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

89. Memorandum From the Executive Committee of the Cabinet Committee on Balance of Payments to the Committee¹

Washington, undated.

SUBJECT

• A program of measures to reduce the 1966 potential deficit

Your Executive Committee has undertaken a thorough review of all the balance of payments accounts, seeking to develop a program which could be used to reinforce existing measures and assure a reduction in whatever deficit may be in prospect. The Executive Committee does not have a new forecast of the balance of payments for this year and believes that it is impossible, at this time, to bring forward any precise estimates. However, there seems to be a strong probability that the likely deficit will need sharp trimming. We are seeking to devise a program of additional measures that might gain savings in the order of $1.5 billion this year. The results are set forth below.

Measures to be acted upon immediately

(1) As regards Government expenditures:

(a) AID should explore the most feasible means of reducing the impact of expenditures on the balance of payments below the forecast made in last December’s program. (Background Information: AID has undertaken a review of its activities to determine the implications of securing a $100 million reduction in the balance of payments impact of its program. Mr. Bell may wish to comment on this item.)

(b) Military expenditures (net) should be brought back to the $1.8 billion level forecast in the December program (a reduction of $350 million from the January forecast). (Background Information: The January forecast showed net military expenditures abroad rising to $2.15 billion. Secretary McNamara may wish to comment on this item and the implications of the $350 million cut in anticipated net spending. A significant part will involve purchases in the United States of petroleum and petroleum products; action is underway to confer with Secretary Udall to discuss domestic production allowables.)

(c) Negotiations looking to offset agreements should be undertaken with Spain and Japan as quickly as possible. (Background Information: A full offset with Spain over a 5-year period is now in effect so that there is no occasion to negotiate further on an offset. However, Spanish military requirements are substantial and there is expectation that additional sales of military equipment will in fact take place. As regards Japan, it is proposed to send a group to Tokyo to initiate discussions looking toward an offset arrangement in conjunction with discussions seeking to obtain some debt prepayment or investment of Japanese reserves in non-liquid liabilities of the United States, or both. For this purpose, a Treasury, State and Federal Reserve Mission visiting the Far East, under 2 (b) below, will be joined in Tokyo by DOD representatives. Negotiating instructions have been prepared—copy attached.)²

(d) Every effort should be made to gain maximum advance payments during 1966 under the German offset agreement. (Background Information: The German offset provides $1,350 million for FY 1966–FY 1967 combined. Arrangements are close to completion that will assure receipt by the United States of $721 million in CY 1966. This requires a special arrangement with the Central Bank of Germany since German budget availabilities would not cover these payments. It is contemplated that, at an appropriate time, we will explore with German officials the possibility of some debt prepayment, taking advantage of the same type of arrangement.)

(e) Gold budget controls should be made effective to assure over-all expenditure ceilings held to absolutely essential levels, with effective review procedures. (Background Information: Budget Director Schultze may wish to comment on the status of the gold budget review.)

(2) As regards foreign debt to the U.S. and foreign central bank reserve portfolios:

(a) Negotiations should be promptly undertaken to obtain as much further World War II debt prepayments as possible. (It does not seem realistic to expect to obtain more than $300 million.) (Background Information: Debt outstanding includes Austria, $47 million; Belgium, $73 million; Britain, $4 billion; France, $392 million; West Germany, $225 million; Italy, $144 million; Japan, $786 million, of which $409 of GARIOA account; Netherlands, $66 million; Spain, $412 million. It is anticipated these negotiations will be undertaken very shortly after the meeting of the Group of Ten Deputies in Washington on April 19.)

(b) Negotiations be undertaken immediately with other countries, including Taiwan, Philippines, Korea, Japan, Thailand and Vietnam—all recipients of increased military expenditures in Southeast Asia—as well as Mexico and Venezuela, to gain investment of as much as possible of their official reserves in non-liquid liabilities of the U.S. ($200 million). (Background Information: Information on recent changes in reserves holdings of the five Southeast Asian countries—excluding Vietnam—is contained in the attached cable of instructions (Circular 2034, April 16, 1966). Defense expenditures in the five countries are expected to increase $150 million from calendar 1965 to calendar 1966. A special task force has been established in connection with financial problems in Vietnam and measures, if feasible, to handle its reserves will be dealt with as part of the over-all problem.)

