Foreign Relations of the United States, 1958–1960, Foreign Economic Policy, Volume IV

57. Memorandum of Conference With President Eisenhower⁰

November 9, 1960.

OTHERS PRESENT¹

• Secretaries Anderson, Dillon, Baird, Gates, Douglas, General Lemnitzer, Mr. Stans, Mr. Wm. McC. Martin, Dr. Paarlberg, General Persons, Mr. Kendall, General Goodpaster

Secretary Anderson said he had asked to meet with the President to talk about the gold situation and urgent steps that must be taken to alleviate it. As he spoke, the U.S. holds $18,116,000,000 in gold. It will sell $218 million on Thursday,² with the result that on Friday we go below $18 billion for the first time in many, many years. $12 billion worth of gold is required to cover our currency, in accordance with law. There are $9.5 billion in instant demands against us that can be filed at any time. He said he did not know what further orders for sale of gold will come in, but many small countries are coming in to ask for their gold, of which they have about $2 billion in demand claims. He read off a list of some twenty small countries now asking us to provide their gold to them.

The President noted that many of these countries are receiving substantial assistance from us and said that perhaps we should stop giving aid to them. Mr. Anderson said the problem they face—which is a real one—is that they could not stand the loss that would be involved if the dollar were to decline in value.

Mr. Anderson said there are three areas in which actions respecting the gold situation might be taken. The first of these pertains to trade—tariffs, customs, etc. To act in this area would be a reversal of policies we have worked hard to place in effect in the United States. The second area of action is monetary. Congress could be asked to reduce the requirement for 25% cover for our currency. This would set off the biggest monetary debate in our history with terribly damaging effects. The President commented that the gain from decreasing this percentage would simply be a temporary one. In addition, we could change the dollar price of gold but others would do the same and we would have gained nothing. Also we could let the price fluctuate, with much the same effect. In addition, we could embargo the export of gold. This would destroy the international gold standard in our lifetimes, but would not destroy our own monetary system. A further step would be to prohibit the holding of gold abroad by Americans. If we were to do this, other countries would take this as a sign that we are going to devalue our gold, and start a run on our gold stocks. This effect could, however, be alleviated by allowing something like a year for people to dispose of their gold holdings. None of these steps appears too attractive. There is a third field in which the United States can act alone. We can cut down and in some cases eliminate the stationing of dependents of military and civilian personnel abroad. We can reduce our troops overseas. We can stop the procurement of non-U.S. items for our post exchanges and commissaries. In our development aid to underdeveloped countries, we can tie our loans to purchases of U.S. products. We can stop the procurement by our military services of supplies from foreign sources. And we can slow down and impede the arrangements for our tourists going abroad.

The President said he had another idea he wanted to have discussed. We now have about $21 billion worth of refined uranium and plutonium. This has great future value as a source of power. He wondered if this could be substituted for gold. Gold became the currency base because of its general usefulness and desirability. Uranium has now become valuable and could perhaps be used in the same way. Mr. Anderson noted that gold is worth only what it can be used for, and much of its value is purely psychological. He indicated question as to whether uranium could be brought into the same kind of use.

Mr. Anderson went on to say that our military expenditures abroad amount to something like $3 billion a year, of which $1 billion is for uranium. Our own supplies of uranium are more than ample now but we are committed to long-term purchases from South Africa. The President said he is all for everything we can do to stop the outflow of gold. He knew the actions would not be easy. Mr. Anderson said that basically the strength of the U.S. dollar is not its gold support but the functioning of our economy. However, the fact is that gold activities can damage our military system and our economy as well as the world economy. Mr. Anderson said that, as soon as it became apparent Mr. Kennedy was the probable victor in the election, confidence in the U.S. dollar declined rapidly and demands for gold arose so that by now we have almost a gold panic situation. With confidence disappearing, we are at the point where the world monetary system, and our own, can be wrecked within a few short weeks. He said he had given a great deal of thought to the steps that might be taken. He recognized that it might be preferable to restrict tourists and to bring home military dependents. He was sure that if we were to raise tariffs there would be a rush to high protection both in the United States and around the world. We have increased our exports to a marked degree this year, and cannot expect to do much better on this score. In fact, our favorable export position this year is in part due to a surge of buying abroad—particularly of jet aircraft. We are at the point where it is imperative to do something quickly and dramatically to try to restore confidence. His suggestion is that we do now what we can unilaterally. Beyond this we should take monetary steps. Only as a last resort should we move in the area of restricting trade.

