62. Memorandum for the Record by Secretary of the Treasury Anderson0
SUBJECT
- Meeting with President-elect Kennedy and Secretary of the Treasury Anderson, December 6, 19601
I pointed out to Senator Kennedy that he would be the first President in the history of the United States who, at the very beginning of his term and possibly throughout his term of office, would face the problem of deficits in our balance of payments of such magnitude and under such new conditions as would require judgments and considerations that were essentially unique to American Administrations.
The deficit in our balance of payments was not an issue in the previous political campaign and was little more than a passing issue in the current Presidential campaign. Consciousness of the American [Page 148] people and, to a large extent, those of other countries became focused upon the imbalance of international payments as a result of the steep rise in the price of gold on the London market in October of 1960. This, of course, was merely an evidence or a symptom of what had occurred and what was occurring.
The problem, in order to be brought into perspective, must be analyzed from the standpoint of changing conditions from 1957 through 1960. In the period of 1957 and 1958, productive capacity of Western Europe and Japan became completed. They achieved external convertibility in their currency and they began to sell competitively throughout the world. The United States which prior to that time had been the principal supplier of goods because of the inability of others to compete found itself suddenly in a highly competitive position.
Prior to the 1957–58 era and subsequent to the end of the war in 1945, the United States had not only supplied large sums of money in the form of grants, loans, and other types of help, but had encouraged overseas investment and had allowed other countries to erect barriers against trade with the dollar area. When the competitive position was restored, the restraints against trade with the dollar area, for the large part, continued. As a result of these and other circumstances, the United States began to run large deficits in its balance of payments in 1958, amounting in that year to $3.4 billion; in 1959, to $3.8 billion; and in 1960, it appeared that the deficit would be within the range of $3.5 billion. These dollars, whether distributed directly to industrialized countries or to the developing countries, tended to accumulate in the hands of the industrialized countries of Western Europe and Japan. For the most part, these countries had achieved their traditional and historical balance between the holding of gold and foreign exchange as a part of their own reserves. As a consequence, dollars which now continue to accumulate in the hands of such countries might very well be expected to be cashed in against the limited gold reserves of the United States.
We therefore had to regard expenditures in our budget if made in the United States as the expenditure of an ordinary dollar, but if transferred abroad, very likely to be in terms of a gold dollar.
It was pointed out that while growth and economic development in this country were both desirable and essential, a rise in GNP with no substantial increase in our gold stocks and with continuing deficits could still supply the elements of a lack of confidence in the international financial system which if allowed to reach unmanageable proportions could bring about serious problems of national and international deflation.
As a part of the problem of confidence, consideration must be given to both external and internal financial problems of the Government. Externally, we must seek to achieve a reasonable balance in our [Page 149] payments position with reference to other countries, we must insist that discriminations which were once tolerated against trade with this country be removed, and we must carefully examine our commitments which result in an outflow of dollars that will be accumulated in the hands of other strong industrial countries.
Of equal importance in the maintenance of confidence is the way in which we manage our internal affairs so as to avoid undue inflationary pressures. This means that strong efforts must be made to pay for our various governmental programs out of current earnings at times when levels of business activity are reasonably high. While a balanced budget is not indispensable and should be evaluated in the light of existing economic circumstances, a continuing effort should be made to achieve balance and to avoid large deficits; and over a period of a business cycle, efforts should be made to achieve a surplus position in excess of any deficits that may have occurred. Such surpluses should be used to retire portions of the national debt.
The way in which we manage the national debt is not only of importance to our citizenship in this country but is carefully examined by others who hold dollar claims against us. Such holders of dollar claims are vitally concerned with the maturity structure of the debt, the avoidance of a continual shortening of the marketable debt, and the freedom of the Treasury to operate freely in the market without statutory restraints.
It was further pointed out that I had reviewed these problems not only with members of this Administration and with Committees in the Congress and Congressional leaders but even with people who had come to be advisers to Senator Kennedy, for more than two years; that while there had been a general understanding of the problem and a belief that something should be done, the attitude had been generally to avoid taking any steps at a given time and to postpone the making of any decisions in this field other than the generally agreed desirability of increasing our exports.
It was pointed out to Senator Kennedy that over the past two years strenuous efforts had been made to persuade other countries to remove their restraints against trade with the dollar area. Substantial progress had been made; much more needed to be done.
