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

[Section 3 of 18]

24. Memorandum for the Record

//Source: Kennedy Library, National Security Files, Kaysen Series, Balance of Payments, Cabinet Committee. Secret. No drafting information appears on the source text. Attached to an April 17 memorandum from Kaysen to President Kennedy are four papers the President requested for discussion with the Cabinet Committee at the April 18 meeting: Council of Economic Advisers' proposal for an IMF drawing of up to $2 billion from the Fund, Ball's discussion of possible negotiations with the major European countries to raise up to $4 billion from 5-year loans from them, a Department of State examination of the possibility of restricting the sale of foreign currencies in the U.S. market, and a Treasury examination of possible taxes on foreign travel. (Ibid., President's Office Files, Treasury) John C. Bullitt submitted copies of these four papers under cover of an April 17 memorandum to members of the Cabinet Committee on Balance of Payments: Secretary Rusk, Ball, McNamara, David Bell, Christian Herter, Walter Heller, and Kaysen. (Ibid., Herter Papers, Balance of Payments)

Washington, April 24, 1963.


Meeting with the President, April 18, 1963, 10:00 A.M., to 12 Noon-- Balance of Payments

The President opened the meeting by asking Secretary Dillon what was the basis for the assumption that our balance of payments would be in good shape in 1965. He referred to the different view that Mr. Acheson's paper suggested./1/ Secretary Dillon responded that it was the general opinion that there would be a substantial improvement in evidence by 1965 or perhaps late 1964, although it was not expected that our accounts would be in balance by then. This opinion had been expressed in the Brookings report./2/ It was shared by the staff of the IMF, the IMF officers and most of the important European central bankers with whom he was in touch. Secretary Dillon then listed the major developments which were prospectively favorable. As far as trade went, European prices could be expected to increase relative to those of the U.S. The possibilities of the continued squeezing of European business profits between rising costs and less rapidly rising prices were about exhausted, and this and other forces would continue to drive European prices up. We could also expect improvements in the investment account. Much of the U.S. investment in Western Europe has been a one-time matter in response to the new political stability in Western Europe and the reappearance of convertibility for European currencies. This was already beginning to decline. Further, higher rate of economic activity in the U.S. would make investment here more attractive. On the other side of the ledger, income from assets held abroad was rising and would continue to rise. Each of the years 1961 and 1962 had shown a $300 million increase in net income from foreign investments over its predecessors. The basic deficit which had been less than a billion dollars in 1961 and was a little over a billion dollars in 1962 could thus be expected to decline. On the other hand, short term capital movements were unpredictable and still presented a problem. Our out-flows on short term capital account had been $2 billion in 1961 and $1.7 billion by last year. Here the question of interest rates was important, but even in the short-term accounts there were countervailing factors. For instance, there had been in the last year a return of flight capital to Europe, much of which was probably concealed in the "errors and omissions" category. It was Secretary Dillon's judgment that this too was coming to an end. These optimistic forecasts were based on the assumption that U.S. foreign expenditures in the military and foreign aid fields continued to be held down. In sum, daylight some time in the period 1965 - 66 - 67 was perfectly visible, and accordingly there was no reason for drastic actions now which would upset the dollar and have an adverse reaction on the whole international payments situation. On the other hand, if by the end of 1964 progress was not in accord-ance with expectations, we would have another look at the problem. It had clearly been a mistake to fix on 1963 as a definite target year in which balance would come.

/1/See footnote 3, Document 20.

/2/Not further identified.

The President then turned to Secretary Ball and asked him to summarize the State Department paper on restricting the access to our capital market for foreign security quotations./3/ Secretary Ball opened by saying that the notion of restricting foreign security sales was not one in which he saw any positive merit. For example, he thought it should be much lower on the priority list than either an IMF drawing or a political negotiation for substantial government loans. However, if these are not possible, then the proposal should be given serious consideration. Secretary Ball reviewed the factual situation as set forth in his memorandum, with emphasis on the increasing use of the U.S. market, especially by Canadians. It was clear that we could not make a blanket prohibition and would have to find some way of dealing with genuine Japanese and Canadian needs. What was needed was some machinery for selective control. In his judgment, this could be accomplished without legislation; and simultaneously, informal talks could be had with the Canadians on what their needs were, but rigorous standards applied to the Europeans. On this basis he thought we might save something between $400 - $600 million annually on the investment account. Secretary Ball noted that the next Finance Minister of Canada, Walter Gordon, was in favor of "buying back Canada" and therefore might well be sympathetic to the program. He was confident that if we had the control machinery to back up our position, we could come to an understanding with the Canadians.

/3/Not further identified.

While he recognized the dangers of any restrictive action, Secretary Ball gave his judgment that it would be much better to restrict foreign securities flotation than to make any large troop redeployments or to impose regressive taxes on tourism. Responding to the President's question, he said that foreign securities sales amounted to about ten per cent of total flotations in our markets.

Secretary Dillon, responding to the President's request for criticism of the proposal, made two chief points. First, he does not share the State Department estimate of the savings the proposed measure would yield. Second, the risk that any restriction would provoke a general capital flight was simply not worth taking. He then went on to develop his points in further detail. Most of the potential yield was in Canada. Canadian loans last year were exceptional in volume and character, and he did not expect they would be repeated on a similar scale. If we restricted Canadian borrowing, there would be an adverse affect on U.S. exports to Canada, since Canada itself had anything but an easy balance of payments situation and we were their major supplier. Further, the Canadians did not demand gold, but held their dollar balances cheerfully. The Japanese situation was similar. As for the rest, other than Canada and Japan, there was little in it. With respect to international institutions, we already had controls. Last year's European borrowings of $200 million will decline. Secretary Dillon has already made informal representations to some European governments and he will make further representations. Of the rest, Israel took $50 million, and thus would be politically difficult to cut down. Australia and New Zealand, which had taken $80 or $90 million last year were already reaching the limitation of their capacity to carry external debt. Further, the New York insurance companies who were the chief buyers of this kind of security were nearing their own limitations on further holdings. In sum, the whole enterprise would yield at most $200 million a year. Since he thought the chances were 100 to 1 that this activity would trigger a mass capital out-flow in which we could lose $1 or $2 billion in assets, and in turn force us to an IMF drawing with all that it implies, he could not see why we should consider it seriously. Further, there was a legal problem. We might need a proclamation of a new emergency which in itself would have an effect on confidence. The classification of our allies as "enemies" to be dealt with under the Trading With the Enemy Act was troublesome.

Secretary Dillon then asked Chairman Martin for his view. Chairman Martin talked about the evanescent character of business confidence. We were facing the real possibility of a crisis. While he did not want to be a Cassandra, he thought it was necessary to warn of what could happen. Liberal policies in trade and in investment matters have been our tradition. We should have the strength and the courage to follow them. If that tradition were impaired, we would start undermining the entire fabric of our liberal policy and all that goes with it, and the confidence which rests on that policy. His own experience with operating voluntary credit controls during the Korean War made him aware of the great difficulties that the operation of a Capital Issues Committee would involve. If this were a dramatic move which added to our resources, Chairman Martin could see some argument for it. But since the forces of the market are working with us we should cooperate rather than oppose them. We should not show the white feather unless we are against the wall.

The President asked what happens when our gold reserves get down to $13 billion. Of course we can suspend the reserve requirement but what effect will that have on confidence? Chairman Martin said that we had to hold clearly to our 1961 policy statement: no embargo on gold movements; no direct controls. There was virtue in maintaining a strong line; as soon as we weaken foreign speculators and central banks would doubt our determination and confidence would drop. Liberal trade policies were, after all, our ultimate goal. If foreign countries had different trade and investment policies, we should not by any means follow their bad example. If necessary, we may have to take the risks of putting deflationary pressure on the economy through monetary policies. But since the favorable forces of expansion were operating to make investment in the U.S. more attractive, it seemed unwise to interfere with them by imposing direct controls. In sum, we should hold the line on our liberal policies. We need the courage and guts to stick to our policy and not allow ourselves to be put on the defensive.

At this point, the President asked Secretary Ball for his comments. Secretary Ball said that his chief difference with the Secretary of the Treasury was with respect to the amount of risk we should be prepared to accept. He shared Secretary Dillon's assumptions as to the favorable outlook for the future. However, we need a prudent policy which guards against the possibility of a worse outcome. It is clear that we have been too optimistic since 1961. If we are forced to take measures to defend the dollar under pressure it will be dangerous from the point of view of the national interest. We need to act now so as to provide a greater margin within which we can rely on the long range forces to improve our position. Further, we had to look to the future of the international payments system, especially in relation to the situation when we move into surplus. An American surplus might well aggravate liquidity problems. As far as the issue of confidence and leadership went, he thought that departure from the strict fidelity to free capital movement was much less of a threat than the possibility that we might deflate our domestic economy. Secretary Ball stressed that he was not in any way suggesting restriction on foreign flotations in the U.S. as a matter of first priority, and repeated his concern that the policies advocated by the Secretary of the Treasury involved an unnecessarily large measure of risk.

Secretary Dillon agreed that the margin on which we were operating was narrow. However, it was he and the Treasury who were conservative, and Secretary Ball's proposal which was reckless. He and Secretary Ball, however, agreed that the issue was really one of priority. In his view once we start down the road of exchange controls and the like, it would be very difficult to stop and the effects on confidence would be clear.

The President then turned to the question of a possible drawing on the IMF. He read from paragraph A. of the Council paper/4/ and noted the assumptions contained therein that we would face a gross deficit of $6 billion in the period 1963 - 64 and that we had to manage our affairs so that we financed no more than $1 billion of this deficit each year through gold losses. Secretary Dillon commented that the figure of $6 billion was inaccurate. We proposed to reduce the out-flow as the Cabinet Committee paper showed, so that the deficit was in fact less than that. If we were successful in reducing the out-flow we could finance the deficits on the present basis for as long a period in the future as necessary. He called on Under Secretary Roosa to comment on this point. Secretary Roosa defined our problem as that of any other borrower--how to keep our credit standing good. This meant primarily two things. First, general confidence in our financial policy and second, clear evidence that the government is doing a comprehensive job in reducing unnecessary expenditures abroad. While he professed no expertise in these matters, Secretary Roosa thought it was highly desirable that if there was any excess fat in our military abroad, we should trim it off. This would have a favorable effect on the opinion of the European financial community. A reduction in tourist expenditures would likewise have a favorable effect on the European financial community. The President asked if this would also be true of U.S. foreign investment. Secretary Roosa replied that it would, but this was a matter on which the Europeans will be taking action. He then stressed the importance of interest rates and quoted Van Lennep (the Director General of the Dutch Ministry of Finance and the Chairman of Working Party #3) to the effect that a half percent rise in the U.S. short rates would be a very important demonstration of our determination to deal with the balance of payments problems. Secretary Roosa went on to talk about the difficulties of estimating what gold sales would be and how undependable the figure was on the distribution of deficits and surpluses in Europe. The Swedes, for example, had just told him that they were willing to hold their dollar balances without asking for gold, and as long as confidence in our policy existed, it was clear they would continue to do so. The President asked Secretary Roosa what was his estimate of the gold loss for 1963 - 64. Secretary Roosa responded that he thought it would be of the same order of magnitude as in the last two years--about $850 million per year or perhaps less. However, he did not wish to promise that the figure would not exceed this, because there were so many variables involved. He reported on his recent favorable discussions with the French, but pointed out that a change in French political attitudes in respect to financial questions might lead to a change in French behavior and a corresponding increase in our loss of gold. Nonetheless, we could sustain gold losses up to $1 billion per year with no strongly adverse effects. Secretary Roosa stressed the crucial importance of avoiding in any way the suggestion that we had lost our nerve. He said that the efforts of the last two years have saved us at least $3 billion in gold in a direct sense. If we had lost the extra $3 billion we would have in fact lost much more because of the alarm that this would have created.

/4/Not further identified.

Secretary Dillon observed that the program of action that the Committee was presenting to the President would take effect primarily in Calendar year 1964 because of the lags involved. The same thing would be true of the change in monetary policy which was proposed for the fall of 1963. Thus his estimate was that while the gold loss would be between $800 million and $1 billion in 1963, it would drop off to something between $500 million and $600 million in 1964.

