Statement by the President Outlining a Program of Action To Deal With the Balance of Payments Problem.

WHERE WE STAND TODAY

I want to discuss with the American people a subject of vital concern to the economic health and well-being of this Nation and the free world.

It is our international balance of payments position.

The strength of our dollar depends on the strength of that position.

The soundness of the free world monetary system, which rests largely on the dollar, also depends on the strength of that position.

To the average citizen, the balance of payments, and the strength of the dollar and of the international monetary system, are meaningless phrases. They seem to have little relevance to our daily lives. Yet their consequences touch us all--consumer and captain of industry, worker, farmer, and financier.

More than ever before, the economy of each nation is today deeply intertwined with that of every other. A vast network of world trade and financial transactions ties us all together. The prosperity of every economy rests on that of every other.

More than ever before, this is one world-" in economic affairs as in every other way.

Your job, the prosperity of your farm or business, depends directly or indirectly on what happens in Europe, Asia, Latin America, or Africa.

The health of the international economic system rests on a sound international money in the same way as the health of our domestic economy rests on a sound domestic money' Today, our domestic money--the U.S. dollar--is also the money most used in international transactions. That money can be sound at home--as it surely is--yet can be in trouble abroad--as it now threatens to become.

In the final analysis its strength abroad depends on our earning abroad about as many dollars as we send abroad.

U.S. dollars flow from these shores for many reasons--to pay for imports and travel, to finance loans and investments, and to maintain our lines of defense around the world.

When that outflow is greater than our earnings and credits from foreign nations, a deficit results in our international accounts.

For 17 of the last 18 years we have had such deficits. For a time those deficits were needed to help the world recover from the ravages of World War II. They could be tolerated by the United States and welcomed by the rest of the world. They distributed more equitably the world's monetary gold reserves and supplemented them with dollars.

Once recovery was assured, however, large deficits were no longer needed and indeed began to threaten the strength of the dollar. Since 1961, your Government has worked to reduce that deficit.

By the middle of the decade, we could see signs of success. Our annual deficit had been reduced two-thirds--from $3.9 billion in 1960 to $1.3 billion in 1965.

In 1966, because of our increased responsibility to arm and supply our men in Southeast Asia, progress was interrupted, with the deficit remaining at the same level as 1965-about $1.3 billion. In 1967, progress was reversed for a number of reasons:

--Our costs for Vietnam increased further. --Private loans and investments abroad

increased.

--Our trade surplus, although larger than 1966, did not rise as much as we had expected.

--Americans spent more on travel abroad. Added to these factors was the uncertainty and unrest surrounding the devaluation of the British pound. This event strained the international monetary system. It sharply increased our balance of payments deficit and our gold sales in the last quarter of 1967.

THE PROBLEM

Preliminary reports indicated that these conditions may result in a 1967 balance of payments deficit in the area of $3.5 to $4 billion--the highest since 1960. Although some factors affecting our deficit will be more favorable in 1968, my advisers and I are convinced that we must act to bring about a decisive improvement.

We cannot tolerate a deficit that could threaten the stability of the international monetary system-of which the U.S. dollar is the bulwark.

We cannot tolerate a deficit that could endanger the strength of the entire free world economy, and thereby threaten our unprecedented prosperity at home.

A TIME FOR ACTION

The time has now come for decisive action designed to bring our balance of payments to--or close to--equilibrium in the year ahead.

The need for action is a national and international responsibility of the highest priority.

I am proposing a program which will meet this critical need, and at the same time satisfy four essential conditions:

--Sustain the growth, strength, and prosperity of our own economy.

--Allow us to continue to meet our international responsibilities in defense of freedom, in promoting world trade, and in encouraging economic growth in the developing countries.

--Engage the cooperation of other free nations, whose stake in a sound international monetary system is no less compelling than our own.

--Recognize the special obligation of those nations with balance of payments surpluses to bring their payments into equilibrium.

THE FIRST ORDER OF BUSINESS

The first line of defense of the dollar is the strength of the American economy.

No business before the returning Congress will be more urgent than this: to enact the anti-inflation tax which I have sought for almost a year. Coupled with our expenditure controls and appropriate monetary policy, this will help to stem the inflationary pressures which now threaten our economic prosperity and our trade surplus.

