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

318. Summary Minutes of Interdepartmental Committee of Under Secretaries on Foreign Economic Policy Meeting, June 13¹

June 13, 1962

PRESENT

• Mr. George C. McGhee, Under Secretary of State for Political Affairs (Acting Chairman)
• Mr. Joseph D. Coppock, Director, Foreign Economic Advisory Staff, Department of State (Executive Secretary)
• Mr. William B. Dale, Deputy to Assistant Secretary for International Affairs, Department of Commerce
• * Mr. Henry H. Fowler, Under Secretary, Department of the Treasury
• Mr. M.D. Goldstein, Chief, International Finance Division, Department of State
• Mr. J.A. Griffin, Economist, Office of International Finance, Department of the Treasury
• * Mr. Edward Gudeman, Under Secretary, Department of Commerce
• Mr. Ralph Hirschtritt, Chief, British Commonwealth and African Division, Department of the Treasury
• Mr. G. Griffith Johnson, Assistant Secretary of State for Economic Affairs
• Mr. John M. Leddy, Assistant Secretary for International Affairs, Department of the Treasury
• Mr. Irving J. Lewis, Deputy Chief, International Division, Bureau of the Budget
• Mr. Davy H. McCall, Budget Examiner, Bureau of the Budget
• Mr. Robert L. Oshirs, Director, Office of International Investments, Department of Commerce
• Mr. Morton Pomerans, International Activities Assistant, Technical Review Staff, Department of the Interior
• Mr. H.F. Reynolds, Senior Staff Coordinator, Program Review and Coordination Staff, Agency for International Development
• Mr. J.H. Richter, Economic Adviser, Foreign Agriculture Service, Department of Agriculture
• Mr. Harry Weiss, Deputy Assistant Secretary for International Affairs, Department of Labor
• Mrs. Ruth S. Donahue, Chief, Policy Reporting Staff, Bureau of Economic Affairs, Department of State (Recording Secretary)
• * MEMBER

International Private Long-Term Capital Movements and Markets

The Problem

Under Secretary of State McGhee, who chaired the meeting, said that the subject of long-term private capital movements is of very great interest. One reason for our interest is the effect such movements have on the balance of payments. In addition, many industries, such as petroleum, are dependent on complete freedom of movements of capital. We are repeatedly approached by people about how our inflow-outflow position could be improved. The Business Council has been looking into this and wants to change the tax bill.

Commenting on the excellent Treasury paper, “Private Long-Term Capital Movements,” Mr. McGhee hoped the discussion would include what we can do to affect the inflow-outflow to our advantage. Also, what international forum, if any, should be used to discuss it. There seems to be a need for us either to restrain other countries from raising money in our markets or be permitted to raise money in their markets, he said.

Presentation

The Balance of Payments Problem

Under Secretary of Treasury Fowler made an over-all presentation of the subject, pointing out that with the balance-of-payments problem having the history and duration that it has had, as a Government we have to examine all the factors. In dealing with the balance-of-payments problem, it is necessary to consider the relationship to foreign policy and the world security situation. For discussion today, Mr. Fowler said, private long-term capital movements come under scrutiny as one of the important components in the balance-of-payments picture.

Mr. Fowler made some general remarks on the U.S. balance-of-payments situation. He referred to the distinction now being made which shows the commercial exports of goods and services (exclusive of those financed by government grants and bans) at about $5 billion in 1961.

He pointed out that military expenditures abroad are a powerful factor in the imbalance. Defense has under way a very thorough-going and effective operation to cut down the drain that military expenses abroad are causing. A large part of the Defense effort has been concerned with arrangements with West Germany for purchases in the U.S. For the next year it appears as though the net impact of our military transactions abroad figure will be cut down from $2.6 billion in 1961 to $1.7 billion.

Foreign aid is the next most important item, and it will take a good deal of vigilance on everyone’s part to keep down that portion of aid not spent for U.S. goods and services, although a good deal of progress is being made.

