Special Message to the Congress on Gold and the Balance of
Payments Deficit. February 6, 1961
To the Congress o f the United States:
The gold outflow of the past three years has dramatically focused world attention on a fundamental change that has been occurring in the economic position of the United States. Our balance of payments - the accounting which shows the result of all of our trade and financial relations with the outside world - has become one of the key factors in our national economic life. Mainly because that balance of payments has been in deficit we have lost gold.
This loss of gold is naturally important to us, but it also concerns the whole free world. For we are the principal banker of the free world and any potential weakness in our dollar spells trouble, not only for us but also for our friends and allies who rely on the dollar to finance a substantial portion, of their trade. We must therefore manage our balance of payments in accordance with our responsibilities. This means that the United States must in the decades ahead, much more than at any time in the past, take its balance of payments into account when formulating its economic policies and conducting its economic affairs.
Economic progress at home is still the first requirement for economic strength abroad. Accordingly, the first requirement for restoring balance in our international payments is to take all possible steps to insure the effective performance of our own economic system - to improve our technology, lower our production and marketing costs, and devise new and superior products, under conditions of price stability. The real wealth of a nation resides in its farms and factories and the people who man them. A dynamic economy producing goods competitively priced in world markets will maintain the strength of the dollar.
Thanks to our international reserves we have time, if we use it wisely, in which to strengthen our domestic economy and make it fully competitive with that of other nations. Our situation is one that justifies concern but not panic or alarm.
In my message on February 2, I dealt with the measures for reviving our domestic economy. The steps I now propose will strengthen our dollar position and insure that our gold reserves are employed effectively to facilitate the commerce of the free nations and to protect the stability of their currencies. Because these steps supplement the policies for strengthening our domestic economy, and because we can take them calmly and deliberately, they are not for that reason any less important or less urgent. Those that are within the present authority of the Executive will be the subject of vigorous action. Where action by the Congress is required I urge early consideration and approval.
For the past decade our international transactions have resulted in a deficit-payments that were in excess of receipts - in every year except that of the Suez crisis, 1957. The surplus of our exports over our imports, while substantial, has not been large enough to cover our expenditures for United States military establishments abroad, for capital invested abroad by private American businesses and for government economic assistance and loan programs. All of these outlays are essential. Our military establishments in foreign countries protect the national security. Private investment promotes world economic growth and trade and, through the return of profits to our country, will strengthen our balance of payments in future years. Our economic assistance programs, much the smallest of these three items in its effect on payments balance, is vital in the continuing struggle against tyranny and oppression, and the poverty on which they feed.
Over the period 1951 to 1957 the deficit in our balance of payments averaged about $1.0 billion annually. These did not result in a net outflow of gold from the United States; foreign monetary authorities, banks and private individuals held these earnings as dollars or claims on dollars. Thus our gold reserves were $22.8 billions at the end of 1950 and $22.9 at the end of 1957. But during these years the dollar holdings by foreign countries increased from $8.4 billion at the end of 1950 to almost $15 billion at the end of 1957.
These earlier deficits in our balance of payments were, in fact, favorable in their world effect. They helped to restore foreign monetary systems by enabling foreign countries to earn the dollars which they needed to rebuild their international reserves. They made it possible for the industralized countries of Western Europe to restore the convertibility of their currencies, thus freeing world trade and payments from exchange control. This was of benefit to the export trade of the United States. However, this growth in foreign dollar holdings placed upon the United States a special responsibility - that of maintaining the dollar as the principal reserve currency of the free world. This required that the dollar be considered by many countries to be as good as gold. It is our responsibility to sustain this confidence.
In 1958 and 1959 the deficit in our balance of payments sharply increased - to $3.5 billion in 1958 and to $3.8 billion in 1959. This came about mainly because of lagging exports and rising imports. There was no significant increase in our outlays for military expenditures, private investment or government economic assistance. However in these years, unlike the period 1951-57, the deficit resulted in large transfers of gold to foreign accounts as well as a further increase in foreign dollar holdings. For the two years together, 1958 and 1959, gold transfers to foreign accounts were $3.0 billion while foreign dollar holdings by foreign countries increased by another $4.3 billion. These gold transfers did not make the underlying balance of payments fundamentally worse. They did reflect a decision by foreigners to take more of their earnings in gold and to hold less in dollars.
