17. Report by the Cabinet Committee on Balance of Payments to President Kennedy0

The Committee has reviewed recent developments in the payments situation of the United States; the measures proposed by the Department of Defense and the Agency for International Development to curtail net overseas dollar expenditures; and the proposals of the Budget Bureau for establishing a control system for international transactions of Federal agencies. It submits the following report and recommendations for your approval.

Balance of Payments Situation

For the first half of 1962 the over-all deficit in our balance of payments has run at an annual rate of about $1-1/2 billion. This represents a very substantial improvement over the deficits of $2.46 billion in 1961 and $3.9 billion in 1960. The improvement in 1962 has been due largely to smaller out-flows of short-term capital and certain nonrecurring factors, such as one-time military payments by Germany. Nevertheless, our exports have continued to grow and the increase in our imports has been smaller than expected. The worsening of our basic deficit—the balance [Page 31]on all transactions except short-term capital and unrecorded transactions—has so far in 1962 not been as bad as had been anticipated. Subtracting one-time receipts in both 1961 (the German debt prepayment) and 1962 (debt prepayments and German military procurement funds), the basic deficit in the first half of 1962 seems likely to amount to an annual rate of about $1.4 billion, as compared with $1.1 billion for all of 1961. This deterioration in the basic deficit was relatively slight taking into account the fact that in response to rising domestic economic activity our imports during the first half of 1962 were running at a level some $1.4 billion higher, annual rate, than imports for 1961 as a whole. For the rest of 1962 we may expect that only a small further increase in imports is likely to take place.

Despite improvement in our over-all deficit, we are continuing to lose gold at a substantial rate. Gold losses during the first half of 1962 amounted to $420 million compared with $857 million for all of 1961. In other words, whereas in 1961 only about one-third of our over-all deficit was reflected in a gold loss, so far in 1962 almost 60 percent of our deficit has been reflected in a gold loss. These continued gold losses raise the question of confidence in the dollar—of continued willingness of foreign monetary authorities to increase their dollar holdings. They strongly underline the importance of action to eliminate the deficit in our balance of payments at the earliest possible moment.

Measures Adopted by the Department of Defense

The Committee has reviewed the projects being developed by the Department of Defense (Annex A)1 which you have approved on an interim basis as indicated in your memorandum of July 16.2 In that memorandum you asked that “the Committee arrange for timely consideration of the interrelations among Defense and AID overseas expenditures” and stated your view that “any final decision to reduce one of the categories of expenditures should be made only after full consideration of its probable impact on the other, as well as its budgetary costs.”

In order to carry out these provisions the Secretary of Defense has agreed to keep the appropriate agencies informed of the development of the projects outlined in Annex A and, in particular, to identify at an early stage, in consultation with such agencies, any project which appears likely (1) to necessitate a substantial increase in United States budget costs; (2) to have an impact of such magnitude on the economy of a foreign nation or nations as to call for consideration of increased United [Page 32]States aid as compensation; (3) to result in large-scale reductions in United States expenditures in countries such as the Federal Republic of Germany where a full offset agreement exists; or (4) to result in a reduction of such magnitude in the foreign exchange resources of a foreign nation or nations as to create the likelihood of such nations adopting new restrictions affecting commercial imports (including those from the United States) or to affect the ability of this Government to negotiate steps toward reducing existing restraints (in both the tariff and nontariff fields) affecting commercial imports; or (5) to involve other significant foreign policy considerations. The Committee will be informed of any disagreements between agencies and, as directed in your memorandum of July 16, those disagreements which the Committee cannot resolve will be referred to you.

In accordance with the foregoing paragraph, the Committee has arranged for a Defense-AID working group (including State with respect to the Military Assistance Program) to appraise the effects of Defense actions under Annex A on AID interests in less developed countries, particularly Korea, Vietnam, Taiwan, the Philippines and Latin America.

The Committee agrees that a reduction in the net defense expenditures to the level of $1.6 billion per year appears attainable in FY 1963, largely through military offset arrangements and increased sales of United States military goods and services. The Departments of State, Treasury and Defense are continuing to pursue military offset negotiations and military equipment sales promotion as a matter of high priority. Further reductions in later years should be possible as the projects in Annex A are developed and implemented.