(3) As regards travel expenditures:

(a) Centralized program management be promptly adopted under the U.S. Travel Service to coordinate the Government travel program, perform liaison with States and the private sector and administer all funds directed toward promoting tourism in the U.S.; to this end, all agencies should support the request for a larger budget for USTS before the Congress. (Background Information: Correspondence between Secretary Fowler and the Vice President regarding this matter is attached.³ Commerce has prepared a memorandum describing how the efforts of USTS would be made more effective with annual budgets of $4.7 million, $10 million, and $15 million and, in the case of the $15 million budget, an expanded mission involving both the promotion of international and domestic travel. Secretary Connor may wish to comment on these alternatives.)

(b) In conjunction with a possible travel tax, renewed consideration should be given to obtaining powers for contingent use of a higher interest equalization tax (savings could amount to $50–$100 million) and also for broadening its coverage to direct investment (in which case savings could be much higher).

(c) Renewed consideration should be given to a tax on travel abroad. (Background Information: A technique for imposing a tax has been developed which would impose a per diem tax on travel abroad—$6 per individual per day—with the requirement that $100 be deposited before departure from the United States. Foreign exchange savings could amount to roughly $600– $1,100 million. For the Caribbean, Canada and Mexico, the deposit would be $50 per individual. The maximum would be set at $540 per trip per individual. The tax could be made progressive by imposing the tax at a daily rate of 1/10 of 1% of the individual’s adjusted gross income for tax purposes with a minimum of $6 per day and a maximum of $50 per day. A lower tax rate would of course bring less savings. Consideration would need to be given to measures that would ease the very sharp impact on the travel industry in the United States.)

(d) A proposal to cut the customs duty-free allowance from $100 to $10 should be submitted to the Congress ($20–$30 million in 1966; up to $100 million in 1967).

(4) As regards private capital:

(a) Direct investment outflows should be held to the $2.4 billion level or lower (to be sought through individual consultations rather than a public change in the program).

(5) As regards exports and imports:

(a) The Export-Import Bank has developed a number of steps, including a limited rediscount facility, to reinsure the availability of export financing. The proposed steps should be introduced promptly.

(b) Emphasis should be given to the need for U.S. businesses to remain export conscious and to insure that an appropriate part of output continues to be sold abroad—over the longer run, this is essential to maintaining markets.

(c) Export consciousness should be reinforced throughout our missions abroad, including aggressive effort in aid recipient countries, to reinsure the effectiveness of “tying” and to help gain additional markets. (Background Information: AID has prepared a memorandum on this subject, and Mr. Bell may wish to comment on it.)

(d) The United States must be in a position to respond if the Soviet Bloc offers to make further purchases of wheat in the free world. In the immediate case, a method of subsidized transport costs to overcome the 50–50 shipping requirement must be available.

(e) Consideration should be given to raising the export price of wheat further upward if the 1966 crop outlook makes it feasible.

(f) Maximize sales from stockpile. (Background Information: Items which we import and which are in stockpile surplus include: aluminum, $700 million; bauxite, $85 million; lead, $400 million; nickel, $225 million; rubber, $475 million; tin, $325 million; and zinc, $380 million.)

Further Studies

The following studies are underway and should be agressively pursued over the next few months:

(1) A four-country study relating U.S. exports to aid status.

(2) Review of the NEEC Task Force reports for possible further measures to enhance export potential.

(3) Study of industries to determine export potential and means of enhancing likelihood of realizing the full potential.

(4) Analysis and evaluation of the interrelationship between exports and private direct investment.

1. Source: Department of State, Ball Papers: Lot 74 D 272, Balance of Payments. Secret. The memorandum was sent under cover of an April 18 memorandum from Assistant Secretary of the Treasury Trued to the Cabinet Committee on Balance of Payments. Trued informed the Committee members: “Secretary Fowler has asked me to send you the attached material which will form the basis for discussion at tomorrow’s Principals only meeting of the Cabinet Committee on Balance of Payments. The meeting will take place at 10:30 a.m. in the Secretary’s conference room.” Minutes of this meeting have not been found, but see Document 90. Copies of this memorandum were sent to Vice President Humphrey and Chairman Martin of the Federal Reserve System.
2. Circular telegram 2034, April 16, is attached but not printed. A copy is also in Department of State, Central Files, FN 12 US.
3. The correspondence consists of two memoranda, both from Vice President Humphrey to Secretary Fowler, one dated April 13 and the other dated March 25, which includes a draft letter from Fowler to Vice President Humphrey. These memoranda are not printed.