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

108. Memorandum From the Cabinet Committee on Balance of Payments to President Johnson¹

Washington, December 6, 1966.

SUBJECT

• Continuation of the Voluntary Cooperation Program in 1967

Your Cabinet Committee on the Balance of Payments has been engaged in an intensive appraisal of the balance-of-payments outlook for 1966 and 1967. Completion of this appraisal and formulation of an over-all program for next year must await decisions on next year’s budg-et and other aspects of domestic economic policy.

However, one major element of the program requires an immediate decision, with a view to public announcement as soon as possible—hopefully by the end of this week. This concerns the continuation of the voluntary cooperation program for business corporations, banks, and other financial institutions administered by the Commerce Department and the Federal Reserve Board.

1. Estimated 1966 Results

With one month to go, we believe that our 1966 liquidity deficit could range between $1.3–$1.8 billion. The wide range, at this late date, is attributable, among other things, to uncertainty about the timing of offset payments and debt prepayment by Germany between now and year-end. These inflows could range from $200 million to $450 million.

Our official settlements deficit in 1966 will clearly be very substantially below last year’s figure of $1.3 billion.

You are, of course, familiar with the reasons why our 1966 liquidity deficit will, at best, be no lower than last year and—as indicated above—conceivably could be somewhat higher:

• —the increased military expenditures and other costs due to Vietnam,
• —plus a further worsening of our trade account due to the rapid expansion of our domestic economy,
• —offset, in large part, by gains on private capital transactions, including in particular large inflows of foreign capital associated with recent high interest rates.

The improvement in the 1966 official settlements deficit is importantly a result of tight money and high interest rates here. U.S. banks have not only curtailed lending abroad, but have borrowed money from their foreign branches. Such inflows have sucked dollars out of foreign official holdings—helping us on the official settlements basis.

2. The 1967 Outlook

The Cabinet Committee believes that even if everything breaks reasonably well next year on the trade front, on the German offset, on the level of Vietnam expenditures, and on the size of capital outflows, we still will be confronted—in the absence of continued voluntary programs—with a liquidity deficit very substantially in excess of this year’s figure. The Cabinet Committee believes that our over-all objective in 1967 should be to continue to move toward balance-of-payments equilibrium as fast as the continuing foreign exchange costs of Vietnam permit.

Continuation of the voluntary programs could bring the deficit back down to a level of $1.5 billion, although the judgment of many of the Cabinet Committee members (based on past painful experience) is that there is likely to be slippage in elements of this forecast, and the deficit could easily run higher. These views underlie the Committee’s conviction that not only should

• —the voluntary programs be continued,
• —but that they be tightened to the greatest extent possible compatible with their voluntary nature,
• —and additional measures both for 1967 and for the longer term should be undertaken.

3. The Commerce Voluntary Program

The Cabinet Committee believes that continuation of the Commerce Voluntary Program to restrain direct-investment outflows of business firms and to limit retention of overseas earnings in 1967 is essential. Secretary Connor has recommended a 1967 program calling for business corporations:

• —to increase their global exports $1.6 billion,
• —to increase repatriation of earnings $300 million,
• —to reduce the combination of direct investment outflows and overseas retained earnings by $100 million from the 1966 level,
• —to stretch out or cut back on marginal gross plant and equipment outlays by overseas subsidiaries.

The proposed 1967 program makes the same distinction between developed and less developed nations as in 1966 (its purpose is to restrain capital flows only to the former).

The program has been examined and approved by the Commerce Department’s Advisory Committee on the Balance of Payments, which considers it tough but feasible. Secretary Connor believes the program as formulated pushes the voluntary approach as far as it can go.

The Cabinet Committee approves the general outline of Commerce’s proposed program and is in agreement with all specifics except one—and it is an important one. The Committee believes that the additional $100 million savings in direct investment outflows and overseas retained earnings (over and above the 1966 program savings) under the proposed 1967 program is inadequate, and additional savings of $300 million should be sought by further tightening of the guideline. This, it is hoped, would have the effect of bringing direct investment outlays in 1967 back to the 1964 level. Secretary Connor dissents from this recommendation on the ground that it is an unreasonable expectation. The Committee, on the other hand, believes these additional savings should be sought because the remaining options for gains of this magnitude are extremely limited.

A draft press release and letter from Secretary Connor to the participating corporations spelling out the 1967 program are attached as Tab B.²

4. The Federal Reserve Voluntary Program

The Cabinet Committee also recommends a continuation, and tightening, of the Federal Reserve voluntary program for banks and other financial institutions.

