Special Message to the Congress on Balance of Payments.

To the Congress of the United States:

Soon after my inauguration, I reported to the Congress on the problems presented to this nation by three successive years, beginning in the late 1950's, of mounting balance of payments deficits accompanied by large gold outflows; and I announced a program designed to restore both confidence in the dollar and eventual equilibrium in our international accounts. The challenge posed by those pressures was heightened at that time by the need to halt and reverse the spread of unemployment and revive our faltering economy. Rejecting a choice between two equally unpalatable alternatives-improved employment at home at the cost of a weaker dollar abroad or a stronger dollar at the cost of a weaker economy and nation-we sought a new course that would simultaneously increase our growth at home, reduce unemployment and strengthen the dollar by eliminating the deficit in our international payments. It is appropriate now--nearly two and one-half years later-to look back on the problems faced, to review the progress made and to chart the course ahead.

There is much from which to take heart. Our economy has resumed its growth and unemployment has been reduced. The dollar remains strong, bulwarked by nearly 40 percent of the free world's monetary gold stock as well as by a newly constructed network of bilateral and multilateral financial arrangements. Our gold outflow has been halved. There are signs of longer-run improvement in our world competitive position, as our prices and costs hold steady while others are rising. The deficit in our balance of payments has been reduced-from $3.9 billion in 1960 to $2.4 billion in 1961 and $2.2 billion in 1962.

Our basic strength, moreover, is vast, real and enduring. Our payments deficits, measured in terms of our loss of gold and the increase in our short-term liquid liabilities to foreigners, have consistently been equaled or exceeded by the growth of our long-term high-yielding foreign assets--assets which have been and will continue to be an increasing source of strength to our balance of payments. Today, Americans hold more than $60 billion of private investments abroad, and dollar loans repayable to the U.S. Government total over $11 billion. At the end of 1962, all of these assets exceeded our liabilities to foreigners by an estimated $27 billion. And they have shown an increasing strength over the years: our total income from these sources in 1959 was $3 billion; in 1962 it had risen to $4.3 billion; and we expect further substantial increases in the coming years.

These are all signs of progress. But unemployment is still too high; our growth rate is still too low; and it is now clear that, despite the favorable forces at work over the long run, more remains to be done today to eliminate the continuing payments deficit.

A significant portion of our progress so far has been due to special agreements with friendly foreign countries--for debt prepayments, advance payments for military equipment, and U.S. borrowings abroad. While similar arrangements may once again prove capable of covering a substantial amount of the gross deficit in 1963, such special transactions cannot be relied upon for the indefinite future. Moreover, while our commercial trade balance and government expenditures overseas have shown modest improvement, capital outflows, both short-term and long-term, have increased.

Although there is urgent need for further effort I want to make it clear that, in solving its international payments problem, this nation will continue to adhere to its historic advocacy of freer trade and capital movements, and that it will continue to honor its obligation to carry a fair share of the defense and development of the free world. At the same time, we shall continue policies designed to reduce unemployment and stimulate growth here at home--for the wellbeing of all free peoples is inextricably entwined with the progress achieved by our own people. I want to make it equally clear that this nation will maintain the dollar as good as gold, freely interchangeable with gold at $35 an ounce, the foundation-stone of the free world's trade and payments system.

But continued confidence at home and cooperation abroad require further administrative and legislative inroads into the hard core of our continuing payments deficit-- augmenting our long-range efforts to improve our economic performance over a period of years in order to achieve both external balance and internal expansion-stepping up our shorter run efforts to reduce our balance of payments deficits while the long-range forces are at work--and adding to our stockpile of arrangements designed to finance our deficits during our return to equilibrium in a way that assures the continued smooth functioning of the world's monetary and trade systems.

Before turning to the specific measures required in the latter two categories, I must emphasize once again the necessity of improving this Nation's over-all long-range economic performance--including increased investment and modernization for greater productivity and profits, continued cost and price stability and full employment and faster growth. This is the key to improving our international competitiveness, increasing our trade surpluses and reducing our capital outflows.

That is why early enactment of the comprehensive tax reduction and revision program previously submitted is the single most important step that can be taken to achieve balance abroad as well as growth here at home. The increased investment incentives and purchasing power these personal and corporate tax reductions would create-combined with last year's actions giving special credits for new investment and more favorable depreciation treatment--will promote more employment, production, sales and investment, particularly when accompanied by the continued ample availability of credit and reasonable long-term rates of interest. A prosperous, high-investment economy brings with it the rapid gains in productivity and efficiency which are so essential to the improvement of our competitive position abroad.

