101. Minutes of Meeting of the Cabinet Committee on Balance of Payments1
Second Quarter Results and Outlook.
Secretary Fowler opened the meeting with a discussion of the current balance-of-payments situation and outlook. The preliminary second quarter “liquidity” deficit was down by several hundred million dollars from the $554 million deficit in the first quarter. The “official settlements” deficit may be roughly the same as in the first quarter.
The trade surplus which amounted to $4.5 billion in the first quarter on an annual rate basis was about a billion dollars less in the second quarter and averaged about $4 billion for the first half. First half exports were only about 2–1/2 percent above the first half 1965 level while imports were up about eight percent.
Gross military expenditures had risen in the second quarter and probably private capital outflows were somewhat higher.
A series of special transactions, however, netted us about $300 million to $400 million on the favorable side in the second quarter. These included: Canadian security repurchases; sizable investments in U.S. long-term assets by several international institutions; and long-term investments in C/D’s by several countries benefiting directly from our expenditures in connection with Vietnam.
While the preliminary “liquidity” deficit for the first half was somewhat under $1 billion, the projection for the second half is somewhat over $1 billion based on a trade balance at about the level of the first half; a rise in military expenditures more than offset, however, by increased German military offset payments; some rise in direct investment; a small outflow of bank funds; and a considerable inflow of special receipts of the types that occurred in the second quarter. Without such receipts the deficit for the year would be nearer to $3 billion than to $2 billion.
Secretary Fowler then called on various agencies to discuss progress in meeting their targets.
Secretary McNamara indicated that their current projection of net expenditures was $1,980 million dollars—over $150 million above the $1,812 million goal they had set themselves last November, if one excludes the $200 million allowance for possible contingencies that had [Page 294] been made at that time. They expect to hold this year’s net expenditures at the $2 billion level. This assumes receipts under the German military offset agreement of $575 million in the second half. It also assumes a savings of $20 million to $40 million through a partial shift of petroleum procurement to the United States. He anticipated no force reductions this year in Europe. In fact, there would be a build-up by the end of the year of 15,000 troops to reinstate the level in Germany that had existed at the beginning of 1966.
Secretary Fowler asked about the possibilities of recouping something from U.S. military property in France.
Secretary McNamara thought nothing was likely to come of this in the near future. He mentioned that we have several kinds of rights that should be negotiated as a package at the appropriate time. These rights cover about $1 billion of grant military aid deliveries in operable condition and with a current value of possibly $200 million to $400 million, as well as about a billion dollars in investment in bases.
Secretary Fowler pointed out that if it were not for French purchases of gold here, we would actually have a net accumulation of gold so far this year.
Under Secretary Ball said that we needed to maintain our “over-fly” rights in France, a factor that had to be considered in considering a negotiation for a financial settlement on our property there. We have reversionary rights for some of our expenditures in connection with bases for which the French acknowledge some settlement responsibility. We also have a theoretical right to compensation for moving costs on the grounds that the French breached an agreement, but there is almost no chance of obtaining anything on this basis. Finally, we have recapture rights to MAP grant military aid deliveries where there may be some possibility of a financial settlement, but any immediate prospect for such a settlement is very dim.
Secretary Fowler said he planned to talk to the French at The Hague meeting of the Group of Ten Ministers on the subject of another French debt prepayment; but he also wanted another “string to his bow.” He would talk further with Secretary McNamara and Under Secretary Ball about developing some bargaining approach on a financial settlement.
Secretary Fowler asked Secretary McNamara whether expenditures abroad other than in the Southeast Asia area could be trimmed.
Secretary McNamara indicated that 50 percent of the 1966 budgeted amounts outside the Southeast Asia area is already being deferred.
AID Director Bell indicated that his agency in November had projected savings of $90 million for 1966. However, due to greater than contemplated draw-downs of U.S. subscriptions by international organizations, the net savings will only be about $45 million. Gross expenditures [Page 295] will be around $427 million in 1966 rather than the $382 million that had been hoped for.
Secretary Fowler asked about the various studies that were being made to promote our commercial exports to AID-recipient countries and to improve the letter of credit procedure for tying our aid dollars. He pointed out that a number of countries showed a very poor record of commercial imports from the U.S. between 1957 and 1964 when their aid imports from the U.S. were increasing. He thought that a study of this situation deserved high priority.
Mr. Bell referred to the Commerce-AID study on this subject. He also said that in order to guard against aid-financing of U.S. products that aid-recipient countries would otherwise purchase on commercial terms, AID was reviewing its eligible list of commodities.
Mr. Bator reported that there would be something ready by the end of the month regarding improvement of the letter of credit procedure.
The Secretary questioned Mr. Bell about his position that assignment of AID export specialists to each field mission for the purpose of promoting U.S. exports would seem inappropriate within the context of AID’s functions and responsibilities. He thought that the commercial attaches could work more effectively if there were one person in each AID mission to whom they could turn for cooperation in promotion of exports.
Mr. Bell replied that they would be glad to cooperate with the commercial attaches but that they were not in the business of export promotion. He asked to be informed of any cases of non-cooperation.
Under Secretary Ball indicated that State was considering a merger of its economic and commercial sections in each embassy to make commercial trade promotion more effective.
Secretary Connor said that there was little chance of approval of an increase in the number of commercial attaches by Representative Rooney’s subcommittee.2 He thought we were losing out on exports to Japan, for example, because of price reasons, due in part to Japan’s proximity to markets like Korea.
Gold Budget.