The President returned to the question of an IMF drawing. Secretary Roosa said we should certainly bear the possibility in mind but at present he would like to save it. We have already worked out the arrangements with Per Jacobsson of the IMF for making a drawing. His own soundings in Europe on the advisability of a drawing were still producing negative results. It would take more time to prepare the Europeans. The Italians, in particular, have bluntly warned us against making a drawing on the grounds that it would shock Europe if the U.S. and UK drew at the same time. All the Europeans expected the UK would be forced to draw. Secretary Dillon distinguished between the notion of any large drawing either up to our gold tranche of approximately $1 billion or up to our first credit tranche of approximately another $1 billion, and the idea of an ice-breaking small technical drawing in relation to Canadian repayment. He was strongly against a big drawing. The Council's analysis of the resources of the Fund was incorrect. The UK must draw and will probably draw $1 billion since the Fund's assets are $2.2 billion in gold and $1.2 billion in hard European currencies. The reserves of hard currencies after a UK drawing would be small. The Fund could sell some gold but if we came in for a drawing on top of a British drawing the Fund would have to sell substantial amounts of gold or activate special borrowing arrangements. If so, our whole financial program would have to be examined at greater detail under the terms of the special arrangements. If the Fund sold gold in any substantial amounts, it would almost certainly ask for the return of the $800 million in Fund gold on deposit with the U.S. This would cancel the gain to us of the drawing. The Canadian situation has changed and the Canadians are not planning to make any repayment this year except for $25 million in gold. Therefore, the occasion for a technical drawing will not present itself now. However, if the British make a drawing we could then examine the situation and see whether a technical drawing was possible. None of this, of course, was a substitute for the action program. In this respect Secretary Dillon called attention to the fact that the $6 billion in the Council memo assumed that there was no action program.

Chairman Heller reminded the group that our basic goal was not merely to save gold, but to do it in a way that kept domestic expansion going and our liberal international policies intact as well. We are all assuming that what we are faced with is a transitional problem rather than a permanent one. In this case it is wise to take the easy measures first and to be sure that the more distasteful measures are available and arranged in order of priority. In his view there was no easier way to get $1 to $2 billion additional in foreign resources than to make a drawing on the IMF, at least up to our gold tranche. His analysis of the IMF reserves was different than the Treasury's. There was $4.4 billion in gold and hard currency: $1 billion drawn by the UK and $1 billion drawn by the U.S. would still leave $2.4 billion in ready IMF reserves in addition to the $3 billion which the standby agreement would provide if necessary. Thus both we and the UK could draw and still leave an emergency reserve of nearly $5.5 billion. The President asked what advantage there would be in an IMF drawing. Secretary Dillon interrupted to remark again on the futility of drawing $1 billion if the result was that the IMF withdrew its deposit with the U.S. of $800 million in gold. Chairman Heller responded that this was an unrealistic view. Per Jacobsson favored active use of the Fund, and he would not act so as stand in the way of it. Secretary Dillon said that a technical drawing on the Fund was acceptable. Any big drawing, however, must wait on the actions of the UK. In the meantime we must continue to talk to the Europeans and the New York financial community to prepare them for the possibility of drawing. After all, we could not take actions which would lead to headlines of the "U.S. Admits Bankruptcy; Goes to IMF" sort.

Chairman Heller pointed out that we could draw European currency and at the same time the Fund could sell gold to the Europeans. This would have the double advantage of increasing our supply of European currencies at the same time that their hunger for gold was appeased. Secretary Roosa responded that the IMF does not think that their present gold stock is large. Furthermore, since they don't expect any further payments in gold they want to hang on to their present holdings. He again raised the question of what must sooner or later happen to the $800 million in gold that the Fund has on deposit with the U.S. Mr. Tobin pointed out that it is hard to believe that the IMF would be acting against us at the same moment that we make a drawing. This simply was not sensible. Further, he was not proposing that the U.S. draw $1 billion all at once, but rather that we make drawings over a period of time, in installments which would total between $1 and $2 billion in the course of the next two years.

The President asked Mr. Tobin whether he was in favor of a drawing. Mr. Tobin responded yes, of course. Our ability to make use of the Fund in a technical way as we did in the past is now at an end because the Fund's holdings of dollars are up to its limit. Drawings in small amounts as a regular routine matter would simply represent a continuation of our past policies in the new technical situation. Mr. Jacobsson and Secretary Dillon could make it perfectly clear to the financial community what was happening, and the whole operation could be carried on in a way that would not shake confidence any more than it has done in the past.

The President then moved to the question of political loans. He asked Secretary Roosa what the prospects were for funding existing dollar holdings and for additional five-year loans along the lines suggested in Secretary Ball's paper. Was there a parliamentary problem? Secretary Ball interrupted to remark that the proposal envisioned financing that would be done by central banks and not through government budgets. The basic question, however, was the necessity for a political decision by governments to ask their central banks to go beyond existing practices with respect to financing U.S. deficits. He said this was something which we obviously would start with the Germans and then the Italians. He sketched the plan further, along the lines of his paper. Secretary Dillon pointed out that in his judgment it would be very difficult to achieve these arrangements, and further, with all the difficulty, it would accomplish nothing beyond what we already have done. The present two year loans will be rolled over and renewed as long as necessary. In fact, the amounts we now have outstanding and the agreements for further amounts up to our needs go to the full extent of the future surpluses of the Germans, Italians, French and Belgians. Thus the $1.2 billion mentioned in the Cabinet Committee paper as the available magnitude of financing of this nature does not accurately reflect the maximum amount that will in fact be available.

Secretary Ball noted that the Treasury was addressing itself to the easy case of the financing which would be available if the U.S. balance of payments was moving in a favorable way. The problem was, however, what would happen if we did not do well. It was in these circumstances that advance agreement was important and it was precisely in these circumstances that the arrangements we now have might prove unreliable. Secretary Dillon responded that it would undoubtedly be desirable to get the kind of commitments of which Mr. Ball had spoken, but he did not think it possible. We now have oral, informal understandings. Any formal contracts were much more difficult to achieve, and if achieved, they would probably involve much harder terms. The Bundesbank was at least as independent as the Federal Reserve System. (Laughter.) Secretary Roosa noted that the Bundesbank and the subsidiary of the Italian central bank which deals with foreign exchange have full authority in the foreign fields and are not subject to instruction by the government. In particular, the head of the Italian activity was independent of the government. He had pointed out to Mr. Roosa in conversation that he was satisfied with the present arrangements, but if the politicians got into it there would be no money.

The President asked whether it was clearly the Treasury's position that we could not go in any formal way beyond what we now have in either standstill understanding and lines of credit? Under Secretary Roosa responded affirmatively. The President asked whether this statement applied to 5 year loans. Under Secretary Roosa responded that we could edge up toward 5 year loans slowly and in one country at a time, but we could not get there in one or a few large leaps.

Secretary Ball called attention to page 5 of the Cabinet Committee report and stated again that this was a good financing scheme if things went well. What if they did not? Messrs. Dillon and Roosa said we would call on the IMF. Chairman Heller remarked that they pictured this as an extreme emergency measure. What was in between the emergency measure and the favorable situation anticipated in the Cabinet Committee report? Roosa responded that what we are now doing can handle such a situation.

Secretary Ball asked what would happen if in the middle of 1964 the situation was no better than it is now. Wouldn't it then be harder to try to make any new arrangements? Wouldn't it be more difficult to go to the Fund then than it is now? We have been talking about a great catastrophe, but this is unlikely. What is likely is the continuation of our past experience of over-optimism and failure to be able to take measures unilaterally which meet the deficit in the next short period. Secretary Dillon said that world opinion was favorable to the United States. We had either to take advantage of this and continue what we are doing or immediately do a handful of major operations at the risk of changing the favorable opinion abroad. The President observed that this was precisely the central point. He then referred to the very difficult experiences of the fall of 1960 and asked whether the fall of 1964 and the discussion incident to another campaign might not bring a similar experience. Do we have the groundwork laid in the London gold market to avoid this? Secretary Dillon responded affirmatively. In 1960 we were totally unprepared to deal with gold speculation. We now have an understanding with all the major countries, and we could and would keep prices in the London gold market down so that another speculative burst like that of the fall of 1960 will not recur.

The President then asked Secretary McNamara what his plans were with respect to Defense outlays on foreign account. What was the present situation and what did he have in mind? Secretary McNamara responded that as of FY 1963 he expected to be losing about $1.6 to $1.7 billion on foreign account. With present programs, and on the assumptions that the Germans continue to buy about $600 million a year under the offset agreement, this figure would be constant for the next two or three years. However, he was doubtful whether in fact the Germans would continue to purchase at this rate for more than another year, and we must be prepared to meet the contingency of decreased income from that source. The only way to improve our position was to reduce troop deployments. It was his judgment that this can be done without reducing our effective military strength; the problem was largely political rather than military. In response to the President's question, he said that half of the expenditures were for NATO; the other half all around the rest of the world with Japan being one of the major areas. The President asked how we could put the political issue to the Europeans. He then referred to the conversations that he, the Secretary of Defense and the Chiefs had had on troop deployments in December. Secretary McNamara responded that it was not the time to raise the issue that was then discussed. What we can do now is thin out our deployments in Europe in terms of troops per combat unit, without reducing the number or strength of our combat units. Thus we would reduce the supporting forces and accompanying dependents. On this basis he expects to be able to reduce the annual rate of net foreign outlays by $300 - $400 million below the current one by the end of Calendar year 1964. These reductions will take place mainly in the UK, Germany, France, Spain and Japan.

The President then asked Mr. Bell about AID's plans. Mr. Bell responded that in the same period their net outlays would be reduced to an annual rate of $500 million or below.

The President turned to the question of the future growth in our export trade. What were the prospects for agriculture and for exports of aircraft? Secretary Dillon commented on our cotton sales, and the loss in market share over the last several years due to a poor pricing method which had made us the residual supplier. The Department of Agriculture was now moving to selling on an auction basis, in an attempt to get back to our previous position of 5 million bales from our present sales of 4 million bales per year. The President asked whether this was enough and what the broader prospects for agricultural trade were. Governor Herter spoke of the Japanese commitments to increase their imports of U.S. agricultural products as the only cheery note in an otherwise not very encouraging picture of the agricultural scene. In response to the President's question, Secretary Ball said that the change in cotton marketing practices would go into effect this year.

The President remarked that the Treasury has certainly done an excellent job to date. As far as the weapons we had against adversity, they seem to boil down chiefly to a change in interest rate with the difficulties that this might bring for the domestic economy and Chairman Heller. The President remarked that we seem to be faced with a screwy system, in which we had to squeeze important public activities in the spheres of defense and aid in order to let the private activities of tourism and foreign investment go forward untouched. However, that was how life was, and how the system operated.

Secretary Dillon observed that it was important for us to organize a promotional campaign for Americans to see America first, and for more foreign travel in the United States. There was then an exchange between Secretary Ball and Secretary Dillon on the relative merits of restricting tourist expenditures and the flow of investment capital. Ball thought the former an undesirable and regressive policy which no Democratic administration should undertake. Secretary Dillon considered that restriction of tourism, especially by taxes, would be much less a blow to confidence and therefore much more desirable than restrictions on the sale of foreign securities.

The President observed that the Treasury was very skillful in shooting down, every three months or so, the balloons which other departments had floated. Secretary Dillon observed that this reflected the Treasury's realism, its understanding that there were no panaceas and its cool assessment of the facts. As for the reductions in defense expenditures which must form the major part of our forward program, he considered that selling the Europeans on it would not be difficult.

The President asked what else we had beyond the reductions in defense and aid expenditures abroad and the possibility of raising interest rates later in the year. What about a tax on the use of capital markets by foreigners? Secretary Roosa indicated that the Treasury was exploring this possibility but was encountering many difficult technical problems. Secretary Dillon said that a tax did not have the selectivity of the kind of control system which Secretary Ball had proposed. In his judgment, if we do anything to restrict foreign securities sales, controls are better than taxes. He added a last word on the need for a citizens committee to promote foreign investment in the United States and said that he would send a proposal along to the President on this.

Secretary Hodges spoke of the need for being tough abroad and for pushing in a number of areas including more competitive agricultural prices, the reduction of petroleum imports, a general export drive, providing tax advantages to importers, an examination of what could be done to implement a revised Webb - Pomerene Act,/5/ and what impact a change in our ocean shipping rate policies would have on the competitiveness of domestic production against certain imports such as Canadian lumber. In response to the President's request, Secretary Hodges promised a memorandum on this last point./6/

/5/The Webb - Pomerene Act was a law to promote the export trade; P.L. 65 - 126, approved April 10, 1918. (40 Stat. 516)

/6/Hodges' undated memorandum to the President, transmitted under cover of an April 19 memorandum from Hodges to the President, urged the Cabinet Committee to conduct the studies it recommended in its April 6 report (see Document 23), particularly those that would lead to increased U.S. exports and decreased imports. He suggested that these studies might cover ocean shipping rates, agricultural support policy, petroleum policy, rapid depreciation based on export sales, and anti- trust legislation. (Washington National Records Center, RG 40, Secretary of Commerce Files: FRC 69 A 6828, Balance of Payments)

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

//Source: Kennedy Library, President's Office Files, Treasury, 4/63 - 6/63. Secret.

Washington, April 20, 1963.

