26. Memorandum From Secretary of the Treasury Dillon to President Johnson1


  • The U.S. Balance of Payments Situation

The improvement since 1960:

Last year’s deficit on regular transactions is now estimated at about $2.8 billion—$500 million below the 1963 level and about $1 billion below 1960 but well above the $2 billion target we had established earlier. The improvement over 1960 was the net result of

  • —A commercial trade surplus up by $500 million.
  • —Investment income up over $1.5 billion.
  • —Effect of Government expenditures overseas down over $1 billion.
  • —Net losses on tourist account up $500 million.2
  • —U.S. purchases of foreign securities unchanged (but only because of the announcement of interest equalization tax in July 1963).
  • —Longer term bank lending to foreigners up sharply by over $500 million.3
  • —Short-term capital outflows up by $400 million.
  • —Direct investment higher by $500 million.4

In brief, improvement has been substantial in those areas which our previous programs targeted—but this improvement has been offset by sharply increased bank lending and continually heavier tourist spending abroad.

Current problems:

The fourth quarter 1964 deficit was particularly large, running at an annual rate of over $4 billion. The sterling crisis has impaired confidence in the dollar. Losses of gold have resumed, $172 million being lost in the fourth quarter with still larger losses expected in the coming months. Details regarding the gold situation are covered in a separate memorandum.5

Foreign exchange markets continue extremely uneasy both because of the sterling crisis and a general cautionary attitude toward both sterling and the dollar. The gold price in London stands at the highest level since the Cuban crisis despite substantial official intervention. Gold losses of about $250 million are foreseen for January and perhaps $600 million for the January–July period.

To sustain confidence in the dollar and avoid further substantial gold losses, it is essential to take steps to insure a reduction in the 1965 deficit to well under $2 billion.

The suggested program:

A special balance of payments message to the Congress reviewing developments since 1960, reaffirming that a change in the price of gold is out of the question and pinpointing the measures required to achieve further improvement. These steps will include:

  • —Announcement that the Gore amendment to the Interest Equalization Tax has been imposed by the President so that the tax falls on [Page 75] bank loans with maturities of one year or more to foreigners (other than loans directly associated with the financing of U.S. exports).6 Imposition of the tax would affect bank lending now running at about $1 billion annually, cutting the outflow by up to perhaps $300 million.
  • —Recommend a two-year extension of the Interest Equalization Tax, thus continuing to curb foreign security sales in the United States capital market by developed countries abroad.

    (To minimize the possibility of heavier bank lending of less than one year, the Federal Reserve should be encouraged to amend Regulation A affecting commercial bank access to the Federal Reserve’s discount window, to deter short-term lending to foreigners.)

  • —Recommend imposition of a travel tax of $100 per person per trip, applicable to trips outside the United States in excess of an appropriate minimum time period (or, alternatively, exclusive of travel to Canada, Mexico, and the Caribbean Islands). The tax would be designed to effect savings of around $250 million. In the absence of this measure U.S. travel expenditures can be expected to increase again by some $300 million in 1965. (This proposal has not been discussed with other Government agencies but, initially at least, will be opposed by the State Department. The proposal is nevertheless essential to provide a rounded attack on the serious balance of payments problem.)7
  • —Recommend extension for two years of legislation limiting tourist exemption to $100 which otherwise would expire on June 30.8
  • —Recommend legislation to improve the tax treatment of foreign portfolio investment in the United States and further encourage other efforts to make foreign long term investment here more attractive.9
  • —Some further reductions, beyond those already planned, in Government expenditures abroad, particularly military. This will involve difficult political decisions but is an essential element in any meaningful balance of payments program.10
  • —Reemphasis of need for price stability and improved exports.11

[Page 76]

The measures respecting tourism and Government expenditures abroad will require policy decisions by you before the message to the Congress can be fully developed. In addition, Commerce may recommend legislation to undertake an expanded guaranty program on export credits to be administered by the Export-Import Bank (the Eximbank will oppose this) and consideration of some incentive to U.S. exports along the lines announced recently by the British Government (this latter aspect is aimed primarily at bargaining with European governments regarding competitive equality of treatment for exports rather than a balance of payments measure).

From previous experience I am reasonably certain that it will be impossible to obtain agreement of interested Departments and agencies on the elements of a useful program. Final decisions will have to be taken by you in a number of instances. This may well require several meetings with you, which should be undertaken in the near future. These meetings must be kept in complete confidence since advance leaks regarding the program could have seriously adverse repercussions. If you desire, I can hold a preliminary meeting of the Cabinet Committee on the Balance of Payments to clarify the issues.

We have so far made real progress against a background of a stable price level. But the improvement remains inadequate—if, as must be the case, a dollar of unquestioned integrity at home and abroad is to go hand-in-hand with progress in establishing the Great Society.

Douglas Dillon 12
  1. Source: Johnson Library, Bator Papers, Balance of Payments Message, February 10, 1965, Memos [2 of 2], Box 16. Confidential.
  2. A handwritten notation presumably by Bator in the left margin reads: “no real objection.”
  3. A handwritten notation presumably by Bator in the left margin reads: “no real objection.”
  4. A handwritten notation presumably by Bator in the left margin reads: “no control proposed.”
  5. Not found, but see Document 25.
  6. The Gore Amendment to the Interest Equalization Tax (see Document 12), gave the President standby authority to apply the tax to the acquisition of foreign debt obligations by commercial banks, which had been exempted by the IET law.
  7. A handwritten notation presumably by Bator in the left margin reads: “Will be violently opposed by traveling public.”
  8. A handwritten notation presumably by Bator in the left margin reads: “OK.”
  9. A handwritten notation presumably by Bator in the left margin reads: “OK.”
  10. A handwritten notation presumably by Bator in the left margin reads: “Strongly disagree.”
  11. A handwritten notation presumably by Bator in the left margin reads: “Where is control over internal investment?”
  12. Printed from a copy that indicates Dillon signed the original.