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In Italy and Japan, resumption of more rapid
growth in domestic economic activity, together with
policies favorable to increased capital exports, suc-
ceeded in reducing payments surpluses as the year
progressed. Industrial expansion in France similarly
led to a shrinkage in that country's over-all surplus
as the trade balance narrowed; however, there con-
tinued to be a net capital inflow.

Germany, which had a payments deficit in 1965
for the first time in several years, swung back to
a sizable surplus in 1966. Monetary policy was tight-

ened mainly to contain inflation. As a result, do-
mestic investment slowed markedly, and the trade
surplus increased sharply. The payments surplus
was still expanding at year end. In January 1967,
Germany took a welcome step toward monetary ease
by lowering the central bank discount rate.

Although somewhat reduced from the preceding
year, payments imbalances continued large in 1966.
In some countries, corrective policies are clearly
needed to prevent imbalances from g;rowing still
larger in the current year. Moreover, considerable
que.stion remains whether the pattern of adjustment
in 1967 will permit a fully satisfactory rate of eco-
nomic growth in the industrial countries, and an
adequate flow of capital to the less developed world.

The United States will be actively pursuing poli-
cies to strengthen its payments position in 1967.
But reduction of U.S. deficits must have a counter-
part in reduced surpluses or increased deficits else-
where. If the impact of the U.S. payments improve-
ment were to fall largely on the United Kingdom
or the less developed countries, the international
payments system would suffer rather than benefit.
From the viewpoint of a viable international pay-
ments pattern, consequently, there is no real alterna-
tive: it is the countries with strong underlying
payments positions and large reserves which must
absorb a major share of the impact of reduced U.S.
and U.K. deficits. In particular, a marked reduction
is needed in the chronic over-all surplus of the ma-
jor industrial countries of Continental Europe.

The surplus countries also bear a significant share
of the responsibility for assuring that the manner
in which adjustment takes place is, to the greatest
extent possible, consistent with the broad objectives
of the international economic community as a whole.

Most importantly, adjustment policies should not,
in the aggregate, prevent a healthy rate of world-
wide economic growth compatible with reasonably
stable price levels. In the United States, demand
policies aiming at a slower rate of growth than that
of 1966 are, of course, entirely appropriate on
purely domestic grounds. But an even more marked
slowdown in demand than is needed for proper
domestic balance would entail serious social and
economic costs at home and could risk a recession.
Given the massive weight of the United States in
the world economy, such a policy would risk a slow-
down in trade and economic g^rowth on a worldwide

On the other hand, the objectives of international
economic expansion and payments adjustment are
simultaneously served when surplus countries with
lagging internal demand take effective steps to spur
the pace of economic activity — as was, for example,
true of France, Italy, and Japan during the past
year. In 1967, a number of surplus countries will be
in a good position to contribute significantly to bet-
ter international payments equilibrium in this fash-

FEBRUARY 27, 1967


ion, without running serious risks of engendering
inflationary pressures.

Surplus countries also have a special responsi-
bility for fostering relative freedom in international
transactions. As the report of Working Party 3
pointed out, it is desirable— wherever possible — that
adjustment take place "through the relaxation of
controls and restraints over international trade and
capital movements by surplus countries, rather than
by the imposition of new restraints by deficit coun-
tries." In the past year, Italy and Japan generally
followed policies that facilitated capital outflows;
the recently announced intention of the French Gov-
ernment to liberalize capital controls is also a hope-
ful development. There is, however, scope for fur-
ther measures by various surplus countries to liber-
alize the regulations that govern capital outflows
and also to ease restrictions on imports. More liberal
import policies would both improve payments bal-
ance and counter domestic inflation.

