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

67. Minutes of Meeting of the Cabinet Committee on Balance of Payments¹

Washington, August 18, 1965.

Balance of Payments Considerations.

Secretary Fowler called attention to several factors that might put the third quarter balance of payments into deficit even after seasonal adjustment. These were the possible further decline in the trade balance, a more than normal increase in tourist expenditures abroad, and the probable increase in bank loans since banks have now about $400 million of leeway under the Federal Reserve 105% ceiling. He pointed out that these factors warn against an over-optimistic attitude. Secretary Connor said he was concerned about the appearance of price increases throughout the economy and the fact that a number of recent wage settlements appeared to exceed the guidelines established by the Council of Economic Advisers. He referred specifically to the Aerospace Corporation settlement.

Mr. Okun said that 4% was tending to become the normal rise in recent wage settlements. He said the developments concerning the minimum wage bill are disquieting and that, if approved, the bill would have two unfortunate results. It would hinder a balanced regional growth of the U.S. economy, and it would raise prices of such items as apparel, shoes, and lumber. In this connection he mentioned that the proposed pay increase for Government employees set a very bad precedent for wage and price stability in private industry. He said that the rises in prices were to a considerable extent concentrated in food items, and these may be temporary rises; but hides, leather and certain other goods, including some industrial goods, were also showing some increases. Director Schultze remarked that the President had said he would not be the chief wrecker of the wage-price guidelines in referring to the proposed Government pay increase. Senator Monroney will hold hearings of his Committee on the proposed pay increase on Monday. Director Schultze thought that the Senate would produce a more responsible bill than the House had approved but that it would still be excessive—probably a two-year bill with average increases of from 9 to 9–1/2%. The Administration, on the other hand, hoped for a one-year bill with an average increase of 3%. There was some possibility that this session of Congress might end without final action on any bill. Secretary Fowler remarked that these two pieces of legislation are extremely important for the success of our entire balance-of-payments program. He asked Secretary Connor about the status of the marine workers’ strike. Secretary Connor said that the marine engineers, one of the three groups on strike, had agreed to accept a new contract and that at least for the next six months no inflationary effects resulting from the settlement would be felt.

Director Schultze said that the Budget Bureau is considering the possibility of more sales out of Government stockpiles as a substitute for imports. He thought that the Symington bill would probably not be approved this session of Congress but added that there was some authority to sell additional amounts from stockpile even without passage of the bill. Secretary Fowler indicated that the Mint was using stockpile nonferrous metals for its purposes. Secretary Connor said the Douglas Committee was still working on the problem of discrimination in ocean freight rates. In response to a question from Secretary Fowler, Assistant Secretary Brimmer indicated that Commerce had estimated that the probable effect on the U.S. balance of payments of ocean freight rate discrimination against U.S. exports was about $60 million a year.

Mr. Okun reported on the extent to which the recent excise tax cut had been passed on to consumers. He said that on an over-all basis, 75% of the cut had been passed along, with a complete adjustment in prices by automobile companies and dealers and a few other industries, but with little or no reduction by manufacturers of automatic pens and pencils, phonograph records, and sporting goods. Under Secretary Ball said that we were losing an opportunity to make substantial wheat sales to Russia because of our policy that 50% of the shipments be made on U.S. ships with their high freight rates. Secretary Fowler indicated that we still got some indirect benefit from the Russian wheat purchases. The Canadians presumably will not have to borrow as much in our market because of their large receipts from wheat sales to Russia. Also, the Russians will have to sell gold to pay for such purchases and we will share in the pool purchases of their gold. He asked what were the problems in getting some of the Russian wheat purchases for the U.S., since such sales would help to get our exports back towards last year’s level which did include some extraordinary shipments to Russia. Secretary Connor said as far as private U.S. sales were concerned there was no obstacle except the opposition of the longshoremen. Under Secretary Ball said that in addition to labor opposition there was an Administrative order issued under the previous Secretary of Commerce that raised a problem although the legal basis for the order was somewhat doubtful in his view. He said the Administration could make a new decision which would waive the 50% shipping requirement, and he thought that we could muster Congressional support for such a position. This would be fruitless, however, if the longshoremen continued their refusal to load ships with wheat going to Russia.

The Secretary indicated that there was no evidence of adverse effect on U.S. exports from the Federal Reserve voluntary program for banks. He asked Mr. Hitch² about the outlook for Defense expenditures in the Vietnam area. Mr. Hitch said it was very difficult to estimate what the additional expenditures would eventually be. Secretary Fowler referred to the joint work of Treasury and Defense in setting up a program involving the use of Military Payments Certificates for preventing the leakage of dollars through military personnel into the black market.

