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THE

SECRETARY

OF THE TREASURY

W ASH INGTON

)
r

December 9 ,

MEMORANDUM FOR I

1964

’ PRESIDENT

A s b ack grou n d f o r y o u r m e e tin g tom orrow w ith th e
C a b in e t C om m ittee on th e J a la n c e o f P a y m en ts, I am
a t t a c h i n g a memorandum on che o u t lo o k f o r th e b a la n c e
o f paym ents i n c l u d i n g recom m en d ation s f o r p o s s i b l e
a c tio n .
The o r i g i n a l d r a f t o f t h i s memorandum was
p r e p a r e d in th e T r e a s u r y and re v ia w a d t h i s a ft e r n o o n
by th e C a b in e t C om m ittee on th e B d lu a ce o f P aym en ts.
The c u r r e n t d r a f t r e p r e s e n t s my own v ie w s ta k in g i n t o
a c c o u n t th e comments a t t h i s a f t e r n o o n 's m e e t in g .
It
d o e s n o t p u r p o r t t o be a f u l l y a g re e d p a p e r .

Douglas Dillon

! ""-IS
A tta c h m e n t




-— *
*

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CQNFTBENTtAirDecember 9, 1964

BALANCE OF PAYMENTS PROSPECTS AND POLICIES
1.

Progress to Date
Our deficit on regular transactions now looks to be between
$2-1/4 and $2-1/2 billion for 1 9 6 4 .
That will be roughly $1 billion below the $3.3
billion 1963 deficit, but short of the widely
shared expectations of a decline to $2 billion
or l e s s .
Deficit has widened to about $3 billion rate for
second half, perhaps reflecting in some part side
effects of U. K. crisis.
With the deficit smaller and good first half results con­
tributing to confidence, the net gold outflow was eliminated
during the first 10 months of the year. Increased outflows in
November and December are expected to bring the gold drain for
year to an estimated $175-$200 million -- still less than half
last year's total.
~
------The earlier stability was partly fortuitous -- re­
flecting largely heavy Russian sales early in year.

2.

Looking Ahead
Our technical experts foresee further limited gains in
1965, bringing the deficit on regular transactions slightly
under $2 b i l l i o n . If realized, that would be the smallest
deficit since the balance of payments became a problem in
1958 -- but little if any better than what had been hoped
for this year. With this outlook, and in the absence of
y
unusual sales by the Soviet Union, the gold outflow can be ts
expected to increase substantially.

3.

Elements in the Problem
Our commercial trade surplus should reach a record $3.4
billion in 1964 -- a better-than-expected gain of $1.1 billion.
DECLASSIFIED




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CONFIDENTIAL-

2

-

Strong markets abroad helped, but in addition, our own price
stability is beginning to pay off in strengthening our wo r l d wide competitive posi t i o n .
—

However, on present reading, we cannot count on so
large a commercial trade surplus in 1965; our experts
now foresee a decline of about $750 m i l l i o n „ The
U.K. import surcharges and slower growth in Canada
and some other markets will tend to restrain export
growth, while an inventory buildup in steel and
elsewhere is expected to swell imports.

On Government overseas account. President Kennedy scheduled
a $1 billion reduction in dollar outlays abroad from the 1962
level by the end of this year -- with full effect in 1965. This
included savings of $500 million through tying of aid, $300
million from lower defense spending, and $200 million from r e ­
duced purchases by AEC abroad. That target, on present schedules,
should be closely approached.
--

AID has virtually reached its target.
Defense is about $45 million behind its spending goal,
partly reflecting pay increases and expenditures in
South Viet-Nam. This forecast does not allow for the
cost of possible further increases in activity in South
Viet-Nam. Suggestions for certain additional military
reductions have been set aside, largely for reasons of
foreign policy. A brief recapitulation of results to
date under July and October 1963 reduction programs is
attached.
(Defense is $175 million ahead of its r e ­
ceipts goal and therefore $130 million ahead on balance.)

--

Purchases by AEC are being reduced on schedule.

Clear slippage is apparent in private capital outf l o w s ,
despite the restraining influence of the Interest Equalization
Tax on purchases of foreign securities.




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.CQNF-iBENWMr

- 3 Bank loans -- only partly related to exports and special
Japanese needs -- ran at a record $2.2 billion annual
rate in first three quarters, despite declines in
short-term lending over the summer.
Direct investment is reaching a new peak of over
$2 billion.
Some liquid funds have moved abroad, despite effort to
maintain short-term interest rates at competitive levels.
New Canadian securities -- exempt from IET -- turned
out to be larger than expected, particularly in recent
months.
The travel account is another important drag on progress.
Tourist spending abroad continues to rise rapidly, reaching
$2.9 billion, $1.7 billion more than foreigners spend here.
4.