1. In the light of your meeting with me on April 18, I would like to have put into effect the program for immediate action to reduce the balance of payments deficit outlined in your memorandum to me of April 6./1/ Specifically:

/1/See Document 23.

a. Defense. Secretary McNamara should proceed to develop recommendations for submission to me, after consultation with the Department of State, before July 1 on specific actions which can be completed by end CY 1964 with the target of a gross reduction in the annual rate of dollar expenditures abroad of between $300 - $400 million below FY 1963 level.

b. AID. Administrator Bell should take action to further reduce AID expenditures that result in payments of dollars abroad with the target of keeping these expenditures to $500 million or less in FY 1965.

c. Gold Budget. Budget Director Gordon should carry forward the screening and readjustment of expenditures abroad by other Federal departments and agencies to achieve the indicated annual saving of $50 - $75 million per year.

d. Agriculture. Secretary Freeman should take steps to achieve savings of $35 million per year, in addition to those included within the "gold budget" review, through administration of PL 480 programs.

I want to be able to announce the implementation of this action program around July 1 in a special statement on our balance of payments effort.

2. In addition, the Treasury should continue to take action to finance as much as possible of the balance of payments deficit, and minimize the drain on our gold stock, along lines that have already been initiated.

3. It is my understanding that monetary policy and debt management will continue on present lines and, barring unexpected developments, that it is not now contemplated that any positive action will be taken to increase short-term interest rates until the tax bill is passed. There thus will be a further opportunity for discussion of this issue later this summer. Meanwhile, the Federal Reserve and Treasury will press other countries (particularly Canada) to lower their short-term rates as appropriate.

4. Action should also proceed, with a view to completion for announcement around July 1 with the immediate action program if possible, on the following:

a. White House Conference on Export Promotion. Secretary Hodges, in consultation with Secretary Dillon and Mr. Feldman of my staff, should prepare a plan of organization and working program for a White House Conference of Business Leaders on Exports to take place in the autumn of 1963.

b. Citizens Committee to Promote Investment in America. Secretary Dillon, in consultation with Under Secretary Ball, should prepare an organization plan and working program for a representative group of financial leaders to promote investment by foreigners in the United States.

c. Tourism. The Secretaries of Agriculture, Commerce and Interior, in consultation with the Balance of Payments Committee, should prepare plans for a "See America Now" program to promote tourist travel in the United States by Americans as well as foreigners.

d. Coastwise and Ocean Shipping. Secretary Hodges, in consultation with the Balance of Payments Committee, should study and report to me on the costs of coastwise and ocean shipping as these affect our ability to compete with foreign products in the United States and abroad, and should prepare a program of recommended action.

e. Other. The Committee should see to it that other studies mentioned in part V of the report of April 6 are completed promptly and the results reported to me.

5. In order to improve the usefulness of the International Monetary Fund to the United States, the Treasury should take appropriate action to prepare public opinion, both here and abroad for the possibility of a technical drawing. The possibility of such a drawing should be kept under close review.

6. In addition, the Long Range International Payments Committee, while continuing its other studies of various proposals for increasing liquidity and reforming the monetary system, should consider possibilities for enlarging member quotas in the International Monetary Fund.

7. Since in my view the balance of payments will remain one of the major constraints on a wide range of government actions in both foreign and domestic policy, I wish the Committee to continue to keep developments under review, and inform me as the need for further action arises.

John F. Kennedy/2/

/2/Printed from a copy that indicates Kennedy signed the original.

26. Memorandum From Secretary of Defense McNamara to President Kennedy

//Source: Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold. Secret.

Washington, June 4, 1963.


Planned Redeployment from Europe of Selected Army and Air Force Units

My purpose is to inform you of certain planned redeployments of Army and Air Force units from Europe. These redeployments have been programmed for some time and, hence, are distinct from the balance of payments actions I will recommend to you by 1 July 63. However, the projected balance of payments savings resulting from these redeployments will be reflected therein.

During the Berlin crisis the Army's strength in Europe increased from 228,700 to 273,400. During FY '63 we reduced this peak figure to 256,000. During FY `64 we are programming a further reduction to 240,000, though in view of your forthcoming trip Secretary Rusk and I have agreed that we should limit withdrawals in the first quarter of FY `64 to the non-combat troops only (9,700).

In the case of the Air Force in NATO Europe, Air Force strength increased from 21 to 32 tactical fighter squadrons during the Berlin crisis, including a number of Air National Guard squadrons. Because the immediate return of all the additional squadrons would have caused an unnecessarily sharp reduction, we activated the 366th Wing of four Regular Air Force squadrons using ANG F - 84 aircraft and equipment. We also planned to deploy three additional squadrons to obtain a total of 28 squadrons. Subsequently, the JCS recommended and I approved the retention of the additional squadrons in the CONUS and the earmarking of Strike Command squadrons for rapid deployment to Europe for possible air superiority operations in the Berlin Air Corridors.

With respect to the 366th Wing, we find that is of marginal value. The obsolescent equipment, lack of war consumables and of modern ordnance restrict the operational value of this wing. Based on August 62 and April 63 recommendations of the JCS I approved in April the return of the wing to the CONUS in the first quarter, FY `64, for conversion to modern F - 4C aircraft and directed that the four bases in France be kept as dispersed operating bases. We then notified the appropriate Congressmen and the press of this move.

As for the political implications of these actions, Secretary Rusk and I believe that the chief concern is the danger of giving to the Europeans any basis for suspicion that these actions somehow are part of a larger pattern and that de Gaulle is right in his claim that the U.S. will pull out of Europe.

We recognize that we cannot afford to take any steps which would cause apprehension in Europe of a U.S. withdrawal. We believe, however, that the nature of these actions is such as to incur little risk of stimulating European fears. The withdrawal of the F-84 Wing and the reduction of Army non-combat troops represent the next-to-last installment of the gradual phase-out of the Berlin build-up which has been in progress since the summer of 1962. The last installment, the decision for withdrawal of which has been deferred until after your trip to Europe, consists of ground combat troops (one armored cavalry regiment, two medium tank battalions and three artillery battalions). Yet, even with their return, as we noted above, the Army in Europe will still be above its pre-Berlin crisis strength and its capabilities have been greatly increased through modernization, reorganization, and prepositioning equipment. Careful and objective exploitation of these favorable elements will permit us to minimize the danger of untoward political developments and Secretary Rusk and I are concerting our efforts to this end.

As you know, other redeployments are currently under study pursuant to your directive of April 20 to the Cabinet Committee on Balance of Payments./1/ I will forward these proposals when prepared after appropriate consultation with Secretary Rusk.

Secretary Rusk concurs.

Robert S. McNamara

/1/See Document 25.

27. Letter From Secretary of State Rusk to Secretary of Defense McNamara

//Source: Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold, 6/62 - 9/63. Secret. A copy was sent to McGeorge Bundy.

Washington, June 7, 1963.

Dear Bob: It might be useful, at some point in the near future, for the two of us to discuss with the President the subject of troop withdrawals from Europe./1/

/1/Secretaries Rusk and McNamara met on July 15 to discuss this question before meeting with the President. A memorandum of their conversation is in Department of State, Secretary's Memoranda of Conversation: Lot 65 D 330.

Study of the potential political effects convinces me that, other than limited adjustments dictated by organizational or other technical considerations, there should be no further withdrawals of our troops from Europe pending conclusion of the present special Stikker NATO force review, and beyond that, until or unless we are convinced that such withdrawals would, in balance, benefit our security position.

Several issues are involved:

First, in the current European political climate, US reductions would raise the fear among Europeans that more cuts would follow, as a part of a pattern of US withdrawal from Europe. DeGaulle's hand would be strengthened. As a result, the immense American political influence over a delicate and vitally important complex, which it has been possible for us to exercise largely because of our major troop presence in Europe, would be weakened.

Second, I am not persuaded that it would be wise to alleviate our balance of payments problem through troop withdrawals, certainly not before all other avenues for easing the problem have been exhausted.

Third, a major withdrawal would force us to accept what is essentially a nuclear trip-wire posture in Europe since our involvement in two world wars in the last half century demonstrates that in a world-wide crisis complete disassociation from Europe is entirely infeasible. Allied progress toward a balanced strategy and force structure in Europe would stop and instead the Europeans would probably cut back their own non- nuclear forces. Although I share your concern that the US 7th Army, fully equipped and trained to fight, has very weak allied forces on both flanks, I believe we must first assure ourselves that further strengthening of these flanks cannot be realized before we seek other solutions. To do otherwise would involve our accepting a dangerously lowered nuclear threshold, with higher risks of political collapse or nuclear war. Berlin, especially, would become more hazardous.

Fourth, US force deployments in Central Europe have contributed immensely to the creation of a military environment conducive to the development and maintenance of German political and military stability. Particularly with the transfer of government about to take place in Germany, we cannot risk the reduction in our influence over German affairs which would result from a major withdrawal of US forces.

Finally, it seems to me that no substantial withdrawal should be carried out or even planned before completion of the new NATO planning exercise aimed at mutually relating the strategy, the forces, and the budg-ets within the Alliance. In the wake of a series of major US actions affecting European security, taken without what Europeans regard as adequate consultation, a unilateral change in our forces in Europe could be disastrous to the cohesion of the Alliance.

While, as I said, I do not rule out limited force readjustments for logistical streamlining or other technical reasons, any readjustment must be carefully handled if we are to avoid serious political damage. Therefore, I would hope there can be full participation from the outset by us in any discussions of proposed change in existing US military deployment in Europe.

In the discussion with the President, it might be useful to broaden the participation to include other members of the Cabinet or the NSC. In any event, I am sending a copy of this letter to McGeorge Bundy for his information.

With warm regards,



/2/Printed from a copy that indicates Rusk signed the original.

28. Memorandum From Secretary of Defense McNamara to President Kennedy

//Source: Kennedy Library, President's Office Files, Treasury, 7/63. Secret. Copies were sent to Rusk and Dillon.

Washington, July 16, 1963.


Reduction in Department of Defense Expenditures Entering the International Balance of Payments

This is in reply to your Memorandum for the Cabinet Committee on Balance of Payments, dated April 20, 1963,/1/ which requested, in part, that after consultation with the State Department, I recommend specific actions, capable of completion by the end of Calendar Year 1964, which would achieve a gross reduction in the annual rate of Department of Defense expenditures abroad of between $300 - 400 million below the FY 1963 level.

/1/Document 25.

Department of Defense Expenditures Overseas

In the absence of action along the lines recommended and discussed below, Department of Defense expenditures entering the international balance of payments during FY's 1963 - 66 are estimated as follows:

($ Millions)

FY 1963 $2,739

FY 1964 2,686

FY 1965 2,700

FY 1966 2,698

These estimates are based on the currently planned deployment of our military forces and the continuation of all current Department of Defense programs designed to reduce expenditures overseas. They also reflect a moderate increase in price and wage levels overseas anticipated for this time period.

As you know, I have made a concerted effort during the past two years to reduce the net adverse balance of Department of Defense transactions entering the international balance of payments. During the period FY 1961 - 63, the net Department of Defense adverse balance, i.e., gross expenditures overseas less receipts, was reduced by approximately $850 million--from $2,334 million to $1,477 million. This reduction was achieved by holding our expenditures relatively constant despite increased international tension and inflation abroad, and by increasing receipts.

With respect to these greater receipts, Germany and Italy have agreed to offset all or part of our defense expenditures in these countries by increased spending for U.S. military goods and services. Our efforts to increase sales of U.S. military equipment to other allied countries will continue to be pressed. However, we believe that the $1 billion of annual receipts projected for the period FY 1964 - 66 are a realistic maximum.

Guidelines for Developing the Actions Proposed Herein

Further actions to reduce Department of Defense expenditures overseas, as outlined in Attachment A,/2/ are based on the following:

/2/Not found.

1. U.S. commitments of effective military forces will continue to be met.

2. A gradually increasing capability of the Armed Forces to deploy rapidly will permit some reduction in other forces permanently in-place overseas.

3. Our increased strategic missile capability will permit, by the middle of CY 1964, somewhat less reliance on overseas based manned bombers.

Summary of Recommended Actions

The actions affecting our present deployments in Europe are:

1. The consolidation on four bases and some reduction (from 103 aircraft to 80) in our present B - 47 Reflex posture by July 1, 1964.

2. The transfer of the aircraft of two U.S. air defense squadrons in Spain to the Spanish Government by January 1, 1965.

3. The return of the F - 102 air defense squadron from Iceland by July 1, 1964 (subject to the concurrence of Iceland's government).

4. The use of increased MATS capabilities to permit the return of 32 C - 130 aircraft from France by April 1, 1964.

5. A reduction in the Army Line of Communications (LOC) in Europe predicated on some reductions in theater reserve stocks, relocation of issue stocks and placing in standby status certain facilities in Western France.

