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

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

Washington, June 7, 1966.

SUBJECT

• Action to cut balance of payments deficit in 1966

This memorandum summarizes the results of action taken since the decision was made on May 11 to make every effort to gain prepayment of official debt owed to the United States and to gain foreign official cooperation in converting dollars held in liquid form into longer term investments.² Both of these actions cut our potential balance of payments deficit. The outlook on this front for assistance this year is quite promising—as shown in the attached schedule.³

As you know, we had anticipated this broader effort when the first quarter results deteriorated. To cut the first quarter deficit, Treasury officials contacted officials of the World Bank and gained the conversion of $71 million held in liquid form to longer term investments. In addition, Deputy Assistant Secretary Knowlton approached Brazilian officials en route to Buenos Aires and gained a $50 million long term investment. Finally, Treasury discussions with the Italians gained a $40 million advance military payment during the first quarter. As a result, the first quarter deficit on the liquidity basis was reduced by $161 million.

Immediately after our May 11 meeting, our Embassies abroad were informed of possible approaches, and we requested their evaluations.⁴ The immediate result was action by financial officials of Thailand to convert $47 million of liquid holdings into longer term deposits.

Assistant Secretary Trued held discussions immediately with financial officials in Japan, Korea, Taiwan and the Philippines—countries which benefit particularly from our expenditures in Southeast Asia. These discussions led to Japanese agreement for assistance to us of $300 million as an absolute minimum, with a potential further gain—assuming Japanese balance of payments does not reverse in highly unexpected fashion—of at least $200 million. Cooperation was promised by the other three countries within the capacity of their limited reserves and potential reserve gains this year, and we estimate at least $100 million assistance from those three combined.

Discussions have been held with officials of Mexico and Venezuela. Mexican officials have agreed to $80 million of these operations and $50 million is likely from Venezuela.

Discussions with World Bank and IDB officials have resulted in $270 million thus far in the second quarter. (Long term investments by the World Bank have been designed to offset its prospective $175 millon bond issue.)

On the occasion of his trip to Western Europe for meetings of the Deputies of the Group of Ten, Under Secretary Deming took occasion to discuss debt prepayment potential. As a result, Italy is prepaying $123 million of Export-Import Bank loans either this quarter or next. Belgian, French, Netherlands, German and Austrian officials are giving sympathetic consideration now. Realistic prospects for prepayment action would suggest perhaps no more than $200 million total from these countries this year.

These European prospects will be followed up in further conversations by Under Secretary Deming as he attends meetings of the Deputies of the Group of Ten and the Economic Policy Committee of the OECD in late June and early July, and I expect to visit with the Finance Ministers of France and the Netherlands when I attend the meeting of the Ministers and Governors of the Group of Ten in late July.

We now anticipate contacting certain other countries in the Middle East. A Treasury official will visit those countries where significant amounts might be obtained. At this point, we propose to limit ourselves to countries where significant amounts are involved since it is desirable to avoid widespread discussions that could trigger counter-productive concern over our position without the promise of substantial benefit to us. However, approaches to some less promising countries can be held in reserve until later this year and, if necessary, action taken then to obtain further gains.

The attached schedule summarizes results thus far and prospects for the remainder of the year.

I should make it clear that even with the success we have had to date in this exercise, it does not appear as though the second quarter deficit will be lower than the first ($582 million on the liquidity basis). Furthermore, even if we are successful in obtaining debt prepayments and long term investments in the second half of the year, as indicated in the attached schedule, we will still be a considerable distance from equilibrium for the year as a whole. However, these efforts should help keep the deficit within reasonable bounds—from the standpoint of impact on public confidence and the foreign exchange markets—while we formulate fundamental new measures to cope with the basic problem.

Henry H. Fowler

1. Source: Johnson Library, White House Central Files, Confidential File, FO 4–1, Balance of Payments (1966), Box 32–39. Confidential.
2. No record of this meeting has been found. See footnote 2, Document 95.
3. Not printed.
4. See Document 96.