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

43. Memorandum From Acting Secretary of the Treasury Deming to President Johnson¹

Washington, February 12, 1965.

SUBJECT

• Reaction to Your Balance-of-Payments Message²

Domestic Reaction

1. Although the balance-of-payments message was overshadowed by the news from Viet Nam, first reports indicate a calm and generally favorable reaction in this country. A number of leading businessmen and bankers made public statements welcoming the call for voluntary restraint and promising their support. Critical comments were confined mainly to a few questions as to the adequacy of the program, and the desire among bankers for a more positive statement on monetary policy. An undertone of reluctance was evident, however, in reports of private comments by industrialists.

2. Some of the bankers’ comments were:

David Rockefeller (Chase Manhattan) said he was “pleased with the voluntary approach” to private capital movements. The business and banking communities would certainly respond. He expressed “disappointment at the President’s silence on monetary policy” but conceded that this was “basically a Federal Reserve responsibility.” He hoped the Federal Reserve “would take action on its own in line with the President’s program.”

George S. Moore (First National City) said, “We approve of the basic decision to seek the voluntary cooperation of bankers and businessmen instead of resorting to exchange controls as some had feared”, but added, “We would have been happier if the President’s message had been more positive on monetary policy”.

Gabriel Hauge (Manufacturers Hanover) said, “The emphasis on voluntary cooperation in many areas is as wise as it is welcome as an alternative to controls. Certainly bankers will be glad to intensify their cooperation with the Federal Reserve in every possible way. Coupled with supporting action in the field of credit policy by the Federal Reserve, the group of measures outlined in the President’s message can have a decidedly favorable impact on our overseas deficit.”

Thomas S. Gates (Morgan Guaranty) said, “We stand ready to cooperate in any program that helps the balance of payments”, but added that “the traditional instrument” of monetary policy “should not be overlooked.”

3. Roger Blough issued a helpful statement, saying:

“The persistence of the balance of payments problem requires definite action and the President’s message proposes a number of constructive measures. The voluntary actions provided are especially welcome.”

However, nationwide surveys by the financial press suggest that industrial corporations have some questions concerning cutbacks in direct investment overseas. Many firms were obviously concerned that their competitors, especially foreign companies, might gain an advantage by continuing to expand abroad. Several industrialists said that their companies were already helping the balance of payments. But despite remarks such as these, it was also evident that the Presidential appeal carried great weight.

4. No effects on domestic financial markets could be attributed to the message. The bad news from Viet Nam was the dominant influence. U.S. Government securities were off one or two thirty-seconds upon receipt of the Viet Nam news but remained virtually unchanged thereafter. Quotations on the New York Stock Exchange fell sharply both yesterday and Wednesday.

Foreign Reaction

3. The first reaction in Europe was to approve the emphasis on reducing capital outflows, but some worries were expressed as to whether the methods chosen would be completely effective. Almost everywhere on the Continent there were questions about achievement of the objectives without a positive contribution by our monetary policy. British officials were sympathetic but were concerned about the possible withdrawal of short-term funds which could adversely affect their own external position.

6. Some of the comments reported by our Embassies were:

The President of the German central bank (Blessing) called it a “good program” but stressed that it was absolutely essential that the U.S. achieve balance of payments equilibrium within 18 months. He very much hoped that the availability of credit would be reduced.

A high official of the German Economics Ministry said the program embarked the U.S. on the road to exchange controls when the problem was simply excess liquidity. He also cautioned that a solution was “extremely urgent”.

Common Market Vice-Chairman (Marjolin) regretted that the interest equalization tax was being extended. But given the unwillingness to even try raising long-term interest rates, the present package might well be the best feasible.

The Governor of the Italian central bank (Carli) expressed support.

A director of the Belgium National Bank concluded that the measures should eliminate a major part of the capital outflow.

French officials had no comment.

7. The Japanese and Canadian governments appeared to be well satisfied with the way we handled their special situations.

In an official statement, the Government of Japan expressed “understanding and sympathy”, although “there might be varied views with regard to the appropriateness of individual measures” and “their impact on the Japanese economy should be carefully studied.” The $100 million exemption for Japan was termed “most encouraging and would serve to maintain the stability of the Japanese balance of payments.”³

An official statement by Canadian Finance Minister Gordon found the message “reassuring”, and added that “it is clear that … they have taken account of our situation here.” The U.S. measures would probably not leave Canada “entirely untouched” but there did not appear to be anything which would cause Canada “serious difficulty.” The statement went on to renew “the assurance of the Canadian Government that our (Canadian) policies will continue to be directed towards general stability in our (Canadian) foreign exchange reserves.”

8. Foreign exchange markets were calm with the dollar slightly stronger. Although the London gold market reacted unfavorably, this seems to have resulted primarily from the events in Viet Nam.

Frederick L. Deming ⁴

1. Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol 2 [1 of 2], Box 2. No classification marking.
2. Reference is to the President’s February 10 message; see footnote 2, Document 38.
3. In his message, President Johnson exempted from the Interest Equalization Tax purchases by U.S. residents of new securities issued or guaranteed by the Government of Japan, up to an aggregate amount of $100 million each year, because an “application of the Tax to bank loans of over one year will, in my judgment, create a sufficient threat to the international monetary system.”
4. Printed from a copy that indicates Deming signed the original.