In 1966, there was an escalation of monetary
restraint. The sharp tightening of monetary policies
in the United States, undertaken largely for domes-
tic reasons, did help significantly to contain the U.S.
payments deficit during the year. Monetary action
also was a key feature in the program to defend
the British pound. But countries in a strong reserve
position also placed heavy reliance on restrictive
monetary policies to contain domestic demand. The
net effect of all these actions, and of the failure of
most other countries to take active steps to avoid
monetary stringency, was a dramatic upward move-
ment in interest rates on a worldwide basis (Chart
17). Between September 1965 and September 1966,
rates on 90-day Eurodollar deposits increased from
4.4 percent to 6.7 percent; yields on long-term in-
ternational bond issues rose by more than a full
percentage point; and there were marked increases
in long-term government bond yields in all major
industrial countries.

The extent to which the present worldvdde level
of interest rates aids the process of balance of pay-
ments adjustment is doubtful. The substantial benefit
to the U.S. balance of payments from the tightening
of U.S. monetary conditions stemmed from differ-
ential monetary conditions here and abroad. The
potential magnitude of such effects is reduced when
surplus countries simultaneously permit or even en-
courage their own interest rates to rise.

From the standpoint of world economic growth,
it would be preferable if payments adjustment took
place at a lower average level of interest rates than
has recently prevailed. Precisely what level is ap-
propriate is a matter that deserves continuing in-
ternational discussion.

Given the key role of the United States in interna-
tional financial markets, a general easing in inter-

national monetary conditions would be greatly aided
by a lessening of monetary tightness in the United
States. A move in this direction, already under way,
will have major benefits for domestic economic bal-
ance. But if credit relaxation were confined to the
United States, it would not promote a better balance '
of payments adjustment either for this country or
for the major surplus countries of Europe. Moreover,
at least in some important European economies,
monetary easing would help to facilitate needed
domestic economic growth. It would appear, there-
fore, that movement toward easier credit conditions
by the countries of Western Europe would promote
their own and the general welfare. Where necessary
for domestic reasons, demand restraint could be main-
tained by greater reliance on fiscal policy.

If the major surplus countries adjust mainly by
permitting their trade surpluses to decline, this can
lead to a substantially improved trade surplus for
the United States and permit it to maintain and
even augment its role as a major capital exporter.
Alternatively, if the large surplus countries — and
particularly the EEC countries — wish to continue to
maintain a substantial surplus on current account,
they should assume a larger share of the responsi-
bility for providing financial capital where it is

Some progress in this direction has, in fact, re-
cently been made, partly under the spur of the more
restricted access to U.S. capital markets. New inter-
national bond issues in Europe during the first
three quarters of 1966, for example, were at an
annual rate of about $1.4 billion — four times the
$360 million level in 1962, the year preceding the
introduction of the Interest Equalization Tax. It is
highly desirable, however, that the surplus countries
take stronger steps to enlarge the capacity of their
capital marlcets and to assure an adequate volume
of long-term capital exports (including foreign aid),
especially to the less developed countries.


The avoidance or appropriate correction of large-
scale payments imbalances is of key importance in
facilitating sound world economic growth and rela-
tively unfettered international trade and payments.
But better adjustment alone is not sufficient to at-
tain these objectives.

In the long run, most countries seek some steady
increase in their international reserves. With grow-
ing world transactions, this has meant that they have
generally sought to have surpluses rather than defi-
cits in their balances of payments. Obviously, how-
ever, all countries cannot attain such a goal simul-
taneously. At present, only the flow of new gold



into monetary reserves can permit a steady accumu-
lation of reserve assets by some countries without
corresponding deficits for others.

This flow of new gold has, for many years, been
inadequate. For much of the postwar period, dollars
supplied through U.S. deficits served as the major
supplement to gold in new reserve creation. For rea-
sons already cited, however, the dollar can no longer
be expected to perform this task in the same way;
nor can it be assumed that adequate new reserves
will accrue in the form of automatic drawing rights
at the IMF, as the byproduct of the Fund's normal
lending operations. To satisfy desires for rising offi-
cial monetary reserves over the longer run and to
eliminate dependence of the world economy on the
vagaries of gold production, deliberate generation
of new reserve assets is needed on a cooperative
international basis.

