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

76. Memorandum From Secretary of the Treasury Fowler to President Johnson¹

Washington, October 22, 1965.

SUBJECT

• Balance of Payments—Fourth Quarter Bolt and Nut Tightening

In view of our immediate concern with making the maximum progress in moving our international payments for 1965 towards balance, given the program in your February 10 Message, this memorandum will deal mainly with the actions we have taken or have pending dealing with the fourth quarter of 1965. However, a few brief comments on 1966 programming follow.

I. Programming for 1966

Your Cabinet Committee on Balance of Payments is heavily engaged in preparing a program for 1966. It will formulate the various options you will wish to consider in tightening and making more effective any lagging elements in the existing program and defining the best mix of additional measures that should produce a balance or slight surplus in 1966. That will be our objective. On present evidence, we believe we can achieve that objective with a beefed-up version of your voluntary program. There is no evidence now to suggest that we will need a mandatory program. (Needless to say, we are doing some very quiet contingency planning in case our expectations are badly disappointed.)

Since the full dress meeting of the Cabinet Committee on September 30, which was the subject of a separate memorandum to you dated October 12 (see Attachment A)² the Executive Committee, headed by Assist-ant Secretary of the Treasury Trued and composed of similarly positioned personnel in the various participating departments and agencies, has been working on a day-to-day basis on various aspects of the program. On Monday, October 18, there was another meeting of the Cabinet Committee attended by both principals and assistants.³

Because of the number of people involved, the need for a high degree of confidentiality in this important phase of programming, and the need to consider frankly a number of disagreeable alternatives, I decided that the best procedure would be to have a series of quiet meetings with the Cabinet Committee principals alone absent any staff. This reduces the number in the room to about ten or eleven who are in every case the head or deputy head of the department or agency. Mr. Bator is participating in these meetings.

We had the first of these restricted meetings on Wednesday, October 20,⁴ and have another scheduled for next Wednesday, October 27. So that you may be aware of the type and range of questions we will be discussing in this series of meetings for principals only, I am attaching a folder containing the agenda, some tables which provide the statistical background for our programming, and an initial list of questions we are asking each other in hammering out the individual program options for 1966 (see Attachment B).⁵

It does not seem useful to burden you with the review of the dialogue going on at this time. I only want to make you aware of the fact that it is going on and the type of questions we are considering. We are driving to have conclusions and recommendations which will be framed in alternative options for you to consider some time between the first and fifteenth of November.

So much for 1966 programming.

II. Dealing With Fourth Quarter

Now to return to what we are doing to minimize additional outflows in the fourth quarter. The following will summarize actions taken and contemplated:

1. Holding Back Bank Loans

The Federal Reserve Board (Governor Robertson) reports that the banks are approximately $575 million below their permitted ceiling on credits to foreigners under the Federal Reserve Board voluntary program. Because this success in this program through the third quarter posed a threat to fourth quarter results if the banks felt 1966 ceilings might be related to 1965 loan totals, the Federal Reserve Board on October 1 advised banks and nonbank institutions cooperating in its program that the ceiling for 1966 would employ the same end of 1964 credit base. Therefore, the banks need not rush out to make loans to bring them up to their current ceiling in fear that a new base will be established which would penalize their failure to be at maximum lending capacity to foreigners. A copy of the Federal Reserve Board press release is attached (see Attachment C). I have asked Governor Robertson to give immediate consideration to the desirability of personal requests to the heads of the biggest participating banks and nonbank institutions to hold back in any further outlays in 1965 that would affect the 1965 results.

2. Holding Back Direct Investment Flows and Maximizing Repatriation of Profits and of Short Term Corporate Funds

The task here has been to walk a tight rope in the light of the disturbing statistics on the levels of direct corporate investment abroad in the first six months of 1965 which became public knowledge in mid-September. We have had to avoid arousing fears that mandatory controls were in the offing which would prompt many companies to repeat the pattern of the last quarter of 1964 when it seems that large amounts were sent out of the country in order to escape anticipated mandatory controls. On the other hand, we had to avoid any appearance either of being willing to accept an ineffective voluntary program in the Department of Commerce or adjudging it to be ineffective until sufficient evidence was accumulated.