In the Pacific, the more important redeployment actions recommended are:

1. The elimination of the obsolescent B - 57 wing in Japan 6 months earlier than programmed (i.e., July 1, 1964). The 12th Tactical Fighter Wing (F - 4C aircraft) now programmed to deploy to Japan upon the phase out of the B - 57 wing would be retained in the U.S. to increase our capability to respond to contingencies elsewhere in the world.

2. The return to the U.S. of 16 C - 124 transports from Japan and 16 C - 130 transports from Okinawa by October 1, 1964, using our increased airlift capabilities to meet much of the Pacific logistics requirements, reduced by the redeployments.

3. The return to the U.S. from Japan of the 66 F - 102 aircraft (20 of which are presently programmed to be removed by July 1, 1964). Such a move is made possible by utilizing in the air defense of Japan the increased capabilities of the Japanese Air Self Defense Force, and the increased capabilities of the USAF to rapidly deploy F - 4C aircraft to Japan during the periods of tension or at the outset of hostilities for air defense missions.

In addition, I recommend a series of actions which would produce foreign exchange savings in such areas as contractual services, petroleum procurement and construction. We also anticipate that savings will be achieved through better personnel management. All of these actions are discussed in greater detail in Attachment A.

Effect of Recommended Actions

My recommended actions would achieve in CY 1965 and FY 1966 a reduction in overseas expenditures of approximately $300 million below the FY 1963 level as follows:

($ Millions)

Revised Estimate Under

Current Estimate Proposed Actions/3/

FY 1963 $2,739 $2,739

FY 1964 2,686 2,671

FY 1965 2,700 2,506

FY 1966 2,698 2,434

/3/Attachment B provides a detailed analysis of U.S. defense expenditures overseas. [Footnote in the source text. Attachment B has not been found.]

Although the redeployments of Air Force units reduce our forward deployed forces, they would have a desirable effect on our capabilities to respond to contingencies anywhere in the world. A smaller portion of our forces would be engaged in substituting for allied self-defense forces, more would be available for concentrated use as conditions may dictate, and a smaller number would be deployed on the more vulnerable forward bases.

The actions relating to Japan go beyond the specific recommendation contained in Mr. Gilpatric's memorandum to you of February 8, 1963 relating to U.S./Japanese Defense Relationships./4/ They involve a considerable withdrawal of aircraft from Japan. However, they are militarily desirable, apart from gold flow considerations, in the sense that they increase our reaction capability elsewhere. In addition, they emphasize for the Japanese our belief that Japan must depend more on its own self-defense capabilities in the future. In this connection I have been disappointed by the current level of Japan's defense expenditures.

/4/Scheduled for publication in volume XXII.

I believe the minor adjustments of Army strength in Europe are desirable, gold flow considerations notwithstanding, in the interests of better organization and management of our resources. This applies particularly to the reorganization and streamlining of the Army Line of Communications (LOC) in France. However, the Joint Chiefs of Staff state:

"The reduction in the Army LOC in Europe could have an adverse impact on the Army combat capability. Three areas of principal concern are the ability of the Army to respond quickly to an emergency in Europe after the cuts are made, the concentration of stocks in the forward area, and the extremely important politico-military implications of placing a part of the LOC in Western France on standby and reducing war reserve levels to 90 days. I believe this adverse impact can be minimized by cooperative logistics agreements in the form of joint depot utilization in Western France, by maintaining a capability in CONUS and Europe for rapid expansion in an emergency and by insuring that adequate airlift and sealift are available for a rapid reconstitution of the LOC."

The possible termination of the Caribou program in Canada has been under review for some time. The FY 1963 procurement was undertaken in part to retain the option of using that aircraft if no more desirable alternative developed in the future while at the same time permitting some continued improvement in Army capability. Continuing study of this matter has led to the conclusion that the 157 Caribou on hand and on order as of June 30, 1963 will be adequate to meet our requirements in view of the availability of C - 130E's.

During your meeting with Prime Minister Pearson on 10 - 11 May 1963, you indicated that we were then reviewing our requirement for the Caribou. You will, of course, remember that we are committed to consult with the Canadian Government before any termination notice is announced. When I met on June 6 with Mr. Drury, the Canadian Minister of Defense Production, I told him that Caribou would have to compete on its own merits against other alternative solutions to the Army's air transport problem. Thus, termination of Caribou procurement will not surprise the Canadian Government even though it will undoubtedly be disappointing.

I have consulted with the Joint Chiefs of Staff with regard to the military acceptability of the foregoing measures. While recognizing the compelling economic issues inherent in the current balance of payments problem, they point out that "most of the measures designed to control gold outflow work against the military desideratum of maintaining a forward strategic posture based upon the deployment of substantial military forces in sensitive strategic areas overseas. The actions recommended in this memorandum which entail bringing home Air Force units will, in varying degrees, increase the reaction time of our military response, particularly in the areas of the Western Pacific. The proposed reduction in the B - 47 forces overseas [a reduction of 23 aircraft for a period of a few months]/5/ will occasion a readjustment of strategic nuclear targeting and, for a limited time, will reduce the weight of our nuclear attack. Also, the Joint Chiefs of Staff have expressed concern over the effect on base rights in Iceland, Spain, and Japan of a reduction of U.S. garrisons there unless such reductions are preceded by careful bilateral negotiations. However, if the contribution of these actions to the solution of the balance of payments problem is considered to outweigh the military risk involved, then the Joint Chiefs of Staff accept the proposals."

/5/Brackets in the source text.

Consideration of Additional Actions

In arriving at these recommendations I have considered a number of other alternatives. These actions included possible redeployments of additional U.S. forces now in Europe and the Pacific, changes in depend- ents policies, early termination of the SAC Reflex posture in Europe, and a further reduction in overseas petroleum procurement. In the course of preliminary discussions, the Department of State expressed concern over the possible adverse political and economic repercussions of substantial redeployments or a significant curtailment of petroleum procurement overseas.

To cite one example of these political constraints, we estimated earlier this year that approximately $20 million of our FY 1964 requirement for aviation gasoline normally procured in the Caribbean area could have been returned to the U.S. by restricting bids to U.S. sources. The added cost of this action would have been only $322,000. When weighed against the fact that other procurements for use overseas are being returned to the U.S. at premium differentials up to 50%, this proposal was very attractive from the budgetary standpoint, and was militarily sound. However, in view of the State Department objections, the procurement of the first half of our FY 1964 requirement was not restricted to U.S. sources.

In addition to the actions recommended herein, I am investigating the following areas which may result in additional savings over those now projected:

1. A review of personnel requirements for DOD communications activities overseas. My preliminary review indicates that some reductions in this area may be desirable.

2. A review of overseas headquarters with a view to streamlining and/or consolidating them.

3. A joint review with the State Department of our over-all force posture in Korea.

4. A review of the Air Force tactical maintenance concept with a view to establishing such maintenance in rearward areas, thus increasing our capabilities for non-nuclear conflict while reducing overseas costs.

5. A review of the possible redeployment of the 1st Marine Aircraft Wing from Japan to Okinawa and a review of the redeployment of the F - 105 TFW from Kadena, Okinawa, to Guam.

6. A review of certain of our forces committed to NATO and deployed overseas, keeping in mind the possibility of redeploying some forces to the United States and in turn demonstrating frequently our ability to deploy to Europe in support of NATO commitments.

Other Possible Savings

I believe that savings of any substantial magnitude over those herein recommended or being reviewed could be accomplished at this time only through: (1) substantial redeployments to the U.S. or other dollar areas, and/or (2) significant reductions in the dependents authorized overseas.


I recommend your approval of the actions proposed in Attachment A.

I have discussed these actions with Secretary Rusk and he concurs in them, subject to review of the detailed plans for their implementation. Secretary Rusk stresses the necessity for a carefully coordinated information and consultation procedure to ensure that:

1. These actions not be presented as a "package" implying U.S. withdrawal from its commitment to maintain the integrity and freedom of the Free World.

2. The specific countries involved in the proposed redeployments understand our reasons and be given no basis for believing that the program is forced upon us by our balance of payments position.

These conditions are, of course, entirely acceptable to me.

Robert S. McNamara

29. Editorial Note

On July 18, 1963, President Kennedy sent a special message to Congress on the balance of payments. The President cited the improvement in balance-of-payments deficit and other signs of progress. He believed that further administrative and legislative measures were required, however, to make "inroads into the hard core of our continuing payments deficit," and he especially reemphasized "the necessity of improving this Nation's over-all long-range economic performance--including increased investment and modernization for greater productivity and profits, continued cost and price stability and full employment and faster growth."

President Kennedy then expounded on immediate measures to reduce the deficit and to defend the U.S. gold reserves in the following areas: export expansion, tourism, federal expenditures abroad, and short- and long-term capital flows. Concerning the latter, he urged Congress to enact an "Interest Equalization Tax" that would increase the cost of borrowing to foreigners. Immediate measures in other areas proposed by the President included investment by foreign savers in the securities of U.S. private companies, special government transactions (such as prepayment of debt by foreign countries and advance payments on military purchases), gold sales and increased dollar holdings, a standby arrangement to draw on dollars in the International Monetary Fund, and informal credit arrangements with the central banks of industrialized nations.

Full implementation of his proposed program of action, the President concluded, would realize gains of about $2 billion, which "will give us the time our basic long-term program needs to improve our international competitive position, and increase the attention for investment in the United States."

For text of the message, see Public Papers of the Presidents of the United States: John F. Kennedy, 1963, pages 574 - 584. Regarding guidance to certain U.S. posts about the message, see Document 76.

30. Letter From John Kenneth Galbraith to President Kennedy

//Source: Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold. Personal; Secret. Galbraith, who had been succeeded by Chester Bowles as Ambassador to India in July 1963, was serving as a consultant to the White House.

Washington, August 28, 1963.

Dear Mr. President: This is the first of two papers that I am sending you on the balance of payments problem.

1. The companion paper is concerned with problems and remedies./1/ This deals with the more serious question, as I measure matters, of how to handle the problem. There is at present no mechanism for enforcing the continuing action on the wide front that the problem requires. Since I must speak frankly about persons and departments, I plead that this particular memorandum be held in strict confidence.

/1/Reference presumably is to Documents 31 and 32.

2. The heart of the matter is that for everyone concerned with the balance of payments problem it is subordinate to another concern. For the Council of Economic Advisers, it is subordinate to the domestic economy. Tobin, although his views were not typical, was perilously close to the conclusion that there is no problem at all. Other members, in fighting off measures which were considered, in my view quite correctly, to have a bad domestic impact, failed to develop a solidly affirmative position. All economists unduly emphasize international liquidity, which is a fashionable conversation piece of the economists' union. The State Department, though it suffers from the effect of a weak balance of payments position on its bargaining position, is primarily concerned with protecting trade, troops and aid. The Commerce Department views the trade balance largely as an opportunity to get more money for trade promotion and foreign tourist travel. These are negligible in their possibilities. The Treasury has responsibility for the problem as a whole, but until recently its sacred cow has been the capital market. Even now, the checking of long-term capital outflows, and the stopping of avenues of escape around the proposed tax, is being handled in a highly unwilling way.

The picture is not entirely black. Bob McNamara has made a loyal and substantial effort to ease the problem. On the dollar-saving side, his is the only area of substantial achievement.

Now as to remedies. Something over a year ago I urged you to set up a Cabinet Committee to have jurisdiction over this problem and to be responsible for its solution./2/ This hasn't worked. It has been a place where those responsible have sought to shift the buck. There is no further hope for action here.

/2/Not further identified.

I gather you have been sufficiently pressed as regards the Treasury and Dillon. The Treasury hasn't done well. It waited too long on long-term capital movements. It is subject to the banker syndrome, which is to foresee disaster but prefer inaction. However, the Treasury cannot exercise real jurisdiction over the other Government Departments. The latter will always find it easier to organize against Dillon than to follow his lead. An appeal to you is inherent in the situation, so the problem comes to your office in any case.

Accordingly, I see no alternative to better organization of the Executive Office for continuing pressure and action. This means, I believe, that you must have someone of stature, fully seized of the seriousness of the problem, who will do in this critical matter what Bundy does for you on foreign policy and Sorensen on domestic policy. (You might reflect that nothing in the areas they so competently now cover is as important as the balance of payments, yet neither can function with real confidence on this issue.) Such a solution will cause sadness in the Treasury and the Council of Economic Advisers. But every President since Roosevelt has had to have an economist or economic figure who was his man to help him in combatting the excessive parochialism of departmental policy. (Currie served Roosevelt in this way, David Bell so served Truman, and Randall and Gabriel Hauge so served Eisenhower.) The man is all-important. Carl Kaysen, who is perhaps the ablest all-around economist in the country, is unfortunately susceptible to the economists' union. As a result, he is overly impressed by the international liquidity escapism. In any case, you need someone full time. I suggest that, whatever the implications, you attach Charles Hitch to the White House Office for nine months for this job. He is highly intelligent, has a pragmatic view of the issue, takes it seriously, and you can rely completely on his judgment. He would act largely through you, but he would command respect as your adviser. This need not be a permanent assignment. He need stay only until the present bleeding is decisively reversed.

