Foreign Relations of the United States, 1964–1968, Volume VIII, International Monetary and Trade Policy

111. Minutes of Meeting of the Cabinet Committee on Balance of Payments¹

Washington, January 4, 1967, 3 p.m.

The Secretary opened the meeting with a brief review of the expected 1966 balance-of-payments results. He thought the “liquidity” deficit would be at the upper end of the $1.3 billion-$1.8 billion range which had been mentioned in the December 6 Memorandum to the President.² He thought the “reserve transactions” balance would show a marked improvement over last year’s $1.3 billion deficit. The trade account would be off by $1 billion or more, with exports up over $3 billion and imports up over $4 billion. Direct military expenditures abroad, mostly due to Vietnam, would be about $800 million higher than in 1965. Offsetting the approximately $1.8 billion deterioration in the trade and military expenditure items were

(1) large inflows of long-term capital from foreign official agencies and international organizations (up $940 million);

(2) large debt prepayments by foreign governments (up $240 million); and

(3) nonrepetition of the large adverse impact of about $660 million in 1965 resulting from U.K. liquidation of its portfolio of private U.S. securities and postponement of its service on the postwar loan.

The Secretary pointed out that the “reserve transactions” balance also benefited from an inflow of around $3 billion of short-term private funds particularly through the foreign branches of U.S. banks. Part of these came out of official reserves abroad. He thought next year’s “reserve transactions” balance would be closer to the “liquidity” balance than it had been in 1966. He then asked Secretary Connor whether there had been any reaction to the announcement of the new Commerce program. Secretary Connor said that the reaction was one of understanding and promise of continued cooperation. He had received only about ten company complaints. Forms for the revised program were now being mailed, but it would be mid-February before any data would be available. The Secretary indicated the President’s interest as well as his own in doing anything that might be helpful to the successful operation of both the Commerce and the Federal Reserve voluntary programs.

Governor Robertson said that some of the banks think they are being penalized for having done a good job but that he fully expected continued cooperation from the banking community.

The Secretary referred to page 5 of the Memorandum to the President in which reference was made to other measures that the Committee may later recommend depending partly on the outlook for the economy in January and on the fiscal and monetary policy mix still to be determined. The Secretary said that while some aspects of the program are long term in nature, we must give them some impetus at this time. He has, therefore, asked his staff and the Executive Committee to intensify their operations particularly with regard to two sectors.

First, the private financial community must be energized to spread the message about benefits accruing to foreign investors under the Foreign Investors Tax Act. Part of the objective of the Fowler Task Force (namely, the stimulation of capital markets in Western Europe) has been achieved but the second objective—stimulation of foreign interest in U.S. securities—has not yet progressed very much and we must actively encourage this development.

Secondly, our trade surplus is too low. We must do more to strengthen interest in penetrating foreign markets. Export credit facilities have been improved for this purpose, but we may also need export incentives of some kind consistent with our role as a leading trading nation.

In the Government field, expenditures under the military and aid programs are long-term problems on which we must continue to work. Secretary Connor said that two other action groups of the National Export Council were preparing reports on the export outlook. One deals with aid to LDC’s and the other with the export outlook in general. The Secretary expressed interest in seeing these reports when they were completed. He then asked Mr. Knowlton to discuss the Executive Committee views on strengthening of the IET.

Mr. Knowlton said that while an ironclad case could not be made for going to a 2% annual burden now, we could point to the fact that the spread between some longer term U.S. and foreign rates is in excess of 1%. A further easing of U.S. rates would probably make a rise in the tax rate necessary. It was also important to move to the 2% rate effective as of the date of requesting new authority from Congress so as to forestall anticipatory outflows of U.S. capital. With regard to application of the tax to maturities of less than one year, he said the Executive Committee had decided that further study was desirable.

