Kennedy (73 page)

“I must say,” Kennedy told a partisan crowd in Moline, Illinois, “the Vice President does show some signs of tension. Now he blames me for the increase in the cost of gold on the London Market…. Mr. Nixon, if you are listening, I did not do it, I promise you.” Kennedy requested his “Academic Advisory Committee” to work out a formal comprehensive public statement. He issued it in Philadelphia on October 31, after a long night’s work hammering out the final draft with Ken Galbraith at the other end of the telephone.

In the transition between his election and inauguration, he became far more concerned. In January the outflow of gold rose to proportions which could not continue without disaster. The need for world confidence in the dollar, and the danger of a “run on the bank” by dollar-holders turning them in for gold, dominated several of his conversations as President-elect. They were the decisive influence in his choice of a Secretary of the Treasury. They started us working on the balance of payments program he presented in February. In his State of the Union Message he emphasized the priority he was giving the problem, his refusal to devalue the dollar by raising the price of gold and his determination to do whatever had to be done “to make certain that…the dollar is ‘sound.’”

Some foreign apprehensions were heightened by the fact that two-thirds of our gold was officially untouchable because it was required as
backing for our currency and Federal Reserve deposits. But no matter how strongly sophisticated bankers and economists assured him that this commitment should be repealed, that it represented merely an unnecessary inducement to foreign dollar-holders to scramble for the other third, the President was certain that any such proposal to the Congress from him in 1961 would be seized upon as “Democratic funny-money finagling.” Inasmuch as the Federal Reserve Board could suspend the rule, and certain that Congress would repeal it in an emergency, he preferred simply to pledge, in his State of the Union address, that
all
our gold reserves, plus our International Monetary Fund drawing rights, were “available” for use if needed. That pledge—and his pledge a week later in the Special Message on the Balance of Payments that the dollar would continue to be “as good as gold”—went a long way toward restoring confidence in the dollar and slowing the gold outflow. The gold speculation in London ceased almost completely, and the President reversed Eisenhower’s curb on military dependents overseas on the grounds that its small contribution to our balance of payments was more than offset by the loss of morale.

He had no intention of devaluing. Nor would he stop the outflow of dollars and gold by shutting off credit, imports or dollar convertibility. He refused to believe that he had to choose between a weaker economy at home or a weaker dollar abroad. But he did recognize that the crisis limited his full use of monetary policy—lower interest rates—in fighting the recession. His concern, in fact, was that the powerful and independent Chairman of the Federal Reserve Board, William McChesney Martin, might hamper recovery through higher rates. The traditional fear of the men at the “Fed” was inflation, not unemployment, and balance of payments pressures plus economic expansion called for higher interest rates in their book. Kennedy could not, by law, order Martin to do anything. But he talked privately and frequently with him, praised his work publicly and reappointed him to the chairmanship. He invited Martin to regular, confidential sessions in his office with the “Troika” (Heller, Dillon and Bell) in which the needs of the economy were stressed. For two and a half years long-term interest rates on bonds as well as mortgages were held down, in contrast with their record rise in the previous few years, while short-term rates were nudged high enough to discourage continued large outflows of short-term capital.

Kennedy’s Budget freedom was also restricted by the balance of payments problem. Too large a Budget deficit resulting from new Kennedy programs, said Dillon, could cause foreign bankers to believe, correctly or not, that the value of the dollar was in doubt and to take more American gold. At the first meeting of the Cabinet on January
26, the Treasury Secretary set forth the problem for his colleagues and warned of its effects on their budgets. During the months and years that followed, that same room would contain countless meetings on that same subject.