To gain new markets abroad and retain the gains of new growth and efficiency here at home, we must continue the price-cost stability of recent years, limiting wage and profit increases to their fair share of our improving productivity. That is why we have, for two years, been urging business and labor to recognize and use reasonable wage-price guideposts for resolving the issues of collective bargaining. Our success in holding down our price level relative to that of our major competitors is a powerful force working to restore our payments balance over the longer run. This fact should not be obscured by current short-run developments.

While these long-range forces are taking effect, a series of more immediate and specialized efforts are needed to reduce the deficit in our international transactions and defend our gold reserves:

1. Export Expansion

Our commercial sales of goods and services to foreign countries in 1962 exceeded our purchases by $4.3 billion, and they are continuing at about the same rate this year. This is our greatest strength, but it is not enough. Our exports of goods have risen only moderately over the past three years, and have not kept pace with the rapid rise of imports which has accompanied our domestic expansion. As a result, rather than furnishing increased support for our other transactions, 1962 saw a decline in our commercial trade surplus.

The primary long-term means for correcting this situation is implementation of the Trade Expansion Act of 1962. The Special Representative for Trade Negotiations is preparing to use to the fullest extent the authority given to me by the Act, in an across-the-board drive for lower tariffs and against other barriers to trade. This should open new markets and widen existing markets for American exports.

As mentioned above, our whole long-range domestic program--including increased investment, improved productivity and wage-price stability--is designed to better the competitive position of our products both at home and abroad. Continued price stability at home, contrasted with the upward trend in prices abroad, will create an increasingly favorable climate for American exports; and this Administration is concentrating on six immediate measures to help American businessmen take advantage of our export potential.

First, the Export-Import Bank has created a wholly new program of export financing which now provides U.S. business with credit facilities equal to any in the world. The major element in this new program is the guarantee of short and medium-term export credits by the Foreign Credit Insurance Association, composed of more than 70 private insurance companies in conjunction with the Export-Import Bank. I urge the Congress to act promptly to restore the Bank to full operating efficiency by renewing its charter and authorizing adequate financing.

Second, the Departments of State and Commerce have strengthened and expanded efforts overseas to probe for new markets and promote the sale and distribution of American products.

Third, the Department of Commerce has developed a broad program of education and assistance to present and potential American exporters. I have requested a relatively small amount of additional funds to strengthen the Department's efforts to stimulate our exports. These funds, amounting to $6 million, were not approved by the House of Representatives. It is essential, if we are to increase our trade surplus, that they be included in the final appropriation bill. This modest sum would pay for itself many times over in increased exports, lower payments deficits, and protection for our gold reserves.

Fourth, the Department of Agriculture announced last March a new auction program for direct sales of cotton abroad. It is expected that this new technique will ensure competitive pricing for our cotton in export markets and will increase exports by as much as $100 million over last year's levels.

Fifth, present ocean freight rates discourage our exports as compared to imports. The freight charges on Atlantic crossings are far higher for eastbound freight than for comparable items bound for our shores. A similar situation prevails on other trade routes. While these substantial differentials may have been acceptable in the immediate post-war period of the dollar shortage when Europe was struggling to get on its feet, their magnitude is clearly unjustified today. Accordingly, I have directed the Secretary of Commerce to take corrective action through the Maritime Administration; and, I am urging the Federal Maritime Commission in its role as an independent regulatory agency to question those specific export rates which appear unduly high. Should legislation prove necessary, it will be sought.

Sixth, in order to give further momentum to the expansion of our export performance, I will convene a White House Conference on Export Expansion on September 17 and 18, to alert American firms, whether or not they are now exporting, to the opportunities and rewards of initiating or expanding export efforts. We shall use this opportunity to emphasize to American businessmen that vigorous action to increase their exports would serve their own private interests as well as the national interest.

2. Tourism

Another element that requires attention to our commercial transactions is the increase in our unfavorable net tourist balance. With increasing prosperity encouraging American travel abroad, total tourist spending in foreign countries rose another 10 percent last year, to nearly $21/2 billion. This was partially offset by increased foreign tourist expenditures in the United States, but the net result was an outflow of $1.4 billion, or two-thirds of last year's overall balance of payments deficit. This year the cost is estimated to be still greater. That is why we have had to limit the duty-free exemption for returning tourists to $100 per person. Last year this measure achieved a saving of more than $100 million, and I am gratified that Congress has extended the limitation for another two years. We have also sought, through establishment of the United States Travel Service, to increase our income from visitors coming to our country. To further that effort, I strongly recommend that Congress approve the full amount of the appropriation requested for the U.S. Travel Service.

