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

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

Washington, June 7, 1965.

Over-all Balance of Payments to Date

It is still much too early to reach any firm conclusion about the effects of the new program. The figures so far look good—but certainly in part they reflect only temporary factors.

March and April showed over-all surpluses of $483 million and $153 million—a substantial turnabout from the $707 million deficit for January–February, and $102 million deficit for March and April 1964. But,

• —a good part of this improvement reflected simply the rebound of exports after the termination of the dock strike,
• —one-shot reflows of corporate funds back to the United States,
• —and, a cessation of the very large capital outflows undertaken in January and early February in anticipation of the February 10 Message.

Data on Program Still Sketchy

We do not yet have much data on the detailed accounts. Nevertheless, it is clear that bank lending fell sharply after the February 10 Message. The increase in net claims on foreigners reported by banks amounted to about $400 million in January and February; was only $140 million in March; and, in April loan repayments actually exceeded new lending, bringing about a reflow of bank funds of $190 million.

The only other statistical evidence we have of the results of the program is the large pull-back of U.S. corporate funds from Canada in March—thus,

—a real assessment of the program will not be possible for several more months.

Reduction in 1965 Deficit If Program Successful

The program has the potential of bringing about a sizeable cut in the deficit this year. If the measures in fact live up to their potential—and assuming no big leaks in other parts of the balance of payments—we see the

—possibility of the 1965 deficit being reduced to the range of $0.7–$1.5 billion,

compared to $3.1 billion for 1964.

This would be better than the forecast for the program as originally recommended in January.

Major reason: banks were given a ceiling of a 5 percent increase for short and long-term lending instead of mere exhortation to hold down the former and leaving the latter entirely to the IET. We now hope for a $1.8 billion cut in bank lending, but

—it will only be realized if the other parts of the program are also carried out.

Other major savings in capital outflows projected for this year: direct investments—$200 million; short-term holdings and long-term investments by U.S. corporations abroad (other than direct investments and foreign securities)—$800 million.

These savings in capital outflows will be partially offset by a probable increase in U.S. purchases of new foreign securities of $340 million, giving a net saving in all private capital outflows of $2.5 billion for the year.

Exports should increase by $0.6 to $1.4 billion or 2.5 to 5.5 percent. Agricultural exports are expected to fall $400 million from last year (when our grain shipments were unusually high) while other exports should rise by $1.0 to $1.8 billion.

But these export gains are expected to be offset by an equivalent increase in imports. On balance, we see no improvement in the trade surplus this year and maybe a worsening.

Net military expenditures could decrease by $150 million, depending on needs to meet developments in Southeast Asia and in the Dominican Republic that cannot be offset by increased savings elsewhere.

The travel deficit will probably worsen by $250 million.

The dollar outflows from our foreign assistance program are continuing to decline. Other government capital outflows will probably increase due largely to a draw-down by the U.K. of last November’s $250 million Export-Import loan.

Gold Outflows Continuing

While current developments suggest some improvement in our position, our continued heavy gold losses urge caution. The gold outflow in March and April totaled $512 million, and the total outflow for 1965 to date is $1.1 billion—half of which was to France. This was a serious deterioration, only partly owing to the low level of losses last year.

The large gold sales, along with the U.S. surpluses in March and April, brought about a reduction of some $1.2 billion in dollar holdings of foreign central banks. Dollar holdings of private foreigners rose by $590 million in January and February (following the trend of the last half of 1964) but declined in March and April by $380 million.

Even if we get a big improvement in the deficit we must expect further gold losses this year (offset, of course, by a reduction in dollar liabilities to foreign official institutions). If we do not get the large improvement our loss could prove intolerable, and make our bargaining position very weak. This signals the fact that no weakening of the program—in any of its points—must be permitted.

Problem Areas

Apart from the question of whether the program meets its objectives, some frictions and pressures have become apparent. Some of the major ones are:

• —a number of bank officials and some corporate officials are pressing for a relaxation of the ceiling;
• —some banks feel they are carrying a disproportionate part of the burden;
• —some corporations which plan to borrow abroad more of the funds needed for investment are finding it difficult to locate loans;
• —there is some concern about the difference in treatment of export financing and less-developed countries under the Fed and Commerce programs;
• —the recent wage settlement and subsequent price increases in the aluminum industry are a disturbing indication that the guideposts are not being taken seriously enough either by labor or industry. Procedures throughout the government need to be reviewed to assure that the implications of the guideposts are fully recognized by both labor and industry in order to better promote our objective of price stability.