Almost to a man, Kennedy’s associates in the administration thought he was excessively concerned about the problem. Even the Treasury resisted his prodding for faster, more far-reaching solutions, opposing in particular any restrictions on American capital going abroad. (The Treasury, confided one nongovernmental adviser to the President, “is subject to the banker syndrome, which is to foresee disaster but prefer inaction.” And the President himself once remarked to Dillon in one of our meetings that “the Treasury is very skillful at shooting down every balloon floated elsewhere in the administration” on this subject.) The economic advisers, more concerned with the domestic economy, pointed out that the totals owed this nation by others far exceeded the claims upon our reserves, and that the wealthiest nation in history, possessing two-fifths of the free world’s gold stocks, was hardly in dire straits.

Privately some advisers told the President that even devaluation was not unthinkable—a drastic change in the system but preferable to wrecking it altogether. But the President emphasized that he did not want that weapon of last resort even mentioned outside his office—or used. By disrupting the international monetary system that we had done so much to create, devaluation would call into doubt the good faith and stability of this nation and the competence of its President.

“I know everyone else thinks I worry about this too much,” he said to me one day as we pored over what seemed like the millionth report on the subject. “But if there’s ever a run on the bank, and I have to devalue the dollar or bring home our troops, as the British did, I’m the one who will take the heat. Besides it’s a club that De Gaulle and all the others hang over my head. Any time there’s a crisis or a quarrel, they can cash in all their dollars and where are we?” He also had some evidence to back his suspicions that the gloomy rumors which triggered the gold withdrawals of 1960 had been deliberately spread by American bankers to embarrass him politically, and he did not want to be vulnerable to the same tactic in 1964.

Aided by Dillon and his talented Under Secretary, Robert Roosa, the President chipped away at the international deficit and gold flow. Despite the reluctance of European nations to keep a larger portion of their reserves in dollars instead of gold, the outflow of our own gold reserves, in Kennedy’s first thirty-two months, was less than half as much as it had been in the previous thirty-two months. But the over-all payments deficit was more stubborn. The third quarter of 1963 showed
the best balance of payments position of any quarter since the Suez crisis had given us a temporary surplus. But that particular quarter’s showing was partly due to the beneficial effects of the President’s proposing a special tax on foreign bond issues floated in our market. This bill, he said, was the kind of proposal he wished Treasury had put forward much earlier. The flow of American investments abroad was largely unrestricted, a policy he continued to doubt. “Sure they bring more in earnings in the long run,” said the President, “but by then this problem will be over. It’s a ridiculous situation for us to be squeezing down essential public activities in order not to touch private investment and tourist spending—but apparently that’s life.” Every time General De Gaulle and his aides talked menacingly about keeping American investments out of Europe, Kennedy secretly wished they would.

Nevertheless progress was slowly being made in other ways. American goods were kept competitive while foreign costs and prices rose. The Treasury constructed a complex network of arrangements with other countries and with the International Monetary Fund to protect the dollar with other currencies. The State, Defense and Treasury Departments persuaded other nations to buy more of their military equipment from us and to pay their old debts off in advance. Despite the Berlin build-up, a more modern military establishment led all other departments in cutting down on expenditures abroad. Federal civilian agencies, which had previously regarded it as a mark of prestige to open a branch office overseas, were discouraged from doing so.

The laws were tightened against Americans avoiding our income taxes abroad. Progress was made in getting other countries to pay their share of the foreign aid and military burden, and our own outlays in these efforts were tied almost wholly to purchases in America. In addition to higher short-term interest rates, new tax incentives helped keep more short-term foreign capital here. The President also pushed Treasury hard, although with limited success, to work with other nations in formulating a far stronger long-range international monetary system to finance future high levels of world trade.

These and other arrangements were generally approved by the Congress, whenever legislation was required, but they were generally unknown to most Americans. Two efforts did win wider attention. One was the effort to close the growing “tourist gap,” by attracting more foreign tourists to this country with a new United States Travel Service and simplified visa procedures and by reducing the duty-free amount our own citizens could spend abroad from $500 to $100. “If we’re restricting servicemen,” said the President, “I don’t see why these rich——can’t do with a little less—including my sisters.” Walter Heller suggested in the fall of 1963 that perhaps Jacqueline Kennedy, whose travels abroad
were well publicized and by some unfavorably criticized, might take a “See America First” trip as part of our effort to get more Americans to vacation in their own country. “Next year,” the President laughed. “Next year I’ll ask her to do that.” At the same time he thought it unfair to restrict—or, as some proposed, tax—all overseas travel, with ill effects on teachers, students and other less affluent tourists, when those proposing such measures would not place equivalent restrictions on the movement of American capital.