No challenge before business and labor is more urgent than this: to exercise the utmost responsibility in their wage-price decisions, which affect so directly our competitive position at home and in world markets.

I have directed the Secretaries of Commerce and Labor, and the Chairman of the Council of Economic Advisers to work with leaders of business and labor to make more effective our voluntary program of wageprice restraint.

I have also instructed the Secretaries of Commerce and Labor to work with unions and companies to prevent our exports from being reduced or our imports increased by crippling work stoppages in the year ahead.

A sure way to instill confidence in our dollar--both here and abroad--is through these actions.

THE NEW PROGRAM

But we must go beyond this, and take additional action to deal with the balance of payments deficit.

Some of the elements in the program I propose will have a temporary but immediate effect. Others will be of longer range.

All are necessary to assure confidence in the American dollar.

TEMPORARY MEASURES

1. Direct Investment

Over the past 3 years, American business has cooperated with the Government in a voluntary program to moderate the flow of U.S. dollars into foreign investments. Business leaders who have participated so wholeheartedly deserve the appreciation of their country.

But the savings now required in foreign investment outlays are clearly beyond the reach of any voluntary program. This is the unanimous view of all my economic and financial advisers and the Chairman of the Federal Reserve Board.

To reduce our balance of payments deficit by at least $1 billion in 1968 from the estimated 1967 level, I am invoking my authority under the banking laws to establish a mandatory program that will restrain direct investment abroad.

This program will be effective immediately. It will insure success and guarantee fairness among American business firms with overseas investments.

The program will be administered by the Department of Commerce, and will operate as follows:

--As in the voluntary program, overall and individual company targets will be set. Authorizations to exceed these targets will be issued only in exceptional circumstances.

--New direct investment outflows to countries in continental Western Europe and other developed nations not heavily dependent on our capital will be stopped in 1968. Problems arising from work already in process or commitments under binding contracts will

receive special consideration.

--New net investments in other developed countries will be limited to 65 percent of the 1965-66 average.

--New net investments in the developing countries will be limited to 110 percent of the 1965-66 average.

This program also requires businesses to continue to bring back foreign earnings to the United States in line with their own 1964-66 practices.

In addition, I have directed the Secretary of the Treasury to explore with the chairmen of the House Ways and Means Committee and the Senate Finance Committee legislative proposals to induce or encourage the repatriation of accumulated earnings by U.S.-owned foreign businesses.

2. Lending by Financial Institutions

To reduce the balance of payments deficit by at least another $500 million, I have requested and authorized the Federal Reserve Board to tighten its program restraining foreign lending by banks and other financial institutions. Chairman Martin has assured me that this reduction can be achieved:

--Without harming the financing of our exports;

--Primarily out of credits to developed countries without jeopardizing the availability of funds to the rest of the world. Chairman Martin believes that this objective can be met through continued cooperation by the financial community. At the request of the Chairman, however, I have given the Federal Reserve Board standby authority to invoke mandatory controls, should such controls become desirable or necessary.

3. Travel Abroad

Our travel deficit this year will exceed $2 billion. To reduce this deficit by $500 million:

--I am asking the American people to defer for the next 2 years all nonessential travel outside the Western Hemisphere.

--I am asking the Secretary of the Treasury to explore with the appropriate congressional committees legislation to help achieve this objective.

4. Government Expenditures Overseas We cannot forgo our essential commitments abroad, on which America's security and survival depend.

Nevertheless, we must take every step to reduce their impact on our balance of payments without endangering our security.

Recently, we have reached important agreements with some of our NATO partners to lessen the balance of payments cost of deploying American forces on the Continent--troops necessarily stationed there for the common defense of all.

Over the past 3 years, a stringent program has saved billions of dollars in foreign exchange.

I am convinced that much more can be done. I believe we should set as our target avoiding a drain of another $500 million on our balance of payments.

To this end, I am taking three steps. First, I have directed the Secretary of State to initiate prompt negotiations with our NATO allies to minimize the foreign exchange costs of keeping our troops in Europe. Our allies can help in a number of ways, including:

--The purchase in the United States of more of their defense needs.