We are working jointly to see that the above do not develop into real problems. At present, the situation does not indicate any need for changing the program. Indeed, success in realizing our projection for 1965 depends on how vigorously we push all your February 10 measures. All parts of the program are inter-related and slackening off or failure in one part will inevitably lead to challenges of other parts. In summary, we must

• —guard against premature optimism,
• —ensure that no one sector is or appears to be carrying the brunt of the program alone,
• —and, impress on all sectors, including the Congress and the public at large, the necessity to follow through on all parts of the program.

Looking Beyond the Program

Whatever the success of the program we must continually bear in mind the fact that these are temporary measures.

Permanent equilibrium will depend on our success in the more basic measures such as further improving our competitive position, making our economy a more rapid absorber of investment funds, and getting the other major countries to carry more of their and the world’s financing needs.

In the next report, we will give a projection of the U.S. payments position for some time ahead and consider its implications for policy. When the temporary measures we have taken are either no longer effective or are inappropriate, it will remain of key importance that we sustain a strong U.S. dollar as an underpinning to an over-all strong U.S. position.

Report on Individual Measures of Program

Following is a report on each of the ten points of your February 10 Message:

1–3. Interest Equalization Tax.

The requested legislation—to extend the tax through 1967 and broaden the coverage to all borrowing over one year maturity instead of three year maturities as at present—is expected to come before the House Ways and Means Committee probably in July. We do not have any indications of serious problems in the House or Senate but attempts will be made to weaken the IET or even let it expire, on the grounds it has been made unnecessary by the voluntary cooperation program.

In the meantime, the IET continues to be very effective. The amount of taxable new security issues purchased by U.S. residents is negligible and Americans continue to reduce their holdings of outstanding foreign securities.

Canadian new issues—which are exempt—amounted to about $150 million during January–April (they were $693 million for all last year). But since Canadian reserves have not increased this year it appears that they are in conformity with our agreement that the exemption will not be used to increase their reserves.

Japan—which has an exemption up to $100 million a year—successfully floated its first issue ($22.5 million) here since early 1963. Their next issue in the U.S.—amounting to $20 million—is expected this summer.

Bank loans with maturities of one year or more came under the IET by your Executive Order of February 10.² This coincided with the introduction of the Fed’s voluntary cooperation program and the two working together have sharply curtailed bank long-term lending. In the period January 1–February 10 such lending to advanced countries was $570 million, but from February 10 to date it has amounted to less than $70 million, one-half of which was to Japan.

4. Voluntary Cooperation Program for Banks.

Banks seem to be cooperating fully with the program but continued cooperation will depend on evidence that all parts of the balance-of-payments program are effectively contributing to improvement.

The target established by the Fed was that banks should limit the net increase in their claims outstanding on foreigners (i.e., new loans minus loan repayments) to five percent of the amount outstanding at the end of 1964. This would allow a net outflow of $470 million in 1965 for banks under the program (some bank lending, such as loans guaranteed by the Export-Import Bank, is exempt from the 105 percent ceiling).

By the end of February, $370 million of the $470 million had already been used—the bulk of it before February 10—and in March there was a further net increase of $40 million, leaving $60 million for the rest of the year (this is the net result of some of the banks being already over their target by $270 million while the remaining banks are under their ceilings by $330 million).

Since some major banks over the ceiling at the end of March are reducing their claims, the outflow for the remainder of 1965 could well be lower than the March rate, giving an outflow for the year of $600 million or less. All in all, it might be reasonable to expect an improvement for the banks under the program of $1–$1.5 billion.³

Indications are that banks are giving priority to export credits and to loans to the less-developed countries. We feel that there is ample room to accommodate a reasonable outflow for these priority areas while still keeping under the 105 percent ceiling.

5. Antitrust Exemption for Banks.

This legislation—to enable banks and other financial institutions to work together on the voluntary cooperation program without running afoul of the antitrust laws—has been reported by the House Judiciary Committee with amendments.

6. Voluntary Cooperation Program for Corporations.

The cooperation of the business community in this program has been firmly established and the replies received from the companies indicate that they will collectively make an important contribution to the solution of the balance-of-payments problem.

