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

77. Memorandum of Conversation¹

Washington, October 27, 1965, 4:30 p.m.

PARTICIPANTS

• Treasury—Secretary Fowler and Mr. Knowlton
• CEA—Mr. Otto Eckstein
• White House—Mr. Francis Bator
• AID—David Bell, Administrator
• Federal Reserve—Governor James Louis Robertson
• Commerce—Secretary Connor
• Defense—Secretary McNamara
• State—Under Secretary Ball
• Agriculture—Under Secretary John A. Schnittker
• BOB—Mr. Charles Schultze, Director
• BOB—Mr. Roth, Deputy Special Representative for Trade Negotiations

SUBJECT

• Cabinet Committee (Principals Only) Meeting

At the start of the meeting Mr. Knowlton passed out a refined version of the balance of payments forecast distributed the previous week.²

Secretary Fowler began by stating that he thought it was time for the group to come up with constructive suggestions for Secretary Connor’s voluntary program. He said Treasury had tentative proposals which he would introduce in a moment but first he wanted to go around the table to see what others had to say.

Mr. Schultze said he would stick his neck out by recommending that:

(1) Exports be removed from the calculation of a target for corporations;

(2) The period 1962–1964 be used as a base for each capital flow;

(3) Targets be established for each of these items;

(4) Credit be given for increments of capital equipment exports; and

(5) Some incentive be given to improve over-all exports.

He said he realized that this was complicated but the best he could do.

Governor Robertson said that he would use 1962–1964 as a base, that he would set a target designed to reduce direct investment by one-third (presumably from the 1965 level), and that he would have a prescribed level for overseas working capital.

Mr. Roth said he, too, would take exports out and that he would establish guidelines for the remaining items. He expressed uncertainty about what figure was really necessary as an objective, indicating a preference for coming up with different programs designed to meet different overall balance of payments objectives.

Mr. Eckstein said that he, too, would take exports out and that he preferred a system that utilized corporations’ foreign net assets as a base.

Mr. Bell said that he had nothing to add but wanted to be sure that the distinction between developed and less developed countries continued to be a feature of the program. Secretary Connor indicated that this might be a problem but did not stress the point. He then read figures that showed an increase in U.S. direct investment in the less developed countries from $275 million in the first quarter (1965) to $367 million in the second, coupled with a decline in such investment in developed countries from $840 million to $584 million.

Secretary McNamara said that we should make a good clear distinction between direct investment and exports. The program should have “good, clear” targets. He raised the question of whether we had an able financial analyst working full time gathering and analyzing statistical background data for the program. He then stated that the President believed that the program had failed and that he (Secretary McNamara) for one didn’t understand what the program was really all about.

Secretary Connor said that new information was being obtained. He believed that we should leave the 1965 program alone, he expected to have a new program approved in January 1966. It would have a strong direct investment emphasis.

Secretary McNamara then asked how many companies accounted for various percents of total investment. Secretary Connor replied that 100 companies accounted for about 80 percent of the direct investment involved in the program.

Secretary Fowler then circulated the Treasury memorandum entitled “Comments on the Commerce Voluntary Program,” dated October 27, along with a list of recommendations.³ The group read the material. Secretary Fowler then made a pitch for using the net asset base.

Secretary McNamara said why didn’t we select 25 companies and get good information. Secretary Fowler asked how long it would take a corporation to fill out Table II (Treasury memo attachment).⁴ Secretary McNamara said that any corporation of the sort in the Commerce Department program could do it in 20 minutes.

Secretary Connor then stated that he, Larry McQuade, and Dr. Brimmer were consulting with corporations every day. He said that while the suggestions he had just received at the meeting were interesting and would be considered, they were not new. He said that based on consultation with his advisory committee (which was a strong one, including men like Sidney Weinberg and George Moore) and the corporations and based on receipt of additional information on the fourth quarter results, he would be prepared with a specific program in the near future.

Secretary Fowler then made the point that the bank program could not be jelled until the Commerce program was set. He said he thought that the Commerce program would be more effective and better received by the business community if it were more specific.

Secretary McNamara returned to his suggestion that we get key information from a group of 25 companies. He said that if we couldn’t get a feel for our objectives in this manner, he just didn’t know how we would come up with a program that could be rationally explained. He for one was not going to sign any recommendations to the President unless he understood the statistical framework in which objectives and guidelines had been selected. For all he knew, a decline of $1 billion in direct investment might create chaos for certain companies. Did we really know what we were doing?

