95. Memorandum From the President’s Deputy Special Assistant for National Security Affairs (Bator) to President Johnson1
Washington, May 11, 1966, 5:45 p.m.
SUBJECT
- Balance of Payments
- 1.
- The first quarter results are poor: an overall deficit running at $2.4 billion per year. (The 1965 rate was $1.3; 1964, $2.8.)
- 2.
- Unless we take drastic action, the rest of 1966 is not likely to
improve much:
- —The Cabinet Committee is agreed on nut-and-bolt tightening which will gain $600–$800 million at most;
- —But that will only offset the deterioration which would otherwise be likely.
- 3.
- There are two reasons for this dismal picture:
- (a)
- The rise in dollar spending in Vietnam.
- (b)
- The rapid expansion of the domestic economy. Since November the GNP forecast for ′66 has gone up by $20 billion—from $712 billion to $732 billion. This will probably produce about $1–$1.2 billion in extra imports.
- 4.
- To get the calendar ′66 deficit much under $2 billion would take drastic action. Direct investment and tourists would be the most likely targets. In both cases, a big improvement would require a tax (or a moratorium) almost immediately—further “voluntary” measures will not do the job.
- 5.
- Any other direct action on components of our payments would
involve enormous costs:
- —Import controls would lead to retaliation. With a still large export surplus, we would be the loser. Also, 30 years of trade policy would be in shambles.
- —Foreign aid provides no way out. To make a real savings of $100 million, we would have to cut the aid program by about $500 million or more. To get anywhere on this front, we would have to gut the program.
- 6.
- The most powerful medicine would be a large general tax increase. This would begin to help by the 4th quarter of ′66, and make a very large difference by 1967. (It could and perhaps should be supplemented by a tax on direct investment.)
- 7.
- Without a tax increase, we are likely to be in balance of payments trouble well into 1967. And the likely sharp rise in prices during 1967 would cast a balance of payments shadow well beyond 1967.
- 8.
- Whatever we do—short of drastic and immediate action on tour-ists and direct investment—there will be a substantial deficit in calendar 1966. Dollars will accumulate in the hands of foreign central and private bank and individuals. This does not necessarily mean massive conversion of these dollars into U.S. gold.
- 9.
- Stopping such conversions will take some effort—Joe Fowler will have suggestions for you this afternoon.2 I think his program will almost certainly prevent a real run on gold during the rest of this year. The French will pose special problems, but we can probably hold the other Europeans in line.
- 10.
- Even at worst—contrary to what some bankers will tell you—a run on gold which would force us to declare a moratorium on sales is not the end of the world. Far from it. The present rules of the international money game place an excessive burden on the U.S. By moving with speed and skill following stoppage of U.S. gold sales, we could within a few months negotiate new rules which would make far more sense all around. Because of our economic strength, trading position, and competitive [text missing], our negotiating leverage would be enormous.
FMB