THE PROBABLE EFFECTIVENESS OF RECENT ADMINISTRATION MEASURES TO CURB THE BALANCE OF PAYMENTS DEFICIT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80B01676R000200140013-3
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 2
• Document Creation Date: December 22, 2016
• Document Release Date: July 22, 2010
• Sequence Number: 13
• Publication Date: January 1, 2000
• Content Type: MEMO

Approved For Release 2010/07/22 : CIA-RDP80BO1676R000200140013-3 -on ^
SUBJECT: The Probable ~zlc~ ~l~??~~ - ents Deficit o,jl
h Balance of paym
t
e ;--"
Measures to Curb
1. This memorandum is for your which transmitted a program
President's message to Congress of 18 July
for correcting the U.S. balance of payments deficit. The Administra-
tion has estimated that the enactment of the proposed measures and cuts
in U.S. Government expenditures abroad would leadtto ardu stantial billion
improvement in U.S. international payments
decrease in the U.S. deficit by 1965; the current total deficit, judging
from the first quarter of 1963, is running at about $2.8 billion this
cularly
year. This forecast appears to us in ORE to be optimistic, partire
now that Canada is excluded from the provisions of the security p
information, and concerns the
move to curtail federal
th
2. The key measures, in addition to e
expenditures abroad, are the proposed interest-equalization tax on U.S.
arrange-
purchases of foreign securities, the announcement of standby
Fund (') authorizing U.S.
m.ents with the International Monetary m lion during the next year, and the
withdrawals from the fund of $500
crease
increase in the Federal Reserve rredtsthe rediscount to,cn ontinuectolinpaer.
The arrangements with the IMF pe to finance the U.S. deficit. This
its dollar holdings and thus help deficit-
is other url is an interim step, which is effective in the short-n liminate le dfrcit.
corrective measures are (hopefully) operating e
amount
This measure is a technical one to avoid what to would
hold dollarsSe By itself
it wil to a contraction in the worhe'causelofgthe increasing supply of dollars
it does nothing to remedy
available to the rest of the world.
The President's security purchase tax proposal is intended
3. The retard that part of the outflow of U.S? capital hwhich is for the
purchase years,
purchhase of foreign securities. This flow,
is summarized as follows:
tax.
5 `
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 1960
1961
1962
1963
(1st qtr.)
U.S. purchase of new foreign issues
573
523
1,076
512
U.S. purchases of outstanding issues
177
353
55
26
Total U.S. purchases of foreign
securities
750
876
1,131
538
From Western Europe
133
266
195
84
From Canada
241
327
379
316
All others
376
283
557
138
4. The leading foreign borrowers in New York are Canada, the World
Bank and Israel; none of these countries' securities would be subject
to the proposed tax. Since the beginning of 1960, 45 percent of total
U.S. purchases of foreign securities have come from Canada and a bare
20 percent from Western Europe on whose securities the burden-of the
tax would fall. Thus, the Administration's estimate that the proposed
tax would reduce U.S. purchases of foreign securities by more than
50 percent seems unduly optimistic.
5. Just prior to the President's message, the Board of Governors
of the Federal Reserve System announced an increase from three to three
and one-half percent in the rate at which the Federal Reserve Banks will
rediscount commercial paper and other acceptable assets. Since this
rate represents the cost of short-term. accommodation to commercial banks,
it is the fundamental determinant of the entire structure of U.S. interest
rates. Because historically a shift in the interest-differential between
New York and London in favor of New York has been associated with a net
movement of short-term funds into New York (and vice versa), it is to be
expected that the higher level of U.S. interest rates resulting from the
recent Federal Reserve action will curb the outflow of U.S. short-term.
capital abroad. Implicit in the President's message-is the estimate that
the increase in short-term interest rates would result in a $500 million
decline in the short-term capital flow. Whether the present interest-
differential will be large enough to accomplish this decline remains to
be seen; but because short-term capital flows have been so sizeable of
late (an average annual outflow of $2 billion in 1960-62) interest rate
adjustment a.n-nPar.+.n -hp n ?n+o-+ +'.n,
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Millions of dollars