29. Letter From the Chairman of the Board of Governors of the Federal
Reserve System (Martin) to Secretary of the Treasury Kennedy
Washington, October 21, 1969.
I regret that I shall have to miss tomorrow’s meeting on the 1970 balance
of payments measures.2
Enclosed with this letter is a statement on the balance of payments
problem, which provides strong reasons for minimizing any relaxation in
the programs and for pressing toward equilibrium in the U.S. balance of
I am sending copies of this letter and the enclosed statement to the
other participants in tomorrow’s meeting.
- For almost two years foreign monetary authorities as a group
have experienced a drain on their dollar holdings. Despite the
worsening in the structure of the U.S. balance of payments, the
inflow of short-term funds through U.S. banks has kept the
dollar strong in exchange markets by making the holding of
dollars attractive to private individuals, business and
financial institutions abroad. [Page 77]
- In 1968 the deficit on the liquidity basis improved
substantially as a result of the January 1 balance of
payments program, and the surge of foreign purchases in
the U.S. stock market, despite a fall-off in the trade
surplus. But the official settlements position improved
even more, as a result of the Eurodollar inflow.
- In the first half of 1969, the liquidity balance
deteriorated sharply for a variety of reasons: a further
fall in the trade surplus, a drop-off in stock purchases
by foreigners, an increase in direct investment
outflows, and the attraction of American funds to the
Eurodollar market. But the official settlements balance
was in sizable surplus, again because of the Eurodollar
- The U.S. payments position has thus been protected in
the past two years by short-term borrowing—in an amount
exceeding $10 billion.
- This protection has come to an end. A mere cessation of the
Eurodollar inflow is enough to throw the official settlements
balance into deficit (as has happened in the past two months).
If, as seems likely, U.S. banks begin to repay Eurodollar
borrowings, the official settlements deficit will probably
exceed the liquidity deficit.
- Thus foreign monetary authorities will very likely be
accumulating large amounts of dollars next year and beyond.
- No doubt, there is some appetite abroad for additional
dollars at the moment. Some countries—notably the United
Kingdom and France—have debts to repay. Others would be
pleased to rebuild their dollar holdings, which have
been depleted in the past two years.
- But the appetite is limited. A large official
settlements deficit is very likely to lead, rather soon,
to a large drawdown of U.S. reserves (gold, our IMF position, SDR’s).
- The attitudes of foreign monetary authorities toward
the accumulation of dollars, in counterpart of our large
official settlements deficit, will no doubt be
influenced by whether they regard the large deficit as
temporary or permanent. Some reversal of the surplus of
1968-69 will be regarded as normal.
- But if the U.S. authorities are seen to be dismantling
the programs to restrain capital outflows in the face of
a large deficit, foreign monetary authorities are likely
to be disturbed and to conclude that the United States
deficit is here to stay. This in turn is likely to lead
them to ask for conversion of greater amounts of dollar
accruals into gold, Fund positions, or SDR’s.
- Beyond this, many officials abroad, particularly in
the Group of Ten countries, might well regard a
significant relaxation of balance of payments restraint
programs in the face of a large deficit as somewhat of a
breach of faith. They were willing to go along with
SDR activation [Page 78] on the grounds
that it would help the balance of payments adjustment
process. Thus they overlooked the unsatisfactory U.S.
payments position in agreeing to SDR activation. A significant relaxation of
restraint programs now would embarrass those European
officials who were so cooperative regarding SDR activation in
substantial amounts. It would also very likely
jeopardize future negotiations regarding SDR’s.
- Beyond these considerations, there is the basic question of
where the United States is heading with its balance of payments
- The initiative of Secretary Kennedy regarding a
study of limited exchange rate flexibility is unlikely
to lead to sizable revaluations of other currencies
against the dollar, over and above the present upward
move of the DM.
- Apart from stopping inflation in the United States and
bringing about a gradual improvement in the trade
balance, there is little else the United States can
point to as a policy to improve the payments
- In these circumstances, a sizable relaxation of
capital restraint programs can only be seen by close
observers as leading to some sort of crisis—presumably a
suspension of convertibility of the dollar into
- While this possibility has been in the minds of many
officials abroad, it has been regarded as a last resort
in circumstances of unavoidable crisis. In such
circumstances, suspension would be understood and
accepted in relatively good grace abroad.
- But if avoidable U.S. actions themselves precipitate
the process that leads to suspension, the financial and
political repercussions abroad are likely to be
- All these considerations point to the desirability not only of
minimizing the extent to which the Commerce and Federal Reserve
programs are relaxed for 1970 but also of continuing to press
toward equilibrium in the U.S. balance of payments.