8. Memorandum From Secretary of the Treasury Dillon to President Kennedy0


  • Fourth Quarterly Report on Balance of Payments1

I am today submitting to you my Fourth Quarterly Report reviewing the current balance-of-payments situation, and the status of the measures taken to implement your Message to the Congress of February 6, 1961. The Report is being widely distributed to other departments and agencies, the activities and expenditures of which affect our [Page 16]balance of payments. This I am doing so that all may be aware of the current situation and prospects, the need for continued vigilance in holding down overseas expenditures, and the need for even greater efforts to increase our receipts from other countries.

The highlights of the Report are the following:

Despite a worsening in our “basic accounts” in the second half of 1961, our situation was much improved over 1960, and even more by comparison with 1959. This reflected the improvement in our merchandise trade. As our imports rose with domestic recovery in the last six months, however, the commercially-financed export surplus dropped. A large part of the improvement in our “basic balance” was due to the special, negotiated prepayments of debts owed the United States Government.
For 1962, we have assumed that acceleration of European economic activity plus the cumulative effects of our various export promotion measures will raise commercially-financed exports by about $1 billion. On the other hand, increased economic activity at home will probably result in an increase in our imports of about $1.5 billion. Some prepayments of debt owed the United States can be expected, but they will probably fall considerably short of the $700 million received in 1961. However, the offset to our military expenditures in Germany recently worked out with the Federal Republic Government and others which are likely within the coming year should substantially lower our net military expenditures overseas. Taking all these factors into account, our “basic deficit” is likely to be somewhat larger than last year’s basic deficit of $600 million.
Short-term capital movements continue to be unpredictable, even though last year more of them were “normal” commercial flows and not speculative capital. To the extent that our exports increase, we can expect a portion of the increase to be financed by short-term capital outflows. Such increases can contribute substantially to the over-all deficit as was the case last year. We are hopeful that other temporary outflows, based largely on interest rate differentials, will be reduced in 1962. Such a reduction could easily offset the moderate increase we look for in short-term capital outflows associated with expanding exports, and could lead to an over-all deficit somewhat smaller than that incurred in 1961.

In 1961 more foreign private recipients of dollars elected to hold them. This contributed to the sharp drop in our gold losses, as compared with 1960. Probably the most important single reason for this—and possibly the most important single development in this field in the past year—is the intangible but vital degree of international cooperation among monetary authorities which has been developed. A variety of ad hoc measures by different monetary authorities contributed to moderating [Page 17]short-term capital flows, to keeping dollar holdings in private hands and out of official reserves, and hence to reducing demands for gold.

The efforts extending through the year to improve international monetary institutions were climaxed by the successful conclusion, early in January 1962, of the new arrangements which will in effect triple the resources of major currencies other than the dollar and sterling available to the International Monetary Fund to meet a request for a drawing by the United States.

The arrangements recently worked out with Germany will offset our military expenditures in that country during 1961 and 1962.2 We intend to seek similar arrangements over the coming year to offset part or all of our defense expenditures in France, Italy and perhaps other industrial European nations with strong economies. During the current year we hope that by these means, plus sales of military goods and serv-ices to other Free World nations, we will be able to offset our defense expenditures by at least $1 billion.
For the longer run, export promotion must be given a major role. The variety of measures designed to increase businessmen’s awareness of export opportunities, and awareness in foreign markets of what the United States has to offer, has been expanded. The Export-Import Bank-Foreign Credit Insurance Association scheme for export credit insurance is one of the new facilities offered business by Government. It will be appropriate to continue and steadily to improve these measures. Plans for an intensification of our national effort to expand our merchandise trade surplus are being surveyed for presentation in the proposed Balance of Payments Message.
It is necessary not to relax our vigilance in holding down United States Government expenditures abroad. In this task Defense, State and AID and other agencies having overseas expenditures are cooperating with the Bureau of the Budget and with us. The two major problems which remain are overseas defense expenditures and the degree of financing of local costs which may be considered necessary in our foreign assistance programs.
We will make every effort to minimize the balance-of-payments impact of our overseas defense expenditures by expanding sales of United States military equipment and negotiating other offsetting arrangements with our industrial allies. With respect to the remaining impact, while further savings will undoubtedly be found possible, major reductions in spending will probably become possible only when a significant reduction can be made in the number of United States forces and dependents deployed overseas. The level and composition of overseas [Page 18]deployment of United States forces is under review by Secretary McNamara.
The proposed new sugar legislation, if provisions to establish import fees are retained, would contribute approximately $100 million to our balance of payments, on the assumption that the use of the fees for economic assistance under the Alliance for Progress will be tied to United States procurement.
The major problem of economic assistance as it affects our balance of payments at the present time is the question of financing the local costs of projects and programs. Largely because of this type of expenditure, AID officials had estimated that commitments of FY 1963 AID funds would result in expenditures abroad of $837 million, as opposed to $647 million resulting from FY 1962 commitments. These estimates are now being revised upwards. Over-all foreign assistance expenditures resulting in an immediate cash outflow from the United States (reflecting also authorizations made before the change in procurement policies) were about $1.3 billion in calendar years 1960 and 1961. This total cannot be allowed to increase and must be reduced to about $1 billion if our foreign assistance operations are to bear their fair share of the burden involved in reaching a balance in our payments.

This is of particular importance in the Alliance for Progress, and may be an increasing problem in other areas, particularly in Africa. We have sought a number of ways to minimize the balance-of-payments effects of the local cost financing which AID undertakes. Among these have been the placing of the dollar funds in segregated accounts, to be used only to pay for United States goods and services, and the agreement reached with Nigeria that it would find other means of increasing imports from the United States by an amount at least as great as the United States financing of local costs. While the Nigerian example is interesting, it may not prove possible to implement it in the desired fashion. Segregated accounts may simply result in AID financing of United States exports which would have been made in any event. Senior policy officials of State and AID are currently cooperating with us in exploring other potential methods of minimizing the balance-of-payments impact of local cost financing. I will furnish you with a special report on the results of these studies in the next two weeks.

In summary, our position is considerably improved. But we cannot relax our efforts. Further vigilance and ingenuity in holding down expenditures, and further efforts to increase our receipts, are necessary.

Douglas Dillon
  1. Source: Kennedy Library, President’s Office Files, Treasury, 3/12/62. Confidential.
  2. The report was attached but is not printed. Dillon also sent the report to Secretary Rusk under cover of a March 15 memorandum, which called particular attention to paragraphs 7 and 10. Dillon added: “I am sure that Fowler Hamilton and the other appropriate officials of the Department of State will cooperate fully in developing promptly new methods of meeting the local cost financing problem.” (Department of State, Central Files, 811.10/3-1562)
  3. Regarding these arrangements, see Documents 40 ff.