For my own part, I have tried to accomplish this by the background press conference I held at your request on Friday, October 1, and public statements in both the American Bankers Association speech on October 5 and the Business Council speech on October 15. In both speeches I indicated we were in the process of re-examining that program to determine what, if any, additional measures “of a voluntary character” should be taken, including “a guidelines program to achieve further improvement in the year ahead.” These two speeches with pertinent excerpts dealing with the Department of Commerce voluntary program marked are attached (see Attachment D).⁶

In the meantime Secretary Connor has specifically disavowed any intention of proposing a program of mandatory controls. He has had several full-day meetings with his Advisory Committee to appraise the situation and determine what the facts are and what conclusions can be drawn.

As a result, I believe the stimulation of outflows in the last quarter of 1965 out of fears that mandatory controls might be imposed early in 1966 has been minimized if not completely avoided. At the same time, I believe my statements have put industry somewhat on notice that we are not going to be content with a second-best effort. To get the flavor of general talk and opinion, you will want to read an article in The New York Times for October 20 by Mr. Rossant. (See Attachment E).⁷

As a second string to our bow in dealing with the fourth quarter, Secretary Connor wrote a letter on October 13 to the Chief Executive Officers of the 567 participating companies in the voluntary program specifically urging three actions designed to produce the best results in the fourth quarter on the corporate side. He said in the letter:

“In addition to the plans you may already have in mind, I would like to suggest the following special steps:

“1. A review of current foreign payments plans to stretch out or reprogram expenditures and dollar outflows to minimize the impact in the final quarter of 1965.

“2. Further reductions, where possible in light of business needs, of short-term assets held for parent company account in foreign countries. Our May 13 guideline on handling of short-term assets asked for reductions to a level not exceeding the amount outstanding on December 31, 1963. Our statistics indicate that non-financial corporations still hold substantial amounts of excess liquid funds abroad. Many firms have not yet reached the 1963 level, and I urge them to accelerate their repatriations.

“3. Where possible and appropriate, the drawing down and return to the United States of excess amounts of liquid funds held by your foreign affiliates. A close review of all your foreign affiliates may indicate ways of achieving a more efficient use of funds held abroad by different units.”

I have asked Secretary Connor and spoken personally to several key members of his Advisory Committee urging them to carry on and support a “word of mouth” campaign by telephone calls, etc., to back up and support the Secretary’s letter appeal. Secretary Connor has also asked the Chief Executives of the 567 participating companies in the Commerce voluntary program to speed up the submission of their third quarter reports and to give their personal estimate “of what you think will be the level of your company’s foreign transactions, during the fourth quarter and for 1965 as a whole, for the items listed in the work sheet.” This may help restrain last quarter excesses. A copy of Secretary Connor’s letter and the covering press release are attached (see Attachment F).⁸

3. Minimizing Military Expenditure Impact on the 1965 Balance of Payments

I have asked Secretary McNamara to ascertain whether there are any Defense Department out-payments abroad which affect 1965 balance of payments results that could be stretched over into 1966. I have also asked him to work through his Mr. Kuss⁹ and Treasury Assistant to the Secretary Charles Sullivan in obtaining any additional advance payments from the Federal Republic of Germany on our military offset agreement in 1965. Messrs. Kuss and Sullivan are having a conference with the Germans on November 4 on this and related matters. If they are unsuccessful, you may wish to bring this up when Chancellor Erhard visits here. It is Secretary McNamara’s clear preference to give first priority in that discussion of the military offset agreement to the longer range necessity for West German action to take the budget action and place the orders that will avoid a shortfall in their commitment to a full offset. He thinks emphasis on advance payments in 1965 might detract from the larger long-range objective. You may wish to do both depending on the situation at the time. Attached is a memorandum from Treasury Assist-ant Sullivan dealing with the only two possibilities of maximizing offset payments in 1965 (see Attachment G)¹⁰

4. Minimizing Aid Outflows in the Fourth Quarter

I have hammered hard at Director Bell, Deputy Director Gaud, and Budget Director Schultze on locating possibilities of deferring aid outflows in the last quarter of 1965. The results have been negative. Unless they can come up with some new leads in this area, I do not see any real possibilities for concrete savings in this area.

