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

[Section 5 of 18]

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

//Source: Kennedy Library, National Security Files, Kaysen Series, Balance of Payments, Bank Fund Meeting. Secret.

Washington, September 18, 1962.

1. On Thursday/1/ you will be having lunch with the Finance Ministers and Bank Governors of the Paris Club./2/ The list is attached at Tab 1./3/ As you will remember this was a joint suggestion of Dillon and Ball. The main idea of having this luncheon was to talk to these people personally about the underlying cause of the deficit in our balance of payments, namely, our disproportionate share of the defense and aid burdens for the whole free world. These people have heard the song before but never in a way which would give them a real feeling of how central it is to your thinking. This is something that you can convey directly in a way no one else can. There follows a sketch of some of the points you might make. These points have been cleared with Ball, and they are quite similar to those which Dillon would ask you to make independently, which are shown at Tab 4, with the exception noted in paragraph 2./4/

/1/September 20.

/2/Also known as the Group of Ten.

/3/None of the tabs is attached or has been found, but see footnote 4 below.

/4/Tab 4 may be the same as Document 61.

2. You should refer again, as you do in your speech,/5/ to the supplemental resources agreement of the IMF Paris Club and how we welcome it. Since these men represent the nine contributing countries other than ourselves, direct expression of U.S. appreciation is appropriate. You may want to say something here about the question of further developments in the international monetary field, in addition to what is in your speech. If you do, it could be along the lines of recognition that the expanded economic strength of other countries in the Free World could properly be reflected in their expanded role in the international monetary system. We recognize the fact that there is more than one way the system might evolve in relation to the central role of the dollar, and we do not foreclose consideration of alternative schemes of improvement for the payments system. (Note: Secretary Dillon would not welcome such a statement. It would mean your taking a public position on the issue of whether we are or are not committed to maintain the dollar as a major international currency in the long-run.)

/5/Regarding President Kennedy's speech to the Boards of Governors of the World Bank and the International Monetary Fund on September 20, see Document 62.

3. A few figures. Our deficit last year was $2.5 billion. This year, as Dillon will have said in his bank speech, we expect it to be somewhere in the neighborhood of $1.5 billion. Set against this a net military expenditure abroad (after receipts from military sales and other offsets) of $2 billion, and untied aid expenditures which have been running over $1 billion, which we hope to get down below $1 billion this year. Thus, more than the whole of our deficit arises from military and aid expenditures.

4. It is worth noting that our military expenditures involve gross payments abroad in the neighborhood of $3 billion. Two-thirds of these payments are in the NATO area where all your auditors, except the Japanese, come from. The Swedes, although neutral, are just as much beneficiaries of these expenditures as the members of the NATO Alliance and they know it. By comparison, NATO members undertake very little in the way of foreign military expenditures except for the UK, other than those connected with offset purchase arrangements with us. We will try to reduce these expenditures to the extent that they do not impair the common security. However, we cannot reduce them substantially unless someone else picks up more of the burden. This is especially true in the NATO area. At Tab 2 are attached estimates of the military budgets of the NATO countries and the portion reflecting foreign expenditures by them. The only substantial figure, besides that of the UK, is the German, and that reflects chiefly the military sales agreement with us. Also attached are the figures that Secretary McNamara gave to General Eisenhower about German military strength and expenditures at your suggestion. These figures do not of course reflect the substantial internal burden of our defense costs, which are likewise high in relation to those of our allies.

5. The European countries tend to be more critical of our aid expend- itures than of our military expenditures. Sometimes they have viewed them as reflecting American notions which are not really their concern. It is important to make the point that aid expenditures are security expend-itures in behalf of the free world just as much as military expenditures are. There may well be differences of view about transactions with particular countries and criticism has tended to focus on these, but by and large the rest of the world is recognizing that aid is in their, as well as our, security interest and begin to join in bearing the burdens. They have understandably in the last years focussed their efforts on their own reconstruction and their own economic progress. Now that they are making such striking success even though we have tied their aid for a year, we are still more liberal in this respect than any other donor. The $1 billion of untied aid that we continue to give out of our total aid budget of nearly $5 billion is larger absolutely and proportionately than the untied aid of other national donors combined, excluding the International Bank and affiliated institutions.

Further, in the 2-1/2 years since our governments agreed to increase capital flow to the less-developed countries through DAC (of which Sweden is not a member), although the total flow has increased, the share of the U.S. has increased rather than decreased.

The Europeans sometimes view aid as merely trade promotion. This is more true of their aid than it is of ours, since most of their aid loans are for short-terms at high rates. In these circumstances we cannot continue to extend long-term, low-rate loans, since in effect our aid is merely used to repay their loans. It is important for this to be recognized and for the terms of their loans to move closer to ours. In rejecting the notion that our aid is merely trade promotion, you might point out that we have a substantial export surplus on commercial account, excluding any AID- financed exports. It was about $3 billion last year.

6. We have borne the burden because we think it is in the interest of free world security; we know that our own security is intimately tied up with that of other major nations in the free world but they must recognize the converse relation. They must remember that during the period when they were unable to make any contribution we willingly carried the whole load alone. Just with respect to the six common market countries and the UK, we have extended in the past a total of $33 billion worth of foreign aid since 1946 (see Tab 3, which breaks these figures down by categories and countries). (It is worth noting that since more than half the aid was extended before 1950 when prices were substantially lower than they are now, this total would be more than $40 billion in current prices.) In addition to this sum, we have disbursed a larger amount (about $55 billion) to the rest of the world over the same time period. We do not remind others of this in order to earn their gratitude, but simply to point out that we bore the responsibility when we could, and if others do not join when they can and we no longer can do it all, our common security will be impaired.

7. The conclusion to be drawn from all this is that while both continued strong effort by the U.S. directed at reducing unnecessary overseas expenditures by the government and promoting exports and further strengthening the international payments machinery in train the problem of the U.S. balance of payments reflects fundamentally the problem of political responsibility in the free world and cannot be considered independent of that problem.

Carl

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

//Source: Kennedy Library, Dillon Papers, Memos to President, 9/62 - 10/62. Confidential. Attached to the source text is a memorandum from Evelyn Lincoln to Dillon, September 20, indicating that the President had read Dillon's memorandum and approved his proposal.

Washington, September 18, 1962.

SUBJECT

Your speech to the IMF Board

As I informed Mr. Sorensen, I feel strongly that any reference in your speech to our readiness to discuss new initiatives in the monetary field would be most dangerous for the dollar at the present juncture. This is not a question of substance but one of psychology. At the invitation of Giscard d'Estaing, we have agreed to meet confidentially in Paris during October with the French, the British, the Germans, and possibly the Italians, in order to examine the possibilities for further cooperative steps.

My reasons for recommending against any mention of our willingness to study new proposals are two-fold: First, the general theme of the IMF meeting, very effectively expounded by Per Jacobsson in his opening address, is that the present international monetary structure is strong and capable of weathering any shocks. This line will be taken by everyone, except for the British, and will be just the opposite of the situation last year at Vienna when talk was necessarily centered on the need to strengthen international monetary institutions because of the weakness of the dollar. Since the British are the only ones indicating the need for further steps at this time, your statement could be misinterpreted as indicating a measure of support for the British proposals. Our analysis of these proposals is that they are extremely dangerous for the dollar. This view is shared by those continental European officials to whom the British have confided the general outlines of their scheme. In short, it seems to us that the British proposals fit in very well with the constant, long-term effort by the United Kingdom to undermine the dollar and force its eventual devaluation. For this reason, we should clearly not appear to support Maudling's ideas.

My second objection relates to the immediate future. A statement by you that we are prepared to study new ideas and welcome new initiatives would in all probability be misinterpreted by the speculative community in New York and Switzerland as indicating a lack of confidence on your part in our ability to handle our balance of payments problem within the framework of the existing monetary system. This could have dangerous and immediate effects this fall. If such a public statement by you should be interpreted in this way, it could well lead to a further run on the dollar similar to those that took place last October and November after the Vienna meeting, and last July after the Canadian crisis. The experience of these two incidents indicates that such runs bring with them the loss of $250 million or more in gold.

The best we could hope for if a statement regarding our readiness to study new initiatives were included in your speech would be that it be looked on as an innocuous statement of readiness to consider any serious proposals put forward by others which naturally would always apply to the United States in its international relations. If this should be the interpretation put on the statement, it would do no harm, but neither would it accomplish anything, since there are no proposals being talked of except for those put forward by the British. On the contrary, if it were taken as a serious desire on our part to explore further new approaches at this time, it would carry with it all the dangers mentioned above. For this reason, I strongly urge that you omit any such statement from your speech.

Douglas Dillon/1/

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

62. Editorial Note

From September 17 to 21, 1962, the annual meeting of the Boards of Governors of the International Bank for Reconstruction and Development (including the International Development Association and the International Finance Corporation) and the International Monetary Fund took place in Washington.

Regarding Adlai Stevenson's support for a proposed U.S. initiative to increase contributions to the International Development Association by $3 billion at the meeting, see Document 201. The Department of the Treasury initiated this proposal, but Under Secretary of State Ball strongly opposed any specific U.S. commitment at the time. Memoranda of Ball's telephone conversations with Carl Kaysen on strategy for the upcoming meeting, including the proposed contents of President Kennedy's speech to the meeting, are in Department of State, Ball Papers: Lot 74 D 272, AID 1961 - 1963, 5(2) and ibid., IMF 1961 - 1963, 7(2). Position papers and other documentation on the meeting are ibid., E Files: Lot 64 D 452, United States Delegation Annual Meetings, Board of Governors, IMF - IBRD - IFC - IDA.

