Foreign Relations of the United States, 1964–1968, Volume VIII, International Monetary and Trade Policy

106. Minutes of Meeting of the Cabinet Committee on the Balance of Payments¹

Washington, December 5, 1966, 3 p.m.

Secretary Fowler reviewed briefly the most recent forecast we have for 1967 which, as of now, includes a trade surplus of $4.9 billion, a GNP of $790 billion and a 6.8 percent growth (of which four percent is real). Without a balance of payments program this adds up to deficit in the neighborhood of $3 billion on a liquidity basis. Secretary Fowler read to the Committee much of his November 8 Memorandum to the President² including the time schedule which recommends the possible announcement of the first stage of the 1967 program, particularly the corporate and bank program early in December with the rest of the program to be tied into the Economic Message in January.

Mr. Knowlton advised the group that the Executive Committee felt that the Federal Reserve program was generally satisfactory and while there were minor wording changes, particularly regarding Canada and Japan, they have been resolved and there is no need to trouble the Cabinet Committee. Chairman Martin said that the Federal Reserve is ready to release their program.

Mr. Knowlton, reporting on the Executive Committee’s attitude about the Commerce Department’s proposal, said there was a strong feeling that the program should be tightened further, specifically that Commerce should shoot for the level on an O.B.E. basis of $2.4 billion (less Delaware subs) compared with projected net direct investment outflows for next year of $2.75 billion. The Executive Committee explored several methods by which Commerce might tighten the program believing that Commerce should decide how to employ these techniques.

Secretary Fowler asked can the Commerce Department program be tightened without losing the success or the character of the program. Mr. Connor feels, Secretary Fowler said, that if we introduce a net direct investment target below $2.75 billion we will be risking having the program come apart at the seams. The past formula would allow corporations to have a goal of 135% and Commerce has already tightened the program to 125%. The Secretary reviewed the net direct investment figures for 1964–1967 and referred to the attitude of the Executive Committee where it was felt that lower figures were justified. He added that it was the conclusion of the IMF consultants that there be further tightening in the corporate program, but their recommendation was not quantified. The Secretary said he recognized that Secretary Connor and his Advisory Committee can not stretch their program too far, nevertheless a further reduction in the over-all target is desirable. If we measure what happened on the direct investment account in 1966 against estimates, we realize that there is some slippage. Secretary Fowler also said that government is working under a handicap in outlining the balance of payments program before the Administration’s Economic Message is ready. This problem of planning could be even worse next year and it would be preferable to decide on the program after the President had prepared his Economic Message. This would argue for extending the termination date of next year’s program until March 31, 1968. The figures could be adjusted; for example to averaging net direct investments of $3 billion over five quarters, rather than $2.4 billion over the year. This stretch-out could be accompanied by a request to industries to moderate their expansion overseas and it would assist forecasting. Finally he said that the export target set for industries next year could be a little more strenuous than that anticipated in the proposed program.

Secretary Connor said he wanted to clarify certain misconceptions which the Committee seemed to harbor. The Commerce program was not aimed exclusively at reducing capital outflows, there are other selected transactions which indicated increased exports and a high repatriation of foreign earnings. He mentioned that the reporting companies contributed $1.4 billion in 1965, $1 billion in 1966, and $2 billion is forecast in 1967 of which $1.6 billion of this latter figure comes from an increase of exports. Secretary Connor said that he felt that the $4.9 billion trade surplus forecast for 1967 was perhaps optimistic, and that in general in planning a program we are just playing with numbers, none of which we can be sure of; therefore, if we are going to keep the program on a voluntary basis we must wait until industry tells us what they can do before we decide if the program can be tightened any further. The Secretary said that the program objective in 1967 is designed to maintain the same level of outflow as that achieved in 1966. He argued that it was not reasonable to tighten the program further during a period of growth in gross plant and equipment expenditures. Furthermore he did not feel that the activities of the 722 reporting companies could be related in a meaningful way to the O.B.E. figure, because of the several items involved in the latter compilation over which the Commerce Department has no control. With respect to the idea of putting the program on a five quarter basis the Secretary argued that this would create a great inconvenience to companies, an inconvenience which is not justified.

