5. Memorandum From the Assistant Secretary of the Treasury for International Affairs (Petty) to Secretary of the Treasury Kennedy1


  • Timing the Reduction or Removal of Balance of Payments Controls

Weighed against the obvious domestic political advantages of the abrupt removal of controls2 are: (1) the adverse foreign reaction it will [Page 8] create and the fallout of this reaction on (a) the SDR ratification and implementation, (b) monetary reform, (c) options available in crises, and (d) speculation for an increase in the official gold price.

A quick removal of controls, as viewed abroad, would not be justified by the U.S. balance of payments statistics, the underlying trend of our position or the state of our domestic economy.3 It would signal that the new Administration

  • —has lowered the priority of achieving equilibrium,
  • —has been seduced by the “window dressing” of the 1968 results,
  • —believes more of the burden of responsibility should shift abroad.

None of this would heighten their interest in pushing rapidly forward on the SDRs. In fact, a quick removal of controls could seriously jeopardize our efforts in all monetary areas. It would be regarded as leading to a substantial liquidity deficit in 1969, and possibly result in renewed gold losses to central banks.

Commerce will be announcing tomorrow a trade deficit for December-and this will not reassure anybody.

U.S. leadership in monetary reform is necessary if progress is to be made. Speaking from a position of strength is vital to our capacity to direct the course of events. As a review of the monetary system is high on the priority of this Administration, we must be careful not to inhibit our conduct of this review by appearing to belittle the responsibility of the deficit country in the balance of payments adjustment process.

The high priority we are giving to contingency planning4 is a testament to the tenuous state of the international financial system. If a crisis such as that at Bonn,5 or worse, occurs in the next few weeks, having done away with our controls would dangerously limit our options and undermine our capacity to control events in such an atmosphere!

We are in the process of preparing proposals to liberalize our controls and these alternatives-together with their costs and benefits-should be available shortly.

  1. Source: Washington National Records Center, Department of the Treasury, Office of the Assistant Secretary for International Affairs: FRC 56 76 108, Studies and Reports, Volume 7, 2/68-11/69. Confidential; Limdis. Drafted by Petty on January 28. Copies were sent to Under Secretaries Walker and Volcker. A handwritten notation reads: “(Note: very limited distribution) per [T. Page] Nelson (Jan 31).”
  2. In a January 28 memorandum to Secretary Rogers entitled “Abolition of Interest Equalization Tax and Balance of Payments Controls on Direct Investment,” Greenwald informed Rogers that at a meeting of the Economic Cabinet, most of the group, including the President, wanted to terminate the controls immediately but that final action had been put off for several days at the request of the Council of Economic Advisers. (National Archives, RG 59, Central Files 1967-69, FN 16 US) Presumably Greenwald was referring to the January 24 meeting (see footnote 3, Document 3), which the full Council of Economic Advisers attended.
  3. A January 28 covering memorandum from Petty to Kennedy referred to a January 27 memorandum from Petty to Kennedy (attached) that put the balance-of-payments cost at least $2,100 million if the direct investment program were abandoned for 1969. (Washington National Records Center, Department of the Treasury, Office of the Assistant Secretary for International Affairs: FRC 56 76 108, Studies and Reports, Volume 7, 2/68-11/69)
  4. Reference is to contingency planning for an international monetary crisis; see Documents 110 ff.
  5. Reference is to a significant increase in holdings of dollars by the Federal Republic of Germany.