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

You have asked for my thoughts on Walt Rostow’s memorandum of February 4 on the balance of payments.1 He takes the position that our gold situation is relatively good compared to other countries and that we need not worry about running further larger balance of payments deficits provided we first repeal the 25% gold cover law and negotiate substantial ten year borrowings from our European creditors.

First, as to Mr. Rostow’s two specific suggestions: You are aware that we all would favor repeal of the 25% gold cover law. However, when Congressman Multer floated a trial balloon on this subject during the last session of Congress, it became obvious that there was intense and emotional conservative opposition to repeal. It is highly doubtful if we could muster a majority, and, in any event, the debate that would ensue would be seriously damaging to international confidence in the dollar. Therefore, we have decided not to press this issue until public opinion shifts or until our gold stock actually drops below the ceiling. As you know, the Federal Reserve can waive the ceiling under certain conditions, and Mr. Martin [Page 163] has stated that he would utilize this authority if it ever should prove necessary. The waiver provisions are relatively innocuous until our gold supply drops to $6 billion—the 25% ceiling would be pierced at about $12 billion. Thereafter, the waiver provisions are so onerous as to be impractical. However, there would be plenty of time to obtain repeal after our gold stock reached $12 billion. Our decision, therefore, has been not to precipitate this unnecessary fight at this time.

As to Mr. Rostow’s suggestion of ten year borrowings in Europe, it is simply an extension and amplification of a new technique originated by the Treasury last year. Loans of over one year duration are not counted as liquid liabilities and thus have the effect of reducing our balance of payments deficit. Last year we negotiated $250 million of 15 month loans with Italy and Switzerland, which relieved our balance of payments to that extent. We have recently concluded a similar borrowing with Germany which runs out as far as two years, but with a shorter term option which the Germans can use in case of need. This technique has proved useful, and we intend to develop it further. However, any sudden campaign such as Mr. Rostow proposes would be doomed to failure.

Most foreign central banks are prohibited by law from making long term loans, and, as a result, our borrowings are generally convertible into 90 day notes upon demand. While we may gradually extend the length of our borrowings, it is perfectly clear that the Europeans would not agree to any large scale stretch out of our present demand liabilities to a ten year term. The dollar, after all, as a key currency, is part of these countries’ liquid reserves. A ten year loan would be far from liquid and could not be counted as a reserve.

Mr. Rostow’s proposal would put us in a position similar to Brazil or Argentina, who, when they cannot pay their debts, go to their creditors and get an agreement to stretch out the debt over a period, usually not longer than five years. In sum, while the Treasury initiative in this area has been successful and can and will be carried further, it is not susceptible of being expanded upon to the extent desired by Mr. Rostow. Mr. Roosa has already scheduled meetings in five countries during the first week in March at which he will be exploring current prospects.

Finally and most important, a word about the philosophy that lies behind Mr. Rostow’s memorandum. This philosophy is the natural reaction of those who find their preferred policies threatened by balance of payments difficulties. It is only natural that they search for ways to make this very real problem go away without interfering with their own project, be they extra low interest rates in the U.S. or the maintenance of large U.S. forces in Europe.

However, such individuals are asking the impossible. The sine qua non of all international monetary dealings, under whatever system may be imagined, is that no country can consistently run a large balance of [Page 164] payments deficit. Under Mr. Rostow’s program we would consolidate our present liquid liabilities into ten year loans and then promptly create new short-term liabilities to take their place. This will not be accepted by our European friends, and cannot be accepted by them if the dollar is to maintain its position as the world’s reserve currency.

It is difficult, if not impossible, to know when the time will come when our credit will be exhausted. If we continue as at present that time will surely come, although I do not believe it is at all imminent. In this judgment, I agree with Mr. Rostow that our position is basically stronger than many of our financial experts think. But, granting this, we must, by one means or another, put our balance of payments house in order—and the sooner the better—since time is now working against us. We simply cannot ignore the basic disciplines of the balance of payments except at our peril.

One final word as to the “burden” of supporting a key currency. The burden is that we must maintain the value of our currency and cannot allow it to be devalued as if we were Brazil, Canada or Argentina. But the benefits are also great. To date, foreign countries and their nationals have acquired nearly $20 billion in dollar accounts. This, in effect, is a demand loan to us of $20 billion which has allowed us to pursue policies over the years that would have been utterly impossible had not the dollar been a key currency. Our dollar liabilities increased by $1-1/4 billion last year alone, which also would have been impossible were it not for the reserve currency status of the dollar. So while a reserve currency has its special problems it also brings in its trail real and important benefits.

Douglas Dillon 2
  1. Source: Kennedy Library, Dillon Papers, Memos to President, 2/63-3/63. Secret.
  2. Document 67.
  3. Printed from a copy that indicates Dillon signed the original.