57. Memorandum From the Chairman of the Council of Economic Advisers (Heller) to President Kennedy0


  • Why we need an interim international monetary agreement

1. To prevent and to counter speculation against the dollar.

Against our $16 billion of gold are outstanding $20 billion in short-term foreign dollar claims (half official, half private). This potential liability can be vastly increased if and when our own citizens sell dollars abroad for foreign currencies or for gold. Consequently we are constantly in danger of a speculative “run” against the dollar and the U.S. gold stock. There have been three runs in the last two years—one in the fall of 1960, one in the spring of 1961 after the revaluation of the Deutschmark, and one this summer ended only by your Telstar statement.1 An international agreement, and only an international agreement, will make it perfectly [Page 139] clear that there is no profit in speculating against the dollar—not just the U.S. but all the major monetary powers together will be publicly committed to concrete measures to defend it.

2. To eliminate the whims and prejudices of currency speculators and bankers from the making of U.S. policy.

The vulnerability of the dollar to failures of confidence means that the U.S. Government is not master in its own house. For unless the international financial community, taking its cues from Wall Street, has “confidence,” there can always be a speculative run.

Thus Chairman Martin reported to you that the dollar’s “bad press” is the reason the Fed moved to higher interest rates this summer in spite of the economic slowdown at home—in effect, New York bankers have learned that one way to get higher interest rates on their loans is to talk down the dollar abroad.

Thus it is argued that a tax cut or a budget deficit must be avoided, or timed, or limited, so as to nurse “confidence.”

Thus U.S. military or aid outlays may be bad for “confidence”—it takes a broader and longer view to see more in these policies than dollar drains.

Anyway the confidence game is one you can’t win. Your intervention with Roger Blough2 and the decline in the stock market were interpreted in some circles as bad for the dollar; but a steel price increase and a stock market boom would also have been regarded as unfavorable signals.

3. To allow the U.S. time for an orderly and constructive adjustment of its balance of payments.

We cannot and do not seek to avoid the adjustments needed to eliminate the basic deficit in our balance of payments. Our basic deficit is not large, and it is declining, cost and price increases in Europe are slowly but surely working for us. The basic deficit is a danger only because its continuation may contribute to a speculative run. By itself it is clearly within our ability to finance for several more years with gold or credit—or to eliminate by drastic action. But hasty drastic action is what we want to avoid—we don’t want to impair the defense or development of the Free World, or to restrict trade with new tariffs and quotas, or to slow down economic growth in the U.S. and the Free World. With the time which an agreement would give us, we can balance our international accounts in an expanding and liberal world economy.

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4. To avoid worldwide deflation.

There is a real danger, under present monetary arrangements, of a contagious epidemic of deflation. Present arrangements put much greater pressures to adjust on deficit countries than on surplus countries. When the Canadian dollar got in trouble, Canada took measures to deflate its economy, restrict its imports, and draw funds from the U.S. Yet Canada’s problem was not inflation, but—like our own—unemployment and excess capacity. Canada’s measures increased the pressure on the U.S. dollar. If we are forced to react similarly—tighter money, less expansionary budget policy, trade restrictions—we will in turn transmit deflationary pressures to Japan, the underdeveloped world, and even to Europe.

5. To provide time to negotiate a permanent improvement in the world monetary system.

Quite apart from the temporary difficulties of the dollar, the world payments system needs to be systematically improved: (a) to defend all currencies against speculative attacks, (b) to internationalize the burden of providing international money, which now falls almost wholly on the dollar, and (c) to provide for an orderly increase in world liquid reserves to finance growth in trade and production. A permanent agreement can be negotiated, and the necessary legislation (like repeal of the gold cover) obtained from Congress, only if the monetary system is in the interim defended against rumor and speculation.

6. Why a visible formal agreement is preferable to continued improvisation.

The techniques which would implement an interim international monetary agreement are essentially the techniques the Treasury has been so skillfully developing this last year and a half. But the Treasury has been using these techniques on a secret, day-to-day, piecemeal, ad hoc basis. There are great advantages to a systematic, public, formal, multilateral agreement governing their further use:

Without such an agreement, improvised expedients to avoid, postpone, or conceal small gold losses run the risk of impairing the very confidence they are intended to sustain. Even foreign governments may not have full confidence in unilateral or bilateral operations to which they are not parties.
Without an agreement, the U.S. does not obtain—in return for gold sales and guarantees given to foreign official and private dollar-holders—any assurance that present unguaranteed dollars will not be converted into gold. With an agreement, we will receive a quid pro quo of the greatest importance—a “standstill” on conversion of present official dollar holdings.
Only an international agreement, convincing to the public in its announced size, duration, and concrete provisions, can effectively defend [Page 141] the dollar against speculation. Confidence in the dollar cannot be maintained by our protestations alone, or by U.S. currency operations alone, no matter how skillful. The only way to send speculators permanently to cover is to have a clear public commitment to defend the dollar from all the major monetary powers. In the absence of such commitments from other governments, our best efforts to reduce balance of payments deficits and gold losses have not succeeded in sustaining confidence.

Walter W. Heller3
  1. Source: Kennedy Library, National Security Files, Kaysen Series, Balance of Payments, International Monetary Agreement, 8/62. No classification marking.
  2. Reference presumably is to President Kennedy’s remarks about the U.S. dollar and gold at his press conference on July 23, which was transmitted abroad by the Telstar communications satellite. For text, see Public Papers of the Presidents of the United States: John F. Kennedy, 1962, p. 570.
  3. Chairman of the Board of Directors of U.S. Steel Corporation.
  4. Printed from a copy that bears this typed signature.