Under Secretary of State Ball spoke to the Governors on September 18. For text of his speech, see Department of State Bulletin, October 15, 1962, pages 575 - 582. In his address to the Governors on September 20, President Kennedy only briefly mentioned that "this country supports the proposal that the [IDA] executive directors develop a program to increase its resources." Most of his address emphasized the importance of the dollar as an international currency and the U.S. efforts, including bringing its international payments into balance, to maintain the strength of the currency. Text of his address is in Public Papers of the Presidents of the United States: John F. Kennedy, 1962, pages 691 - 694.

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

//Source: Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold, 6/62 - 3/63. Limited Official Use.

Washington, November 14, 1962.

SUBJECT

October Developments in the Balance of Payments Deficit/1/

/1/In a November 14 memorandum to Dillon, President Kennedy asked whether "the October loss of dollars indicates to you that we must take more drastic steps comparable to those that Canada took in the spring. Would the various steps that Canada took in the spring have an adverse effect on the economy. If not should we consider any of them." The President added that in any event he would discuss this with Chancellor Adenauer that afternoon. (Kennedy Library, Dillon Papers, Memos to President) Regarding Canada's efforts to improve its balance-of-payments position, see footnote 11, Document 33.

On the basis of very early indications, our over-all payments deficit increased very substantially in October, by about $900 million, of which $56 million represented gold losses.

This very large deficit, without seasonal adjustment, is in sharp contrast to the third quarter deficit of about $725 million, and to the deficit for the first nine months of the year of $1.5 billion, without any seasonal adjustment. Debt prepayments in the first nine months were about $550 million, with most of this in the third quarter.

These unusually large figures in October are believed to be due primarily to transactions with Canada which may have accounted for as much as $600 million of the October deficit. The figures reflect special fiscal year-end window dressing operations by the Canadian banks of which about $180 million returned to the U.S. during the first week of November.

It has been estimated that the Canadians lost about $600 million to the United States in the first half of the year. About $400 million of this was reversed in the third quarter. It is likely that the bulk if not all of the remainder of the earlier loss was reversed during October.

The Canadian government also borrowed $125 million during the month from U.S. insurance companies on a long term basis and apparently attracted some short-term capital from the U.S. for investment purposes.

As a result of this strengthened position, Canada yesterday reduced her Bank rate from 5% to 4%. It had been raised as high as 6% at the time of the currency crisis last June. This action should be helpful in reducing the incentive for short-term flows to Canada.

Other major transactions in October, outside of Canada, included the following: an increase of about $100 million in the official reserves of France and Italy, payments of $75 to $100 million to Venezuela for taxes and royalties by U.S. oil companies, a cash subscription of $30 million from the U.S. Government to the Inter-American Development Bank, sales of about $20 million in Australian bonds to American purchasers, and approximately $30 million movement of short term funds to the United Kingdom in the last few days of October.

Estimates of the basic deficit for the third quarter will not become available for several weeks. During the first half of the year, the basic deficit was less than $300 million, seasonally adjusted.

From January 1 through November 7, we now estimate the over-all deficit, without seasonal adjustment, at about $2.1 billion. Last year it was $2.5 billion for the full year. During the remainder of the year we should receive a payment of almost $125 million on the British loan. We expect the deficit to be reduced another $75 million by special borrowing operations with Switzerland and Italy. On the unfavorable side, there may be window dressing operations by the European banks at the end of December which may result in some temporary capital outflow of an extremely short-term character.

These figures indicate the importance of our receiving before the end of the year the German payments of $225 million due us for military equipment under the terms of the Strauss - Gilpatric agreement,/2/ if the deficit for the full year is to show an improvement over the figure for the previous year. As you know this payment is now doubtful because of the recent German defense budget cutbacks.

/2/Regarding this agreement, see Document 53.

Douglas Dillon

64. Editorial Note

During Chancellor Adenauer's visit to Washington November 14 and 15, 1962, he held several meetings with U.S. Government officials. At the second meeting with President Kennedy on the afternoon of November 14, the two discussed the French situation and the U.S. balance of payments: "The situation in France had really been desperate until de Gaulle took over and if he had not come in when he did, there was real danger of a true civil war.

"The President stated that this problem was related to another one which he wished to discuss with the Chancellor. This was the matter of our dollar balance, which of course always affects the burdens we are carrying overseas. Under no circumstances did we want to retrench in our overseas defense efforts, which were costing us about $3 billion annually. (The Chancellor expressed surprise that it was so little. He had thought it would be considerably more.) For this reason the United States greatly appreciated the Strauss/Gilpatric arrangement whereby German orders would be placed in the United States in the amount of $250 million per year. Since our difficulties in October we had had to draw on our dollar resources even more and had since then heard the disquieting rumor that for budgetary reasons the Federal Republic was expecting not to fulfill this agreement this year. This would mean that our deficit would be that much higher this year and this would have a very bad psychological effect. The President hoped that Germany could see its way to making the purchases as anticipated.

"The Chancellor indicated that he was not informed in this matter and that he would look into it on his return. He would do everything in his power to see that Germany's promise was kept.

"The President stated that we were appreciative of the aid extended so far in this respect by the Federal Republic, for instance their percentage of dollar holdings. It was important that our deficit did not go up over last year. If it remained the same, it was tolerable, but if it increased it constituted a worsening of the situation. He had heard that Germany expected to make up next year what they would not be buying this year but it would be better if it were done this year. The President then stated that he would like to give the Chancellor a one- page memorandum on this matter to take home with him." (Memorandum of conversation, November 14; Department of State, Conference Files: Lot 65 D 533, CF 2181)

The full text of this memorandum of conversation and other documentation on Adenauer's visit are printed in volume XV, pages 427 - 443. See also Document 65.

65. Memorandum of Conversation

//Source: Department of State, Conference Files: Lot 65 D 533, CF 2181. Confidential. Drafted by Raymond J. Albright (Treasury) on November 16 and approved by Dillon's office on November 21. The conversation was held in Dillon's office.

Washington, November 15, 1962.

PARTICIPANTS

Dr. Gerhard Schroeder, German Foreign Minister Dr. Karl Carstens, State Secretary, German Foreign Ministry Erich Feldweg, German Embassy Interpreter Robert M. Brandin, Department of State Secretary Dillon Under Secretary Fowler Acting Assisting Secretary Bullitt F. Lisle Widman Raymond J. Albright

SUBJECT

Military Offset Arrangements; Development Assistance Activities

Following his greeting to the Foreign Minister, Secretary Dillon remarked that the President had spoken yesterday about the necessity for a larger German defense budget and about the importance we place on the agreements for logistics cooperation which had been concluded by our respective defense ministries in the form of the Strauss - Gilpatric understandings. He noted the importance of fulfilling these agreements for the benefit of both countries and the Alliance.

Minister Schroeder said that with respect to these agreements for military cooperation he could only respond as the Chancellor had done to the President. Neither the Chancellor nor he knew the details of the problems which had arisen. However, they promised to look into the matter immediately upon their return. He noted that the Chancellor had said he would do everything in his power to arrive at a proper solution. Minister Schroeder said he could only reaffirm, as had the Chancellor, that they did not intend to withdraw from commitments that may have been made. He noted that the short memorandum on the problem which the President had offered to provide to the Chancellor today should greatly facilitate following up on the matter when they returned. In the meantime, he would appreciate it if the Secretary would give him more details on the problem and possible solutions.

Secretary Dillon said that these arrangements for military cooperation had become even more valuable than we had realized at the time the agreements were reached about a year ago. By these agreements the supply systems of our two countries had been joined in a way which made them more effective and cheaper to operate than if we duplicated our efforts. For example, the U.S. had made available U.S. Army training areas and had allotted 50% of the U.S. Air Force total training time in the Federal Republic to the German Air Force. Since the U.S. produces great quantities of the most modern military equipment, we have been in a position to sell this equipment to Germany more cheaply than alternative sources. In addition, we have given high priority to deliveries to Germany and have indicated our willingness to make changes in equipment to meet German needs. The problem that has arisen concerns $300 million of payments that were to be made by Germany for such equipment during the second half of this year. We have been informed that because of cut- backs in the German defense budget about two-thirds of this sum is not to be paid on schedule.

Minister Schroeder inquired whether the payments due were for deliveries that have actually been made or whether there has been a slow-down of U.S. deliveries and therefore a corresponding slow-down in payments.

Secretary Dillon responded that the payments we expect are for services we have performed according to the agreements, but that the German defense budget levels prevent payment.

Minister Schroeder said he was surprised to encounter this problem in Washington, since he had not heard about it before he left and he was not familiar with arguments on the German side.

Secretary Dillon said that the German Defense Ministry tells us they simply have no money. However, he wanted Minister Schroeder to understand that there was no disagreement between our defense ministries on the terms of the basic understandings. It was merely that the expected and agreed payments appear now not to be forthcoming.

