300. Memorandum From the Chairman of the Council of Economic Advisers (Ackley) to Attorney General Katzenbach1
SUBJECT
- Copper
The present situation in the market for copper and the outlook for the near future pose serious risks to the stability of the U.S. economy and to the common defense. These risks can only be avoided if the President is able, as necessary, to release into the market some portion of the copper contained in our national stockpile.
The United States depends for a significant fraction of its copper supply on imports from abroad. Both in the United States and in the free world, copper consumption has been expanding in the past several years more rapidly than copper production. Existing and threatened interferences with the supply of copper may intensify this disparity. As a result, shortages and inflationary price rises have appeared, and threaten to become more widespread. These have tended to interfere with the normal channels of supply of copper to industry and may do so increasingly [Page 744] in the future. Such interferences can impair the ability of defense contractors and suppliers of essential civilian goods and services to produce for the common defense and for the maintenance of a healthy economy.
The world supply of copper has been repeatedly interrupted during the past several years through strikes and political disturbances in several major producing countries. Since most copper producers are operating at capacity, interruptions of supply cannot be easily made up. At the present time, the Chilean copper industry, which produces 15% of the free-world supply and is the largest single foreign supplier for the United States, is on strike, with a loss already which is estimated at 30,000 tons. The supply of copper from Zambia is in serious danger of being cut off by the differences between Rhodesia and her neighbors. Zambian production is even larger than Chile’s, and its interruption would immediately impose serious disruptions on the economies of our allies in Western Europe, with immediate repercussions on our own.
The result of the disruptions already suffered and of the speculation promoted by the threat of further disruptions in the future has been the creation of shortages and inflationary increases in the price of copper. The large producers of primary copper in the world, including the principal U.S. producers, have endeavored to maintain the flow of their copper to their regular customers under long-term contracts. However, growing demand and restricted supply have prevented the large producers from supplying the full needs of their customers, many of whom have had to turn elsewhere for a substantial fraction of their requirements. The residual “outside” or “dealers” market, both in the United States and in Europe, is supplied by small producers and by copper refined from scrap. The enlarged demands placed on this market have forced copper prices above 60 cents a pound both in New York and in London, compared with the recent price of the large primary producers of 36 cents.
These circumstances not only pose serious inequities on users of copper, who must obtain varying fractions of their supply in the two markets, but threaten as well the further disruption of supply. The wide price differential tends to divert copper supply into the outside market. This may result in the increased outflow of copper and copper scrap from the United States, or from the United States and its allies to other countries. And the threat of even greater shortages and still higher prices tends to induce the hoarding of copper, not only by pure speculators but by normal suppliers and users of copper. Indeed, there is already some evidence of the building-up of speculative inventories of copper both in the United States and abroad.
An orderly supply of copper is essential for our economic and military strength. Copper is used in a great variety of products, from electrical machinery to automobiles, from household plumbing to our coinage. [Page 745] It is a key material in the war in Vietnam. It is essential in the production of ammunition, planes and helicopters, communications equipment, military vehicles, and many other defense products. Defense uses in 1966 are expected to be more than double those in 1965.
In addition to the existing and threatened interferences with defense and essential civilian production, the health of our economy and the strength of our Nation are also directly threatened by the increase of our price level associated with recent and prospective developments in the copper market. Higher prices for copper and copper products have contributed significantly to the rise in the index of wholesale industrial prices in the past year, a rise which follows several years of complete stability. As copper prices continue to rise, the pressure on the Nation’s industrial price level becomes greater. Higher industrial prices affect the cost of living, increase the pressures for wage increases in excess of productivity gains, and threaten to touch off a wage-price spiral. A wage-price spiral would greatly impair our ability to restore equilibrium in our balance of payments. A strong balance of payments is essential to our ability to command resources beyond our borders for defense and other essential national purposes. Development of a wage-price spiral would require policies designed to curb inflation by reducing total production and incomes and thereby the economic welfare of every citizen.
The release of copper from the national stockpile will offset the loss of production that has been suffered due to disturbances in the major supplying countries. It will help meet the increased demands caused by the step-up in the war in Vietnam and by expanding civilian needs. It will reduce or eliminate disruptions to the normal channels of copper supply and tendencies for copper to be diverted to export or to useless hoards. By contributing to the stability of copper prices, it will help assure continued stability of our industrial price structure. It will thereby help preserve the cost-price record which has been so fundamental to our economic expansion and to the restoration of equilibrium in our balance of payments.
Clearly, the President needs to be able to release copper from the stockpile for the common defense and to protect the health of the U.S. economy.
- Source: Johnson Library, Confidential File, Oversize Attachments 12/65, Box 161. No classification marking.↩