Foreign Relations of the United States, 1961–1963, Volume IX, Foreign Economic Policy

18. Memorandum From Secretary of the Treasury Dillon to President Kennedy ⁰

Washington, October 9, 1962.

SUBJECT

• Report on Measures to Improve the Balance of Payments

The two principal lines of attack on the balance of payments deficit consist of measures to curtail the outflow of dollars stemming from the activities of government itself, and measures to increase our export receipts. The measures adopted over the past two years have contributed to the improvement to date in those areas. The importance of actions to reduce government expenditures abroad relates not only to their direct contribution to the improvement in the balance of payments, but also to their effect in demonstrating to the American public that the Federal Government is carrying its full weight in meeting the problem.

Reducing Government Expenditures Abroad

At your direction I am chairing a Cabinet Committee on the Balance of Payments. The regular meetings of this Committee are providing the focal point for discussion and resolution of major policy issues in this field. In addition to its own reports to you, the Committee has reviewed this report and the first quarterly report to you from the Director of the Bureau of the Budget which is discussed below.

The most important recent action in this area is the new Defense program for reducing expenditures entering the balance of payments. More significant savings may result from this program than from previous efforts by that Department to reduce expenditures, because of the basic change in the level of additional budgetary costs considered “acceptable” in order to effect balance of payments savings.

The second most significant government expenditure affecting the balance of payments is foreign economic assistance. Procedures for seeking to insure minimum adverse effects on the balance of payments of cash transfers to aid recipients, primarily for the financing of local currency costs of projects, have now been agreed upon.

The magnitude and importance for the balance of payments of other government expenditures abroad will be assessed and controlled through the new control system for foreign exchange expenditures of Federal agencies which the Bureau of the Budget has instituted with your approval. Though the potential savings in the expenditures of other Government departments and agencies will be relatively minor by comparison with Defense and AID expenditures, they will nevertheless be important collectively.

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Reduction of Military Expenditures Abroad

Secretary McNamara is proceeding, pursuant to your interim approval, with the development under Defense Project Eight of a series of actions aimed at helping to reduce the net adverse effect of defense expenditures on the balance of payments to the level of $1.6 billion in fiscal year 1963, and to not more than $1 billion in fiscal year 1966. This compares with a level of $2.6 billion in fiscal year 1961.

The agreement reached with Germany last October to offset U.S. military expenditures in that country during 1961 and 1962 is expected to yield about $1 billion during the current calendar year (including reclassification of the German account). This agreement was extended to cover calendar years 1963 and 1964 in a “Memorandum of Understanding” dated 14 September 1962.

Negotiations have also been undertaken with France for an offset arrangement for U.S. expenditures there, but French officials have stated that major increases in purchases from the U.S. will not occur, as long as the U.S. remains unwilling to sell equipment in the nuclear and missile fields. Negotiations for an offset arrangement with Italy resulted in an Understanding, reached on 19 September 1962, that Italy will place initial orders for military equipment, approximating $100 million, with the U.S. Department of Defense within 30 days and that the U.S. will guarantee the availability of $100 million in credit assistance repayable over five years.

On July 16, Secretary McNamara announced a tightening of restrictions on overseas procurement.¹ With respect to purchases for use overseas, the degree of preference accorded U.S. suppliers over foreign suppliers was increased from 25 percent to at least 50 percent. With respect to purchases for use in the United States, there is established a procedure for reviewing every proposed foreign purchase to consider whether it should be returned to the U.S.

All new overseas construction planned for FY 1963 is being reviewed with a view to reducing foreign exchange costs by 66 percent. In addition, a review of base requirements from last January through June 30, 1962 led to decisions to reduce or close 46 overseas bases and facilities.

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Economic Assistance Programs

Secretary Rusk has agreed with our target of reducing to $1 billion annually the portion of economic aid expenditures which is paid to foreigners. He has also issued instructions to explore the possibilities of a further reduction, in line with your desire.

Of the total $1,250 million of such outpayments which was expected in FY 1963, about $500 million comprised contributions to international organizations and overseas operating costs of the aid program. The former item, at least, is not subject to much compression, but we are examining possible means of delaying the balance of payments impact.