As I argue in the accompanying memorandum, the present trend can be reversed. It is this, as well as the urgency of doing so, that leads me to urge that the powers of the President be decisively engaged.

Yours faithfully,

John Kenneth Galbraith/3/

/3/Printed from a copy that bears this typed signature.

31. Letter From John Kenneth Galbraith to President Kennedy

//Source: Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold. Personal; Secret.

Washington, August 28, 1963.

Dear Mr. President: I am submitting herewith the report on the balance of payments which you requested./1/

/1/Document 32. The President's request has not been further identified.

While I realize you are not without reading material, I venture to urge your attention for the document as a whole.

The report takes an unsanguine view of the prospect. There is no solid reason for expecting the situation to improve. The consequences of unabated drain, which unhappily must be assumed, will be manifold and grave.

In the report, I examine at some length the nature and shortcomings of past action. By its nature this involves a good deal of second-guessing and hindsight. I would hope this would not be thought critical of individuals. It is important to see why, through errors of optimism and the desire to contract out of difficult action, we have erred in handling this problem in the past.

The heart of the strategy I propose is to suspend capital exports for a minimum period of six to nine months, with possible extension. This is imperative and requires supplementing recent Treasury action by stronger executive measures. The existing steps are not sufficient for the task.

The present course of trade negotiation is sadly inconsistent with our balance of payments position. I recommend as the next step the effective postponement of the existing negotiations with the Common Market Countries. I would personally like to go much farther for I do not believe that we have sufficiently reconciled our trade policy with our balance of payments position. However, I am restrained by the lack of public or even governmental preparation for such a reversal.

Further, I urge certain steps on tourist travel, military deployment, and the deeper tying of aid. None of these, the military proposals excepted, will have a very prompt yield. All will be important in the slightly longer run.

The person who comments responsibly on the payments problem is like the herald who brings bad news: He is a figure for popular execution, and in this case each department will have its own gibbet. There are, indeed, grave difficulties with everything here urged. I hope these will not be considered decisive for they must now be measured against the alternative courses of action, which are few and worse, and the consequences of inaction, which would be worse yet.

Yours faithfully,

John Kenneth Galbraith/2/

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

32. Memorandum From John Kenneth Galbraith to President Kennedy

Washington, August 28, 1963.

//Source: Kennedy Library, President's Office Files, Treasury, 8/63 - 11/63. No classification marking.


I have now reviewed the papers on the balance of payments/1/ and have talked at some length with those principally concerned. The following assessment is divided into three parts: the problem; the past and present efforts to deal with it which I feel to be seriously defective; and the action we should now take. We are, I fear, faced with the need for serious and difficult steps more than a little occasioned by the reluctance and postponement of the past. Those who now urge further postponement may wish to recall that the steps we now face could have been avoided by lesser but more timely action in the past. Further delay will mean yet more severe measures.

/1/Not further identified.

Delay will mean continued accumulation in foreign hands of dollar assets convertible into gold or the conversion of these assets into gold. Gold withdrawals at any time during the next 14 months could occur with damaging political effect on the Administration. It might be promoted for political purposes. We are taking unacceptable risks as long as the imbalance continues. There are more deep-seated costs. You have heard sufficiently of the restraints that the payments weakness imposes on domestic employment policy. It is also notably undermining our foreign policy. Bargaining strength is far more intimately related to the balance of payments than to any other factor. Our troubles this past year with our European allies, France in particular, are not because we are militarily weaker or have less eloquent negotiators than in the past. It is because we are financially weak and our allies have become strong and more than a trifle arrogant as a result. If the weakness continues we will be able to keep our military and economic aid commitments only by borrowing. In consequence we will have the economic and political weakness of a debtor nation. It will soon be noticed that our foreign policy lacks the power, certainty and confidence of the past. This will also have domestic political overtones, for the weakness will be attributed one way or another to the Administration.

There is a feeling among some in the Administration that if the worst came to the ultimate worst these various consequences could be eliminated by devaluation. (Dr. Tobin has influentially taken this position.) So, though it cannot be mentioned, we have an ace in the hole. We have not. Prior to any decision to devalue in our system of checks, news leaks and balances there would be vast press disturbance, huge gold outflows, and deep suspicion of the competence of those concerned, all with the most disastrous political effects. And economists, even the men of reputation, persist in thinking of devaluation (or floating exchange rates) in terms of a small country vis-a-vis the United States. In fact, the devaluation by the United States would bring prompt and immediate devaluation by every other country, including currencies as hard as the Swiss Franc. All this would promptly restore the previous exchange and trading relationships, the previous imbalance, and the previous dependence on external credits.

In turning to measures, we must see first (a) why past action has not worked and (b) what prospective action is needed. For purposes not of criticism but of analysis, it is especially important that we see the defects of past action.

Shortcomings of Past Action

Much useful work has been done on the balance of payments problem. Both the underlying problem and the possible course of action have been considerably clarified in the last two and one-half years. However, our attitude toward the problem has been seriously defective for the following reasons:

1. We have naturally sought to maintain confidence in the dollar. Accordingly, we have been perpetually optimistic about the prospects for turning the balance in our favor. In the course of persuading others, we have repeatedly persuaded ourselves that all would soon be well. Each remedial step--to tie aid, reduce dollar outlays for defense, stimulate trade and tourist travel, and (more recently) to control access to the domestic capital market--has been presented as a total remedy. This optimism has then become the basis of policy until it was evident that something more was needed. There have been so many optimistic forecasts that none would now be taken seriously. This is not good public procedure.

2. We have attached great hopes to policies that were never capable of supplying a solution. And we have seized with inordinate enthusiasm on any available trend in the right direction. There was no chance whatever that increased foreign travel in the United States would have an important effect on the travel account or that Government-sponsored trade promotion activities abroad would importantly affect sales within the lifetime of this Administration. These steps may be useful but the changes they work can only be exceedingly gradual. Recently it has become the cliche, supported by the Brookings study,/2/ that European prices are rising more rapidly than our own. This will be the fundamental corrective. This is unduly optimistic. One of the prime accomplishments of this Administration has been to obtain a measure of control over wages and prices. But there is no real indication that our control is better than that of our European competitors. At any time our prices could go up. And it seems certain that the Common Market governments can bring theirs under greater control if they must. At this moment, in fact, there are indications of adverse movements on our side. Accordingly, it is silly and dangerous to pin our policy, as we are now doing, to so slight a prospect.

/2/Not further identified.

3. The balance of payments has fallen afoul of the interests and concerns of individual Departments. The Council of Economic Advisers, in my view quite properly, have considered the balance of payments subordinate to the performance of the domestic economy. The State Department has considered it subordinate to troop strength, trade, and aid. The Treasury Department has until recently considered it subordinate to the maintenance of free capital markets. If all of these interests are protected (I exclude Defense, which has made a serious effort to cut down on its overseas outlays), there is precious little that can be done about the payments balance. Someone's ox must be gored.

4. The liquidity problem has been used as an escape hatch by the economists. International reserves are unquestionably inadequate. As we make our balance of payments better, that of others will become worse. But more international reserves are not a basic remedy; they only extend the time we have to correct our imbalance. Moreover, as responsibility is now assumed in the world, the negotiation of improved reserve mechanism is only possible when the United States is acting out of generosity and not out of need. The European countries do not see their responsibilities as do we; they will not respond if we are the supplicants. They will, however, be more cooperative when they must.

5. Finally, in dealing with this problem we have had an erroneous view of the national interest. It has been said that trade, aid, and military outlays must not be touched because this would jeopardize the fundamental security of the United States. We have yet to realize how much the payments balance is already jeopardizing our position. A weak balance of payments is undermining our role as the leader of the Western Alliance, making it safe for difficult politicians to thumb their nose at us, weakening our hand on trade negotiation, and making us petitioners on currency matters. This is what is fragmenting the Alliance; by not needing to stick with us each can go off in his own direction. The Alliance would be in far better shape with fewer American troops and a strong American payments balance than a large American soldiery in Europe for which we have to beg from the French or the Germans.

I turn now to action. Three considerations should control our further steps in this field, as follows:

1. The time for purely cosmetic action is past. Hereafter, action must be considered and real. Anything that now smacks of toying with the problem will be damaging to confidence. Nor can we afford to waste more time.

2. It can no longer be held against a measure that it hurts--or that it is inconsistent with existing policy. Everything henceforth will hurt. All untaken action will interfere with some existing policy. Otherwise the action would have been taken.

3. We should bear in mind that determined action in this field may bring far quicker response than we imagine. Germany, France and Italy got out of a seemingly hopeless balance of payments position with amazing speed. Britain has been in trouble at least five times since World War II; each time when she has cranked herself up to determined action (which as with us was what required the effort), the situation was quickly remedied. The Canadians were in bad shape a year ago; a strong move brought quick results. It should be the same, given serious action, with us. This point is important because strong surgical action may do less damage to military, trade, aid, and other important things, including our domestic political situation, than the continuing erosion of half-hearted measures that are not really corrective.

There are five steps in decreasing order of importance which should be a part of the program of what might be called decisive reversal. These are:

1. A moratorium on long-term capital outflow; 2. Appropriate tariff action; 3. Modernized military deployment; 4. Restraint on tourist travel; and 5. Deep tying of aid.

I comment on each in turn.

Long-Term Capital Movements

Control of long-term capital outflows is the first essential in a balance of payments strategy.

It is the least damaging attack on the balance of payments. It means that savings which hitherto have been flowing into foreign investment will now seek domestic use. This will keep our long-term interest rates low, with supporting effect on domestic economy and employment. It has some differential effect on our productivity. Since other countries, including Switzerland, maintain full convertibility while keeping formal or informal restraint on long-term capital movements, there should be no serious loss of international confidence from this moratorium.

The way has now been paved for control by the interest equalization tax and the attendant uncertainty which has brought long-term capital outflow to a temporary halt. However, it is not at all certain that at present rates the levy will be an effective deterrent. Either passage or non-passage of the legislation could bring a renewed outflow. Nor does the levy touch direct investment. We should have a six-months' moratorium on both. Long-term capital movements are a withdrawal of available surplus; this surplus by definition we do not have. Accordingly, I would urge that even after the passage of the tax (or its rejection) the market be kept closed for at least nine months. The portfolio and issues market could be closed to specifically foreign borrowers under Section 5 (b) of the Trading with the Enemy Act of 1917. Steps should also be taken to see that there is no evasion by way of long-term bank loans. By (say) next July we might have another look to see what relaxation we could afford, subject to the restraining effect of the tax.

Immediately, the 500 largest American corporations plus any others indicated as operating abroad should be circularized by the Treasury with the request that they (a) defer any new direct investment abroad and (b) notify the Treasury of present commitments. If this does not work, stronger steps should be taken under existing law as above. Direct investment is a large item in the Western European countries and if savings are to be appreciable it must be included. Without hurting Canada or the Underdeveloped Countries, for which there would be exceptions, a half to three quarters of a billion (net) of last year's $2.2 billion deficit could have been covered by suspension of long-term outflow. For this year there would have been a proportionately rather larger saving out of the larger deficit.


While it is official doctrine in Washington that the trade balance is moving in our favor, in fact the prospect is unfavorable. We have had no gains in the last three years; the merchandise balance has in fact fallen from $5.4 billion in 1961 to $4.1 billion in the first quarter of this year. This is a surplus, as the papers on the subject stress ad nauseum. But our past position has only been strong because this balance on commerical account was relatively much more favorable than now. As noted, this is no reliable assurance that our wage-price situation will continue more to our advantage than that of our European competitors. There is the absolute certainty as things now stand of adverse movements in our tariff position.

Specifically, under the Treaty of Rome it is the unweighted average of tariffs that is being lowered around the Community. This means that we will get tariff reductions in those markets to which we do not now ship goods; we will get tariff increases in our established markets. Since it takes time to develop imports, the damage will considerably exceed the benefit. Meanwhile, the elimination of internal tariffs means that American machinery and equipment and other manufactured products will be subject to the increased competition of tariff-free products from other countries within the Common Market. This adds up in the years ahead to an adverse movement of some magnitude.

Reaction to this matter so far has combined hope with incantation. The papers say the adverse movement must be offset by muscular and masculine bargaining during the Kennedy round. This is self-delusion. Tariffs are in fact being raised against us. We can get them back down only by equal concessions on our side. Our payments balance weakens our hand on tariff bargaining as elsewhere. So present trends will leave us at a real disadvantage. But it is worse than that. We shall be reducing tariffs primarily on European consumers goods which are responsive both to lower prices and high incomes in this market. We shall be offering concessions at least in considerable part on machinery and equipment which, in the view of qualified observers, are procured in the United States less because of their price advantage than because of their technological superiority. In any case, we do know that consumers goods are generally more responsive to tariffs and price reductions than capital goods.