Minister Schroeder said he was surprised that the problem stemmed from a shortage in the 1962 budget. He would have supposed that the Defense Ministry could not have ordered more than that for which it could actually make payments. If it were the 1963 budget he could understand there might be a problem.

Secretary Dillon commented that perhaps the Defense Ministry expected an extra appropriation for the 1962 budget. He referred Minister Schroeder to Herr Schiffers in the Defense Ministry as the man who is familiar with this defense budget problem.

Minister Schroeder wondered how the Finance Minister would allow the Defense Ministry to over-commit itself, and he presumed that Secretary Dillon would not allow the U.S. Defense Department to become engaged in commitments which we could not pay.

Secretary Dillon noted that the Strauss - Gilpatric agreement of February 2, 1962,/1/ set forth specific, agreed figures and schedules concerning when payments should be made, so that the Defense Ministry certainly knew that far in advance what payments were expected of them this year.

/1/This agreement was an exchange of letters between Strauss and Gilpatric. (Telegram 1796 from Bonn, February 2; Department of State, Central Files, 762.0221/2 - 262) Final text was in telegram 1774 from Bonn, January 31 (ibid., 762.0221/1 - 3162), as amended in telegram 1789 from Bonn, February 2 (ibid., 762.0221/2 - 262). Regarding the October 24 understanding, see Document 53. On September 24, Gilpatric and Strauss signed a second memorandum of understanding, which provided for the expansion of U.S. - German military cooperation and the continuation of the financial offset arrangements. The text of this agreement has not been found.

Minister Schroeder stated that once the German party in Washington receives the memorandum offered by the President they will know where the difficulty lies and can come up with a proper solution upon their return.

[Here follows discussion of additional funding for the International Development Association and foreign economic assistance to Latin America, Africa, and South Asia.]

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

Washington, January 16, 1963.

PROSPECTIVE GOLD LOSSES

//Source: Kennedy Library, President's Office Files, Treasury, 1/63 - 3/63. Confidential.

We must expect further substantial gold losses over the next few months. The certainty of such losses is related mainly to our continuing heavy balance of payments deficit rather than to hoarding and speculation. In fact, the London gold market has been quiescent since November and the central bank consortium has been a net buyer of gold. At best, however, these purchases are not likely to exceed $70 - 80 million per month, of which the U.S. share would be one-half. Meanwhile, foreign countries that are gaining dollars over and above working balances or normal holdings are planning to take gold from us.

The U.K. and the entire sterling area are in a seasonal period of surplus, which the British expect to total, very roughly, about $400 million in the first six months of 1963. The Federal Reserve has been negotiating for an increase to $250 million (from $50 million) in the mutual swap facility with the Bank of England. If these negotiations are successful, the full credit is likely to be used to absorb the U.K. accruals temporarily, pending a possible seasonal reversal of the payments flow in the fall. The British want the remaining $150 million in gold, however, of which they are taking $50 million today.

France is still running large surpluses, which may total close to $1.2 billion for the year. The French will probably use half this amount for debt prepayments. Of the remainder, about three-fourths will be converted into gold since the French aim at a 75-percent gold ratio in their reserves. If the French do no more than to keep up their regular monthly purchases of $34 million ($204 million in the first six months of the year), their gold ratio will actually decline slightly.

Spain's rate of reserve gains has slowed, but the Spaniards wish to raise their gold holdings to $600 million from $480 million--i.e., to about one-half the $1.2 billion in reserves they expect to reach by mid- year. Consequently, they have asked for $20 million a month for six months starting in January. The latest Spanish demand is ostensibly related to the fact that the British have withdrawn an exchange guarantee on Spain's holdings of sterling. Therefore, the Spaniards will convert some of their sterling into dollars to buy the gold so that we will probably lose somewhat less gold to the British than we otherwise might.

An Austrian gold purchase of $50 million was postponed late last year through use of a Federal Reserve swap of that amount with the Austrian National Bank, but since there has been no turnaround in their balance of payments, we must expect them to run off the swap and purchase gold early in 1963. The Austrians have a steady payments surplus and wish to hold 50 percent of their reserves in gold. They are well below that ratio now.

These prospective gold purchases total roughly $525 million for the first half of the year. While we might very optimistically hope to recoup as much as $200 million from the London gold market and other sources over this period, any renewal of uncertainties and fears could greatly reduce this figure. Moreover, the gold demands of the U.K., France, Spain and Austria may be augmented by those of other countries, although we think we have a fairly good basis for gauging the bulk of the first-half-of-1963 demands.

The situation underscores the crucial importance of using as intensively as possible all appropriate methods to curb the balance of payments deficit.

Douglas Dillon

67. Memorandum From the Counselor and Chairman of the Policy Planning Council (Rostow) to President Kennedy

//Source: Kennedy Library, Dillon Papers, Memos to President, 2/62 - 3/63. Secret.

/1/The full-page table, entitled "Official Gold and Dollar Holdings of Selected Countries in Relation to Their Foreign Trade and Their Total Payment Obligations in 1961," is in the Supplement.

Washington, February 4, 1963.

SUBJECT

Balance of Payments Problem

In confronting the balance of payments problem I thought it might be interesting for you to see the reserve figures of the various nations set out in the form of the attached table.1

The last two columns show that, relative to our current trade and payments obligations, our gold reserve is still relatively large. Except for the Swiss, we lead the field.

On the other hand, we face the two familiar limitations:

--Our $12 billion domestic gold cover;

--The burdens of maintaining the dollar as a unique reserve currency which leaves us vulnerable to sudden withdrawals; (although the French holdings should not frighten us, if we have a reasonable contingency plan, which is not all that difficult).

My reflection on this table is that we are in a position to sweat out a somewhat longer basic adjustment in our balance of payments position than envisaged some months ago if two conditions are satisfied: the lifting of the domestic gold cover; and the early bilateral negotiation with key European countries (and perhaps Japan) of arrangements for them to hold dollars on longer term (say, in ten year bonds) with an exchange guarantee and with the understanding that we would reciprocate when their balance of payments were under strain. In effect, such arrangements would fund a large portion of our outstanding short-term dollar obligations and spread the burden of maintaining a reserve currency to supplement inadequate world gold supplies. This method would simply be an extension in the trend of Treasury policy; but it is urgent for three reasons.

First, we cannot mount the kind of European policy most of us now envisage until the ground is under our feet on balance of payments, and we can separate our policy towards conventional forces from our balance of payments strain.

Second, it is difficult to envisage acceptance of the across-the-board tariff cuts Herter aims to negotiate unless we have an environment of relatively full employment at home; and this also requires relief from balance of payments pressure.

Finally, we may have difficulty with the tax bill if, in the face of continued balance of payments deficits, and no offset arrangements, anxiety should develop that prosperity via the tax cut would make our balance of payments situation worse.

If another converging argument is needed, the balance of payments is likely to haunt us--among other things--in a foreign aid battle this year that will be adequately tough without its heavy shadow.

I conclude that a balance of payments move of the kind I suggest here is now of the utmost urgency; and that we would undertake it from a position of greater initial reserve strength than we often grant ourselves.

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

//Source: Kennedy Library, Dillon Papers, Memos to President, 2/63 - 3/63. Secret.

Washington, February 11, 1963.

You have asked for my thoughts on Walt Rostow's memorandum of February 4 on the balance of payments./1/ He takes the position that our gold situation is relatively good compared to other countries and that we need not worry about running further larger balance of payments deficits provided we first repeal the 25% gold cover law and negotiate substantial ten year borrowings from our European creditors.

/1/Document 67.

First, as to Mr. Rostow's two specific suggestions: You are aware that we all would favor repeal of the 25% gold cover law. However, when Congressman Multer floated a trial balloon on this subject during the last session of Congress, it became obvious that there was intense and emotional conservative opposition to repeal. It is highly doubtful if we could muster a majority, and, in any event, the debate that would ensue would be seriously damaging to international confidence in the dollar. Therefore, we have decided not to press this issue until public opinion shifts or until our gold stock actually drops below the ceiling. As you know, the Federal Reserve can waive the ceiling under certain conditions, and Mr. Martin has stated that he would utilize this authority if it ever should prove necessary. The waiver provisions are relatively innocuous until our gold supply drops to $6 billion--the 25% ceiling would be pierced at about $12 billion. Thereafter, the waiver provisions are so onerous as to be impractical. However, there would be plenty of time to obtain repeal after our gold stock reached $12 billion. Our decision, therefore, has been not to precipitate this unnecessary fight at this time.

As to Mr. Rostow's suggestion of ten year borrowings in Europe, it is simply an extension and amplification of a new technique originated by the Treasury last year. Loans of over one year duration are not counted as liquid liabilities and thus have the effect of reducing our balance of payments deficit. Last year we negotiated $250 million of 15 month loans with Italy and Switzerland, which relieved our balance of payments to that extent. We have recently concluded a similar borrowing with Germany which runs out as far as two years, but with a shorter term option which the Germans can use in case of need. This technique has proved useful, and we intend to develop it further. However, any sudden campaign such as Mr. Rostow proposes would be doomed to failure.

Most foreign central banks are prohibited by law from making long term loans, and, as a result, our borrowings are generally convertible into 90 day notes upon demand. While we may gradually extend the length of our borrowings, it is perfectly clear that the Europeans would not agree to any large scale stretch out of our present demand liabilities to a ten year term. The dollar, after all, as a key currency, is part of these countries' liquid reserves. A ten year loan would be far from liquid and could not be counted as a reserve.