Last year, 1960, the surplus of our exports of goods and services over our imports increased from $2.2 billion in 1959 to $5.8 billion. This was caused, principally, by an increase - amounting to more than $3 billion - in our exports. This once more reduced what may be called our basic deficit - it was only about $1.5 billion for the year. However, during 1960 there was a large movement abroad of short-term capital. Favorable interest rates abroad, a high rate of growth and good investment prospects in Europe and some speculative fears concerning the future value of the dollar all played a part. It is estimated that this outward flow of short-term funds was between $2 and $2.5 billion, and this was the crucial factor in raising the over-all deficit to $3.8 billion. Of this, $1.7 billion were transferred in the form of gold and $2.1 billion took the form of increased foreign dollar holdings.
An outward movement of short-term funds such as that which occurred in 1960 should not be considered a part of the basic deficit. Such movements are quickly reversible in response to changes in interest rates and other business factors here and abroad. Moreover, insofar as short-term funds transferred to foreign financial centers consist of U.S.-owned capital, they create United States claims against the recipient country. In the new era of convertible currencies upon which we have entered, we may expect that short-term money will continue to flow back and forth. I have requested the Secretary of State and the Secretary of the Treasury to work for still closer cooperation between the monetary and financial authorities of the industrialized free nations with a view toward avoiding excessive short-term money flows which could be upsetting to the orderly development of international trade and payments.
In sum our basic deficit of $1.5 billions is of manageable proportions. And it is this basic deficit which affects the real strength of our currency. But the time has come to end this deficit. It must be ended by responsible, determined and constructive measures.
There are other factors which lend basic support to our monetary and financial position. Our gold reserve now stands at $17.5 billion. This is more than 1½ times foreign official dollar holdings and more than 90% of all foreign dollar holdings. It is some 2/5 of the gold stock of the entire free world.
Of this $17.5 billion, gold reserves not committed against either currency or deposits account for nearly $6 billion. The remaining $11.5 billion are held under existing regulations as a reserve against Federal Reserve currency and deposits. But these, too, can be freed to sustain the value of the dollar; and I have pledged that the full strength of our total gold stocks and other international reserves stands behind the value of the dollar for use if needed.
In addition, the United States has a quota in the International Monetary Fund of $4.1 billion. This can be drawn upon if necessary and our access to the Fund's resources must be regarded as part of our international reserves.
Finally beyond its liquid international reserves, the government and citizens of the United States hold large assets abroad. Western European countries whose currencies are now strong owe us long-term governmental debts of $2.9 billion. Our private short-term assets abroad now are estimated at $4½ billion. Our long-term private investments in foreign countries - including both plants owned directly by American companies and securities of foreign business and governments owned by Americans - total over $44 billion, exceeding foreign investments in the U.S. economy by some $28 billion. In any reckoning of international assets and liabilities, the United States has a strong solvent position.
In short, powerful resources stand behind the dollar. Our gold and monetary reserves are large; so are the physical and monetary assets we hold throughout the world. And, in the years ahead, if the program I previously outlined is pursued, the dollar will have the added strength of the reviving power of the American economy itself.
Certain firm conclusions follow:
1. The United States official dollar price of gold can and will be maintained at $35 an ounce. Exchange controls over trade and investment will not be invoked. Our national security and economic assistance programs will be carried forward. Those who fear weakness in the dollar will find their fears unfounded. Those who hope for speculative reasons for an increase in the price of gold will find their hopes in vain.
2. We must now gain control of our balance of payments position so that we can achieve over-all equilibrium in our international payments. This means that any sustained future outflow of dollars into the monetary reserves of other countries should come about only as the result of considered judgments as to the appropriate needs for dollar reserves.
3. In seeking over-all equilibrium we must place maximum emphasis on expanding our exports. Our costs and prices must therefore be kept low; and the government must play a more vigorous part in helping to enlarge foreign markets for American goods and services.
4. A return to protectionism is not a solution. Such a course would provoke retaliation; and the balance of trade, which is now substantially in our favor, could be turned against us with disastrous effects to the dollar.