Private Investment

The third thing in the balance-of-payments picture is U.S. long-term direct and portfolio investment. Figures of the last few years are impressive, particularly when one looks at the other side of the ledger—foreign investment in the U.S., both direct and portfolio, and the fact that there is still a sizable system of restrictions which obstruct the use of foreign capital markets. If the restrictions of other countries were removed however, there is still a question of whether the inflow would tend to equate the outflow. Mr. Fowler said he receives different prognostications of the course of foreign investment when he talks to business representatives. Some say that this is the beginning of a process of investing abroad; others say that long-term capital outflow is going to top out.

European capital markets are not as well organized to deal with the capital raising process as is our New York market, and interest rates for long-term money in the U.S. still look fairly attractive compared with rates in Europe.

Present US Outflow and Prospects

Assistant Secretary of Treasury Leddy then discussed the Treasury paper dealing with long-term private investment.

He summarized the 1961 balance-of-payments picture, which showed a commercial surplus in 1961 of goods and services, exclusive of aid aspects of exports, of approximately $5 billion. These and other receipts had to finance military expenditures, aid spent abroad and capital outflow.

a. Military

The military net figure was $2.6 billion (gross outflow, $3 billion, minus $400 million of sales). On the basis of Defense Department plans, Treasury estimates this figure can be brought down to $1.7 billion.

b. AID

The AID net outflow was $1.3 billion exclusive of AID-financed US exports. This figure is composed of transfers to international institutions and direct cash transfers to countries under aid programs. This is a difficult area in which to reduce the outflow, but our objective is to get this figure down to $1 billion. Many of the problems involve local currency financing, but we may be able to see that some of the dollars provided for this purpose are spent for U.S. exports.

Private remittances and pension payments which are continuing and run at about $900 million.

Against the background of these facts, the figures on private long-term investment show $2.1 billion net outflow in 1961.

As a result of these various movements, the U.S. had a deficit last year of $600 million.

c. Private Long-Term Investment

From the tables in the Treasury paper, it can be seen that over the past 5 years about 60% of the outflow in long-term private investment was for direct and 40% for portfolio. Since 1958, there has been an upward trend in U.S. direct investment while portfolio investment has remained flat through 1961.

Selected years from the chart show that new outflow of direct investment moved up from $1.1 billion in 1958 to $1.5 billion in 1961, whereas portfolio net remained at about $600 million. The tendency of direct investment to increase reflects an increase in manufacturing investment and a decrease in petroleum investment. This trend is also reflected in the geographic pattern—an increase in direct investment in Europe and a decline in Latin America. There is increasing direct investment toward the EEC, but investment in the UK remains still higher than the EEC. The outflow from the U.S. in direct investment to the EEC in 1956 was $140 million and in 1960 it was $282 million; to the U.K. it was $278 million in 1956 and $589 million in 1960. The latter figure, however, included the Ford transaction of $367 million.

The first quarter of 1962 shows an increase in the portfolio sector, mainly because of foreign bond issues in our market. In 1961 issues of such securities in our market totaled $269 million. So far in 1962 they total $400 million. While interest rates are lower here than in Europe, foreign use of the U.S. capital market is not just a question of interest rates. There is also the matter of availability of markets and that is why we are putting so much stress on Europe to develop its own capital markets.

Over-all, in the first quarter of 1962, the total private long-term investment, direct and portfolio, is just about where it was in 1961. The total has not gone up.

European Inflow-Outflow Picture

In 1961 the UK outflow (gross figure) was $1 billion and the EEC outflow was $1 billion. (This compares to a total of $2.5 billion for the U.S.) But the EEC inflow was $1.6 billion, so that there was a net inflow to the EEC of around $650 million. Much of the European outflows, probably at least half, were to other EEC countries.

U.S. Policy and Objectives

Mr. Leddy said that the U.S. Government has been resisting strongly the concept of placing controls on outflow of capital. Restrictions in that area would bring about a more restrictive policy in other areas. On the other hand, we have been urging that the Europeans do something themselves on removing the restrictions that they still have in effect and on developing their own capital markets. These actions are being pursued basically through the OECD. The first important public announcement made on this was by Secretary Dillon in his Rome speech.