Third country commodity procurement by AID has already been sharply reduced, from 56 percent of total commodity procurement in FY 1961 to 36 percent of a much smaller total in FY 1962. The drop in procurement in the nineteen industrialized countries, from which procurement is now generally prohibited, was even sharper, from $495 million (47 percent) in FY 1961 to $139 million (17 percent) in FY 1962.

We have been most concerned about the prospect of rising cash transfers to aid recipients, especially for local costs of development programs in Latin America and Africa. Some increase in this type of expend-iture is an inevitable result of the Alliance for Progress program and of the new role thrust on the U.S. in Africa. One way of reducing to some extent the balance of payments impact of this type of expenditure is to limit the ultimate use of the dollars involved to U.S. exports of goods and services. General arrangements for the establishment for this purpose of restricted accounts in the Treasury, and for the treatment of these transactions in our balance of payments presentations, have been agreed upon by AID, Treasury, Commerce and Budget.

Furthermore, in accordance with your request, AID Administrator Hamilton is submitting to you weekly reports of proposed program actions involving (1) a probable dollar outflow of $1 million or more, and (2) dollar financing of $2.5 million or more, whether or not a dollar outflow is expected, and semi-monthly reports on actions taken.

Other Government Expenditures

The Bureau of the Budget has now instituted, after discussion with other agencies, review by the Cabinet Committee on the Balance of Payments, and approval by you, a Government-wide control system for international transactions of Federal agencies. This system submits to a separate process of periodic review, comparable to that of the regular budget process, anticipated expenditures abroad of most Federal agencies. The first report has been forwarded to you by Budget Director Bell.

Increasing our Receipts from Abroad

In the longer run we can succeed in building the kind of international economy in which we want to live, not by restrictive measures, but only by fostering an expanding world economy which provides greater opportunities for us as well as others and by competing effectively within this system. A most basic aspect of this is our export promotion drive.

Domestic Policies

Price stability and an efficient, modern industry—able to compete successfully in world markets in terms of new products, delivery schedules, and quality as well as price—are the essential underpinnings of a larger trade balance. Our ultimate success in this area will reflect the performance of our whole economy—labor, business, and agriculture alike—over the months and years ahead, rather than any dramatic single action by the Government. Government does, however, have a responsibility for helping to create an environment conducive to rapid growth within a context of stable prices.

One important recent action in this connection was the Treasury Department announcement on July 12 of a fundamental reform in the tax treatment of depreciation.² According to Treasury estimates, the new guidelines will be reflected in additional depreciation writeoffs approaching $3.4 billion in the first year.

A companion measure—a tax credit equivalent to seven percent of new investment in equipment—is incorporated in the tax bill which has now been passed by the Congress. Together with the depreciation reform, this measure will provide tax treatment for investment in new equipment in the United States more nearly comparable to that provided in other industrialized countries.

Productivity gains since early 1961 have been gratifyingly large, although a large part of the improvement was admittedly cyclical. Meanwhile, wage increases have generally been moderate and unit labor costs in manufacturing are now lower than they were in 1959, at a comparable stage of economic recovery. The past three years have represented an exceptional period of industrial price stability during the postwar period.

Trade Promotion

These domestic developments provide a basis for continued U.S. export competitiveness. But even the best mouse trap doesn’t sell itself in today’s world. Our second major line of attack, therefore, has been the active promotional efforts which are necessary if we are to maintain or increase the U.S. share of total world exports. On July 17, Mr. Draper Daniels entered on duty in the Department of Commerce as National Export Coordinator, charged with giving increased impetus to all our varied programs.

The program of export credit insurance begun on February 3 has met with a favorable reception. By the end of June the Foreign Credit Insurance Association, which now has 71 member companies, had issued 685 policies covering $331 million of anticipated exports during the policy year. On July 2, FCIA broadened the cover to include, at the option of the exporter, protection from the date he accepts the sales order.

On July 16, FCIA and the Export-Import Bank announced the availability of policies to cover export credits with terms up to 5 years.³ Together with the earlier system of guarantees to commercial banks on medium-term export sales, American exporters now have credit facilities more nearly equal to those anywhere in the world.

