U.S. Department of State
FRUS, 1961-63, Vol. IX: Foreign Economic Policy
Office of the Historian

[Section 2 of 18]

General Foreign Economic Policy

//Source: Eisenhower Library, Post-Presidential Papers, 1961 - 1969, John F. Kennedy 1960 - 1961 (2). No classification marking. Drafted by Wilton B. Persons, Assistant to President Eisenhower. The meeting was held in the Cabinet Room of the White House. A shorter memorandum of this meeting is in a memorandum from Clark M. Clifford to President Kennedy, January 24. (Department of State, Rusk Files: Lot 72 D 192, White House Correspondence, 1/61 - 11/63)

1. Memorandum for the Record

Washington, January 19, 1961, 9:45 a.m.

[Here follows discussion of seven unrelated issues.]

8. Coordination and Development of Basic Economic, Fiscal and Monetary Policies

Senator Kennedy indicated that he and his people had been thoroughly briefed and asked if Secretary Anderson had anything further to give them. Secretary Anderson made a strong recommendation that public statements on matters as delicate as the balance of payments situation should be confined to the President and his Secretary of the Treas-ury only. This would mean that the government would be speaking with one voice and this would be very helpful to an understanding by foreign governments of the United States position. Secretary Anderson further recommended that communications with the Federal Reserve System be kept in the family and particularly in cases where there were differences of opinions.

The President referred to the morale effect of separating military families brought about by the recent order made in an effort to alleviate the balance of payments situation./1/ He pointed out that this was done as a quick move to do something concrete to stop the flow of gold and to show our Allies that we meant business. He expressed the hope that further study of this complicated matter would indicate that other and less drastic means could be used for accomplishing this purpose. He stated, however, that the situation could deteriorate to the point where even more radical measures might become necessary but expressed the hope that the Defense Department would minimize as much as possible the effects on dependents of military men. For example, he discussed the possibility of returning a full division to the United States, pointing out that this would require careful preparation before it was done. He also stated that American troops had been sent to Europe originally as an emergency move to give Europe a chance to recover from the devastation of war and that from the point of view of the United States we would be much stronger militarily if we brought some of these troops home and had them located as a central reserve.

/1/Reference is to the directive issued by President Eisenhower on November 16, 1960. For documentation on the preparation and issuance of this directive, see Foreign Relations, 1958 - 1960, vol. IV, pp. 135 - 140.1

The President indicated that, in his opinion, the State Department should bring back some dependents but thus far State has been recalcitrant. He pointed out that the soldier does not want to be made the goat in this matter and he felt this reaction was justified. The President also stated that there are several agencies of the government which could pick up some of the burden.

Secretary Anderson pointed out that gold erosion is still going on at a rate which we cannot afford--reporting $225 million from January 1, 1961, to January 19, 1961.

Senator Kennedy asked if there is any change in the gold balance among our Allies, and Secretary Anderson pointed out that all of our Allies have dollar surpluses--except Japan which has recently changed its reserve ratio. Secretary Anderson emphasized that the key to the gold problem is confidence on the part of other nations in the stability of the dollar and our willingness and ability to handle our fiscal affairs wisely. At this point, the President pointed out that he had had a study made as to the effect of ICA's programs on the outflow of gold and found this to be minimal./2/

/2/The ICA study has not been found.

Secretary Anderson indicated that the British had been very helpful in the gold situation and had worked with us very closely. He also pointed out that the Treasury Department keeps a "watch officer" on duty 24 hours a day on this particular matter.

[Here follows a brief discussion of the Presidential transition proc- ess.]

2. Editorial Note

On February 6, 1961, President Kennedy sent a special message to Congress outlining measures to ease the crisis in the U.S. balance-of- payments situation. Because of a continuing deficit in the balance of payments, the United States had suffered a gold outflow, which was troublesome, Kennedy emphasized, "not only for us but also for our friends and allies who rely on the dollar to finance a substantial portion of their trade." He went on to propose both short- and long-term measures to eliminate the deficit and stem the outflow of gold caused by loss of foreign confidence in the dollar. He assigned specific responsibilities to the Departments of the Treasury, State, Defense, Commerce, and Agriculture, the Bureau of the Budget, and the Export- Import Bank to implement his program for export promotion, burdensharing in defense and foreign assistance, and financial restraints and incentives designed to encourage foreign dollar investments. For text of his message, see Public Papers of the Presidents of the United States: John F. Kennedy, 1961, pages 57 - 66.

The President followed up by directing Secretary of the Treasury Douglas Dillon "to undertake coordinating responsibility for that program and to report to me periodically on the progress achieved, along with any recommendations for additional action deemed necessary on the balance of payments problem. In carrying out this responsibility, you should consult with the heads of other Departments and Agencies concerned." (Memorandum from Kennedy to Dillon, February 17; Department of State, E Files: Lot 64 D 452, Balance of Payments--Procurement)

3. Report From Secretary of the Treasury Dillon to President Kennedy

//Source: Kennedy Library, President's Office Files, Treasury, 1/61 - 9/61. Confidential. The unsigned report was transmitted under cover of a March 20 letter from Dillon to the President, in which he added: "I believe we should plan on making a comprehensive public report sometime in May after our first quarter payments statistics have become available."

Washington, March 20, 1961.

REPORT TO THE PRESIDENT ONBALANCE OF PAYMENTS MEASURES

In your memorandum of February 17, 1961,/1/ you directed me, acting in close cooperation with the Bureau of the Budget, to undertake responsibility for coordinating the program of measures to improve our balance of payments position, and to report to you periodically on the progress achieved. Accordingly, I am submitting this report on the status of measures taken by the several Departments and Agencies to strengthen our balance of payments position.

/1/See Document 2.

In preparing this report I thought it would be most convenient for you if I referred to each of the measures which you described in your Balance of Payments Message to the Congress on February 6, 1961,/2/ in the order in which they appear therein. Some of these measures are ones on which work is actively being pursued but on which definite conclusions have not yet been reached.

/2/See Document 2.

On the basis of this review I conclude that no additional action on your part regarding the balance of payments problem is necessary at this time.

I. Measures to Ease the Short-Term Demand Problem

1. Measures to Improve International Monetary Institutions. Treasury in consultation with the National Advisory Council on International Monetary and Financial Problems is intensively studying such meas-ures. The Under Secretary of the Treasury for Monetary Affairs (Mr. Roosa) is chairing a special ad hoc subcommittee on this problem. Also, the United States Executive Director on the International Monetary Fund/3/ is discussing the international aspects of the problem in the Board of Directors of the Fund. My objective is to assure that the Treasury's study, when completed, will reflect the best judgment we can get from within our own government and from other governments.

/3/Frank A. Southard, Jr.

2. Use of United States Drawing Rights in the International Monetary Fund. We are keeping track of the current situation carefully. I doubt that we will find it desirable to make a drawing on the Fund in the near future. In the meantime, the United States Executive Director in the Fund is continuing to press for the use by other countries of convertible currencies other than the dollar and sterling in their drawings from the Fund. This will help to avoid an increase in foreign country holdings of dollars and sterling due to drawings from the Fund.

Your statement of the United States attitude has itself had a great influence in causing other members to view the Fund's total resources as more readily accessible for general use.

3. Special Interest Rates for Dollar Holdings by Foreign Governments and Monetary Authorities. Your message of February 6 outlined two companion measures to retain foreign short-term balances in this country.

The first is the plan for using the Treasury's authority under the Second Liberty Bond Act, as amended, to issue securities at special rates of interest for subscription exclusively by foreign governments or monetary authorities.

To supplement this plan, and to prevent consequential losses to domestic commercial banks through its adoption, an Administration bill was sent to the Banking and Currency Committees of both branches of Congress on March 14, 1961, which would amend the Federal Reserve Act and the Federal Deposit Insurance Corporation Act to exempt from regulation the rates of interest paid by banks on time deposits held in this country by foreign governments or monetary authorities, and certain international institutions. No schedule for hearings on this Bill has yet been set.

After action has been taken on the proposed bill, the desirability of special Treasury issues to foreign governments and monetary authorities will be considered in the light of circumstances then obtaining.

Finally, an Administration bill to encourage foreign dollar holdings by unifying the tax treatment of income from various types of foreign central banks' earning assets in this country was reported favorably by the Ways and Means Committee of the House on March 6, 1961. It is scheduled for House consideration today.

4. Prohibition on Holding of Gold Abroad by Americans. The following steps are being taken for effective enforcement of the recent Executive Order forbidding the holding of gold abroad by Americans: (1) letters are being sent to the Central Intelligence Agency and other competent agencies requesting that they tap sources available to them for information relating to the illegal holding of gold abroad; and (2) the Bureau of the Mint is establishing a licensing procedure for foreign branches or subsidiaries of United States companies when such branches or subsidiaries are using gold abroad for industrial, professional or artistic purposes. This procedure among other things will require them to report on their stocks of gold.

(The following must be kept strictly confidential.) The National Bank of Switzerland is cooperating in our efforts by asking all commercial banks in Switzerland to notify all American holders of gold accounts that such holdings will be illegal under United States law after June 1, 1961. The Swiss National Bank has itself already refused to undertake or expedite transactions regarded by it as in violation of United States law. Central banks in other countries are taking less decisive but useful actions. Switzerland, however, is probably the principal center for holdings of gold abroad by American nationals.

II. Measures to Correct the Basic Payments Deficit and Achieve Longer- Term Equilibrium

1. Action by the Senate to Approve the Organization for Economic Cooperation and Development (OECD). Favorable action was taken by the Senate on March 16, 1961. The Administration should proceed promptly with ratification of the Convention./4/ It is important that we do this well before April 18, the date of the meeting of the Economic Policy Committee of the OEEC-OECD, which will be an important instrument for the coordination of economic policies of the Atlantic community.

/4/President Kennedy ratified the OECD for the United States on March 23. See Public Papers of the Presidents of the United States: John F. Kennedy, 1961, pp. 212 - 213.

2. Export Promotion. Since February 6, 1961, the Department of Commerce, working through 33 regional export expansion committees has organized and participated in 44 clinics, work shops, and trade meetings for the promotion of exports. A film entitled "Exportunities" is being effectively used in this connection. The Secretary of Commerce and his staff have constantly urged export expansion in their public speeches.

Abroad, the first United States foreign trade center is scheduled to open in London on June 26, 1961. Negotiations are progressing for additional foreign trade centers in Southeast Asia, South America, Europe, and Africa.

A follow-up procedure has been established to assure that trade opportunities developed by our trade missions abroad will eventuate in as many export orders as possible.

3. Cost and Price Stabilization. The first meeting of the Advisory Committee on Labor and Management Policy is scheduled for March 21, 1961. I hope that this Committee will encourage productivity gains and other measures designed to make American goods competitive in international markets.

4. Export Guarantees and Financing. The Export-Import Bank has made excellent progress in developing a new program of export credit guarantees comparable to those offered by foreign countries. I am sure that the new program will meet the objective of placing our exporters on a basis of full equality with their competitors in other countries. The National Advisory Council approved this program in principle today. I recommend that at your press conference this week you inform the Congress and the public of the principles on which this new program will be based. I will submit a draft statement for your consideration tomorrow. The details of the new program will be worked out after talks with private business interests over the next few weeks.

5. Foreign Travel to the United States. The Department of Commerce is planning a promotional campaign in the United States and abroad. The task group established by your directive of February 17, 1961, to simplify visa and entry procedures/5/ has decided to recommend the submission of legislation to establish a new 90-day "tourist" visa classification with authorization to waive such visas on a reciprocal basis. Details of plans and prospects of the Foreign Travel Program are included in a special report by the Secretary of Commerce to you.