5. The flow of resources from the industrialized countries to the developing countries must be increased. In all that we do to strengthen our balance of payments, we must be especially mindful that the less developed countries remain in a weak financial position. Help from the industrialized countries is more important than ever; we cannot strengthen our balance of payments at the expense of the developing countries without incurring even greater dangers to our national security.
6. The United States must take the lead in harmonizing the financial and economic policies for growth and stability of those industrialized nations of the world whose economic behavior significantly influences the course of the world economy and the trend of international payments.
To carry forward these policies I propose a program for action, which may be divided into two parts. The first part describes those measures which will improve domestic monetary arrangements and strengthen international cooperation in economic and monetary policy. These measures will help us better to meet short-term demands on reserves such as those of recent years. The measures in the second group are designed to correct the persisting basic deficit in our balance of payments.
I. MEASURES TO EASE THE SHORT-TERM
1. Measures to Improve International Monetary Institutions.
Increasing international monetary reserves will be required to support the ever-growing volume of trade, services and capital movements among the countries of the free world. Until now the free nations have relied upon increased gold production and continued growth in holdings of dollars and pounds sterling. In the future, it may not always be desirable or appropriate to rely entirely on these sources. We must now, in cooperation with other lending countries, begin to consider ways in which international monetary institutions - especially the International Monetary Fund - can be strengthened and more effectively utilized, both in furnishing needed increases in reserves, and in providing the flexibility required to support a healthy and growing world economy. I am therefore directing that studies to this end be initiated promptly by the Secretary of the Treasury.
2. Use of United States Drawing Rights in the International Monetary Fund.
The United States has never made use of its drawing rights under the International Monetary Fund to meet deficits in its balance of payments. If and when appropriate, these rights should and will be exercised within the framework of Fund policies. The United States will also support continued efforts in the Fund to facilitate drawings by other members in the currencies of industrialized countries whose payments positions are in surplus and whose reserves are large. This will help to reduce the burden now borne by the dollar.
3. Special Interest Rates for Dollar Holdings by Foreign Governments and Monetary Authorities.
( a ) The Federal Reserve Act should now be amended to permit the Federal Reserve System to establish separate maxima for rates of interest paid by member banks on time and savings deposits held in this country by foreign governments or monetary authorities (Section 19, paragraph 14). This authority, when exercised, would enable American banks to make a maximum competitive effort to attract and hold dollar balances which might otherwise be converted into gold. At the same time domestic rates, when desirable for reasons of domestic policy, could be held at a lower level. I will shortly send to the Congress a draft of the needed legislation.
( b ) I have directed the Secretary of the Treasury to use, whenever it appears desirable, the authority already extended to him by the Second Liberty Bond Act to issue securities, at special rates of interest, for subscription and holding exclusively by foreign governments or monetary authorities. The exercise of this authority could provide an additional inducement to hold foreign official balances in dollars.
( c ) As a final means of holding or attracting foreign dollars, the Congress should enact a measure designed to unify the tax treatment accorded the earning assets of foreign central banks. At present, income derived by foreign central banks of issue from bankers acceptances and bank deposits is exempt from tax under section 861 of the Code. Income from United States Government securities, however, is taxable to foreign central banks in the absence of applicable tax treaty provisions or a special ruling exempting a particular bank from taxation under particular circumstances. Suggested legislation will shortly be forthcoming.
4. Prohibition on Holding of Gold Abroad by Americans.
The recent Executive Order forbidding the holding of gold abroad by Americans will be maintained. It was fully justified on grounds of equity. It will also help to prevent speculation in the gold market. I am directing the Secretary of the Treasury to keep me advised on steps being taken for effective enforcement. I place everyone on notice that those few American citizens who are tempted to speculate against the dollar will not profit in this manner.
II. MEASURES TO CORRECT THE BASIC PAYMENTS DEFICIT AND ACHIEVE LONGER-TERM EQUILIBRIUM
1. Action by the Senate to Approve the Organization for Economic Cooperation and Development.
I earnestly request early action by the Senate approving United States membership in the Organization for Economic Cooperation and Development. The OECD, in which the industrialized countries of Western Europe, the United States and Canada will be joined, is of vital importance for assisting, on a cooperative basis, the developing countries of the free world. It will also provide a solid framework within which we can carry out intensive and frequent international consultations on the financial and monetary policies which must be pursued in order to achieve and maintain better balance in the international payments position.