European responses have been mixed. The Germans and Swiss have been helpful. Following Dillon’s speech, Carli of the Bank of Italy said Italy should remove some of the restrictions of its foreign investments by Italians. The French and Dutch and certainly the U.K. still tend to think in terms of controls. The U.K. in its present circumstances is not in a position to give up direct controls. Mr. Leddy pointed out that even if we get every hopeful progress, this is an area which will take quite a while for results since there are still the institutional arrangements in Europe which will take considerable time to change.

Discussion

Tax Legislation

Mr. Fowler was asked how Treasury anticipated the tax legislation would affect the outflow and pointed out that it is only one element in the situation. Noting that there is strong pressure by some at home and abroad to impose controls on direct investment, he said the policy of this Government is to avoid such controls.

However, the least we can do as a response to this situation, Mr. Fowler said, is to try to adjust the tax laws so we can honestly say that they are not adding to the incentives to invest overseas. Those incentives exist particularly in the European area and will continue to exist, even when the tax incentive is abolished.

Mr. Fowler referred to the differences in sentiment on the tax haven problem which is more readily accepted in Congress compared to the great resistance to the Administration’s proposal to eliminate the right of tax deferral on overseas investments. This was rejected by the House Ways and Means Committee, and the tax provision is now basically anti-tax haven. There is strong sentiment in the Senate Committee that something should be done, but that Committee may not go all the way to eliminate deferral.

Assessment Needed of Political Reaction to U.S. Investment

Mr. Fowler noted that the discussion had raised a political question of whether there is any substantial danger that a continued flow of American industrial capital into the Western European market would ultimately produce a political situation reminiscent of the recent reactions in Canada to our investment there? It was noted that the French have raised some questions about U.S. investment. Mr. Goldstein also observed that advanced European countries main capital controls to get the kind of investment flow that they want.

Mr. McGhee said that the State Department would take a look at this problem.

Program for Promoting U.S. Securities in Europe Suggested

Mr. Gudeman and others suggested it might be well for the U.S. Government to get American securities offered in Europe, either for dollars or for European currencies. Bearing in mind that it will take a long time to organize European markets, it was suggested that American securities might be listed, for example, on the Paris exchange; and that perhaps the U.S. Government might assist in advertising such action.

Mr. Leddy said that Treasury might discuss this with the financial community first. Mr. Fowler said that Treasury has a Committee with which it meets on debt management problems and it might discuss the matter with that Committee. Mr. McGhee suggested that Treasury circulate a memo about any thoughts that Committee might have about selling American securities abroad. We could then see what can be done. Mr. Fowler said that Treasury would be glad to do that.

OECD Efforts in this Field

It was pointed out that the OECD efforts are in two Committees—the Invisibles Committee and in Working Party 3 of the Economic Policy Committee. The Invisibles Committee had been drawing up a code of liberalization of invisible transactions and capital movements. Earlier this year our delegate suggested that the terms of reference be broadened to permit examination of the whole problem of the restrictions which block capital flows. This is now going ahead, and the first report is due July 1. That should supply further information of what the restrictions are in the various European countries.

In Working Party 3, which is at a higher policy level than the Invisibles Committee, we have been bringing up the subject of restrictions on capital movements ever since the end of last year. There have been mixed reactions, but we have gotten these people to focus on the problem and there should be some progress. The Europeans, while not enthusiastic, have shown signs of understanding.

Other Approaches

Mr. Fowler again reminded the group that there is no one solution to our balance-of-payments problem and that it is tremendously important that our export, travel, and other programs progress quickly. Mr. Fowler said there is also a question of whether OECD action should be supplemented by bilateral contacts and direct diplomatic efforts. Mr. Leddy suggested that far more information is needed before we can apply multilateral or bilateral pressure.

Follow-up Action

The discussion left it that: a) State would assess the likely political reaction in other countries to large U.S. investments, and b) Treasury would circulate a memo on the possibilities of using the business community in a program designed to sell American securities abroad.

Joseph D. Coppock

Executive Secretary

1. International private long-term capital movement and markets. Official Use Only. 8 pp. Department of State, E Files: Lot 65 D 68, ICFEP, June 13, 1962.