Governor Robertson thought there would be a real need to apply the IET to the shorter range maturities, although it would be unwise at this time to do so. He also thought the margin within which the IET could be moved ought to be large enough to cover the possible interest differential. He would, therefore, suggest asking for Congressional authorization to move up to a 3% annual rate equivalent. Mr. Knowlton remarked that the Executive Committee had concluded this was a matter for Treasury’s judgment in light of the situation in Congress and other factors. Mr. Deming said that he saw no objection in principle to applying the tax to shorter maturities but that operative problems might be very difficult. Mr. Knowlton pointed out that if it became publicly known that the tax might be applied to maturities of under one year, speculative outflows might be stimulated. Secretary Connor said he thought there was no case for requesting as much as 3% from Congress or for applying the tax to maturities of less than one year. He felt the latter request would meet strong Congressional opposition. Governor Robertson remarked that the IET should be strong enough to carry the whole load of controlling capital outflows when the voluntary cooperation program ended.

The Secretary remarked that it appeared to be an open question of whether the Executive Committee proposal went far enough. He said that perhaps by the time the Ways and Means Committee gets to this item, further study within the Government will have produced a definite recommendation particularly with regard to the application of the tax to shorter maturities. Mr. Okun remarked that we may want standby authority to apply the tax to under one year maturities even though we do not intend to use it immediately. Mr. Solomon remarked the more flexibility you request from Congress the more guarantee you must give about how you intend to use the flexibility. Mr. Knowlton pointed out that the Japanese would be quite worried about the application of the tax to maturities under one year and that this might lead them to activate their large existing credit liens with U.S. banks. He also thought that firms making U.S. direct investment abroad would be tempted to put short-term funds abroad through this or other channels in anticipation of direct investment controls.

The Secretary said that while there are different views in some respects, there apparently is agreement that the tax should be extended for three years and that flexible authority to change the burden of the tax from zero to 2% should be sought. He next turned to the recommendations regarding tourism and said that the Government must emphasize the balance-of-payments impact of foreign travel, not with the idea of stopping the outflow of tourist dollars but with the idea of leveling it off. He asked Mr. Knowlton for a summary of the Executive Committee views on this subject.

Mr. Knowlton said the majority of the Committee believed some closer alignment of tourist guidelines with business and bank guidelines is necessary, although there were some individual agency objections to doing anything in the field of tourism. With regard to passport fees, there was almost unanimous disapproval of tying the proceeds to the USTS budget. Such tying would not avoid Congressional difficulties, and it might represent more funds than USTS could use effectively.

As an alternative, the Executive Committee was suggesting a high-level Task Force including representation from the travel industry. This Task Force would suggest how the Government might wisely spend funds to attract foreign tourists to U.S., how states and cities might cooperate in the effort to attract foreign visitors, etc. The President would announce he intends to request funds from Congress to implement feasible recommendations of the new Task Force.

Mr. Knowlton said that this approach would have several advantages, including receipt of the travel industry’s support of whatever program was finally adopted.

Mr. Van Dyk thought that the foreign travel gap in 1967 would be no larger than in 1966 despite the fact that travel by Americans is increasing at the rate of 10% a year. He thought this indicated that the situation was not so serious. Any program regarding travel abroad, therefore, should be voluntary and completely positive. He discussed the “Discover America” program and said that the private travel industry’s efforts had been enlisted on the basis of no government restrictions on travel. The Vice President felt that support of the travel industry would be lost under any other condition.

Mr. Van Dyk said that $350 million was the extent of our travel deficit with Europe. It was hardly worth endangering the President’s prestige by having him make an appeal to the public with the object of reducing this gap. With regard to increased funds for the USTS, he said that Representative Rooney objected to the USTS per se. With regard to the proposed Task Force, he thought it would proliferate bureaucracy. He said that a new travel bill is being prepared in Congress which would formalize the USTS coordinating function, enable USTS to encourage travel by Americans within the U.S., and raise the budget request to $10 million. Representative Ullman would sponsor the new bill in the House; Senators Javits and Magnuson in the Senate.

Secretary McNamara said he thought a moderate appeal by the President to the public would help. He favored an increase in the passport fee to $25 and earmarking of an appropriate amount of the proceeds for USTS.

