56. Memorandum From the President’s Deputy Special Assistant for National Security Affairs (Kaysen) to President Kennedy0
Attached are a number of papers1 which you have looked at or asked for in the past two weeks in connection with discussions of the balance of payments plus one or two items I thought you might find it worthwhile to read.
All these papers focus on the monetary or gold holding aspect of the problem rather than on the current balance of payments. As you are well aware, improvements in the current balance of payments will be at best slow. Such improvements do contribute to a stronger U.S. position in the international financial markets, they do not change the fundamental problem created by large foreign holdings of dollars which may be turned into gold at the pleasure of the holders. It is chiefly to this problem that the papers are addressed.
- The first group of four items contains the proposal for the solution of the gold problem which you got from Walter Loucheim2 through Ted Sorensen [Page 136] (Tab 1) and comments on it. In accordance with your request, I asked Jim Tobin and Bob Roosa to comment on it. Doug Dillon added his comments to Roosa’s (Tab 2, Tobin; Tab 3, Roosa; Tab 4, Dillon). Loucheim’s most important idea is that we should agree with the other major holders of gold on what ratios of gold we should hold on our total foreign exchange reserves. This would result in the present world gold stocks supporting a greater total of liquidity, and would have the effect of ruling out runs on our gold by foreign central banks holding dollars. The removal of the 25 per cent gold cover requirement for our internal currency circulation which Loucheim suggests is a necessary step to putting his major proposal into effect.
Tobin and Roosa agree on the accuracy of Loucheim’s diagnosis of the problem and on the ultimate desirability of his proposal for agreed fixed reserve ratios. The great difference between them is that Tobin thinks both that this is a practical proposition and that it is necessary for us to move in this direction fairly soon. Roosa doubts its practicality, and further, he is much more certain that the steps the Treasury is now taking (see Dillon’s memorandum) are as much as can usefully be done now. Roosa’s doubts on the practicality of more far-reaching measures and his evaluation as to what should be done now are of course related.
These comments reflect a continuing difference in outlook between Treasury and CEA, which was revealed in the discussions in your office Thursday. Doug Dillon and Bob Roosa are confident that they have the situation well in hand, that the various steps they are taking—which by their nature tend to be obscure and closely held—are the best that can be done now and that any large-scale changes are impossible either because the Europeans won’t agree to them or because it would be a dangerous sign of weakness on our part to propose them. The Council position, on the other hand, is that some fundamental change in the mechanism of international payments is necessary. Further, it is dangerous to wait to make this change for some indefinite future time, 2, 3, or 4 years from now when we achieve an equilibrium or a surplus in our balance of payments. The inhibiting influence the gold problem has exercised on our domestic economic policy and the high price we will have to pay in foreign policy programs if we feel we must cut overseas military and foreign aid expenditures to the bone are the chief arguments in favor of the Council’s position that we make a large step in the near future. The differences of viewpoint involved are illustrated by the contrast of a single pair of figures. All the operations which Dillon describes in his memorandum have resulted in our holding $400 million worth of foreign currencies in our reserves. If we carried out a plan such as Loucheim suggests we might wish to hold something of the order of $3 or $4 billion worth of foreign currencies in our reserves and correspondingly less gold.
The next item is a paper of Tobin’s which shows how a proposal for agreed gold reserve ratios would work in some detail (Tab 5). Although it is long, I think it is clear. If we accepted this idea we would probably want to choose something like his Plan II, which has the effect of increasing total world reserves by about 10 per cent. It involves, of course, a very substantial transfer of gold from U.S. to other countries as the price of protecting us against the risk of uncontrollable runs on our present holdings.
Walter Heller’s covering note indicates that it is possible for you to give a gold guarantee without Congressional action. This, of course, does not answer the question of whether it is wise to do so.
- Neither the Treasury nor the Council has given you comments on the letter of Bruno Saager3 to Prince Radziwill (Tab 6). At the meeting, Bob Roosa really didn’t answer your question of what was wrong with Saager’s idea of increasing the price of gold in all currencies. First, it is better than doing nothing. It will solve our short-run problem, as well as increasing world liquidity. However, it is far from the best way of solving the problem and it has a number of disadvantages. First, the benefits go to the Soviets, to the South Africans, and to a very small extent, to Canadian and American gold mining companies who will be encouraged to mine more gold by the higher price. We combine giving advantages to the Soviets and to the South Africans with increasing our own and Canadian production of something we don’t really need. Second, it leaves the basic problem of the inadequacies of the international monetary mechanism untouched, although it clearly postpones the particular problem we have to face for a number of years. It will still be true that movements of gold need not be related to the real needs of international trade and finance. If we are to exert our efforts to get the continental European countries to agree to this proposition, we might do better to use these efforts toward a more useful end. Third, it is a move which creates something of the same problems for us that devaluation would create. It encourages gold speculators. It probably leads to some lack of confidence in the dollar, even though it helps our immediate position greatly. Since it will justify the passion for holding gold, it will strengthen rather than weaken speculative motives in the international money market. These are, after all, the source of a large part of our troubles.
The next item is a copy of a brief comment from the Economist on the Canadian situation which Dave Bell and Walter Heller both thought you should read (Tab 7).[Page 138]
At Tab 8, I attach Jim Tobin’s paper which you read at Camp David the other day and asked me to send to Dillon for comment, in case you want to look at it again.
- Finally, to raise the average level of the package, I include a brief essay that J.M. Keynes wrote in 1930 (Tab 9). It remains the most elegant statement of the fundamental proposition that a rational international payment system could dispense with gold altogether. The great attention paid to gold is another myth. The last few sentences are now again as apposite as they were in 1930. As you said of the Alliance for Progress, those who oppose reform may get revolution.
- Source: Kennedy Library, National Security Files, Kaysen Series, Balance of Payments, General, 7/1/62-7/15/62. Confidential.↩
- None of the papers (tabs) is attached or has been found.↩
- Walter C. Loucheim, Jr., investment consultant to the National Advisory Council on International Monetary and Financial Problems.↩
- Not further identified.↩