It was emphasized that in our efforts to bring our balance of payments into more reasonable equilibrium, we should try to avoid actions that would lessen or hamper the development of international trade and the continuing progress of the developing countries of the world. This meant that serious choices had to be made. Nothing which affected our balance of payments should be considered sacrosanct; nor should any course of action be permitted to achieve a new attractiveness simply because it is easy.
[Page 150]The acceleration in the gold price on the free market in London since October 1960 and the movement of gold out of the country during the last half of 1960 were carefully reviewed. It was pointed out that this movement began in serious proportions in July 1960 and had continued in varying degrees since that time. Senator Kennedy was told that during a meeting of the World Bank and International Monetary Fund in September 1960 the United States Government had expressed to the Chancellor of the Exchequer the strong belief that the price of gold should not be allowed to fluctuate substantially above the parity price of $35 an ounce; that some central banks, notably the Bank of Italy, had been securing their requirements of gold in the London free market, thereby exerting pressure on demand in that market. It was suggested that both the British and the United States should indicate to the Governor of the Bank of Italy that the requirements of the central bank of Italy could be more appropriately met by the Bank of Italy buying directly from the United States in the normal course.
After the rise of the gold price in London, there were some statements to the effect that the British had not been certain as to whether or not gold supplied to the free market in London by the Bank of England could be replenished by purchases from the United States. I described to Senator Kennedy a meeting with the Deputy Governor of the Bank of England, Mr. Parsons, which resulted in a statement by the United States authorities that we did not object to the way in which the Bank of England was buying and selling gold in the London free market and that we had told Governor Parsons that we would expect if this practice was followed in the future, that the United Kingdom would be buying some gold from us. We stated that the London free market was their market and should be operated by them, but that we should be in daily communication, or hourly communication if necessary, in order to avoid widespread swings in the price for which gold was sold in London. Senator Kennedy was advised that this arrangement was now working satisfactorily and that we hoped we could avoid situations which would so accelerate demand as to increase the complexity of the problem.
It was suggested that a number of plans had been put forward concerning the International Monetary Fund and other efforts of international cooperation. While none of these ideas should be discarded or cast aside, they should be reviewed carefully for both current and future implications. They should be evaluated in the light of whether or not they went to the basic problem of imbalance in our international accounts or whether they simply were temporary expedients to postpone the issue or were aimed primarily at additional international liquidity rather than the settlement of imbalances.
[Page 151]I pointed out that we had carefully reviewed with Mr. Paul Nitze our recent trip to Germany and had made clear to him that while not asking the advice of Senator Kennedy with reference to our proposals, any counsel or advice he wished to give would be most welcome and would be taken into account.
On our return from Germany, we reviewed again with Mr. Nitze the details of our meetings in Germany, France, and Great Britain, and particularly pointed out those portions of our mission which were not accurately reported in press statements. On this occasion, we made clear that any suggestions from Senator Kennedy or his associates would be welcome.
Senator Kennedy said that he understood the difficulty of the tasks involved in our European trip and that it certainly would make his efforts in dealing with our international imbalances “an easier one.” There were reviewed a number of possible measures which might be considered in trying to bring our balance of payments into more reasonable equilibrium with an analysis of both the good points and difficulties involved in each course of procedure.
The Senator was informed that long hours of study had gone into all phases of this problem in the Treasury and with other agencies of the Government and that these studies both in the form of memoranda and in oral consultations would be made fully available to him and to his associates. It was suggested that both before and after he assumed the responsibilities of the Presidency those of us who had worked closely with the problem would be available for such consultation as he might require.
Senator Kennedy thanked me for the review and stated that President Eisenhower had already given him a substantial review of his own analysis of the problem. He stated that he recognized that it was one of the important problems with which he would be confronted; that he was appreciative of the efforts which had been made for achieving a correction of the international imbalances thus far and that he was sure that his own efforts would be assisted greatly by the work which already had been done.
This memorandum was dictated by Secretary of the Treasury Robert Anderson at my request—for the President’s record.
- Source: Eisenhower Library, Whitman File, Presidential Transition Series. No classification marking. Anderson did not sign or initial the memorandum.↩
- The meeting was held in the White House following a meeting between President Eisenhower and President-elect Kennedy which covered a number of issues, including the balance-of-payments problem. For Eisenhower’s account of the conversation, see Dwight D. Eisenhower, Waging Peace, 1956–1961 (Garden City, NY: Doubleday, 1965), pp. 712–716.↩