88. Minutes of Meeting of the Cabinet Committee on Balance of Payments1
The following persons were present:
- Treasury Dept.—Secretary Fowler, Under Secretaries Barr and Deming, Assistant Secretary Trued and Mr. Schaffner
- Defense Dept.—Secretary McNamara and Mr. Robert Kovarik
- Commerce Dept.—Secretary Connor, Mr. Gerald Pollack, and Mr. Lawrence McQuade
- State Dept.—Under Secretary Mann, Mr. A. Solomon, and Mr. Cooper
- Agriculture Dept.—Under Secretary Schnittker and Mr. Koffsky
- AID —Mr. Gaud, Mr. Gustav Ranis, and Mr. Gordon Chase
- Trade Negotiations—Governor Herter and Mr. Malmgren
- Budget—Assistant Director Zwick, Mr. R. Richardson
- CEA —Chairman Ackley, Mr. Arthur Okun, and Mr. Frank Schiff
- White House—Mr. F. Bator
- Federal Reserve—Chairman Martin, Governor Daane, and Governor Brimmer
The Secretary said that major changes since last November’s forecast of the 1966 situation resulted from the Vietnam situation and the trade outlook; that it was prudent to plan for a lower trade surplus than had been forecast. He wanted to present additional steps involving $1–1/2 billion of balance-of-payments savings this year for the President’s consideration about a month from now.
Secretary McNamara said that DOD expenditures abroad were now estimated at about $350 million higher for 1966 than contemplated last November. (The $350 million includes the “up to $200 million” which was footnoted in last November’s projection.) The Secretary said that there was no possibility of reducing deployment of troops abroad, but there were possibilities of increasing procurement of U.S. goods. Petroleum purchases could be shifted back to the United States, although at a 125% increase in price. Altogether, he felt that it might be possible to save $125 million of expenditure in Southeast Asia during calendar year 1966 by returning to the U.S. procurement of P.O.L., various types of equipment and supplies. He concluded by saying that Defense would try to pare $350 million off the CY 1966 projected net military expenditure abroad of $2,152.8 million, thus bringing it down to $1,800 million.
The Secretary asked whether most of the DOD increase in expenditure outside of Vietnam was due to rising prices, and Secretary McNamara assured him that it was. The Secretary then asked whether the projected $350 million balance-of-payments saving would be made despite rising prices abroad, and Secretary McNamara indicated that that was what he contemplated. The savings would include a number of measures in addition to returning procurement to the U.S.—for example, it would include any increase in voluntary savings of military personnel abroad that might be induced by higher interest rates on their savings.
The Secretary next asked about the possibilities of diverting part of the increased reserves accruing to Vietnam, Thailand, Taiwan, Korea, and the Philippines (from our military expenditures) into U.S. agency bonds. He said that State Department help in this matter would be needed and wondered whether a discreet circular to the Embassies in these countries would be useful to get the negotiations started.
Mr. Solomon said that the State Department was already trying to get the Vietnamese Government to invest in U.S. bonds (presumably agency bonds). He pointed out that DOD expenditures in Southeast Asia were over a billion dollars higher than in 1961. He and Mr. Trued would work together in developing an approach to the Governments of the countries involved.
[Page 246]The Secretary asked if anything more could be done to press offset negotiations with Japan and Spain. Secretary McNamara replied that there was no prospect for accomplishing anything with these countries this year but that he thought this should be pushed hard in the future. The Secretary then referred to the importance of obtaining maximum payments during CY 1966 from Germany under the offset agreement. Secretary McNamara said that, as far as he was concerned, the Germans would be faced in this negotiation with the prospect of “no money—no troops.”
Mr. Gaud then described recent AID efforts to achieve balance-of-payments benefits by encouraging more LDC expenditures in the U.S. He indicated they had been educating the missions to give this subject much more attention. He proposed that a committee be set up to analyze four types of countries: one group where we do well in exporting on a commercial basis and where we have a significant aid program; another where we do well but have no aid program; third group where we do poorly even though we have an aid program; and a fourth type where we do poorly and have no program.
Secretary Connor said that he would set up a meeting of the appropriate agencies to see what could be done to improve U.S. commercial markets in the LCD’s. The Secretary indicated that Mr. Herter’s office might be interested as well as State, AID, and Agriculture.
Mr. Gaud then went on to discuss dollar financing of local currency costs in AID-recipient countries. He said this problem had been reduced to a magnitude of “ten’s of million’s of dollars” and that where it was done at all, it was done under a letter of credit procedure. There was a question of how effective this tied procedure actually was, and this matter was being studied by Mr. Zwick’s committee.
The Secretary inquired whether AID could draw up a budget of maximum local cost financing for this year leaving the distribution of the total amount among various recipient countries on a flexible basis. He felt that with such a budget, it would be possible to trip individual country programs more effectively. Mr. Gaud promised to provide an estimated range for these expenditures, the countries in which they would be made, and the reasons for doing it.