The public’s attention was called even more strongly to the administration’s effort to increase our export trade. A variety of tools was employed, under the direction of Secretary of Commerce Hodges—including trade missions, market surveys and export promotion and education among American businessmen. A wholly new program of export credit insurance was developed. But the major effort—and one of the major legislative efforts of the Kennedy administration—was the Trade Expansion Act of 1962.

Like the antirecession program in 1961 and the tax cut in 1963 (and, later in 1963, civil rights), the 1962 trade bill became the centerpiece of all that year’s efforts—the subject of extra emphasis in the State of the Union Message, the subject of the year’s first special legislative message, the subject of a pep talk with charts to Democratic legislators, the subject of several Presidential speeches, and the subject of an intense White House lobbying effort with priority over almost all other bills. The new proposal would help our balance of payments, said the President, hopefully by increasing our exports faster than imports, and by enabling our businessmen to sell on more equal terms to the European Common Market instead of building plants within the Market.

But balance of payments considerations contributed only one of many long-range arguments for trade expansion. The Reciprocal Trade Agreements Act of Franklin Roosevelt and Cordell Hull had become outmoded and inadequate, as successive renewals narrowed the President’s negotiating authority. The remarkable growth and bargaining strength of the European Economic Community, known familiarly as the Common Market, and the application of Great Britain and her European trading partners for membership in 1961, produced new pressures for new legislation. If American business and agriculture could not share on suitable terms in the growth of that market, the President’s hopes for both greater Atlantic unity and greater American prosperity were clearly less likely to be realized.

The Reciprocal Trade Act expired in mid-1962. As we prepared in the fall of 1961 for Kennedy’s second legislative program, some advisers counseled merely a twelfth extension of the existing Act, with the usual minimum of amendments. That strategy would allow time to prepare
the Congress and country and to await the EEC’s action on Britain’s application. But the President felt that the evidence was clear, that events might pass us by, and that the fierce fight which even a simple extension would entail might better be fought, and fought only once, for a wholly new trade instrument. “The United States,” he said, “did not rise to greatness by waiting for others to lead…. Economic isolation and political leadership are wholly incompatible.”

He established a special operation in the executive offices, headed by Philadelphia banker Howard Peterson, to help promote the bill in the Congress and mass media. Because his courtly Secretary of Commerce was better received by skeptical Congressmen than international lawyer George Ball, who was our trade and EEC expert, he directed Hodges rather than the Under Secretary of State to take the lead in all Hill testimony and negotiations. But he kept matters closely coordinated by the White House.

The Congress, accustomed to grumbling about even superficial changes in the old Reciprocal Trade Act, had been ill prepared for an unprecedented bill giving the President a five-year authority to cut all tariffs by as much as 50 percent and to cut tariffs down to zero on those commodities traded predominantly by the U.S. and the Common Market. The President never avoided the fact that, in order to sell more, we would have to buy more; and he proposed as part of the trade bill a measure (which he had first introduced as a Senator years earlier) to provide Federal “adjustment assistance” to firms and workers injured by any increases in imports deemed desirable. He did not expect that revolutionary provision to pass. It contained a variety of social welfare and economic aids which could never be passed on their own. Including it, however, helped our labor friends support the bill among their skeptical, traditionally protectionist members. It also served as a lightning rod to draw fire away from other sections, and as bargaining material if a compromise had to be made. The best evidence of the bill’s expert management and amazing success was the continued presence of those readjustment provisions when it came to the White House to be signed.