42. Memorandum of Conversation0

MVK M-21


Washington, February-March, 1961

US Summary on Financial Matters I

Discussions held on February 15 in US Treasury. Participants included Secretary Dillon, Under Secretary Ball, Chairman Martin, FRB, and Mr. Heller, CEA, for US and Sir Frank Lee, Sir Denis Rickett, and Ambassador Caccia for UK.

[Page 109]

Economic Situation

Sir Frank said he hoped these informal discussions would be only the first of a continuing series, particularly because of the relationship of the two reserve currencies. With respect to the UK economic situation, he said 1960 had registered high levels of consumption and investment accompanied by a rise in prices and wages. The outlook for 1961 was for internal demand to continue to rise and there was thus a continued need for restraints to provide leeway for exports, although there may be some easing of the heavy import demand because of past inventory build up. He expressed concern over the UK payments outlook for 1961 but did not feel it would necessarily be a critical period. If there is a reduced inflow of short-term capital in 1961 and a fall in reserves, the UK would not be too concerned provided the trend is toward an improved world payments position. He said the UK welcomed the President’s balance of payments statement,1 and that despite some uncertainty over the future the US and UK should not be deflected from the general purpose of expansion of world trade and the freest possible movement of capital.

Mr. Heller noted three aspects of the US economic situation: 1) the current recession, 2) the anemic recovery since 1958, and 3) the slowing down in long-term rate of growth. He noted that the peak was reached in the second quarter of 1960 when GNP reached $506 billion, and that in the first quarter 1961 GNP was close to $500 billion. The US potential, however, is estimated at $545 to $550 billion. Moreover, our rate of growth had declined since 1953. Mr. Heller said that, without taking account of any new programs contemplated by the new Administration, the forecast was for a gradual rise in GNP during 1961. He noted the problems relating to the strong impact of the federal tax system at high levels of economic activity and the various restraints on monetary policy, especially the balance of payments.

Secretary Dillon referred to the forecast in the British “Outlook” paper,2 that US GNP would fall by 3 per cent from the 1960 peak and recover from the second half of 1961 onward, and said that our figures indicated a decline of only slightly more than one per cent. Mr. Heller observed that, again without allowing for special new programs, we foresee an increase in public sector activities and no further substantial softening of the private sector.

Balance of Payments

Secretary Dillon cited an over-all US payments deficit for 1960 of $3.8 billion, which was the same as for 1959. About $2.3 billion of the 1960 deficit resulted from short-term capital movements primarily in the second [Page 110] half of the year. Some $1.5 million is considered as a basic deficit. The US expected a better export position in 1961. He referred in this connection to the hope that more canned fruit could be sold to the UK. He referred also to the various steps the US was taking to improve its payments position, e.g.,ICA and military procurement, reduction of duty-free allowances for tourists, and possible action with respect to short term export credits and removal of tax incentives for foreign investment.

As to the outlook for the US balance of payments, Secretary Dillon said we do not wish to prognosticate but thought there was a good chance the US could approach equilibrium with respect to the basic deficit in three to four years. With regard to the special interest rate arrangements, he said it was not our wish to siphon off a substantial amount of funds from Europe, although there may be a modest movement of funds back to this country.

Sir Frank said that the US starts from a good trade position while the UK starts from a bad one. He welcomed the US approach which was aimed at improving the basic deficit without doing “direct and manifest” harm to others. US actions may, however, have a short-term effect on sterling. If sterling does come under strain in 1961, the UK should keep calm, provided the basic trend seems to be in the right direction. He noted that the UK deficit rose from ₤120 million in 1959 to ₤180 million in 1960. The UK payments outlook for 1961 was far from satisfactory.

German Payments Surplus and Aid

Sir Frank referred to Prime Minister MACMILLAN’s meeting with Dr. Adenauer on February 233 and asked for US views on how the basic structural imbalance between surplus and deficit countries could be tackled in concert, and also on the possibility of revaluation of the Deutsche Mark.

Secretary Dillon said that in our efforts to obtain a greater German contribution we were emphasizing the imbalance in world payments arising from the German surplus. We were pressing for expansion of German military equipment purchases in the US, without a reduction in their purchases elsewhere in Europe. Germany could also help on joint use of military facilities, and by military aid to Greece and Turkey. These contributions could well be made by Germany since it received about $1 billion per annum from foreign military expenditures, of which some $675 million came from the US and $200 million from the UK.

Secretary Dillon said we hoped that with German contributions in the military field and by our own actions, US balance of payments on military account could be helped by some $400 million this year, including $100 million in savings on Greek and Turkish aid, $150 million from [Page 111] German purchases of US military equipment, and possibly $100 million by the US buying material here for the use of our forces in Germany. It was entirely up to the Germans whether they wanted to make debt prepayment, but they could not extract from the US a concession on vested assets. Furthermore, this would be a one-time operation and not an approach to our basic deficit. He stressed the need for a substantial continuing German aid program with untied procurement, although the US would probably get back, through purchases of US goods, only a small percentage of the expenditures.

Secretary Dillon thought the prospects for any meaningful revaluation of the DM were not good. He understood that at one time the Germans had considered a small adjustment of perhaps 5 per cent, but in his view this would have been inadequate and would have led to speculation. Moreover, it was the Germans’ view last year that if they revalued they probably would not have to do other things such as agreeing to the US request for them to increase aid contributions.

Sir Frank thought that an “adequate revaluation” would help the situation materially. While he agreed that a prolonged period of discussion and speculation followed by a revaluation of only 5 per cent would be undesirable, he nevertheless thought something in the neighborhood of 10 per cent would be adequate. He said that he did not maintain that revaluation was an alternative to the other things that Germany should do.

Secretary Dillon replied that the US places a lower priority on revaluation than the UK. He did not think revaluation was possible before the fall, nor even then that revaluation above 5 per cent was possible. In the US view even 8 or 10 per cent would not be enough. Secretary Dillon thought that the balance of payments measures we were seeking from the Germans were of the most pressing importance, and that we should move ahead with them before doing anything on revaluation.

  1. Source: Department of State, Conference Files: Lot 65 D 366, CF 1832. Confidential. No drafting information appears on the source text, which was prepared on March 22.
  2. See Document 2.
  3. Not further identified.
  4. Adenauer visited London for private talks with Macmillan February 22-23.