30. Memorandum From the Assistant Secretary of State for Policy Planning (Smith) to the Under Secretary of State (Dillon)0
SUBJECT
- Key Country Policy Coordination and the US Balance of Payments
The recent sharp increase in the United States balance of payments deficit as a result of a large outflow of short-term funds confirms the long recognized need for closer coordination of economic policies between the key countries of Western Europe and the United States. Now that the currencies of the major industrial countries are freely convertible I believe the need for this coordination is more pressing than at any time since the war.
If such coordination existed it well might have produced the required concerted action on monetary policy to have curbed this outflow. It might, for example, have achieved concerted action on short-term interest rates here and abroad. It also might have been instrumental in dissuading the Italians from converting their dollar reserves into gold. It most certainly could have served to assure other countries that the United States had no intention of devaluing the dollar.
The need for closer economic coordination with the key countries of Western Europe promises to be of particular urgency for the United States in the months immediately ahead. Whatever progress the United States may continue to make in remedying its basic balance of payments difficulties, its reserves will remain vulnerable to short-term raids, as during the third quarter of this year, because of differences in interest rates here and abroad, lack of confidence in the dollar etc.
Such outflows if they occur, even though temporary, will complicate the solution of the longer term payments problem and pose the further risk of forcing the United States Government to adopt counter-measures which could undermine some of our important foreign policy objectives. Concern about our balance of payments situation could [Page 69] also handicap the new administration if, for example, it decides it is necessary to maintain low interest rates in order to stimulate domestic business activity.
I realize a forum for economic policy coordination between the major Western powers now exists in the Economic Policy Committee of the OEEC and will be established in the OECD. However, this forum is too large and unwieldy to yield the kind of quick action required to deal with problems such as short-term capital flows. What is needed, as suggested in Bowie’s1 report on The North Atlantic Nations Tasks for the 1960’s is a smaller more informal body possibly consisting of senior treasury and central bank officials of the United States, the United Kingdom, France, Germany and Italy. While the inclusion of Japan also might be desirable this probably would make it more difficult at this stage to enlist the full cooperation of the other participants.
Such a small high level group could provide an effective forum for consultations on a frank and open basis of all contemplated courses of action in the field of monetary and fiscal policy with a view to minimizing their balance of payments impact.
While the OEEC/OECD Economic Policy Committee is too large for the purposes discussed here there are important advantages in using the meetings of this Committee as the occasion for informal key country discussions. Among other things this would permit the group to enjoy some degree of anonymity and its consultations would not give rise to the undesirable speculation that would inevitably arise if special international conferences were convened for the purpose or a new consultative instrument was created. Moreover, if the type of economic coordination suggested here was completely separated from the OECD this would take away most of the sinew and muscle required to make the OECD a meaningful organization which the United States wishes to do.
It is therefore proposed that arrangements be made to have this informal key country group meet when appropriate at regular OEEC/OECD Economic Policy Committee sessions to discuss previously prepared agenda. Regular meetings of the Economic Policy Committee probably will be held with sufficient frequency to ensure the necessary policy consultation and coordination in the smaller group. However, if necessary, additional OECD meetings could be convened on short notice.
It is further suggested that the United States plan the first key country consultations for the Economic Policy Committee meeting which I understand is scheduled for early next year. The principal item [Page 70] on the agenda could be the development of coordinated action to minimize short-term capital flows but other related fiscal and monetary questions also might be covered.
I appreciate that the development of a United States position for such a meeting would require coordination with other interested Government agencies particularly Treasury and the Federal Reserve Bank. In view of the attitudes of the latter two agencies toward international economic policy coordination it might be desirable to delay interagency discussions until the new administration takes over. In the meantime I would suggest that the State Department establish a working group to prepare its position.
- Source: Department of State, S/P Files: Lot 67 D 548, Economic Policy, 1957–1960. Secret. Drafted by Henry Brodie of the Policy Planning Staff. Filed as an attachment to a December 16 memorandum from Dillon’s Special Assistant James C. Haahr to Assistant Secretary Martin stating that Dillon wanted him to take action on it; Haahr added that Dillon thought it was important and wanted to keep it within the Department for the time being.↩
- Former Assistant Secretary of State for Policy Planning Robert R. Bowie.↩