In addition, in cooperation with the appropriate government agencies, I am asking the domestic travel and tourism industry to launch a more unified drive to encourage Americans to learn more about their own country and the glory of their heritage. A See America Now program, to be in full operation by the spring of 1964, will make the most of our magnificent resources and make travel at home a more appealing alternative to travel abroad.

3. Federal Expenditures Abroad

Federal expenditures abroad go largely for defense and aid. These represent the obligations which flow from our position of world leadership and unrivaled economic strength. With the recovery of other economically-advanced nations, particularly our allies in Western Europe, we have made vigorous and increasingly successful efforts to work out with them a better sharing of our common responsibilities. These efforts--combined with rigorous scrutiny of offshore expenditures--have enabled us, in spite of mounting world-wide requirements and costs, to reduce the over-all total of our own overseas expenditures while we increase the security of the Free World and maintain a high level of assistance to developing countries.

A continual process of modernizing our armed forces and increasing efficiency, resulting in heightened defense effectiveness, is reducing the requirements for overseas dollars expenditures. At the same time, by tying our aid more effectively to domestic procurement and cutting civilian expenditures sharply, we should be able to achieve further savings. In fact, by January 1965, these processes should result in a reduction of the rate of our Federal overseas dollar expenditures by approximately $1 billion from that of 1962.

(a) Military Expenditures.--The Defense Department has, since the beginning of this Administration, been making vigorous efforts to restrain overseas expenditures, without reducing military effectiveness.

Thus, despite the Berlin buildup of 1961 and rising costs overseas, gross expenditures abroad by the Defense Department have been held below 1960 levels. As a result of the desire of our allies to acquire from us modern military equipment, which they need to strengthen Free World defenses, at lower cost than they could produce the equipment themselves, substantial offsets to these expenditures have also been achieved, so that our net outlays abroad for defense have declined from $2.7 billion in 1960 to $1.9 billion in 1962.

In line with these continuing efforts, the Secretary of Defense has informed me that the annual rate of expenditures abroad by the Department of Defense will be reduced-by measures to be put into effect before the end of calendar year 1964--by more than $300 million from the 1962 level. At the same time the Department of Defense will continue to seek arrangements with major allied countries to increase their military procurement from the United States so as to reduce the net outflow still further. The Secretary has further assured me that this reduction will be accomplished without any reduction in the effectiveness of our military posture and with no impairment in our ability to meet our commitments to our allies in all parts of the world.

In addition to direct expenditures by the Defense Department, our defense expenditures abroad have for many years been increased by the cost of programs for the acquisition of strategic materials from foreign sources. The cost of these programs is now steadily declining since they have largely fulfilled their purpose and are no longer needed. Within two years they will be reduced by over $200 million as compared to 1962, ensuring a total reduction in defense dollar expenditures well in excess of $500 million.

(b) Agency for International Development.--During 1960 only about one-third of AID program expenditures were in the form of U.S. goods and services. Last year that proportion had risen to about 50 percent. But during the fiscal year which ended last month, fully 80 percent of AID's commitments were "tied" to the export of U.S. goods and services. The balance was virtually all committed for purchases in the less developed countries rather than in the developed nations where the payments surpluses exist which give rise to our deficit. During fiscal year 1964, for which funds are now being considered by the Congress, AID commitments tied to U.S. exports will rise beyond 80 percent of the total. I have directed the Administrator of AID to continue and intensify this policy so that AID expenditures entering our balance of payments in fiscal year 1965 may be further reduced by about $500 million as compared to fiscal year 1961, from about $1 billion to not over $500 million, the lowest practicable minimum.

(c) Other departments and agencies. The overseas disbursements of all other departments of government have also been brought under special review and control by the Director of the Bureau of the Budget. Total Federal expenditures abroad (excluding Defense, AID, Treasury payments on foreign-held debt and federal pension payments) coming within the scope of this review now amount to approximately $600 million per year. The Director of the Budget has assured me that vigorous screening of expenditures abroad by these other Federal departments and agencies will achieve further substantial balance of payments savings. These savings, together with those which may be expected from revisions of programs under the Agricultural Trade Development and Assistance Act, should amount to some $100 million a year. This includes my request to the Congress to enact legislation permitting freer use of our present holdings of the currencies of a number of other countries.