Mr. Rostow's proposal would put us in a position similar to Brazil or Argentina, who, when they cannot pay their debts, go to their creditors and get an agreement to stretch out the debt over a period, usually not longer than five years. In sum, while the Treasury initiative in this area has been successful and can and will be carried further, it is not susceptible of being expanded upon to the extent desired by Mr. Rostow. Mr. Roosa has already scheduled meetings in five countries during the first week in March at which he will be exploring current prospects.

Finally and most important, a word about the philosophy that lies behind Mr. Rostow's memorandum. This philosophy is the natural reaction of those who find their preferred policies threatened by balance of payments difficulties. It is only natural that they search for ways to make this very real problem go away without interfering with their own project, be they extra low interest rates in the U.S. or the maintenance of large U.S. forces in Europe.

However, such individuals are asking the impossible. The sine qua non of all international monetary dealings, under whatever system may be imagined, is that no country can consistently run a large balance of payments deficit. Under Mr. Rostow's program we would consolidate our present liquid liabilities into ten year loans and then promptly create new short-term liabilities to take their place. This will not be accepted by our European friends, and cannot be accepted by them if the dollar is to maintain its position as the world's reserve currency.

It is difficult, if not impossible, to know when the time will come when our credit will be exhausted. If we continue as at present that time will surely come, although I do not believe it is at all imminent. In this judgment, I agree with Mr. Rostow that our position is basically stronger than many of our financial experts think. But, granting this, we must, by one means or another, put our balance of payments house in order--and the sooner the better--since time is now working against us. We simply cannot ignore the basic disciplines of the balance of payments except at our peril.

One final word as to the "burden" of supporting a key currency. The burden is that we must maintain the value of our currency and cannot allow it to be devalued as if we were Brazil, Canada or Argentina. But the benefits are also great. To date, foreign countries and their nationals have acquired nearly $20 billion in dollar accounts. This, in effect, is a demand loan to us of $20 billion which has allowed us to pursue policies over the years that would have been utterly impossible had not the dollar been a key currency. Our dollar liabilities increased by $1-1/4 billion last year alone, which also would have been impossible were it not for the reserve currency status of the dollar. So while a reserve currency has its special problems it also brings in its trail real and important benefits.

Douglas Dillon/2/

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

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

//Source: Department of State, Central Files, FN 12 US. Confidential.

Washington, March 8, 1963.

DEAR DEAN: I have read your letter of February 25 to Ros Gilpatric about the Japanese offset negotiations/1/ and am somewhat concerned about certain points in it.

/1/This letter is scheduled for publication in volume XXII.

If I correctly interpret the last paragraph of your letter, it implies a direct link between the level of U.S. military expenditures in Japan and Japan's remaining "a highly favorable market for U.S. civilian exports." While any such direct link might be possible under a bilateral trade arrangement it would be contrary to the principle of multilateral trade and payments which we have all sought so strenuously to foster and which is the foundation of our entire international trade and financial policy. There is, of course, no question of the over-all adequacy of Japan's foreign currency earnings.

Moreover, the experience of recent years indicates that reductions in U.S. military spending have not hindered the growth of U.S. commercial exports to Japan. Since 1953 our military expenditures in Japan have declined by more than half (from $725 to $350 million) while our commercial exports have more than doubled (from $681 to $1,413 million).

The fact that U.S. commercial exports to Japan normally exceed our imports is sometimes cited as a reason why we should not try to reduce our expenditures in Japan. However, we have in the past always stood by the position that it would not be proper to concentrate on one item-- merchandise trade--without considering the other items in our trade and payments which are highly favorable to Japan and which more than cover Japan's trade deficit with us. On merchandise trade alone the U.S. sells more than it buys not only to Japan but also to Germany, Italy, Spain and France (the other nations where we have sought offsets), and in fact to most industrial nations. If we were to limit our balance of payments corrective actions to nations where we do not have a trade surplus, we would eliminate from consideration most of the major countries of the world.

Japan's balance of payments prospects give no cause for concern. According to Embassy Tokyo's projections of last November 21 (A - 738),/2/ Japan will increase its foreign exchange reserves over the three years 1963 through 1965 by almost $1 billion, despite an estimated $70 million reduction in the level of U.S. military spending. This increase of $1 billion is well in excess of the offset targets which I discussed with Secretaries Ball and Gilpatric last October ($100 million in 1963; $200 million in 1964; and $300 million in 1965).

/2/Not printed. (Department of State, Central Files, 794.5/11 - 2162)

I know you recognize the urgency of getting our more prosperous allies to assume a more equitable share of the burden of Free World defense and aid, and we are in agreement that the Japanese military effort is inadequate. However, in considering military offsets and reductions in Japan, I am concerned that we may be setting our sights too low and may not be approaching the problem with sufficient urgency and initiative.

I would think that once the Joint Chiefs' analyses on possible reductions in Japan are completed it might be useful to arrange a State/Treas-ury/Defense meeting, possibly with the President, to consider the offset negotiations and possible defense reductions, and to get agreement on precisely what we should aim for and how we expect to achieve it.

I am sending copies of this letter to Ros Gilpatric and to McGeorge Bundy./3/

With best wishes,

Sincerely,

Douglas

/3/In his March 22 reply to Dillon, Secretary Rusk wrote that certain points in his February 25 letter to Gilpatric "may have lent themselves to misinterpretation." After agreeing with Dillon on the importance of "getting the industrialized countries of Europe and the Pacific to carry a more equitable share of the burden of Free World defense and economic assistance," he went on to stress the equal importance of greater trade liberalization by Japan. "The military area is circumscribed by constraints," he argued, "while the much larger civilian sector offers considerably greater room for maneuver." (Department of State, Central Files, FN 12 US)

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

//Source: Kennedy Library, National Security Files, Subjects Series, Balance of Payments and Gold, 6/62 - 6/63. Secret. The source text is a copy sent to McGeorge Bundy by Dillon on March 19. Dillon's covering memorandum reads: "Since the attached letter deals with a matter of considerable importance to our balance of payments, I would appreciate it if you could bring it to the President's attention."

Washington, March 19, 1963.

DEAR DEAN: You will recall that I mentioned to you a few weeks ago my feeling that the Treasury could be of help to you in your perennial effort to obtain more adequate defense contributions from our NATO allies. As I pointed out, it has seemed to me that part of the problem lies in the fact that the Finance Ministers of our NATO allies have been able to avoid all personal responsibility for the decisions reached by their colleagues in charge of defense and foreign policy. This leaves them free to actively oppose within their own governments the appropriation of the funds required to meet agreed goals. This they have not hesitated to do even though agreements by NATO national representatives are supposed to be government commitments. Last fall's struggle in the German Government was but the latest and clearest example of many such cases.

It would appear to me that Stikker's current initative on military planning/1/ may present a useful opportunity to consider ways and means of tying the European Finance Ministers more closely into NATO decisions so that they will feel responsible within their governments to provide the funds needed to meet agreed force goals. As you know, this was the original thought behind the practice of including Ministers of Finance in the December Ministerial meetings. Since no substantive tasks have been assigned to the Ministers of Finance at these meetings, their attendance has become purely symbolic, and indeed some of the more important Ministers, i.e., the German Minister, seldom even bother to attend. I also feel that unless we can find a way to make better use of the Finance Ministers, serious consideration should be given to relieving them of the necessity of attending these meetings.

/1/Documentation on NATO Secretary-General Stikker's initiative is printed in volume XIII.

Irrespective of your decision on this larger question, I believe that the Treasury could be of substantial help to the Departments of State and Defense in preparing the U.S. position on the capacity of our allies to finance any given military program. I note that Stikker has proposed to, "examine the financial and economic implications for member countries collectively and individually of providing the forces called for in MC26/4." In particular, he has proposed to attempt to determine, "whether member countries were capable of a greater financial and economic effort in favor of defense and were bearing an equitable share of the common defense burden."

I am glad to know that we are supporting Stikker in this effort and believe that the Treasury's resources can be of substantial help in reaching our overall objective of bringing NATO strategy, forces and budgets into rational balance. In particular, the Treasury should be able to help in the critical analysis of the estimates of financial capabilities of individual NATO countries prepared by the International Secretariat. In view of the importance of this matter in our overall NATO objectives, political, strategic and financial, as well as to our balance of payments, I am taking the liberty of sending copies of this letter to Bob McNamara and Mac Bundy.

With best wishes,

Sincerely,

Douglas/2/

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

71. Editorial Note

French Foreign Minister Couve de Murville met with U.S. officials on May 25, 1963. The memorandum of his conversation with President Kennedy at the White House on May 25 at 11 a.m. begins as follows:

"The President greeted the Foreign Minister and said he was glad to see him. He asked how things were going on in France. The Minister said the economic situation was generally favorable, but there was a danger of inflation. The government was taking certain measures such as limiting credit, increasing taxes, and liberalizing imports. The President stressed the importance the United States Government attaches to increasing the volume of trade. He said he thought so long as the interest rates and the costs of France and the United States remained relatively stable, we could look forward to such an increase. The Foreign Minister said he thought that the greatest need of the West was to have a sound monetary policy. This aspect of the common interest of the West was not being adequately discussed. The President agreed and said that matters of this sort tended to be treated too technically and to remain too much in the hands of the bankers, who do not see them in terms of the national interest.

