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

5. Report From the Cabinet Committee on Balance of Payments to President Johnson¹

Washington, undated.

SUMMARY AND RECOMMENDATIONS

Attached to this summary is a comprehensive report from the Cabinet Committee on the Balance of Payments, including a review of the 1963 results, an evaluation of performance under existing programs to reduce the deficit, and the outlook for the period ahead.²

During 1963, the deficit on regular transactions—excluding special inter-government financing—decreased from 1962’s $3.6 billion to $3.3 billion. However, results in the second half of 1963 differed sharply from the first half: the deficit on regular transactions dropped from a $4.6 billion annual rate to a $2.0 billion rate.

This sharp improvement was largely due to reduced capital outflows—owing in good measure to announcement on July 18, 1963, of the proposed Interest Equalization Tax and the Federal Reserve’s increase in its discount rate.³ There was also an increase in exports. The improvement in both of these areas may prove to be somewhat greater than can be sustained through 1964.

The improved performance in 1963 was a major factor in cutting our net gold loss to foreigners to $392 million. Overall gold losses totaled $461 million, because of domestic sales of $69 million. The lower gold loss also reflects the effects of enlarged Russian gold sales and the success of our efforts over the past three years to strengthen our capacity for financing the deficit.

But even if present favorable conditions continue, the deficit on regular transactions for 1964 is projected to run between $1.5–$2 billion. This would show substantial improvement over 1963—and be the lowest deficit since 1957—but it would still be on the high side of the safe margin of tolerance. It is essential that we continue to show steady and substantial progress in eliminating the deficit.

President Kennedy’s July 18 Balance-of-Payments Message set specific targets for savings totaling $2 billion, which consist of:

• —reduction of $300 million in the annual rate of gross outlays for defense by January 1, 1965 compared to 1962;
• —reduction of over $200 million in 1965—as compared with 1962—in cost of strategic materials acquired from foreign sources;
• —continuation of AID policies tying commitments to U.S. exports, resulting in a decline of AID expenditures entering our balance of payments in fiscal year 1965 to not over $500 million;
• —savings by other agencies, together with those expected from revisions of programs under the Agricultural Trade Development and Assistance Act, of $100 million a year; and
• —$1 billion annual savings from the combined effect of the increase in short-term interest rates and the Interest Equalization Tax.

It now appears that, with continued effort, these targets can be attained. Further progress will require us to:

1. Maintain wage-price stability. It appears that at last our trade balance may be benefiting from our relatively stable prices over the last few years. In the face of the increasing determination of the Western European countries to curtail inflation, it is absolutely vital that we maintain the stability of our own prices over the period ahead if we are to achieve balance of payments equilibrium and stem the gold outflow.

2. Reinforce efforts to increase our exports, including efforts to provide adequate commercial personnel abroad as well as favorable credit facilities. In this connection, give maximum support to the National Export Expansion Coordinator, who is also Executive Director to the Cabinet Committee on Export Expansion.⁴ The Coordinator is giving particular attention to the expansion of exports of consumer goods to the developed countries and to further improvements in government policies and operations so as to facilitate exports. Based on past experience, direct Presidential intervention will be needed to obtain the modest appropriations required to mount an adequate export program.

3. Press the Congress to appropriate the funds requested by the U.S. Travel Service to promote foreign travel in the United States. (The Congress cut them for FY 1964.)⁵

4. ⁶ Give prompt and effective encouragement, by means of a Presidential statement and widespread publicity, to the “See America” program, including support for earliest practicable Senate action. In view of the delay in this program, it should be extended to include 1965.⁷

5. Assure enactment of the Interest Equalization Tax without crippling amendments.

6. Continue efforts to secure freer and more efficient European capital markets, so as to meet their own needs, as well as increased participation in meeting the capital needs of the less developed countries.

7. Review promptly the recommendations of the Presidential Task Force on “Promoting Increased Foreign Investment in United States Corporate Securities and Increased Foreign Financing for United States Corporations Operating Abroad,” delivered to you on April 27, 1964.⁸ The Secretary of the Treasury will present recommendations to you based on this review.