2. Export Promotion.
The Department of Commerce will provide energetic leadership to American industry in a drive to develop export markets. Firms and industries will be encouraged to step up their efforts to develop exports and given every assistance in doing so. As American industry comes to realize the vital role of export earnings for our foreign policy, I have little doubt of its response.
We will promptly increase our commercial representatives and facilities abroad. This is a joint program of the Departments of Commerce and State which must proceed with drive and conviction in order to produce effective results. The budget which has already gone to Congress requests $1,250,000 for the State Department to add 41 Foreign Service Commercial Attaches overseas, together with 48 experienced foreign nationals and supporting American staff.
The new budget requests will also allow an increase in overseas commercial facilities. The Commerce Department is doubling its Trade Mission program from 11 to 18 per year and will provide more useful information to our overseas posts. I am ordering rapid completion of our two new foreign trade centers at London and Bangkok and have requested the departments to explore whether three more could be added next year in Africa, Latin America and Europe.
3. Cost and Price Stabilization.
Our export promotion efforts, no matter how well devised or energetically pursued, will not be effective unless American goods are competitively priced. Our domestic policies - of government, of business and of labor - must be directed to maintaining competitive costs, improving productivity and stabilizing or where possible lowering prices. Measures to achieve these ends which are important for the domestic economy are even more vital for our international competitive position. I have already stated my intention of creating an Advisory Committee on Labor and Management Policy to encourage productivity gains, advance automation and encourage sound wage policies and price stability.
4. Export Guarantees and Financing.
Our Export-Import Bank must play an increasingly important role in our export promotion efforts. Last year the Export-Import Bank announced a widening of the facilities which it offers for extending credit to American exporters. Despite the improvements made, these facilities are not yet adequate, nor are they comparable to those offered by foreign countries, especially those offered to small and medium- sized exporting concerns and those offered for the financing of consumer goods. I am directing the President of the Export-Import Bank, by April 1, to prepare and submit to the Secretary of the Treasury, as Chairman of the National Advisory Council on International Monetary and Financial Problems, a new program under the Export-Import Bank to place our exporters on a basis of full equality with their competitors in other countries. Also, I have asked the Secretary of the Treasury to initiate and submit by the same date a study of methods through which private financial institutions can participate more broadly in providing export credit facilities.
5. Foreign Travel to the United States.
Foreign travel to the United States constitutes a large potential market hitherto virtually untapped. American travelers annually spend some $2 billion in foreign countries. Foreign travelers only spend about $1 billion in this country. Economic conditions in many foreign countries have improved to the point where a strong travel promotion effort by this country can be expected to yield significant results. The Department of Commerce, in cooperation with the Departments of State and Treasury, will announce shortly a major new program to encourage foreign travel in the United States along the lines envisaged in S. 3102, introduced by Senator Magnuson at the last session of the Congress. This program will include the establishment of travel offices abroad; new advertising campaigns; action to simplify our visa and entry procedures for temporary visitors; and efforts to relax foreign restrictions on travel to the United States. The program will be energetically administered in the Department of Commerce. I am asking the Secretary of Commerce to report in full on plans and prospects by April 1.
6. Agricultural Exports.
Our agricultural industry, which is of unparalleled efficiency, must make its full contribution to our payments balance. I am directing the Secretary of Agriculture to report on all feasible and internationally desirable means of expanding our exports of farm products, and to emphasize the need for export expansion as a primary objective of our new farm programs.
7. Policy on Economic Assistance.
Our foreign economic assistance programs are now being administered in such a way as to place primary emphasis on the procurement of American goods. This assistance, accompanied as it is by the export of American products, does not therefore have a significantly adverse effect on our balance of payments. (Not more than 20% of the funds expended for economic grants, development loan assistance, technical assistance and contributions to international organizations, which amounted to $2.6 billion in 1960, is today available for expenditures outside the United States, and we intend to keep an even closer review of these items.) These restrictions will be maintained until reasonable over-all equilibrium has been achieved. Then the United States will discuss with other capital-exporting countries the desirability of instituting common policies for world-wide procurement in the administration of economic development or assistance programs.
