358. Memorandum from Bullitt to the Cabinet Committee on Balance of Payments, March 191

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Secretary Dillon has asked that the attached memorandum covering Under Secretary Roosa’s recent discussions in Europe be transmitted to you as of possible interest in connection with the discussion scheduled for the Balance of Payments Committee on March 20 at 3:00 p.m. The Secretary has asked that note be taken of the highly confidential nature of certain portions of the memorandum dealing with certain aspects of current conditions.

John C. Bullitt
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  • Conclusions from my trip to France (and OECD), Italy, Switzerland, Germany and England, February 25–March 6

This is a summary for the confidential record of conclusions already reported to you orally. My conversations were almost exclusively with financial officials and bankers (in addition to our ambassadors and embassy staffs). Since returning, I have had further discussions with European financial people at the meetings in Princeton, March 7–8. Some of my findings have been reflected in the report to you on “Financial Measures for the Balance of Payments Deficit, 1963–64,” submitted on March 15 by the Long Range International Payments Committee.

1. The dominent financial concern in Europe is with the U.K., although the British themselves are trying to appear oblivious to this attention. The present balance of payments position of the U.K. is good, but many Europeans fear that it will soon deteriorate. Having lost the stimulus and momentum of the drive toward the Common Market, Macmillan and Maudling must do something. The worst would be early devaluation; the next worse, some kind of home expansion program that would cause capital flight and perhaps lead to devaluation. [Typeset Page 1539] Short of either, sterling will be subject to “bear raids” which could in themselves be disruptive.

2. The fear of sterling devaluation is giving the United States an unearned assist, in that Europeans are increasingly aware of the need to strengthen the framework of cooperation now identified with our operations in foreign currencies, including the swaps and the borrowings. In all five countries (as well as from the Dutch, Belgian and Swedish representatives at the OECD meetings), I heard that the accomplishments in cooperation among the leading industrial countries must not be impaired by the present splintering of other political and economic efforts toward unity of action. If anything, the desire for monetary cooperation is increased. This is true in France, too, particularly in the Banque de France.

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3. The highest authorities are hoping that the United States will, in close confidence, take the lead in assuring a firm protection against the risk of sterling devaluation. None believes that sterling is in fact overvalued. All fear devaluation of sterling—not only because it would mean the final end of sterling as a reserve currency but also because it would gravely threaten the ability of the United States to maintain the $35 gold price. All have full confidence that we intend to maintain our price. They hope that we will take appropriate action to avert any British move toward devaluation. Since they believe that any attack on sterling would be purely speculative, and not supported by a basic appraisal of the British position, they believe that another British drawing on the IMF would be entirely appropriate to withstand a raid. They hope we will urge this approach on the British and will make use of our own special defenses if needed to protect the dollar against any repercussions from a run on sterling or from a British drawing on the IMF.

4. Prospects are good for extending the use of our swap and borrowing arrangements, provided we move ahead through bilateral negotiations—but discussing the outlines of these arrangements on a multilateral basis, from time to time. Even if Germany, Italy and Switzerland should not have balance of payments surpluses in 1963 and 1964, their central banks will probably take substantial additional amounts of U.S. securities denominated in their currencies. Central banks will not, however, at present take maturities beyond two years (although they are prepared to renew, and Italy has just agreed to extend all its present holdings to 1965 maturities).

Borrowings of longer maturity (5 years or beyond) would have to be arranged on a government-to-government basis, which means that the internal counterpart of funds loaned to the United States would have to be obtained through a budget surplus (or borrowing in the home market by the government). Given the uncertain political situa [Typeset Page 1540] tions in Germany and Italy today, nothing can be usefully explored along these lines for the present. The Swiss Confederation, having already purchased $80 million equivalent of our under-two-year securities, foresees no budget surplus in the coming year and is reluctant to borrow on the home market for the purpose of making a longer-term government loan to the United States. Substantial possibilities do exist within the established maturity ranges for additional borrowing by the United States from the Swiss National Bank, and through it, from the Swiss banking system. The French may possibly extend us a modest loan, but only through the Banque de France and for 1 to 2 year original maturity. The Finance Ministry will continue debt prepayment in amounts related to the balance of payments surplus.

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5. The Germans and Italians advise against a technical drawing on the IMF by the United States in existing circumstances. They regard our swap and borrowing arrangements as adequate for meeting any technical problems arising from the fact that the Fund presently holds dollars up to 74% of the United States’ quota. They warned that a U.S. drawing, regardless of its size, would create doubts in their financial communities concerning the ability of the Fund to provide the full support needed to keep the monetary system functioning if sterling suffers a run over the months ahead. They believe the world is not ready for the spectacle of both reserve currencies drawing on the Fund at the same time—short of an unusual emergency which would make the reasons clear to everyone.

6. All central bank and treasury officials in the five countries (including the United Kingdom) stated confidentially their flat opposition to any devaluation. All are equally opposed to a “floating rate.” The French, Germans and Italians consider a floating rate even more harmful and disruptive than an actual devaluation.

7. While concern continues over our balance of payments situation, the Europeans generally still believe that we can eliminate the deficit. They appreciate that we have not used exchange restrictions or trade restrictions or a slashing of military or economic aid to stop the deficit. Many recognize that our effort instead to solve the deficit by making lasting improvements in our competitive trade position must necessarily take time, and be difficult to predict in both timing and magnitude. Because most of them admire our effort to evolve a solution “in the right way” and because most also know that there is no usable substitute for the dollar, they will undoubtedly continue to cooperate—but we cannot take this for granted. Our own performance must show steady real improvement.

8. Many financial people continue to believe that much of our deficit is produced by capital outflows which could be limited or offset if our interest rates were higher. Some are beginning to understand [Typeset Page 1541] that our long-term rates are held low by the enormous volume of domestic liquid savings and that the only zone for effective action is the short-term area in which we have been operating with some success. Nonetheless, there is no question that a further rise in the short-term rate, if this were practicable, would not only help reduce our outflow of short-term funds but would also impress European financial people as evidence of further determined effort by us to reduce the balance of payments drain and preserve our gold reserves.

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9. There is still much uneasiness over the prospective size of our Federal Government deficit, though understanding and support for the tax bill are widespread. Few realize that we have been able to finance the entire rise of the Federal debt in 1962 outside the commercial banking system—a result achievable within the existing structure of long-term rates because the volume of domestic liquid savings increased so impressively in 1962. As Europeans were informed of these facts, their concern over our domestic deficit was satisfied. It is clearly necessary to improve our communications with Europe in this regard (your Princeton speech of March 7 was an effective start; that was followed by a special press release on March 14).

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1. 1963 Projections.

2. Prospects for Financing the Deficit—1963–64 (Report of the LRIPC).

3. Further nonfinancial measures to reduce the deficit—status of Executive Committee paper.

4. Time table for future discussion.

  1. Provides read-out of Roosa’s recent European discussions on balance of payments. Confidential. 6 pp. Kennedy Library, Herter Papers, Balance of Payments, Box 1.