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

118. Memorandum From the President’s Special Assistant (Rostow) to President Johnson¹

Washington, March 29, 1967, 7 p.m.

SUBJECT

• Two Steps to Help the Balance of Payments

In the attached, Secretary Fowler asks you to approve two ways of using his Exchange Stabilization Fund to help the balance of payments. He proposes to use the Fund:

• —to guarantee payment of a German offset obligation we would sell to the U.K. in a complicated, 3-cornered deal designed to shift $100 million in receipts into the first quarter. (If we do this, we must do it before midnight, Friday, March 31.)
• —to buy U.S. Government agency securities and sell them, usually at a discount, to foreign central banks and other official holders.

Fowler has blanket authority to use the Exchange Stabilization Fund for any purpose which will strengthen the dollar. But the law requires that he have the President’s approval.

3-Cornered Arrangement

Fowler, Ackley, and the rest of us are very worried that a very large first-quarter payments deficit would produce serious pressure for tight money—which is just what we don’t need. Fowler’s proposal would take advantage of an opportunity to sift $100 million in inflow from the second quarter to the first. This would not solve the problem, but it would help. Basically, Fowler suggests the following:

• —we would transfer to the British $100 million in German offset obligations which will be paid in the second quarter.
• —in return, the U.K. would immediately pay us the $100 million, less the interest we would normally pay on a similar amount in Treasury bills.
• —through the Exchange Stabilization Fund, we would guarantee payment of the German obligation.

Obviously, we would have to forego $100 million in anticipated second-quarter receipts, but your advisers are agreed that the first-quarter problem is serious enough to be worth it.

This transaction would not be made public. If it leaked, we could be charged with gimmickry, but Fowler believes he has an effective defense: we are simply trying to keep our balance of payments difficulties from being exaggerated through uneven receipts under the US–FRG offset deal.

Purchases of Securities

This proposal is aimed at the longer term. The market is now so structured that there are relatively few sales of U.S. agency securities to foreign governments and central banks. Fowler’s proposal is that the Exchange Stabilization Fund buy these securities at the going rate and sell them to official foreign holders, usually at a slight discount (1/8–3/8 of a point). The Exchange Stabilization Fund would take the small losses involved.

Fowler is confident this operation would not cause any trouble on the Hill if it were noticed at all. (The Exchange Stabilization Fund is not audited outside the Treasury and does not require appropriations.) If criticism did develop, he believes we could show that the benefits to the balance of payments far outweigh the cost to the Fund.

Recommendation

I recommend that you approve both proposals. The CEA concurs.

Walt

• Approve guarantee of German note in 3-cornered deal²
• Disapprove
• Speak to me
• Approve Fund purchases of agency securities³
• Disapprove
• Speak to me

Attachment

Washington, March 29, 1967.

Letter From Secretary of the Treasury Fowler to President Johnson ⁴

Dear Mr. President:

As you know, the Government of the Federal Republic of Germany has agreed to make deposits in the U.S. Treasury at agreed intervals for the purchase of military equipment in the United States. We propose to transfer to the Government of the United Kingdom before the end of this calendar quarter all U.S. rights to receive from the Government of the Federal Republic of Germany during the second calendar quarter a deposit of $100 million, receiving therefor $100 million discounted to yield the current bill rate. We also propose to have the Exchange Stabilization Fund guarantee to the Government of the United Kingdom payment on the deposit.

The proposed transaction would prevent an adverse impact on the balance-of-payments position of the United States which results from deposits being made by the Government of the Federal Republic of Germany at a rate slower than approximately even quarterly amounts. Purchase of this asset by the Government of the United Kingdom during the first calendar quarter would be reflected as a long-term inflow of dollars during the first calendar quarter. The Government of the United Kingdom has dollars available to make the proposed purchase and it may be willing to enter into the transaction provided its own investment is guaranteed by the Exchange Stabilization Fund.

I believe it would also be desirable for the Exchange Stabilization Fund to have the authority to purchase U.S. agency obligations and to sell them to foreign governments, central banks, and monetary institutions, making such sales at discount whenever this would be appropriate. Not more than a reasonable percentage of the assets of the Fund would be applied to this program.

Authority for the Exchange Stabilization Fund to make such purchases and sales would be helpful in our effort to sell medium-and long-term U.S. agency obligations to foreign official holders. Such sales are reported as long-term inflows of dollars in our balance-of-payments statistics.

The Secretary of the Treasury, with the approval of the President, has the authority to use the Exchange Stabilization Fund for the issuance of the proposed guarantee and for the proposed purchases and sales of U.S. agency obligations under Section 10 of the Gold Reserve Act of 1934 (32 U.S.C. 822a). This section authorizes the Secretary of the Treasury, with the approval of the President, “… to deal in gold and foreign exchange and such other instruments of credit and securities as he may deem necessary to carry out the purpose of …” the Exchange Stabilization Fund. The section also provides that “The Fund shall be available for expenditure, under the direction of the Secretary of the Treasury and in his discretion, for any purpose in connection with carrying out the provisions of this section, … .” On September 4, 1934, the President granted his approval for the Secretary of the Treasury to purchase or sell foreign exchange for the account of the Fund for present or future delivery. On June 5, 1962, the President approved a recommendation that the Exchange Stabilization Fund be authorized to receive and hold deposits of currencies drawn pursuant to exchange stabilization agreements, which the Treasury enters into from time to time with foreign governments and central banks, and to pay interest on such deposits. On February 10, 1964, you authorized an extension of this authority to include the acceptance from foreign governments, central banks, and official monetary institutions of deposits of dollars and foreign currencies unrelated to exchange stabilization agreements and to pay interest on such deposits.

I recommend that you authorize me to use the Exchange Stabilization Fund to guarantee payment to the Government of the United Kingdom under the proposed transaction described above and to purchase U.S. agency obligations and to sell them at market price or at discount to foreign official holders. If you approve my recommendations, will you please so confirm in writing in the space provided below.⁵

Faithfully yours,

Henry H. Fowler

1. Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. IV, January 1967 [2 of 2], Box 3. Confidential. An attached undated note from “A.” (presumably Alice M. Caubet) to Lois Nivens, indicates, among other things, that regarding authority for the Secretary of the Treasury to use Exchange Stabilization Funds “Mr. Smith has asked Mr. Hamilton to do a memo to Sec. of Treas., by tonight for Mr. Rostow’s signature.” That memorandum is presumably the one printed here.
2. This option is checked.
3. This option is checked. A handwritten note by Alice Caubet next to these approvals reads: “notified Hamilton’s ofc. 3/30/67 3:10. amc. Dene said E. Hamilton will take care of notifying as nec.” Dene is unidentified.
4. No classification marking.
5. An approval line at the end of Fowler’s memorandum bears the President’s signature.