82. Report From the Cabinet Committee on Balance of Payments to the President1
SUBJECT
- 1966 Balance of Payments Program
The Cabinet Committee has completed its appraisal of the balance of payments outlook for 1965 and 1966. Table I, attached, shows the U.S. balance of payments since 1960, including an estimate of our deficit this year and a projection for 1966, with and without a reinforced program.2 The results of this appraisal and the recommendations for action to bring our accounts close to balance next year are set forth in this memorandum.3
1. Estimated 1965 Results
We have taken a number of steps in attempting to guard against serious fourth quarter deterioration in our balance of payments. Nevertheless, [Page 231] certain substantial outflows during October—which may still prove to be window dressing by Canadian banks prior to the end of their fiscal year on October 31, 1965 and reversible during the fourth quarter—may prove to be more than temporary. If these flows are reversed, the over-all deficit this year could, at best, total $1.3 billion; if not reversed, the over-all deficit could well run to $1.5 billion. On a regular transactions basis, the deficit would run between $1.7 billion and $1.9 billion. Table I shows the optimum results that can be expected.
The deficit on official transactions this year is difficult to predict in view of the possibility of a large fourth quarter shift between foreign private and foreign official dollar holdings.
2. The Outlook for 1966
With a simple continuation of our present program, we would expect the 1966 over-all deficit to be $1.4 billion, and the regular transactions deficit $1.6 billion. These projections, shown in Table I, allow for an increase in total Department of Defense overseas expenditures of $290 million, attributable entirely to our intensified effort in Southeast Asia. These expenditures will be only partially offset by increased military receipts. A further $200 million increase in expenditures may occur next year and worsen the projected deficit by that amount (see footnote b of Table I).
3. Immediate Decisions: The Voluntary Programs
The Cabinet Committee believes that the lion’s share of our 1966 improvement must come from a reinforced Commerce Department program.
The program recommended by Commerce calls for
- —the continuation of a voluntary approach
- —use of an over-all target for corporations similar to that of
1965 but importantly buttressed by
- (1)
- a new target designed specifically to limit direct investment, and
- (2)
- a formula which will give each company and the government a basis for judging individual company performance.
- —improved reporting and forecasting procedures, with coverage expanded to include 900 companies as against 500 at present.
The Cabinet Committee asks your approval of this proposed program, which will more specifically provide that
- —direct investment (including reinvested earnings) during the two-year period 1965–1966 be limited to 90 percent of such outflows during the three-year period 1962–1964. (This formula would allow average annual investment during 1965–1966 at a rate equal to 135 percent of the 1962–1964 annual average.)
- —the direct investment target apply not only to all developed countries (including Canada) but also to the following oil-producing countries (traditionally classified as less-developed countries):
| Abu Dhabi | Libya |
| Bahrein | Neutral Zone |
| Iran | Qatar |
| Iraq | Saudi Arabia |
| Indonesia |
The importance of the petroleum industry in the over-all direct investment picture and the size of its activities in these countries are such that the program cannot achieve results of the desired magnitude unless these additional geographical restraints are imposed. This effort should be reinforced by
—extending the Interest Equalization Tax to these areas as well.
Application of this new Commerce Department target on the expanded geographical basis proposed is expected to bring balance of payments savings of $1.1 billion in direct investment and related capital flows. This is a substantial drop from the $3.4 billion level of outflow now estimated for 1965, but it should be noted that the level of direct investment permitted is still substantially higher than the annual average outflow during the 1962–1964 period, although it is no higher than the outflow in 1964 alone.
The Commerce program calls also for continued repatriation of corporate overseas cash balances. If these repatriations amount, as expected, to $200 million, the over-all contribution of the new Commerce program next year would be $1.3 billion.
As regards the program administered by the Federal Reserve, the Cabinet Committee asks your approval of the Federal Reserve’s program for 1966 on a voluntary basis with the modifications noted below.
There can only be deep satisfaction regarding the results of the bank program during 1965—bank lending to foreigners dropped from the exceptionally high $2.5 billion levels in 1964 to an estimated $260 million in 1965.
The Cabinet Committee is keenly aware of this contribution and the need to sustain broad support of the program. It believes it highly desirable—indeed, essential—in the face of this performance not to appear to apply even harsher measures. It is also desirable now to provide some margin of lending capacity to banks now effectively precluded from foreign lending because they had little or no such lending on their books as of the base date of December 31, 1964. The Committee therefore recommends that
- —the ceiling for bank lending to foreigners be raised from 105 percent of the December 31, 1964 base by 1 percent per quarter, thus setting a new ceiling of 109 percent for end of 1966; and
- —small banks be permitted to lend up to $450,000 each, provided such lending by each bank covers U.S. exports being financed for its regular customers or provides credit to a developing country.
These revisions should materially assist in assuring that financing of U.S. exports remains adequate.
It is estimated that, under these revisions, net bank lending will rise in 1966 to $400 million, from $260 million in 1965. Of the $140 million increase, $70 million will result from lending allowed by the special provision for small banks. This modest increase in lending under the higher ceiling assumes the same high degree of bank cooperation that has characterized the past year.