8. Actively discourage further interest rate increases abroad, particularly in Canada.

Begin Secret

9. Achieve additional savings in military expenditures. Secretary McNamara, at President Kennedy’s request, proposed a further program of $375 million of reductions over and above the $300 million announced in July. A part of this program was approved in September which is estimated to result in gross savings of approximately $125 million. Among other actions proposed by Secretary McNamara, State and Defense are to prepare a political-military plan of action for review by you for the withdrawal of 10 tactical air squadrons from Europe;⁹ Defense has under study a possible reduction of an additional 30,000 Army logistical support personnel in Europe; and State and Defense are keeping under informal review the political-military factors related to a withdrawal of one or both U.S. divisions from Korea. Defense will continue to make every effort to find additional savings, consistent with our basic political-military requirements. (End Secret)

10. Continue to press vigorous government-industry efforts in military export sales so that cash receipts may be maintained at least at $1 billion annually.¹⁰

11. Urge all agencies and regulatory commissions to take the balance of payments fully into consideration in their policies and decisions. In its recent report on the balance of payments, the members of the Joint Economic Committee unanimously recommended, “that the Government intensify its efforts not only with respect to the balance-of-payments effects of its own expenditures, but also with regard to its regulatory and other activities.”¹¹ Accordingly, we recommend that you send letters to this effect to the heads of all governmental agencies and regulatory commissions appointed by the President.

12. Continue active implementation of the so-called gold budget procedure, whereby the Bureau of the Budget reviews estimates of Government agencies’ international transactions and recommends savings. However, it should be recognized that, while a tight rein must be kept on increases in overseas expenditures, significant further savings below those already projected cannot be expected without basic program changes.

CONCLUSION

Having recorded a dramatic improvement in our external payments position since last July, any slackening of our efforts now, in the absence of assurance that this improvement will continue, would seriously weaken confidence in the dollar. So, we must continue to push all parts of our over-all program to eliminate the deficit. This is the only way we can make good on:

• —President Kennedy’s pledge of February 6, 1961, to achieve over-all equilibrium in our international payments and thus halt gold losses,
• —your pledge that the dollar will remain fully interchangeable with gold at the present fixed price of $35 an ounce.¹²

In his annual message to Congress on the State of the Union, January 8, President Johnson said, “This administration must and will preserve the present gold value of the dollar.” See Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1963–64, Book I, pp. 112–118, for the complete text of his message.

1. Source: Johnson Library, National Security File, Balance of Payments, Vol. 1, November 27, 1963 thru October 31, 1964, Box 1. Secret (With Limited Official Use Sections). The report was submitted under a cover sheet dated May 1.
2. Not printed.
3. On July 18, 1963, President Kennedy delivered a special message to Congress on the balance-of-payments problem. See Public Papers of the Presidents: John F. Kennedy, 1963, pp. 574–584. In his message, President Kennedy recommended the enactment of an “interest equalization tax,” which “would stem the flood of foreign security sales in our markets and still be consistent with both economic growth and free capital movements.” The interest equalization tax was signed into law on September 2, 1964; see Document 12. The Federal Reserve Board approved on July 16, 1963, a rise in the rediscount rate, i.e. bank rate, from 3 to 3–1/2 percent, effective July 17. The Board said that its action was designed to aid U.S. efforts to combat the international balance-of-payments problem.
4. The Interagency or Cabinet Committee on Export Expansion was established by President Johnson when he signed Executive Order 11132 on December 12, 1963. This committee served in an advisory capacity to the Secretary of Commerce and had as members: Secretary of Commerce, Chairman; Secretary of the Treasury; Secretary of Agriculture; Secretary of State; Secretary of Defense; President of the Export-Import Bank of Washington; Administrator of the Small Business Administration; and Administrator of the Agency for International Development. (28 Federal Register, p. 13533; see also Department of State Bulletin, January 6, 1964, pp. 25–26)
5. A handwritten notation by Bundy in the margin next to this paragraph reads: “$19 million.”
6. A handwritten notation by Bundy in the margin to this paragraph reads: “See Lohil Public Committee.”
7. On August 15, 1964, President Johnson announced at a news conference that he had signed a joint resolution, P.L. 88–416 (78 State. 388), and issued a proclamation (Proclamation 3607, “See the United States in 1964 and 1965,” August 15 (29 Federal Register, p. 11883, 3 CFR 1964 Supp.) calling on American citizens to “see more of our country, to visit and to enjoy our historic shrines and our scenic wonders.” See Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1963–64, Book II, pp. 964–965, for the complete text of President Johnson’s announcement.
8. President Kennedy appointed a Task Force on Promoting Increased Foreign Investment and Increased Foreign Financing on October 2, 1963. The Task Force, chaired by Under Secretary of the Treasury Henry H. Fowler, submitted its report to President Johnson on April 27, 1964; for extracts, see American Foreign Policy: Current Documents, 1964, pp. 1182–1190. See also Document 24.
9. A handwritten notation by Bundy in the margin next to this paragraph reads: “England & France.”
10. A handwritten notation by Bundy in the margin next to this paragraph reads: “Germany Offset.”
11. This report has not been further identified.
12. On February 6, 1961, President Kennedy delivered a special message to Congress on the gold crisis. In this message, he proposed several initiatives to lower the deficit in the nation’s balance of payments and to stem the outflow of gold. For text, see Public Papers of the Presidents of the United States: John F. Kennedy, 1963, pp. 57–66.