21. Memorandum From the Chairman of the Council of Economic Advisers (Ackley) to President Johnson1


  • The Balance of Payments

The facts about our progress in correcting the balance-of-payments deficit—which you used so effectively during the campaign—have not appreciably changed.

The regular-transactions deficit for 1964 is now conservatively estimated at $2.4 billion

  • —down 28% from 1963’s $3.3 billion;
  • —down 39% from the 1958–60 average of $3.9 billion.

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This will be the best year-to-year gain since 1957.

If the December results are as good as December last year, the 1964 deficit will be even less than the expected $2.4 billion.

If we measured our deficit the way most European countries do, our deficit this year would be about $1 billion, down from about $2.4 billion last year (measured the same way).


We are expected to lose some gold in December. Even so, our gold losses for the year (now estimated at $175–200 million) will be the lowest since 1957

  • —down about 60% from last year
  • —down almost 90% from the average of 1958–60.

And our gold losses this year will be less than half the $0.5 billion loss forecast at the beginning of the year.


To be sure, the 1964 deficit is now estimated as somewhat higher than the $2 billion hoped for at the beginning of the year.

But most foreigners took our earlier estimate with a few grains of salt.

Foreigners (e.g., the OECD last week)2 continue to compliment us for the very substantial improvement we have made.

A prominent American banker who specializes in international finance and is in very close touch with European bankers told me yesterday he thinks our problem is so nearly solved that he wants us to relax some of our present measures. I think this is premature, but indicates there is also optimism in financial circles.


It is remarkable that this year’s deficit has apparently been financed with little increase of our “official liabilities” abroad (to governments and central banks).

And our official liabilities to Europe will have been substantially reduced this year.

This is partly a tribute to continued brilliant Treasury management, and partly to the improved position of the LDC’s.

But foreign private businesses have also been happy to hold a large part of the dollar balances created by our deficit

  • —because they need larger balances to finance their trade and payments;
  • —because they have renewed confidence in the soundness of the dollar.


The conservative estimate of the technical experts is for a further $600 million (about 25%) improvement of our deficit next year.

If it began to appear next year that we were not going to get this improvement, we would want to consider further measures.

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We should have some further stand-by measures in preparation.

But we can’t decide now on the specific measures we would need to use. For example, we might wish to use our authority to apply the Interest Equalization Tax to bank loans, but only if the volume of such loans stays high.


Some people seem frightened by an alleged parallel to the British case. But the situations are in no sense similar.

Our export surplus is large and steadily improving—they have had a steadily worsening trade deficit.

Our costs have been stable for 7 years; theirs have risen about 16%.

Our reserve position is infinitely stronger. Our deficit this year will be about 15% of our reserves; their deficit will exceed 2/3 of their reserves.

Their official liabilities are 2–1/2 times their reserves; ours are less than our reserves.

We have much more room for maneuver than they—our imports are less than 3% of GNP; theirs 17%.


This doesn’t mean that we could never have a run on the dollar. We could (and we did in 1960 when our deficit was considerably worse).

But—unless the British should devalue—there seems much less risk of a run now than in a long time.

There is no way we could reduce that risk to zero—especially so long as we remain a reserve currency, which we must, short of a whole new international monetary system.

We have many defenses against a run: our still massive gold stock; a flexible discount rate with no ceiling; our network of swaps; the IMF; a massive “package” of emergency support such as we put together for the U.K.


Certainly, we are not yet out of the woods on the balance of payments.

We need to keep on doing everything we are doing now, and there may be some things we can do better.

We should continue to underline to the world our determination to protect the dollar at all costs. Amending our “gold cover” requirement will make even clearer that our gold will be used to defend the dollar.

There is surely no reason for panic. A hastily conceived program of added measures that promised only minor gains or that involved high costs to our other objectives could be taken as a sign of our own loss of confidence.

Gardner Ackley 3
  1. Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. 2 [2 of 2], Box 2. No classification marking.
  2. The Ministerial Council of the OECD met in Paris December 2–3, 1964. For text of the communique issued at the conclusion of this meeting, see American Foreign Policy: Current Documents, 1964, pp. 497–499.
  3. Printed from a copy that bears this typed signature.