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

31. Action Memorandum From the President’s Assistant for National Security Affairs (Kissinger) to President Nixon¹

Washington, November 28, 1969.

SUBJECT

• Balance of Payments Program for 1970

At Tab A are recommendations from Secretary Kennedy for next year’s balance of payments control programs on foreign investment by U.S. companies and banks.² An early announcement is needed to permit the companies and banks to develop their own plans in light of the new program. I have checked this memorandum with Arthur Burns.³

Level of Restraint

Secretary Kennedy, with the concurrence or acquiescence of all relevant parties, recommends a modest liberalization of the present controls on foreign investment by U.S. firms:

1. An increase in the level of foreign investment for each firm exempted from the controls, from $1 million to $3 million.

2. Exemption from control of an additional $2 million per firm for investment in LDCs.

These steps represent a compromise between the preferences of some for more liberalization and the preferences of others for less. They would:

• —Eliminate about 350 companies from coverage by the Commerce program, which would be popular politically.
• —Risk an increase in capital outflows of up to $600 million. (The net effect on our balance of payments would be decidedly smaller because any additional capital outflows would generate additional U.S. exports.)
• —Risk foreign policy problems, if our balance of payments turns sour enough next year to require us to take tough unilateral actions—such as suspension of the gold convertibility of the dollar—since we might be blamed for creating the problem ourselves by relaxing our defensive measures.

Five other options were considered:

1. Tightening of the controls. (This would signal a new policy direction for the Administration, contrary to our basic philosophy of freer trade and payments.)

2. No change from 1969. [This would disappoint some businessmen but would reduce the risks cited above. It was initially preferred by the Budget Bureau and the Federal Reserve. It is strongly opposed by CEA (Tab B).]⁵

3. Liberalization on investment in LDCs only. (This is strongly supported by Arthur Burns, who would increase the level of investment exempt from control to $5 million for LDCs only.)

4. Slightly greater liberalization than finally proposed by Secretary Kennedy, by eliminating the present program’s preferential treatment from LDCs in addition to the two steps proposed by Secretary Kennedy. (Its gross payments effect of up to $900 million would run greater real and psychological risks but would be better received by some businessmen. It is preferred by Secretary Stans.)

5. A large reduction or complete elimination of the controls. (This was deemed by all as too risky in view of next year’s unfavorable balance of payments outlook.)

Treatment of LDCs, including Latin America

In your speech on Latin America, you said that, “We are examining ways to modify our direct investment controls in order to help meet the investment requirements of developing nations in Latin America and elsewhere.”⁶

Secretary Kennedy’s proposal would redeem that pledge by the increase in the overall restraint level and the preferential “minimum allowance” for investment in LDCs. Arthur Burns’ proposal would do so to an even greater extent, by providing a greater degree of LDC preference and less cumbersome rules to implement it.

Tightening of the controls or the “no change” option would clearly not redeem your pledge. Neither would Commerce’s proposal, which would eliminate the favored treatment for LDCs under the present program.

Recommendation:

That you approve the proposal of Secretary Kennedy, agreed or acquiesced in by Arthur Burns, Secretary Stans, and all other relevant parties, for modest liberalization in 1970 of our controls on capital outflows by U.S. corporations and banks.

Approve⁷

Prefer no liberalization, as initially proposed by the Federal Reserve and the Budget Bureau. Prefer slightly greater liberalization as initially proposed by Commerce.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 309, Balance of Payments. Confidential. Attached to Document 32.
2. Secretary Kennedy’s November 19 memorandum and its attachments, including an undated memorandum from Secretary Stans, are not printed. An earlier version of Secretary Kennedy’s memorandum, dated November 5, did not go forward to the President. (National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 309, Balance of Payments)
3. An earlier version of this memorandum was forwarded to Kissinger under cover of a November 20 memorandum from Bergsten, in which Bergsten noted that he had discussed the memorandum to the President “at length” with Burns and had “cleared” it with him. (Ibid.)
5. Brackets in the source text. Tab B, McCracken’s November 11 memorandum for the President, is not printed. He noted that “maintaining the momentum towards our goal of a more free and open economy … should be a primary objective of economic policy … [but] the outlook for our balance of payments is not rosy enough to permit complete abandonment of these programs, but neither is it so bad that we cannot do anything at all.” McCracken’s recommendation was to “urge … that a further modest step be taken soon.”
6. For text of the October 31 address, see Public Papers of the Presidents of the United States: Richard M. Nixon, 1969, pp. 893-901.
7. The President initialed his approval of the first and second options. Prefer liberalization for investment in LDCs only, as preferred by Arthur Burns. (I would find this fully acceptable.)