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

166. Telegram From President Johnson to the President’s Special Assistant (Califano)¹

December 23, 1967, 1900Z.

Apropos of the gold position memo transmitted earlier today, please have Committee carefully consider, evaluate, and be prepared to accept or give reasons why to the following comments on Gardner Ackley’s memo with regard to Fowler proposal.²

• Point 1—No comment except that if we had not suffered from continuing deficits, the rest of the world would have suffered for lack of international liquidity.
• Point 2—The deficit for the first 3/4 of 1967 would not be alarming or cause any current problem because the reasons for the increase are reasonable and except for military, not primarily continuing.

• Point 3—The fourth quarter is very serious. It is caused substantially by

  1. The inept handling by the British of their devaluation which played unbelievably into the hands of speculators—smart money men and even amateurs.

  2. Subsequent loss of gold to speculators and hoarders who saw the British devaluation as the opening wedge and under the present structure of the London gold³ can buy gold at prices which carry no risk.

  3. Subsequent uncertainties as to whether this source of gold would be shut off or restricted which still exist.

  Much depends on what “special transactions” Fowler has in mind and how much they will help.

  The 500 million liquidation of U.K. securities being a one time affair is explainable.

• Point 4—If there is no cover (i.e., Fowler special transactions) or stop-gap foreign maneuevering particularly with continuing uncertainties and rumors stimulated by speculators and even respected European economists all the points in 4 are likely to occur unless we announce a strong and specific program. How strong must depend on how bad the fourth quarter deficit is.
• Point 5—I agree entirely—that we must move quickly otherwise we risk a similar unnecessary further loss as happened to the British. In addition prompt action might even ease the fourth quarter loss.

• Point 6—The Fowler program—

  A. I don’t like the “border tax adjustment” at all except as a bargaining point in GATT which is, of course, of no use for the present immediate requirement. It will stimulate speculators as a step toward devaluation. It will damage our international image in many areas. It hits at an area which is not the root of the problem. Under nbr 2 the balance of trade improved.

  B. The tourist tax proposal is complicated—cumbersome—will obviously produce only limited results—advertises weakness to millions of people which in turn will probably increase the outflow by speculators—inhibits international good will which tourism builds—will encourage tourists to be more extravagant abroad—doubtful of Congressional passage—certain to be used by Republicans in an election year—therefore damaging to the President.⁴

  The last three points I would endorse—

  A. Offset negotiations and greater share of foreign exchange costs of troops abroad.

  B. Bank and financial institution program.

  C. Tightening of the Commerce program of direct investment and here is where I would put the bite depending on the extent of necessity—and for the duration of the Vietnam emergency or until the B of P is adjusted—

  1. Permit foreign investment only under license, i.e., for special purposes or national interest—or undeveloped countries of specific foreign policy objectives—

  This could be reversed to apply only to these countries which do not co-operate in an economic sense or who are unwilling to hold dollars in reasonable proportion to their gold withdrawals or to those with favorable balances who are unwilling to share world economic burdens equitably—

  I would list the following advantages to this step—

  1. Business has been well treated and is basically good.

  2. Far fewer voters would be directly affected—less difficult in Congress and better for President.

  3. Provides tremendous bargaining strength in international economic negotiations.

  4. Money not sent abroad would be invested at home at least to some extent thereby increasing employment producing more tax revenue.

  5. Can be readily adjusted administratively by granting more or less licenses as circumstances warrant.

  6. Can be sufficiently substantial to convince skeptics promptly, thereby quickly discouraging speculators.

  7. Would convince world we mean business.

  The obvious disadvantage is business opposition. This could be substantially offset by providing tax concessions to business with overseas interest—for the emergency period—who repatriate capital and earnings at this time. This is one of my suggestions in the previous gold position memorandum.⁵

• Point 7—The border tax adjustment—in addition to my own points as stated I agree entirely with the disadvantages listed:

  1. Devaluation of dollar in trade despite export surplus,

  2. Protectionism,

  3. Will be countered by others,

  4. In the end retaliation by Europe might make U.S. worse off.

• Point 8—Dislike of tourist tax covered above.
• Point 9—Direct investment control covered above. The point made of encouraging U.S. firms to raise money abroad has limitations due to size of money markets.
• Point 10—I agree with Secretary Fowler that strong measures must be taken. Half-hearted ones will only have the reverse effect—as per the British debacle and the present outflow of gold through the London market. This outflow should be stopped firmly and at once.

By taking strong action we will strengthen our hand in negotiating an international system along Rio lines which is absolutely essential.

1. Source: Johnson Library, National Security File, Subject File, 1968 Balance of Payments Programs, Cables [2 of 2], Box 4. Secret; Flash. Regarding the transmission of this telegram, see footnote 1, Document 165.
2. This introductory paragraph is the verbatim text of an undated typed note from President Johnson to Califano, which is attached to an undated paper prepared by Charles W. Engelhard. (Ibid., National Security File, Balance of Payments, Vol. IV, January 1967 [2 of 2], Box 3) The remainder of the telegram is identical to Englehard’s memorandum, which comments on Ackley’s memorandum to the President, transmitted in Document 162.
3. The word “market” appears after this word in the Englehard memorandum.
4. The italicized words here and below are underlined in Engelhard’s memorandum but not in the source text.
5. Document 165.