"The President then turned to the US balance of payments difficulties. He said that the United States would be short another $2.5 billion this year. The danger was not so much a matter of loss of dollars, as the possibility of a run on gold. This was our big problem. The President said that every time it was proposed that we take some steps to bring our payments into balance, we were exposed to loss of confidence in our currency which took the form of a run on the dollar. Couve asked whether the United States Government had ever considered changing the international price of gold. The President asked in turn whether this would not cause a run on the dollar. Couve said it would not, because everyone would have already agreed on the new price beforehand, and each currency would be pegged to it when it came into effect. He went on to say that he thought that the United States was dealing with the problem of the balance of payments piecemeal. The United States, he said, does not have a real deficit. It has a foreign trade surplus. He said he thought that tourists should be counted under trade. He said the real trouble was that there was too much export of US capital abroad. The President agreed that tourists are a form of trade. He pointed out that we lose $1.5 billion under this category in addition to our expenditures for military and foreign aid programs. Couve observed that tourists represented something more than trade, that they played an important political and psychological role in international relations." (Department of State, Presidential Memoranda of Conversation: Lot 66 D 149, April - June 1963)

The full text of this lengthy memorandum of conversation is printed in volume XIII, pages 769 - 775. A memorandum of Ball's conversation with Couve de Murville on May 25 covering trade, monetary policy, and nuclear matters is in Department of State, Central Files, POL FR - US.

72. Memorandum of Conversation

//Source: Department of State, Conference Files: Lot 66 D 110, CF 2275. Confidential. Drafted by Robert C. Creel (EUR/GER) on June 24 and approved by S on July 6 and by the White House on July 8. The meeting was held in the Palais Schaumburg. President Kennedy and Secretary Rusk arrived in Bonn on June 23 for a 4-day visit, including a trip to Berlin.

PET/MC/12 Bonn, June 24, 1963.

PRESIDENT'S EUROPEAN TRIP

June 1963

PARTICIPANTS:

United States The President The Secretary of State Ambassador George C. McGhee Assistant Secretary Tyler Assistant Secretary Manning Minister Martin Hillenbrand Mr. Pierre Salinger Mr. Robert Creel EUR/GER Mr. Lissance (interpreter)

Germany Chancellor Konrad Adenauer Vice Chancellor Ludwig Erhard Foreign Minister Gerhard Schroeder Defense Minister Kai-Uwe von Hassel Ambassador Karl Heinrich Knappstein State Secretary Globke State Secretary Carstens State Secretary von Hase Counselor Weber (interpreter)

SUBJECT

Trade and Fiscal Policy Matters

The President said a third subject he wished to bring up, in addition to the MLF and nuclear test ban,/1/ was the general area of economic relations, including such matters as monetary policy, offset arrangements and the Kennedy Round of trade negotiations. The President said that these economic subjects were possibly even more important to us now than nuclear matters. This was because our nuclear position was very strong indeed and entirely adequate to discourage any attack on the West.

/1/A telegraphic summary of the President's conversation with Adenauer on the MLF is printed in vol. XIII, pp. 597 - 598. A memorandum of their conversation on the nuclear test ban (PET/MC/14), June 24, is in Department of State, Conference Files: Lot 66 D 110, CF 2275.

The President said we would not wish to repeat the experience of the 1920's, which had had wide repercussions in Europe. If international trade could be expanded, this would help bring prosperity both to the US and to Europe. It was very important that the coming trade negotiations be successful. While foreign trade was not inherently as important to us as to the Europeans, it was nevertheless important in that it played a key role in enabling us to earn enough to maintain our overseas commitments. The President hoped that the coming negotiations could be conducted at the highest level. They should involve heads of government and Foreign and Defense ministers, and not just be left to technicians such as agricultural experts and tariff commissioners. Unless we could maintain international liquidity and a balanced trade situation, there would be difficulties which could possibly lead to a collapse. For example, he added, had it not been for the constructive role played at the Geneva trade talks by the Federal German Government we would have had a breakdown there.

Continuing on this theme, the President said that in America, we lose $1-1/2 billion a year in tourist trade alone. On the other side of the coin, we send more agricultural products to Germany than the Germans sell to us. What was needed was to look to the overall balance of international trade and to make every effort to maintain this balance. At the present time the US economy was in a strong position and the dollar in good shape. The redistribution of assets internationally over the past 10 years had been healthy. The President added: "We must conduct these negotiations at the top level--otherwise we'll be ruined by bookkeepers".

Foreign Minister Schroeder said that the German deficit in tourist trade was running around $700 million a year. The President commented maybe we had better include Directors of Tourism in our discussions. It was in any case important to get the whole balance of trade out on the table. The French, Italians and Spanish had favorable tourism balances. Our overall purpose was to maintain general liquidity and upward movement in the economy on an international scale in a balanced way.

Professor Erhard entered the discussion at this point. He said he wanted to tell the President that the problems of the US in the field of trade and balance of payments were well known to the Germans and they appreciated our concern. He wished to stress, however, that this was not just a US problem but one for the entire free world. Should the dollar encounter difficulties, this would affect us all just as the solar system would be disrupted were the sun no longer to stand still. In Germany, efforts had been made to take our balance of payments problem into account. For example, present German reserves totalled DM 29 billion, with a ratio of DM 15 billion in gold and only DM 14 billion in US dollars. This ratio was the most favorable to the US of all European countries. The Germans did not wish to change this because they laid great stake on their good relations with the US. They were constantly seeking ways of strengthening international liquidity and making better use of available resources. For example, the German Central Bank was already taking steps to acquire US Treasury Bonds in large amounts. The Germans were interested in strengthening not only the dollar but the international economic cohesion of the free world. The Germans would do all they could so long as the problem was bilateral in scope. Foreign trade was very important for the Germans--it represented 15% of GNP as contrasted with only 4% for the US--because it was so large a percentage of the total effort and their own economy was more vulnerable. He felt there was a complete identity of interest with us in this area.

Professor Erhard then said that one of the big difficulties lay in the agricultural field. The German Government had problems with its own farmers, who spoke with a loud voice. He hoped the FRG could grapple with this problem before the end of the year. If they were not successful, it would make the Kennedy Round more difficult. He attached great importance to the success of the Kennedy Round. He thought his efforts with Governor Herter in Geneva had borne witness to this. Many other problems came to his mind in this area, although some of them concerned US internal policies, such as trade and financial policies, tax policies, etc. Maybe he would have a chance to discuss some of these with the President in Wiesbaden tomorrow./2/ In such event he hoped the President would consider him to be speaking not as German but as an expert in the field of international economics.

/2/President Kennedy spent most of June 25 with Erhard and others on a trip to Wiesbaden and environs. (Kennedy Library, President's Appointment Books) For a record of the conversation, see Document 73. For a memorandum from Ball to President Kennedy, June 21, which contained talking points for the President's meetings with Erhard, see the Supplement.

The President agreed this might be useful. He cited the valuable contributions the Germans had made in the past on such things as military offset arrangements, general financial and monetary policy, the Geneva GATT negotiations, preparations for the Kennedy Round, etc. He had sometimes wondered why this was called the Kennedy Round and why it should not be called the Adenauer Round or the de Gaulle Round. But whatever it was called, it must be a success. We needed the cooperation of all countries, but the Federal Republic was in a particularly important position. We had been glad to have the views of the Federal Republic and would take them into account. The problems were considerable but it would amount to a failure of will and nerves if we did not solve them successfully.

The Chancellor said he would like to add a word "as a layman but also as a politician". He agreed that these matters should be the responsibility of the leading Ministers. This could cause some difficulties, however; witness the fact that the French Foreign Minister always attended the EEC meetings, and this sometimes had the effect that other countries would listen more to him than to the German technical experts. The Chancellor was not sure the President was fully aware of the great difficulties the Germans were having with the French in the field of agricultural trade matters, particularly as concerned grain prices. The French were producing more wheat than they needed and at a lower price than the Germans because they had better soil and better weather. There were problems with the German trade unions, where their boss was not George Meany but Herr Brenner. The metal workers were a very big union with a dominating position, and recent agreements on wages and hours had affected German production. Coal was no longer the source of wealth it had once been, and mining operations were expensive. The Federal Government had to look to its future economic position with some anxiety and ask whether it was going to be in a position to carry out all of its obligations. The Germans wanted to do all they could in the economic and agricultural fields and would work together for the common good. After all, we were all threatened by the same adversary. But the Germans had problems. The days of large German export balances were gone. German exports were coming down close to imports and the German trade balance was delicate. But the Germans had good will, which was an asset which counted for much. The President could count on German good will in the Kennedy Round. But it should be remembered that the Germans were not as rich as some people believed.

The President said the Chancellor sounded like someone coming to a bank for a loan. The Chancellor smilingly replied that if that were the case he might talk differently.

The President said that a further difficulty was that we spent $200 million a year on bases in France, where there were no offset arrangements. In France we had to earn our money somehow to maintain our bases. The French Finance Minister should know better than to accuse us of trying to dominate the French economy or trying to dump our goods there. Exports were only a small percentage of our total products. Our GNP had increased from $500 billion to $585 billion in recent months. We could lose $20 billion a year in trade without hurting. Trade was important to us only in that it enabled us to earn balances to carry out our world commitments and play a world role.