4. Short-term capital flows

By skillful use of the tools of debt management and monetary policy, the Treasury Department and the Federal Reserve System have substantially reduced the outflow of short-term capital through a series of carefully managed increases in short-term money rates, while maintaining ample credit availability and keeping both long-term rates and bank loan rates low and, in many cases, declining. Experience in the recovery under way over the past 2 1/2 years provides a solid basis for expecting that a determined effort can succeed in keeping long-term investment and mortgage money plentiful and cheap while boosting short-term interest rates. From February 1961 through July 12, 1963, the rate on newly issued 3-month Treasury bills rose 76 basis points, while the rise in long-term Treasury bond yields was held to only 22 basis points and the yields on high-grade corporate bonds and mortgages actually declined.

However, the recorded outflows of short-term funds--together with unrecorded net outflows, a large portion of which undoubtedly represent short-term capital movements-still amounted to approximately $1.6 billion in 1962 and have continued on a substantial scale so far this year. A sizeable reduction in this drain would do much to strengthen our overall balance of payments. It is for this reason that the Federal Reserve has decided to increase the rediscount rate from 3 to 31/2 percent. At the same time, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation have raised the interstate ceilings on time deposits payable in 90 days to 1 year, in order to enable our banks to compete more effectively with those abroad and thus attract funds that might otherwise leave the country.

While none of us welcomes higher interest rates at a time when our economy is operating below capacity, an increase in short-term rates--at a time when liquid savings are growing rapidly, and when there are no accompanying restrictions on credit availability nor parallel increases in the interest rates on bank loans, home mortgages or other long-term obligations--should have little, if any, adverse effect on our economy. The unprecedented flow of liquid savings should largely insulate the longer term markets from the effect of higher short-term rates. I have been assured by both Treasury and Federal Reserve officials that they intend to do everything possible through debt management policy and open-market operations to avoid any reduction in domestic credit availability and any upward pressure on long-term interest rates while the economy operates below capacity without inflation. Other agencies of the Federal Government will work to maintain continued ready availability of private mortgage loans at stable interest rates. Nevertheless, the situation lends increased urgency to the fiscal stimulus that would be provided by the prompt enactment of the substantial tax reductions I have recommended.

5. Long-Term Capital Outflows consisting of direct investment in productive plants abroad appear to have leveled off in recent years, whereas portfolio investments in the form of long-term loans or securities purchases have been rising rapidly. While our long-range program should increase the attractiveness of domestic investment and further reduce the outflow of direct investment, the rising outflow of long-term capital for portfolio investment abroad shows no sign of abating. It is up from $850 million in 1960 to $1.2 billion in 1962, and so far this year is running at an annual rate of well over $1.5 billion.

In view of the continued existence of direct controls and inadequate capital market mechanisms in many foreign countries, and the wide differential between the long-term rates of interest in the larger industrial countries and the United States, there appear to be only three possible solutions to this problem, two of which are unacceptable under present circumstances:

--A substantial increase in our whole long-term interest rate structure would throw our economy into reverse, increase unemployment and substantially reduce our import requirements, thereby damaging the economy of every free nation;

--The initiation of direct capital controls, which are in use in most countries, is inappropriate to our circumstances. It is contrary to our basic precept of free markets. We cannot take this route.

--A third alternative--the one which I recommend--would stem the flood of foreign security sales in our markets and still be fully consistent with both economic growth and free capital movements. I urge the enactment by the Congress of an "Interest Equalization Tax", which would, in effect, increase by approximately one percent the interest cost to foreigners of obtaining capital in this country, and thus help equalize interest rate patterns for longer term financing in the United States and abroad. The rate of tax should be graduated from 2.75 percent to 15 percent of the value of debt obligations, according to the remaining maturity of the obligation, and should be 15 percent in the case of equity securities. This tax should remain in effect through 1965 when improvements in both our balance of payments and in the operation of foreign capital markets are expected to permit its abandonment.

Under this alternative, the allocation of savings for investment in securities will continue to be the result of decisions based on market prices. There will be no limitations on the marketing of foreign issues and no Governmental screening of borrowers. Reliance will be placed on price alone to effect an over-all reduction in the outflow of American funds for stocks, bonds, and long-term loans--both new or outstanding, whether publicly marketed or privately placed.

The tax would not apply to direct investment. It would not apply to securities or loans that mature in less than three years. Nor would it apply to the loans of commercial banks. These exemptions will assure that export credit will remain fully available. Furthermore, purchases of the securities of less developed countries or of companies operating primarily in such countries will not be taxed.