/5/Not found.

6. Agricultural Exports. The Department of Agriculture is studying how to improve the effectiveness of our foreign market development program, particularly in countries which offer the best cash market prospects. I have requested the Secretary of Agriculture for an appraisal of the effects on our cash dollar exports of the various operations under Public Law 480,/6/ including barter operations. I will ask that this study be undertaken promptly so as to assist in policy developments with respect to the Food-for-Peace Program.

/6/P.L. 480 was formally entitled the Agricultural Trade Development and Assistance Act, enacted on July 10, 1954. For text, see 68 Stat. 454.

7. Policy on Economic Assistance. The policy adopted in October 1959 to emphasize procurement from United States sources under Development Loan Fund loans/7/ is being implemented so that for the loans and commitments made since that time (apart from those made for covering local currency costs or for foreign development bank financing) only about 14 percent of the disbursements will be made offshore.

/7/Regarding this policy, see Foreign Relations, 1958 - 1960, vol. IV, p. 353.

The International Cooperation Administration reports that a trial period of at least one year will be required to determine the effects of a new procedure adopted last December under which an orderly cessation of commodity procurement in a specified list of industrialized countries was undertaken. At present, waivers are being granted in cases where the new policy would interfere with United States foreign policy objectives. I am asking the Secretary of State to keep me informed on waivers granted under this new policy, indicating the amounts of such waivers and the justification supporting them.

As regards ICA cash transfers to foreign governments, efforts to minimize procurement in the countries referred to above are being carried out on a case-by-case basis.

Action in accordance with earlier directives has not been taken by DLF or ICA on the establishment of ceilings for offshore expenditures because such ceilings would not be meaningful for FY 1961 and would be premature for FY 1962 since requests for funds for that year are now under review. I believe that ceilings should be adopted as soon as FY 1962 funds are voted and that State Department witnesses should be prepared to make provisional estimates during Congressional hearings.

8. Tariffs, Restrictions and Discriminations Against American Exports. The Department of State is continuing its efforts to obtain the removal by foreign countries of quantitative import restrictions which affect our exports. American Embassies abroad have recently approached the governments of Austria, Colombia, France, and the Netherlands on specific commodity problems. Moreover, during recent visits by representatives of Germany and the United Kingdom, the need to liberalize imports of specific commodities was discussed, and it is likely that some relaxation of these restrictions will be announced in the near future.

The problem of gaining concessions for United States agricultural exports continues to be most difficult. Under Secretary Ball, on his current trip to Europe,/8/ will talk with officials of certain European Economic Community member states regarding the necessity of safeguarding access of United States agricultural exports to the Community market as well as an opportunity to share in the enlarged consumption of agricultural products within the Community.

/8/George Ball traveled to Europe March 18 - 30; see Documents 99 - 102.

9. Promotion of Foreign Investment in the United States. Techniques are being considered for achieving and maintaining a higher degree of liberalization of capital investment in the United States and other foreign countries by European countries with strong reserve positions. The Department of Commerce has also assembled material to enlist the interest of foreigners who may wish to invest in the United States.

10. Abuse of "Tax Havens". Taxation of American Investment Abroad. The Treasury has under study the question of whether present tax laws may be stimulating in undue amounts the flow of American capital to industrial countries abroad through special preferential treatment. This study is expected to be completed shortly so that recommendations may be included in your April tax message.

11. Increased Contributions by Other Industrialized Countries to the Less Developed Countries and to the Common Defense. The objectives to be sought in this field are under consideration and will be discussed by the Under Secretary of State for Economic Affairs in his current trip to European capitals and to the meeting of the Development Assistance Group in London, March 27 - 29, 1961.

12. Reduction of Customs Exemption for Returning American Traveller. The Administration Bill on this subject is currently held up in the House Ways and Means Committee. The State Department has written the Committee stating that there is no reason to expect that enactment of this legislation would provoke foreign retaliation. It is hoped that this information will lead to early favorable Committee action.

13. Centralized Review of Dollar Outlays. The Treasury Department and the Bureau of the Budget have started to consult on procedures for analyzing that part of the appropriation request of Departments and Agencies which will involve dollar expenditures abroad.

14. U.S. Military Expenditures Abroad. The Defense Department reports that action to effect savings has been taken in all of the principal categories in which it has foreign expenditures. These have been implemented by the military services and instructions have been sent to the field. In the case of personal expenditures, new actions are being taken in lieu of the previous order to reduce the number of dependents abroad. Actual results are not yet available, but the estimated savings during CY 1961 are:

(1) $65 million in the purchase of equipment, materials and supplies.

(2) $25 million in offshore procurement under the Military Assist-ance Program.

(3) In the case of personal expenditures of troops and employees overseas, a saving of about $80 million in CY 1961 is hoped for by such actions as:

(a) Discouraging the purchase of foreign goods and other expenditures in the local economies.

(b) Prohibiting the transportation at Government expense of foreign cars acquired after March 6, 1961.

(c) Encouraging savings programs by personnel, particularly through the purchase of United States Savings Bonds in which Defense is cooperating with the Treasury Department.

(d) Allowing the duty-free entry of gifts to be reduced from $50 to $10 when the present temporary legislation expires June 30, 1961.

No fixed estimates are available of savings in the categories of construction and contractual services.

Also, in accord with your message the Defense Department is reviewing savings which might be accomplished in the area of logistic support for our forces, particularly through the combined use of facilities with our allies. Discussions conducted by Ambassador Dowling have begun with the Germans in Bonn. Also under review are increased purchases of newer weapons and weapons systems by those countries financially capable of paying for them. It is estimated that sales to the financially capable countries of Europe will increase in CY 1961 to $230 million from $188 million in CY 1960. Grant aid by the United States to Western Europe (excluding Greece and Turkey) is estimated to decline from $400 million to about $350 million between 1960 and 1961.

Since the effectiveness of the directives will in large measure depend upon the way in which they are carried out at subsidiary levels, periodic follow-ups and reviews will be necessary.

I find it a matter of disappointment that the Defense Department has been unable to achieve more savings from its direct operations--which so far are estimated at only $170 million for calendar year 1961. With annual outlays of close to $3 billion I would hope that at least $500 million in savings could be found. In particular, I believe that much more than the $65 million estimate could be cut from the almost $1 billion of procurement overseas. Unless we do better I fear that public pressure for the reduction of our forces overseas will again emerge. I intend to meet with Secretary McNamara, David Bell and appropriate Defense officials to see what can be done to achieve greater progress in this area.

4. Memorandum From Secretary of State Rusk to President Kennedy

//Source: Kennedy Library, National Security Files, Kaysen Series, Ball Committee. No classification marking. In a July 28 memorandum to Secretary Rusk, Ball indicated that he had drafted this memorandum, which he attached for the Secretary's signature. (Department of State, E Files: Lot 65 D 68, Interdepartmental Committee of Under Secretaries on Foreign Economic Policy - Origin)

Washington, July 28, 1961.

SUBJECT

Coordination of Foreign Economic Policy

On March 12, 1961, at your direction, the Council on Foreign Economic Policy was abolished and its functions transferred to the Secretary of State./1/

/1/A copy of the White House Press Release, March 17, announcing the immediate termination of 17 interdepartmental committees, is ibid., Interdepartmental Committee of Under Secretaries on Foreign Economic Policy - Agenda, Creation.

On May 26, 1961, in your letter to the Congress transmitting the foreign assistance bill,/2/ you reaffirmed this decision and indicated that you expect the Secretary of State to become the focal point of responsibility for coordination of foreign economic policies. You also expect him, in facilitating executive branch coordination of foreign economic policies, to choose whatever mechanisms he finds appropriate, including the formation of interagency working groups.

/2/See Public Papers of the Presidents of the United States: John F. Kennedy, 1961, pp. 407 - 411.

Pursuant to these actions, I have asked the Under Secretary of State for Economic Affairs to assume, under my direction, responsibility for assuring proper interagency consultation and coordination in this field.

He is undertaking to assure that appropriate consultation and coordination is achieved by holding periodic meetings, under his chairmanship, with the Under Secretaries in the interested departments. I am enclosing a letter which he has dispatched to the various participants in this activity outlining the work and procedures of such meetings./3/

This approach constitutes an initial step by this Department to assure that the views of the agencies concerned will be brought to bear early and fully on foreign economic policy matters.

Dean Rusk/4/

/3/Not attached, but a copy of a letter from Ball to Walter W. Heller (and the other members of the Under Secretaries Committee), dated July 31, is in Department of State, E Files: Lot 65 D 68, Interdepartmental Committee of Under Secretaries on Foreign Economic Policy - Origin.

/4/Printed from a copy that indicates Rusk signed the original.

5. Editorial Note

In his letter to the members of the Interdepartmental Committee of Under Secretaries on Foreign Economic Policy, July 31 (see footnote 3, Document 4), George Ball proposed regular meetings of the committee every other Wednesday afternoon. He also indicated that the Council of Economic Advisers and the new head of the Agency for International Development would participate. Ball, who served as chairman, designated Joseph D. Coppock as executive secretary. Coppock circulated the planning papers in advance as well as follow up actions.

In a memorandum to the members of the Interdepartmental Committee of Under Secretaries on Foreign Economic Policy, July 2, 1962, Coppock attached, among other things, a copy of Ball's July 31, 1961, letter setting forth the functions of the committee, the attendance record of the official members, a list of subjects taken up in the meetings, and Coppock's evaluation of the committee. (Department of State, E Files: Lot 65 D 68, Interdepartmental Committee of Under Secretaries on Foreign Economic Policy - Origin)

In a memorandum to Under Secretary of Commerce Edward Gudeman, July 9, 1962, Assistant Secretary of Commerce Jack N. Behrman offered a critique of Coppock's evaluation. Essentially, Behrman argued, Coppock avoided the central question of "whether or not the Committee should be a decision-making body." Behrman went on to argue that "the Committee should make recommendations on broad foreign economic policies." (Washington National Records Center, RG 40, Under Secretary of Commerce Files: FRC 66 A 1971, Foreign Economic Policy Meetings (Ball), Miscellaneous Material)

This interdepartmental committee met regularly until late June 1962 when it recessed with the expectation of resuming meetings in the fall. The committee remained inactive, however, for 6 months. A background paper on the committee and its future was transmitted under cover of a memorandum from G. Griffith Johnson to George C. McGhee, January 17, 1963. (Department of State, E Files: Lot 65 D 68, Interdepartmental Committee of Under Secretaries on Foreign Economic Policy, Reactivation of Committee) The committee was reactivated in January 1963 and held six more meetings, the last one on May 23, 1963.

6. Summary Minutes of Meeting of the Interdepartmental Committee of Under Secretaries on Foreign Economic Policy

//Source: Department of State, E Files: Lot 65 D 68, Interdepartmental Committee of Under Secretaries on Foreign Economic Policy, Balance of Payments. Official Use Only.

Washington, October 4, 1961.

[Here follow a list of those attending the meeting and some announcements Ball made concerning the Common Market, textiles, and the next meeting.]

II. Discussion

Balance of Payments and Related Problems. Mr. Ball introduced the main topic by noting that it cuts across the activities of all the agencies represented, and that our ability to solve this problem will largely determine the extent to which we may be committed to lines which are contrary to those that we wish to pursue at home and abroad.