In 1966, significant progress was made toward
setting up a mechanism for such deliberate reserve
creation. Representatives of the major industrial
countries known as the Group of Ten agreed that it
is prudent to begin the preparation of a contin-
gency plan now. They also agreed that deliberate
reserve creation should be tailored to global needs
rather than the financing of individual balance of
payments deficits; that decisions on the amount of
reserves to be created should be made for some
years ahead; and that reserve assets should be dis-
tributed to all members of the Fund, on the basis of
IMF quotas or comparable objective standards.
While the negotiations in the Group of Ten, and
parallel deliberations by the Executive Directors of
the Fund, did not result in complete accord on the
precise form and use of new reserve assets, the
exploration of technical details produced substantial
agreement regarding the nature of alternative
"building blocks" that might be incorporated in the
final contingency plan.

A major accomplishment in 1966 was the initia-
tion of a second stage of international monetary
negotiations late in the year, involving joint discus-
sions of the Executive Directors of the Fund and
the Deputies of the Finance Ministers and Central
Bank Governors of the Group of Ten. It is hoped
that these meetings, which have already shown
great promise, will by the time of the next Annual
Meeting of the Fund lead to a wide consensus on
the key remaining points at issue.

Differences of view on two of these points already
seem to be narrowing. There now appears to be
a widespread feeling that the needs of the inter-
national monetary system can best be served if
deliberate reserve creation is effected through the
development of an entirely new reserve unit, dis-
tributed to all Fund members. At the same time,
there is increasing recognition that satisfactory pro-
cedures can be developed to make the new reserve

FEBRUARY 27, 1967

Interest Rates in Selected Countries





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asset generally acceptable without linking its use
to specified payments of gold.

Probably the most important outstanding issue
is the precise manner in which decisions on reserve
creation are to be made. There is good reason to
expect, however, that this question can be resolved
in a way that takes account of the legitimate needs
and interests of all the countries represented in the

While the progress made in the negotiations thus
gives ground for considerable satisfaction, it is also
true that the need for developing a contingency
plan for deliberate reserve creation has become more

One reason is that it can no longer be assumed
that U.S. deficits will automatically increase world
reserves. These deficits, which for much of the post-
war period were the main element in new reserve
creation, have since the end of 1964 made no net
contribution to the rise in world reserves. Indeed,


in September 1966, the dollar holdings in the official
reserves of other countries were actually smaller
than 21 months earlier, both in absolute terms and
after a rough adjustment for seasonal influences.
Over this period, total U.S. gold sales to other
countries were more than twice as large as the
accumulated U.S. balance of payments deficit on
official settlements. Thus, the manner in which the
U.S. deficit was financed has tended to reduce,
rather than augment, the total of world reserves.

Second, the flow of gold into monetary channels
has been sharply reduced recently. While final esti-
mates for 1966 are not yet available, it is likely
that there was virtually no net addition of gold
to monetary reserves during the year. In 1965, only
$240 million of new gold entered into monetary
stocks. This contrasts vnth an annual average of
about $600 million in the decade ended in 1964.

Third, it is significant that the modest increase
in over-all world reserves that did occur in the
recent past reflected very special circumstances.
During the 21-month period from the end of 1964
through September 1966, world reserves increased
by about $1.8 billion. But the largest part of this
increase was a byproduct of the difficulties expe-
rienced by the British pound, which caused the U.K.
authorities to draw $1.4 billion from the IMF; a
large portion of this drawing, in turn, increased
reserve claims on the Fund by other countries. Not
only can transactions of this kind no longer be
counted upon to add to world reserves as the British
situation improves, but repayment of Britain's debt
could actually lead to a contraction of reserves.

