362. Memorandum from Heller to President Kennedy, July 81

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SUBJECT

  • A Program for the Balance of Payments

Rather than wait for my return from Paris, let me respond immediately to your challenge to CEA to provide its balance of payments program. (Whatever additional nuggets I may pick up in Paris I will report to you on Monday.)

We have no hidden panacea. If we had, it would have been brought out long before this. But it has been some time since we restated for you what has been, and still is, our basic approach. It can be easily summarized.

Essentially, our policy position rests upon the conviction that basic economic developments both in Europe and the U.S. are moving to restore payments balance—and the Brookings Study agrees. Our policies should be designed to reinforce these basic forces, and, in the meantime, to “finance” our transitional deficit. The measures we take need not and should not sacrifice vital domestic and foreign policy objectives of the United States. (We agree, of course, that if defense savings are possible without weakening our military or political posture, we should hasten to take full advantage of them.)

1. The two basic developments which will solve our balance of payments problem in the course of time are (a) the continued stoppage of inflation in the U.S. economy, and (b) the irresistible inflationary forces at work in Europe. We obviously cannot directly reinforce the latter forces. But we can and should continue to impress on the Europeans (through OECD and otherwise) the necessity—in their own interests and in the interests of the rest of the developed and underdeveloped free world—to maintain high demand and employment and to avoid restrictive and recessionary policies. The strength of the European commitment to full employment can probably be taken for granted; but we can [Facsimile Page 2] encourage them to combat promptly any signs of weakness in the levels of their domestic demands, and urge that they use monetary policy for stimulus and fiscal policy for restraint (the [Typeset Page 1557] obverse of their prescription for us). And we can insist that the tendency of their balance of payments to move from surplus toward deficit—as ours moves the other way—should provide no excuse for new trade restrictions.

2. Our developing price advantage must not be allowed to be dissipated by unnecessary price rises here. Renewed emphasis must be placed upon our wage-price guideposts, and there must be a demonstrated willingness to use governmental pressures to clamp down on incipient inflationary wage and price settlements. We in the CEA (with John Lewis taking the lead) have initiated a new hard look at the guideposts themselves, at the adequacy of economic intelligence in the Government to provide an “early warning system” of incipient trouble spots, and at the channels available for exerting influence on price and wage decisions.

In this context, the recent steel agreement is of crucial importance. It is clearly below the economy-wide productivity increase, and below the productivity increase in steel. It comes at an excellent time, and we should not hesitate to make the best use that we can of it (without unnecessarily offending Dave McDonald).

3. Rapid and sustained expansion of our own economy is not only an urgent domestic requirement (now made more than ever important by the new significance of Negro unemployment), but also it is the best means of stemming the outflow of long-term and short-term U.S. capital. It will affect both direct investment and financial investment abroad. When profits rise and investment opportunities expand at home, the attention of investors will shift to the domestic scene. When banks and insurance companies find ready borrowers at home, their lending abroad will taper off. This is a far better way to cut down outflows than to restrict the sources of lendable funds.

Because of the overriding importance of domestic recovery—for balance of payments as well as domestic reasons—we must take no action, such as higher long-term interest rates, that would imperil continued and accelerated expansion.

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4. We should freely use our reserves—which are still large—to tide us over. We should not hesitate to draw on the IMF in the near future, not only to help supply our foreign currency needs but also to strengthen the IMF by making clear that it is an effective international mechanism for large and strong economies to use and not just for the underdeveloped ones. If necessary, we can activate the special borrowing arrangements.

5. Efforts like those you made in Europe can surely impress upon our allies the necessity—in their interest as well as ours—to maintain the strength of the dollar by

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—Cooperating in its defense against speculative attacks;

—being willing to hold and to add to their holdings of dollars (while we in return, in one form or another, provide a guarantee for such holdings against exchange devaluation of the dollar—which is precisely what the Roosa bonds do on a limited scale);

—assuming larger financial burdens in behalf of the common defense and aid efforts;

—actively exploring with us interim and longer-range multilateral solutions to the problems that arise when major industrial nations encounter relatively intractable (in the short run) deficits that do not result from inflationary domestic policies.

6. In this connection, the joint studies now about to be initiated by the Finance Ministers of the “Ten” (the first meeting of their deputies will be held Thursday in Paris), should receive every support and encouragement of the U.S.; and we should make clear to the other governments that we regard this as an initiative of major significance for the reasonably near term, not the distant future.

7. Further steps to tighten U.S. procurement or to tie U.S. aid seem unwise. If anything, we should retreat slightly from some of the more obviously silly and inefficient things we have done, especially those that are purely cosmetic.

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8. We must continue to pursue a hard bargaining line in the GATT negotiations, in the expectation that a general tariff reduction that is really reciprocal will help us more than it can hurt. The agricultural negotiations—and EEC agricultural policy—are, of course, crucially important.

9. If short-term money rates are to be raised, we must make sure that the Fed and the Treasury are committed to take all actions necessary to prevent any rise in long-term rates. They have the ability to do so—to do a twist operation on a really grand scale. It would mean that the Treasury would stand ready to finance the entire deficit and, if necessary, its refundings, by selling bills, and that the Fed would stand ready to supply all of the necessary reserves by buying long-terms, and, if called on, to buy even more long-terms while selling bills. If we decided to embark on such a spartan program, a rise in the discount rate could form part of the package.

10. If long-term capital flows persist at the level of the past year, we should—as a last resort—invoke controls on flotation or placement of foreign bond issues in our markets. This is not equivalent to, nor would it inevitably force us into, exchange controls, as both practice and experience in Europe so clearly demonstrate.

This is recognizably no panacea. But it is no less a program because some of its elements involve refraining from action rather than initiating it. It involves risks, but so does any policy. It will not satisfy those who feel that we court disaster unless we knuckle under to the prejudices [Typeset Page 1559] of the international bankers. The present division of Europe does not make it easier; but then, it exacerbates other problems as well. In our view, a calm, determined, non-crisis approach will find support and understanding in those places where support and understanding are crucial, and will in the end engender rather than impair confidence even in the financial community.

Walter W. Heller
  1. CEA’s program for the balance of payments. No classification marking. 4 pp. Kennedy Library, National Security Files, Kaysen Series, Balance of Payments, General, 4/63–7/63, Box 362.