Mr. Fowler then developed the points made in the Treasury paper, "The Balance of Payments and our Foreign Economic Policy."/1/ The basis for balance-of-payments actions is the President's message of February 6, which outlined in broad form U.S. policies for dealing with the problem. Quarterly reports from the various participating agencies have been compiled into one over-all report to the President. An attempt will be made to put the next report, due the latter part of October or first of November, in a form that would be available for widespread official distribution so that all agencies can see what is going on.

/1/Dated September 29. (Ibid.)

Treasury expects to initiate a series of small task force meetings on particular phases of the problem and the Secretary will sit down with the two or three Departments or Agencies concerned to discuss what more should be done. This is a device to keep the program moving and up-to- date.

Mr. Roosa then discussed the problem of short-term capital movements under conditions of currency convertibility and the measures being taken and considered to deal with this problem. He said that the Vienna negotiations represented substantial progress although they might be less ambitious than some people might hope for. He pointed out that we are limited by what other countries are prepared to accept.

In the discussion that followed the Treasury presentation, Mr. Tobin warned that, even though our position may be improving, we must bear in mind that in the next one to three years the balance almost inevitably will worsen because our domestic recovery will cause imports to increase faster than exports. It may be a few years before the measures we are taking now improve our basic position. The important question is whether we are able to protect the dollar from runs during the transition period when things get worse before they get better.

On the multilateral aspects of the currency question, he continued, there is a question of how much we should rely on bilateral transactions and how much we should use international organizations like the IMF or the OECD.

Mr. Tobin also warned that while implementing the short-term measures, we must keep in mind the long run. We must remember that in the long run if we get back in balance and the UK does also, and if we haven't a new reserve currency, we have the question of the mechanism for supplying liquidity thereafter.

Mr. Hansen asked if it isn't possible that we could deal with the short- term problem in ways which we will not like in the long term. In foreign aid, for example, we have gone into the consortium approach and we are thereby setting up trading patterns which are not in our long-term interest. He cited the case of Pakistan and the tying of purchases to countries furnishing aid.

Mr. Fowler said that, with the exception of the Buy American meas-ures, he felt all of the short-run actions in the financial field undertaken to contend with the balance-of-payments problem are not only consistent with but promote the kind of liberal foreign economic policy we are committed to. Mr. Coppock observed that the February 6 Message puts a great burden on export expansion and domestic monetary restraint, since devaluation, exchange controls, and new restrictions on imports were ruled out as measures for correcting the payments imbalance.

Mr. Gudeman noted what Commerce is doing in the way of export and travel promotion, and called attention to the importance of trade centers abroad such as we have in London. One thing Commerce wants to work on with the State Department is obtaining better Commercial Attaches who will seek out opportunities for American goods rather than just taking care of the material that comes over their desks. In this regard, there will be a meeting of European Commercial Attaches in London soon and we will give them suggestions. Also, we must keep prices down so our goods will be competitive. Mr. Gudeman hopes for modernization of equipment so that manufacturing can be more efficient and prices reduced. We also need to give more attention to research and development, and Mr. Gudeman suggested Treasury might consider tax incentives so more would be spent on research and development. Mr. Fowler suggested that Mr. Gudeman talk with Assistant Secretary Surrey about this. Mr. Gudeman also mentioned the need for export guarantees and lending terms comparable to those offered by Europe so that we can support our exporters. He mentioned particularly lending to finance exports to an American subsidiary abroad for re-export.

Mr. Hansen said the Budget Bureau had started a review of military policy statements. A major question this poses for our balance of payments is the movement and placement of troops. He suggested that Treasury might keep in close touch with this.

7. Letter From Secretary of the Treasury Dillon to Secretary of State Rusk

Washington, February 20, 1962.

//Source: Department of State, Central Files, 811.10/2 - 2062. Official Use Only.

Dear Dean: The President spoke to me today and asked what could be done to further tighten up on the balance of payments impact of foreign aid expenditures. I told him of our agreement last week that Assist-ant Secretary Leddy and Mr. Chenery would meet this week to see what could be done to minimize the outflow of dollars for local cost financing.

I also told the President of my view which I mentioned in our meeting last week that the over-all balance of payments impact of foreign aid operations, including our contributions to the Inter-American Bank and to the International Development Association, as well as AID and military assistance expenditures, should not exceed a billion dollars annually as compared to last year's level of about $1.2 billion. The President expressed his concern that the figure was running this high and asked that I inform you of his concern and that we jointly furnish him with a progress report by the end of next week which would indicate what could be done to meet or better the billion dollar goal./1/

/1/See Document 8.

With best wishes,

Sincerely,

Douglas

8. Memorandum From Secretary of the Treasury Dillon to President Kennedy

Washington, March 12, 1962.

//Source: Kennedy Library, President's Office Files, Treasury, 3/12/62. Confidential.

Fourth Quarterly Report on Balance of Payments/1/

/1/The report was attached but is not printed. Dillon also sent the report to Secretary Rusk under cover of a March 15 memorandum, which called particular attention to paragraphs 7 and 10. Dillon added: "I am sure that Fowler Hamilton and the other appropriate officials of the Department of State will cooperate fully in developing promptly new methods of meeting the local cost financing problem." (Department of State, Central Files, 811.10/3 - 1562)

SUBJECT

I am today submitting to you my Fourth Quarterly Report reviewing the current balance-of-payments situation, and the status of the measures taken to implement your Message to the Congress of February 6, 1961. The Report is being widely distributed to other departments and agencies, the activities and expenditures of which affect our balance of payments. This I am doing so that all may be aware of the current situation and prospects, the need for continued vigilance in holding down overseas expenditures, and the need for even greater efforts to increase our receipts from other countries.

The highlights of the Report are the following:

1. Despite a worsening in our "basic accounts" in the second half of 1961, our situation was much improved over 1960, and even more by comparison with 1959. This reflected the improvement in our merchandise trade. As our imports rose with domestic recovery in the last six months, however, the commercially-financed export surplus dropped. A large part of the improvement in our "basic balance" was due to the special, negotiated prepayments of debts owed the United States Government.

2. For 1962, we have assumed that acceleration of European economic activity plus the cumulative effects of our various export promotion measures will raise commercially-financed exports by about $1 billion. On the other hand, increased economic activity at home will probably result in an increase in our imports of about $1.5 billion. Some prepayments of debt owed the United States can be expected, but they will probably fall considerably short of the $700 million received in 1961. However, the offset to our military expenditures in Germany recently worked out with the Federal Republic Government and others which are likely within the coming year should substantially lower our net military expenditures overseas. Taking all these factors into account, our "basic deficit" is likely to be somewhat larger than last year's basic deficit of $600 million.

3. Short-term capital movements continue to be unpredictable, even though last year more of them were "normal" commercial flows and not speculative capital. To the extent that our exports increase, we can expect a portion of the increase to be financed by short-term capital outflows. Such increases can contribute substantially to the over-all deficit as was the case last year. We are hopeful that other temporary outflows, based largely on interest rate differentials, will be reduced in 1962. Such a reduction could easily offset the moderate increase we look for in short-term capital outflows associated with expanding exports, and could lead to an over-all deficit somewhat smaller than that incurred in 1961.

4. In 1961 more foreign private recipients of dollars elected to hold them. This contributed to the sharp drop in our gold losses, as compared with 1960. Probably the most important single reason for this--and possibly the most important single development in this field in the past year--is the intangible but vital degree of international cooperation among monetary authorities which has been developed. A variety of ad hoc measures by different monetary authorities contributed to moderating short-term capital flows, to keeping dollar holdings in private hands and out of official reserves, and hence to reducing demands for gold.

The efforts extending through the year to improve international monetary institutions were climaxed by the successful conclusion, early in January 1962, of the new arrangements which will in effect triple the resources of major currencies other than the dollar and sterling available to the International Monetary Fund to meet a request for a drawing by the United States.

5. The arrangements recently worked out with Germany will offset our military expenditures in that country during 1961 and 1962./2/ We intend to seek similar arrangements over the coming year to offset part or all of our defense expenditures in France, Italy and perhaps other industrial European nations with strong economies. During the current year we hope that by these means, plus sales of military goods and serv- ices to other Free World nations, we will be able to offset our defense expenditures by at least $1 billion.

/2/Regarding these arrangements, see Documents 40 ff.

6. For the longer run, export promotion must be given a major role. The variety of measures designed to increase businessmen's awareness of export opportunities, and awareness in foreign markets of what the United States has to offer, has been expanded. The Export-Import Bank - Foreign Credit Insurance Association scheme for export credit insurance is one of the new facilities offered business by Government. It will be appropriate to continue and steadily to improve these measures. Plans for an intensification of our national effort to expand our merchandise trade surplus are being surveyed for presentation in the proposed Balance of Payments Message.

7. It is necessary not to relax our vigilance in holding down United States Government expenditures abroad. In this task Defense, State and AID and other agencies having overseas expenditures are cooperating with the Bureau of the Budget and with us. The two major problems which remain are overseas defense expenditures and the degree of financing of local costs which may be considered necessary in our foreign assistance programs.

8. We will make every effort to minimize the balance-of-payments impact of our overseas defense expenditures by expanding sales of United States military equipment and negotiating other offsetting arrangements with our industrial allies. With respect to the remaining impact, while further savings will undoubtedly be found possible, major reductions in spending will probably become possible only when a significant reduction can be made in the number of United States forces and dependents deployed overseas. The level and composition of overseas deployment of United States forces is under review by Secretary McNamara.

9. The proposed new sugar legislation, if provisions to establish import fees are retained, would contribute approximately $100 million to our balance of payments, on the assumption that the use of the fees for economic assistance under the Alliance for Progress will be tied to United States procurement.

10. The major problem of economic assistance as it affects our balance of payments at the present time is the question of financing the local costs of projects and programs. Largely because of this type of expenditure, AID officials had estimated that commitments of FY 1963 AID funds would result in expenditures abroad of $837 million, as opposed to $647 million resulting from FY 1962 commitments. These estimates are now being revised upwards. Over-all foreign assistance expenditures resulting in an immediate cash outflow from the United States (reflecting also authorizations made before the change in procurement policies) were about $1.3 billion in calendar years 1960 and 1961. This total cannot be allowed to increase and must be reduced to about $1 billion if our foreign assistance operations are to bear their fair share of the burden involved in reaching a balance in our payments.

This is of particular importance in the Alliance for Progress, and may be an increasing problem in other areas, particularly in Africa. We have sought a number of ways to minimize the balance-of-payments effects of the local cost financing which AID undertakes. Among these have been the placing of the dollar funds in segregated accounts, to be used only to pay for United States goods and services, and the agreement reached with Nigeria that it would find other means of increasing imports from the United States by an amount at least as great as the United States financing of local costs. While the Nigerian example is interesting, it may not prove possible to implement it in the desired fashion. Segregated accounts may simply result in AID financing of United States exports which would have been made in any event. Senior policy officials of State and AID are currently cooperating with us in exploring other potential methods of minimizing the balance-of-payments impact of local cost financing. I will furnish you with a special report on the results of these studies in the next two weeks.

In summary, our position is considerably improved. But we cannot relax our efforts. Further vigilance and ingenuity in holding down expenditures, and further efforts to increase our receipts, are necessary.