Erhard said he wished to mention other things which might be done to help the situation. The Germans had revalued their currency not long ago, which had helped US exports to Germany. It was important to maintain a stable price level. The problem could not be solved by inflation of currencies all over Europe. He had suggested to Governor Herter the possibility of setting up world commodity agreements for cereals and cattle as we had on coffee and cotton. It was important to work together in GATT. We must open the doors wider to international trade; this would require less manipulation of currencies.

In essence, Erhard said, he had a single request--for more open- mindedness on our part in developing instrumentalities for handling international trade and business--instrumentalities to control, direct and supervise international economic development.

The President said he completely agreed. It was necessary however to make a judgment as to which tools to use. He hoped to talk further with Erhard about this tomorrow.

At this point the President excused himself in view of the imminence of his scheduled press conference./3/

/3/For the transcript of the President's press conference beginning at 5:30 p.m., see Public Papers of the Presidents of the United States: John F. Kennedy, 1963, pp. 505 - 511.

73. Memorandum of Conversation

//Source: Department of State, Conference Files: Lot 66 D 110, CF 2275. Secret. No drafting information appears on the source text. Approved by the White House on July 22. The meeting was held at the Von Steuben Hotel.

US/MC/27 Wiesbaden, June 25, 1963, 6 p.m.

THE PRESIDENT'S TRIP TO EUROPE

June 23 - July 2, 1963

SUBJECT

Erhard's Views on American Economy

PARTICIPANTS

United States The President Mr. Lissance (Interpreter)

Germany Vice Chancellor Erhard Mr. Weber (Interpreter)

The President opened by stating that he appreciated what Erhard had done for trade and to help Gov. Herter in Geneva. He then asked Erhard's ideas concerning the balance of payments and monetary policy.

Erhard replied that he followed all aspects of the U.S. trade balance closely. This trade balance was not merely America's concern, in which case it would not be his business to talk about it, but it was something of concern to the world monetary order. A policy of defense spending and simultaneous tax reduction seemed entirely appropriate provided the two together served not merely to increase consumer purchasing power but also had the effect of stimulating productive investment. He had closely studied American tax reduction plans, however, and had concluded that if they only encouraged consumer spending, they would not speed economic growth.

There is a rather strange situation that runs contrary to traditional economic views, Germany had an overboom, with a very lively market, a surplus, and continuing activity. In the same situation the U.S. had unemployment, a balance of payments deficit, and a good deal of unused productive capacity. Erhard thought we should increase the discount and interest rates. Such an increase need not at all paralyze investment activity, but would on the contrary stimulate it. Low interest rates did not produce the effect expected of them. His ideas about that and about monetary policy were embodied in a bill that he would submit to the Bundestag. He also stressed the need on the American side for a more active policy of influencing the business cycle.

The President noted that last year there was a deficit of $2 billion. Now it is cut by one-third, with investment down.

Erhard thought there were some devices which had not been used enough. He would have a discussion with the president of the International Monetary Fund. Erhard had proposed to him that nations should draw on the mark and not only on the dollar. Wider use of the Fund's facilities would be useful.

The President commended Erhard for his helpfulness in connection with the dollar balance. If everybody wanted 100 percent gold cover, there just is not enough gold for that around. Raising the rate for money had been considered, but we must remember that when that was done before we got the recessions of 1958 and 1960. If we raise the rate now we might run into the same situation. He thought the tax cut would get things on the move.

Vice Chancellor Erhard wondered whether there were not certain powerful industrial and business interests in the United States who deliberately manipulated the American economy to perpetuate a high level of unemployment. Their rationale could be that full employment in Germany having brought about a situation where the labor unions pre-sented management with ever increasing demands, a level of unemployment such as the present level in the United States would keep American labor more tractable and keep production costs favorable for export. The President dismissed such a possibility by saying that these powerful industrial and business interests were not "smart enough" to carry out such a deliberate plan.

74. Telegram From the Department of State to the Embassy in Germany

//Source: Department of State, Central Files, FN 12 US. Confidential; Priority. Drafted by Louis C. Boochever (A/AID) on July 10; cleared by Creel (GER) and Richard H. Davis (EUR) in draft, W. Carter Ide (AID/AA/NESA) and James P. Grant (NEA) in substance, and Walter H. Lubkeman (S/S); and approved by Frederick F. Simmons (AID/EXSEC) for David E. Bell (A/AID). Repeated to Paris (OECD) and New Delhi.

Washington, July 11, 1963, 9:48 p.m.

106. ADCOR. In accordance with understanding developed on further messages to Erhard in light of brevity of President's conference with him/1/ Ambassador requested approach Erhard on military offsets and on aid. Approach (or approaches) should be made in context of Deptel 373 of August 1962/2/ re priorities of FRG effort. In view pledging session of India consortium scheduled July 18, Ambassador should raise development aid issues at earliest opportunity along following lines (separate message on offsets to follow):

/1/See Document 73.

/2/Dated August 8, 1962. (Department of State, Central Files, 811.10/8 - 862)

The President regrets that the brief time available for his talk with Erhard in Wiesbaden did not allow discussion of many aspects of general economic relations. He is most appreciative of FRG cooperation with U.S. as expressed in military offset arrangement, international financial action and in support of IDA. The continuation of a full military offset undertaken in the light of the U.S. balance-of-payment difficulties continues to be of primary importance in U.S.-German economic relationship. President is aware of the fact that he owes Erhard a memorandum on the U.S. view of the existing difference over offset levels and this memorandum is being prepared with urgency./3/

/3/A memorandum on U.S. - German cooperative logistics and financial offset arrangements, with instructions to deliver it to Erhard, was transmitted in telegram 147 to Bonn, July 16. (Ibid., FN 12 US)

[Here follows discussion of cooperation with the Federal Republic of Germany on development aid.]

Rusk

75. Telegram From the Embassy in Germany to the Department of State

//Source: Department of State, Central Files, FN 12 US. Secret; Priority. Relayed to the Department of Defense.

Bonn, July 13, 1963, 8 p.m.

3433. Pass Defense and Treasury.

1. As long as US balance of payments remains a serious problem, our military presence in Germany will be vulnerable to criticism and a target for reduction, in absence of satisfactory offset arrangement to compensate for US foreign exchange costs. I have stressed this in all my talks with German officials, including Chancellor, von Hassel, and Erhard. Recent negotiations in Washington and Bonn have revealed a disturbing lack of understanding, among certain key officials in the Ministry Defense, and others, of the importance of the offset arrangements to a continuation of the present level of US military effort in Germany.

2. Despite von Hassel's firm assurance last February, MOD has been unwilling to commit itself to payments in excess of $1,000 million during US FY 1964 - 65 (target $1,300 million). Furthermore, they foresee payments of only about $100 million during the second half of CY 1963. From the standpoint of new orders, the prospect of reaching the target during CY's 1963 and 1964 ($1,300 million) is somewhat brighter. Thus far, however, we have only succeeded in establishing firm FRG military requirements for orders amounting to $532 million.

3. I believe Minister von Hassel, the Chancellor and other Cabinet officers have a sincere desire to provide a full offset. They seem to have a vague impression that an offset is feasible, and that it will probably be achieved anyway without much effort on their part. Actually, Germany is fairly close to being able to provide a full offset for CY's 1963 and 1964. The main difficulty at present is in maintaining a steady flow of payments during remainder of this year. This will require special effort (perhaps an advance against the CY 1964 defense budget), but with support of high levels in the German Government, I believe it can be accomplished.

4. The President's visit presents an important opportunity for a new initiative on this subject. I believe the President should seek firm assurance of a full offset from both Chancellor Adenauer and Economics Minister Erhard. The President should obtain confirmation that the agreements call for new payments (during US FY 1964 - 65) as well as new orders (during CY 1963 - 64) fully equal to US military expenditures in Germany during CY 1963 and 1964, now estimated at $1,300 million.

5. Related to the offset objective, and in some respects even more important, is the need to assure adequate defense budget for CY 1964, including compensation for any advances. I believe the President should express to the Chancellor and others his recognition of the FedRep's very important contribution to Allied security in increasing the defense budg-et from about DM 10 billion in 1960 to DM 18 billion in 1963. The President might, at same time, stress importance of maintaining momentum of the military buildup and his hope that Defense would continue to receive a reasonable priority in the allocation of budgetary funds. In our judgment, a feasible goal for 1964 would be DM 21 billion (MOD is requesting DM 21.6 billion) but I question propriety of President recommending a specific figure.

McGhee

76. Circular Telegram From the Department of State to Certain Diplomatic Missions

//Source: Department of State, Central Files, FN 12 US. Limited Official Use; Operational Immediate. Drafted by F. L. Widman (Treasury/OIA) and Benjamin Caplan (E/OFE), cleared by Roosa and Springsteen, and approved by Caplan. Sent to all NATO capitals except Ankara, Athens, Lisbon, and Reykjavik, and to Bern, Zurich, Buenos Aires, Canberra, Madrid, Manila, Mexico City, Moscow, New Delhi, Rio de Janeiro, Stockholm, Tokyo, and Vienna.

Washington, July 17, 1963, 9:51 p.m.

98. Deliver by 9:00 a.m. Local Time. President will transmit special message to Congress on balance payments Noon EDT Thursday, July 18./1/

/1/See Document 29.

