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

68. Memorandum for the Record¹

Washington, September 20, 1965.

RECORD OF MEETING WITH THE PRESIDENT AND BALANCE OF PAYMENTS CABINET COMMITTEE, 11:30 AM–1 PM, MONDAY, SEPTEMBER 20, 1965

ATTENDING

• Fowler, Deming, Volcker; McNamara; Ball, Mann; Martin; Ackley, Okun; Bell; Staats; Brimmer; Califano, Bator

Fowler opened with a brief report on the progress of the balance of payments program, results during the first half of the year, and prospects for the rest of this year and 1966. Essentially, he summarized the September 10 Cabinet Committee Report to the President (at Tab A), especially pages 1–2.² His central conclusions were that:

• —the Federal Reserve’s program for banks and financial institutions is working exceedingly well;
• —the results of the corporate program was much less clear, with a sharp rise in direct investment during the first half and a danger of still further increases by next year.

There followed a discussion organized around the various major components of the balance of payments:

1. Direct Investment

It was agreed that we would have to give serious thought, on a contingency basis, to possible tightening of the corporate program and perhaps even eventual imposition of mandatory controls. The President asked for estimates of the fraction of direct foreign investment accounted for by 25–50–75 firms, and instructed Commerce to make recommendations to him about a possible White House meeting with up to 75 of the key business people, before October 3. Brimmer promised a report from Commerce by COB Tuesday, September 21.³ Ball suggested that the Treasury explore possible tax incentive devices which would make investment in the U.S. more attractive than investment abroad, and encourage financing from foreign sources.

2. Exports

After some discussion of export performance during the first half of ′65 and the prospects for the rest of ′65 and ′66, the President instructed Commerce, in consultation with the Council of Economic Advisers to report on further steps to encourage exports. (Fowler and Bill Martin reported that there was no hard evidence that the Bank program was cutting into exports by tightening export credit. A survey of exporters now underway will provide a surer basis for judgment by mid-November.)

3. Military Spending

McNamara reported Defense Department progress on reducing net dollar expenditures abroad (expenditures less offsets). In 1961, the net figure was $2.7 billion; the current estimate for 1965 is $1.6 billion, of which about $.5 billion is accounted for by Southeast Asia. ($400 million in Europe; $500 million in Southeast Asia; $250 million in Japan; $200 million in Canada; $250 million in the oil countries.⁴ Spending in Germany is fully offset.⁵ (The Canadians offset only hardware and not stationing costs.) The President instructed Ball to take charge of a State-Defense exercise to recommend steps we might take to reduce the drain in Japan and Canada. Ball promised a report by COB Friday, September 24.⁶ (Bator suggested to McNamara that an estimate be made of the real drain into European reserves via Japan and Canada, given their high rate of spending, at the margin, in the U.S.)

4. A.I.D.

The President asked for views on Senator Douglas’ suggestion that we cut aid to French overseas territories. Bell pointed out that the amounts involved ($10–$20 million) were much smaller than Senator Douglas had indicated, but agreed that the question should be looked at. Bell reported that A.I.D. and the Federal Reserve were jointly reexamining the effectiveness of aid tying, and that the Council and Treasury would also be involved. (Following previous Presidential instruction, Komer and I will watch this carefully, and will referee any dispute.)

Bell listed three major categories of outright dollar expenditure:

(1) Public and private money funnelled through the multilateral institutions, IBRD, IDA, IDB, etc. We have made some progress here by eliminating advance payments, but there is no way really to change the system.

(2) That portion of the salaries of A.I.D.-financed people living overseas which is spent for local goods and services. A.I.D. has encouraged savings in U.S. banks and purchases of U.S. goods through commissaries and PXs, and will continue these efforts. Bell estimated that about one-third of the salaries of overseas employees is not directly returned to the U.S.

(3) Dollar expenditures in Southeast Asia and Jordan. The drain here is very tough to stop without program cutbacks. The local administrative machinery is simply incapable of operating on a tied-aid basis.

5. Use of Local Currencies in Lieu of Dollars

Bell reported that there are eight countries where our local currency balances are in excess of foreseeable needs, principally India, Pakistan, the UAR, and Yugoslavia. (The Polish balance is being converted and repaid in dollars.) He indicated that we would keep looking for constructive ways to use these currencies, but that it is most unlikely that we will achieve major dollar savings.

The President asked whether our local currency balances weren’t evidence that PL 480, Title I⁷ programs are, in effect, large-scale give-aways. It was agreed that this is true of such programs in the excess currency countries.

There followed a discussion of the justification for further PL 480, and indeed for further aid, to India and Pakistan while they are using their foreign exchange and other resources to buy and produce weapons to fight each other.

It was agreed, and the President so instructed, that as a general rule, PL 480 agreements should be on a year-by-year basis. (Bell remarked that the three-year UAR agreement was clearly a mistake.)

6. Over-all Balance of Payments Prospects

The President asked how our February 1965 forecast will look in retrospect in January 1966. We replied that, during the first half of 1965 the voluntary program, taken as a whole, worked better than we expected and that we will probably better our projection for the entire year.

The President asked whether a $1.5 billion deficit for CY 1965 would justify shifting to a mandatory program. The discussion on this did not reach a conclusion. It was agreed that Fowler would put the Executive Committee to work on an estimate for the rest of 1965 and 1966, as well as on recommendations for a contingency program to be ready in case the 1965 results turn out to be unsatisfactory. (When the President asked Fowler whether we know what we would do if the voluntary program clearly failed, the Secretary answered: Yes, Sir. We will have to shift to a mandatory program.)

The President instructed the Cabinet Committee to report to him in two weeks on our progress in contingency planning.

7. Other Topics

The President instructed Defense to report on where the Indians and Pakistanis get their oil, and whether anything could be done by the international oil companies to “regulate” the flow. Defense is expected to produce a report by the end of this week.

1. Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. 2 [1 of 2], December 8, 1964, Box 2. No classification marking. Drafted by Bator on September 21. The memorandum was sent under cover of a September 22 memorandum from Bator to President Johnson, in which he wrote: “I understand from Joe Califano that you wish to have an informal record of the balance of payments meeting on Monday. Here it is.”
2. Presumably a reference to Report from the Cabinet Committee on Balance of Payments to the President, September 10, not attached but ibid., in which an appraisal of the balance-of-payments situation was summarized in great detail. This report was sent under cover of a September 10 memorandum from Acting Secretary of the Treasury Joseph W. Barr to members of the Cabinet Committee on Balance of Payments. (Ibid.)
3. See Document 69.
4. I rechecked this: $150 million is POL; $100 million is other (Latin America, etc.). [Handwritten footnote in the source text.]
5. The next sentence was crossed out; it reads: “In Japan, spending exceeds the offset by about $250 million; in Canada by more than $200 million.”
6. This report has not been identified.
7. P.L. 480, the Agricultural Trade Development and Assistance Act of 1954, enacted July 10, 1954 (68 Stat. 454).