Budget Director Schultze said that they had just finished their “gold budget” report based on the March submissions and that the combined net outflow on a “regular transaction” basis had declined from $2.8 billion in FY 1963 to $2.4 billion in FY 1964 to $2.2 billion in FY 1965. In FY 1966, however, they rose to $2.6 billion and the prospective figure for FY 1967 was $2.9 billion. It would drop again to $1.8 billion in FY 1968 on the [Page 296] assumption of no war after July 1, 1967. The rise between FY 1965 and FY 1967 was more than accounted for by DOD and AID expenditures in connection with Vietnam. The expenditures of other agencies were about level in FY 1966 and 1967 but their receipts were accelerating so that their net expenditures showed a decline of about $167 million.
BOB has sent letters to six major agencies with research operations abroad asking for a submission of their budgeted costs and personnel requirements for such operations by August 6. (Combined research expenditures abroad amounted to around $35 million per year.) Budget was also looking into the possibilities of acquiring for government use abroad blocked foreign currencies held by private U.S. firms, of selling more savings bonds to civilian personnel abroad, and of using our excess currency holdings in certain countries more intensively. BOB was studying U.S. dollar outflows to international organizations to determine what portion returned for expenditures in this country. Finally, they were talking to the Agriculture Department about the latter’s expansion of agricultural sales promotion activities under the Agriculture Marketing Act.3
With regard to a point raised by Under Secretary Barr, he said that he would take a look at payments under the Philippine veterans’ claims settlements.
Commerce Programs.
Secretary Connor said that the first quarter special VCP reports showed no discrepancies from the regular OBE reports filed by companies under the program. He pointed out that the majority of companies would better their targets and would complete their projected schedules for borrowing abroad. He had talked or written to about half of the 49 companies which were failing to meet their targets by $5 million or more.
Secretary McNamara asked about the reason for the large increase in U.S. imports.
Secretary Connor replied that all types of imports were increasing. He thought production shortages were accounting for both the large increase in imports and for the relatively small increase in exports.
Secretary McNamara did not think that shortages played an important role. He feared we are freezing ourselves in at a high level of imports that would be difficult to reverse. He did not believe that the rise in DOD expenditures due to the Vietnam conflict had an important adverse effect on our trade balance. He pointed out that Defense expenditures were a smaller percentage of GNP than in the previous four or five years.
[Page 297]He asked whether somebody might see if the Brookings people had made a revision of their projection of the U.S. trade balance in 1968.
Secretary Fowler asked Mr. Knowlton to inquire about this matter. He then asked Secretary Connor why projected direct investment income was down.
Secretary Connor replied that he was not sure of all the reasons, but that according to his Business Advisory Committee, profits of U.S. subsidiaries abroad were lower due to growing competition. He would look further into the matter.
With regard to getting railroads to reduce their freight rates on coal hauled for export, Secretary Connor said that the companies claim the U.S. can sell all coal available for export at present prices. He did not think, therefore, that there was any possibility of getting the railroads to reduce rates, particularly in view of the fact that they had to provide more service in connection with coal for export.
Secretary Fowler referred to a letter from a firm which indicated it had greatly increased its use of American ships. He wondered whether more could be done on this score.
Secretary Connor replied that there was a shortage of U.S. commercial ships due to DOD use in connection with the Vietnam war.
Secretary McNamara said he could pull ships out of moth balls, man them with Navy crews, and release the ships he was now using for commercial transport.
Budget Director Schultze thought that such an operation would involve a high budget cost relative to the prospective balance-of-payments savings.
Secretary Fowler pointed out that the transportation business we are losing under the present arrangement might be lost to us forever.
It was agreed that Commerce and Labor would prepare a plan on this matter for DOD consideration. Budget Director Schultze asked that Budget be allowed to review the plan.
Federal Reserve Program.
Governor Robertson said that banks were about $119 million under their December 31, 1964, level of claims on foreigners and almost $800 million under their target ceiling. He thought there might be a very small outflow in the last half of their year, but not as much as $1 million.
Secretary Fowler asked if the Federal Reserve knew whether a disproportionate share of our import financing were being done by American institutions rather than by the foreign exporters and their financing institutions.
Governor Robertson said he would look into the matter.
[Page 298]Possible Announcements For Mid-August Press Conference.
Secretary Fowler then turned to the list of possible items for announcement in connection with the mid-August press conference on the second quarter balance-of-payments results. He requested that Commerce and AID in connection with BOB and others work on the plan for a high level trade mission to AID-recipient countries to promote U.S. exports. He promised to send some Treasury material on this subject to Commerce and AID.
With regard to the opening of the Exim rediscount facility the Secretary said that he hoped it could be announced at the mid-August press conference.
With regard to announcement of the clarified IRS guidelines for intra-company pricing, the Secretary expressed a wish to review this matter with Secretary Connor.
The possibility of announcing an expansion of the U.S. Travel Serv-ice depended on a BOB study which would be completed within a few weeks.
With regard to requesting Congress to further reduce exemptions for U.S. tourists, the Secretary indicated his staff had estimated possible savings of $100 million per year. He had not yet made up his mind about an approach to Congress.
- Source: Johnson Library, Fowler Papers, International Balance of Payments Committee: Cabinet Committee on Balance of Payments, 8/65–12/66, Box 52. Confidential. Drafted by Philip P. Schaffner (Treasury) on July 19. The meeting was held at the Treasury Department.↩
- Representative John J. Rooney (D.-N.Y.), Chairman of the Subcommittee on Appropriations for State, Justice, Commerce, the Judiciary, and Related Agencies.↩
- Agricultural Marketing Act of 1946, 7 USC 1621–1627 (60 Stat. 1087) amended and approved on September 7, 1966, P.L. 89–556 (80 Stat. 694).↩