75. Memorandum of Conversation1
PARTICIPANTS
- Treasury—Secretary Fowler and Mr. Knowlton
- CEA—Mr. Arthur M. Okun and Otto Eckstein
- White House—Mr. Francis Bator
- AID—Mr. William S. Gaud, Deputy Administrator
- Federal Reserve—Governor James Louis Robertson
- Commerce—Secretary Connor
- Defense—Secretary McNamara
- State—Under Secretary Ball
- Agriculture—Under Secretary John A. Schnittker
- BOB—Charles Schultze, Director
- BOB—Mr. Roth, Deputy Special Representative for Trade Negotiations
SUBJECT
- Cabinet Committee (Principals Only) Meeting
Secretary Fowler opened by referring to excerpts from his October 15, 1965, Hot Springs speech, which explained the nature and setting of the present balance of payments problem.
Secretary Fowler then outlined the steps that had been proposed to date to help the fourth-quarter results (United Kingdom deferment of Export-Import Bank loan; no further U.K. liquidation of securities; and payment of their year-end debt service charges). He then asked Mr. Gaud if AID could help. Mr. Gaud said no—in fact, there would be a $20 million outflow to the Dominican Republic (through the OAS).
Secretary Fowler asked Secretary McNamara whether DOD could do more, and he replied he “didn’t believe so.” Biggest expense personnel, and nothing could be done there. Ludwig Erhard’s personal agreement to meet offset commitments must be obtained. Secretary Fowler asked Mr. Bator to “crank this in” to the White House meeting. Secretary McNamara then stated that the 1965 balance of payments consideration was not the central consideration, that the over-all 1965, 1966, and 1967 offset picture must be examined and clarified. Erhard would arrive late in the year (December) and there would be little he could do to help our balance of payments picture at that stage, and other issues were of more basic importance. Getting orders was crucial.
Secretary Fowler then asked Governor Robertson whether more could be done to discourage bank outflows in the fourth quarter. Governor [Page 206] Robertson said no—the banks will hold back if they possibly can. Secretary Fowler asked whether it would be productive for Governor Robertson to make a few key calls on important banks at the end of the year to avoid any unnecessary loan payments late in 1965, and the Governor again stated that he did not believe this would be helpful. There was then a discussion of the advisability of extending the Fed guidelines to loans of more than 10-year maturity from non-bank financial institutions and of the possibility of cutting off the flow of these funds to Canada. Governor Robertson pointed out that 90 per cent of the outstanding loans and investments made by this kind of institution had maturities of more than ten years and 70 per cent of these were held in Canada. This year there has been an inflow of this type of money from all areas (in the aggregate) other than Canada. Secretary Connor, like Secretary Fowler, had the feeling that there were leakages to Canada through his program as well as through the Fed program. It was agreed that Under Secretary Deming and Mr. Knowlton would meet with Governor Robertson to discuss extension of the guidelines to Canada at 2:30 p.m. the following afternoon. Secretary McNamara stated that we should get from his people the latest description of Canadian offset agreements. He said Canada simply was not carrying its share of the free world defense. Undersecretary Ball said we could and should be tough with the Canadians.
Secretary Fowler asked Secretary Connor what had been done since his letter, dated October 14, 1965, to corporations.2 Had there been any organized telephone calls to make sure that businessmen were making every effort to cooperate? Secretary Connor replied that telegrams had been sent to delinquents and that his group was awaiting replies and putting together other information in an effort to improve the program. Secretary Fowler asked whether it would be appropriate to have corporations sign “purpose statements” and to make it a requirement that these be filed with banks before corporations could borrow money. The “purpose statement” would be signed by the chief executive of the corporation in question; it would state how much of the loan would go abroad; and it would indicate that the corporation believed its activities were consistent with the Commerce voluntary program. Governor Robertson said the banks would object strenuously, that the Fed’s program (under guideline 13) already stipulates that loans must be within the spirit of the Commerce program.
There was then some additional conversation about Canada and the fact that it had become what it was hoped it would not become in June 1963, i.e., an important loophole in the program.
[Page 207]After discussion of whether exports should not be separated out of the Commerce Department’s overall targets, Secretary Connor stated that he was inclined to agree with Secretary Fowler that they should.
There was then conversation about whether corporations were giving up a greater return by restricting overseas direct investment the banks had been forced to forego. Governor Robertson objected strongly to this inference, stating that bank returns were “surer and quicker”.
Secretary McNamara got up to go, mentioning that he had some ideas about savings in his area but they were importantly contingent upon coming up with steps to limit tourist spending.
Secretary Fowler asked Mr. Schultze what progress was being made on the work necessary to bring out balance of payments figures on an official settlements basis. Mr. Schultze said he knew of no bottleneck here but would check into it immediately.
The conversation then turned to agricultural matters, and the meeting gradually began to break up. It was agreed that Messrs. Bator and Schultze would prepare a memorandum on the 50 percent agricultural bottoms problem. It was generally felt that “an appeal to all reasonable men” was a more sensible approach than any efforts to make a “deal” with the longshoremen.
At the very end of the meeting Secretary Fowler made reference to a Symington-Fowler Plan on P.L. 480 loans. Mr. Schultze said that he had a plan designed to increase overseas military savings by providing investments in Export-Import Bank participations. He agreed to talk to Paul Volcker about this matter the following day.