He thought that in general we must act more firmly on the balance-of-payments program. Continuation of the deficit was adversely affecting our foreign policy and our military policy abroad. The deficit problem must be solved. He said that the voluntary cooperation programs were not so voluntary. He, therefore, saw no reason why tourism could not be treated on a stricter basis. He ended by saying that he did not ask for any exemption from tightening of the duty-free privilege or the gift privilege for military personnel abroad except those in combat zones.

Mr. Schultze said with regard to tying passport fee proceeds to the USTS budget, there was no easy Congressional approach. He thought the Task Force proposal would be helpful in supporting the request to Congress for more funds for USTS which he said he personally approved. He did not approve the higher passport fee which he felt was a regressive tax. If something had to be done in this area, he would prefer to go back to some of the proposals which were discussed earlier in the year and which took income differences into account. With regard to a public appeal by the President, he disapproved a strong approach but did not feel strongly about a mild approach. The Secretary asked him to read Tab E which contained draft language for such an approach.³ Mr. Van Dyk said that he thought one paragraph (first full paragraph on page 3) was all right if the last phrase about asking Congress to tighten further our customs exemptions was changed to a positive note about international travel year. Mr. Gaud said he approved the Tab E draft and preferred the Task Force approach to the passport fee. Mr. Roth did not think a Presidential appeal would be effective; it would possibly be embarrassing to the President if not effective. He though the Tab E material was possibly too detailed. He agreed with Mr. Van Dyk about losing support of the travel industry if they suspected Government restrictive measures would be taken. He preferred the Task Force approach to the passport fee.

Secretary Connor did not think that Government steps in the tourist field would reduce cooperation from the travel industry. He liked the Tab E draft although he would delete the reference to economic controls on page 3 of the draft. He said that it was important to keep the spotlight on the travel deficit which he said would continue to grow worse as the large jets begin to operate. Mr. Solomon said that a CAB analysis indicated the reduction of fares to between $200 and $250 per round trip would stimulate an increment of foreign travel to the U.S. equal to the increment of U.S. travel to Europe. The big new jets would bring fares down close to this level. The Secretary referred to analyses that the travel gap would be $4 billion to $5 billion by 1974 or 1975. With this huge deficit facing us, the private sector in the Government would have to do much more to attract foreign tourists here. He thought that there were two questions:

(1) How to achieve a tapering off in the outflow of U.S. tourist dollars?

(2) How to promote foreign tourism to the U.S. as a long-term measure?

He wondered whether encouraging Americans to travel in the U.S. did not reduce the emphasis on promotion of foreign travel to the U.S. Secretary Connor remarked that the “Discover America” program really did not have much to do with bringing foreigners to the U.S. and that the proposed new Task Force would be helpful in this area. He also favored raising the passport fee to $25 but without earmarking the proceeds for USTS. Mr. Rostow thought that the travel problem might be mentioned in some general Presidential message. He did not think the travel gap reflected relative income levels only. There were other obstacles in the U.S. to the flow of foreign visitors here. He thought it was all right if a Presidential message would ask for a moderating of travel and spending abroad by U.S. tourists. He referred to the fact that he had taken the same position in an earlier Cabinet Committee meeting. He thought a higher passport fee would be all right but not with the proceeds earmarked for the USTS. He opposed a reduction in the U.S. tourist exemption. He recalled that $50 had been proposed by the OECD as a norm for the amount of tourist exemption, but reducing the tourist exemption would cause very difficult problems in the Western Hemisphere. The Mexicans and Caribbean Islands counted on tourist trade heavily and the Canadians are having an international fair in 1967. The Secretary asked why the U.S. should have a higher exemption than major European countries, and Mr. Rostow replied that he supposed because we were a richer country. The Secretary remarked we were not richer in balance-of-payments terms. Mr. Rostow said that the reductions in the tourist exemption would not produce much in balance-of-payments savings. Mr. Solomon supplemented this by estimating that gross savings would be from $10 million to $30 million and net savings from $5 million to $15 million at the most. He pointed out that Mexico allows $80 duty free to its returning tourists. Mr. Knowlton said we estimated $50 million gross savings from the tourist package being proposed. Mr. Solomon added that Mexico was very sensitive about the border traffic situation and that the Caribbean Islands need tourist money badly. Mr. Rostow said that irritating some countries like Greece might not be worth the benefits we get from the tourist exemption. He also thought that travelers would be induced to falsify their returns if there were any further reduction in the exemption.