New elements likely draw particular attention abroad include reduction approximately one billion dollars annually in US Government dollar expenditures overseas, imposition of interest equalization tax designed to increase by approximately 1 percent interest cost to foreigners of obtaining capital in United States and $500 million IMF standby arrangement.

Press will receive advance briefing here but with firm understanding that nothing be released before hour of transmission. Full text being airmailed. Maximum dissemination desired. Separate cable will contain guidance for your use in discussions with press and local governments.

[Here follows a summary of the President's July 18 special message to Congress.]

Rusk

77. Telegram From the Department of State to the Embassy in the United Kingdom

//Source: Department of State, Central Files, FN 16 US. Unclassified. Drafted by F. L. Widman (Treasury), cleared by Creel and Mortimer D. Goldstein (E/OFE), and approved for transmission by Vincent J. Monti (OC/OCT). Also sent to Paris (Embassy and USRO), Bonn, Rome, The Hague, Brussels (Embassy and BUSEC), Ottawa, and Tokyo. Attached to the source text is the typewritten text of the press release issued by the Department of the Treasury.

Washington, July 20, 1963, 8:20 p.m.

517. In view apparent misunderstanding abroad, Treasury issued supplemental press release July 20, as follows: "July 19 remains effective date of interest equalization tax, recommended by President Kennedy, on purchases of all foreign securities outside U.S., Treasury said today.

Following President's message on July 18, Treasury announced delay to August 16 as date from which purchases of outstanding foreign securities would be subject to rules of proposed tax, if those purchases were effected on U.S. national securities exchanges registered with Securities Exchange Commission./1/

/1/Reference is to the Department of the Treasury's announcement at 6:15 p.m. on July 18 that "purchasers of foreign securities traded on a national securities exchange registered with the Securities and Exchange Commission would not be subject to the Interest Equalization Tax proposed by the President in his Message to the Congress today on purchases made on such exchanges prior to and including August 16, 1963." (Quoted in Department of State Bulletin, August 12, 1963, p. 256n)

Delay does not apply to transactions carried out on foreign securities exchanges nor to transactions in U.S. or elsewhere which are not carried out through U.S. registered securities exchanges. Recommended effective date of proposed tax on such transactions, and for taxable newly issued foreign securities purchased by American investors, remains July 19.

Treasury and representatives of exchanges are currently developing detailed procedures involved in applying rules of proposed tax to transactions on these U.S. exchanges."

Request Emb cooperation in dissemination this info.

Rusk

78. Telegram From the Embassy in Germany to the Department of State

//Source: Department of State, Central Files, FN 12 US. Confidential; Priority. Repeated to Paris and USRO, London, Rome, Brussels (BUSEC), and Bern.

Bonn, July 23, 1963, 7 p.m.

314. Paris also for USRO. Department pass Treasury.

1. German opinion on President's balance of payments program, both official and private, soured somewhat over weekend and Monday./1/ Exception extended Canada/2/ and, to lesser extent, skepticism over enforcement, confusion on effective date and rumored further exception for Japan, have led many to conclude that interest equalization tax will be largely ineffective and possibly even counter-productive. Several quarters have expressed fear that effort to enforce tax will draw US inevitably into exchange controls.

/1/July 22.

/2/Following representations by the Canadian Government, which complained about the U.S. proposed measures, especially the interest equalization tax, to improve its balance-of-payments position, the U.S. and Canadian Governments issued a joint statement on July 21. The statement specified, among other things, that U.S. officials agreed to include a provision in the draft legislation to Congress "authorizing a procedure under which the President could modify the application of the tax by the establishment from time to time of exemptions, which he could make either unlimited or limited in amount." For full text, see Department of State Bulletin, August 12, 1963, p. 256. Additional documentation on U.S.-Canadian discussions on this question is printed in volume XIII.

2. Bundesbank and Economic Ministry officials continue support program but privately have expressed disappointment over Canadian exception, which they feel has weakened confidence in entire program. Bundesbank (Emminger) believes discretionary authority implied in press release on Canadian exception suggests create one of kind of capital issues committee. Officials also not happy over discriminatory manner in which it now appears to them tax will be administered.

3. Private banking community seems concerned that situation of dollar so serious as to justify such "drastic" measures and many bankers doubt that interest equalization tax can be effectively enforced. Rumors are circulating that Congress might amend proposal to make direct investment subject to tax, thus adding to atmosphere of confusion and uncertainty.

4. Since Friday, press reaction also focused on equalization tax and acknowledged much depends on detailed proposals to Congress and Congressional handling. Some circles felt Wall Street would undergo period of isolation while others would somewhat welcome German stock market's new independence from New York.

Tuesday Frankfurter Allgemeine (FAZ) considered Canadian exemption indication program not thought through and opined exemption to Japan has been granted. Banking circles, according FAZ, regretted European central banks and governments had given their approval to American action because if other governments followed US example it would mean end free international capital movements.

Hillenbrand

79. Circular Telegram From the Department of State to Certain Diplomatic Missions

//Source: Department of State, Central Files, FN 12 US. Limited Official Use. Drafted by Widman (Treasury/OIN), cleared in substance by Goldstein, and approved by Monti. Sent to Tokyo; repeated to Bern, Bonn, Brussels, Canberra, The Hague, London, Ottawa, Paris, Rome, and Zurich; and pouched to Copenhagen, Luxembourg, Madrid, Oslo, Stockholm, and Vienna.

Washington, July 26, 1963, 10:08 p.m.

176. Paris for Embassy and USRO; Brussels for Embassy and BUSEC. Following letter handed Takeuchi by Secretary Dillon this afternoon./1/ Begin verbatim text:

/1/Circular telegram 179, July 27, reported that when Ambassador Takeuchi called on Secretary Dillon on July 26 to receive this letter, Dillon also showed him a press release that the United States intended to issue over the weekend that would make clear that it would grant no exemption from the interest equalization tax to Japan. Takeuchi became "quite disturbed" and "objected to specific mention of Japan in press statement and indicated GOJ would continue to press for exemption." Dillon agreed not to issue this statement but sought to make clear to him that "some action would be required prior to reopening of markets to halt damaging rumors that exemption would be extended to Japan." (Ibid.)

Dear Mr. Minister:

I have been deeply concerned by your letter of July 24, 1963,/2/ indicating that the proposed U.S. interest equalization tax is expected to deal a severe blow to the Japanese economy and requesting consideration of an exemption for Japan.

/2/Not found.

May I say, first of all, that I regret having been unable to consult with you about this measure before the public announcement was made but I am sure you will appreciate that an action of this type, like a budgetary proposal, which will have major impact on securities markets, cannot be discussed in advance even with the closest of friends. In acting to raise the cost to foreigners of long-term borrowing in the U.S. we were following the advice of our colleagues in the OECD--which will soon include Japan--but the specific technique was of our own development. This particular proposal was not discussed in advance of its announcement with any other government and indeed, the knowledge of the proposal was limited to a very few individuals within my own government. It could not have been otherwise.

I am pleased that it has been possible for your representatives to discuss in detail with Under Secretary Roosa this week the probable effect of the proposed tax on Japan. It has been most helpful to have these consulations before we complete the drafting of the actual legislation which will be proposed to the Congress. In this way we are able to give full consideration to the views of the Government of Japan.

The President would not have proposed the introduction of an interest equalization tax had it not become clear that the need for action to reduce the outflow of long-term capital from the U.S. was urgent. The initiation of direct capital controls would be contrary to our basic precept of free markets and we could not take this route. A substantial increase in our whole long-term interest rate structure, if such an increase could practicably have been effected, would have thrown our economy into reverse and damaged the economy of every free nation as well.

In moving to reduce the outflow of capital we fully realized that our action would have a significant impact on our friends abroad, but the U.S. cannot eliminate its balance-of-payments deficit unless some of the surpluses of our friends are also affected. I trust and am confident that the leading industrial nations of the world including Japan will understand the necessity for the action taken. I have already received assurances from the leading Western European powers that the steps taken last week including the tax proposal to strengthen the position of the dollar are both understood and supported. They are prepared to make adjustments just as we are having to make adjustments.

In recent years the general pattern of U.S.-Japanese economic relationships has been such that Japan has had large net dollar earnings from its trade and service transactions with the U.S., taken together, and has used these dollars as well as the very large volume of dollars borrowed from the U.S., short-term and long-term, to meet its deficits with other areas of the world and to build its foreign exchange reserves. This proc-ess, so necessary to Japan's progress and development, has now helped to establish Japan in a position of strength. This new situation warrants, as I am sure you will agree, increasing reliance of Japan on other sources of capital as well.

We do not expect that our interest equalization tax will prevent Japanese borrowing in our markets. Because of the wide difference between the Japanese interest rate structure and the interest rates which Japan pays on its borrowings in the United States, some part of the borrowings previously contemplated by Japanese firms or the Japanese government should still be practicable. Our markets remain completely open and free. The only difference is an additional element of borrowing cost that will deter some borrowers, but not all. This is why we feel certain that any urgent Japanese needs can continue to be met.