The hard truth is that traditional trade policy is now at odds with the balance of payments problem and no semantic obfuscation can cancel the fact. We should not be surprised. The existing policy was born in reaction to the incongruity of high tariffs in a creditor which had no unilateral transfers abroad. It accommodated the need of foreign countries to make large payments to the United States. The policy remains; the situation has been reversed. If we are going ahead with the Kennedy round we must expect it to worsen the payments balance.

We have come very far down a very dubious path. The historic method of correcting a payments balance has been to raise tariffs and raise domestic prices. It is probably the best method of accomplishing the result--and one that is most consistent with a free price system and minimum controls. Present policy is to go in exactly the opposite direction. We are planning action that makes our balance of payments action more perilous. There are also interesting questions of priority. Are we to expand our imports of luxury automobiles, fine woolens, and other expensive European products at the same time as we limit travel freedom or redeploy troops?

The issue is eased by the time-consuming character of the negotiations. It will be some months before they begin and a considerable period thereafter before there are any cuts. This quiet but calculated delay can hold off adverse effects for some time. This I recommend as a minimum. It would limit the damage by unveiling a tariff round that must weaken us beyond what is inherent in the forming of the Common Market.

There is a strong case for suggesting that we should go in the opposite direction. Tariffs are being raised against us in Europe. We need to cut back on imports of consumer products. The logic of this situation is an offsetting surcharge on manufactured products from the Common Market Countries as the best way of getting our balance of payments turned around. Even from the viewpoint of the proponent of liberal trade, this might be the best way of righting our position promptly and with minimum damage. The long erosion of lesser measures could be worse. There would, presumably, be some retaliation by the Common Market Countries. But our farm exports to the Common Market Countries, grain especially, are on a residual basis and retribution would hurt the exporter. Machinery and equipment exports are related to the technological situation and retribution here would also hurt the buyer. However, a step of this kind is probably beyond the range of present attitudes. The psychological turn-around would be very great.

Defense Outlays Abroad

I am impressed by the efforts that the Defense Department has made to cut its expenditures abroad. I am persuaded that no further efforts should be made in this direction which seem to discriminate against military personnel. Limitation on travel by dependents and limitation on personal expenditures by the military abroad, particularly so long as nothing is done about expenditures of tourists and wealthy American residents abroad, is palpably discriminatory.

I would urge, however, that continuing and forceful attention be given to a more modern deployment of troops. It is much more important to our position to have a strong balance of payments than to have any given number of divisions in Europe. Modern airlift capacity gives us a choice which we did not have 10 years ago as to whether troops are stationed in forward positions in Europe or in the zone of the interior of the United States. We should increasingly exercise the option in behalf of stateside locations. This is not withdrawal or redeployment; rather it is an accommodation to the mobility of the modern force. Long-range combat aircraft are providing much the same opportunities for the Air Force. Our terminology should reflect this fact. The semantics are important. We should speak not of redeployment but of (say) multiple- base operations. Gains from this source will take time to realize but are obviously important.

Tourist Travel

Much attention has been paid in recent discussion to the increasing outlays for travel from $1.0 billion in 1954 to twice that amount this year, with another $400 million on foreign flag carriers. There is no chance of appreciable offset from foreign travel in the United States-- American expenditure increases $100,000,000 a year, while foreign expenditure goes up $35,000,000. Nor is there relief from the Travel America program. Both are useful but have their principal quantitative effect on the volume of wishful thinking.

To control tourist travel means to control the movement of people, with attendant political and administrative difficulty and annoyance. A tax on passports would be highly regressive. A per diem tax on days spent abroad would have a particularly adverse effect on students, artists and writers, who have the best of reasons for foreign residence. However, it would be possible to have people declare expenditures abroad on their income tax and subject outlays so declared to a surtax. This latter would be little more subject to abuse than the deductions presently allowed under the income tax. Control could be exercised in various ways, including certified and attested exchanges of money. It would exempt the low-income traveler--the person who spent less than say $750 abroad. It would reach the higher-spending traveler and would also be a device for guiding traffic to American flag carriers were purchases of tickets on such carriers excluded from the tax.

This would require new legislation. We should start work on the tax, but defer a final decision until the beginning of the next legislative year. The amounts involved are difficult to estimate. Perhaps we would do well if we checked the present increase.

Deep Tying of Aid

As a last step, and one with longer run implications, we must begin to extend aid-tying to include dollars which, in the absence of such assist-ance, would have to be spent in the United States. There is always danger of using aid for purchases that must come from the United States market and free dollars earned in American trade somewhere else. In the past, I have urged, unsuccessfully, that countries like India agree as a quid pro quo to direct an increasing proportion of their free dollar purchases to the United States. This proposal has run afoul of the liberal trade-at-any-price policy. I am now inclined to think it insufficient. Instead, we should move toward a policy of partial financing. Both project and non-project assistance abroad would be covered not 100% of dollar requirements but some specified percentage of the total. The aid, though of an equal total, would be spread over a large number of projects and purchases. Countries thus would have an inducement to direct purchases now going to other countries to the United Sates and to use dollars for this purpose. Our aid would thus become a direct inducement to dollar trade; our aid, if you will, becomes a massive but quite legitimate subsidy to our dollar trade. Other developed countries that object have the option of effecting similar arrangements. This would not bring any short-run change. It would take the balance of payments problem out of the aid program in the longer run. My judgment on this particular recommendation is not final, pending a study now being undertaken by David Bell./3/

/3/A draft memorandum from Bell to the President, October 29, prepared by Francis Bator (AID/AA/PC), comments on Galbraith's supertying proposals, but on an attached note from Frederick Simmons (AID/EXSEC) to Bell, October 30, appears the handwritten notation, "Not sent. Can now be filed. DB 2/7". (Washington National Records Center, RG 286, AID Administrator Files, FRC 67 A 1530, Balance of Payments, FY 1964)


The foregoing program is not agreeable. But I would not judge there is any part which I now propose that is insuperably difficult.

I would urge that we take a decision on four matters--the moratorium on capital exports, the administrative delay on the Kennedy round, the further military program, and the deep tying of aid--at this time. The tourist expenditure tax should be ready if the prospect still seems grim when Congress assembles. We have time on this before the next travel season. The temporary surcharge on imported consumers' goods is a drastic turn-around in policy. I have an uneasy feeling that it will still be necessary in the end, the consequences notwithstanding. Those who are troubled by it should not go too far out on the limb for, by historical standards, it is the most commonplace as well as the most certain of all the remedies available.

33. Memorandum for the Record

//Source: Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold. Secret. A slightly different version, as indicated in footnotes 2 - 10 below, was prepared as a memorandum from President Kennedy to McNamara, Dillon, Ball, Roosa, Bell, Heller, Gordon, Sorensen, Bundy, Galbraith, Kaysen, and Tobin, September 12. (Department of State, Central Files, E 1 US) This memorandum was apparently not distributed or was recalled after distribution. An undated note by "sw" (presumably Seymour Weiss (U)), attached to this memorandum, reads: "Original copy--to U--returned to Anderson, 2:20 PM, who is eager for our copies to be destroyed. G/PM copy back." Anderson is presumably Robert Anderson, Staff Assistant in U. A later version of this memorandum is summarized in Document 35.

Washington, September 12, 1963.

I found our discussions of September 11/1/ helpful, and I think we must continue to give this problem our urgent attention. As a result of yesterday's discussion I wish to make the following assignments for action and further study:

/1/No record of these discussions has been found.

1. The Department of Defense, after discussion with the Department of State, to bring forward recommendations for further savings of overseas expenditures, without diminishing our effective military strength.

2. The Treasury to examine ways of further slowing/2/ the outflow of capital including,

/2/The President's September 12 memorandum (see the source note above) uses the words "limiting further" instead of "further slowing."

a. Broadening the interest equalization tax to cover bank loans;

b. Increasing efforts to dissuade American investors from committing funds abroad,/3/ including both large-scale direct investment and large- scale purchases of foreign securities, regardless of enactment of the interest equalization tax.

/3/The President's memorandum does not include the rest of this sentence.

c. Discussing with the Western European finance ministers and central bankers at the Bank-Fund Meeting the possibilities of their taking action to slow direct U.S. investment in Europe./4/

/4/The President's memorandum uses the word "limit" instead of "slow" and adds the following sentence: "Unless I hear convincing argument to the contrary, the Secretary and Under Secretary are to indicate our strong interest in effecting such a limitation."

3. The Treasury/5/ to prepare contingency plans for all actions, including direct controls on capital movements, which might be necessary in three/6/ sets of circumstances: (a) if the interest equalization tax fails of enactment; (b) if the balance of payments fails to show adequate improvement during the early months of 1964; (c) if there should be a serious balance of payments crisis./7/

/5/The President's memorandum at this point adds the following: "in consultation with the Council of Economic Advisers and the Bureau of the Budget."

/6/Here the President's memorandum reads: "two".

/7/The President's memorandum contained no item (c). Item (b) in that memorandum reads: "if there is a serious balance-of-payments crisis in the first half of 1964."

In preparing the plans for the third/8/ contingency it may be desirable to consider what can now be done by administrative action, and to examine the possible desirability and feasibility of requests for new legislative authority concerning capital movements, suspension of the gold cover, and the like.

/8/The President's memorandum reads here: "second."

4. The Treasury, in consultation with the Council of Economic Advisers and the Bureau of the Budget, to prepare tax proposals for possible presentation to the next session of the Congress which will: (a) limit tourists' expenditures overseas; (b) provide incentives for increased repatriation of foreign earnings and decreased direct investment in Western Europe by American firms; (c) encourage increased exports. On the third item in particular, the Treasury should consult with the Department of State and Department of Commerce/9/ as well.

/9/The President's memorandum does not include the words "and Department of Commerce."

5. The Department of State, in consultation with the Office of the Special Trade Representative and the Department of Commerce,/10/ to examine the nature and timing of the probable effects of the Kennedy round negotiations on our export earnings. In connection with this, they should also examine the possibility of emergency use of temporary countervailing duties as a balance of payments measure along the lines of the Canadian action last spring./11/

/10/The President's memorandum does not include the words "and the Department of Commerce."

/11/Reference is to surcharges imposed on imports, which the Canadian Government announced on June 24, 1962. These were gradually removed in the following months, the last one on April 1, 1963.

6. The Agency for International Development to prepare an evaluation of Ambassador Galbraith's proposal for super-tying of aid./12/

/12/See footnote 3, Document 32.

7. The consultants involved--Professors Galbraith, Tobin and Kaysen--to reflect further on our discussion and give me in writing any additional views they have.

8. I should like the papers called for at the earliest possible dates in each case, and I expect to renew our discussion when enough of them are available. The usual caution about holding these discussions within the smallest possible circle applies.

John F. Kennedy

34. Memorandum From Secretary of State Rusk to President Kennedy

//Source: Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold, 8/63 - 9/63. Top Secret. The source text is undated, but a copy is dated September 18. (Department of State, Central Files, FN 12 US)

Washington, undated.


Department of Defense Proposals for Further Reductions in Balance of Payments Drain

1. Secretary McNamara has submitted his memorandum to you dealing with reduction in DOD expenditures entering the balance of payments./1/ The reduction proposed totalling approximately $380 million in FY '66 would be additive to those previously coordinated with the Department of State and subsequently approved by you on July 16, 1963./2/

/1/See Document 28.

/2/The President's approval has not been further identified.

2. It is my considered judgment that a significant proportion of these additional proposed reductions can be effectuated with some, but not undue, foreign policy risks. Since I share with you and Secretary McNamara the view that corrective action must be taken to alleviate our current gold and dollar deficit, I am prepared to concur in these proposals and to join Secretary McNamara in recommending your approval of them. These would include:

a. Return of B - 47 aircraft from the UK and Spain $37 b. Reduction in US military headquarters abroad 5 c. Reduction in foreign procurement of goods and services 103 d. Cancellation of the activation of one squadron of reconnaissance aircraft for Japan 25

Total 170

In connection with these items I have requested that when the Department of Defense has developed specific, detailed, country proposals, they be submitted to the Department of State so that the timing and tactics of their implementation may be carefully coordinated.

3. With regard to the remainder of the proposals, specifically those involving major redeployments of aircraft from Europe back to the US, substantial reductions in our ground forces in Europe, withdrawal of our two divisions from Korea, a reduction in foreign procured POL, particularly from Venezuela (all of which would realize a net balance of payments savings of approximately $210 million), I have concluded that our basic national security posture and foreign policy interests would be so seriously jeopardized through their acceptance that I recommend that they not be approved.

