86. Circular Telegram From the Department of State to Certain Posts1
1544. Treasury Secretary Fowler, Commerce Secretary Connor, FRB Chairman Martin and Governor Robertson held press conference February 14 on 1965 balance of payments. Text of statements being airmailed. Key points follow: Secretary Fowler reported that liquidity deficit 1965 $1.3 billion, improvement of $1.5 billion over 1964 in very large part attributable to effectiveness of voluntary cooperation program.
1965 record plus tightening of program for 1966 give reason to believe will be continuing improvement in private capital areas. Prospect of legislation to encourage foreign portfolio investment in U.S., increase in investment income, moderation of direct investment outflows, and expanding trade surplus offer most promising areas for improvement in 1966. Main imponderables are rising balance of payments costs in Southeast Asia and direct and indirect impact of Viet Nam on domestic economy and trade. Not possible to say how these factors will affect 1966 figures. Equilibrium (balance on liquidity concept plus or minus $250 million) remains 1966 goal. U.S. cannot be certain that “present measures as they currently operate will lead us to that goal if foreign exchange costs of Viet Nam rise sharply over increases presently projected.” As of now program believed effective and see no reason to change its character.
Deficit on official settlements somewhat less than $1.4 billion. Failure private dollar holdings to grow ascribed to large increase in 1964, dollar repatriation by American firms, tightening of domestic credit in several countries, and improvement in outlook for sterling.
Adverse factors in 1965 included trade surplus which declined from $6.7 billion to $4.8 billion, tourist deficit which rose from $1.6 billion to $1.8 billion, direct investment abroad which larger although fourth quarter figure not yet available, and $500 million conversion of long-term assets into liquid assets by U.K. Government.
Favorable factors included shift in bank credit from $2.5 billion outflow to slight inflow, shift in non-bank claims on foreigners, excluding U.S. purchases of foreign securities from outflow of $900 million to inflow of around $300 million.
Secretary Connor explained deterioration in trade account by slower pace of economic activity in major foreign markets and acceleration [Page 240] in domestic economic activity. Also emphasized sharp turnabout in direct investment outflow after mid-1965, with annual rate at first half at $4.1 billion and total figure expected be well below $3.4 billion. Connor noted also borrowing by American companies in fourth quarter of about $175 million through sale of securities to foreign investors, which will be recorded in U.S. statistics. Additional sum of about same amount raised through sale of securities by subsidiaries abroad which does not affect U.S. balance of payments data. Amount borrowed by firms incorporated in U.S. can be considered partial offset to direct investment outflow.
Governor Robertson reported that foreign loans and investments of banks reporting under voluntary program showed increase for 1965 of only $155 million. Thus banking system was $320 million below target suggested by 1965 guidelines. With this margin plus additional expansion consistent with 1966 guidelines, banks expected to have more than ample leeway to accommodate all priority credit needs in 1966.
In response to question re impact direct investment guidelines on Canada, Connor said expected impact be small but planned watch situation carefully.
- Source: Department of State, Central Files, FN 12 US. Unclassified. Drafted by F.L. Widman (Treasury) on February 14; cleared by Trued and approved by Richard N. Cooper. Sent to Bern, Bonn, Brussels, The Hague, London, Paris, Ottawa, Rome, Stockholm, Tokyo, and Zurich.↩