The unusual exemption being considered for Canada should be understood in these same terms. In effect, the Canadians, agreeing with us that the volume of their borrowing here must be restrained, have undertaken to bring about any changes in their own interest rate structure needed to reduce the differentials between interest rates in their markets and ours, and thereby deter Canadian borrowing here. The exemption we are recommending for Canada relates only to new issues of Canadian securities, not to the purchase by Americans of outstanding securities-- the latter will in any event remain subject to tax. This unusual exemption is practicable only because of the unusually close interrelationships between the Canadian capital markets and our own. The significant result is that Canadian borrowing here will be substantially reduced to the approximate levels characteristic of earlier years.

I am sure you will agree with me, regrettably, that the United States must curtail the overall amounts borrowed in the long-term capital markets here, at least for a time, if we are to restore equilibrium in our payments position. It is because that restoration is essential for the stability of the international monetary system that we have been forced to introduce the proposed tax. Its effect will also be to discourage as well many of the European borrowers who, at the time of the President's announcement, were planning a substantial volume of additional financing in the United States. But we will not be required to choose among countries nor among borrowers. The tax method will assert its effects through the market process, with an increase in the comparative cost of borrowing here acting to reduce the amount that will be borrowed.

My feeling, Mr. Minister, is that we must now keep a close watch on developments. We will look forward to further discussions with your representatives here on a continuing basis. I am particularly looking forward to an opportunity of reviewing the entire situation with you when you come to Washington at the time of the annual meeting of the International Bank and Fund in September. No doubt we will have further occasion to consult on the special economic problems in our own balance of payments relationships at the time of the Joint Japan-United States Cabinet Committee meeting in Tokyo in November. I suggest we plan on that basis.

Sincerely yours, Douglas Dillon.

Rusk

80. Telegram From the Department of State to the Embassy in Germany

//Source: Department of State, Central Files, FN 12 US. Confidential; Operational Immediate. Drafted by Henry J. Kuss (Defense) and Robert M. Brandin (EUR/GER) on July 29; cleared by Sullivan (Treasury), Brandin, David Klein (White House), and Grant G. Hilliker (S/S); and approved by Jeffrey C. Kitchen (G/PM).

Washington, July 30, 1963, 9:07 p.m.

300. Joint State - Treasury - Defense. Embtel 374./1/ Re Part I Joint Report we agree that there should be no doubt that the U.S. expects a full offset to U.S. defense expenditures in both payments and orders. Therefore it is proposed that Secretary McNamara present the following letter to Minister von Hassel to make it absolutely clear that we expect full offset. This is in keeping with the past practice of exchanges with the FRG MOD on this subject.

/1/Telegram 374 from Bonn, July 27, claimed that the Joint Report, which was signed on July 24 by representatives of the Department of Defense and the German Defense Ministry and was to be signed by German Defense Minister Kai-Uwe von Hassel and McNamara during the latter's visit to Bonn July 31 - August 2, was not clear whether the payments offset during the next 2 years would be $1,300 million or $1,000 million. The telegram expressed the fear that the German Government would interpret the Joint Report as "U.S. acquiescence to FRG minimum payments schedule totaling $1,000 million." (Ibid.) The Joint Report has not been found.

Begin text

"1. In consonance with the assurances that you gave President Kennedy and in accordance with the memorandum presented to Minister Erhard,/2/ following his discussion with President Kennedy during his recent visit, it is in our mutual interest to offset in full the dollars received by Germany as a result of U.S. defense expenditures in Germany.

/2/See footnote 3, Document 74.

"2. Therefore, the level of FRG payments--as well as orders--resulting from the cooperative logistics arrangements between our respective governments, which will have benefit both to the military capabilities of the armed forces of the FRG and to the U.S. balance of payments, should result in a full offset of U.S. defense expenditures in the FRG, presently estimated at $1,300 million for CY 63 - 64.

"3. It is our understanding that this objective is in consonance with a $1,300 million planned FRG procurement objective for CY 63 - 64." End text.

Re second troublesome feature mentioned Embtel we realize FRG could use para 4 to modify payments schedule, but we do not consider it feasible eliminate reference to Feb. 2 exchange of letters or to amend those letters./3/

/3/The source text has no signature.

81. Editorial Note

Concerns in the Government of Japan about the Kennedy administration's proposed interest equalization tax prompted Japanese Foreign Minister Masayoshi Ohira to come to Washington for discussions with senior U.S. officials. He met separately with Under Secretary Ball and Secretary Rusk on August 1 and with President Kennedy on August 2, 1963. Memoranda of all three conversations are scheduled for publication in volume XXII. Regarding earlier Japanese complaints on this question, see Document 79.

82. Memorandum of Conversation

//Source: Department of State, Presidential Memoranda of Conversation: Lot 66 D 149, July - September 1963. Secret. Drafted by Richard B. Finn (EUR/GER) on September 30 and approved by U on September 30 and the White House on October 4.

Washington, September 24, 1963.

SUBJECT

U.S. Troop Reductions in Europe

PARTICIPANTS

Germans Dr. Gerhard Schroeder, Foreign Minister, Federal Republic of Germany Ambassador Karl Heinrich Knappstein, German Embassy Dr. Albert Reinkemeyer, Deputy Assistant Secretary, Foreign Office Mr. Heinz Weber, Counselor-Interpreter

Americans The President Acting Secretary Ball Ambassador George C. McGhee, American Embassy, Bonn Assistant Secretary William R. Tyler, EUR Mr. Richard B. Finn, Deputy Director, GER

The President said that he also wished to talk about troop reductions in Europe./1/ He noted that there had been a problem arising from the withdrawal of 600 US troops from the Berlin Garrison. He said that the US has very large forces abroad and an extensive logistics line, which has been set up almost on a wartime basis. The United States maintains around 300,000 men in Europe. The President said that the US does not want to take actions which would have an adverse impact on public opinion in Germany but does not wish to keep spending money to maintain forces which are not of real value. Mr. Ball commented that these reductions relate to non-combat units.

/1/For additional documentation on decisions leading to troop reductions in Europe, see Documents 26 ff.

Mr. Schroeder said that the important thing is to have detailed talks in advance so that objectives are made clear and public opinion can be clarified. Otherwise people in Germany would think the US was reducing its forces as a result of some arrangement between the US and the Soviet Union. The important thing is to explain these matters in advance and to carry out the reductions at an appropriate time.

The President said that the US would discuss these matters with the Federal Republic as the situation develops. In the case of US forces in Germany, the President said the arguments against reductions at this time are more powerful than the arguments in favor.

Mr. Schroeder said there are positive aspects to these reductions. The US always maintains large numbers of supporting units with its divisions. If some of these units are withdrawn, this may have an effect on German performance. The Foreign Minister repeated that the Federal Republic would be agreeable to withdrawals if there were good preparation in advance.

The President noted that these reductions involve about 18,000 men, largely in France, Britain and Spain. He emphasized that the US would stay in close touch with the Federal Republic on this subject.

Mr. Schroeder stated that the decisive point is that German public opinion should feel that there has been frank consultation. He commented that Germany is a little different perhaps in this respect. When the President went to Berlin, his statements were of great importance and were well received. Nevertheless the US is at some distance from Germany and the German people feel the need for an "allowance" of goodwill and understanding.

The President said he understood this point. He was glad that he had been able to go to Germany to show the interest of the U.S. and our understanding of the German situation. It is probably hard for the German people to understand clearly some of the problems which the United States considers of major importance, such as the race problem and Cuba.

As the meeting broke up Mr. Ball said it had been a very unusual meeting since the subject of poultry had not been discussed. The President emphasized his interest in an early solution of the problem. Mr. Schroeder said that he was very aware of this matter and that the Federal Republic had been working for what it hoped would be a solution of the problem of poultry levies.

The meeting ended at 11:35 a.m.

83. Telegram From the Department of State to the Embassy in Japan

//Source: Department of State, Central Files, FN 16 US. Limited Official Use; Priority. Drafted by Martin Y. Hirabayashi (FE/EA/J), cleared by Blaser (Treasury) in substance and Thelma E. Vettel (FE/EA), and approved by Leonard L. Bacon (FE/EA).

Washington, November 20, 1963, 9:07 a.m.

1317. Consultative Task Force for interest equalization tax met November 18 in Department. Japanese represented by Minister Yamashita, Ohkawara, Matsumoto and Kaya. US represented by Under Secretary Daane of Treasury, Barnett and Trezise of State, and others.

Interest Equalization Tax

Japanese expressed concern over delayed timing of IET enactment and its implications and GOJ dilemma in attempting to estimate foreign capital component in public investment sector of budget. Said survey of European capital market possibilities has proven disappointing and GOJ now is faced with decision whether to return to New York market for funds.

We informed the Japanese that shape and content of IET would most likely be same as described to them earlier, that delay in passage of bill was result of "legislative glue" and not from any change in favorable attitude of Congress, that we thought it possible House would approve in December and Senate would take action in January. The capital market would then open with the one percent interest rate equivalent in tax added./1/ Said we are delighted that Japanese making efforts obtain European capital. In response to questions we assured them that Washington Post and New York Times editorials suggesting establishment of Capital Issues Committee to screen foreign borrowings did not have USG backing./2/

/1/The Interest Equalization Tax Act was not enacted until September 4, 1964. (P.L. 88 - 563; 78 Stat. 809)

/2/Not further identified.

[Here follows brief discussion of other U.S.-Japan economic questions.]

Johnson

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[End of Section 5]

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