5. Minimizing United Kingdom Fund Withdrawals

As I indicated to you earlier, I took advantage of the presence here during the Bank and Fund meeting of Lord Cromer, head of the Bank of England, to urge the deferral by the United Kingdom of any further action on their part this year that might adversely affect our fourth quarter picture. He encouraged me to believe, and subsequent probes with Bank of England authorities have confirmed our hope, that they will be in a position to defer a drawing-down of their long-standing Export-Import Bank credit for $250 million which they had contemplated utilizing in the fourth quarter. I also hope that they will minimize any further liquidation of their government-owned corporate securities in the United States which they have been selling off during the past year in order to liquefy their assets for use in meeting their problems. For your information, these liquidations have adversely affected our balance of payments by $492 million through the third quarter of this year. The deferment of these items would be an extra dividend in our September 10 operation.

6. Holding Back Canadian Outflows to Canada

In 1963, when the Interest Equalization Tax was announced, there was a large kickback from Canada which, as you know, depends upon U.S. capital outflows to make up for its chronic trade deficit. It was agreed by Secretary Dillon and Canadian Minister of Finance, Walter Gordon, that Canadian issues in the New York market would be exempt from the IET with the side understanding that Canadian financing would not be used to push Canadian reserves beyond their level at that time which was approximately $2.8 billion. This involves an undertaking by the Canadian Government to do something to restrain their private and public borrowers in the New York market if it should appear that this exempt excess is resulting in fattening Canadian reserves.

When Minister Gordon was here for the Bank and Fund meeting we arranged a joint United States-Canadian Treasury meeting on or about November 15 (following the Canadian election on November 9) to review the workings of our arrangements in the light of the intervening voluntary program for the banks. My reason for requesting this meeting is that I have been accumulating some information that leads me to believe Canadian private institutions might become a large loophole in both of our voluntary programs. This is a long term problem and November 15 will be adequate time to discuss it. However, I am calling Gordon next week concerning a study now in process to ask him to take steps with certain private and public Canadian borrowers, who are scheduled in the New York market between now and the first of the year to raise approximately $222 million, to hold off or defer these financings if it appears that they would result in pushing Canadian reserves beyond the level stipulated in his understanding with Secretary Dillon.

Whether I can obtain any results will depend upon (a) the Canadian appraisal of their own reserve outlook for the turn of the year, and (b) Gordon’s willingness to approach private or public borrowers in the middle of a campaign to postpone their borrowing arrangements in the New York market until after the first of the year.

7. What Will Be the Result of All This?

You know my disinclination to make forecasts, so let’s look at the record.

Last January in Secretary Dillon’s “Report to the President on the Balance of Payments”¹¹ it was estimated that an agreed program of immediate measures which was incorporated in your February 10 Message would provide total estimated savings of $1,400–$1,500 million in 1965 but it was also pointed out that some of the measures “are not of equal firmness as far as savings anticipation are concerned.”¹² Applying this January estimate to the $3.1 billion 1964 deficit on a regular transactions basis would have produced a deficit of $1.6 to $1.7 billion. A re-estimate of the situation was made in the “Report to the President from the Cabinet Committee on the Balance of Payments” dated June 7.¹³ It was said in that report that:

“The program has a potential of bringing about a sizeable cut in the deficit this year. If the measures in savings live up to their potential—and assuming no big leaks in other parts of the balance of payments—we see the possibility of the 1965 deficit being reduced in the range of $0.7–$1.5 billion, compared to $3.1 billion for 1964.”