Douglas Dillon

9. Memorandum From Secretary of State Rusk and Secretary of the Treasury Dillon to President Kennedy

//Source: Department of State, Central Files, 811.10/4 - 962. For Official Use Only. The date, "9 Apr 62," was added by hand. A longer memorandum from Frank M. Coffin to Secretaries Rusk and Dillon, April 6, which was transmitted under cover of an April 6 memorandum from Coffin to Secretary Rusk, is ibid. In this covering memorandum, Coffin suggested that the Secretary sign the memorandum printed here and forward it to Secretary Dillon (who had already approved it in draft) so that it could be sent to the President by the close of business April 6.

Washington, April 9, 1962.

SUBJECT

Relation of Foreign Assistance to the Balance of Payments

Department of Commerce statistics show that in 1961 total foreign economic aid expenditures (including PL 480 and Ex-Im Bank) were $4.1 billion, of which $1.3 billion was paid directly to foreign countries or international organizations and therefore involved an immediate dollar outflow from the United States. Treasury is of the opinion that steps should be taken to limit this outflow in future years to $1 billion as part of our over-all program to overcome the current U.S. balance of payments deficit. While AID seriously questions whether this can be done without jeopardizing the effectiveness of the foreign aid program, it is prepared to make a serious effort to meet the Treasury goal. As a first step, the Agency is presently attempting in cooperation with Treasury and State to develop possible techniques for achieving this goal. Should this prove impossible without undue risk, in the judgment of AID, a further report will be submitted to you.

The $1 billion limit poses a difficult problem in view of the increase in the AID program to almost $3.4 billion out of about $6.2 billion in total foreign economic aid anticipated for programming in FY 1963. Dollar outflow payments from the $6.2 billion are expected under current policies to be about $1.25 billion, of which the AID program will account for roughly $1 billion.

Inevitably there will be some delay before any policy change which might be made affecting the FY 1963 program will be reflected in a reduction in actual dollar outflow on an expenditure basis. During 1962 and 1963 expenditures will to a large extent be made from funds programmed in earlier fiscal years, but since these funds have already been committed, we have little or no power now to influence the manner in which they are spent.

FY 1963 Program Projections

As indicated in the table below, under current policies the composition of payments involving an immediate dollar outflow is shifting away from procurement of commodities from third country sources to direct cash payments to the aid recipient countries.

1960 1961 Fy 1963 Expenditures Expenditures Program (millions) (millions) (millions)

Third country procurement/1/ 673 412 250

Cash grants and local cost financing 108 400 500

Other (mainly contributions to international organiza- tions and overseas operating costs) 470 498 500

Total 1,251 1,310 1,250

Total Foreign Economic Assistance 3,381 4,100 6,200

Payments abroad as a % of total foreign economic assistance 37% 32% 20%

/1/Commodities procured for import into the aid recipient countries from non-U.S. sources. [Footnote in the source text.]

The reduction in third country procurement reflects decisions made in 1959 to emphasize U.S. procurement with Development Loan funds and in 1960 to confine ICA procurement to the U.S. and less industrialized countries of the free world. Third country procurement being currently authorized is almost exclusively from the less developed countries themselves.

The increase in cash payments to the aid recipient countries is not due to grants for political or security support, which will continue to run at about $100 million annually, but rather to rapidly increasing programs for the financing of local development costs, particularly in Latin America and Africa.

It is clear that if the $1 billion limit on dollar outflow is to be achieved, it will have to be by changing the form in which AID supports local costs or possibly by cutting back on our assistance to these areas. Further cuts in third country procurement would impinge primarily on the less developed countries and could adversely affect our development objectives. Other payments, which consist principally of contributions to international organizations and program operating costs, provide little margin for reduction without either lessening our participation in international organizations or substantially reducing over-all programs.

Local Cost Financing

The local cost financing problem arises from the need to get important projects under way rapidly in Latin America and Africa where there have been no substantial assistance programs that generated local currency in the past. These areas have a high priority need for infrastructure facilities with a large local cost component. In the absence of local currency counterpart, such as can be used for these purposes in the Middle and Far East, it is often necessary to pay out dollars to obtain the local currency needed for getting the projects started without undue delay.

We must be careful not to take action which would unduly restrict our freedom of operation in these areas or uneconomically force a substitution of less efficient projects and techniques making relatively intensive use of imported capital equipment for more efficient projects and techniques making relatively intensive use of local resources. The need is for a mechanism enabling us to stimulate the most appropriate approaches to development while at the same time minimizing the advance pay out of untied dollars.

Possibilities now being studied include:

(1) Concentrating U.S. aid on projects with a high foreign exchange rather than local cost component when a country's total program consists of both types of projects;

(2) Where dollar financing of local costs is necessary, restricting it to the additional import demand which can be expected to result from the development program in question;

(3) Agreements, such as that recently made with Nigeria, requiring the developing country to increase its imports from the U.S. by the full amount of dollar aid received;

(4) Financing local costs to the extent possible by a commitment of funds to be drawn upon through the procurement authorization system or some similar device for maximizing U.S. procurement and avoiding an initial transfer of funds into foreign hands; and

(5) Arrangements, such as segregated accounts, for tying dollars tendered for local cost financing to U.S. procurement when circumstances necessitate an initial transfer of funds to the foreign government or its central bank.

Tying foreign aid to U.S. procurement should not be regarded as a permanent policy. It is expected to continue at least at its present level while our over all payments situation is in deficit and until we can persuade other donor countries to increase their aid efforts. We are currently stressing with these countries that assistance extended by balance of payments surplus countries should be on an untied basis, and we must ourselves be prepared to shift to that basis once our deficit is overcome.

Dean Rusk/2/

/2/The source text bears no signature by Dillon above his title, which appears on the left-hand side of the page. George Ball's initials appear next to Secretary Rusk's signature.

10. Editorial Note

On June 7, 1962, President Kennedy proposed in a memorandum to Secretary of the Treasury Dillon the creation of an inter-Cabinet Committee composed of Dillon (chairman), the Secretaries of Defense and Commerce, and the AID Administrator to work on the balance-of-payments problem. This committee "should come forward with a program perhaps in November with assurances of bringing this problem under control within a reasonable period of time." Dillon welcomed this suggestion in his memorandum to the President, June 14, and recommended the addition of the Director of the Bureau of the Budget to the group. He thought the committee should operate informally so that it would not interfere with the wider interagency coordination specified in the President's February 17 memorandum to Dillon (see Document 2).

In a June 15 memorandum to David Bell, McGeorge Bundy agreed with Bell's suggestion to include a member of the Council of Economic Advisers and added that the President had said that George Ball should serve on the committee after Ball mentioned that the Department of State should be represented.

In a June 22 memorandum to the President, McGeorge Bundy recommended the addition of Ball and a representative from the Council of Economic Advisers and suggested that the President ask David Bell to be prepared to bring to the new committee proposals for a "gold budget" for use in controlling expenditures that affect the balance of payments.

All these memoranda are in the Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold, 6/62 - 3/63. For President Kennedy's tasking for the creation of this committee, see Document 11.

The President's Special Representative for Trade Negotiations was added to the committee in early 1963. (Memorandum from Kaysen to the Cabinet Committee on Balance of Payments, March 14, 1963; Kennedy Library, National Security Files, Subjects Series, Trade, General, 1/63 - 7/63)

11. Memorandum From President Kennedy to Secretary of the Treasury Dillon

//Source: Kennedy Library, Dillon Papers, Memos to President, 5/62 - 6/62. No classification marking.

Washington, June 22, 1962.

I like the proposals in your memorandum of June 14th/1/ on the ways of carrying forward a small inter-Cabinet committee on the balance of payments. I agree with you that the Director of the Bureau of the Budget should be added, and I also believe that we should have representation from the State Department--presumably George Ball--and from the Council of Economic Advisers. I doubt if we would need any further White House representation at this stage.

/1/See Document 10.

I agree with your view that the group should begin to think hard about broad policy on the balance of payments, but I also want it to be a working committee that will keep a sharp eye on the management of our own disbursements within the Executive Branch. For this purpose I am asking Dave Bell to be prepared to bring to the new committee proposals for what might be called a "gold budget" for use in controlling all federal expenditures that affect the balance of payments. A number of instances in recent weeks have made it clear that our Executive control in this area is not what it ought to be, and I think the basic budgetary process provides an excellent analogy to the sort of thing we now need in the balance of payments field.

John F. Kennedy

Would you chair the committee and arrange for its frequent meeting./2/

/2/This postscript was added in the President's handwriting.

12. Memorandum From the Administrator of the Agency for International Development (Hamilton) to President Kennedy

//Source: Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold, 6/62 - 3/63. No classification marking.

Washington, June 28, 1962.

SUBJECT

A.I.D. Actions Affecting the U.S. Balance of Payments

In accordance with your memorandum of June 20,/1/ responsible officials of A.I.D. have reviewed with Carl Kaysen all proposed A.I.D. actions that affect the U.S. balance of payments. It is estimated that of a total proposed commitment of funds of $493 million for the remainder of fiscal year 1962, less than $3 million will be used for procurement from non-U.S. sources. A statement covering each of these actions has been transmitted to the White House./2/

After reviewing these actions, Mr. Kaysen stated that there was no objection to A.I.D. proceeding with these commitments.

Subject to your approval, I suggest that in the future A.I.D. submit to you on a weekly basis all proposed actions to commit funds that may result in procurement from non-U.S. sources in the amount of one million dollars or more so that you may pass upon the proposed action. This agency will also advise you every two weeks of the total funds committed and the portion expected to be expended outside the United States./3/

Fowler Hamilton

/1/See footnote 3, Document 144.

/2/A six-page list of AID actions affecting the U.S. balance of payments, undated, was transmitted under cover of a June 27 memorandum from Holis B. Chenery to Kaysen. (Washington National Records Center, RG 286, AID Administrator Files: FRC 65 A 481, Development Financing, FY 1962)

/3/In a July 2 memorandum to Hamilton, President Kennedy replied that the AID reporting scheme proposed in Hamilton's June 28 memorandum was "satisfactory as far as it goes," but he requested that "you also add each proposed commitment of $2-1/2 million or more whether or not it may result in expenditures of dollars outside the United States." (Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold, 6/62 - 3/63)

13. Editorial Note

In a memorandum to the Secretaries of the Military Departments, Director of Defense Research and Engineering, the Joint Chiefs of Staff, Assistant Secretaries of Defense, and the General Counsel of the Department of Defense, July 10, 1962, Secretary of Defense McNamara submitted a list of projects and actions to try to reduce to $1 billion the net adverse dollar balance entering the U.S. balance of payments. He further indicated that this dollar objective was "to be achieved without reducing our military power abroad." The action list, known as Revised Project Eight, incorporated into a single project all previous projects relating to U.S. defense expenditures and receipts entering the international balance of payments. It assigned the office responsible for submission of the replies and indicated the tentative due date for submission. In addition, McNamara submitted a Project Eight Action List for prior projects that had been approved with the office assigned responsibility for implementation. (Kennedy Library, National Security Files, Meetings and Memoranda Series, NSAM 171)

For a more general summary of these lists of projects and actions, see Document 15.

Both McNamara's July 10 memorandum and the attached eight-page Revised Project Eight List and one-page Project Eight Action List, are in the Supplement.

14. National Security Action Memorandum No. 171

Washington, July 16, 1962.

//Source: Kennedy Library, National Security Files, Meetings and Memoranda Series, NSAM 171. Confidential. Copies were sent to Ball and Fowler Hamilton. According to a memorandum from Charles E. Johnson to the executive secretaries of the Departments of State, Defense, and the Treasury, and the Bureau of the Budget and AID, July 18, 1962, attached to the source text, this NSAM was originally distributed as an unnumbered memorandum to the Cabinet Committee on the Balance of Payments, but it was then decided to include it unchanged in the NSAM series (except for the addition of a subject heading) and given additional distribution. A copy of the original memorandum, July 16, is attached to the source text.

