Foreign Relations of the United States, 1961–1963, Volumes VII, VIII, IX, Arms Control; National Security Policy; Foreign Economic Policy, Microfiche Supplement

315. Memorandum from Dillon to President Kennedy, January 18¹

January 18, 1962

SUBJECT

• Fourth Quarter Balance of Payments Figures

Sunday’s Herald Tribune front page story referring to a large fourth quarter payments deficit was unfortunate since it gave an exaggerated picture of the situation on the basis of incomplete and tentative data. It also failed to focus attention on the improvement in the basic deficit, which is a much more important indicator of the underlying position of our international accounts. Instead it highlighted the over-all deficit which includes for the fourth quarter a variety of short-term capital flows some of which we suspect should not be included in our deficit at all.

Reliable figures for the fourth quarter are not likely to be available until early or mid-February. Our best guess is that the fourth quarter will show an unadjusted over-all deficit of $1.2 billion, a substantial increase over the $900 million in the third quarter. The seasonally adjusted figures would be $1.4 billion compared with $800 million. However, the basic deficit for the fourth quarter is now estimated to be somewhat smaller than the $670 million for the third quarter. What appears to have taken place was a sudden increase in short-term capital movements in the fourth quarter as compared with a very small outward movement (about $100 million) in the third quarter. Much of this shift may well be accounted for by the timing of the flow of payments and receipts passing through our balance of payments accounts. We also suspect that the large fourth quarter movements may include some deposits by Americans of dollars in Canadian banks which then reinvest the funds in our own money market through their New York agencies. There is some doubt whether such balances should be included in our deficit figures. We are working with the Commerce Department in an effort to analyze this problem further.

The presentation of our balance of payments statistics presents an important public relations problem. We have been able to obtain some improvement in the standard tables published by the Department of Commerce but there is a considerable distance to go. In particular, it is important that the Department of Commerce introduce in its tables the concept of the basic balance which has been used in a number of your statements, in my speeches, and in the economic report of the CEA. At the same time, we must be careful to leave no impression that there is any attempt to juggle or conceal figures. We are discussing this whole question with the Department of Commerce in connection with its publication of the fourth quarter and full year 1961 payments figures which will be made available in the next six weeks or so.

Despite the increase in the deficit during the fourth quarter there was no undue pressure on the dollar in the exchange market and no significant gold transactions apart from the special sale of about $300 million to the United Kingdom at the time they also made a repayment to the International Monetary Fund. Private foreign investors continued to build up their liquid dollar assets during the quarter. This is a sharp contrast to the experience in the fourth quarter of 1960, when the overall balance of payments deficit was also $1.2 billion. At that time private foreign investors reduced their dollar holdings by over $500 million, the dollar was under severe pressure in the exchange markets, and our gold losses were heavy.

The best picture we have of the 1961 results, compared with 1960, is provided by the attached table. As you can see, the basic deficit will probably be about $500 million for the year, compared with $1.9 billion in 1960, and the over-all deficit may be $2.4 billion compared with $3.9 billion in 1960. In 1961 the increase in official monetary authorities’ dollar holdings plus their gold acquisitions will probably be only $1.1 billion, whereas in 1960 almost all the deficit of $3.9 billion resulted in foreign official acquisitions.

Despite the fact that, compared with 1960, the 1961 balance of payments will show a reduction of about 2/3 in the basic deficit, a reduction of about 1/2 in the gold outflow, and a decline of over 1/3 in the overall deficit, the large fourth quarter overall deficit may be disturbing to the market as the figures become more generally available. We are alert to the possibility that this may in itself stimulate additional short-term capital flows.

Douglas Dillon

Attachment

U.S. BALANCE OF PAYMENTS (millions of dollars)

	1960	1961	(Tentative)
Commercial merchandise surplus	2,867	3,300
Commercial services surplus	1,664	1,800
Commercial surplus: goods and services	4,531	5,100
Net military expenditures abroad	−2,713	−2,600
Economic aid expenditures abroad and contributions to regional and international institutions	−1,226	−1,350
U.S. net private long-term investment	−2,5441	−2,350
Other net non-trade payments	+80	+7002
Net non-trade payments	−6,403	−5,600
Basic balance (i.e., balance on current, long-term capital, and government accounts)	−1,872	−500
U.S. private short-term capital flows less foreign commercial credits to U.S.	−1,409	−1,100
Errors and Omissions, including capital flows (outflow (−))	−648	−750
Overall “deficit”	−3,929	−2,350
(Of which on official monetary account)3	(−3,683)	(−1,100)
1 Includes $370 million single direct investment transaction involving cash payments abroad.
2 Reflects special debt prepayments to the U.S. Government of $649 million.
3 Not seasonally adjusted.

1. “Fourth Quarter Balance of Payments Figures.” Confidential. 3 pp. Kennedy Library, President’s Office Files, Treasury, Balance of Payments, 1/62–8/62, Box 94E.