With regard to expediting deliveries of U.S. goods rather than procuring offshore, Mr. Gaud said that as of March 15, AID was buying offshore only for Vietnam and Laos; and that offshore procurement for these two countries would be made only in countries where we have special AID interest and a tied letter of credit arrangement—for example, in Taiwan, Korea, Thailand, etc. Furthermore, he said that in most cases offshore procurement was limited to items of which the U.S. is a net importer. He said that the current procedure will mean more procurement in the U.S. He indicated that some items, however, would be very [Page 247] expensive if procured from the U.S. rather than offshore and in some cases transportation costs effectively ruled it out—e.g., cement.
Mr. Gaud said that he thought AID recipients could be encouraged to hold some of their reserves here and specifically referred to Tunisia as a possibility. The Secretary noted that that would make these countries realize that we had a balance-of-payments problem.
The next subject discussed was the operation of the gold budget procedure. Mr. Zwick said that the March 15 submission was the latest and that this submission had been accompanied by a Presidential reminder to each agency to take a hard look at its overseas expenditures. He said that submissions had not yet been received from State, DOD, Interior, Peace Corps, HEW, and that the submission from AID, as yet, was only an informal one. He also said that submissions by NSF, NASA, AEC, and Treasury were not complete in various respects. The Secretary indicated that he had gone over the Treasury submission and that Mr. Zwick may have not seen the most recent version.
Mr. Zwick indicated that the gold budget procedure had degenerated. Budget intended to have oral hearings on the basis of the March 15 submission with some of the agencies and to ask for hard explanations of deviations of expenditures from earlier projections. Budget would then send a report through the Cabinet Committee on Balance of Payments to the President. He felt that the State Department would have to build a “gold budget” procedure into its Embassy administrative system. He also emphasized that to get any real savings from the “gold budget” procedure required program changes. He thought that unless agencies were prepared to face up to this fact, a great deal of time and effort would be spent with no appreciable results in the form of balance-of-payments savings.
Mr. Solomon indicated that State Department was trying to have more international conferences held in Washington as a balance-of-payments measure. Under Secretary Mann indicated that there were possibilities for additional savings abroad by reducing the number of military attaches, reducing the number of administrative personnel in the Embassies, and by restricting services to American tourists. Mr. Bator said he would like to know what portion of expenditures abroad are for administrative overhead. Under Secretary Mann referred to the fact that the Veterans Administration maintains a staff in Mexico to service the handling of paychecks to U.S. retired persons there.
Mr. Zwick went on to indicate that if you take out DOD and AID expenditures abroad plus uncontrollable items, such as interest payments to foreigners, there remained about $486 million of disbursements abroad per year, of which State and USIA make $300 million. This leaves about $180 million for other agency expenditures. In answer to a question about research expenditures abroad, he said that project research [Page 248] expenditures, other than DOD, were about $30 million. Under Secretary Barr indicated that any failure to make all possible savings exposed the Government to criticism from the business community as well as the Congress.
The Secretary asked when the Budget Bureau could formulate some alternative programs designed to achieve balance-of-payments savings through some priority rating among the various overseas programs. Mr. Zwick thought this would be possible by the 15th or 20th of April. The Secretary indicated that the Committee would look for BOB suggestions at that time to consider as possible recommendations to the President.
Discussion then turned to possibilities of debt prepayments. Mr. Solomon indicated that State Department would give the Committee its estimate next week of the negotiating possibilities. The Secretary asked Messrs. Deming and Trued to work on this subject from the Treasury side. He then asked about the possibilities of increased savings from overseas personnel. He pointed out the President’s great interest in the voluntary savings promotion plan and that pressure on the military abroad to do more savings would not be discriminatory, since more pressure is going to be put on civilian personnel here at home. Mr. Mann thought that the salaries of junior State Department officers abroad were too low to offer much possibility for increased savings; but he suggested we might ask Government people here and abroad to buy U.S. automobiles instead of foreign cars.
Mr. Kovarik said that he thought with a 6% or 7% interest rate on savings, DOD could get something additional from military personnel. Mr. Kovarik and Secretary Connor emphasized that anything involuntary in the Government personnel field should be tied to some type of tourist restriction.