Mr. Knowlton emphasized that the trade estimate was put together by an interagency group chaired by the Commerce Department. He added that exports grew by more than 12 percent in 1966 and Commerce was asking their companies to achieve less in export expansion in 1967 than they did in 1966. Secretary Connor questioned how meaningful an export target was, since it was in the interest of corporations to push these as much as possible anyway. Secretary Fowler thought a higher target might encourage them to work a little harder. Secretary McNamara said that more exports are not equivalent to an improvement in net direct investments, which is the objective. He went on to raise the broader question that he feared the U.S. was cutting its foreign policy too close because of balance of payments considerations. If this results in cutting back on our objectives we would be paying a very serious price indeed. Nevertheless he recognized that balance of payments considerations are a fact of life—a concern shared by all. It is all mythology, but it is a myth in which people believe and therefore we must contend with it.

In conclusion, Secretary McNamara agreed that the total projected deficit for 1967, after applying the proposed program, was still too large and further efforts would be required. Secretary Connor suggested that there might be a cutback in Vietnam. Secretary McNamara felt that this suggestion identified the issue: We are being asked to cut back in our basic foreign policy objectives in order that U.S. corporations may continue their investing overseas. In dealing with this entire balance of payments problem, we are running too close to the line, always being ready to cut back in our effort to achieve our basic objectives in order that we may satisfy the balance of payments standard.

Secretary Fowler, referring to the projections, said that even on the most optimistic estimates, he felt that there was a need to bring direct investments down further and, in addition, industry must be asked to stretch out its foreign expansion—just as all aspects of the United States Government and private alike are asked to moderate expenditures: no one is asking that they be stopped. Secretary McNamara felt that the balance of payments program, that is, the Federal Reserve and Commerce programs were too thin to recommend to the President, and standing alone they were unsatisfactory. Secretary Rostow commenting on his recent trip observed that while the myth of equilibrium was being preached, a deficit of around $1.5 billion was bringing home to the Europeans what the true implications were to everybody of the United States reaching equilibrium. Moreover, he felt that increasingly we were getting support for what we were trying to achieve in Vietnam. Secretary Fowler, in referring to Secretary McNamara’s statement, stated that we are all in the business of cutting things fine these days; we are seeking to proceed with a great society, foreign aid, Vietnam, and free capital flows, all in the framework of a free economy. This can only be achieved by cutting things very fine and he suggested that the Commerce program was not cut fine enough. Secretary Connor believed that his program was as far as he could go; that to tighten it further might cause it to come apart at the seams. If the program is to maintain its voluntary character, the Secretary said there was strong recommendation to continue it at the 125 percent level. If the objectives are not met in the future those who change it will say that industry has failed.

Mr. Bator said he felt that the key to the problem rests in the continued expansion of gross plant and of equipment expenditures overseas. Using this continued growth as a justification for the higher direct investment figure was not appropriate. On the contrary, he concluded that this growth figure had to be pared down. Secretary Connor said that he did not think this was possible on a voluntary basis, although he intended to include in his announcement a plea for moderated expenditures in the year ahead. Ambassador Roth inquired if it was possible to establish a 120 percent target and adjust it upward if the reports to be received in February indicated that this was necessary. Mr. Knowlton inquired if substantial foreign investments (less Delaware subs) were $2.9 billion, and if the reporting companies accounted for $1.9 billion, then after allowing for less developed countries and certain financial transactions from Canada, there remained a hole that might be plugged. He inquired if a group might not be set up to examine this area and suggest methods to close these holes. Secretary Connor explained that there were signs that the nature of the gross plant and equipment expenditures was changing. It appeared that there was evidence of few new ventures and increasingly more money was being spent on expanding existing operations.

Secretary Fowler said the issue is, is it reasonable to reduce direct net investments from $2.75 billion to $2.4 billion? “No,” said Secretary Connor, not in the face of growing expenditures. Mr. Bator said that the risk of trying to save $300 million more in the Commerce program was less than the other risks that are involved. Secretary McNamara argued that we must not push too fast to achieve our burden sharing objective. Secretary Fowler said that if $300 or $400 million were saved in the Commerce program, severe efforts for further improvement are still required in other areas. Secretary Connor felt that it would not be possible to tighten the Commerce program further without losing the voluntary character of the program. He thought that the Federal Reserve program had in fact been loosened.