The Department of Commerce has continued its efforts to stimulate business interest in exports. The National Export Expansion Council, its 33 associated Regional Councils, the President’s “E” Export Award, the transformation of the Foreign Commerce Weekly into the new International Commerce weekly news magazine, and the continued expansion of existing Foreign Service and Commerce assistance to businessmen, have all contributed to a marked increase in interest in exporting. This interest has been demonstrated by increased demands for services from the Commerce Department and its field offices throughout the United States, increased business purchases from Commerce of trade lists, World Trade Directory reports, and trade contact surveys, and the borrowing by businessmen of almost twice as many commodity, economic and industry reports, submitted from Foreign Service posts around the world, as in the first six months of last year.

State and Commerce have actively sought to interest foreign buyers through participation in trade fairs, trade centers and trade missions as well as by more traditional trade opportunity information programs. During the half year, more than 2.3 million people visited U.S. exhibitions in six international trade fairs on four continents. Two trade centers, which are permanent marketing sites, have been opened in London and Bangkok. A third will open shortly in Frankfurt.

Continued U.S. representations to foreign countries have contributed to the removal of most unjustifiable quantitative restrictions on imports of U.S. industrial products. Quantitative restrictions against agricultural products remain a problem, but our efforts have secured some degree of liberalization in a number of Western European countries and Japan.

The United States and the other countries with whom we negotiated tariff concessions at the Geneva tariff conference took the necessary legal actions to begin bringing these concessions into effect July 1, 1962 or shortly thereafter.

Congress has now completed action on the Trade Expansion Act of 1962, giving you substantially the authority you requested.

Promotion of Foreign Travel to the United States

Offices of the United States Travel Service have been established in eight foreign cities, and its personnel are working in 30 foreign countries. Visa procedures have been greatly simplified. A major additional step, which recently has been announced, is the waiver of personal appearances in most countries. The Travel Service has been working with U.S. communities to seek to insure that travelers to the United States receive a more cordial welcome.

Based on data for the first six months, the number of overseas visitors to the United States increased 18 percent over last year. During the same period, the number of visitors from countries in which the Travel Service has mounted a promotional effort rose 21 percent. U.S. tourist travel to other countries has also been increasing, however, with the result that the “travel deficit” is still growing rather than declining. Nevertheless, sample Customs data for the first seven months of this year indicate that, if the trend continues for the balance of the year, the reduced exemptions will cause American tourists to buy perhaps $90 million less abroad than they otherwise would have.

Promotion of Foreign Investment in the United States

To reduce our long-term net capital outflow, we have sought to increase the attractiveness of foreign investment in the United States, to reduce certain tax incentives which presently favor American investment abroad, and to continue our long-standing efforts to persuade the Europeans to adopt measures to make capital outflows more possible. In essence, we have sought liberalization by Europe rather than restrictive action by the United States.

Continuing efforts to find foreign capital sources interested in investment in the U.S. have resulted in several small new European direct investments. Commerce is continuing to seek foreign enterprises interested in establishing operations in the United States, with modestly growing interest from abroad. This activity is particularly keyed in with the ARA program of assistance to labor surplus areas.

We have also sought to impress upon our European friends the importance of developing European capital markets and of opening them up to permit a freer flow of capital to the U.S. and to the less developed countries. I made this the theme of my talk to the American Bankers Association conference in Rome in May. Although we would not wish for, or expect, the United States to cease to be a supplier of capital to the world, it would be of benefit to both ourselves and to borrowers if European capital markets were expanded so that it would not be necessary for so many borrowers to look only to the United States market as is now the case. In recent months, significant relaxations of capital restrictions have been made by France, Austria and Spain.

The Role of Other Countries

In recent years other countries have assumed a greater degree of international financial responsibility. The most dramatic results for our balance of payments have been the military offset arrangements already discussed, and the large prepayments of debts owed the U.S. Government by European countries in surplus positions. Of a longer range character are the measures to induce other countries to extend more financing to less-developed countries, and measures of international cooperation among monetary authorities.

Debt Prepayments

Because they provide maximum balance-of-payments assistance during the period before our long-run measures achieve their full effects, we have given high priority to securing advance repayments of obligations owed the U.S. Government by countries in substantial surplus positions. France and Sweden have now joined the list of countries that made special debt prepayments last year—the Federal Republic of Germany, the Netherlands, and Italy—and Italy made a substantial additional prepayment in July. Total special receipts from these sources in the second and third quarters amounted to almost $550 million.

