Foreign Relations of the United States, 1969–1976, Volume III, Foreign Economic Policy; International Monetary Policy, 1969–1972

63. Telegram From the Department of State to Certain Posts¹

Washington, April 21, 1971, 1630Z.

67590. For Ambassador From Treasury Secretary Connally. Subject: U.S. Balance of Payments.

1. In light increasing attention being given abroad, publicly and privately, to U.S. balance of payments problem,² appropriate Embassy personnel need to be able to draw on the following background concerning the immediate and longer range aspects of this problem and with principal elements of U.S. policy.

2. During week ending April 2, there appeared to be some movement of funds into Deutschemarks and Swiss francs for short-period speculation, whereas earlier movements were primarily in response to differentially high short-term interest rates in Germany. Because of this sudden burst of speculation, Treasury made available the following statement in response to inquiries.

Begin Verbatim Text. “Current rumors and speculation apparently grow out of large recent flows of interest-sensitive short-term capital. This is a matter that can be and is being dealt with on its own terms. This essentially short-term problem will not bring any change in the basic policies of the United States, which are well known, with respect to gold and the foreign exchange markets. Nor, as they have made clear, is it a cause for changes in the exchange rates of other countries.” End Verbatim Text.

3. During week ended April 9, exchange markets much calmer, and flows reduced. Interest differentials narrowed between Euro-dollar market and German money market as result of (1) U.S. Treasury borrowing of $1.5 billion from foreign branches of American banks, (2) large withdrawals of funds from Euro-dollar market through previous week’s flows into Germany that reduced supply of dollars in Euro-dollar market, and (3) market realization that monetary authorities now taking steps to reduce differentials, as indicated by reductions in German and U.K. discount rates, and can take additional measures if desired. Nevertheless, markets remain highly sensitive and nervous.

4. U.S. Missions not expected to take initiative in discussions of this matter, but if questioned, should take the line indicated in Treasury statement as well as drawing on elaboration below.

5. Official view is that recent large accumulations of dollars in Europe are primarily due to short-term capital movements growing out of different cyclical circumstances in U.S. and Europe. These movements should be distinguished from the basic balance of payments positions on current and long-term capital account which are more persistent and much less volatile.

Basic Payments Positions

6. The United States basic deficit for 1970 is in the neighborhood of $2-1/2 to 3 billion. This is not satisfactory but is not significantly larger than average of past five years. U.S. current account surplus excluding government grants, at $2.3 billion in 1970, was higher than average of 1968-69 by over $1 billion, though smaller than 1961-65 average of $5.7 billion.

7. Basic balance of payments positions are not especially strong in Europe. A major part of offsetting surpluses to the U.S. basic deficit will probably be found, though data uncertain, in Canada and Japan. Continental European basic surpluses have been held down by U.S. restraints on long-term capital outflows. Large, current account surplus of Germany was nearly halved in 1970 as compared with 1969, and appears to be weakening somewhat further. Although current account surplus of EC as a whole remains large, this surplus now roughly balanced by aid and large long-term capital outflows, leaving basic balance in balance. Wage and price movements in Europe now suggest a more rapid pace of inflation relative to the U.S. and Canada and such movements also weigh against upward revaluations of European currencies. United States has exercised restraint on inflationary demand in 1969 and 1970 and unemployment has reached levels substantially higher than those experienced in Europe.

8. However, the U.S. basic balance remains unsatisfactory, reflecting serious deterioration in U.S. trade surplus from levels of early 1960’s. This deterioration shows up primarily with Japan and Canada, although European agricultural policies present the threat of further deterioration. In addition a primary cause of current difficulties is our continuing large military defense burden including particularly in such surplus areas as Europe and Japan. Despite their surpluses many other developed countries, including both Japan and the EC, still have important restrictions against our imports.