Balance-of-Payments Projection for 1968.

The Secretary referred to the projection that had been requested from the Executive Committee for a U.S. balance-of-payments position in 1968 on the assumption that the voluntary program would have been ended by that time. He said the Executive Committee was undertaking a critical evaluation of the projection that had been made by a technical group and that the Executive Committee would formulate policy implications of the projection for discussion by the Cabinet Committee at its next meeting, probably in November. He asked that the existence of this projection be kept closely guarded. He referred briefly to the results of the projection, and he pointed out that there was a large element of judgment about the magnitude of the items in the projection.

Balance-of-Payments Concept.

Mr. Capron of the Budget Bureau reported on the results of the Evaluation Committee’s consideration of the Bernstein report on U.S. balance-of-payments statistics.³ He said there was unanimity in recommending that both the present concept and the official settlements concept be published in the regular balance-of-payments articles of the Commerce Department. The following procedure would be adopted. An exchange of letters between Director Schultze and Secretary Connor agreeing on the recommendation would be made public by means of a letter to Senator Proxmire, whose Committee had actively introduced the use of the official settlements concept for measuring the balance-of-payments deficit. It was hoped that this procedure might have some value in getting Congressional support for a $260,000 supplemental appropriation which the Office of Business Economics in Commerce would need in order to put into effect the statistical improvements recommended in the Bernstein report. Both he and Mr. Capron expressed their appreciation for the cooperation of Walter Lederer, Chief, Balance of Payments Division, Office of Business Economics, Department of Commerce, in the Evaluation Committee’s formulation of recommendations for improving the statistics. Assistant Secretary Brimmer said that it would probably be December before the two deficit concepts could be shown in the Survey. Assistant Secretary Solomon indicated that it might be useful if the IMF were to do some work in standardizing the official settlements concept for use by the advanced countries. Assistant Secretary Trued remarked that the Fund had been doing work in this field for the last two years and that he would ask the U.S. Executive Director if anything further could be done. Secretary Fowler called attention to the fact that the National Bureau of Economic Research was not going to be able to continue its research on the development of a better export price index and that it was necessary to decide whether the U.S. Government should pick up and continue the Bureau’s work. Director Schultze indicated that the Labor Department was considering this possibility. Secretary Fowler referred to a speech made by Senator Symington on August 3 in which the Senator made some comments about the effect of U.S. aid to Latin America on our exports to that area. He said he would appreciate it if Mr. Bell would look into this matter and review the draft letter from the Secretary to Senator Symington.⁴

Mr. Roth indicated that there would probably be no progress in the Kennedy tariff negotiation round until after the German and possibly the French elections. He suggested that the Secretary of Agriculture might be added to the membership of the Cabinet Committee on Balance of Payments and Secretary Connor believed that the Secretary of Labor should also be added to the membership. Secretary Fowler thought these were both appropriate additions and indicated that he would check this matter with the President.

Philip P. Schaffner ⁵

1. Source: Johnson Library, Fowler Papers, International Balance of Payments—Classified Material: Cabinet Committee on Balance of Payments, 8/65–12/66, Box 52. Confidential. Drafted by Philip P. Schaffner (Treasury) on August 20. Another record of this meeting, sent under cover of an August 25 memorandum from Acting Assistant Secretary of the Treasury for International Affairs Knowlton to the Cabinet Committee on Balance of Payments, was sent to President Johnson. (Department of State, Central Files, FN 12 US)
2. Charles J. Hitch, Assistant Secretary of Defense (Comptroller).
3. Published as Review Committee for Balance of Payments Statistics, The Balance of Payments Statistics of the United States, A Review and Appraisal; Report to the Bureau of the Budget (Washington, D.C., U.S. Government Printing Office, 1965). The Review Committee for Balance of Payments Statistics was appointed in April 1963 by the Bureau of the Budget to study the adequacy of U.S. balance-of-payments statistics and to make recommendations for their improvement. It was headed by Edward M. Bernstein, former research director of the IMF, whose principal recommendation was to shift the method of defining balance-of-payments surplus or deficit from the “liquidity” concept to an “official settlements” concept. (Current Economic Developments, No. 727, May 11, 1965, pp. 11–13; Washington National Records Center, E/CBA/REP Files:FRC 72 A 6248, Current Economic Developments)
4. Secretary Rusk’s draft letter to Senator Symington has not been further identified.
5. Printed from a copy that bears this typed signature.