27. Memorandum by the Chairman of the Council of Economic Advisers (Ackley)1


  • Cabinet Committee on Balance of Payments:
  • Secretary of the Treasury
  • Secretary of Defense
  • Secretary of Commerce
  • Under Secretary of State
  • Administrator of AID
  • Special Representative for Trade Negotiations
  • Director, Bureau of the Budget
  • Mr. Bundy, the White House


  • Balance-of-Payments Program

Secretary Dillon’s memorandum of January 8 calls for further steps to improve our balance of payments.2 The program recommendations contained in his memorandum, however, do not appear to exhaust the possibilities. Set out briefly below are additional or alternative steps that should be considered before decisions are reached.

Many of these possibilities involve the area of direct investment, one of the largest and most steadily expanding drains on our balance of payments. Governments of most of the developed countries would be happier if this flow were reduced; indeed the current magnitude of such investment (at a time when the U.S. is running large deficits and asking surplus countries to hold enlarged low-yielding liquid claims against us) appears to be impairing their willingness to cooperate with us in other areas. Since at least a temporary reduction in this flow is also in the U.S. interest, it would seem that this is a promising area in which to move.

The IET could be extended, in some form, to direct investment, with or without an exemption for that portion of direct investment associated with the export of machinery and equipment from the United States. A somewhat higher tax rate might be needed, given the higher return from direct than from portfolio investment. As a minimum, the definition of direct investment in the IET could be changed so that the tax would apply to all purchase of stock in (or other means of taking over) existing foreign enterprises.
Moral suasion could be tried in the field of direct investment. This could be done by a strong general Presidential appeal, or directly with [Page 78] key firms. Or one or more business groups could be encouraged to set up a voluntary self-policing effort.
Taxation of income from private foreign investment could be strengthened. In the new climate of opinion, tax measures such as those proposed but not enacted in 1962 might be reintroduced with perhaps greater chance of enactment. In any case, a renewal of these proposals might cause prospective investors to hesitate.
Additionally or alternatively, the Europeans could be quietly encouraged to use their existing controls on investment to cut back on American direct investment in their jurisdictions. In fact, our official posture has been just the opposite.
In the area of bank loans, moral suasion might be even more effective than extension of the IET, particularly because it could be applied to loans of any term. But any effort to use either moral suasion or the IET runs into both political difficulties and possible ineffectiveness unless the Canadian loophole is closed. Canadian authorities should be willing—as a part of the price for their continued IET exemption—to close this loophole themselves if we move to reduce the foreign lending of our own banks.
If the IET is extended to banks, the definition of a loan of over one year should be altered to include renewals of shorter-term loans, and an increase in the tax rate should be considered.
If American travel is to be taxed (and I am not convinced it should), some effort should be made to reduce its highly regressive character. Regressivity would be lessened if the tax were applied to the sale (or purchase) of international ship and airline tickets, with perhaps a higher rate on more expensive accommodations. (The Treasury suggestion for an exemption on short trips would appear to make the tax more regressive.) We should certainly consider reducing the customs exemption to $50, and eliminating the liquor allowance.
On the price stability front, a request that Congress enact a concurrent resolution affirming the principles of the price-wage guideposts might be considered, in order to give greater moral sanction to these principles. Perhaps there is an alternative and less difficult way to strengthen the authority of the guideposts.
Gardner Ackley 3
  1. Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. 2 [2 of 2], Box 2. Confidential. A copy was sent to the Chairman of the Board of Governors, Federal Reserve System.
  2. Not printed. (Ibid.)
  3. Printed from a copy that bears this typed signature.