Mr. Bator thought the Task Force proposal was a good idea. He thought the passport fee was a miserable sort of regressive tax. With regard to the Presidential appeal, he thought that if an appeal were to be made—and he was not sure of its desirability—it should have a moderate approach. He thought that it was a mistake to talk about a travel gap any more than one might talk about a banana or machinery gap. He did not think the proposed tourist measures would have much balance-of-payments savings effect. The Secretary said that the period of time for which we should try to moderate travel by Americans might be debatable, but the draft Presidential appeal was a short-term one. Mr. Okun thought the Task Force approach was all right and said he had changed his mind about a possible Presidential appeal in reading the draft language in Tab E. He did not know how much good it would do, but he did not think the appeal as drafted would stir up any strong feelings. With regard to a passport fee, he said he agreed with Mr. Schultze. With regard to reducing tourist exemptions, he said he admired the Secretary’s willingness to tackle Congress on this matter in view of last year’s bad experience. He wondered, since the approach might fail, whether it was desirable to have it on the record. On the other hand, if the Secretary felt that he could get it, he should try. He mentioned that Mr. Ackley was worried about the adverse effect of tourism measures on confidence in the dollar. Governor Robertson agreed that tourism was an important item in our balance of payments but that he thought any measure in this field should be limited to encouragement of foreign tourists to visit the U.S. Anything else would be ineffective, embarrassing to the President, harmful to our market for jet planes abroad, and trivial as a balance-of-payments measure. A Presidential appeal would be construed as a desperation step that would hurt the dollar. He thought the reduction of the exemption from $100 to $50 would create a political storm, but that it was the least undesirable of the measures proposed. He did approve of the reduction of the number of times a year that the tourist exemption might be used. He claimed that applying the duty to the total value of purchases would cause more spending abroad rather than less spending. He said there would be no psychological value for the Federal Reserve program by launching a tourist program. Mr. Finner of Agriculture said that the only gain he saw in the tourist program would be to give the balance-of-payments program a more well rounded appearance. He thought the Task Force proposal was all right. Mr. Connor added to his previous endorsement of the proposals by saying that he would also favor the $100 to $50 reduction. He did not think that the Bahamas would have any problem this year if the tourist duty-free exemption were lowered. Any problem would be confined to the Virgin Islands. Mr. Van Dyk said that the Vice President thought the reduction of the customs exemption was not necessarily bad if it were designed to reduce spending rather than travel. The Virgin Islands would be the only area where there might be a problem.

Mr. Okun remarked that there had also been talk of a $5 processing fee on returning tourists in addition to the proposed new base for assess-ing duty. He did not think this was equitable. Mr. Deming remarked that he thought it was like the Paris airport tax. The Secretary then turned to the subject of the Latin American housing authority problem and said he understood that there was agreement in the Committee on the proposed allocation of funds, as between fiscal year 1968 and fiscal year 1969.

P. Schaffner ⁴

1. Source: Johnson Library, Fowler Papers, International Balance of Payments—Classified Material: Cabinet Committee on Balance of Payments, 1967–68 [2 of 2], Box 52. Confidential. Drafted by Philip P. Schaffner on January 10. The meeting was held at the Treasury Department. A list of participants is not printed; the following attended: Secretary Fowler, Deming, Knowlton, Petty, and Schaffner (Treasury), Secretary McNamara and Robert N. Anthony (DOD), Secretary Connor, Rostow and Solomon (State), Winn Finner (Agriculture), Administrator Gaud and Gustav Ranis (AID), Roth (STR), Director Schultze and Charles J. Zwick (BOB), Okun (CEA), Bator, Governors Robertson, Daane, and Brimmer (Federal Reserve), and T. Van Dyk (Vice President’s Office).
2. Document 108.
3. No tabs have been found.
4. Winthrop Knowlton initialed below Schaffner’s signature, presumably indicating his approval of the minutes.