62. Memorandum From the Deputy Under Secretary of State for Economic Affairs (Samuels) to the President’s Assistant for International Economic Affairs (Peterson)1
- Capital Control Programs
I would like to comment briefly on the Capital Control Programs, including Mr. Shultz’ memorandum of March 2.2[Page 150]
Without commenting in detail on the analysis in the Shultz memorandum, I agree basically with the conclusion that we should dismantle the capital controls programs. This should, however, be done progressively and not in one step, for reasons stated in the next paragraph. The controls distort resource allocation and the most efficient development of U.S. and European capital markets, raise the cost of doing business abroad, and give rise to resentments under certain circumstances in foreign countries over the dominating role that U.S. companies play in absorbing capital availabilities in the European capital market. Further, these controls get in the way of attempts to reduce artificial barriers to the flows of capital and resources. Moreover, by now we may have exhausted any short-term balance of payments benefits from the controls, although this conclusion could be debated on a technical level ad infinitum.
In stating the above, however, I believe it important that this unwinding should take place in an orderly fashion and take account of the problems involved. For example, in winding down the FDIP, whether we do it through increasing allowables or collapsing schedules or by some other device, we must bear in mind there exists $10.5 billion of outstanding American borrowing abroad which could readily flow into U.S. hands and greatly exacerbate our dollar outflow problem unless the dismantling is handled carefully. Although much of the massive outflow this and last year is a result of the U.S. and European business cycles and interest rate differentials being out of phase with each other and is probably capable of being better stabilized as interest rates change, abandonment of the structure of controls under present circumstances would be viewed as an affirmation of the current widely-held belief abroad that the fundamental U.S. attitude toward the balance of payments is in fact one of “benign neglect.” This would have unfortunate monetary effects, and beyond that would further encourage foreigners to seek ways of insulating themselves from the effects of U.S. economic and monetary policies. I reiterate, therefore, that we should progressively wind down the controls toward elimination, preferably at a substantially accelerated rate over that which has so far prevailed.