71. Minutes of Meeting of the Cabinet Committee on Balance of Payments1
Secretary Fowler said that he envisaged several meetings culminating in a report to the President around the end of October. It was agreed that the next meeting of the Cabinet Committee would be on Monday, October 18, at 4:30.
The Secretary turned to the balance-of-payments projections which had just been made by the Lederer Committee2 and said that he had had a very violent reaction to it. He said that three things arose in his mind as a result. One, he would talk to the British about their borrowing $250 million from the EX–IM Bank, in the hopes of discouraging them. Secondly, it will be necessary for the Fed to announce very soon that the 1966 base would be based on the end of 1964 claims as now. Third, that some changes might be necessary in the Commerce program and he would want to hear from Secretary Connor on that.
He also suggested that it might be necessary to raise the IET rate above the current one percent for next year. He also suggested that we might want to limit all non-bank loans, that is more than ten years as well as less than ten years, to the 105 percent ceiling.
Secretary McNamara said that he shared Secretary Fowler’s concern and that we would need additions to the program and this should be the purpose of the next meeting. He said that he was not impressed by the actions that we had taken over the last several years to help our trade balance. He said that he had heard that U.S. businessmen do not know how to sell and that he didn’t know whether this was true or not but that we needed more information on costs and prices. He said that he was very impressed with the recent moves which the British had been making to help their basic trade position. He felt that Secretary Fowler might want to appoint some subcommittee chaired by the CEA to look into these basic factors.
Secretary Connor said that they had been doing something on exports, that the National Export Expansion Council had been reorganized (headed by Mr. Foy)3 and that they would have some specific recommendations. [Page 195] He said that he had been visiting around himself. It was true that we had neglected the import side but he understood that we would not want to undertake such things as surcharges or voluntary restraints on imports as the Japanese had done.
Secretary McNamara asked if we could have brought in proposals on this for October 18 and Secretary Fowler agreed that the Executive Committee would handle this.
Secretary Connor reported that he was meeting with his advisory committee on October 11 and that they would have some suggestions in other areas as well as their own. He said that the voluntary program was working and gave the following specifics:
He said that the program had first been explained to the businessmen on February 18 and that some had not gotten under the program until as late as April, therefore the second quarter should be the test. He said that he had given them latitude to make the method of their own improvements to their own situations. There had been no stress on the capital investment part of the program and that they had not been asked to cancel plans which were underway. He noted for example an Australian iron ore refinancing project.
He said that where he had asked for the businesses to give priority they had come through. $575 million had been repatriated in short-term funds and this cost the corporations money. Also remittances were up from $1061 million in the first quarter to $1148 million in the second quarter and that this was against the trend and that this cost money.
He had suggested guidelines only for the developed countries and investment in Western Europe in the second quarter was down. Direct investment outflows of 380 firms decreased by $220 million in the second quarter compared to the first quarter. He said that foreign borrowing had amounted to $480 million and that this was unprecedented although we had no bench mark with which to compare it.
Capital outflow in the first half of $2041 million is a problem but net income of the corporations after taking account of remittances was a plus $260 million in the second quarter compared to a minus $98 million in the first quarter. He said he was looking carefully at the capital flows and the advisory committee was thinking of alternatives.
Exports in the second quarter had increased and this was a result of the ending of the dock strike but it still reflected some effort by the firms. They would need a big increase in exports to meet the $1.3 billion improvement that they had set for themselves in 1965. He said it looks like we will get an increase in exports but we don’t know if it will be enough for this. The advisory council program will be public information in the next few weeks.
On imports he said that they were not in the program but that he had asked particular companies to report on anticipated imports and to [Page 196] encourage them to export components of their products to their foreign subs.
Secretary Connor said that the tourist gap was still a real problem. He said that it looked like we would get more receipts from abroad next year and this was good but the U.S. tourist should not be neglected, should we limit their expenditures? He closed by saying that we should not blame the corporations at this point.
Secretary Fowler emphasized the necessity for secrecy on these deliberations, that all documents should be classified secret and limited to a need to know basis in distribution.
Secretary Fowler said that on the projected deficit of $2 billion for this year a good part of this was due to the U.K. situation—there were the liquidations of securities, the EX–IM credit of $250 million and the failure of the British to make their debt repayment at the end of this year. He said that as they improve there would be less drain on the U.S.
Under Secretary Ball said that the State Department would circulate proposals well before the next meeting. He felt that overall we had done pretty well when we look back at what we expected to do before February 10.
Secretary Fowler said that this was true if we compared it to our pre-February 10 projections but it was not so good when we look at our June 7 report which forecast a deficit of between $.7 and $1.5 billion.4
There was further discussion of the necessity for strict secrecy. Secretary Fowler said that he got the impression that the delegates to the IMF meeting had come here with the impression that we were doing quite well but after being here now have the impression that we are doing very poorly. He said that there are all sorts of rumors circulating at the Sheraton Park Hotel.
Mr. Bator said that we should make a distinction between doing something for the immediate future and doing something for the longer-run, that is 1966. He felt that we should first turn our attention to some quick-fix, the cosmetic approach to the fourth quarter. He said that the deficit for the second half of this year in the projection of $1.34 billion works out to an annual rate of $2.68 billion and that the newspapers will be quick to make this calculation and point out that we were doing poorly. So we must get this second half figure down.
