43. Memorandum of Conversation0

MVK M-22


Washington, February-March, 1961

US Summary on Financial Matters II

Discussions held on February 16 in US Treasury. Participants included Secretary Dillon, Under Secretary Roosa, Assistant Secretary Martin, Mr. Heller, CEA, Chairman Martin of Federal Reserve Board, for US, and Sir Frank Lee and Mr. Parsons, Bank of England, for UK.

German Payments Surplus and Aid (cont’d)

Sir Frank referred to the previous day’s discussions and said that West Germany was at the heart of the British imbalance. He was skeptical of the ability of getting the Germans to take on enough over the long term to overcome their persistent surplus without revaluation. He noted that the German current account surplus was unlikely to be less than $1 billion in 1961, and even with a $1 billion German aid program, the Germans probably would not commit more than half nor disburse more than one fourth this year. Secretary Dillon said that the US estimated the 1961 German surplus at about the same figure, and that it was vitally important for the Germans to do more in foreign aid and military purchases abroad. However, if the various measures previously mentioned, including a parallel approach by the British on German military purchases, are carried out, we visualize that the German current surplus could be reduced to some $250 million.

Secretary Dillon reiterated his view that revaluation was not the answer at this time, and Mr. Heller pointed out US military costs in dollars might increase with the German revaluation. Sir Frank said he hoped to keep the Prime Minister from raising the question of revaluation with the Germans.

Other Surplus Countries

Secretary Dillon said we have been impressed by the size of the Italian payments surplus, but that it would be difficult to deal with it without first succeeding with the German surplus. He thought under present programs the British and the French were carrying their share of the foreign [Page 113] aid burden and the problem is to get the French to continue. Sir Frank observed that the French surplus also bears watching; the Japanese problem was a unique one that affected all industrialized countries, whereas the German, French and Italian surplus problems related rather more directly to the US and the UK deficit positions. He said that Japan was not extending much aid as distinct from reparations and export credits. Secretary Dillon noted that while there had been success in getting Japan to relax its import restrictions, it had offset this by increasing tariffs. He thought that in view of Japan’s interest in Asia, it could be persuaded to increase long term aid to India and Pakistan.

Monetary Matters

Secretary Dillon noted that for the first time since the 1920’s there was convertibility of the major trading currencies. This meant that short term capital flows of the type experienced recently were easier to set off than before, and there was thus a need for much closer cooperation and coordination among the important fiscal and monetary authorities. He noted that the US Treasury was considering the possibility of freeing the interest rate limitations for foreign official balances. The President’s message made clear the necessity to maintain US short term interest rates to avoid substantial outflow of short term funds, and at the same time to maintain a different pattern for long term interest rates. He reiterated, however, that it was not the US Government’s intention to attract a big return flow of funds from abroad, but rather to stabilize the situation. US Federal Reserve authorities were interested in working out closer contacts with their opposite numbers abroad. Under Secretary Roosa raised questions about techniques that needed to be considered on two points: one was the interest rate affecting the short term flow of funds, the other concerned the judgment of central banks whether to hold such funds in gold or dollars. Chairman Martin said that exploratory discussions on these matters, both bilateral and multilateral, would be invaluable, particularly in the present atmosphere of convertibility. He also pointed out that the Board’s monetary policy would be defensive rather than aggressive with respect to foreign funds.

Secretary Dillon noted that the OECD would provide a forum for coordination, although it might not be the only forum nor adequate in terms of size. Sir Frank said that the UK was willing to consider anything that might help moderate the speculative movement of short term funds, but saw difficulty because of the great differences in various domestic economies. For example, the UK problem was one of excessive demand, the US the contrary. Mr. Parsons also concurred in the need to explore every conceivable possibility of cooperation in monetary policy. He wondered whether an interest rate of one or two per cent would be sufficient inducement to change the minds of central banks on whether to hold gold or dollars. He, moreover, did not personally favor splitting markets [Page 114] into compartments, with one for central banks and the other for private individuals and commercial banks, when in fact the markets are interrelated. Secretary Dillon remarked that these various mechanisms were not considered as being inherently desirable but rather as defensive measures which have been made necessary because some of our friends have placed undue reliance on monetary policy as opposed to fiscal policy. The US felt the two were, of course, complementary. Secretary Dillon stressed the importance to the free world of coordination with Europe in this area at this time. It was the responsibility of the US to assure confidence abroad by showing that the American economy was under control.

Sir Frank accepted the idea that US action in this field was designed to be defensive and not aggressive.

  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.