MEMORANDUM FOR

The Secretary of State

The Secretary of Defense

The Secretary of the Treasury

The Director, Bureau of the Budget

SUBJECT

"Department of Defense Actions to Reduce Its Overseas Expenditures"

1. I have reviewed the proposed actions of the Department of Defense directed toward reducing its overseas expenditures (see attached memorandum from the Secretary of Defense)./1/ Subject to the qualifications set forth below, I approve these actions as interim meas- ures, until the Cabinet Committee recommends and I approve guidance for reducing government overseas expenditures in all departments.

/1/Reference is to McNamara's July 10 memorandum; see Document 13.

2. In certain countries, the actions proposed by the Defense Department may result in a need for compensating increases in aid. This appears especially likely to be the case in Korea, South Vietnam, and the Republic of China, countries whose foreign exchange requirements we, in essence, underwrite. In certain other countries, including Iceland, the Philippines, and Japan, which are not now major recipients of aid, the impact of reductions in U.S. military expenditures may also create demands for aid. The economic situation of these countries and our policy interests in them are such that we cannot simply ignore the possibility that savings on military account will be cancelled or substantially offset by increased expenditures on aid account.

3. Accordingly, I request that the Committee arrange for timely consideration of the interrelations among Defense and AID overseas expenditures in these and similar cases. Any final decision to reduce one of the categories of expenditures should be made only after full consideration of its probable impact on the other, as well as its budgetary costs. Issues which cannot be resolved by the Committee should be referred to me.

John F. Kennedy/2/

/2/Printed from a copy that bears this typed signature.

Note: The attachment to the original memorandum, a memorandum from the Secretary of Defense dated July 10, 1962, subject: "Revised Project List--List of Projects and Actions for Reducing Defense Expenditures Entering the International Balance of Payments", has been given separate distribution to the affected agencies and is not attached. It is, however, included by reference.

15. Memorandum From the Deputy Under Secretary of State for Political Affairs (Johnson) to the Under Secretary of State (Ball)

//Source: Department of State, E Files: Lot 64 D 452, Balance of Payments - Procurement. Secret. Drafted by George S. Newman (G/PM) and transmitted through S/S. The date, "7/18/62," was added by hand.

Washington, July 18, 1962.

SUBJECT

Presidential Memorandum of July 16 to Members of Cabinet Committee on Balance of Payments/1/

The Defense attachment to the Presidential memorandum/2/ was discussed at a meeting in my office last Saturday/3/ with Defense, AID, White House and BOB representatives. At that time Mr. Hitch/4/ elaborated on the scope of the various projects contained in the list. He pointed out that these were still in the study stage and that final procurement actions would not be taken until the completion of these studies. However, in some cases partial steps are being taken in some of these areas that should result in an early decrease of overseas expenditures by Defense.

/1/Document 14.

/2/Reference is to McNamara's July 10 memorandum; see Document 13.

/3/July 14.

/4/Presumably Charles J. Hitch, Assistant Secretary of Defense (Comptroller).

During our discussions, the impact of reduced Defense expenditures in certain countries in terms of possible increased aid requirements was explored. In addition to the countries mentioned in the President's memorandum, there also may be problems with respect to Greece, Turkey and Pakistan. However, the precise impact on AID cannot be determined until we know more specifically the nature and extent of Defense's proposals to reduce expenditures in those countries.

In addition to the AID considerations, the implementation of certain of the projects proposed by Defense will have significant political repercussions. Most obvious are those projects relating to force reductions in overseas areas. In some cases the withdrawals are rather small and should not present any unmanageable political problems. On the other hand, the projects to reduce our Army forces in Europe by 44,000 and the withdrawal of the one squadron in Iceland present extremely serious political problems in terms of our security objectives. Additional political repercussions will arise from the economic impact in overseas areas of a number of Defense projects should they be implemented, e.g. returning a major portion of petroleum procurement to the U.S., reducing hiring of foreign nationals. The seriousness of this impact, however, cannot be judged until we have more precise information on the magnitude and nature of these reductions. Furthermore, a number of the suggested actions would put such activities as PX and commissaries in direct competition with the local economy to a greater degree than is presently the case, and we can probably expect local reaction to a move of this type. The degree to which we can take such actions would have to be carefully reviewed in light of agreements and understandings we have with the host countries with respect to the basing of our forces in their territory.

The Defense Study program does not provide explicitly for estimates of the amounts of compensating aid that might be necessary as a result of the impact on individual countries of the suggested actions. The net benefit to our balance of payments depends on this, and on the amount by which curtailment of dollar expenditures in each of the various countries can be expected to result in reduced purchases from the U.S. by all countries. Studies to establish a basis for reasoned judgments on both scores must precede decisions on the various proposed policies. It must also be recognized that procurement policies tailored to these considerations would probably be discriminatory, in an absolute sense, as between countries. This, also, could be productive of diplomatic frictions.

I believe it is important to alert Defense to the fact that, unless reductions are carefully and selectively applied, it may well result in the development of a political atmosphere in a number of countries which will make it extremely difficult for us to negotiate for the various Defense arrangements and facilities that Defense itself considers extremely important to have in order to maintain an effective combat posture.

Nevertheless, I believe that the studies outlined by Defense are justified and should be undertaken. However, I think it extremely important that the Department of State be fully consulted on these studies and that, in those instances, where we believe there will be serious adverse political effects the issue should be placed before the Cabinet Committee prior to any implementation by the Department of Defense.

16. Circular Telegram From the Department of State to All Diplomatic Missions

//Source: Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold, 6/62 - 9/63. Confidential; Priority. Drafted by George S. Newman on July 19; cleared in E, EUR, FE, ARA, NEA, AF, U, S/S, the Department of Defense, and the White House; and approved by Newman. Repeated to Paris for Stoessel and McGuire and to CINCLANT, CINCARIB, and CINCPAC for the Political Advisers.

Washington, July 19, 1962, 7:48 p.m.

98. With regard to recent announcements by SecDef concerning efforts to reduce U.S. defense expenditures abroad, the following is provided for your guidance in response any official or public queries.

Defense, under Presidential instructions and as part Government-wide program to lower balance of payments deficit by reducing foreign exchange expenditures, has initiated a number of study projects towards this goal and which would at the same time not repeat not impair U.S. combat effectiveness abroad. These studies, scope of which has been made public, will cover U.S. military operations worldwide. They will involve overseas procurement of supplies and services for U.S. Forces, construction programs, expenditures by U.S. military personnel and their dependents abroad, use of foreign labor whether by direct or contract hire, review of overseas procurement for MAP, etc.

To date, SecDef has issued instructions on overseas procurement of supplies and services for use by U.S. military forces abroad. These require purchase from U.S. sources if contract does not exceed $10,000 or if delivered cost is estimated to be not more than 50% greater than the cost from foreign sources. If contract is over $10,000 and cost differential exceeds 50%, procurement action must be referred to SecDef to determine whether it should be awarded to U.S. sources. Directive exempts all procurement from indigenous sources which is undertaken pursuant to a treaty or executive agreement and excludes purchases for overseas construction, petroleum, MAP, and non-appropriated funds which are covered by separate directive. Programs under excluded categories are now under study.

Also SecDef has directed that all proposed purchases abroad for Defense purposes for use in U.S. under existing "Buy American Act" regulations will be referred to SecDef to determine whether exception to normal procedures would be in national interest.

It is important to emphasize that other specific Defense actions within this over-all policy are in the study stage preliminary to decisions which will be made in the future.

FYI. Department is coordinating closely with Defense on study projects and implementing procurement directives. Both agencies recognize political and economic ramifications involved. Where military commands, MAAGs, or missions are located in your country and are undertaking reviews on overseas procurement pursuant to Defense directives, all posts should work closely with those organizations in this activity. Political and economic implications which may result from implementing projects should be brought to the attention of military commanders. Posts should similarly advise Department of specific problems they foresee as a result of assessments by posts and overseas Defense organizations. End FYI.

Rusk

17. Report by the Cabinet Committee on Balance of Payments to President Kennedy

//Source: Kennedy Library, National Security Files, Kaysen Series, Balance of Payments, Cabinet Committee, 7/62 - 2/63. Confidential. The source text bears no drafting information. Transmitted under cover of a July 27 memorandum from Dillon to President Kennedy.

Washington, July 27, 1962.

The Committee has reviewed recent developments in the payments situation of the United States; the measures proposed by the Department of Defense and the Agency for International Development to curtail net overseas dollar expenditures; and the proposals of the Budget Bureau for establishing a control system for international transactions of Federal agencies. It submits the following report and recommendations for your approval.

Balance of Payments Situation

For the first half of 1962 the over-all deficit in our balance of payments has run at an annual rate of about $1-1/2 billion. This represents a very substantial improvement over the deficits of $2.46 billion in 1961 and $3.9 billion in 1960. The improvement in 1962 has been due largely to smaller out-flows of short-term capital and certain nonrecurring factors, such as one-time military payments by Germany. Nevertheless, our exports have continued to grow and the increase in our imports has been smaller than expected. The worsening of our basic deficit--the balance on all transactions except short-term capital and unrecorded transactions--has so far in 1962 not been as bad as had been anticipated. Subtracting one-time receipts in both 1961 (the German debt prepayment) and 1962 (debt prepayments and German military procurement funds), the basic deficit in the first half of 1962 seems likely to amount to an annual rate of about $1.4 billion, as compared with $1.1 billion for all of 1961. This deterioration in the basic deficit was relatively slight taking into account the fact that in response to rising domestic economic activity our imports during the first half of 1962 were running at a level some $1.4 billion higher, annual rate, than imports for 1961 as a whole. For the rest of 1962 we may expect that only a small further increase in imports is likely to take place.

Despite improvement in our over-all deficit, we are continuing to lose gold at a substantial rate. Gold losses during the first half of 1962 amounted to $420 million compared with $857 million for all of 1961. In other words, whereas in 1961 only about one-third of our over-all deficit was reflected in a gold loss, so far in 1962 almost 60 percent of our deficit has been reflected in a gold loss. These continued gold losses raise the question of confidence in the dollar--of continued willingness of foreign monetary authorities to increase their dollar holdings. They strongly underline the importance of action to eliminate the deficit in our balance of payments at the earliest possible moment.

Measures Adopted by the Department of Defense

The Committee has reviewed the projects being developed by the Department of Defense (Annex A)/1/ which you have approved on an interim basis as indicated in your memorandum of July 16./2/ In that memorandum you asked that "the Committee arrange for timely consideration of the interrelations among Defense and AID overseas expenditures" and stated your view that "any final decision to reduce one of the categories of expenditures should be made only after full consideration of its probable impact on the other, as well as its budgetary costs."

/1/Presumably McNamara's July 10 memorandum, which is not attached; see Document 13.

/2/See Document 14.