Secretary Connor replied that he believed the net improvement in direct investment and repatriated earnings in 1966 should and would be about $1 billion. His preliminary thinking was that we should set a target for direct investment of 110 percent of the 1964 flow. This would create a figure of $2.6 billion. He said we should set a target of repatriated earnings of 20 percent above 1964 figure. This would create an inflow of $4.5 billion. The difference between these two flows would be $1.9 billion, compared with $900 million estimated for 1965. He said emphatically these guidelines should apply to all countries.

Mr. Bator then asked Secretary Connor whether, in view of the feelings expressed at the meeting, he didn’t think it would be helpful if a small technical advisory group were established represented by Treasury, Budget, CEA, and perhaps an outside expert to inform the various principals about the statistical frame of reference in which Commerce was making decisions. Secretary Connor said he thought this “might be a good idea”.

The discussion turned to the matter of the mid-November press conference, what should be said before it, what should be said at it, and when we should have a new program ready for the President. Mr. Bator said that he was deeply concerned that he and others had told the President that everything was under control and that we were moving ahead satisfactorily. Secretary Connor interjected that what people had been telling the President and what everyone in fact had been trying to make clear for months to the public was that the second quarter was abnormal and that the third quarter would show a deficit.

Secretary Fowler said that there should be a press conference in mid-November comparable to the one in June with good strong statements from Chairman Martin, Secretary Connor and himself. The idea of conditioning the public to the third quarter deficit beforehand was dismissed. The point was made by one member of the group that we should state at the press conference that the third quarter deficit was actually somewhat lower than we anticipated.

Secretary Fowler then said that “he was more worried about what people said after the press conference than before.” Returning to the subject of when we should have a program for the President, he said that he had to have a report for the President in early November presenting him with various options, if not a concrete program in detail.

Secretary McNamara returned to the subject of the technical advisory group. He asked specifically for deadlines. Secretary Connor said he would have recommendations with respect to a new program for the Cabinet Committee (principals only) meeting the following week. Secretary McNamara asked then whether it was the general understanding that the advisory group would by then have looked at the statistical back-up for the Commerce recommendations so that it could decide what more would be needed and so that all necessary statistical information would be obtained by no later than the first of the year. Secretary Fowler indicated that this was the understanding.

Secretary Fowler then asked Secretary McNamara to comment on possible savings in the military area. The latter distributed several tables. Talking first about Table 53: U.S. Defense Expenditures and Receipts Entering the International Balance of Payments (dated October 19, 1965),⁵ he pointed out that the net adverse balance of military expenditures would have been $1,218 million in calendar year 1966 had Southeast Asian expenditures remained at the calendar year 1960 level. In view of increases there, he said the figure now looked as though it would be $1,812 million, up from $1,472 million in calendar year 1965. He said that it was possible that the figure might be $125 million higher than this if proposals to increase military strength in Southeast Asia by another 125,000 troops went forward. In discussing another table (Possible Actions to Reduce Department of Defense Foreign Exchange Costs), he mentioned that additional savings looked pretty limited. Two big possibilities on the receipt side—$25 million from Canada and $50 million from Japan—would be “very hard to do soon”. The Japanese problem was pretty difficult. Henry Kuss had been on a selling mission to Canada but nothing major could be expected soon.

There was then a brief flurry of conversation about Canada, with Mr. Ball stating that he thought we were in a position to put pressure on Canadians. Secretary Fowler mentioned that a Canadian delegation would be down the next morning (October 28), and Treasury was going to discuss with them the possibility of curtailing Canadian securities issues in the fourth quarter. Mr. Ball said that in the past we had given way too easily with the Canadians.

Secretary McNamara then turned to the possibility of compulsory savings programs for overseas troops. He said he thought he could relate it to the pay increase and produce a savings of $80 million. In the ensuing conversation, it was agreed other governmental employees overseas would also have to be included in the program. Mr. Schultze said he would look into the problems of such a program in a little more detail.

Secretary Fowler then asked Mr. Schnittker whether Agriculture would head up a task force to examine the whole outlook for food and agricultural exports, examining the balance of payments implications of the over-all picture, the picture vis-a-vis the USSR and the Soviet Bloc, and PL 480. The task force would be chaired by Agriculture and include representatives from Treasury, AID, Budget and possibly State. Mr. Schnittker said that Secretary of Agriculture was away but that he would begin immediately to draw up a memorandum, as Secretary Fowler suggested, giving the task force its terms of reference.

