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

162. Telegram From the President’s Special Assistant (Califano) to President Johnson in Thailand¹

Washington, December 22, 1967, 1649Z.

CAP 671128. In line with your call yesterday,² I am meeting this afternoon with Dean Rusk, Charlie Schultze, Gardner Ackley, Joe Fowler, Sandy Trowbridge, Clark Clifford, Bill Roth, Ed Fried, Bill Martin, Bob McNamara and Ernie Goldstein.

Incidentally, Secretary McNamara has sent a memorandum to you indicating that he will be leaving tonight or tomorrow for Aspen, Colorado, for a vacation between Christmas and New Year’s.³

At the meeting this afternoon, we will do our best to resolve the remaining issues.

The extent of agreement and disagreement is reflected in the following memorandum which Gardner Ackley prepared for you at my request.

The memorandum lays out the present balance of payments problem, the program that Fowler is proposing, the extent of disagreement in the government and some of the questions that you should consider in determining whether to go forward with it.

“Memorandum for the President

Subject: The U.S. balance of payments: facts, proposals, and issues

1. The over-all balance of payments has been in deficit (on liquidity basis) every year since 1950, with the one exception of 1957 (Suez). In the early years, this was a blessing to the world. Since about 1959, it has been a serious problem, the deficits in 1965–66 were considerably below earlier years:

• 1960—$3.9 billion
• 1961–64 average—2.5 billion
• 1965—1.3 billion
• 1966—1.4 billion

2. Through the first 3 quarters of 1967, the deficit widened to $1.7 billion ($2–1/4 billion at annual rate). Although our trade balance improved and U.S. direct investment was reduced, there were these adverse changes:

• —Net military spending abroad, up more than $1/2 billion;
• —Private remittances (mainly to Israel), up nearly $1/4 billion;
• —Foreign security issues (especially to Israel and Canada), up more than $1/4 billion; and
• —The tourist gap (mostly the effect of Expo ′67), up about $400 million.

3. The 4th quarter, however, threatens to turn the year into a disaster. So far in this quarter, the outflow has been nearly $2 billion. The deficit for the full year may challenge 1960’s unhappy record of $3.9 billion.

• —The only major known special transaction was the $500 million liquidation of U.K. securities.
• —By the process of elimination, speculative activity must be blamed for much of the 4th quarter trouble. The smart money has probably been moving out in fear either of devaluation or of new controls. We are now getting direct evidence of this (for example, from Chase Bank).
• —Whatever ‘special transactions’ Joe Fowler has up his sleeve will help to dent the huge deficit for the current quarter.
• —On the other hand, press stories hinting at the bad 4th quarter results and at a drastic new balance-of-payments program could stimulate the outflow in the final week of 1967.

4. Reasons for concern with the rising deficit include the following:

• —A ‘run’ by private speculators here and abroad could quickly pour billions of dollars into the hands of foreign central banks.
• —A renewal of speculation on a hike in the gold price could force us to part with up to $300 million of gold a week to support the price in the London market; this also puts dollars in the hands of the foreign central banks in the gold pool.
• —As they get more dollars, foreign central banks will become more and more worried that they won’t be able to convert them into gold, and may begin massive conversions while there’s some left.
• —The faster our gold stock declines, the more fearful the speculators will get and the more worried the central banks will become.
• —Foreign central banks will ask a bigger and bigger voice in our domestic economic policies as their price for continuing to hold dollars and staying in the gold pool.

5. It is important to move swiftly on our balance of payments decisions

• —to remove speculative uncertainty about our plans, and
• —to beat the publication of any hard figures on the size of the 4th quarter hemorrhage.

6. Joe Fowler is firming up a program to announce before New Year’s Day. In addition to a number of minor elements, it includes the following major items, the first 3 of which are particularly controversial:

• —A ‘border tax adjustment’—a tax of 2 percent (or more) on imports and an equal subsidy on exports. At 2 percent, this could be worth nearly a billion dollars a year when fully effective.
• —A tourist tax of $6 a day on trips abroad other than to Canada, Mexico, or the Caribbean, possibly combined with a 15 percent excise on international airline fares. This could yield $1/2 billion a year.
• —A major tightening of the commerce program on direct investment—still leaving it voluntary—designed to save over $1 billion and to insure greater cooperation through better administration.
• —A set of offset negotiations to get other countries to bear a greater share of the foreign exchange costs of our troops abroad. With luck, we might pick up $200 million more than in 1967. Without new offset agreements, receipts would decline substantially.
• —A tightening of the Fed voluntary programs for banks and financial institutions from the program already announced for 1968. This should be worth several hundred million.