The President said he would add that a first step is that we must without fail balance our budget both for FY–61 and FY–62. Mr. Anderson agreed, saying it is necessary both to achieve a better international balance of payments and to pay as we go domestically, because much of the loss of confidence in the dollar has come from the prospect of inflation under the new administration. The President noted in passing that we could help ourselves substantially by selling U–235 to France, at the same time saving France the necessity of making great capital outlays for a separation plant.

Mr. Stans said that he wanted the group to know that at the moment we appear to be in the red for fiscal year 1961. Profits are down, with corresponding drop in tax receipts, and expenditures are running above the budget, notably in Defense. He said it would take drastic action to put us into the black again for FY–61, but said it could be done. With regard to FY–62, the first run out of a budget shows a deficit of the order of several billion dollars. Much can be done to improve upon this but here again there is a real question as to whether we can show a balanced budget. He said he is going back over all the submissions to try to force them down. He said his main complaint with the action proposed is that they do not go far enough. He thought we are at the point where we must cut our troops in Germany, without waiting to see what the Germans are willing to contribute. Mr. Anderson said he thought it was essential that these steps be decided upon and announced before he and Mr. Dillon meet with Chancellor Adenauer. Maintaining our forces abroad costs us something like $685 million a year in adverse impact on our balance of payments. Mr. Dillon noted that this figure could be cut to about $250 million by bringing our dependents out of Europe. The President said that the tour of duty there could be cut to something like eighteen months. In Europe this ought to be acceptable. He thought Mr. Gates should not go to the services on this matter, but should tell them what is to be done. He also thought we should not spend so much abroad for military procurement.

Secretary Anderson said that this action does not signify that we have followed the wrong policies in the past. The fact is that we are in a new situation wherein there is an intolerable drain on our gold. He suggested that the group take a few days to study the matter but reiterated that he thinks it is essential to do this before he visits Germany. Mr. Dillon agreed that action should be taken to cut down dependents before the visit is made. The President said that this action should include cutting down on the dependents of Foreign Service personnel, except for the Ambassador or one or two top aides. Mr. Gates said that the best way to make a cut of this kind is the stupid way—that is to impose a percentage cut. Nothing else will work. He asked that the President not single out the military to have them without their dependents, and thus make them second-class citizens. The President said he had no intention of doing that. He noted that other countries do not have the tremendous embassy staffs that we seem to have, nor do they have large numbers of personnel in technical areas such as agriculture, labor, etc. Mr. Dillon referred to personnel of ICA, and said that many of these families can be brought back.

Secretary Anderson said he would like to see this made a Presidential directive and kept very secret for the moment. The President said it must become a public document when approved. He reverted to the desirability of lifting restrictions regarding the sale of U–235 abroad.

Mr. Martin said he is in complete agreement with the actions proposed. He said the situation will certainly get away from us unless we act quickly to stop this outflow.

The President suggested there are many things that can be done, such as slowing down the processing of passports, so as to cut down on tourism. He asked Mr. Anderson to serve as Chairman of the group to iron out what can be done. He noted that if this is talked about in the Defense establishment, it will leak to the press. General Persons said there have already been stories in the press about it. Finally, the President said there could be cuts made in military manpower, including military attachés and MAAGs. He thought great reductions could be made in the personnel in our embassies.

Following the meeting, the President asked me to stay in touch with what is done to see that the same principles are applied to Foreign Service and other non-military personnel as to military personnel. I told him I was still unsatisfied on this whole matter inasmuch as the steps that were being discussed did not account for more than 1/10 of the net gold outflow. The real cause of gold outflow is a rush of investment money abroad, largely to profitable areas in Western Europe, the net effect of which ties dollars down for long-term investments, with the receiving countries converting them immediately into demand claims against our gold. Until something is done about this these other moves are not substantial except for their psychological effect. The President agreed but noted that no one had come to him with any plan to deal with this aspect of the matter.

G.
Brigadier General, USA

0. Source: Eisenhower Library, Whitman File, DDE Diaries. Secret. Drafted by Goodpaster on November 14.
1. Those present not previously identified include Deputy Secretary of Defense James H. Douglas, JCS Chairman General Lyman Lemnitzer, and Special Counsel to the President David W. Kendall.
2. November 10.