Secretary Fowler distributed the proposed letter from the President to the Chairman of the Balance of Payments Committee. The general comments on this letter were favorable but final comments were reserved.³ Secretary McNamara said that the confidential memorandum to the President should reflect the attitude that the members were not satisfied with just a bank and corporate program, and that additional measures were required in the travel and export stimulation areas, to mention a few.⁴

Secretary Fowler said he did not want to bring a divided issue before the President, and asked if he could not say it was the sense of the Committee that the Commerce program should be marginally tighter. Administrator Gaud inquired if the Committee was ruling out the possibility of efforts in the area of tourism. The tourist flow gives no benefit to the balance of payments in either the long or short run. Should we not do something here? Secretary Connor argued for an appeal by the President that the tourists moderate their foreign travel, referring to the sacrifices being made in Vietnam. Secretary Fowler referred to the notes of the last meeting, where there was a suggestion (1) that the President make an appeal to the public on tourism, (2) that passport fees should be increased with the proceeds going to support the U.S. Travel Agency, and (3) reduction in the customs exemption.⁵ Secretary McNamara called the overall program limited and asked for another program which would cut the tourist outflow and build the foundations for the future when we would not be plagued by this problem. Secretary Fowler agreed with the need for a long-term program, but emphasized the importance of announcing in the very near future the continuation of the voluntary cooperation program on the balance of payments, in order that industry may be given time to plan and comply. Secretary Rostow said that he was impressed with the argument that some restraint on tourism would help the private business community respond to the appeal and meet their target. Secretary McNamara felt that a passport fee increase was not restrictive. It would support the President’s appeal and it would provide the revenue needed for the travel service. It was agreed that his recommendation could be included in the confidential letter to the President, although legislation may be required to obtain the increased fee. Director Schultze dissented on the budgetary grounds that earmarked funds were undesirable. Secretary Fowler emphasized that while only the short range programs are being discussed today, long-term measures will be actively pursued, such as encouraging the inflow of capital; developing foreign capital markets; mechanics to put the restraint program on a standby basis but ready to be reinvoked; encouragement of tourism in the United States; export promotion and possible tax incentives; realigning the balance of payments costs of military commitments; sharing the burden of assistance to the LDCs; and IMF reform. Chairman Ackley reserved judgment on whether an increased passport fee on tourism was enough, or whether we should not examine a tax on foreign travel. Mr. Knowlton urged that the timing of any action on tourism be postponed until January and not to have it coincide with the forthcoming announcement on the bank and corporate program. Secretary Fowler concurred, stating that he had to discuss this with Vice President Humphrey. He added that Treasury was prepared to reduce the customs exemption to $10. Mr. Bator felt that tightening the tourist program could only be achieved if the corporate program was tighter. Secretary Fowler added that extension of the IET would be required, and that the possibility of a change in the economic policy mix underscored the need for the tax extension. Under Secretary Schnittker said that in our forthcoming examination of long-term measures, we should re-examine the issue of cargo preference as well as switching soy beans from a restricted to a general license. Secretary Connor agreed that this was timely.

JR Petty

1. Source: Johnson Library, Fowler Papers, Voluntary Program, Box 16. Confidential. Drafted by John R. Petty (Treasury) on December 10. The meeting was held in Secretary Fowler’s Conference Room. A list of participants is not printed; the following attended the meeting: Gaud (AID), Schnittker (Agriculture), Schultze (BOB), Ackley (CEA), Secretary Connor, Secretary McNamara, Martin (Federal Reserve), Rostow (State), Roth (Trade Negotiations), Fowler, Knowlton, and Petty (Treasury), and Bator. Copies were sent to Secretary Fowler and Knowlton, Petty, and Schaffner.
2. Document 105.
3. An apparent reference to the letter cited in footnote 5, Document 107.
4. Presumably a reference to Document 108.
5. This meeting has not been further identified.