Statement on the Balance of Payments.

IN MY fiscal message to the Congress on March 26, I called for a strong budget surplus and monetary restraint to curb an inflation that has been allowed to run into its fourth year. This is fundamental economics, and I pointed out that we intend to deal with fundamentals.

Similarly, the problem of regaining equilibrium in the U.S. balance of payments cannot be solved with expedients that postpone the problem to another year. We shall stop treating symptoms and start treating causes, and we shall find our solutions in the framework of freer trade and payments.

Fundamental economics call for:

--creating the conditions that make it possible to rebuild our trade surplus.

--ultimate dismantling of the network of direct controls which may seem useful in the short run but are self-defeating in the long run.

The U.S. balance of payments showed a surplus last year. But this surplus included an unusually high and probably unsustainable capital inflow. Our trade surplus, which reached a peak of $6.5 billion in the mid-sixties, declined sharply and all but disappeared.

That trade surplus must be rebuilt, and it can only be rebuilt by restoring stable and noninflationary economic growth to the U.S. economy. Inflation has drawn in a flood of imports while it has diminished our competitiveness in world markets and thus dampened our export expansion.

This is why our program of fiscal and monetary restraint is as necessary for our external trade as for restoring order in our domestic economy.

Building on the. solid base of a healthy, noninflationary economy--a base that only the fundamentals of fiscal and monetary restraints now can restore--we are planning a sustained effort in several key areas:

--In export expansion, we have tentatively set an export goal of $50 billion to be achieved by 1973. This compares with 1968 exports of about $34 billion. This is primarily the task of American private enterprise, but government must help to coordinate the effort and offer assistance and encouragement. We must also call on the productivity and ingenuity of American industry to meet the competitive challenge of imported goods.

--In trade policies, we will be working with our major trading partners abroad to insure that our products receive a fair competitive reception.

--In defense activities, we will also work with our friends abroad to insure that the balance of payments burden of providing for the common defense is shared fairly.

--In travel, we will encourage more foreign travel to the United States. Here, as in other areas, we will be relying heavily on the support of the private community. We seek no restrictions on the American tourist's freedom to travel.

--In international investment, we will review our own regulations and tax policy to assure that foreign investment in the U.S. is not discouraged; for example, we move now to eliminate from our laws the prospective taxation of interest on foreign-held bank deposits.

--In the international financial area, we will be continuing to work with our friends abroad to strengthen and improve the international monetary system. An expanding world economy will require growing levels of trade with adequate levels of reserves, and effective methods by which countries can adjust their payments imbalances. In particular, we look forward to ratification by the International Monetary Fund members of the Special Drawing Rights plan and its early activation.

I am confident that measures in these areas, coupled with the cooling of the economy through fiscal-monetary restraint, will move us in an orderly manner toward true balance-of-payments equilibrium. Accordingly, I have begun, gradually but purposefully, to dismantle the direct controls which only mask the underlying problem. Specifically:

First, I have today signed an Executive order [11464] reducing the effective rate of the interest equalization tax from 1 1/4 percent to 3/4 of 1 percent. This measure was designed to close a large gap-which has now narrowed--between foreign and domestic interest rates. I shall, however, request the Congress to extend the President's discretionary authority under the interest equalization tax for 18 months beyond its scheduled expiration in July.

Second, I have approved a recommendation to relax somewhat the foreign direct investment program of the Department of Commerce. This means that most firms investing abroad will have substantially more freedom in planning these investments.

Third, I have been informed by Chairman Martin of modifications in the Federal Reserve program which will provide more flexibility for commercial banks, particularly smaller and medium-sized banks, to finance U.S. exports.

These are prudent and limited steps that recognize the realities of our present balance-of-payments situation.

The distortions created by more than 3 years of inflation cannot be corrected overnight. Nor can the dislocations resulting from a decade of balance-of-payments deficits be corrected in a short time.

But the time for restoring the basis of our prosperity is long overdue. We shall continually direct America's economic policy, both foreign and domestic, at correcting the root causes of our problems, rather than covering them over with a patchwork quilt of controls.

By facing up to fundamental economic needs, the inflationary tide and the trade tide can be turned and the U.S. dollar continued strong and secure.