8. Tariffs, Restrictions and Discriminations Against American Exports.
Quota discriminations against American exports have largely disappeared with the return of currency convertibility. We will press for prompt removal of the few restrictions that still exist, as well as for the maximum liberalization of remaining nondiscriminatory quotas in other industralized countries, which apply mainly to agricultural exports. In the tariff negotiations now going forward under GATT we shall seek the fullest possible measure of tariff reduction by foreign countries to the benefit of our exports.
9. Promotion of Foreign Investment in the United States.
We shall press those Western European countries with strong reserve positions to eliminate the restrictions they still maintain limiting the opportunities for their citizens to invest in the United States and other foreign countries. Also, we are initiating, through the Department of Commerce, a new program to bring investment opportunities in the United States to the attention of foreign investors in the industrialized countries.
10. Abuse of "tax havens." Taxation of American Investment Abroad.
I shall recommend that the Congress enact legislation to prevent the abuse of foreign "tax havens" by American capital abroad as a means of tax avoidance. In addition, I have asked the Secretary of the Treasury to report by April 1 on whether present tax laws may be stimulating in undue amounts the flow of American capital to the industrial countries abroad through special preferential treatment., and to report further on what remedial action may be required. But we shall not penalize legitimate private investment abroad, which will strengthen our trade and currency in future years.
11. Foreign Assistance Contribution to the Less Developed Countries and the Common Defense.
It is indispensable that the industrialized countries of the free world join in undertaking systematic budgetary contributions for economic assistance to the less developed countries and the common defense. These contributions should be fully commensurate with their economic and financial positions. Some countries are fulfilling this responsibility; it is a matter of disappointment that others have not yet undertaken to do so. Such actions are important in the short run to achieve a better balance in international trade and payments. Even more important, they are essential to the continuing and effective discharge of our common responsibilities for free world security, economic growth and stability.
12. Reduction of Customs Exemption for Returning American Travelers.
After World War II, as part of our efforts to relieve the dollar shortage which then plagued the world, Congress provided for two additional increases of $300 and $100 in the duty-free allowance for returning travelers, for a total of $500. The primary purpose for this change having vanished, I am recommending legislation to withdraw this stimulus to American spending abroad and return to the historic basic duty-free allowance of $100.
13. Centralized Review of Dollar Outlays.
Through the Bureau of the Budget, it has long been our sound financial practice to centralize the review of total spending of the Departments and Agencies of the Government of the United States, including their spending abroad. Under present circumstances, foreign outlays must be examined in a new perspective. Accordingly, I am instructing the Director of the Bureau of the Budget, in consultation with the Secretary of the Treasury, to develop special procedures for analyzing that part of the requests of departments and agencies for spending authority which will involve overseas outlays to insure that our budgetary decisions will be taken with full understanding of their projected impact on the country's balance of payments.
14. U.S. Military Expenditures Abroad.
National security expenditures abroad constitute one of the largest items in the outflow of dollars, amounting to about $3.0 billion a year. We must maintain a fully effective military force wherever necessary and for as long as needed. While it is clear that we must exercise maximum prudence in our dollar outlays abroad, it has become clear that the present limitation on dependents was not the best way to accomplish this savings, and that this limitation was seriously hurting morale and recruitment in the armed forces. At the same time, the Secretary of Defense has informed me that equivalent dollar savings could be made through other measures, including limitations on expenditures abroad by military personnel for tourism and the purchase of durable consumer goods. Accordingly I have directed him to rescind the limitation on dependents and instead to put these measures into effect immediately.
I have also asked him to review the possibilities for savings in the logistic support of our forces, including the combined use of facilities with our allies. We shall also, where appropriate, urge the purchase of the newer weapons and weapons systems by those of our allies who are financially capable of doing so. We shall continue the policy inaugurated last November of emphasizing United States procurement for our military forces abroad wherever practicable, even though some increased budgetary cost may be incurred. Since foreign procurement of this nature has amounted to almost $1 billion a year, significant savings in dollar outflow can be expected - and I am asking the Secretary of Defense to report on these and the other savings by no later than April 1st, to see if further steps are needed then.
These measures, combined with increasing confidence in the dollar abroad and steady economic growth at home, can cure the basic long-term deficit in our balance of payments and check the outflow of gold. They symbolize a new dimension of this nation's foreign and domestic economic policies - a new area of difficult problems - but they are problems which can be met by forceful and timely legislative and executive action.