In order to carry out these provisions the Secretary of Defense has agreed to keep the appropriate agencies informed of the development of the projects outlined in Annex A and, in particular, to identify at an early stage, in consultation with such agencies, any project which appears likely (1) to necessitate a substantial increase in United States budget costs; (2) to have an impact of such magnitude on the economy of a foreign nation or nations as to call for consideration of increased United States aid as compensation; (3) to result in large- scale reductions in United States expenditures in countries such as the Federal Republic of Germany where a full offset agreement exists; or (4) to result in a reduction of such magnitude in the foreign exchange resources of a foreign nation or nations as to create the likelihood of such nations adopting new restrictions affecting commercial imports (including those from the United States) or to affect the ability of this Government to negotiate steps toward reducing existing restraints (in both the tariff and nontariff fields) affecting commercial imports; or (5) to involve other significant foreign policy considerations. The Committee will be informed of any disagreements between agencies and, as directed in your memorandum of July 16, those disagreements which the Committee cannot resolve will be referred to you.

In accordance with the foregoing paragraph, the Committee has arranged for a Defense - AID working group (including State with respect to the Military Assistance Program) to appraise the effects of Defense actions under Annex A on AID interests in less developed countries, particularly Korea, Vietnam, Taiwan, the Philippines and Latin America.

The Committee agrees that a reduction in the net defense expenditures to the level of $1.6 billion per year appears attainable in FY 1963, largely through military offset arrangements and increased sales of United States military goods and services. The Departments of State, Treasury and Defense are continuing to pursue military offset negotiations and military equipment sales promotion as a matter of high priority. Further reductions in later years should be possible as the projects in Annex A are developed and implemented.

Study of the Buy-American Act/3/

/3/Reference is to Title III of an appropriations bill for the Treasury and Post Office Departments, approved March 3, 1933. (41 USC 10a et seq.)

The Committee has requested the Bureau of the Budget to submit at an early date for the Committee's consideration the results of the Bureau's survey of the current effects of the Buy-American Act on procurement overseas by United States Government agencies for use within the United States. Recommendations as to appropriate revisions will be made after receipt of this information. Meanwhile, the Secretary of Defense will keep Defense purchases under the Buy-American Act under his personal review.

Aid and the Balance of Payments

The Committee has reviewed in a preliminary form, and approves the general direction of, AID's program for minimizing the effect of economic assistance on the balance of payments. The Committee agrees that a reduction in foreign assistance payments to foreign countries and international organizations to below $1 billion and in AID's part of the total to below $800 million appears attainable in FY 1963 largely because of the tightening in AID procurement policies more than a year and a half ago.

Present AID estimates for FY 1963 are shown in the tables attached as Annex B./4/ Since AID has not yet completed its study of all possibilities for reduction in offshore procurement and cash transfers, the Committee is not yet in a position to concur in the figures contained in these tables or cited below.

/4/Neither Annex B nor C is printed.

AID's program contains the following major elements:

1. The policy that all goods and services procured with Development Loan funds be obtained from the United States, except as waived by the Administrator or his Deputy, will be continued.

2. The policy of prohibiting procurement in the other industrialized countries with grant funds, except for minor amounts approved by the Administrator or his Deputy, will be continued. AID has estimated that FY 1963 obligations for procurement in the less developed countries with grant funds will be about $225 million. At your request, AID is now eval-uating the procurement which takes place in the less developed countries.

3. Where local financial mechanisms can be adapted without seriously jeopardizing the program, it will henceforth be AID's policy that cash transfers, including those for local currency purchases which exceed $250,000 per country per year, shall be placed in a restricted deposit account in the Treasury which can be drawn upon by the recipient country only to finance purchases from the United States, subject to exceptions made by the Administrator or his Deputy. General arrangements for the establishment of these restricted deposit accounts, as well as the method of treating them in the published official balance of payments of the United States, have been agreed upon by the AID agency, the Treasury Department, the Bureau of the Budget and the Department of Commerce. AID has estimated that about $320 million would be obligated for deposit in such accounts in FY 1963 and that FY 1963 obligations for cash transfers and local currency purchases outside the restricted account procedure will total about $275 million. At your request, it is reviewing this estimate with a view to further reductions. Certain situations, such as Laos, Jordan and Vietnam (which has just been approved although it was not included in the above estimates), will not be amenable or fully amenable to the restricted account procedure.

Contributions to International Organizations

The Committee will shortly review, from the point of view of our balance of payments, proposals for United States contributions in calendar year 1963 to the International Development Association, the Inter-American Development Bank, the Social Progress Trust Fund and the United Nations.

Priorities in Foreign Negotiations

United States objectives with respect to the other industrialized countries of the Free World include (a) arrangements for offsetting the dollar costs of United States military expenditures in such countries; and (b) an increase in, and improvement in the terms of, development assist-ance from other industrialized countries to the developing areas. Both these objectives are important to our foreign economic policy. However, it should be understood that under present circumstances military offset arrangements enjoy a clear priority over increased development assist-ance because of the immediate and direct benefits which this objective can bring to our balance of payments. Appropriate United States missions should be instructed accordingly./5/

/5/These instructions were sent in telegram 811 to Paris for USRO and to Bonn, Rome, and Brussels, August 8. (Department of State, Central Files, 811.10/8-862)

Control System for International Transactions of Federal Agencies

The Committee has reviewed the proposals of the Bureau of the Budget for the institution of a process designed to insure continued scrutiny and control of government outlays involving dollar expenditures overseas. The Committee recommends that you approve the memorandum to you on this subject submitted by the Bureau of the Budget, the text of which is contained in Annex C. It is understood that this procedure, which involves quarterly reports to the Bureau of the Budget by all agencies having overseas expenditures in excess of $1 million per year, will be reviewed as experience is gained in its administration.

18. Memorandum From Secretary of the Treasury Dillon to President Kennedy

//Source: Kennedy Library, Herter Papers, Balance of Payments. Official Use Only (With Confidential Section). Transmitted under cover of a memorandum from Dillon to the President, October 9, which indicated that this report was his fifth to the President on meas-ures taken to reduce the balance-of-payments deficit. Henceforth, Dillon added, the reports would be prepared on the same time schedule as those done by the Bureau of the Budget on international expenditures of federal agencies, and both would be submitted to the President as one integrated quarterly report. Also attached to the source text is a memorandum from Dillon to the members of the Cabinet Committee, October 10, indicating that a copy of the report was attached for their information.

Washington, October 9, 1962.

SUBJECT

Report on Measures to Improve the Balance of Payments

The two principal lines of attack on the balance of payments deficit consist of measures to curtail the outflow of dollars stemming from the activities of government itself, and measures to increase our export receipts. The measures adopted over the past two years have contributed to the improvement to date in those areas. The importance of actions to reduce government expenditures abroad relates not only to their direct contribution to the improvement in the balance of payments, but also to their effect in demonstrating to the American public that the Federal Government is carrying its full weight in meeting the problem.

Reducing Government Expenditures Abroad

At your direction I am chairing a Cabinet Committee on the Balance of Payments. The regular meetings of this Committee are providing the focal point for discussion and resolution of major policy issues in this field. In addition to its own reports to you, the Committee has reviewed this report and the first quarterly report to you from the Director of the Bureau of the Budget which is discussed below.

The most important recent action in this area is the new Defense program for reducing expenditures entering the balance of payments. More significant savings may result from this program than from previous efforts by that Department to reduce expenditures, because of the basic change in the level of additional budgetary costs considered "acceptable" in order to effect balance of payments savings.

The second most significant government expenditure affecting the balance of payments is foreign economic assistance. Procedures for seeking to insure minimum adverse effects on the balance of payments of cash transfers to aid recipients, primarily for the financing of local currency costs of projects, have now been agreed upon.

The magnitude and importance for the balance of payments of other government expenditures abroad will be assessed and controlled through the new control system for foreign exchange expenditures of Federal agencies which the Bureau of the Budget has instituted with your approval. Though the potential savings in the expenditures of other Government departments and agencies will be relatively minor by comparison with Defense and AID expenditures, they will nevertheless be important collectively.

Begin Confidential

Reduction of Military Expenditures Abroad

Secretary McNamara is proceeding, pursuant to your interim approval, with the development under Defense Project Eight of a series of actions aimed at helping to reduce the net adverse effect of defense expenditures on the balance of payments to the level of $1.6 billion in fiscal year 1963, and to not more than $1 billion in fiscal year 1966. This compares with a level of $2.6 billion in fiscal year 1961.

The agreement reached with Germany last October to offset U.S. military expenditures in that country during 1961 and 1962 is expected to yield about $1 billion during the current calendar year (including reclassification of the German account). This agreement was extended to cover calendar years 1963 and 1964 in a "Memorandum of Understanding" dated 14 September 1962.

Negotiations have also been undertaken with France for an offset arrangement for U.S. expenditures there, but French officials have stated that major increases in purchases from the U.S. will not occur, as long as the U.S. remains unwilling to sell equipment in the nuclear and missile fields. Negotiations for an offset arrangement with Italy resulted in an Understanding, reached on 19 September 1962, that Italy will place initial orders for military equipment, approximating $100 million, with the U.S. Department of Defense within 30 days and that the U.S. will guarantee the availability of $100 million in credit assistance repayable over five years.

On July 16, Secretary McNamara announced a tightening of restrictions on overseas procurement./1/ With respect to purchases for use overseas, the degree of preference accorded U.S. suppliers over foreign suppliers was increased from 25 percent to at least 50 percent. With respect to purchases for use in the United States, there is established a procedure for reviewing every proposed foreign purchase to consider whether it should be returned to the U.S.

/1/See Document 16.

All new overseas construction planned for FY 1963 is being reviewed with a view to reducing foreign exchange costs by 66 percent. In addition, a review of base requirements from last January through June 30, 1962 led to decisions to reduce or close 46 overseas bases and facilities.

End Confidential

Begin Official Use Only

Economic Assistance Programs

Secretary Rusk has agreed with our target of reducing to $1 billion annually the portion of economic aid expenditures which is paid to foreigners. He has also issued instructions to explore the possibilities of a further reduction, in line with your desire.

Of the total $1,250 million of such outpayments which was expected in FY 1963, about $500 million comprised contributions to international organizations and overseas operating costs of the aid program. The former item, at least, is not subject to much compression, but we are examining possible means of delaying the balance of payments impact.

Third country commodity procurement by AID has already been sharply reduced, from 56 percent of total commodity procurement in FY 1961 to 36 percent of a much smaller total in FY 1962. The drop in procurement in the nineteen industrialized countries, from which procurement is now generally prohibited, was even sharper, from $495 million (47 percent) in FY 1961 to $139 million (17 percent) in FY 1962.

We have been most concerned about the prospect of rising cash transfers to aid recipients, especially for local costs of development programs in Latin America and Africa. Some increase in this type of expend-iture is an inevitable result of the Alliance for Progress program and of the new role thrust on the U.S. in Africa. One way of reducing to some extent the balance of payments impact of this type of expenditure is to limit the ultimate use of the dollars involved to U.S. exports of goods and services. General arrangements for the establishment for this purpose of restricted accounts in the Treasury, and for the treatment of these transactions in our balance of payments presentations, have been agreed upon by AID, Treasury, Commerce and Budget.

Furthermore, in accordance with your request, AID Administrator Hamilton is submitting to you weekly reports of proposed program actions involving (1) a probable dollar outflow of $1 million or more, and (2) dollar financing of $2.5 million or more, whether or not a dollar outflow is expected, and semi-monthly reports on actions taken.

Other Government Expenditures

The Bureau of the Budget has now instituted, after discussion with other agencies, review by the Cabinet Committee on the Balance of Payments, and approval by you, a Government-wide control system for international transactions of Federal agencies. This system submits to a separate process of periodic review, comparable to that of the regular budget process, anticipated expenditures abroad of most Federal agencies. The first report has been forwarded to you by Budget Director Bell.