The Federal Reserve Board has recommended a program under which banks

• —will receive no increase in their present guideline ceiling (109 percent of the December 1964 base)
• —but will be permitted to move only gradually up to that ceiling by the end of 1967
• —providing that 90 percent of the allowable increase in credits must be used either for loans to less developed countries or for export financing, leaving only 10 percent for non-export loans to developed countries.

The banks are approximately $1.2 billion below the 109 percent ceiling now, so they will have plenty of leeway under the extended 109 percent ceiling. On the other hand, there is a sharpened focus under the recommended program on loans to less developed countries and on export credits. This is consistent with our other balance-of-payments efforts (e.g., the establishment of the EX–IM rediscount facility).

The permissible increase in non-export credits to developed countries in 1967 would be only $120 million.

The proposed program for the non-bank, financial institutions for 1967 will replace three different guidelines used in the 1966 program with a single guideline permitting an increase of 5 percent in outstanding foreign assets covered under the program over the 15 months from October 1, 1966, through December 31, 1967. This guideline will permit increases in these assets between October 1, 1966, and December 31, 1967, of about $100 million.

The Cabinet Committee concurs in the Federal Reserve Board’s recommended program, the proposed release of which is attached as Tab C.³

5. Other Measures under Consideration

We are very much aware of the difficulty of reaching a decision on the Federal Reserve and Corporate Programs for 1967 without a complete picture of the other measures that the Committee may later recommend depending somewhat on the outlook for the economy in January and the fiscal and monetary policy mix still to be determined.

Additional measures we are recommending now for inclusion in your Economic Message include

• —extension of the Interest Equalization Tax, which expires July 31, 1967. This has proven effective in limiting the accessibility of our capital market to foreigners. The recommendation for extension may include provisions for tightening the IET and making it more flexible (these features have not yet been discussed by the Committee).
• —measures to reduce the travel deficit (increase in passport fees to provide funds for encouraging travel to the United States, cut in customs exemptions, and a voluntary appeal to U.S. citizens to restrain travel plans outside the hemisphere for the duration of the Viet Nam conflict).
• —follow-up actions to exploit passage of Foreign Investors Tax Act.⁴
• —continuation and possible tightening of our balance-of-payments arrangements with Canada.

The Committee views with concern the continuing and increasing tourist gap which this year places a net deficit burden on our balance of payments of approximately $1.8–$1.9 billion, having increased from $1.2 billion in 1961. In view of the request Government has made of industry and financial institutions, not to mention the sacrifices of our men in the field, it is both appropriate and timely to introduce modest measures to call the public’s attention to the large dollar drain from tourism, seeking their cooperation in moderating this outflow.

The Vice President wants to see the final tourism program before it is submitted to you formally. I am, therefore, giving him a copy of this memorandum.

While there is still not unanimity, the Cabinet Committee is preponderantly in agreement that, as a minimum, the new measures listed above are required in the travel area, both because of their impact on the travel deficit itself and the reinforcing influence they may have on the efforts of businessmen and bankers called upon to make greater sacrifices in 1967 than before. (See Tab D for dissenting views.)⁵

Decisions Required at This Time

The Cabinet Committee recommends:⁶

(1) That you approve continuation of the Federal Reserve voluntary program on the basis outlined above.

(2) That you approve a continuation of the Commerce voluntary program.

(3) If (2) above is approved, that you approve the recommendation of your Committee that the program recommended by Commerce be tightened to provide additional balance-of-payments savings of $300 million,

or, you approve the level recommended by Commerce, whose judgment is that further tightening is unrealistic on a voluntary basis.

(4) The Committee requests that you indicate your over-all approval of this proposed continuation of the Commerce and Federal Reserve voluntary programs in the form of a letter, attached as Tab A,⁷ to be released in connection with public announcement of the two programs for 1967.

(5) The Committee further recommends that such public announcement be made by Secretaries Fowler and Connor and [Chairman Martin] [Governor Robertson]⁸ at a press conference to be scheduled for Friday, December9.

1. Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. 3 [1 of 2], Box 2. Confidential. Secretary Fowler sent the memorandum to President Johnson under cover of Document 107. A handwritten note at the top of the source text reads: “$7 billion.”
2. See footnote 6, Document 107.
3. Tab C was not found; see footnote 7, Document 107.
4. President Johnson signed the Foreign Investors Tax Act of 1966 on November 13, 1966; P.L. 89–909 (80 Stat. 1539).
5. Tab D was not found and has not been further identified.
6. There is no indication on the source text if the recommendations were approved or disapproved.
7. Tab A was not attached; see footnote 5, Document 107.
8. Brackets in the source text.