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

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

Washington, November 16, 1965.

SUBJECT

• Progress Report on Balance of Payments—Bolt and Nut Tightening—Supplement to October 22 Memo²

I want to bring you up-to-date on balance of payments developments—both our work on preparing a program for 1966 and our most recent efforts to “tighten bolts and nuts” in the fourth quarter.

I. Programming for 1966

The Cabinet Committee continues to work hard on this. Since my memorandum to you on October 22, we have had two more meetings of the small, principals only, Cabinet Committee group—on October 27th³ and November 3rd⁴—at which a variety of proposals was discussed. Secretary Connor is actively engaged in the formulation of a new voluntary Commerce Department program, which he has presented for consideration to the full Cabinet Committee today, Tuesday, November 16. Governor Robertson also presented the Federal Reserve program for 1966.

Governor Robertson, Secretary Connor, and I will hold a joint press conference on Wednesday, November 17—to announce the third quarter balance of payments results. It is presently believed that the third quarter deficit seasonally adjusted came to $615 million on a regular transactions basis, a $485 million deficit on an overall basis, but will show a surplus of $260 million on an official settlements basis. Public release of the third quarter figures is bound to have some adverse effects since it is unexpectedly large, but we shall have to minimize the impact.

It is my objective to present to you during the week of November 21 specific proposed changes in our voluntary programs for banks, non-bank financial institutions, and for corporations. (It may be possible to announce the general outlines of the Commerce program at the Wednesday press conference in a way that does not commit us to specific quantitative results but which nevertheless helps restrain outflow for the rest of the year; we might simply say, for example, that the new guidelines will depend on combined 1965–1966 corporate performance, so that any outflow this year will count against the corporation in question next year.)

To the extent that changes in the voluntary program fall short of bringing us into balance next year (and this is a matter of deciding to what degree these programs can prudently be tightened), our efforts are also directed toward presenting you in the near future with preliminary recommendations on new measures—including possible legislation—to be publicly unveiled if and when necessary in 1966.

On Friday, November 19, a bilateral U.S.-Canadian meeting on balance of payments will take place in Ottawa.⁵ This is the second meeting that has been held to discuss joint problems in this area. (The first took place on July 26, 1965.)⁶ Assistant Secretary Merlyn Trued will head the U.S. delegation, and it is our intention to negotiate an arrangement (in all likelihood involving a tightening of the Federal Reserve voluntary program for non-bank financial institutions) that will result in a lower level of Canadian borrowing in U.S. capital markets next year.

On Saturday, November 20, Secretary Freeman will submit to me the recommendations of a special task force on agricultural exports.

The principals of the Cabinet Committee during the course of their three meetings also have been addressing themselves in depth to other aspects of the 1966 program—government expenditures abroad (military, aid and civilian), tourism, factors affecting our trade balance, foreign investment in the United States, etc. A full program incorporating decisions on the entire range of 1966 plans can be put together by December 1.

II. Dealing with the Fourth Quarter

In my memorandum of October 22, I listed a number of steps we had taken or planned to take to minimize additional outflows in the fourth quarter. Generally speaking, I believe we have been successful in this respect. Without going into detail, let me just cite a few specific instances where special efforts are paying off:

1. Through a cooperative effort with the Canadians (launched on Tuesday, November 9) we are meeting with good success in persuading Canadian borrowers to defer deliveries of U.S. dollars until 1966.⁷ These deferments already exceed $100 million and may reach $150 million in the remaining weeks of the year.

2. The World Bank has agreed to offset an $18 million IDA encashment by purchase of a like amount of 13-month certificates of deposits. The Inter-American Development Bank is making arrangements to hold drawings until 1966 on a $75 million non-interest bearing demand note of ours which it holds, while operating on short-term certificates. We are carefully screening all of the loans of the various U.S. lending agencies to make sure that 1965 disbursements are minimized.

3. Arrangements are being made to limit the 1965 balance of payments impact of aid to the Dominican Republic.

4. The military is well along in its analysis of possible year-end savings, and Secretary McNamara will be discussing this matter with me next week.

5. The United Kingdom has formally agreed with Under Secretary Deming not to take down the $250 million Export-Import Bank loan this year; and they have stated that they will handle further liquidations—if any—of their U.S. securities portfolio in a manner that does not hurt our payments picture.

6. The visit to Bonn of Treasury and Department of Defense officials early in November developed fairly firm prospects for an additional $80 million of advance payments on military offset arrangements being made before December 31, 1965.

As to “what will be the result of all this,” I continue to believe, as I expressed to you in my memorandum of October 22, that we will end up the year with a deficit in the range of $1.5–$2.0 billion. Quite clearly some of the things we are doing to help the last quarter will come back to hurt us in 1966. But this simply means that, in developing a stronger overall 1966 program, recognition must be given to a less encouraging outlook. I intend to take full account of this in presenting the program to you.

Henry H. Fowler

1. Source: Johnson Library, National Security File, Subject File, Balance of Payments, Vol. 3 [2 of 2], Box 2. Secret.
2. Document 76.
3. See Document 77.
4. No record of this meeting has been found.
5. No record of this meeting has been found.
6. For an account of this meeting, see the Department of Treasury press release, July 26, in the Annual Report of the Secretary of the Treasury on the State of the Finances, 1966 (Washington, 1967), p. 497.
7. Regarding the postponement of Canadian securities issues, see the Department of the Treasury press release, November 9; ibid., pp. 499–500.