The Secretary of Commerce has asked 585 companies to supply data on their foreign transactions for 1964 and to indicate what improvement in the net total for these transactions they expect for 1965.⁴ As of May 21, 543 companies had replied and data for 438 firms could be tabulated, giving figures for their earnings from all their exports, and on investments and other current transactions, along with their capital outflows to developed countries.

The net balance for all these transactions in 1964 was a credit of $10.9 billion and the reporting firms estimated that this would be increased to $12.2 billion in 1965, an improvement of $1.3 billion.

It should be noted however that this $1.3 billion improvement cannot be interpreted as a potential reduction in our balance-of-payments deficit. A good part of the improvement anticipated is in the form of increased exports (the reporting firms account for over 40 percent of total U.S. exports), and a substantial improvement in our exports was already anticipated even in the absence of the program and is included in our current projection. The same cautionary comment applies to dividends and interest earned by these companies.

Virtually all of the companies submitting comments on direct investment clearly understand the basis of the request that they exercise restraint and indicated their determination to cooperate to the maximum extent feasible. A number of companies, although not specifically asked, volunteered the information that they have deferred or canceled investment projects in developed countries which they had originally planned to make in 1965. Some companies reported that the launching of the program caught them with investment commitments which were well along toward completion and could not be stopped without abandoning sizeable investments.

In response to the request that they raise more of their funds in developed countries, about 20 percent reported that they have borrowed or are planning to borrow abroad to finance investment projects (and, in many cases, in spite of added cost).

Several firms reported that they will try to raise funds by selling shares abroad in their foreign subsidiaries. In three or four cases the company stated that it had changed its plans to buy up minority interests in its affiliates abroad.

Over half of the 438 companies reported that they held no short-term financial assets abroad at the end of 1964. The remaining firms reported they held $1.5 billion—$1.0 billion in Canada—at the end of 1964, an increase of $437 million during the year. The companies appear to be cooperating in a significant way in reducing these holdings.

In order to strengthen the program, Secretary Connor has decided to send letters to some 3,000 firms not previously contacted. This letter will briefly describe the program and ask for cooperative efforts similar to those now self-imposed by the current participants, except that quarterly reports will not be requested.

7. Government Expenditures Abroad.

In conformance with your desire to reduce military expenditures abroad, the Defense Department has undertaken a program to reduce expenditures by an additional $50 million this year and $100 million in 1966, excluding expenditures related to increased activity in Southeast Asia. However, the increased operations relating to Southeast Asia currently are expected to cost $100 million in 1965, more than offsetting the projected additional savings for this year. Nevertheless, other savings, primarily reduced procurement of uranium, may reduce total military expenditures this year by $60 million from the 1964 level, depending on developments in Southeast Asia and the Dominican Republic.

Receipts from deliveries of military equipment are expected to increase by $90 million in 1965, giving an improvement up to $150 million in net military expenditures.

AID continues to seek further balance-of-payments savings, but possibilities for further major reductions are now limited if the U.S. is to continue to meet its foreign policy objectives. In addition to continuing to tie over 85 percent of its commitments to U.S. goods and services, AID has taken several measures which will lead to increased substitution of our foreign currency holdings for dollar expenditures. The dollar outflow in 1964 from AID operations was cut to well under $500 million and it is anticipated that this will fall to $400 million or less in 1965.

The remainder of the Federal agencies currently estimate little if any change in their payments from calendar year 1964 to 1965. Gradual increases in such items as pensions and annuities are offset by savings in other agencies. There was, however, a one-time saving of about $105 million in 1964 which is not expected to reappear in 1965. This was the result of drawing down the funded balances of previously reserved foreign currencies which will not be freed for other uses.

In total, Federal agencies continue to make a substantial contribution to reducing the balance-of-payments deficit. The latest gold budget data shows that on a fiscal year basis, the Federal excess of payments on regular transactions declined more than 23 percent ($630 million) from 1963 to 1965, and are expected to decline another 13 percent ($290 million) from 1965 to 1967. Gross payments, that is before deducting receipts, declined 15 percent ($725 million) from 1963 to 1965, but are expected to rise by 4 percent ($175 million) from 1965 to 1967. The Budget Director is sending you separately a summary report on the gold budget status.⁵

8. Tourism.

The legislation to reduce the duty exemption allowed returning U.S. residents has been reported by the House Ways and Means Committee. However, the Committee did not eliminate the to-follow privilege as we had proposed, which reduces our projected savings of $75–$125 million. On the other hand, the Committee added a provision reducing the amount of alcoholic beverages allowed free from duty from one gallon to one quart and limited the privilege to persons over twenty-one.⁶

There is little to indicate that the “See the U.S.A.” program has yet taken effect.⁷ Passport applications in the first four months of this year were up substantially over last year and current indications are that our foreign travel expenditures in 1965 will be $450 million over 1964.