4. In brief summary, my reasons are as follows:

a. Whether or not the military risks involved are deemed acceptable, the magnitude and nature of the adjustments will raise immense political problems which no amount of effectively devised and assiduously implemented diplomacy and public relations will be able to contravene.

b. Our European Allies, some of whom are critically examining our every move for signs that the recent initiation of East-West negotiations is in fact to be at the expense of our commitment to the Western Alliance, will read into the major adjustments a first step in US disengagment from Europe. Particularly if the Soviet Union, independent of our actions, effects certain force withdrawals from the Satellites (this is predicted in some quarters) the notion of US - USSR collusion will be even more difficult to confront. Whatever intrinsic military strength and protection is provided by the US forces stationed in Europe, the major significance of this deployment has always been associated with the symbolic, but nevertheless real and unequivocal commitment of the US to involvement in any future aggression in Europe. Though large forces would remain after this withdrawal, the magnitude and nature of the proposed reductions (over 50% of US air forces, 15% of US ground forces amounting to 100,000 US military personnel and dependents would be withdrawn from Europe alone) coming at this time, would prove to many that this was the forerunner of future additional withdrawals, perhaps based upon explicit or implicit agreement with the Soviet Union. It would confirm the DeGaulle thesis that Europe, in the last analysis, cannot rely for its security upon alliance with the U.S. Moreover, recalling the violent FRG reaction to the projected reduction of 600 men in the Berlin garrison, as sweeping a series of force adjustments as proposed in the DOD memorandum, can be expected to ignite anew German doubts and suspicions with dangerously unpredictable consequences.

Even if technical military arguments can be adduced to support the moves, such as the longer range of the F4C aircraft, they will not be politically persuasive.

There are, in addition, two special circumstances connected to the European force adjustments which require separate consideration:

(1) With regard to the aircraft withdrawals, it is possible that SACEUR and our Allies would consider redeployment back to the US as inconsistent with the effective fulfillment of the commitment of these forces to NATO. Should this eventuate, it would represent the first time in the history of the alliance that the US abrogated its previous commitment to meet specified NATO force requirements.

(2) With regard to the 30,000 ground troop removal, as well as with regard to the aircraft redeployment, the US would be accepting a degradation in its capacity to respond immediately with fully effective forces to an enemy attack unless it was preceded by a considerable period of warning and mobilization time. While such an adjustment may or may not eventually prove to be militarily advisable, it represents a significant shift in our past position vis-a-vis our allies. It represents at least partial acceptance of a need for greater reliance on nuclear weapons, a view the US has consistently fought, and thus warrants very careful study before adoption as US policy. Indeed, if adopted on the basis of what appears to be a fiscal rather than military motivation, it may well prove doubly unsettling to our allies. It could, moreover, lead to increased pressure on their part for more nuclear weapons.

c. In the Far East, removal of additional fighter aircraft will compound the delicate negotiating problem we are already seized with in relation to the previously proposed aircraft reductions. However, the additional number of aircraft to be removed (from Japan and the Philippines) are relatively so limited in number that the problems involved should be politically manageable. The same cannot be said for the Korean proposal.

The present junta government in Korea contains untrustworthy elements some of which may be pro-Communist, and we would find it hard to maintain the UN command, and its authority, if we withdrew our divisions. Military rule has introduced factionalism into the ROK command. The UN command is needed to moderate that factionalism; we dare not increase the risk that important elements of the ROK armed forces may fall into armed conflict against each other. Moreover, we must be able to use fullest possible United States influence to prevent ROK forces from being used to perpetuate military rule if it becomes apparent that the populace would revolt rather than accept it. Our two divisions and the United Nations command give us opportunities for exercise of control at the 38th parallel we cannot afford to surrender. Otherwise the present or prospective ROK leadership might, advertently or inadvertently, get into a border clash with the Communists. Alternately, a tempting opportunity might be presented to North Korea if ROK forces fell to fighting each other or the civil populace. In either situation, especially if accompanied by indications of possible Chinese Communist intervention, we might well, [2 lines of source text not declassified] risk their being overrun while we tried to evaluate what might be an obscure situation.

Moreover, [2-1/2 lines of source text not declassified] our position in Japan (given Japanese aversion to nuclear weapons, this policy adjustment could trigger a major reassessment of Japanese policy toward the US), the Far East in general and other areas of the world populated by the colored races, could be substantially undermined.

The Department recently made a thorough study of the proposal to remove the two US divisions from Korea, summarizing its analysis and conclusions in a letter to the Chairman of the Joint Chiefs of Staff. I commend this document to your attention as a means of gaining a full appreciation of the complex series of issues which the proposal raises. (Attachment A)/3/

/3/Not attached and not found.

d. I have similarly taken exception to that portion of the proposed DOD reduction in procurement of foreign POL which would probably fall within the Caribbean, specifically on Venezuela. It will take full measure of our very best efforts to forestall the political instability, which typifies the Venezuelan problem, from turning into complete chaos. A reduction in revenues from US purchases of Venezuelan oil exports is bound to be highly destructive of the accomplishment of our objectives.

e. Moreover, the magnitude of balance of payments savings which would be realized from effecting these decisive retractions in our military power, particularly in Europe and the Far East, would represent less than 1/10th of the annual current gold and dollar deficit. In the case of Korea, for example, the military budget savings would be almost fully offset and the gold savings partly nullified by requirement for additional US foreign aid without which the Korean economy could not survive. In the context of sharply constricted aid appropriations this could become an acute crisis. Thus, in this as well as other areas the risks involved are out of all proportions to the prospective savings.

5. Recognizing that there is no easy solution to the difficult balance of payments problem which we currently confront, I would far rather accept the adverse foreign policy consequences of taking certain actions in the non-security, fiscal and monetary fields. These actions which have been previously studied by the Balance of Payments Committee would at least have the virtue of making a far more substantial dent in the existing problem.

Accordingly, I have instructed my staff to prepare detailed programs for pursuing our balance of payments savings operations in these areas, along with a time schedule for implementation. I would propose to provide this for your consideration within thirty days, as an alternative to acceptance of those portions of the DOD proposal which I have discussed in paragraph 4. above.

Also, though my preliminary review has cast doubt upon the utility of removing one of the two divisions from Korea, I would be prepared to join in a thorough State - Defense study of the advantages and disadvantages of taking such an action. Since the balance of payments savings to the US Government of removing our forces from Korea is likely to be relatively negligible (as noted previously) the delay occasioned by a careful examination of the security policy implications of a one division withdrawal would not adversely prejudice our efforts to rectify the balance of payments imbalance.

6. Pending submission of the fiscal and monetary program proposals referred to in paragraph 5. above, I feel I would be derelict in my responsibility to you if I did not advise you that, in my considered judgment, the implementation of the DOD proposals alluded to in paragraph 4. above would be the gravest sort of mistake, fraught with adverse political and psychological consequences, perhaps out of all proportion to the intrinsic military significance, but, nevertheless, carrying a real danger of jeopardizing our entire existing national security posture.

Dean Rusk/4/

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

35. Editorial Note

On September 19, 1963, President Kennedy sent a memorandum to Secretaries Dillon and McNamara, Ball, Roosa, Bell, Heller, Gordon, Sorensen, Bundy, Galbraith, Kaysen, and Tobin. This was an abbreviated version of the President's memorandum for the record, Document 33. The September 19 version essentially reproduced paragraphs 1 and 2 ending with the word "capital". Paragraphs 2a, 2b, 2c, and 2d were omitted entirely. Paragraph 3 was revised as follows: "The Treasury, in consultation with the Council of Economic Advisers and the Bureau of the Budget, to prepare tax proposals for possible presentation to the next session of the Congress on a number of topics, including the encouragement of increased exports. On increased exports, the Treasury should consult with the Department of State and the Department of Commerce."

Paragraph 5 in the September 19 memorandum ended with the word "earnings." The second sentence of this paragraph in the President's memorandum for the record was omitted entirely. Paragraphs 6 - 8 were identical to those in the memorandum for the record, and a ninth paragraph was added as follows: "A more detailed record of the meeting and of my views is available in Mr. Bundy's office to those who participated in the discussion of September 11." (Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold)

36. Draft Memorandum From Secretary of Defense McNamara to President Kennedy

//Source: Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold, 8/63 - 9/63. Top Secret.

Washington, September 19, 1963.


Reduction in Department of Defense Expenditures Entering the International Balance of Payments

On July 16 you approved a series of actions designed to reduce annual military expenditures abroad by $305 million between FY 63 and FY 66./1/ At that time you asked that we consider additional actions to achieve further reductions. It is the purpose of this memorandum to list a series of moves which, if approved, will reduce annual military expenditures abroad by an additional $339 million. The total reduction in annual expenditures, between FY 63 and FY 66, will then amount to $644 million as shown in the table below.

/1/See Document 28. The President's approval of the recommendations has not been further identified.

($ million)

Original Revision Revision Plan of 7/16/63 of 9/19/63

FY 63 $2,739 $2,739 $2,739 64 2,686 2,671 2,671 65 2,700 2,506 2,376 66 2,698 2,434 ($305) 2,095 ($644)

To achieve the further annual reduction of $339 million, it will be necessary to:

Estimated Annual Foreign Ex. Saving/2/ Action ($ million)

/2/Next to the figures in items 1 a and b, 2 d, 4, and 6 a - c and e below is a handwritten "n" for "no." These markings do not agree in every case with the decisions detailed in the memorandum for the record, Document 37.

1. Return the 80 B - 47 a/c from Europe to the U.S. by 4/1/65, fifteen months earlier than planned. By that date the U.S. missile force will be about three times what it is today.

a. From Spain to the U.S.: 40 B - 47 a/c $16.0 b. From the U.K. to the U.S.: 40 B - 47 a/c 21.3

2. Plan "multi-base" operations for selected fighter squadrons. The home bases of such squadrons would be transferred from the theaters to the U.S. Periodic "movement exercises" will be scheduled during which the squadrons will move from their home bases in the U.S. to their "forward bases" in the theaters.

a. From France to the U.S.: 3 squadrons (48 a/c) 20.6 b. From Germany to the U.S.: 4 squadrons (135 a/c) 21.7 c. From the U.K. to the U.S.: 7 squadrons (168 a/c) 32.4 d. From Japan to the U.S.: 1 squadron (18 a/c) 24.8

3. Reduce U.S. and Korean forces in Korea as recommended by the Chiefs (see Appendix A) and adjust MAP accordingly. 65.0

4. Reduce U.S. Army logistical forces in Europe by an additional 30,000 (15,000 by 7/1/64 and 15,000 more by 7/1/65). Do so by such means as reorganizing depots on functional lines and returning to the U.S. units required in Europe primarily for post-M-Day operations. USA- REUR's strength would then total approximately 205,000. 45.0

5. Reduce by 15% U.S. personnel in U.S. military headquarters abroad. 5.0

6. Reduce foreign procurement of goods and serv-ices as follows:

a. Cut employment of foreign nationals by an additional 10% to a total of approximately 180,000 personnel. 40.0 b. Cut the foreign exchange cost of construction to $70 million in FY 66. 15.0 c. Reduce the foreign exchange cost of contractual services by an additional 4%. 15.0 d. Reduce the foreign exchange cost of petroleum to $200 million, an additional reduction of 15-20%. 35.0 e. Miscellaneous reductions. 18.0

Total Annual Saving FY 67 and Beyond $374.8/3/ Less: Amount Not Applicable to FY 66 35.1 Estimated Saving in FY 66 $339.7

/3/Next to this figure is a handwritten "$170.0 n."

A summary of U.S. Defense Expenditures and Receipts Entering the International Balance of Payments, after taking account of the proposed actions, is presented in Table 1. The current and proposed deployments of U.S. Air Force fighter aircraft in Europe and the Pacific are shown in Table 2./4/

/4/For Tables 1 and 2, see the Supplement.

I do not believe the proposed force redeployments will weaken significantly our ability to respond to Communist aggression. The increase in the procurement of Army equipment, airlift aircraft, and fighter aircraft, and the increase in the ferry range of such aircraft have greatly increased our ability to deploy both air and ground forces from the U.S. to theaters of operation within a period of strategic warning.

In order to demonstrate the increased mobility of our forces, we expect to conduct in October a strategic mobility exercise ("BIG LIFT") involving the deployment to Europe of an armored division and a composite air strike force. The armored division and support unit personnel will exercise with equipment already prepositioned in Europe and participate in a NATO sponsored field training exercise. The exercise will serve to test our system and to demonstrate dramatically our redeployment capabilities to our Allies and to the Soviets. We would expect periodically to undertake similar movements to the Far East. I anticipate that by the end of FY 65 we will be able to move over 200 combat-ready tactical fighters to Europe in three days.

I have consulted the Joint Chiefs of Staff with regard to the military acceptability of these measures. Their views are as follows:/5/

/5/The views of the Joint Chiefs of Staff were not included in this draft memorandum.