Increasing our Receipts from Abroad

In the longer run we can succeed in building the kind of international economy in which we want to live, not by restrictive measures, but only by fostering an expanding world economy which provides greater opportunities for us as well as others and by competing effectively within this system. A most basic aspect of this is our export promotion drive.

Domestic Policies

Price stability and an efficient, modern industry--able to compete successfully in world markets in terms of new products, delivery schedules, and quality as well as price--are the essential underpinnings of a larger trade balance. Our ultimate success in this area will reflect the performance of our whole economy--labor, business, and agriculture alike--over the months and years ahead, rather than any dramatic single action by the Government. Government does, however, have a responsibility for helping to create an environment conducive to rapid growth within a context of stable prices.

One important recent action in this connection was the Treasury Department announcement on July 12 of a fundamental reform in the tax treatment of depreciation./2/ According to Treasury estimates, the new guidelines will be reflected in additional depreciation writeoffs approaching $3.4 billion in the first year.

/2/Not further identified.

A companion measure--a tax credit equivalent to seven percent of new investment in equipment--is incorporated in the tax bill which has now been passed by the Congress. Together with the depreciation reform, this measure will provide tax treatment for investment in new equipment in the United States more nearly comparable to that provided in other industrialized countries.

Productivity gains since early 1961 have been gratifyingly large, although a large part of the improvement was admittedly cyclical. Meanwhile, wage increases have generally been moderate and unit labor costs in manufacturing are now lower than they were in 1959, at a comparable stage of economic recovery. The past three years have represented an exceptional period of industrial price stability during the postwar period.

Trade Promotion

These domestic developments provide a basis for continued U.S. export competitiveness. But even the best mouse trap doesn't sell itself in today's world. Our second major line of attack, therefore, has been the active promotional efforts which are necessary if we are to maintain or increase the U.S. share of total world exports. On July 17, Mr. Draper Daniels entered on duty in the Department of Commerce as National Export Coordinator, charged with giving increased impetus to all our varied programs.

The program of export credit insurance begun on February 3 has met with a favorable reception. By the end of June the Foreign Credit Insurance Association, which now has 71 member companies, had issued 685 policies covering $331 million of anticipated exports during the policy year. On July 2, FCIA broadened the cover to include, at the option of the exporter, protection from the date he accepts the sales order.

On July 16, FCIA and the Export-Import Bank announced the availability of policies to cover export credits with terms up to 5 years./3/ Together with the earlier system of guarantees to commercial banks on medium-term export sales, American exporters now have credit facilities more nearly equal to those anywhere in the world.

/3/Not further identified.

The Department of Commerce has continued its efforts to stimulate business interest in exports. The National Export Expansion Council, its 33 associated Regional Councils, the President's "E" Export Award, the transformation of the Foreign Commerce Weekly into the new International Commerce weekly news magazine, and the continued expansion of existing Foreign Service and Commerce assistance to businessmen, have all contributed to a marked increase in interest in exporting. This interest has been demonstrated by increased demands for services from the Commerce Department and its field offices throughout the United States, increased business purchases from Commerce of trade lists, World Trade Directory reports, and trade contact surveys, and the borrowing by businessmen of almost twice as many commodity, economic and industry reports, submitted from Foreign Service posts around the world, as in the first six months of last year.

State and Commerce have actively sought to interest foreign buyers through participation in trade fairs, trade centers and trade missions as well as by more traditional trade opportunity information programs. During the half year, more than 2.3 million people visited U.S. exhibitions in six international trade fairs on four continents. Two trade centers, which are permanent marketing sites, have been opened in London and Bangkok. A third will open shortly in Frankfurt.

Continued U.S. representations to foreign countries have contributed to the removal of most unjustifiable quantitative restrictions on imports of U.S. industrial products. Quantitative restrictions against agricultural products remain a problem, but our efforts have secured some degree of liberalization in a number of Western European countries and Japan.

The United States and the other countries with whom we negotiated tariff concessions at the Geneva tariff conference took the necessary legal actions to begin bringing these concessions into effect July 1, 1962 or shortly thereafter.

Congress has now completed action on the Trade Expansion Act of 1962, giving you substantially the authority you requested.

Promotion of Foreign Travel to the United States

Offices of the United States Travel Service have been established in eight foreign cities, and its personnel are working in 30 foreign countries. Visa procedures have been greatly simplified. A major additional step, which recently has been announced, is the waiver of personal appearances in most countries. The Travel Service has been working with U.S. communities to seek to insure that travelers to the United States receive a more cordial welcome.

Based on data for the first six months, the number of overseas visitors to the United States increased 18 percent over last year. During the same period, the number of visitors from countries in which the Travel Service has mounted a promotional effort rose 21 percent. U.S. tourist travel to other countries has also been increasing, however, with the result that the "travel deficit" is still growing rather than declining. Nevertheless, sample Customs data for the first seven months of this year indicate that, if the trend continues for the balance of the year, the reduced exemptions will cause American tourists to buy perhaps $90 million less abroad than they otherwise would have.

Promotion of Foreign Investment in the United States

To reduce our long-term net capital outflow, we have sought to increase the attractiveness of foreign investment in the United States, to reduce certain tax incentives which presently favor American investment abroad, and to continue our long-standing efforts to persuade the Europeans to adopt measures to make capital outflows more possible. In essence, we have sought liberalization by Europe rather than restrictive action by the United States.

Continuing efforts to find foreign capital sources interested in investment in the U.S. have resulted in several small new European direct investments. Commerce is continuing to seek foreign enterprises interested in establishing operations in the United States, with modestly growing interest from abroad. This activity is particularly keyed in with the ARA program of assistance to labor surplus areas.

We have also sought to impress upon our European friends the importance of developing European capital markets and of opening them up to permit a freer flow of capital to the U.S. and to the less developed countries. I made this the theme of my talk to the American Bankers Association conference in Rome in May. Although we would not wish for, or expect, the United States to cease to be a supplier of capital to the world, it would be of benefit to both ourselves and to borrowers if European capital markets were expanded so that it would not be necessary for so many borrowers to look only to the United States market as is now the case. In recent months, significant relaxations of capital restrictions have been made by France, Austria and Spain.

The Role of Other Countries

In recent years other countries have assumed a greater degree of international financial responsibility. The most dramatic results for our balance of payments have been the military offset arrangements already discussed, and the large prepayments of debts owed the U.S. Government by European countries in surplus positions. Of a longer range character are the measures to induce other countries to extend more financing to less-developed countries, and measures of international cooperation among monetary authorities.

Debt Prepayments

Because they provide maximum balance-of-payments assistance during the period before our long-run measures achieve their full effects, we have given high priority to securing advance repayments of obligations owed the U.S. Government by countries in substantial surplus positions. France and Sweden have now joined the list of countries that made special debt prepayments last year--the Federal Republic of Germany, the Netherlands, and Italy--and Italy made a substantial additional prepayment in July. Total special receipts from these sources in the second and third quarters amounted to almost $550 million.

Economic Assistance

The first Annual Review of the economic assistance programs of the members of the Development Assistance Committee (DAC) of the OECD subjected these programs to searching examination. The Review offered another opportunity for the U.S. to press other DAC members to increase the level of their programs, and to liberalize the terms and conditions on which it is made available. The Chairman's Report on the Annual Aid Review was considered by DAC on July 25 - 26, and by the OECD Council July 31./4/ Norway has joined the group of aid donors which, as members of DAC, are committed to increasing the size and effectiveness of their aid programs. Norwegian accession raised total DAC membership to 11 countries plus the EEC.

/4/Regarding the July 25 - 26 meeting of the DAC, see Document 149. The July 31 meeting of the OECD Council has not been further identified.

The Report of the Chairman of DAC on the Annual Aid Review was considered by DAC and the OECD Council in July, and has been released to the public. It noted that the total flow of official funds from DAC members to less-developed countries increased by 22 percent in 1961. Considering only grants, gross loans of over 5 years maturity, and contributions to international organizations, "aid" extended by other DAC members rose 26 percent to $2.5 billion; that by the U.S. on the same basis rose 27 percent to $3.9 billion. This Report also indicates a continued improvement in the terms on which the United States and several other DAC countries are providing their official assistance.

We have also been pressing for the formation of "coordinating groups" to consider the development programs of specific aid recipient countries. In addition to the long-standing "consortia" for India and Pakistan, the IBRD has formed "consultative committees" for Nigeria and Tunisia. Plans are well advanced for "consortia" under OECD auspices on behalf of Greece and Turkey. DAC has held two meetings on Colombia, with IBRD and OAS participation, to develop support for an IBRD "consultative group" to finance the Colombian development plan. DAC "coordinating groups" have met on Thailand and East Africa, and there have been several meetings of DAC members to discuss Latin American development problems. A similar group on Viet Nam has been set up outside of DAC. It appears likely that some grouping will be organized for Iran, probably under either IBRD or DAC auspices. Such detailed discussions offer the best type of forum in which to urge other donors, where appropriate, to increase their aid, lengthen the terms of their loans, and lower interest rates.

International Monetary Cooperation

Cooperative arrangements between the United States and European monetary authorities have been continued and strengthened during 1962. Notable among the actions during this period is the entry of the Federal Reserve System into the exchange stabilization field to supplement the resources of the Treasury's Exchange Stabilization Fund. In the case of several countries, a part of the foreign currencies obtained by the United States through these swap arrangements have already been utilized to limit increases in their dollar reserves and thereby forestall or reduce additional demands which would have been made on our gold holdings.

Although this type of operation does not directly affect the deficit in our balance of payments in a statistical sense, it helps by reducing gold outflows to maintain confidence in the dollar and reduce speculative short-term outflows of capital that have an adverse effect on our balance.

In addition, forward exchange operations of the sort initiated last year have been continued by the Treasury. These operations are primarily designed to keep forward exchange rates from moving out of line with their interest rate parities and thereby make it unprofitable for short- term capital to flow abroad because of higher foreign interest rates.

Cooperative arrangements among central banks of the so-called Basle group have contributed to the stability of the price of gold in the London market. Growing nervousness in the exchange markets in late June and July led to pressure on the gold market, which was reversed after your press conference on July 23./5/

/5/For the transcript, see Public Papers of the Presidents of the United States: John F. Kennedy, 1962, pp. 568 - 576.

Among the longer range actions in this area is the increase in the resources to become available to us through the International Monetary Fund. The Congress has now passed both the authorizing legislation and the appropriation necessary for U.S. participation in the arrangements which were agreed to last year.

Douglas Dillon

19. Memorandum From the President's Deputy Special Assistant for National Security Affairs (Kaysen) to the President's Special Assistant for National Security Affairs (Bundy)

//Source: Kennedy Library, National Security Files, Meetings and Memoranda Series, NSC Meetings, 1963, No. 508. No classification marking.

Washington, January 21, 1963.

SUBJECT

Observation on the Balance of Payments for the President's Discussion with the NSC Tomorrow

It is most unlikely that we can achieve the goal of balance in our international accounts by the end of 1963. In fact, 1965 looks like the earliest realistic target year, and that may be optimistic. We have cut the proportion of government grants and loans which result in dollar outflows from about 36% in calendar year 1960 to about 24% for last year, and we expect to get it below 20% in the next year. It will be difficult to cut it any further. We are still reducing net military expenditures abroad, mostly by increasing use of offset arrangements with our NATO Allies. We also propose to negotiate offset arrangements with Spain and Japan. Here, as in the loans and grants fields, we are running into diminishing returns. Nonetheless, the importance of maintaining these efforts is great.