On the other hand, expenditures here by foreign tourists are expected to rise by 10 to 15 percent, continuing the encouraging trend which began last year when the increase was 17 percent. The net result of these increased expenditures and receipts is expected to raise the travel deficit by about $250 million this year to a level of $1,850 million.

9. Export Promotion.

The Commerce Department has conducted a vigorous cooperative business-government program to further stimulate U.S. exports. Since the first of the year Commerce has:

• —initiated a new export promotion device abroad (sample display centers), introducing products of almost 400 U.S. firms new to the export markets;
• —opened an additional trade center, and sponsored U.S. trade shows and engaged in other commercial show activities yielding estimated sales of more than $22 million thus far this year and 100 new agency relationships.

In the year ending March, 1965, manufacturing unit-labor costs in the United States dropped about 1 percent, despite an increase of 3.6 percent in average hourly wages. In foreign countries, these costs were generally stable, so that the U.S. improved its international competitive position. U.S. wholesale prices in March were up 0.9 percent from a year earlier, but this was less of an increase than in the other major countries except Japan.

The typical collective bargaining outcome thus far in 1965 has been reasonably close to the guideposts. But the most recent settlement in aluminum was close to 4 percent. It is not clear how much influence this will have on later settlements in steel and other industries. In general, however, the outlook is for maintenance and possibly some further improvement in the U.S. international competitive position this year.

The outlook is uncertain for a favorable settlement of the contract dispute in the shipping industry, and a strike on both the East and West Coasts may occur. This would seriously disrupt exports. On the other hand, a settlement purchased at the expense of an inflationary wage settlement may also have seriously adverse effects on the balance of payments.

The effort to expand U.S. exports is supported by the Federal Maritime Commission, which feels that the present ocean freight rate structure appears to be discriminatory and this may be an impediment to the U.S. export expansion effort.

The F.M.C. program includes (i) a greater effort to assist shippers in obtaining more equitable rates from the steamship conferences; (ii) recommendations for negotiations with foreign governments on production of information and to urge their acceptance of our efforts to eliminate discrimination against U.S. exports; (iii) increased pace of regulation of activities and rate practices of ocean carriers and, if necessary, disapproval of conference agreements.

10. Removal of Tax Barriers to Foreign Investment in the United States.

Hearings on the legislation to accomplish this purpose are scheduled to begin in the House Ways and Means Committee in late June or early July.

1. Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. 2 [1 of 2], December 8, 1964, Box 2. Confidential. The report was sent under cover of a memorandum from Secretary of the Treasury Fowler to the members of the Cabinet Committee on Balance of Payments on June 7. A copy was also sent to the Chairman of the Board of Governors, Federal Reserve System.
2. Executive Order 11198, “Imposition of Interest Equalization Tax on Certain Commercial Bank Loans” (30 Federal Register 1929), authorized President Johnson to impose the tax on bank loans abroad with maturities of one year or more, with appropriate exemption for borrowers in developing countries.
3. Differs from $1.8 figure on page 2 because Federal Reserve program excludes credit guaranteed by Ex-Im Bank, bank claims for account of customers and bank claims by U.S. affiliates of foreign banks. [Footnote in the source text.]
4. See Document 52.
5. See Document 62.
6. President Johnson signed H.R. 8147 on June 30. P.L. 89–62 (79 Stat. 208) made permanent the existing temporary law that goods with a value of up to $100 could be brought into the United States duty-free by U.S. residents returning from abroad after an absence of not less than 48 hours once every 30 days, but stipulated that the $100 valuation would apply to the retail value of the goods, rather than wholesale value as under the existing law. For President Johnson’s statement after signing the bill, see Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1965, Book II, pp. 712–713.
7. Regarding this program, see footnote 7, Document 5.