--Investments in long term United States securities. I have also directed the Secretaries of State, Treasury, and Defense to find similar ways of dealing with this problem in other parts of the woad.

Second, I have instructed the Director of the Budget to find ways of reducing the number of American civilians working overseas.

Third, I have instructed the Secretary of Defense to find ways to reduce further the foreign exchange impact of personal spending by U.S. forces and their dependents in Europe.

LONG TERM MEASURES

1. Export Increases

American exports provide an important source of earnings for our businessmen and jobs for our workers.

They are the cornerstone of our balance of payments position.

Last year we sold abroad $30 billion worth of American goods.

What we now need is a long-range systematic program to stimulate the flow of the products of our factories and farms into overseas markets.

We must begin now.

Some of the steps require legislation:

I shall ask the Congress to support an intensified 5 year, $200 million Commerce Department program to promote the sale of American goods overseas.

I shall also ask the Congress to earmark $500 million of the Export-Import Bank authorization to:

--Provide better export insurance.

--Expand guarantees for export financing.

--Broaden the scope of government financing of our exports.

Other measures require no legislation.

I have today directed the Secretary of Commerce to begin a joint export association program. Through these associations, we will provide direct financial support to American corporations joining together to sell abroad.

And finally, the Export-Import Bank-through a more liberal rediscount system-will encourage banks across the Nation to help firms increase their exports.

2. Nontariff Barriers

In the Kennedy Round, we climaxed three decades of intensive effort to achieve the greatest reduction in tariff barriers in all the history of trade negotiations. Trade liberalization remains the basic policy of the United States.

We must now look beyond the great success of the Kennedy Round to the problems of nontariff barriers that pose a continued threat to the growth of world trade and to our competitive position.

American commerce is at a disadvantage because of the tax systems of some of our trading partners. Some nations give across the-board tax rebates on exports which leave their ports and impose special border tax charges on our goods entering their country.

International rules govern these special taxes under the General Agreement on Tariffs and Trade. These rules must be adjusted to expand international trade further.

In keeping with the principles of cooperation and consultation on common problems, I have initiated discussions at a high level with our friends abroad on these critical matters--particularly those nations with balance of payments surpluses.

These discussions will examine proposals for prompt cooperative action among all parties to minimize the disadvantages to our trade which arise from differences among national tax systems.

We are also preparing legislative measures in this area whose scope and nature will depend upon the outcome of these consultations.

Through these means we are determined to achieve a substantial improvement in our trade surplus over the coming years. In the year immediately ahead, we expect to realize an improvement of $500 million.

3. Foreign Investment and Travel in the United States

We can encourage the flow of foreign funds to our shores in two other ways:

--First, by an intensified program to at. tract greater foreign investment in U.S corporate securities, carrying out the principles of the Foreign Investors Tax Act of 1966.

--Second, by a program to attract more visitors to this land. A special task force, headed by Robert McKinney of Santa Fe, N. Mex., is already at work on measures to accomplish this. I have directed the task force to report within 45 days on the immediate measures that can be taken, and to make its long term recommendations within 90 days.

MEETING THE WORLD'S RESERVE NEEDS

Our movement toward balance will curb the flow of dollars into international reserves. It will therefore be vital to speed up plans for the creation of new reserves--the Special Drawing Rights--in the International Monetary Fund. These new reserves will be a welcome companion to gold and dollars, and will strengthen the gold exchange standard. The dollar will remain convertible into gold at $35 an ounce, and our full gold stock will back that commitment.

A TIME FOR RESPONSIBILITY

The program I have outlined is a program of action.

It is a program which will preserve confidence in the dollar, both at home and abroad.

The U.S. dollar has wrought the greatest economic miracles of modern times.

It stimulated the resurgence of a war ruined Europe.

It has helped to bring new strength and life to the developing world.

It has underwritten unprecedented prosperity for the American people, who are now in the 83d month of sustained economic growth.

A strong dollar protects and preserves the prosperity of businessman and banker, worker and farmer--here and overseas.

The action program I have outlined in this message will keep the dollar strong. It will fulfill our responsibilities to the American people and to the free world.

I appeal to all of our citizens to join me in this very necessary and laudable effort to preserve our country's financial strength.