I recommend that you approve actions 1 through 6, and that the Secretaries of State and Defense be directed to develop and implement detailed plans for carrying out the program.


37. Memorandum for the Record

//Source: Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold, 8/63 - 9/63. Top Secret. Drafted by Bundy.

Washington, September 23, 1963.


Meeting on Defense proposals for further reductions in balance of payments drain, September 19, 1963, 4 PM

Present: The President, Secretaries Rusk, McNamara, Ball and Gilpatric, Mr. Bundy

The President approved the Defense Department's proposals stated in the Secretary of Defense's draft memorandum of September 19,/1/ but with the exception of those items which were disapproved by the Secretary of State, and with the restoration of $20 million in foreign exchange petroleum costs which the Secretary of Defense undertook to save in another area than that of Venezuela. The reductions approved therefore total $190 million and include items 1, 2d, 5 and 6 in the Secretary of Defense's memorandum.

/1/Document 36.

It was agreed that the Department of Defense would develop specific, detailed, country proposals for these reductions and that they would be submitted to the Department of State so that the timing and tactics of their implementation would be carefully coordinated between the two Departments.

The President also indicated his desire that a political base be established which would make it possible at some later stage to reconsider the disapproved actions, and he particularly indicated his desire to be in a position to approve actions 2a and 2c. He did not indicate that he would expect to approve item 3 at any time in the near future, but he agreed to further review of this matter.

Because of the sensitivity of this topic, only the most limited distribution of this memorandum is being made in a single copy to each officer present, but the Departments may use the first two paragraphs of this record in communicating necessary information to others as to present discussions.

Pending the development of a strong plan for the establishment of the necessary political base, knowledge of the President's further desires should not be communicated except on the most urgent need-to-know basis, and in no case in writing.

McGeorge Bundy

38. National Security Action Memorandum No. 270

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

Washington, October 29, 1963.

TO The Secretary of State The Secretary of Defense Chairman, Joint Chiefs of Staff


Meeting with the President, Thursday, October 24, 10:30 a.m., in the Cabinet Room, on European Matters

1. Based on Secretary Gilpatric's summary of recent Presidential decisions concerning the redeployment of US military forces from Europe and the schedule for implementing the approved actions, the President reaffirmed that:

a. Possible redeployments of US forces under consideration within the government should not be discussed publicly nor with our allies until a decision has been made and a politico-military plan for action approved. Following these steps, we should consult as appropriate with our allies before any public announcement is made, and then proceed with our intended actions. Wherever possible, action of low visibility should be taken without public announcement.

b. The United States will maintain in Germany ground forces equivalent to six divisions as long as they are required, and this policy is to be reaffirmed by Secretary Rusk in Frankfurt./1/

/1/Reference is to Secretary Rusk's visit to Frankfurt, Germany, to dedicate a memorial to General George C. Marshall on October 27.

2. The following actions were approved by the President, to take place under the above guidelines.

(1) The three C - 130 squadrons permanently stationed in France will be returned as scheduled; two squadrons will be maintained in France on rotation.

(2) US Army lines of communication forces in France will be reduced by approximately 5400 as scheduled.

(3) The inactivation of the Lacrosse and 280mm gun battalions will proceed as scheduled.

(4) A plan for the further reorganization of the Army's European logistics forces, entailing an additional reduction of about 30,000 personnel over the next two calendar years, will be developed by the Department of the Army for review by the Joint Chiefs of Staff and the Secretary of Defense.

(5) The specific 10% reduction in headquarters staff of 7th Army and USAREUR and the over-all 15% reduction worldwide in headquarters staffs (which may involve further adjustments in Headquarters, 7th Army, and USAREUR) will go forward as scheduled.

(6) The President approved the return to the United States, commencing early in 1964 and to be completed within FY 1964 with the minimum explanation practicable, the six Berlin "Roundout" units consisting of three artillery battalions, two armored battalions, and one cavalry regiment, with its support units. The schedule of this action and the manner of disclosure to the FRG were left for later decision by the President.

(7) The redeployment of the second Long Thrust battle group will not be discussed until January, although planning should go forward for its probable return to the United States in early spring.

(8) B - 47 units will be withdrawn from Spain and the United Kingdom as scheduled by the spring of 1965. The President reaffirmed this decision after being informed that although the Joint Chiefs of Staff recommended against this action the Deputy Secretary and the Secretary of Defense strongly supported it.

(9) The President approved in principle the proposal to withdraw three fighter squadrons from France and seven fighter squadrons from the UK by the end of FY 1966. Defense should urgently prepare, in connection with State, a plan of action to carry this out, with an estimate of the political and military problems (including the views of the Joint Chiefs of Staff) involved for final approval of the President before any implementation.

3. On the basis of the above guidelines and decisions, section IV of Secretary Rusk's draft speech for Frankfurt on 27 October was reviewed and appropriate modifications were made. The President approved the attached revised draft./2/

/2/Not attached. Text of Secretary Rusk's address is in Department of State Bulletin, November 11, 1963, pp. 726 - 731.

4. At the conclusion of the meeting, the President set forth the following rationale for use by US officials publicly, with the guidance that it should be used only as required, and only in such detail as is necessary.

a. The United States intends to keep the equivalent of six divisions in Europe as long as they are required. The United States will continue to meet its NATO commitment.

b. Operation Big Lift should be viewed as an example of our ability to add rapidly additional forces to Europe. Were it a replacement division, it would use the equipment of one of the divisions now in place. Instead, it is using one of the two division sets of equipment prestocked in Europe. In reality, the US thus will have over seven divisions in Europe over the next month or more.

McGeorge Bundy

39. Memorandum From Secretary of the Treasury Dillon to President Johnson

//Source: Kennedy Library, Dillon Papers, Memos to President, 1963. Limited Official Use.

Washington, December 2, 1963.


Report on the Balance of Payments

At the time of the inauguration, the dollar was under heavy pressure as a result of three successive years of heavy balance of payments deficits and the heavy gold losses which occurred in the fall of 1960 and continued during the first three weeks of 1961.

We were faced with two necessities, both serious, but one far more acute than the other. The first and most acute necessity was to reestablish confidence in the value of the dollar and thus put an end to the heavy losses of gold. The second necessity was to devise a program that would lead as rapidly as possible to the achievement of balance in our payments. It was recognized from the beginning that this second objective could only be achieved over a period of several years, but it was also recognized that steady and observable progress was necessary if confidence in the dollar was to be maintained.

We have had marked success in achieving our first objective, the restoration and maintenance of confidence in the dollar. However, while progress has been made toward our second objective, the achievement of balance in our payments, it has not as yet been adequate, and more rapid and sustained results are now necessary. Fortunately, there are reasonable indications that programs presently underway can bring us the improvement we need.

The restoration of confidence in the dollar involved convincing the world of our determination to maintain the gold value of the dollar at $35 an ounce, and to end our payments deficits. In providing protection for the dollar we have created a whole series of new financial tools and mechanisms, designed to offset speculative surges and conserve our gold stock.

Among these were:

1. The establishment of close cooperation between the Treasury and Federal Reserve on the one hand, and European Finance Ministries and Central Banks on the other.

2. Currency swap arrangements with foreign Central Banks which now total $2 billion.

3. The informal London gold pool that has prevented undue speculation in gold and served to channel gold to Central Banks in an orderly manner.

4. Medium term, i.e. 2 year, borrowings by the U.S. in foreign currencies to avoid conversion of unwanted dollars into gold.

5. Establishment of the $6 billion borrowing arrangements in connection with the International Monetary Fund, primarily so as to strengthen its ability to defend the dollar against speculative attack.

6. Inauguration of a study by the Group of Ten, i.e. the countries party to the IMF borrowing arrangements, to determine what, if anything, can or should be done to further strengthen the functioning of the international monetary system. Under Secretary Roosa is chairman of this study group which held its first meeting in early November and is expected to report to a meeting of the Ministers of the Ten next summer. I am attaching a fuller description of the Committee's work and objectives, prepared by Mr. Roosa.

We have had two programs to improve our balance of payments both contained in Presidential Messages to the Congress, one in February 1961, and the second in July 1963./1/ The February 1961 program involved stress on export expansion, the creation of a new system of export insurance comparable to those in use abroad, the establishment of strict buy-American policies for our foreign aid program and our military forces overseas, the shoring up of short-term interest rates to check outflows of funds, and an attempt to moderate the outflow of direct investment through the removal of tax incentives to investment overseas. Our efforts in the tax field were only about 50 percent successful as Congress refused to adopt our entire tax package. The investment credit and the 1962 depreciation reform were also part of this program since they were designed to improve our competitive position by speeding up modernization of plant and equipment. They have been helpful in this regard but tax incentives to new investment are still somewhat greater overseas than in the United States.

/1/See Documents 2 and 29.

By early 1963, it became obvious that the 1961 program was not adequate and that further steps would have to be taken. Our hopes for increased exports had not been realized, the Berlin augmentation of our military forces in Europe had offset the savings made by Defense in their Buy- American program, and Congress had only accepted half of our tax program on direct foreign investment.

Consequently, early last spring a study was undertaken of ways and means of further reducing overseas government expenditures. The Treasury also initiated studies of methods of restraining the outflow of portfolio capital which had started to reach alarming proportions. The result was the July message.

In this message, the President reiterated the importance of export expansion, suggested a "See America Now" program for 1964 to make travel at home a more appealing alternative to foreign travel, announced that the United States had arranged a standby facility with the IMF for up to one-half billion dollars, announced that the rate of Federal overseas expenditures would be reduced by $1 billion by the end of 1964, and proposed the Interest Equalization Tax./2/ This tax is designed to increase the cost to foreigners of raising money in our markets by 1 percent a year. A new program to stimulate foreign purchases of U.S. securities was also announced.

/2/Additional documentation on preparations for legislation for an Interest Equalization Tax is in Washington National Records Center, RG 40, Secretary of Commerce Files: FRC 68 A 5947, Correspondence: Secretary Hodges; and ibid., Treasury Department.

Finally, the Federal Reserve raised the rediscount rate to 3-1/2 percent from 3 percent. This action has brought our short-term interest rates into approximate balance with those abroad and was the culmination of a two-year joint Treasury - Federal Reserve effort to raise short-term interest rates while maintaining the availability of credit and avoiding upward pressure on the long-term rates that are so vital to domestic economic progress. Short-term rates are now about 1-1/4 percent higher than in early 1961, while long-term corporate and municipal rates have changed little, if at all, and mortgage rates have actually declined by an average of 1/2 of 1 percent.

Last summer's increase in short-term interest rates and the proposed Interest Equalization Tax brought sharp improvement in our third quarter figures. The third quarter produced the best results of any quarter since 1957. This improvement is being relatively well maintained so far this quarter. Nevertheless, 1963 will show little, if any, improvement over 1962 because of the heavy capital outflows during the first half of the year.

For the future it is essential that the $1 billion annual saving in government spending overseas be achieved as scheduled by the end of next year. If at all possible, and I believe it is, the target should be exceeded. It includes $300 million in defense savings overseas which involve numerous redeployments of service and air force combat units. When approving this program, President Kennedy asked Secretary McNamara to develop recommendations for an additional $300 million in savings. This further program has now been under discussion between State and Defense and with the Joint Chiefs for some months. It should soon be possible to reach firm Presidential decisions on this program. Most of the redeployments involved in the July program will take place either late next spring or next fall, so their full effect will not be felt before 1965. Because of the long lead times involved it would be helpful if early decisions could be reached on the additional $300 million program requested by President Kennedy.

Redeployments do not involve combat forces in Germany because Germany is currently fully offsetting the dollar cost of our forces in Germany by the purchase of U.S. made military equipment.

Present indications are that 1963 balance of payments results will approximate those of 1962--a deficit of about $3.5 billion before accounting for debt prepayments or other special intergovernmental \ transactions designed to hold down the final total. After all such transactions, 1963 should approximate the $2.4 - $2.2 overall level of 1961 and 1962.

Assuming enactment of the Interest Equalization Tax and continued vigorous action to hold down dollar expenditures abroad, 1964 should witness a substantial improvement and 1965 could well see the deficit on regular transactions brought down to the neighborhood of $1 billion from the current $3.5 billion.

In short, the balance of payments problem is many faceted and requires constant attention on many fronts. However, the combination of the 1961 and 1963 programs, plus such further savings as may prove possible in the defense area, now appear to be adequate to bring very substantial improvement over the course of the next year.

The likelihood of these future gains may be foreshadowed by the relative improvement in our gold position that is taking place this year. It now looks as if our 1963 gold loss will only approximate $500 million, compared to $890 million in 1962, $857 million in 1961, and $1,703 million in 1960.

Douglas Dillon/3/

/3/Printed from a copy that indicates Dillon signed the original.


[End of Section 3]

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