On the latter subject, the Secretary indicated that he understood estimated departures of U.S. tourists for Europe were up 11.6% above the first quarter of last year. He had talked about the tourist problem with the Vice President, and he thought a great number of steps could be taken to earn more foreign tourist dollars in the U.S. He thought that a centralized management within the Government was a good step in this direction. The other alternative would be to place a tax on U.S. tourism abroad or adopt a program of strong moral suasion. Under Secretary Mann inquired about what would happen to the U.S. tourist industry in Canada and Mexico if we did any such thing. He pointed out that Mexico earns $500 million a year net from its U.S. tourist trade and that any reduction of this would hurt them. The Secretary said he would welcome any comments on this subject—whether along the lines of continuing as we are, or centralizing management responsibility for promoting foreign tourism in the U.S.—something he would regard as a minimum step—or imposing a tax or strong moral suasion on U.S. tourists. He said we must [Page 249] ask Congress to cut the $100 duty-free gift limit. Secretary Connor said he would prefer a vigorous moral suasion effort to a tax. He thought such an effort would get enough citizens to thinking about balance-of-payments savings that some could actually be achieved. The Secretary asked what agency had responsibility for encouraging the holding of conventions in the U.S. Secretary Connor said that his agency did and that they had been working on this.
Discussion then turned to the subject of increased wheat exports. Mr. Koffsky said that the Soviet-bloc may not be in the market for U.S. wheat this year at all but that at any event, we will not know for a few months. If they were to come in, they might buy as much as $100 million on an annual basis. He pointed out, however, that the U.S.S.R. does not like the discrimination in cargo preference and, therefore, might try to avoid buying here at all. In the long run, he thought the solution depended on the Labor and Justice Departments. The Secretary inquired whether a long-run package involving some short-term subsidy of transport cost might be the best solution and Mr. Koffsky agreed that it would.
With regard to raising prices on U.S. wheat export, Mr. Koffsky said that they had moved the price up about 2/3rds of the $.10 a bushel that had earlier been mentioned. When the 1966 crop outlook is more clear—around the middle of the year—they would hope to be able to move up the other 1/3rd. With prices $.10 per bushel higher, the annual savings for the balance of payments would amount to about $45 million a year. He said that the over-all outlook for agricultural exports in 1966 suggested a $300 million increase over the 1965 level.
The Secretary referred to the Douglas Task Force recommendations on liberalizing export credit and guarantees and providing a special rediscount facility. Secretary Connor said there were three Task Force reports and that he felt that the chairmen should be given a chance to discuss their reports and their recommendations at an early meeting of the Cabinet Committee on Balance of Payments.2 Mr. Daane indicated that this would be satisfactory with the Federal Reserve, although they had not studied these reports. Mr. Trued suggested that it might be better to have the meeting with a smaller group of agencies having a direct interest, and Governor Brimmer suggested that, in view of the highly technical nature of many of the Task Force recommendations, the Executive Committee should take a close look first. The Secretary then suggested the following procedure. The Executive Committee should prepare a concise summary and evaluation of the issues in each report. This would be followed by a preliminary meeting of five or six appropriate agencies to get familiar with the issues. Then there could be a meeting of the Cabinet Committee on Balance of Payments with the Task Force chairmen, as [Page 250] guests, or of a smaller group of department heads. With regard to establishment of individual firm export targets, Secretary Connor said that he did not think this made much sense in connection with Commerce’s present program in view of the many problems involved in setting up export quotas. He indicated that his Advisory Committee was meeting with him on Monday, March 28, and that this subject might be further considered there.
The Secretary then mentioned the subject of stockpile disposals which he said combined price stabilization, budgetary, and balance-of-payments objectives. The Secretary asked about the feasibility of Government industry working groups to improve U.S. competitiveness from both an export and import viewpoint. Secretary Connor thought such a procedure would not be worthwhile now while the Commerce program was going on and that in fact it could lead to a lot of mischief. Secretary Connor then gave a progress report on the Commerce voluntary program. He said that small companies were having trouble with the report form that was due in mid-February under the tightened program. The data for about 500 companies, however, show that the 1965 program was a success; and that a $1.3 billion target was reached by the 500 firms. They also repatriated about $400 million of liquid assets from abroad. With regard to the 1966 program, the reports of 541 companies show figures which do not reconcile with the latest OBE figures on projected plant and equipment expenditures abroad. The latter which will be announced shortly will show a 24% higher level for 1966 than the actual for 1965; and this implies that a great deal of foreign borrowing will be necessary to meet the two-year target. The companies did show a much better performance in the last half of 1965—better than had been anticipated—so that the 1966 savings will be somewhat less than had been anticipated.
Mr. Bator asked Secretary Connor whether he thought that the OBE estimates of plant and equipment expenditures were overly pessimistic, in view of the decline in last year’s actual expenditures below the projected level. Secretary Connor thought the OBE figures might be a good indicator in a stable period but not in one of rapid change. He thought the estimate for 1966, however, might be closer to the truth than last year’s projection proved to be in view of the fact that some companies had carried over expenditures from 1965 into 1966.
Governor Daane reported that as of the end of February, 1966, banks were more than $800 million below their permissible ceiling and $255 million below the December 31, 1964, base.