48. Memorandum From Secretary of the Treasury Dillon to President Johnson1
Efforts on your balance of payments program are now concentrated on developing and publicizing more detailed guidelines for financial institutions and industrial firms. As expected, many problems of detail have come to the surface with respect to assuring appropriate priorities for export credits and developing countries and making allowance for the special problems of Japan, Canada, and the U.K. Both the Federal Reserve and Commerce have worked with technical people from finance and industry to help resolve these problems, and remaining issues are now being settled among the interested agencies. The Treasury has continued to serve as a coordinating focal point.
I believe we have now found ways to implement the guidelines fully consistent with our separate special commitments negotiated with Canada and Japan, assuring them of continuing access to our capital markets for limited amounts of funds. Most importantly, no limitations are being suggested for purchases of longer-term foreign bonds by American long-term investors beyond the restraints inherent in the Interest Equalization Tax, which has proved effective in that area. This permits the basic Canadian and Japanese exemptions from the Interest Equalization Tax to remain fully effective.
At the same time, we do not plan to ask for a reduction in direct investment in Canada since, under our understanding with the Canadians, a reduction in direct investment would permit them to sell more bonds in the U.S. market, thus merely shifting the U.S. capital outflow from the more profitable direct investment area into the less attractive long-term loan area. The problems in this area were discussed with a Canadian financial delegation in Washington again this week, and I believe they are satisfied with our approach.
As Secretary Connor will be reviewing for you in more detail, the program with industrial firms will be made more informal than planned earlier, with less emphasis on detailed reporting and general guidelines, but with a concentrated effort to enlist the personal cooperation of the top executives of international companies on a continuing basis. This approach, which was warmly supported by the business advisory [Page 125] group, will be incorporated in a letter from Secretary Connor to the chief executive officers of affected firms next week. The Federal Reserve this afternoon released their detailed guidelines for the banks, for publication in Monday papers.
There has been some loose talk and press stories that outflows of funds in the current quarter are far exceeding the adverse fourth quarter results. On the basis of all the information we have, that impression is totally false. However, it is not yet clear, amid the cross currents affecting the exchange markets, what sort of improvement we can expect this quarter over the previous three months. As I indicated to you earlier, visible results in terms of balance of payments data from the current program cannot be anticipated before the second quarter, and it could be even longer before its full effects are apparent.
Already, however, there are scattered indications in the foreign exchange and money markets that the program is beginning to bite. For instance, rates in the “Euro-dollar” market, where U.S. dollars are borrowed and lent by European banks, have risen by as much as 1/4% since your Message,2 probably as a result of some curtailment in the supply from this country. The flow of U.S. funds into Canadian finance company paper, upon which we receive partial reports, has been minimal since February 10, after a heavy volume earlier in the year. In addition, the dollar has been somewhat stronger in the exchange markets, and the latest weekly balance of payments data show a sizable surplus, following a small surplus a week earlier—certainly encouraging even though these data are subject to erratic swings.
The response from business and financial leaders who have been personally exposed to the program remains encouraging.
- Source: Johnson Library, Bator Papers, Balance of Payments Message, February 10, 1965, Memos [2 of 2], Box 16. No classification marking. Submitted under cover of a March 5 note to Francis Bator from Robert Carswell in which he wrote: “The original of the attached memorandum has gone to Mr. Busby who requested it on behalf of the President and said it should be sent directly to him.”↩
- Reference is to President Johnson’s February 10 message to Congress; see footnote 2, Document 38.↩
- Printed from a copy that indicates Dillon signed the original.↩