Study of the Buy-American Act3

The Committee has requested the Bureau of the Budget to submit at an early date for the Committee’s consideration the results of the Bureau’s survey of the current effects of the Buy-American Act on procurement overseas by United States Government agencies for use within the United States. Recommendations as to appropriate revisions will be made after receipt of this information. Meanwhile, the Secretary of Defense will keep Defense purchases under the Buy-American Act under his personal review.

Aid and the Balance of Payments

The Committee has reviewed in a preliminary form, and approves the general direction of, AID’s program for minimizing the effect of economic [Page 33]assistance on the balance of payments. The Committee agrees that a reduction in foreign assistance payments to foreign countries and international organizations to below $1 billion and in AID’s part of the total to below $800 million appears attainable in FY 1963 largely because of the tightening in AID procurement policies more than a year and a half ago.

Present AID estimates for FY 1963 are shown in the tables attached as Annex B.4 Since AID has not yet completed its study of all possibilities for reduction in offshore procurement and cash transfers, the Committee is not yet in a position to concur in the figures contained in these tables or cited below.

AID’s program contains the following major elements:

1.
The policy that all goods and services procured with Development Loan funds be obtained from the United States, except as waived by the Administrator or his Deputy, will be continued.
2.
The policy of prohibiting procurement in the other industrialized countries with grant funds, except for minor amounts approved by the Administrator or his Deputy, will be continued. AID has estimated that FY 1963 obligations for procurement in the less developed countries with grant funds will be about $225 million. At your request, AID is now eval-uating the procurement which takes place in the less developed countries.
3.
Where local financial mechanisms can be adapted without seriously jeopardizing the program, it will henceforth be AID’s policy that cash transfers, including those for local currency purchases which exceed $250,000 per country per year, shall be placed in a restricted deposit account in the Treasury which can be drawn upon by the recipient country only to finance purchases from the United States, subject to exceptions made by the Administrator or his Deputy. General arrangements for the establishment of these restricted deposit accounts, as well as the method of treating them in the published official balance of payments of the United States, have been agreed upon by the AID agency, the Treasury Department, the Bureau of the Budget and the Department of Commerce. AID has estimated that about $320 million would be obligated for deposit in such accounts in FY 1963 and that FY 1963 obligations for cash transfers and local currency purchases outside the restricted account procedure will total about $275 million. At your request, it is reviewing this estimate with a view to further reductions. Certain situations, such as Laos, Jordan and Vietnam (which has just been approved although it was not included in the above estimates), will not be amenable or fully amenable to the restricted account procedure.

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Contributions to International Organizations

The Committee will shortly review, from the point of view of our balance of payments, proposals for United States contributions in calendar year 1963 to the International Development Association, the Inter-American Development Bank, the Social Progress Trust Fund and the United Nations.

Priorities in Foreign Negotiations

United States objectives with respect to the other industrialized countries of the Free World include (a) arrangements for offsetting the dollar costs of United States military expenditures in such countries; and (b) an increase in, and improvement in the terms of, development assist-ance from other industrialized countries to the developing areas. Both these objectives are important to our foreign economic policy. However, it should be understood that under present circumstances military offset arrangements enjoy a clear priority over increased development assist-ance because of the immediate and direct benefits which this objective can bring to our balance of payments. Appropriate United States missions should be instructed accordingly.5

Control System for International Transactions of Federal Agencies

The Committee has reviewed the proposals of the Bureau of the Budget for the institution of a process designed to insure continued scrutiny and control of government outlays involving dollar expenditures overseas. The Committee recommends that you approve the memorandum to you on this subject submitted by the Bureau of the Budget, the text of which is contained in Annex C. It is understood that this procedure, which involves quarterly reports to the Bureau of the Budget by all agencies having overseas expenditures in excess of $1 million per year, will be reviewed as experience is gained in its administration.

  1. Source: Kennedy Library, National Security Files, Kaysen Series, Balance of Payments, Cabinet Committee, 7/62-2/63. Confidential. The source text bears no drafting information. Transmitted under cover of a July 27 memorandum from Dillon to President Kennedy.
  2. Presumably McNamara’s July 10 memorandum, which is not attached; see Document 13.
  3. See Document 14.
  4. Reference is to Title III of an appropriations bill for the Treasury and Post Office Departments, approved March 3, 1933. (41 USC 10a et seq.)
  5. Neither Annex B nor C is printed.
  6. These instructions were sent in telegram 811 to Paris for USRO and to Bonn, Rome, and Brussels, August 8. (Department of State, Central Files, 811.10/8-862)