Balancing Act

Alone among the major nations, the U.S. has permitted its citizens to spend, lend and invest their money freely almost anywhere in the world. This unshackled capitalism has helped dozens of foreign economies, brought the U.S. worldwide economic power and prestige, and earned considerable profit for American industry. In one sense, clearly, the free outflow of capital is a distinct asset. In another, it is an increasingly serious problem, since it is a major source of the U.S.'s payments deficit and the cause of its stepped-up loss of gold.

Last week Lyndon Johnson took both aspects into account with a balance-of-payments message aimed at lessening the payments problem without sharply restricting capital movements. The message was milder than many had expected. Another example of Johnson compromise, it combined some moderate restraints on the flow of dollars abroad with an appeal to the patriotism of U.S. industry. "The contribution of American capital to the world's growth and prosperity has been immense," said Johnson. "But our balance-of-payments deficit leaves me no choice." Since the U.S. feels that it cannot make major cuts in foreign aid or military spending abroad without endangering its security, the President concentrated on three main areas:

sb TOURISM. The biggest public impact will be caused by Johnson's proposal to cut the amount of duty-free goods that U.S. tourists may bring home from $100 at wholesale value to $50 at retail value. Whisky, rugs, custom-made suits and other goods, which can now be shipped home as part of a tourist's duty-free allotment, henceforth will be taxed regardless of whether the tourist has spent his allotment. Projected dollar savings: about $100 million a year.

sb INTEREST RATES. The strongest business impact will come as a result of Johnson's order that banks and other lenders will have to pay a tax of 1% to 2.75% on their long-term loans to foreign borrowers. This order will be backed up by the Government pressure on bankers to reduce their short-term foreign loans. Expected savings: more than $1 billion a year.

sb FOREIGN INVESTMENT. The most difficult of the proposals to realize will be Johnson's call "to enlist the leaders of American business in a national campaign to limit their direct investments abroad, their deposits in foreign banks and their holding of foreign financial assets" until the payments deficit has been redressed.

Johnson thus refused, despite the pressures of events and of many of his advisers, to attack the problem head-on with a strongly restrictive message. The U.S. gold stock dwindled by another $150 million last week, falling below $15 billion for the first time since 1939, and France's Charles de Gaulle was intent on making more mischief for the dollar (see WORLD BUSINESS). Johnson's advisers divided into "Hawks," who wanted to take strong measures to counter the payments deficit, and "Doves," who felt that stern restrictions would damage the nation. Johnson heeded the Doves, among them Commerce Secretary John Connor and President Donald C. Cook of American Electric Power Co., a prime Johnson adviser who will become Secretary of the Treasury this spring when Douglas Dillon leaves.

Rather than concentrate only on the negative aspects of the payments problem, the Johnson Administration plans some positive steps to attract foreign funds to the U.S. to balance the outflow of dollars. To narrow the tourist gap--U.S. travelers last year left more than $2 billion abroad v. $1.1 billion spent by foreigners visiting the U.S.--the Government will step up its promotion to lure more travelers from abroad. Among the latest features: $99 bus tickets good for unlimited travel through the nation. To woo more foreign investors, the Administration plans to give them tax breaks on their U.S. stock market profits.

Too Vague. Businessmen were clearly relieved that the program was not tougher. "I was pleased," said David Rockefeller, president of Chase Manhattan Bank, "that a voluntary approach was taken rather than a resort to rigid capital controls." Still, many businessmen found the program too vague, felt that it would be hard to expect voluntary restraint on investments abroad without firmer guidelines. Michael McCarthy, chairman of Merrill Lynch, Pierce, Fenner & Smith, suggested that the Government induce U.S. businessmen to bring more of their profits home by slashing the current 48% tax rate on such profits to the capital-gains level of 25%. Many bankers feel that the U.S. could best close its payments gap by raising domestic interest rates; such an increase would attract deposits from abroad and slow down the flow of capital from the U.S. to havens of higher interest overseas. But Johnson, an easy-money devotee who often puts domestic needs ahead of foreign considerations, believes that the nation's economy will grow faster if rates are kept low.

This week 65 top bankers and some 300 business executives will go to Washington at the President's invitation. Federal Reserve Chairman William McChesney Martin will put pressure on the bankers to cut back their foreign lending, which rose by more than $2 billion last year, to a $500 million increase this year. Commerce Secretary Connor will ask hundreds of key companies to set goals for cutting their foreign spending, then will review their budgets every three months. Ironically, Connor is well suited for the job: when he was president of Merck & Co., he vastly expanded its drug empire overseas.

Changing the Books. Along with its new efforts to halt the payments deficit, the U.S. is changing its views on some long-held practices and policies. In his message last week, Johnson indicated that he favors Europe's liberal system for measuring the balance of payments. Under it, dollars held by foreign citizens or private banks would not be considered liabilities, as they are now, while dollars held by foreign governments and central banks would continue to be so considered. If the U.S. were to adopt that system of accounting, it would slash its payments deficit ($3 billion last year) in half.

Johnson also spoke out more explicitly than any other U.S. President ever has in favor of altering the whole international monetary system, which places too much reliance--and strain--on the dollar and the British pound. He proposed "the development of supplementary sources of reserves." One plan, favored by Donald Cook among others, would be to create a new international money, which presumably would be backed by many of the world's strong currencies. But the President is well aware that the U.S. cannot bargain strongly for a broader and more equitable monetary system until it cleans up its own payments difficulties. If persuasion fails to do that job, Lyndon Johnson will no doubt find it necessary to resort to firmer controls.

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