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

168. Telegram From the Department of State to the Embassy in the United Kingdom¹

Washington, December 31, 1967, 0859Z.

91707. For Ambassador. Please deliver Sunday, December 31 following letter to Prime Minister Wilson from President Johnson:²

“Dear Harold:

We are at the end of a difficult year, and both our countries have much unfinished business to carry forward. It is encouraging to recall nonetheless that it has been a year in which our close consultations and collaboration have helped produce a number of memorable achievements—the maintenance of security arrangements in Europe, the agreement on the new reserve unit in the IMF, the completion of the Kennedy Round, to recall a few. We are not yet out of the woods in the Middle East, but we have certainly made progress, with the passage of your Resolution in the Security Council.³

We can take heart also from the success we have had through our joint efforts and through the cooperation of the other financial powers in meeting the critical problems of November and December and in restoring a sense of confidence and order to the world’s financial system.

The speculative fever of these weeks has severely tested our methods of cooperating on economic problems; but, we have continued to work together effectively in a financial world suddenly beset by fear and disorder. We have, thus far, met and repelled a serious threat to the foundations of the international monetary system, which, in turn, could also have undone the accomplishments of the Kennedy Round and the unity of the system of international commerce.

Meanwhile, the agreements at London and Rio on a plan to supplement existing reserve assets are a further reason for solid satisfaction, as we look to the longer future.

In both of these achievements—the long-range improvement of our international monetary system and the recent defense of the existing system—James Callaghan at the Treasury and Leslie O’Brien at the Bank of England have played important and, indeed, vital roles. I know that they have contributed much to the recent efforts to preserve order in the gold and foreign exchange markets. I am reassured by our mutual determination to exert a constructive force in the world financial system. This, I know, reflects a clear common understanding of the importance of international monetary cooperation in creating that environment of safety and opportunity which is required for the continued growth and stability of our nations’ economies.

As you know, we, as well as our trading partners, have been concerned about the balance of payments position of the United States. This concern has been increased by the events of recent weeks. As a result, I am announcing on January 1, 1968, a new and vastly strengthened program to reduce our deficit and guarantee the continued viability of the international monetary system.

In the program, I will press for the tax increase to restrain excessive demand in the United States and to reduce our budget deficit to manageable proportions. I hope that this bill will soon become law. This, in itself, should be a helpful factor in our balance of payments and should demonstrate to the world that we will keep our own economic house in order. And the Federal Reserve has already made clear its determination to use monetary policy to this end.

But much more needs to be done; and we propose to do much more. Our balance of payments actions are designed to improve both our current and our capital accounts.

These actions will be painful to the United States and, to some degree, to our international partners. They are designed to avoid as far as possible adverse effects on the developing areas of the world. We hope they will result more in the reduction of surpluses than in the shift or increase of deficits. And we have kept very much in mind the views of other countries and the international economic institutions.

In this effort we wish to proceed within the spirit and the letter of the recent Resolution of the OECD Ministerial Council that the adjustment of the American deficit and the European surplus is a matter of common concern, to be handled cooperatively. Surpluses in international payments are the mirror image of deficits. Thus, both surplus and deficit countries must strive to reach balance and act cooperatively to this end. This is no less true in the 1960’s than it was in the late 1940’s and ′50’s, when we carried the responsibilities of a surplus nation. This concept was definitively developed by our best economic and financial experts in a carefully prepared OECD Report on ‘The Adjustment Process’ in August 1966.⁴

Our deficits have been the net result of a current account surplus, including a trade surplus, inadequate to support foreign exchange costs of our external capital flows, foreign aid programs, and military expend-itures for the common defense. During the period of the ‘dollar gap,’ these deficits helped redistribute the world’s monetary reserves—the time has come, we all agree, to bring them to an end.

As we see the problem, we need to act to improve our current account, reduce capital outflows, and neutralize more fully our net foreign exchange expenditures in the common defense. Our new program is designed to move us strongly towards equilibrium. But full success will require the understanding and cooperation of our partners. It seems axiomatic to us, and basic to our view of the OECD Resolution, that those in strong reserve positions, or in surplus, should avoid actions that increase surpluses, should not take offsetting action to preserve their surpluses—indeed, that it will be necessary for them to take positive action to move toward balance. Otherwise, the only result will be to shift the adjustment burden to those who can least bear it or to make it more difficult for us to achieve balance. In our judgment—and, I believe, in your judgment—it is important for the United States to move decisively toward balance with the least possible dislocation to the world’s system of trade and finance. Our mutual security and collective well-being, which rest upon the continuing strength and unity of the international economic system, are at stake.

It is against these fundamental objectives, which I am sure are common objectives, that I hope you and your Government will judge our new and strengthened balance of payments program. I have asked Ambassador Bruce to call on you to explain our new program more fully. I have also asked Under Secretary Katzenbach to visit with you in London to review further both this program and the entire scope of our mutual cooperation. I trust you and your key ministers will support this program and, thereby, help preserve confidence in the system we have built so diligently together over the past twenty years. I am looking forward to seeing you in February.

Sincerely, Lyndon B. Johnson”

Mark letter “Secret” and request HMG make no public reference to fact or substance of this letter. Talking points on substance of program to be used by Ambassador contained in septel.⁵

Rusk

1. Source: Department of State, Central Files, POL UK-US. Secret; Exdis; Flash. Drafted at the White House, cleared by Jeanne W. Davis (S/S) and Leddy (EUR), and approved by Enders (M).
2. For background regarding this letter and similar ones from President Johnson to heads of government, see Document 167.
3. Reference presumably is to a British resolution, which became Resolution 242, adopted by the U.N. Security Council on November 22, 1967. For text, see American Foreign Policy: Current Documents, 1967, pp. 616–617.
4. For a summary of this report, see The New York Times, August 15, 1966, p. 39.
5. Not further identified.