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T H E L Y N D O N B A IN E S J O H N S O N L IB R A R Y P A P E R S Ol llliNRY F O W L E R iu http://fraser.stlouisfed.org/ Federal Reserve Bank o f St. Louis 52 International Balance of Payments Classified Material: Cabinet Committee on B/P, 8/65—12/66 http://fraser.stlouisfed.org/ Federal Reserve Bank o f St. Louis OCT 1 2 065 DECUSSITliiD \urhotirr, ffcj C ___ NAHA, DateLf2<fy WiMORASDOM FOR THE PRESIDENT Your Cabinet Committee on B a la n c e of Payment! met tn Sept^-.ber 30 in the first a ten toward an intensified scd comprehensive review of w r present .. .ition anci the out* » look for 1965 and 1966. Tec or three more wetins's will be held during October in order to complete this ^ tailed study* Tha nsxt otm 1* scheduled for Monday, Octo w r l o * Specific «!COTTaendations with respect to tt» balsn*# ot payments program will then be forwarded to yo<*. Thia is an interim report* Although a firm evaluation and appropriate recctnnendations must await further detailed analyses end assessment, svn- broad conclusions seem warranted, as follows: „ Wc are reasonably on target with your balance of payment* program; results for the c-atit: year 1965 p ro m is e to be close to those we anticir>eted ac Che beginning of the year. The specific balance rf S l S i omtr-‘ -utlis to tbi. p . t f o r - ^ . vary significantly from those we expeetcd | u t j “ 2£ total result indicates a m^casiful over-all, program dinsfar. — Sense isnediste actions are necessary to guard again?:. a sharp worsening of the payments situation daring the fourth quarter of 1965. The actions required av & qu t lined be low • — The preliminary outlook for 196b, on the beela aresent program, is for modest improvement; reinforce Snt“ particularly of tte Comnerce Depart*: ent prograir, la essential if satisfactory progress toward equilib rium is to be assured. jjsenET' y, & i - 2 f*deral 8 w » m p r o R g n with respect Co beaks end nonbanking financial institut ions is paying off hsndsomely, far in excess Of our expectations, end promises effectiveness at least through next year. Banks have sore than done their Job: they are now $600 million below their permitted ceiling on credits to foreigners. This very success, however, poses e threat to the fourth quarter results if hanks move vigorously toward the ceiling during the rest of 1965. To help guard against such a sudden outflow, the Federal geserve has “ advised the institutions concerned that the ceiling “ for 1S66 will employ the m m end*of-1964 credit bese. banks therefore need not ru^h out to a-ake loans to bring them up to their current ceiling in feer that a new bese will be established which would penalise their failure to be at maxioum lending capacity to foreigners. Even with this precautionary step, soma adverse effect in the fourth quarter remains e clear possibility. Substantial reinforcement of the program administered by the Oepartatnt of Commerce is clearly in order in view of the very heavy increase in direct investment sbrosd this year and the Indications that this will continue. A reinforcement of that progrsa is now in the making. It essentially will Involve — the establishment of firm suideposts for corporate behavior in investing a b n a d , sharp tightening of performance standards and Improvement in the departDent of CosMezce’ ebilicy to analyse performence s results and undertake frequent discussions with the laggards. We believe such tightening could being about substantial improvement, yet retain the eeeentially voluntary nature of the program. Improved performance in this corporate sector is essential in the very practical tense of oalance of payments results — but also to insure that other parts of trie over-all program* remain acceptable as being fairly imposed. iv. -m c k e t More immediately, Commerce will — re-emphasise to the corporations the need tc continue to repatriate earnings, to borrow abroad and bring back all dollar* held abroad not absolutely naaded for working purposes. This etwuld help to minimise streina avan whil* the new measures are being developed and ieeuad. A U o , 1 took advantage of the presence bare **5^*8 Che Bank and Fund m e t i n g of Lord Cromer, bead of tne ^ of England, to urge the deferral by the United Kingdow of any further action on their part this year “ drawdown of their long standing Export-Iwport Beak Credit) that night adversely effect the 4tb quarter picture. I believe they will be In e position to cooperate and artwilling to do so. Ocher measures ere aleo now under critical review determine those further geine that can be recorded with the eoo cation of feeeible neaaures to exporta, tourism, ailitary S ^ o c S c aid - particularly important over the longer-run. The above observations suggest that your pres ear. p w ^ a s , suitably reinforced lwt beeically voluntary, can t»rinjj Lnproventnt needed in our belence of p e y r e m s this y«ar ana a further stride toward equilibrium In 1964. W e auat, Iswersr, continue to be cooetantly elert to any indication that the procree la faltering since the balance of peymeuta reeulta r e a e in critical to world wids confidence in the dollar and to our ability to gain any w M u u n ^ t u l step toward substantial improvement of the international payments system. W do not lareeee at this time any need for wore d r a a t i x n e a e u r a s . i n ^ A rK— e could be Sharply counterproductive. Never the less, contingency planning within a small interagency group will continue at Che top of the working agenda. Your COTwlttee is fully aware that this phaae of interagency planning mist be strictly guarded since rumor of it could bring ebout substantial epeeulecive or anticipatory o u t f l w s of funds. ggCnBT http://fraser.stlouisfed.org/ Federal Reserve Bank o f St. Louis