These considerations suggest that the time when
deliberately created reserves are needed may be
closer at hand than is often realized. In any event,
continued uncertainty regarding the nature of a
contingency plan and the timing of its adoption can
be a growing source of uneasiness in international
financial markets and interfere with the smooth
working of the adjustment process. Clear agree-
ment on a contingency plan, on the other hand,
would be a major factor in strengthening confidence
in the world monetary system and in reducing gold
hoarding and would help lessen the tendency of
countries to pursue unattainable balance of pay-
ments aims.

The essential tasks for 1967 thus are to improve
the process of payments adjustment through in-
creased international cooperation and to move deci-

sively toward establishing a mechanism for deliber-
ate reserve creation. The two tasks are intimately
interwoven; success in both is necessary to provide
a sound climate for world economic growth and rela-
tive freedom in trade and capital transactions, as
well as to assure an adequate flow of long-term^
capital from the developed to the less developed

Congressional Documents
Relating to Foreign Policy

89th Congress, 2d Session

A Collection of Excerpts and a Bibliography Relating
to the National Collegiate Debate Topic, 1966-1967,
Resolved : That the United States Should Substan-
tially Reduce Its Foreign Policy Commitments.
Compiled by the Foreign Affairs Division, Legis-
lative Reference Service, Library of Congress.
H. Doc. 503. October 1966. 237 pp.

Aspects of Intellectual Ferment in the Soviet Un-
ion. Prepared by the Legislative Reference Service
of the Library of Congress. S. Doc. 130. October
17, 1966. 33 pp.

90th Congress, 1st Session

Fourth Special Report of the U.S. Advisory Com-
mission on International Educational and Cultural
Affairs. H. Doc. 32. January 10, 1967. 14 pp.

ILO [International Labor Organization] Recom-
mendation No. 123. Letter from Assistant Secre-
tary for Congressional Relations, Department of
State, Transmitting the Text of ILO Recom-
mendation No. 123 Concerning the Employment
of Women With Family Responsibilities. H. Doc.
45. January 25, 1967. 13 pp.

Investigation of Immigration and Naturalization
Matters. Report to accompany S. Res. 32. S. Rept.
14. February 1, 1967. 9 pp.

Study of Certain Aspects of National Security and
International Operations. Report to accompany
S. Res. 54. S. Rept. 20. February 1, 1967. 4 pp.

Study of Problems Created by the Flow of Refugees
and Escapees. Report to accompany S. Res. 38.
S. Rept. 35. February 2, 1967. 5 pp.

Review of the Administration of the Trading With
the Enemy Act. Report to accompany S. Res. 41.
S. Rept. 37. February 2, 1967. 4 pp.

Study of Foreign Aid Expenditures. Report to ac-
company S. Res. 57. S. Rept. 44. February 2, 1967.
14 pp.

Study of U.S. Foreign Policies. Report to accompany
S. Res. 67. S. Rept. 47. February 2, 1967. 4 pp.




United States and Morocco Sign Cultural Agreement

Following is the text of the cultural agree-
ment bettveen the United States and Mo-
rocco, which ivas signed at Washington on
February 10 by Secretary Rusk and Moroc-
can Foreign Minister Mohamed Cherkaoui.

Press release 33 dated February 10

The Government of the United States of
America and the Government of the King-
dom of Morocco,

In' consideration of the bonds of friend-
ship and understanding existing between the
peoples of the United States of America and
of the Kingdom of Morocco;

In view of the expressed desire of both
Governments for an agreement which would
encourage and further stimulate the present
educational and cultural program between
the two countries;

Inspired by the determination to increase
mutual understanding between the peoples
of the United States of America and the
Kingdom of Morocco;

Agree as follows:

Article I

Each Government shall encourage the ex-
tension within its own territory of a better
knowledge of the history, civilization, insti-
tutions, literature and other cultural accom-
pUshments of the people of the other coun-
try by such means as promoting and facil-
itating the exchange of books, periodicals
and other publications; the exchange of
musical, dramatic, dance and athletic groups

and performers; the exchange of fine art and
other exhibitions; the exchange of radio and
television programs, films, phonograph rec-
ords and tapes; and the establishment of uni-
versity courses and chairs and language in-

Article II

Each Government shall encourage and fa-
cilitate in its territory the conduct of cultural
activities and the establishment of libraries,
educational and scientific institutions, lan-
guage centers and film libraries by the Gov-
ernment and non-governmental organiza-
tions of the other country. The scope and
field of the aforementioned activities shall
be mutually agreed upon by the concerned
authorities of both Governments.