9. USG is not following “passive” policy or policy of “benign neglect” as some Europeans assume on basis recent articles of some U.S. academics. U.S. has taken actions to limit basic balance deficit including renewal of IET, and extension of Commerce and FRB programs covering corporate and bank capital flows. Administration hopes Congress will authorize DISC proposal to improve export performance and is working to make U.S. export credit facilities more competitive. Beyond that, negotiations must be pursued bilaterally and multilaterally to defend U.S. export interests, and to seek improvements in military burden-sharing arrangements. Our trade position is very different than it was in the early postwar period. The United States should not and will not seek solution by depressing the U.S. economy. In fact, such action would aggravate net capital outflow. It would also reduce U.S. imports, thus tending to depress the economies of some exporting countries.

10. Through its demand management policies, the United States has slowed down the U.S. economy markedly and we are now experiencing improved price performance that can only be helpful to balance of payments. The Administration has also taken steps to deal with inflationary pressures in construction and called attention to other specific points of inflationary pressure in the economy, with an eye to international as well as domestic implications of excessive price and wage advances. If further stimulus to the economy should be needed in the future, fiscal rather than monetary action would certainly be considered.

Short-Term Capital Flows

11. While short-term capital flows more transitory problem, large flows do represent serious problem for several European countries and for international monetary system. U.S. concern with this problem evidenced in President’s report on “U.S. Foreign Policy in the 1970’s” in which he listed objective of cooperation in monetary sphere “to handle large-scale shifts of liquid capital without exchange crises or losses in the ability of individual nations to pursue their monetary policies.” President called for “an intensive examination to determine whether there is need to reinforce the present techniques and procedures of international monetary cooperation to enable us better to cope with such movements.” This problem, though serious, is fundamentally different from the basic balance problem. It results from fact countries in different cyclical situations tend to different interest rate levels and monetary policies must have scope for domestic requirements. In 1970-71, this has meant substantial differential between U.S. interest rates which have been relatively low reflecting sluggishness of economy and our need for economic stimulus, and interest rates in certain European countries, which have been high reflecting continuing inflationary boom and desire for continued restraint in those countries. These divergencies in money market conditions are the major source of the massive U.S. official settlements deficit of 1970.

12. Even with available techniques for dealing with short-term capital flows, all nations must be prepared to ride out large swings in payments positions in such divergent cyclical situations. This is not something that can or should be dealt with by changes in exchange rate parities. If expansion of U.S. economy is accompanied by firming of U.S. money markets and there is an easing of monetary conditions in foreign financial centers, U.S. official settlements deficit should be substantially reduced. Questions of the appropriate policy mix as between fiscal and monetary policy are relevant for all advanced countries, not merely for the United States.

Summary

13. While we are concerned over both the basic balance and short-term capital flows, we are attacking problems in cooperation with others. Solution not seen in dramatic action in areas of international monetary system, and no emergency measures or special international meetings under consideration.

14. Recognizing there are no quick or easy answers to world balance of payments adjustment problem, USG intends to carry out its part of responsibility for improved structure. Orderly growth with price stability in U.S. is essential underpinning in such improvement. The extremes of slack and overheating offer no salvation for the balance of payments. A combination of orderly growth with better price stability than other leading industrial nations will be achieving in years ahead should move the U.S. along the desired path toward a stronger current and basic balance position.

Rogers

1. Source: National Archives, RG 59, Central Files 1970-73, FN 12 US. Confidential. Drafted by G.H. Willis and W.C. Cates (Treasury); cleared by Under Secretary Volcker, Deputy Assistant Secretary of State Weintraub (E), and Curran (S/S); and approved by Deputy Under Secretary of State Samuels. Sent to the Embassies in OECD capitals, the USEC Mission in Brussels, and the OECD Mission in Paris.
2. In late March and early April a number of posts reported on foreign concerns about the U.S. balance of payments. Telegram 68708 to The Hague, April 22, noted that telegram 67590 should help answer a number of questions about the balance of payments and measures taken. (Ibid.)