312. Memorandum from Dillon to President Kennedy, November 71
I am sending to you today my third report on the balance of payments and the measures we are taking pursuant to your Message to the Congress of February 6 on the Balance of Payments and Gold. I plan to distribute this report to the several Departments concerned in order to maintain their interest and cooperation in the overall program.
These are the highlights which I think are important enough to warrant your personal attention:
1. After disappearing entirely in the first half of 1961, our basic deficit is again emerging in the second half and threatens to grow in the first half of 1962. Comparative figures are: $1.9 billion for 1960; 0 for the first half of 1961; from $2 to 2½ billion, annual rate, in the second half of 1961; and from $2 to 3 billion, annual rate, in the first half of 1962. The main reason is to be found in growing imports resulting from the demands of our domestic recovery. Exports are high but are not increasing.
2. For the moment short-term capital flow is under control. There will probably be very little outflow the rest of this year and early next year, and most of that will be of a non-speculative character. However, if the business and banking community here and abroad begins to become concerned over our widening basic deficit, speculative [Facsimile Page 2] pressures may arise once more. This underlines the importance of bringing to quick completion negotiations for the creation of the new $6 billion fund among the major industrialized countries which could be used to offset capital flows. We hope to sign up by the end of the year and obtain Congressional approval at the next session.
3. Since the entry into force last June of the prohibition on gold holdings abroad by Americans, we have received reports of sizeable illegal holdings. Reports of this kind are usually difficult to confirm but we are investigating.
4. Commerce and Eximbank have done an outstanding job in our efforts to eliminate the basic deficit. Commerce has shown imagination [Typeset Page 1396] and drive in its new export promotion program and new travel program. These should begin to have some effect in the next two years. The new export credit insurance program worked out by the Eximbank is an excellent one and should begin to show results in 1962.
5. Defense is also doing a good job, especially in the recent negotiations with the Germans which Under Secretary Gilpatric has now brought to a successful conclusion. This will mean German payments to us which fully offset our dollar military payments in Germany at current levels. A problem will arise, however, when and if our forces in Europe are enlarged further, i.e. beyond the October deployments. I am discussing with Defense the possibility of negotiating improvements in our military payments arrangements with France, where we now have a net outflow on military account of more than $300 million annually. Secretary McNamara said at the last Cabinet meeting that he was confident Defense could cut our world-wide dollar military outflow [Facsimile Page 3] in half (that is, by $1½ billion) over the next 18 months or two years. If this can be done, it will make a tremendous contribution to the balance of payments.
6. State has found it difficult to pull its weight in the export promotion program because of Congressional cuts in appropriations last year. The Administration should give full support to State in obtaining the necessary appropriations at the next session of Congress.
7. The policy of assuring maximum U.S. procurement with foreign aid money is operating effectively with one exception: rising dollar outlays for local costs in many of the underdeveloped countries. These dollars wind up in the central banks of the recipient countries and through imports from other industrialized countries are transferred to the latter where they become additional claims against our gold stock. It is hard to control this problem unless we are prepared to place reasonably stringent limits on the dollars which AID will make available for local costs in the developing countries. Treasury is working with AID on a possible formula designed to accomplish this purpose.
8. Secretary Freeman has given personal attention to the problem of liberalizing foreign trade barriers against our agricultural products and recently represented the United States in an OECD discussion on this subject. The immediate outlook for agricultural exports is not good. The main problem is cotton, where exports will be down in 1962 because of rising stocks and lower demand abroad. Meanwhile, the Department of Agriculture is considering a greatly expanded barter program which in my judgment would materially reduce further our dollar earnings from agricultural exports. These barter deals are being actively promoted by traders who gain from the large profit margins they are able to make through sales to the stockpile of imported minerals and other materials they obtain from bartered agricultural exports. [Facsimile Page 4] Such barter [Typeset Page 1397] deals are not of any direct benefit to agricultural producers but do have the support of a small but vocal group of Congressmen in the Agriculture Committees. I have expressed my concern on this matter to Secretary Freeman and we are working with Agriculture and other agencies to see if we can formulate a barter program which will not materially hurt our net dollar income from agricultural exports.
9. As I mentioned at the Cabinet meeting the other day, we need strong Administration support to get our tax haven legislation through the Congress next year. If we succeed, this could reduce the basic deficit by $250 million annually.
10. We must make a continuing strong effort involving cooperation by the White House, CEA, Commerce and Treasury in urging business and labor to maintain competitive costs and prices. I will be speaking to the Advisory Committee on Labor and Management on this problem late this month.
- Third report on balance of payments and Treasury actions. Confidential. 4 pp. Kennedy Library, President’s Office Files, Treasury, Balance of Payments, 10/61–12/61, Box 94E.↩