Foreign Relations of the United States, 1969–1976, Volume III, Foreign Economic Policy; International Monetary Policy, 1969–1972

10. Paper Prepared in the Department of the Treasury¹

Washington, March 17, 1969.

TALKING PAPER ON REVISED BALANCE OF PAYMENTS PROGRAM

The Nixon Administration views with great concern the growing trend toward restrictionism around the world. Restraints on capital flows are now being reinforced by restraints on the trade account and the pressure in this area is mounting. We have not succeeded if a system of reasonable international equilibrium can only be obtained through excessive demand restraints coupled with selective restrictions. We believe that the process by which international payments between nations are adjusted must be improved in order that equilibrium relationships can be maintained without selective controls.

1. The selective controls on Direct Investment of the Johnson Administration were put together hurriedly; of necessity, inequities arose in the base periods selected. We have now had the benefit of statistical runs for 1968, and we consider it desirable and proper to make adjustments in the direct investment program which will have the effect of:

a. Substantially reducing the administrative burden, both to the Government and to the smaller corporations;

b. Providing some relief for those companies which were caught with an inequitable base period;

c. Relaxing somewhat on the restrictions on the amount of earnings retained abroad—which should help the situation on foreign borrowings:

(“Help the situation”: for us means that those companies which have had to repatriate more than 80-100 percent of earnings because of the formula will only have to repatriate 70 percent; this allowance should also help them repay foreign debt from the proceeds of their operations abroad; the Europeans if they interpret the statement favorably might see it as a slight easing of demand upon their banking resources which would help the debt “overhang” problem of our companies and also help to ease rates; others could interpret a relaxation as providing all the more money for takeovers.)

2. The Interest Equalization Tax, as you know, was created to remove the interest incentive which the lower money rates in New York usually allowed over comparable rates in European markets.

It seems to us that under present circumstances and with the tight money conditions in the U.S. that an adjustment in the IET rate is warranted. Congress gave us flexible authority to vary the rate with money conditions and since this is a unique delegation of authority we must use it when conditions warrant; otherwise, when we go to extend this legislation next year, Congress may withdraw that power.

3. The Federal Reserve Program has hit pretty hard the small and medium-sized banks who were left without a base period, and we may announce some modification or changes designed primarily to make the regional banks be more active in promoting exports.

Any attempt to put a balance of payments price tag on these intended steps would be misleading because the numbers involved in adjusting the targets in these complicated programs are difficult to translate into year-end balance of payments results. Basically, we have had the approach of not making the changes so small that they are unnoticeable; nor so large that they demonstrate a lack of caution.

Conclusion

Increasingly, our main thrust in balance of payments adjustment will be upon general measures rather than selective controls. There is no doubt about the determination of this Administration to recreate a proper balance in our economy. We will employ monetary and fiscal policy to the extent necessary and for as long as necessary to achieve this type of economic order. While we will be reversing the trend toward restrictionism by our intended modest relaxation we know full well that until general restraints have done their task, selective controls cannot be abandoned.

1. Source: Washington National Records Center, Department of the Treasury, Office of the Assistant Secretary for International Affairs: FRC 56 76 108, Studies and Reports, Volume 7, 2/68-11/69. Confidential. The paper, which bears no indication of a drafter, may have been prepared for the President’s meeting with the Economic Quadriad on March 18 (see Document 12) or for Volcker’s European consultations (see footnote 4, Document 8).