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

316. Memorandum from Dillon to President Kennedy, March 28¹

March 28, 1962

In view of our discussion yesterday on the balance of payments, I thought you might be interested in a capsule version of my thoughts as to how and when the problem can be solved.

In the first place, we do have a definite plan of attack. It is not simple since the problem is many sided. The first and probably most important variable in the situation is the size of the average basic deficit which we must aim to cure. It is my view that this figure is about $2.5 billion on a conservative basis. As you recall, the basic deficit last year was $600 million whereas it was $1.9 billion the year before and $4.3 billion the year before that. The $2.5 billion figure can be arrived at from last year’s results by disregarding the $700 million we received in advance repayments of foreign debts and by decreasing our commercial trade surplus from the actual $3 billion figure to $2 billion to make allowance for $1 billion of the surplus in the first half of last year which was due primarily to an unusually low, recession induced, level of imports. With these adjustments, which assume an average commercial trade surplus of the same order of magnitude as we achieved during the last half of 1961, our basic deficit for last year would be $2.3 billion which is rounded up to $2.5 billion to be on the safe side. It must be realized that this $2.5 billion average deficit is not an absolute figure but rather the median point around which the actual deficit will swing based on the state of business conditions in Europe and the United States. Changes in these conditions could be expected to produce swings of $1 billion or so in either direction in our commercial trade surplus. This means that we are now operating with a basic deficit ranging from $1.5 billion to $3.5 billion and that what we are trying to do is to change this area by a $2.5 billion improvement to one ranging between a deficit of $1 billion and a surplus of $1 billion depending on business conditions.

It should be possible to achieve this $2.5 billion improvement by calendar year 1964, with steady improvement on the way. This can be done in accordance with the following table:

	Recent Average(in millions)	New Program(in millions)	Improvement(in millions)
Military expenses	$3,000	$2,000	$1,000
Net long term capital flows	+$300	+$800	$500
Foreign aid	$1,300	$1,000	$300
Commercial trade surplus	+$2,000	+$2,700	$700
TOTAL IMPROVEMENT			$2,500

The savings in military expenditures can be broken down as follows:

	(in millions)
Increased German purchases	$500
Increased offset purchases by others:Italy, France, etc.	$100
Decrease in uranium purchases	$100
Procurement shifted to United States	$100
Reductions in logistic costs (fewerpersonnel, closing bases, etc.)	$100
Total identifiable	$900
General goal agreed by Secretary McNamara	$1,000
Still to be identified	$100

The most likely areas for finding the remaining $100 million are in offset agreements with France and Italy.

The $500 million saving in capital flows would be accounted for by roughly a 10% increase in the repatriation of earnings to this country coupled with a 10% decrease in investment overseas. These results will depend on the enactment of your original foreign tax proposals including the elimination of deferral for all foreign income in the industrialized countries. The present version of the tax bill now before the House would accomplish about half of this result.

The reduction in foreign aid dollar expenditures will require continuing attention and effort on the part of AID. State and AID have just about agreed with us that $1 billion is an appropriate target as an overall ceiling for dollar expenditures but it will require close attention and continued effort on the part of all hands in State and AID to succeed.

The $700 million figure for an improvement in our commercial surplus represents approximately a 2% shift in the overall total of exports and imports which is currently running around $33 billion a year. If it is thought of only as an increase in exports, it would involve approximately a 4% increase from our current level. This is the item which is most difficult to be specific about since in the final analysis it depends upon the efforts of private business. However, if we are successful in maintaining price stability and if the investment credit is enacted, the extra efforts of the Departments of Commerce and State in this field plus the new facilities for export credits should be able to produce an improvement of this nature by the end of 1963. Included in this $700 million is $100 million for reduction in tourist expenditures abroad which customs statistics indicate to be a reasonable estimate of the results of the reduced duty free allowance.

As to timing, the bulk of the savings in defense should be available for calendar year 1963, as should the savings in capital flows, provided the tax bill is enacted in satisfactory form. I would expect the hoped for improvement in exports and the savings in our foreign aid program would require a year longer which is the reason we aim for a balance in 1964.

This takes no account of short term flows which include the most volatile and dangerous elements in our payments situation. These can only be handled by maintaining confidence in the private holders of dollars and by maintaining a reasonable equilibrium between short term rates in the United States and abroad.

Douglas Dillon

1. Time frame/solutions to balance of payments problem. Secret. 4 pp. Kennedy Library, President’s Office Files, Treasury, Balance of Payments, 1/62–8/62, Box 94E.