8. Memorandum of Conversation1


  • Secretary Kennedy’s Meeting on Proposed 1969 Revised Balance of Payments Program


  • Treasury:
    • Secretary Kennedy
    • Under Secretary Volcker
    • Assistant Secretary Petty
  • State:
    • Secretary Rogers
    • Acting Assistant Secretary Greenwald
    • Deputy Assistant Secretary Enders
  • Commerce:
    • Secretary Stans
    • Mr. Cadle, Acting Director, OFDI
  • Federal Reserve:
    • Chairman Martin
  • CEA:
    • Chairman McCracken
    • Mr. Houthakker
  • BOB:
    • Director Mayo
  • White House:
    • Counsellor to the President Burns

Under Secretary Volcker introduced the discussion by giving a brief report on the foreign exchange markets which indicated that the pressure on the French franc and the pound sterling was modest and the atmosphere of last Thursday2 no longer prevailed. Mr. Volcker referred to the proposed Memorandum to the President3 and indicated that the proposed relaxation could cost in balance of payments terms an amount in the neighborhood of $1 billion, depending upon various developments. He reported that the staffs of the various agencies expressed considerable caution at the idea of moving ahead now to relax controls to the degree indicated. The primary concern was about the probable negative reaction abroad to such a relaxation. Foreigners would grumble that this relaxation will finance takeovers by American companies; it would make more difficult the activation of Special Drawing Rights, and it could impede the talks on monetary reform. Finally, Mr. Volcker reported that the IMF Managing Director Schweitzer suggested caution about the idea of relaxing controls and said that the cost could be reduced by not including the Federal Reserve Program in the relaxation.

Mr. Volcker closed with the question: Should the Federal Reserve be part of the relaxation? And what should be the timing of the announcement?

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Secretary Kennedy pointed out the difficulty of the choice in view of the bad balance of payments numbers which are projected. “If we do nothing now,” he said, “we get locked into the ways of the past; on the other hand, we do not want to touch off an adverse market reaction with possible side effects that are unpredictable.”

Secretary Stans indicated that he was leaving for Europe on April 11, and he would not want to have the relaxation announced a week before he would go—as he would have to spend most of his time explaining the action. Second, he underscored the importance of an early announcement by pointing out that presently, regulations do not exist for the foreign direct investment program for 1969; and, to be fair to the corporations, they must come out shortly. Finally, he indicated that most of the advantages to the Administration would be attained through the OFDI relaxation, and therefore it is possible that it could be done separately.

Secretary Rogers indicated that President Nixon during his trip agreed to undertake consultations with the Europeans, and he indicated that it would be appropriate to do that on this matter. Mr. Volcker said that the Europeans would be likely to say: “No.” Secretary Rogers indicated that this is what consultation is all about. Secretary Kennedy commented that, in view of this, Mr. Volcker should propose to consult in Europe on this matter.

Counsellor Burns doubted that the balance of payments deficit as projected would be increased to the extent indicated. He added that consultations may occasion long delays in the announcement if they are undertaken thoroughly. The Europeans are concerned about the trade policies of the United States, and they do not understand the details of the OFDI. What they are anxious to avoid is a unilateral action in the trade area.

Chairman McCracken commented that there are different dimensions to foreign concern about the U.S. balance of payments. One concern is they would argue that we are taking the wraps off of our companies, permitting them to buy out European corporations. And the second concern is that we get on top of our inflationary problem. He supported the relaxation and pointed out it carried a greater obligation to control inflation at home.

Counsellor Burns said the fact the domestic economy was going too fast and the fact that the relaxation carried a greater obligation to control inflation provided all the more reason to pursue the course of relaxation of controls now. If we can announce our expenditure policy for fiscal 1970, the President’s proposed balance of payments statement would be greatly strengthened.

Secretary Rogers doubted if more pressure to control inflation were needed—there is no lack of consciousness or determination in this regard. Secretary Kennedy added that we are not getting the budgetary cuts he would like to see.

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Mr. Houthakker suggested that the relaxation could be presented as primarily a technical adjustment. Counsellor Burns said the matter was broader than that, and the announcement should be too: we should add the continued deferment of withholding tax on interest paid on foreign deposits. We must decide now whether we do or do not have a philosophy as a government; we must declare we are moving away from creeping restrictionism. The Europeans are as afraid as we are of the trend toward restrictionism.

While Secretary Stans did not feel there is any need for a ballyhoo statement because American interests would understand the significance of the move, Counsellor Burns felt that the President needed to state his principles now.

Mr. Petty inquired if an announcement of this sort was really of the nature that would require consultations; it is nowhere near the league of NPTs or ABMs. Secretary Rogers replied that the statements on the President’s trip did not imply any limits to consultation.

Director Mayo indicated that any announcement would be strongly reinforced with an announcement on expenditure cuts and an extension of the tax surcharge.

Chairman Martin summarized his views and said that it would be appropriate to undertake consultations on this subject, but he emphasized that these consultations should be at the political level and not with the central banks or even with the G-10 Deputies. Mr. Volcker should make it clear that the United States is choosing general restraint over selective controls and we would take whatever steps necessary to control inflation.

Secretary Kennedy summarized: Mr. Volcker would go and make the necessary consultations, he would present this action in a positive manner and indicate that this Administration would seek an extension of the Interest Equalization Tax, an extension of the surtax, and include appropriate expenditure controls, as well.4

John Petty
  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. Drafted by Petty on March 13 and approved by Volcker. The meeting was held in Room 4426 of the Treasury Department.
  2. March 6.
  3. Reference is to a draft memorandum to the President on “Relaxation of Balance-of-Payments Controls,” which was circulated by Kennedy to the Secretaries of State and Commerce, the Budget Director, and the Chairmen of the Federal Reserve System and the Council of Economic Advisers on March 7, under cover of a memorandum inviting them to the March 11 meeting to discuss the draft. (Washington National Records Center, Department of the Treasury, Secretary’s Memos/Correspondence, 1966-1970: FRC 56 74 7, Memo to the Secretary, March-April, 1969) An earlier version of the draft memorandum to the President, dated March 3 with the subject line, “Reversing the Trend Toward Restrictions by Beginning the Relaxation of Controls,” is ibid., Deputy to the Assistant Secretary for International Affairs: FRC 56 83 26, Current Problems and Contingency Planning 11/68-4/69. See Document 15 for the memorandum that was sent to the President on April 1.
  4. C. Fred Bergsten reported on this March 11 meeting to Kissinger in a March 12 information memorandum. He informed Kissinger that Burns and Stans had resisted Rogers’ insistence on consultations and had been overruled by Kennedy. Bergsten wrote: “any decision to relax the present controls has been postponed…. Treasury Under Secretary Volcker will thus raise the issue in his upcoming European trip. He will inform them that we plan to reduce our reliance on controls but will seek their views on timing and complementary steps. This approach will stand in marked contrast to that of the previous Administration, which enacted the entire control program-a much more drastic step than the marginal relaxation now envisaged-and then sent teams to Europe and the Far East to inform them of the action. In fact, it could be argued that it is stretching the President’s commitment quite far to consult on an issue of this magnitude. However, I supported Rogers on the grounds that any unilateral action should be avoided so shortly after the trip.” (National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 309, BOP) Under Secretary Volcker traveled to Bern, Bonn, Brussels, The Hague, Rome, and Stockholm March 21-26.