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C H A IR M A N O F T H E B O A R D O F G O V E R N O R S
F E D E R A L R E S E R V E "S Y S T E M
WASHINGTON, D. C. 20551

January 26, 1972
T he Honorable Maurice H. Stans
Secretary of Commerce.
Department of Commerce
Washington, D. C. 20230
Dear Maury:
I have given considerable thought to your memorandum
of January 14 on ’
’
Liberalization and Termination of the Foreign
Direct Investment.Program." Although I am entirely in.sympathy
with'your objectives, I differ with some specific parts of your
proposal.'
would be unwise, in my view, to announce now a date
ror zucure cerain.ation of the program. My objections to such^an
announcement are:
1. So soon after the Smithsonian agreement,
such an announcement by the United States would be
regarded as aggressive by the other participants to
the agreement. They would view the announcement as
a threat to the structure of exchange rates agreed
to on December 18.
2. It would be detrimental to the trade nego­
tiations now under way and to the negotiations fore­
seen later.
3. It would encourage other countries to erect
or reimpose controls on inflows of capital.
4. It would strengthen the opposition of the
labor movement and some business people to direct
investments overseas^. We cannot dismiss lightly
their argument that direct investment leads to the
export of U.S. jobs. Announcement of termination
of the program would strengthen support for the
Hartke-Burke bill, which is aimed at both limiting
direct investment and fixing quotas for imports.







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The Honorable Maurice H. Stans

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5.
Currently the fo re ig n exchange markets are in
an un certain s t a t e . Announcement o f termination o f the
program would put the d o lla r under a d d itio n al p r e ss u re ,
in cre asin g the danger that the Smithsonian agreement w ill
unravel.
With regard to the 1972 program, 1 would suggest some m od ifica­
tio n , in your proposal fo r c o lla p sin g the schedules. I t seems to me un­
d e s ir a b l e to permit companies to s h i f t unused allow ables from LDCfs to
more developed c o u n tr ie s. Thus” I would suggest th at the c o lla p se o f the
schedules should apply only to the 1972 and l a t e r programs. This modi­
f i c a t i o n would reduce the amount o f the pro spectiv e outflow, d e s ir a b le
in any event fo r the f i v e reasons c ite d above, and would a lso reduce
^ a d v e r s e p o l i t i c a l re a c tio n in both developing and developed co u n trie s.
in clin ed to go along with your proposals for an in cre a se
in the earnings allow able from 40 to 50 per cent and fo r an increase in
the minimum allow able to $6 m illio n .
S in c erely yours,

/ 'V
Arthur F. Burns




J A N

1 4 1 9 7 2

M E M O R A N D U M FOR:

H o n o r a b l e John B . Connally
S e c r etary1 o f the Treasury
ir
H onprable G e p r g e P. Shultz, D ir e c t o r
'Office of Management and B u d g e t

>>J H o n o r a b l e A r t h u r P. B u r n s , Chairman.
B o a r d of Governors of the F e d e r a l R e s e r v e S;
H o n o r a b l e H e r b e r t Stein, C h a i r m a n
Co u n c i l of Economic A d v i s e r s

_ ,

m

H o n o r a b l e Peter G. Peterson
A s s i s t a n t to t h e President
for International E c o n o m i c A f f a i r s

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b 15.2 citiLon cin Tsirini.nH/fciori oil
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cl
Investment Program

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W e r e c o m m e n d the foll o w i n g p r o g r a m for the p h a s e o u t of tlife
F o r e i g n D i r e c t Invest m e n t Regulations, p o i n t i n g to, a term i n a -tion effe c t i v e D e c e m b e r 31, 1973.
*

.

V7e w o u l d announce a liberalization for 1972 c o n s i s t ­
ing of a co l l a p s e of schedules, an i n c rease in t he
ea r nings 'allowable from .40 percent to 50 p e r c e n t o f
p r i o r ye a r earnings of foreign affiliates, arid a
$6 m i l l i o n m i n i m u m allowable (compared to the 1971
minimum' allowable of $2 million for Schedules 3 / C
and a s u p p l e m e n t a l $4 million in Schedu le A ) . T h e
* cost
of such l i b e r alization w o u l d b e just under
$.1 b i l l i o n or" about 40 percent of total c urrent
restraint, and w o u l d re d u c e the c ompanies under
r e s t r a i n t from a bout 220 to hal f that, or 113.




2.

I n 1973, w e w o u l d i n c r e a s e the e a rnings allowable *
f r o m 50 p e r c e n t to ’ p e r c e n t and t h e m i n i m u m all o w ­
75
ab l e f r o m $5 million to $25 million. Th i s w o u l d p r o ­
v i d e an additional cos t in 1973 of a p p r o x imately .
$850 m i l l i o n , :an, a d d i t i o n a l 40 p e r c e n t o f current..
* restraint/, and w o u l d r e d u c e the c o m p a n i e s under
r e s t r a i n t t o about 30.

3;. • In* 1974'/ all further r e s t r a i n t in' terms of current
‘i n v e s t m e n t activity w o u l d b e terminated. T h e b a l a n c e
o f p a y m e n t s cost of t h i s final libera l i z a t i o n w o u l d
b e o n l y a p p r o x i m a t e l y $400 or $500 million.-. /
*v.;
W e v/ould re t a i n control over t h e r e p a y m e n t o f accurStl a t e d b o r r o w i n g s r e s u l t i n g from the p r i o r controls J'
V7e b e l i e v e this c ould b e accomp l i s h e d b y the use o %
v o l u n t a r y guidelines, b u t the d i s c i p l i n e c o u l d b e 1
"m a d e m a n d a t o r y if it a p p e a r e d n e c e s s a r y at tha t tirfib.
A r e a s o n a b l e structure o f the g u i d e l i n e s u s e d for a
R e p a y m e n t s o f foreign b o r r o w i n g s c o u l d c r e a t e a po-2*
t e n ^ i a l annual o u t f l o w o f U . S . - s o u r c e c a p i t a l for ^
' r e p a y m e n t o f the foreign b o r r o w i n g s of $2 t o $3 , r
b i l l i o n p e r year. A g r e a t e r or lesser o u t f l o w c o u S d
b e . p r o v i d e d b y v a r y i n g t h e guidelines.
•’' .
1 vT u l d p r o p o s e t h a t the e f f e c t i v e t e r m i n a t i o n dat e b e an­
.o
n o u n c e d a t this tim e and w o u l d also suggest t h a t t h e same
c p u j s e b e f o l l o w e d w i t h rega r d - t o t h e succee d i n g liberaliza^
•fcion s t a g e s b e y o n d t h e 1972 liberalization.
I believe' t h i s
is a b s o l u t e l y n e c e s s a r y in order to r e d e e m t h e P r e s i d e n t ' s
c o m m i t m e n t t o t h e t e r m i n a t i o n of tjie controls and I t h i n k a
v i g o r o u s l i b e r a l i z a t i o n pr o p o s a l for 1972 is e q u a l l y crucial
in e s t a b l i s h i n g the c r e d i b i l i t y o f our c o m m i t m e n t to t e r m i n a ­
t i o n a t t h e end o f 1973.
A p o s s i b l e c o u n t e r - a r g u m e n t to e s t a b l i s h i n g t h e t e r m i n a t i o n
d a t e at t h i s tim e is t h a t a specific A d m i n i s t r a t i o n c o m m i t m e n t
t o t e r m i n a t i o n at thris tim e m i g h t increase r e s i s t a n c e from
o r g a n i z e d labor d u r i n g 1972.
'
*

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