As regards the program for nonbank financial institutions (insurance companies, pension funds, etc.), the Cabinet Committee recommends that
- —the tax exemption for new issues for Canada be continued without limitation as to amount (see discussion below) and that the exemption for up to $100 million of Japanese issues also be continued;
- —the Interest Equalization Tax be applied to the nine countries listed earlier in the memorandum;
- —net purchases of securities of developed countries other than Japan and Canada be limited under the Federal Reserve program during the period ending December 31, 1966, to 105 percent of the amount of such securities held by one of these institutions on September 30, 1965.
It is estimated that application of these measures, including the Canadian arrangement discussed below, will bring net balance of payments savings of at least $200 million.
3. New Canadian Agreement
Extensive discussions with Canadian officials have been held to determine how a cutback in net Canadian long-term borrowing in the U.S. can be best accomplished. We have now agreed that a cutback is in order and that this can be accomplished by Canadian action to use some $300–$400 million of its reserves (which now stand at $2.9 billion, or about $200 million above the June 1963 base used in connection with the exemption from the Interest Equalization Tax given to Canada in July 1963)4 to cover its over-all current account deficit.
The Canadians strongly and persuasively urge that we not approach the objective by setting any quota for Canada, since the establishment of such a quota runs serious risk of triggering chaos in the market and bringing about heavy losses to Canadian reserves.
As an alternative, the Canadians have agreed to
- —use some $300–$400 million of Canada’s own reserves to finance part of its 1966 deficit;
- —purchase from Americans an amount of outstanding Canadian securities, thus providing an inflow of long-term capital to the U.S. and offsetting the balance of payments impact of that amount of new security issues so as to limit the net flow of capital into Canada to the amount of its over-all current account deficit less the use of $300–$400 million of Canada’s reserves;
- —sell us $200 million of gold to provide help on that front.
Most importantly, we believe continued cooperation is assured and that Canada will fully honor its commitments and assist us in stopping any leakages through Canada.
4. Other Measures
Barring a deterioration in the underlying fundamentals, the above measures should bring us within $35 million of balance on an over-all basis, and within $220 million on a regular transactions basis, next year. The proposals relating to the voluntary programs can be announced and implemented quickly.
At the same time, the Cabinet Committee believes it important to make clear to the public that these changes by no means comprise the entire program. To reinforce the efforts described above, the following additional steps should also be taken:
- —all government agencies must intensify their efforts to hold down the balance of payments costs of their programs. AID has proposed certain additional steps which should assure some further reduction in its offshore expenditures, despite larger anticipated economic aid costs in Vietnam and Southeast Asia; against a background of climbing expenditures, the military must ensure—through cost reductions, military offset arrangements, etc.—that the deterioration in its payments is no worse than it need be; the Director of the Budget must continue to examine our many miscellaneous civilian programs for possible Gold Budget savings.
- —legislation to encourage foreign investment in the United States (the so-called Fowler Task Force bill) should be passed by the Congress as soon as possible.5
- —in the travel area, an interagency Task Force is now preparing a report to the Cabinet Committee setting forth possible measures to dampen our net losses on this account, including the possibility of cutting expenditures by government personnel abroad through an involuntary savings program. Pending completion of this study, the Discover America program must be continued and every effort made by government officials—by letter and public statement—to encourage the activities of the private sector in this field; the Commerce Department should seek additional appropriations for the U.S. Travel Service, currently operating at a marked competitive disadvantage in relation to its foreign counterparts; and the Administration should publicly endorse the efforts of the Civil Aeronautics Board to encourage all-inclusive charter tours of the United States.
- —in the field of non-agricultural exports, attention should focus on taking all appropriate measures that would intensify U.S. export efforts during 1966; in this connection, the export survey—results of which are expected to become available in February—should be carefully studied to determine what new measures in the area of export promotion would be of assistance.
- —in the field of agricultural exports, changes in the commodity export credit program, in pricing of export certificates, and further tightening of P. L. 480 programs will help produce gains, in the view of the inter-agency task force on agriculture, of up to $60 million in 1966. Easing of trade restrictions with Communist nations through removal of cargo preferences and relaxation of licensing requirements could yield another $100–$500 million in exports in 1966, and the Cabinet Committee believes efforts to encourage these sales should be made in the coming year, with particular emphasis on sales of wheat to the Soviet Union. A special Task Force now has under preparation a detailed study of this entire area for submission to the Cabinet Committee.
Potential 1966 savings from these various activities could amount to $150–$300 million.
- Source: Johnson Library, National Security File, Balance of Payments, Vol. 3 [2 of 2], Box 2. Secret.↩
- Table I, “U.S. Balance of Payments 1960–1966,” is not printed.↩
- A graph, “Dollar Outflows from Selected Accounts in U.S. Balance of Payments,” covering 1960 to 1965, is not printed.↩
- See Document 12.↩
- See Document 24.↩