The meeting then returned to a discussion of military matters, with reference first to Japan. Mr. Ball said that he would be sending Secretary Fowler a memorandum on the Japanese situation soon but warned that “it would be discouraging.” Secretary McNamara said the Japanese problem required five years of intensive psycho-analysis. Secretary Fowler asked what the effect would be if we withdrew certain of our troops. Secretary McNamara said that unfortunately the Japanese would welcome this.

Secretary Fowler then asked Secretary McNamara about military prospects in the Netherlands and the Netherlands Antilles. He was tired of Holtrop lecturing him on lack of American financial discipline. Couldn’t we give him a shove? Secretary McNamara said a sales program was under way but it was minor. The trouble with the Netherlands was that she wanted a nuclear submarine and we wouldn’t give her one. Secretary Fowler asked about the Philippines. Secretary McNamara said there was very little potential here. They had a $22 million military assist-ance program. We hoped they would send troops to Vietnam but if they did so, we would have to pay for them. The Philippines, he said, was “a real trouble spot.”

In discussing the exchange problem in South Vietnam, it was agreed to wait 60 days and look at the effectiveness of the present exchange control system there shortly after the beginning of the year. Secretary McNamara described this as a “very serious problem.”

Secretary Fowler then asked Mr. Ball for his comments on tourism. Mr. Ball stated that there were three approaches: (1) restriction on dollar transfer; (2) taxes; and (3) a voluntary approach. He ruled out the first and third. The first [would] involve, black market dollars, was messy, futile, etc.; the third would not be effective. He then went through the list of possible taxes and described the pros and cons of each (mostly cons). The four types of taxes were: (a) head tax; (b) fare tax; (c) reported expenditure tax; and (d) a “presumptive” travel expenditure tax based on the number of days spent abroad and the level of the traveler’s domestic income tax. Mr. Bator said that the presumptive travel expenditures tax was “ingenious”. The rest of the group expressed more amusement than interest.

Secretary Fowler then read a letter that he had recently received recommending differential passport charges. The charges would differ for three groups: tourists, businessmen, and students and scholars. There would be a scale of graduated charges based on frequency of departures from the U.S. Funds gathered would be used to subsidize Commerce’s U.S. Travel Service.

Mr. Schultze suggested that the gap between 17-day fares and regular fares had had the effect of limiting the average expenditures of travelers abroad, and he wondered whether more work shouldn’t be done to see whether changes in pricing techniques couldn’t further reduce the average per capita expenditures abroad. Mr. Ball seemed to think that this might be worth pursuing, but there was very little reaction from the rest of the group.

Secretary McNamara stated that he felt that the group was not being sufficiently optimistic about the possibility of steps in the tourist area. He said that we would have a different environment in 1966. There was the Vietnam crisis; the domestic budget would be “fantastic”; and if there were a compulsory savings plan for Government employees abroad, it would make tourist restrictions considerably easier to sell.

Mr. Bator commented that there was a double pay-off from tourist measures: (1) the effect it had on our ability to make all the other programs tougher; and (2) the direct savings from the tourist measures themselves.

At this point, the subject of the Interest Equalization Tax came up. Secretary Fowler mentioned to Governor Robertson that he would not be replying to his memorandum of the previous day (October 26)⁶ because he didn’t want any more put down on paper on this particular subject than was absolutely necessary. He hoped that others who had received the memorandum would not respond either. Mr. Bator expressed the view that a broader and more flexible IET was probably the ultimate solution to our basic problem. Secretary Fowler said that if we were to go the IET approach in 1966 we would be “taking advantage of a short-term crisis to get a long-term tool”. Mr. Eckstein said that he really didn’t think that we were in sufficiently dire straits to pull this particular stop.

Secretary Fowler said that he would blame Mr. Bator for bringing up this subject at this time. In closing the meeting, Secretary Fowler said that he would be in touch with the group about reconvening the following Wednesday or Thursday (November 3 or November 4) at the same time.

Winthrop Knowlton

1. Source: Johnson Library, Fowler Papers, International Balance of Payments—Classified Material: Cabinet Committee Meeting, 10/27/65, Box 53. Secret. Drafted by Knowlton. The meeting was held in Secretary Fowler’s Conference Room.
2. Not found.
3. Entitled “Comments on the Commerce Voluntary Program,” not printed. (Johnson Library, Fowler Papers, International Balance of Payments—Classified Material: Cabinet Committee Meeting, 11/3/65, Box 53)
4. Not attached, but a copy is ibid., 10/27/65, Box 53.
5. None of the tables cited is printed. (Ibid., 9/30/65, Box 53)
6. Not found.