78. Telegram From the Embassy in Germany to the Department of State 0

314. Paris also for USRO. Department pass Treasury.

German opinion on President’s balance of payments program, both official and private, soured somewhat over weekend and Monday.1 Exception extended Canada2 and, to lesser extent, skepticism over enforcement, confusion on effective date and rumored further exception for Japan, have led many to conclude that interest equalization tax will be largely ineffective and possibly even counter-productive. Several quarters have expressed fear that effort to enforce tax will draw US inevitably into exchange controls.
Bundesbank and Economic Ministry officials continue support program but privately have expressed disappointment over Canadian exception, which they feel has weakened confidence in entire program. Bundesbank (Emminger) believes discretionary authority implied in press release on Canadian exception suggests create one of kind of capital issues committee. Officials also not happy over discriminatory manner in which it now appears to them tax will be administered.
Private banking community seems concerned that situation of dollar so serious as to justify such “drastic” measures and many bankers doubt that interest equalization tax can be effectively enforced. Rumors are circulating that Congress might amend proposal to make direct investment subject to tax, thus adding to atmosphere of confusion and uncertainty.
Since Friday, press reaction also focused on equalization tax and acknowledged much depends on detailed proposals to Congress and Congressional handling. Some circles felt Wall Street would undergo period of isolation while others would somewhat welcome German stock market’s new independence from New York.

Tuesday Frankfurter Allgemeine (FAZ) considered Canadian exemption indication program not thought through and opined exemption to Japan has been granted. Banking circles, according FAZ, regretted European central banks and governments had given their approval to American action because if other governments followed US example it would mean end free international capital movements.

  1. Source: Department of State, Central Files,FN 12 US. Confidential; Priority. Repeated to Paris and USRO, London, Rome, Brussels (BUSEC), and Bern.
  2. July 22.
  3. Following representations by the Canadian Government, which complained about the U.S. proposed measures, especially the interest equalization tax, to improve its balance-of-payments position, the U.S. and Canadian Governments issued a joint statement on July 21. The statement specified, among other things, that U.S. officials agreed to include a provision in the draft legislation to Congress “authorizing a procedure under which the President could modify the application of the tax by the establishment from time to time of exemptions, which he could make either unlimited or limited in amount.” For full text, see Department of State Bulletin, August 12, 1963, p. 256. Additional documentation on U.S.-Canadian discussions on this question is printed in volume XIII.