There are a number of points you should note:

1.
The so-called “long-term investment”—accounting for $1.35 of the $1.5 billion—involves a switch by foreign central banks from holdings of liquid dollars to longer-term dollar securities. This is useful cosmetics; increases in foreign holdings of long-term securities do not count as part of our deficit. But it is a one-time gain. We cannot count on another $1 plus billion next year.
2.

I do not believe that the $1.5 billion gain is likely to reduce our 1966 deficit, on a liquidity basis, much below $1.5–$2 billion (the 1965 rate was $1.3 billion; 1964 was $2.8 billion). Dollar spending in Vietnam, and, more important, the deterioration in our trade account (due to the still rapid expansion in the economy), will more than offset the gain.

However, we will be able to give you a much clearer picture of the prospects when we get preliminary results for the second quarter in mid-July.

3.
I do not believe—and Fowler and your other economic advisers agree—that the situation calls for further drastic action. (It would take drastic steps sharply to reduce the deficit.) A serious run on gold during the rest of this year is most unlikely. And even if it should happen—after November—we would come out of it in better shape than we are in now. The truth is, that the present rules of the international money game are stacked against us. If the Europeans force a crisis, our economic strength and real bargaining leverage would soon become very clear to all concerned.
4.
The only pre-November danger is a run on sterling. With a strong UK reserve position, and the strike settled, I think it an even money bet that there will be no massive run during the summer. But it is certainly no better than an even bet. After a couple of good weeks, they are now beginning to lose money again.
5.
If they can hold out until the autumn, their tough tax increase—which goes into effect in September—will take some of the pressure off the economy, holding down imports and releasing resources for export. But meanwhile, they are having a terrible time holding down wage rates and prices. This is not surprising, with unemployment at less than 1.5%.
6.
Wilson’s calculation is that, as long as total demand keeps pulling on capacity, business investment will keep expanding. If they can get investment up from 18% of GNP to about 25%, they will be able to increase productivity (and potential output) much faster than during the past fifteen years. (They are working hard to get investment into industries with the greatest technological and export potential.)
7.
The risk Wilson takes is that the pressure of demand on capacity—which is needed to encourage the high rate of investment—will cause prices to get even more out of line. If so, devaluation will become increasingly hard to avoid.
8.
Some of your advisers would consider a British devaluation a near disaster. I, myself, am increasingly convinced that—if it comes after November—it might offer us a unique chance to force a change in the rules of the game on gold. But these are preliminary as well as heretical thoughts. In the meanwhile, Deming, Okun, Solomon and I are working to bring our contingency plans of last summer up to date. We will be in good shape to spell out for you the choices, well before any real trouble.

FMB
  1. Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. 3 [1 of 2], Box 2. Secret; Very Sensitive. Handwritten at the top of the source text is the initial “L”.↩
  2. Tab A, not printed, is a June 30 memorandum from Fowler to President Johnson entitled “Action to cut balance of payments deficit in 1966.” It is very similar to Document 98.↩