Attachment
March 18,
1963
SUBJECT
- 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.
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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
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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
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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).