Evaluation
Continuing, visible progress toward reducing our deficit
is essential to assure adequate financing for our deficit and
to maintain confidence -- already affected by side effects of
the U.K. crisis.
In this context, the technicians' current forecast
would be judged disconcertingly high by European
creditors -- too high to be fully certain of orderly
f i n ancing.
Present policies must be continued and reinforced -and additional backstops prepared -- to assure
some improvement on the current CY 1965 forecast
and lay the ground for further significant progress
in CY 1966. The "safety margin" today is too thin.

5.

Indicated Program
A.
Basic to all else is continued price and cost stability -the key both to export expansion and continued confidence in our
longer-run prospects.




-GONHDENHAL

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CONFIDENTIAL'

- 4 This suggests reiteration of "guideposts", close
attention to key wage and price decisions, and con­
tinued emphasis on measures to spur productivity and
cost-cuttingo
B.
On that foundation, our export effort should be further
strengthened through:
1. Increased emphasis by Commerce on locating foreign
markets, contacting potential new exporters, and promotion
of cash sales which are more immediately productive than
credit sales on extra liberal terms. Strong Presidential
backing will be needed for adequate appropriations to carry
out this program.
2. Stepped up efforts to develop more flexible policies
in the maritime field to (a) permit shipment of Governmentfinanced exports in foreign ships where necessary to make sale,
and (b) correct shipping cost differentials that discriminate
against U.S. exports..
3. Exploration by affected agencies of opportunities
for developing Iron Curtain markets, including judicious
use of credit where this leads to accompanying cash sales.
C. Re-examination of targets for reductions in dollar out­
lays abroad by AID and Defense is required to prevent slippage
and to seek out further areas for savings.
In addition, action should be taken to assure Germany
meets commitment for military orders and payments to U. S.
w h i c h fully offset U. S. defense spending in Germany during
1965 and 1966.
D. A reduction in the net capital outflow is e s s e n t i a l ,
to achieve the needed reduction in the balance of payments
deficit. To assure this:




CQ&Ff-PEN-T-IAir

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.CONF-ffiEWMAG

- 5 1. Renewal of the basic Interest Equalization Tax
legislation will be required.
2. Implementation of tax changes and other measures
required to improve climate for foreign purchases of U . S .
securities should be expedited.
3. Monetary policy is doing what it can at the moment
to minimize outflows of short-term funds while supporting
domestic growth. Its flexibility in meeting future con­
tingencies must not be impaired. Monetary policy will
also need continued support from Treasury debt operations
and from intervention in foreign exchange markets to meet
objective of avoiding incentives to shift liquid funds
abroad.
4.

As further backstops:
a.

b.

We must be prepared to close the Canadian IET
exemption if anything like present borrowing
rate is maintained ($380 million in fourth
q u a r t e r ) . However, the Canadians have indicated
clear recognition of need for lower rate next
year.

c.
E.
to:

Unless increasing domestic loan demands slow
the rise in foreign bank lending, the IET will
need to be extended to bank term loans.

Study should be undertaken of problems entailed
in extending the IET to direct investment abroad.

To restrain the losses on travel account, it is essential

1. Extend legislation limiting duty-free tourist imports,
and study desirability of reducing present $100 per trip limit.
2. Invigorate the "See America Now" program with adequate
appropriations, centralized responsibility, and top level
support.




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3. Assure that fare decisions by the CAB take into
account balance of payments implications of foreign travel.
4. As a "backstop", we should devise a workable tax on
overseas U. S. tourists for possible implementation well
before heavy summer tourist season.
F. In the best of circumstances, we must be prepared for further
gold losses. Declining ratio of gold to Fed note and deposit
liabilities (now near 28 per cent) underscores need for relaxing
25 per cent gold cover requirement, making gold unambiguously
available in defense of dollar.
(The primary public justification
for this move lies in coming need to provide for the long-run
expansion in the monetary base required by domestic g r o w t h ) .
6.

Recommendation
A tentative decision should be taken to send a special balance
of payments message to the Congress on or about March 15, when
detailed figures on 1964 results first become available. This
message could reiterate Presidential determination to substantially
improve our payments and to take all needed measures to that end.
It could report results of effort to reduce Government expenditures
overseas, request extension of Interest Equalization Tax, emphasize
need for action on other items in legislative program and announce
any further steps which may be necessary.

Attachment




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C Q H F fflE H H E A Ir

DEFENSE OUTLAYS ABROAD

SUMMARY OF
PHASE I A N D PHASE II REDUCTIONS
HAVING EFFECT IN CY 1965 ($m)

Original
estimate

Present estimate
To be realized
Total
program
in CY 1965

Phase I

361

320

320

Phase II

375

117

80

736

437 .

Less other increases




400

-63

-145

673

255

.-eeNFIDENTiAL

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Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102