Ultimately we must look for a solution to the balance of payments problem in a substantial increase in our exports, unless we are to make fundamental changes in our foreign commitments. This is mainly a matter of domestic economic policy, in keeping our products competitive in world markets in terms of price and quality. However, it also depends on conscious effort, both in trade negotiations and export promotion. We are expanding export promotion programs for this purpose.

It is clear that the importance of monetary arrangements which serve to defend the dollar will remain/1/ through the next several years, and that we can count on Treasury's continued ingenious efforts to deal with this problem. But we must not look on it as a technical monetary problem alone, but also as an important problem of foreign policy in which joint action among the leading Western nations in a variety of ways will continue to be of the greatest importance.

C.K./2/

/1/The word "important" has been crossed out at this point.

/2/Printed from a copy that bears these typed initials.

20. Memorandum for the Record

//Source: Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold. Top Secret. Drafted by McGeorge Bundy.

Washington, February 27, 1963.

Meeting between the President and Mr. Dean Acheson,February 26, 1963, 11 AM, on Balance of Payments/1/

/1/At an NSC Executive Committee meeting on February 5, the President asked Acheson "to look at our balance of payments problem, consulting with Treasury, Defense, State, and Governor Herter." A summary record of that NSC meeting is printed in vol. XIII, pp. 173 - 179.

PRESENT

The President

Mr. Dean Acheson

Mr. McGeorge Bundy

The President began by pointing out that we are facing the same problem that had been developing since 1957, and asked Mr. Acheson whether earlier action by the last Administration could not have improved matters. Mr. Acheson said he thought that if the Eisenhower Administration had undertaken the measures which had been developed in the last two years, they could have cut the annual deficit in half to about $2 billion. Mr. Acheson further remarked that the optimistic hopes of the Kennedy Treasury would have been right if exports had held up as hoped. The President asked about the problem of capital outflow, and expressed his feeling that it was really not sensible for Henry Ford to be able to lay hands on $300 million of America's gold reserve by a single private decision. Mr. Acheson expressed agreement, and said that one way of limiting capital outflow might be to put a tax on it. The President asked whether we might not have a law similar to that in Switzerland, and Mr. Acheson replied that most such laws were easily avoided when it was a capital flight that is intended, but he repeated that taxes might limit investment. On this same problem of investment, Mr. Acheson noted that our foreign investments have been about equal to our net outflow of dollars, and he remarked that if costs should continue to rise in Europe and if they can be held in line in this country, this foreign investment flow might be cut down and perhaps even reversed. The President noted, and Mr. Acheson agreed, that on the other hand we could expect to take some losses on agricultural exports.

The President asked Mr. Acheson about the possibility of raising interest rates to hold money here, and Mr. Acheson remarked that this would hold short-term money but that such action would run the risk of slowing down economic growth in the US, and he indicated that he would not welcome this particular move at present.

Turning to his basic proposals, Mr. Acheson remarked that the whole object was to get a period of time in which it would not be necessary to use small expedients with troublesome side effects. If things went well during this period of time, no more drastic action would be needed, and if not, there would be time to note the trend and take other measures. Mr. Acheson said that over a similar period of time he thought that we would get a clear notion of what the Europeans will and will not do in such fields as military strategy and deployment, and that if they would not/2/ meet our standards, we could make careful plans for appropriate rearrangement of our own commitments. The President expressed his concern at the possibility that he might be forced to make major political or military adjustments for balance of payments reasons at a time when tourists alone represented a billion dollar drain--since tourists contributed nothing of major significance to the national interest.

/2/The word "not" has been inserted by hand.

Mr. Acheson continued with a description of his basic plan, remarking that most of the borrowing should be done in France and Germany, and he expressed his belief that both the French and the Germans would be willing in fact to cooperate. In his view a persuasive argument could be made that the United States was facing these difficulties not because things are going badly, but because they are going well, and that the proposed program is in their interest as well as in ours. Mr. Acheson believed that the French would enjoy being able to cooperate in this particular field, and he did not expect that General de Gaulle would attempt to use the monetary weapon for his quite different political purposes. In response to a question from Mr. Bundy, Mr. Acheson remarked that he believed the ten billion dollar figure was adequate in size, and the balance of its distribution among the different categories was satisfactory. He was not troubled by the prospect of reduction in the gold balance, since he believed that in any long-term rearrangement of international monetary practices, there would have to be a reduction in gold holdings in any case. He believed that the gold cover requirement which could be waived if necessary by the Federal Reserve was not a serious obstacle if carefully approached.

The President remarked on the difficulty of getting State and Treas-ury together. Mr. Acheson repeated that one difficulty was that the Secretary of State expressed his own lack of interest and concern, while Mr. Ball took a breezy attitude which was very frightening to Mr. Roosa. The President indicated his understanding of this difficulty but said that we should not leave this matter simply to the bankers. Mr. Acheson agreed, but he remarked that now Mr. Roosa was deeply concerned and that indeed his own proposal was one which had been put to him first by Mr. Roosa himself.

There was a brief discussion of devaluation in which the President remarked that his own view had been that one difficulty in devaluation was that others would promptly follow suit, and the second difficulty was that dollars would not be held with great confidence thereafter. Mr. Acheson indicated his own view that devaluation was neither a great terror nor an immediate answer to the problem. A better answer would be selective revaluation of unusually strong currencies, but this was not currently likely. The President and Mr. Acheson exchanged with good cheer the thought that it would be pleasant to close down one or two bases in Spain and to discourage the Spaniards from supposing that they could draw gold and hold us up on the military front, both at the same time.

It was agreed that Mr. Acheson would talk privately with Secretary Dillon very soon and that at the end of the week there would be a meeting for discussion of the Acheson report/3/ among a small group of very senior officers of government.

McGeorge Bundy/4/

/3/Entitled "Recommendations Relating to United States International Payments Problems," dated February 25. (Kennedy Library, Herter Papers, Balance of Payments)

/4/Printed from a copy that bears this typed signature.

21. National Security Action Memorandum No. 225

//Source: Kennedy Library, National Security Files, Meetings and Memoranda Series, NSAM 225. Confidential. Copies were sent to Bundy, Charles E. Johnson, and Kaysen.

Washington, February 27, 1963.

TO

The Secretary of State The Secretary of Defense The Secretary of the Treasury The Administrator, Agency for International Development The Director of Central Intelligence

1. The deficit in our balance of payments and the problems associated with it continue to be major problems which influence national security policy along a broad front. The prospects that they will cease to do so in the immediate future are not bright. I think we must, therefore, make sure that financial elements in our relations with other countries are given a proper weight in any transactions we have with them. Conversely, we must be sure that any financial transactions and arrangements we make with other countries tie in with our broader foreign policy needs.

2. I therefore request that the Secretary of State, in exercising his coordinating responsibilities for all our dealings with other countries, give special attention to this point. He should see that the Secretary of the Treasury is informed in a timely way of significant forthcoming negotiations or renegotiations on any topic involving those foreign countries with which our financial relations are particularly important. I request the Secretary of Defense, the Administrator of AID and, in those cases in which he is concerned, the Director of Central Intelligence, to review the arrangements for keeping the Secretary of State informed on those negotiations on which they have the primary action responsibility so that he can perform this task effectively. The Secretary of the Treasury, in turn, will provide the Secretary of State, and others concerned, his estimate of our financial interests and financial possibilities in any such negotiations.

3. In the same way, I request the Secretary of the Treasury to notify the Secretary of State and, where appropriate, the Secretary of Defense and the Director of AID in advance of any financial negotiations involving other countries which might have an impact on our general relations with them.

4. I direct particular attention at this time to any negotiations involving the following countries because of the importance of their gold and dollar holdings or of their commercial transactions with us: Austria, Canada, France, Germany, Italy, Japan, Spain, Switzerland and the United Kingdom.

John F. Kennedy/1/

/1/Printed from a copy that indicates Kennedy signed the original.

22. Memorandum From President Kennedy to the Cabinet Committee on Balance of Payments

//Source: Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold. Confidential. A Top Secret, Eyes Only memorandum from Kaysen to members of the Cabinet Committee, March 2, indicating that the committee members were to receive the memorandum printed here as well as a copy of Acheson's report to the President on the balance of payments is ibid. Concerning the report, Kaysen noted: "The President requests that you continue to have no discussion of this report with your staff or in any way make its existence known to any other person."

Washington, March 2, 1963.

1. It appears that we can no longer look forward to achieving a balance in our international accounts in the next year. Secretary of the Treas- ury Dillon's last report (February 13) to me on measures to improve the balance of payments and the attached gold budget/1/ make clear that further substantial savings on the Federal accounts are unlikely to be achieved without program changes. I would therefore like you to survey the alternative courses of action open to us, as we look at this problem for the next several years ahead.

/1/Not printed. (Kennedy Library, Herter Papers, Balance of Payments)

If we simply go forward with existing measures, how long will it be before we can expect with confidence to bring our accounts into balance? If this is our program, can we expect to finance the deficits in the interim by the methods we are now using? If we cannot be comfortable with the answers to these questions, what alternative possibilities exist: (a) for bringing our accounts into balance in a shorter period of time and (b) for financing our deficits until we can bring them into balance?

2. Under (a), I would like an examination of what cutbacks in AID programs and Defense deployments would be necessary to make a significant reduction in the government's share of the external deficit. I would also like an examination of measures that could be taken in the private sector to reduce outflows, especially private foreign investment abroad, and the expenditures of U.S. tourists.

Are there any further measures that could be taken to stimulate exports, including possibly differential tax treatment of export income, which we would be wise to take?

What are the possibilities of using monetary policy to further restrain or even reverse the flow of funds abroad? What would the domestic consequences of such policies be?

3. In addition to this examination of what we can do to reduce the deficit, I want to be sure we have considered thoroughly all the means available to us for financing our external deficit until we can bring our accounts into balance. Further, are we doing enough to deal with the problem of persuading the major European nations to hold the dollars they now have? In this connection, I would like a reconsideration of the proposals examined by Treasury, State and the Council of Economic Advisers last September,/2/ in the light of our new and more somber expectations.

/2/Not further identified.

4. I would like your survey of these alternative possibilities, their likely effectiveness in dealing with our balance of payments problems, and their costs in terms of our other policy alternatives by the end of March. It seems to me that at that time we must confront the decisions that are necessary to prepare ourselves for the long pull in dealing with this persistent problem.

John Kennedy

23. Editorial Note

Under cover of a memorandum to President Kennedy, April 5, 1963, Secretary of the Treasury Dillon submitted a 31-page report prepared by the Cabinet Committee on Balance of Payments, which reexamined the problem of balance of payments. (Kennedy Library, President's Office Files, Treasury, Balance of Payments) Kaysen summarized this report in an April 6 memorandum to the President. (Ibid., National Security Files, Subjects Series, Balance of Payments and Gold) In a memorandum to the Cabinet Committee on Balance of Payments, April 10, President Kennedy announced a meeting on Thursday, April 18, at 10 a.m. to discuss thoroughly the alternative proposals for further actions to reduce or finance the anticipated balance-of-payments deficit over the next 2 years. He proposed that those who had put forward proposals on which there was not general agreement should be prepared to explain and defend them at the meeting, and he indicated specific items that the Department of State, Council of Economic Advisers, and Department of the Treasury should be prepared to discuss. He also indicated he was ready to explore other options raised in the Cabinet Committee's report. (Ibid.)

For a record of the April 18 meeting, see Document 24.

(###)

[End of Section 2]

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