Article III

The two Governments shall promote and
facilitate the interchange between the United
States of America and the Kingdom of Mo-
rocco of prominent persons, professors,
teachers, technicians, students and other
qualified individuals from all walks of life.

Article IV
Each Government shall, in order to facil-
itate the interchange of the persons referred
to in Article III, look with favor on the estab-
lishment of scholarships, travel grants and
other forms of assistance in the schools, col-
leges, universities and cultural and scientific
institutions within its territory.

FEBRUARY 27, 1967


Article V

Each Government shall assist, insofar as
possible, in the placement of qualified na-
tionals of the other country in its higher
educational institutions and shall endeavor
to provide information with regard to facil-
ities, courses of instruction and other oppor-
tunities which may be of interest to na-
tionals of the other country.

Article VI

The two Governments shall encourage co-
operation between the learned and profes-
sional societies and the educational, scientific
and cultural institutions of the two countries.

Article VII

Each Government shall encourage and fa-
cilitate access, on the part of scholars and
students, to its monuments, collections,
archives, libraries, laboratories and other in-
stitutions of learning. The two Governments
undertake to facilitate archaeological mis-
sions in carrying out archaeological field
work and excavations and to encourage the
exchange of duplicates, copies and casts of
antiquities and other works of art. The ex-
change of photographic copies of manu-
scripts and books shall also be encouraged.

Article VIII

With agreement of both Governments a
committee or committees comprised of repre-
sentatives of the two countries will be con-
vened as necessary to consult on means to
further the general purpose of this agree-

Article IX

Each Government shall use its best efforts
to extend to citizens of the other country
engaged in activities pursuant to the present
agreement such favorable treatment with
respect to entry, travel, residence and exit
as is consistent with its national laws and

Article X

This agreement shall not have the effect
of changing the domestic law of either coun-
try, and the responsibilities assumed by each^
Government under this agreement shall be
subject to its Constitution and applicable
laws and regulations and will be executed
within the framework of domestic policy and
procedures and practices defining internal
jurisdiction of governmental and other agen-
cies within their respective territories.

Article XI

The present agreement shall come into
force on the date of signature and shall re-
main in force indefinitely, but may be termi-
nated by one year's notice of intention to
terminate from either Government to the

In witness whereof the respective repre-
sentatives, duly authorized for the purpose,
have signed this agreement.

Done in dupUcate at Washington this 10th
day of February, 1967, in the English and
French languages, both equally authentic.

For the Government of the United States of

Dean Rusk

For the Government of the Kingdom of


U.S. and Mexico Resume Talks
on Radio Broadcasting Agreement

Press release 28 dated February 10

Delegations representing Mexico and the
United States will resume formal negotia-
tions in Mexico City on February 14 on an
agreement concerning radio broadcasting in
the standard broadcast band. The negotia-
tions look toward an agreement to replace one
which expired on June 9, 1966, but which was



ixtended until the end of 1967 by a protocol
igned in Mexico City on April 13, 1966.i The
current agreement governs relationships in
the use of radio frequencies in the standard
Droadcast band with the aim of minimizing
larmful interference to the parties concerned.

The Mexican delegation for these negotia-
bions is headed by Lazaro Barajas Gutierrez,
Permanent Mexican Representative on the
Administrative Council of the International
Telecommunication Union, assisted by Mexi-
an officials from the Ministry of Transport
and Communications. The United States dele-

Online LibraryUnited States. Dept. of State. Office of Public CoDepartment of State bulletin (Volume v. 56, Jan- Mar 1967) → online text (page 62 of 90)