Nor will the tax apply to transactions in foreign securities already owned by Americans, or to the purchase of securities by foreigners. Underwriters and dealers would be exempted from the tax on stock or securities resold to foreigners as part of the distribution of a new issue. But all Americans who purchase new or outstanding foreign securities from foreign issuers or owners would be subject to this tax. In order to avoid unfair burdens on transactions which are nearly complete, the tax should not apply to offerings of securities for which active registration statements are now on file with the Securities and Exchange Commission. Purchase commitments which have already been made should also not be affected.

The Secretary of the Treasury is submitting the details of this proposal to the Congress; and I have been assured that the House Ways and Means Committee will be prepared to give high priority to this proposal after action has been taken with respect to the over-all program of tax reduction and reform now before it. Since the effectiveness of this tax requires its immediate application, I am asking Congress to make the legislation effective from the date of this Message. The Internal Revenue Service will promptly make available all instructions necessary for interim fulfillment of the provisions of this recommendation, pending the enactment of legislation by the Congress.

6. Investment by foreign savers in the securities of United States private companies has fallen rapidly to less than $150 million in 1962. The better climate for investment that will flow from enactment of the program for tax reduction and reform now before the Congress will do much to improve this situation but a direct action program is also needed to promote overseas sales of securities of U.S. companies. Such a program should also be designed to increase foreign participation in the financing of new or expanded operations on the part of U.S. companies operating abroad.

To meet these two facets of a single problem, a new and positive program should be directed to the following areas of effort:

(a) The identification and critical appraisal of the legal, administrative and institutional restrictions remaining in the capital markets of other industrial nations of the Free World which prevent the purchase of American securities and hamper U.S. companies in financing their operations abroad from non-U.S. sources;

(b) A review of U.S. Government and private activities which adversely affect foreign purchase of the securities of U.S. private companies; and

(c) A broad and intensive effort by the U.S. financial community to market securities of U.S. private companies to foreign investors, and to increase the availability of foreign financing for U.S. business operating abroad.

Such a program will necessarily involve a pooling of the know-how and efforts of the Government and the financial community. I have asked the Treasury Department, in consultation with the State Department, to develop an organization plan and program.

The increased freedom of capital movement and increased participation by foreign citizens and financial institutions in the ownership and financing of American business, towards which these efforts are directed, will serve to strengthen the economic and political ties of the Free World as well as its monetary system. Securities of U.S. private firms could be and should be one of our best selling exports. An increasing foreign investment in these securities will encourage a more balanced two-way capital traffic between the United States and other capital markets and minimize the impact of net long-term capital outflows from the United States on our balance of payments.

7. Special Government transactions covered $1.4 billion of our deficit in 1962. These included prepayment of debt by foreign countries, advance payments on military purchases here, and the issuance by the Treasury of medium-term securities to foreign official holders of dollars. Further debt prepayment is expected in 1963--France has just announced a prepayment of $160 million--but it is clear that these are temporary gains which cannot be repeated for very long. Nor is it likely that advance payments on military purchases will again be large, as the pace of deliveries against purchases is now rising.

Therefore, as our continuing balance of payments deficit leads to accruals of dollars by foreign central banks, exceeding the size of the dollar balances which they normally carry, it has been particularly helpful that a number of foreign governments and central banks have begun purchasing a new type of non-marketable medium-term Treasury security, denominated either in dollars or in their own currencies, as a convenient alternative to the purchase of gold. Some $610 million of such securities have been newly issued thus far in 1963.

Further debt prepayments and further sales of these securities during the remainder of this year will reflect the unprecedented degree of cooperation now prevailing in international finance and the growing recognition that correction of payments imbalances is a responsibility of the surplus as well as the deficit countries. In this spirit we shall also continue to press for a fuller and fairer sharing of the burdens of defense and aid and for the reduction or elimination of the trade barriers which impede our exports.

8. Gold Sales and Increased Dollar Holdings serve to finance what remains of our deficit after special governmental transactions. In 1962, this deficit amounted to approximately $2.2 billion. It was financed by the sale of $890 million in gold and $17 million of our holdings of foreign exchange as well as by an increase in foreign holdings of dollars and U.S. government securities amounting to $653 million, and an increase of $626 million in the holdings of dollars by the International Monetary Fund.