7. The border tax adjustment would add 2 percent (or more) to the cost of our imports and would rebate 2 percent of foreign sales to our exporters. It would be designed to make up for the cost of “hidden” excise taxes such as those on gasoline, freight, and telephones.

• —A few other nations are doing this under GATT rules now, and many are doing things equally dubious under the rules.
• —Fowler is particularly enthusiastic about this proposal because
• —it will cost very little in revenues;
• —in his judgment, it will sail through Congress and at the same time head off the quota drive;
• —it shows toughness with the Europeans.
• —The disadvantages and dangers are
• —it is an obvious devaluation of the dollar in trade, despite our big export surplus;
• —it looks like a move toward protectionism;
• —it will surely be countered by Canada, Japan, the U.K., and perhaps others, either by similar action or by outright devaluation;
• —if it provoked retaliation by continental Europe, we would lose all the potential trade gains, possibly trigger off a trade war, and stir up financial markets badly.
• —Everyone agrees that we are being hurt under existing GATT practices. But some of your advisers (STR, State, and CEA) would prefer not to announce the action until we have a hard and quick (2 or 3 weeks) negotiation with the Europeans, either persuading them to reverse their own border tax practices or else to accept ours. This is intended to minimize the risk of retaliation (if we have to move), and to preserve our long-standing leadership in trade liberalization.

8. The per diem tourist tax is obviously a hot potato. Some think it can be made more acceptable and more equitable by exempting trips by persons who haven’t been abroad during the four prior years, and by making the per diem proportional to the traveler’s income (e.g., 0.2 percent of his previous year’s income tax for each day abroad), with a $6 minimum.

9. Direct investment is the most glaring deficit account of the private economy, still exceeding $2–1/2 billion a year. It is also area that irritates the Europeans most. Commerce’s voluntary program has helped some, mainly by encouraging more U.S. firms to raise money abroad to finance their foreign plants. But now we ought to slash this area far more drastically. Sandy Trowbridge feels he cannot promise the $1 billion Joe Fowler wants. Sandy thinks he can squeeze out $600 million and still hold the program together on a voluntary basis. We could slap on direct controls, but that would be messy at best and would be bitterly opposed by the business community. On the other hand, can we really have a compulsory program on tourists and trade, and still leave the capital program voluntary?

10. Fowler’s basic strategy is ‘the bigger the better.’ He wants to show that we are taking promptly all action to deal with the balance of payments and to minimize the chance of a real explosion in international financial markets in 1968. The key issues raised by this strategy are:

• —Will such a massive program look like an act of desperation and thus inflame the speculators?
• —If the necessary legislation doesn’t pass, won’t we be in even worse shape than we are now?
• —If we load the Ways and Means Committee with a bunch of other measures, does this improve or worsen the prospects for the income tax surcharge?
• —Isn’t removal of the gold cover an essential part of the program?
• —We have been pounding away that the European surplus countries have an equal responsibility to help remedy the world imbalance. They have argued it’s all our fault, and we have to correct it. This way, don’t we admit we’ve been wrong, and let them off the hook? If we omit the tourist tax and the border tax adjustment (the things they will really scream about), aren’t we in a better position to get them to help us to solve the problem cooperatively?
• —Is all this worth doing just to preserve the gold-dollar link?

Signed,

Gardner Ackley ”

1. Source: Johnson Library, National Security File, Subject File, 1968 Balance of Payments Programs, Cables [2 of 2], Box 4. Secret. Drafted on December 22 and sent to the President who was then in Korat, Thailand. During December 19–24, the President visited Australia to attend the funeral of Australian Prime Minister Holt and then continued around the world, stopping in Thailand, Vietnam, Pakistan, the Vatican, Italy, and the Azores. (Johnson Library, President’s Daily Diary)
2. Not further identified.
3. This memorandum has not been found.