Mr. Ackley felt that on the whole the program had been successful. He said that we should now look for major savings, that we should not be diverted with numerous minor things. Direct investment was the biggest disappointment in the program and this is where we should look.
Mr. Martin said that he agreed with Mr. Ackley. He also agreed that foreigners had come here optimistic and now as Secretary Fowler noted [Page 197] they appeared to be pessimistic about our balance of payments. He then asked Mr. Robertson to report.
Mr. Robertson said that he agreed that we must indicate that the base for 1966 would be the end of 1964. He said that he was going shortly to inform the banks how they had done overall in July and August and that this could be the occasion for announcing this. He said that only 45 banks were over the 105 percent ceiling—by a total of $75 million—but that banks as a whole were under the ceiling by $575 million as of the end of August. There had been a further decline in claims outstanding of $200 million in July and August.
Mr. Trued asked whether or not Mr. Robertson would mention what the percentage ceiling would be to the banks when he announced to them we would keep the 1964 base. Mr. Robertson said that he had not planned to indicate that now, that maybe the results of the fourth quarter would be better than it looks at this point. He said that at the next meeting he would have some suggestions on the non-bank part of the program. He noted that while their outflow had been $1 billion last year it was only $146 million this year thus far. He said that here there was a problem of putting Canada in jeopardy.
Secretary Fowler said that he would discuss with Governor Robertson and Mr. Martin later the problem of the non-bank program and the Canadian banks. It was then agreed by all that the Fed should go ahead and announce the 1966 base would be the end of 1964 claims outstanding.
Mr. Trued again raised the question of whether the percentage ceiling would be indicated. Secretary Connor said that when the Fed announces what its base for 1966 would be that this would naturally raise the question of the base for the corporations, and that if he should be asked this question he would say that the base for the corporations would also be 1964. This was agreed to by all.
Secretary Fowler said that we would have to look at the issue of Canadian securities. He said that he would want to ask the Canadians to resume their efforts of last year of restraining municipal borrowing.
Secretary Fowler then said in regard to the Commerce program for the fourth quarter, could we urge more corporations to bring more liquid funds back and he then noted that as of the end of June they still held almost a billion dollars in liquid investments.
Secretary Connor said that we must be careful to avoid making firms afraid of mandatory measures. He said that he had not recommended anything of a mandatory nature in his paper.
Secretary Fowler said in regard to rumors on mandatory controls perhaps it was best simply to take the advisory committee of Secretary Connor into confidence and to let them know the kinds of things we are [Page 198] thinking about and by that they will know we are not contemplating mandatory measures.
Secretary Connor said that there would be no problem of talking with them and assuring them that we were not contemplating mandatory controls.
Mr. Bator raised the question of whether we should have agreed some safe language for the press and the public in regard to the kinds of measures that we are contemplating.
There was then an extended discussion of the posture that the Government should assume in this interim period while we are considering the new measures to avoid a repetition of the speculation which was rampant prior to the February 10 program. While the group felt that we wanted to assure the banks and businesses that they need not fear mandatory controls, on the other hand some expressed fear that this might involve locking us in and that we should avoid making any commitments which would bind us in this respect. Mr. Roth expressed the hope that we should not lock ourselves in and then possibly be in the position where we would have to take a quick look and make a quick decision on measures necessarily avoiding mandatory controls. He hoped that we would not have to take quick action for example on export subsidies, import surcharges and tourist restrictions.
Mr. Gaud said he had little to add to the discussion. AID was down to an irreducible minimum but they would do their best to see what more they could do.
Mr. Schultze noted that the gold budget was due in September 15 but most of the agencies had not yet reported so he encouraged them to hurry up and get their reports in.
There was further discussion of the problem of public posture during this interim period and Secretary Fowler suggested that we might look at what we did and did not do in this period prior to February 10 and learn from that.
It was pointed out that one basic difference between then and now was that the public realizes that we have less latitude or leeway now before imposing controls than we had then.
It was generally agreed that rather than to try some scheme to assure the public about the mandatory controls it would be better for Secretary Connor to simply act naturally.
Secretary Fowler wondered if there wasn’t some way to avoid banks and firms rushing money overseas in an attempt to get under the wire by letting them know either directly or indirectly that whatever they did between now and then would be held against them, that whatever we did the base would be set at a period early enough not to allow them to profit by moving money out before some new program was announced. [Page 199] The fear was expressed, however, that this might accentuate the fears of the banks and businesses.
- Source: Johnson Library, Fowler Papers, International Balance of Payments Committee—Classified Material: Cabinet Committee on Balance of Payments, 8/65–12/66, Box 52. Secret. The source text bears no drafting information.↩
- Presumably a reference to a committee headed by Walter Lederer, Chief, Balance of Payments Division, Office of Business Economics, Department of Commerce. The committee and its projections have not been further identified.↩
- Fred C. Foy, Chief Executive Officer, Koppers Company, Pittsburgh, served as Chairman of this Council, which was enlarged and revitalized. For President Johnson’s August 20 statement on the role of this Council, see Public Papers of the Presidents of the United States: Lyndon B. Johnson, 1965, Book II, pp. 951–952.↩
- Document 61.↩