The total outflow of gold for the two years 1961 and 1962 combined only slightly exceeded the outflow in the single year 1960; and the outflow in 1963 is running at a rate well below last year. Since the rise in short-term interest rates resulting from the recent action of the Federal Reserve will make it considerably more attractive for foreigners to hold their assets in dollars, including short-term U.S. government securities, prospects are improved that increased foreign holdings of these assets instead of gold will finance a still larger share of our deficit.

9. The International Monetary Fund, however, presents a different situation. Last year the Fund's dollar holdings increased as other countries paid off their debts in dollars and concentrated new borrowings in other convertible currencies to the extent practicable. But the Fund's rules provide that, except in the case of a drawing--that is, a borrowing--it cannot hold more of any currency than was paid in at the time of original subscription (in effect, 75%); and the Fund's holdings of dollars have now nearly reached that level.

To meet this situation the United States has requested and the Executive Board of the IMF has approved a $500 million standby arrangement which authorizes us to draw on the Fund from time to time during the coming year. It is our intention to utilize this authority for the purpose of facilitating repayments which are expected to total about $500 million during the course of the next twelve months. When a country desires to repay the Fund, we will draw convertible foreign currencies from the Fund, paying for them with dollars. The country making the repayment will use its own dollars to buy these foreign currencies from us in order to repay the Fund. All transfers will take place at par. Thus the Fund will continue to finance a portion of our deficit by increasing its holdings of dollars and its various debtors will continue to have a simple and cost less method by which they can redeem their obligations to the Fund. The alternative under present circumstances, now that they cannot pay off directly in dollars, would have been either to buy gold from the U.S. with which to repay the Fund, or to purchase other convertible currencies in the market with their dollars at extra cost and inconvenience.

Drawings by the United States under this new arrangement will be repayable in three years, with a two year extension available if needed. No interest will be payable, but the drawings will be subject to a one-time service charge of one half of one percent.

10. Evolution of the International Monetary System

During the past two years great progress has been made in strengthening the basic fabric of the International Monetary System upon which the whole free world depends. Far closer cooperation among the Central Banks of the leading industrial countries has been achieved. Reciprocal credit arrangements have been established to meet instantly any disruptive disturbance to international payments--arrangements which successfully contained the monetary repercussions of the Berlin crisis in 1961, the heavy pressure on the Canadian dollar in the spring of 1962, the Cuban crisis last autumn, the reaction that followed the exclusion of the United Kingdom from the Common Market, and a number of less striking events that might, in other years, have set off dangerous rounds of currency speculation. An informal but highly effective operating relationship has grown up among a number of the same countries with respect to the London gold market, ruling out for the future any repetition of the alarming rise in the price of gold which created such uncertainty in October, 1960. Finally, ten of the leading industrial countries have established a $6 billion facility for providing supplemental resources to the International Monetary Fund, which will be available in the event of any threat to the stability of the international monetary system.

The net result has been to provide strong defenses against successful raids on a major currency. Our efforts to strengthen these defenses will continue. While this process is taking place, the U.S. will continue to study and discuss with other countries measures which might be taken for a further strengthening of the international monetary system over the longer run. The U.S. interest in the continuing evolution of the system inaugurated at the time of Bretton Woods is not a result of our current payments deficit--rather it reflects our concern that adequate provision be made for the growth of international liquidity to finance expanding world trade over the years ahead. Indeed, one of the reasons that new sources of liquidity may well be needed is that, as we close our payments gap, we will cut down our provision of dollars to the rest of the world.

As yet, this government is not prepared to recommend any specific prescription for long-term improvement of the international monetary system. But we are studying the matter closely; we shall be discussing possible improvements with our friends abroad; and our minds will be open to their initiatives. We share their view that the problem of improving the payments mechanism is one that demands careful joint deliberation. At the same time, we do not pretend that talk of long-range reform of the system is any substitute for the actions that we ourselves must take now.

THE PROMISE OF THE FUTURE

Full implementation of the program of action I have outlined today should lead to substantial improvement in our international payments. The rate of government expenditures abroad will drop by $900 million over the next 18 months, and the combined effect of the increase in short-term interest rates and the Interest Equalization Tax should equal, and more probably exceed, this figure. Gains of this magnitude-approximately $2 billion--will give us the time our basic long-term program needs to improve our international competitive position, and increase the attraction for investment in the United States.

These two objectives must be the basis of any permanent closing of the payments gap, and this program will achieve them without threatening our growth at home. It will also do so without compromising our adherence to the principles of freer trade and free movements of capital. It will, in fact, help prevent pressures for more restrictive measures. In short, while we must intensify our efforts, we can do so with full confidence in the future.

JOHN F. KENNEDY