Office of the Historian

72. Memorandum From the President’s Deputy Special Assistant for National Security Affairs (Bator) to President Johnson1

Washington, October 1, 1965, 7:25 p.m.

SUBJECT

  • Interim Report on Balance of Payments Contingency Planning

The Cabinet Committee met yesterday afternoon to discuss the latest projections for the rest of ′65 and for ′66, and the proposals of the various departments for possible tightening of your program.2 Joe Fowler’s report will be over shortly, but you might wish to have a preliminary indication of where we are.

We have not yet come to any final conclusions—work is still going on—but it was generally agreed that:

1.
The best evidence suggests that our 1965 performance, taken as a whole, and excluding money transferred to the British, is likely to be much better than we forecast in January–February. The only really disturbing component has been direct business investment. (None of the British transfer reflects the recent support package. It consists mostly of a draw-down of last year’s swap and EX–IM loan, and a partial cashing in of their portfolio of U.S. securities.)
2.
However, even in the absence of another scare like the one last January, we cannot afford to sit on our hands. If we take no action, the deficit during the second half of 1965 is likely to be appreciably larger than during the first six months. We are working on three fronts:
(i)
Quick-fix operations to reduce the 4th quarter deficit. Charlie Schultze, working with Defense, will be doing the sort of job on the December outflow that he does on the June budget figure. (Needless to say this largely cosmetic operation is even more sensitive than the rest.) Also, Joe Fowler will start talking with the British tomorrow about limiting their drawings and transfers during the rest of the year. We’ll have a [Page 200] go at the Canadians about their borrowing in New York after their elections.
(ii)
A serious tightening especially of the Commerce Program.3 Even on a pessimistic view, the evidence does not now justify a shift to a mandatory program with sanctions. But we do need much sharper criteria, and much fuller reporting by the companies of what they are doing. Jack Connor and his people are hard at work on this, and will consult with his advisory committee. Jack is perfectly clear that he has got to move.
(iii)
Contingency planning. The current forecast may still be too optimistic—we have to hedge our bets. Joe Fowler and all your other principals and experts know and share your view that we cannot afford another serious deterioration in the balance of payments. Thus on an absolutely top secret basis, we are preparing a full-blown contingency package in case we run into real trouble.

Timing. On most of the fourth quarter quick-fix operations, we should be ready in a week or two. (Those which involve negotiations with the British and Canadians will take longer.) None will require Presidential involvement.

Recommendations for tightening Connor’s program will be on your desk during the last week in October at the latest. I agree with Fowler and Connor, and so do Ackley and Schultze, that this is not too leisurely a schedule. Getting a revised program in shape and working it out with the key business people takes time. The risks of too hasty and therefore faulty action outweigh the risks of a 3–4 week delay. Nothing is more likely to produce a hot-money crisis than an emergency atmosphere generated by the government.

In the meanwhile, we’ll be taking two preliminary steps early next week. On Monday,4 the Fed will announce that the base for calculating the banks’ 1966 target will remain what it has been: the volume of credit outstanding on December 31, 1964. (There has been speculation that we will shift to a higher base which would tend to penalize the most cooperative banks and might suggest that we are in a mood to relax the bank program for 1966. The proposed Fed announcement is at Tab A.)5

In his Tuesday speech to the American Bankers Association, Joe Fowler will try (i) to reassure the business community that we are not about to impose mandatory controls (this to minimize the threat of a panicky shift of corporate money to Europe, without really tying our hands) and (ii) to, nevertheless, warn them that the voluntary program needs beefing up (something they already expect). His proposed language is at Tab B;6 we’ll be working on it over the weekend.

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Security. All internal papers having to do with balance of payments policy will be classified secret and handled on a strict need-to-know basis. This is not likely to stop Slevin, Bartlett, et al. but it should make things somewhat more difficult for them.

Francis M. Bator 7
  1. Source: Johnson Library, National Security File, Balance of Payments, Vol. 3 [2 of 2], Box 2. Secret; Sensitive.↩
  2. See Document 71.↩
  3. Reference is to the voluntary program.↩
  4. October 4.↩
  5. Not found.↩
  6. The draft of Fowler’s October 5 speech was not attached.↩
  7. Printed from a copy that bears this typed signature.↩