Economic Assistance

The first Annual Review of the economic assistance programs of the members of the Development Assistance Committee (DAC) of the OECD subjected these programs to searching examination. The Review offered another opportunity for the U.S. to press other DAC members to increase the level of their programs, and to liberalize the terms and conditions on which it is made available. The Chairman’s Report on the Annual Aid Review was considered by DAC on July 25-26, and by the OECD Council July 31.⁴ Norway has joined the group of aid donors which, as members of DAC, are committed to increasing the size and effectiveness of their aid programs. Norwegian accession raised total DAC membership to 11 countries plus the EEC.

The Report of the Chairman of DAC on the Annual Aid Review was considered by DAC and the OECD Council in July, and has been released to the public. It noted that the total flow of official funds from DAC members to less-developed countries increased by 22 percent in 1961. Considering only grants, gross loans of over 5 years maturity, and contributions to international organizations, “aid” extended by other DAC members rose 26 percent to $2.5 billion; that by the U.S. on the same basis rose 27 percent to $3.9 billion. This Report also indicates a continued improvement in the terms on which the United States and several other DAC countries are providing their official assistance.

We have also been pressing for the formation of “coordinating groups” to consider the development programs of specific aid recipient countries. In addition to the long-standing “consortia” for India and Pakistan, the IBRD has formed “consultative committees” for Nigeria and Tunisia. Plans are well advanced for “consortia” under OECD auspices on behalf of Greece and Turkey. DAC has held two meetings on Colombia, with IBRD and OAS participation, to develop support for an IBRD “consultative group” to finance the Colombian development plan. DAC “coordinating groups” have met on Thailand and East Africa, and there have been several meetings of DAC members to discuss Latin American development problems. A similar group on Viet Nam has been set up outside of DAC. It appears likely that some grouping will be organized for Iran, probably under either IBRD or DAC auspices. Such detailed discussions offer the best type of forum in which to urge other donors, where appropriate, to increase their aid, lengthen the terms of their loans, and lower interest rates.

International Monetary Cooperation

Cooperative arrangements between the United States and European monetary authorities have been continued and strengthened during 1962. Notable among the actions during this period is the entry of the Federal Reserve System into the exchange stabilization field to supplement the resources of the Treasury’s Exchange Stabilization Fund. In the case of several countries, a part of the foreign currencies obtained by the United States through these swap arrangements have already been utilized to limit increases in their dollar reserves and thereby forestall or reduce additional demands which would have been made on our gold holdings.

Although this type of operation does not directly affect the deficit in our balance of payments in a statistical sense, it helps by reducing gold outflows to maintain confidence in the dollar and reduce speculative short-term outflows of capital that have an adverse effect on our balance.

In addition, forward exchange operations of the sort initiated last year have been continued by the Treasury. These operations are primarily designed to keep forward exchange rates from moving out of line with their interest rate parities and thereby make it unprofitable for short-term capital to flow abroad because of higher foreign interest rates.

Cooperative arrangements among central banks of the so-called Basle group have contributed to the stability of the price of gold in the London market. Growing nervousness in the exchange markets in late June and July led to pressure on the gold market, which was reversed after your press conference on July 23.⁵

Among the longer range actions in this area is the increase in the resources to become available to us through the International Monetary Fund. The Congress has now passed both the authorizing legislation and the appropriation necessary for U.S. participation in the arrangements which were agreed to last year.

Douglas Dillon

0. Source: Kennedy Library, Herter Papers, Balance of Payments. Official Use Only (With Confidential Section). Transmitted under cover of a memorandum from Dillon to the President, October 9, which indicated that this report was his fifth to the President on meas-ures taken to reduce the balance-of-payments deficit. Henceforth, Dillon added, the reports would be prepared on the same time schedule as those done by the Bureau of the Budget on international expenditures of federal agencies, and both would be submitted to the President as one integrated quarterly report. Also attached to the source text is a memorandum from Dillon to the members of the Cabinet Committee, October 10, indicating that a copy of the report was attached for their information.
1. See Document 16.
2. Not further identified.
3. Not further identified.
4. Regarding the July 25-26 meeting of the DAC, see Document 149. The July 31 meeting of the OECD Council has not been further identified.
5. For the transcript, see Public Papers of the Presidents of the United States: John F. Kennedy, 1962, pp. 568-576.