In the next quarterly report to you, dated September 10,¹⁴ the Cabinet Committee stated:

“The 1965 deficit now seems likely to fall in the upper end of the range of $0.7–$1.5 billion we projected in our June report.”

Two major factors have combined to move our current estimates of the deficit to a range of $1.5 to 2.0 billion—matching the original February forecast for the program and falling short of the optimistic expectation of last June. They are:

(1) The decline in exports in the first six months due to the dock strike and the lack of any repeat orders for Soviet wheat shipments such as in 1964. These factors and expanding steel imports, presumably as a hedge against the strike, resulted in a drop in our trade balance for the first six months compared to 1964 levels of approximately $1,700 million.

(2) Impact on balance of payments due to sales by the United Kingdom Government from its portfolio of United States stocks in order to fortify its reserve position. These sales have had approximately $500 million of impact on our balance of payments this year.

The last quarter will probably tell the tale between a very real success and a modest and reassuring improvement. I am shooting for a net deficit on a regular transactions basis of $1.5 billion for 1965 as compared to $3.1 billion in 1964. I would not be too surprised if the final figure is in excess of that up to $2 billion. I should be very disappointed if it goes beyond that. The most likely cause of such a bad outcome would be another scare like last winter that we were about to impose mandatory controls.

Henry H. Fowler

Attachment C

Washington, October 1, 1965.

Federal Reserve Press Release¹⁵

U.S. commercial banks, cooperating in the Federal Reserve-administered program for voluntary restraint of foreign credits, reduced their foreign loans and investments by another $200 million in July and August, it was announced today.

J. L. Robertson, who is conducting the program for the Board of Governors of the Federal Reserve System, praised the cooperation of the banks and other financial institutions for making the program even more successful than might have been anticipated in its objective of helping to achieve the improvement the President has called for in the U.S. balance of international payments.

Governor Robertson said that the July–August developments, coming on top of a $300 million reduction in the second quarter that already had offset most of the $400 million increase in this year’s first quarter, leave the banks with a leeway of $575 million, as of August 31, under the suggested target level.

Of the banks reporting in August, he added, there were only 45 whose foreign claims were in excess of the target—which is set at 105 per cent of the amount of each bank’s foreign credits outstanding on December 31, 1964—and then only by a total of $75 million. Every bank is expected to bring its total foreign credits within its target figure not later than March, 1966.

Respecting the future of the Voluntary Foreign Credit Restraint Program, Governor Robertson said that despite the progress which has been made, we must persevere in the program of restraint until equilibrium is attained in our balance of payments.

He said that the program presently administered by the Federal Reserve would need to be extended through 1966. While it is too early to determine what might be an appropriate objective for next year, or what changes in detail might be desirable, he said that any target for next year will continue to have as its base the December 31, 1964, outstandings of each financial institution—bank or non-bank. Any other approach would penalize those who have been the “best performers” of 1965.

1. Source: Johnson Library, National Security File, Subject File, Balance of Payments, vol. 3 [2 of 2], Box 2. Secret. A handwritten notation on the first page reads: “M—to Texas. L.”
2. Document 74.
3. No record of this meeting has been found.
4. See Document 75.
5. Not attached.
6. Not attached.
7. Not printed.
8. This letter and press release were not attached and have not been found.
9. Henry J. Kuss, Jr., Deputy Assistant Secretary of Defense (International Logistics Negotiations).
10. Tab G, a memorandum from Sullivan to Secretary Fowler, October 21, on “Maximizing Military Offset Payments in CY 1965: Germany and Italy,” is not printed.
11. Document 33.
12. This quotation appears in Document 33.
13. Document 61.
14. See footnote 2, Document 68.
15. No classification marking. A typed note at the top of the page reads: “Advance for release in morning newspapers, Monday, October 4, 1965.”