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TABLE II.-Comparison of debt projections of June 23, 1964, with actual results

[In billions)

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1 Adjustment to $4,000,000,000 cash balance places data on basis comparable to estimates given on June 23, 1964, as shown in col. 2.

Senator Long (presiding). May I ask you, Mr. Secretary, what is your reaction to this what I call the Martin slump in the stock market that was set off after

Senator ANDERSON. Still going on.

Senator LONG (continuing). After Federal Reserve Board Chairman Martin said it. I didn't say it wasn't still going on. Most people attribute that statement to him.

Senator WILLIAMS. Is that the Martin slump to the Johnson market? [Laughter.]

Secretary FOWLER. Mr. Chairman, I don't think my reactions to the situation have changed in any appreciable degree from those that I voiced to this committee some days ago, I think in response to questions from Senator Williams and Senator Smathers. We had a thorough roundup analysis of the current situation as it relates to the economy, as was reported in the press last Thursday at the White House, with Chairman Martin and the Chairman of the Council of Economic Advisers and the Director of the Budget. Under Secretary Deming attended, and another member of the Council-I believe Mr. Okum. As the press reported the President's statement, I think it was the unanimous view of that group that the present outlook for the economy is a favorable one.

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I think we all recognize that it is too much to expect that the economy will maintain the tremendous pace it had in the first quarter, when the gross national product increased about $14.2 billion due to some nonrecurring factors--the carryover of automobile demand from the fourth quarter when there had been some interruptions due to strike and the steel inventory buildup in anticipation, or in fear of, a steel strike at the time of the May closing of the contract. I think we all expected the second quarter to continue to show a healthy rate of increase but not nearly at the pace that the first quarter had shown. We expect the third and fourth quarters of this calendar year to continue to show a healthy and appreciable expansion.

Any forecasting is attended by a good deal of risk, but it is certainly very difficult to see beyond the first of the year in any meaningful way although I must say we were all of the opinion that there is nothing on the horizon in the way of data or trends about the economic situation that indicate any substantial difficulties in 1966.

Now, of course, one could say that the stock market break, itself, is an indicator of some possible difficulty ahead.

As a matter of fact, I was asked that question after the meeting by the press, and I commented that the stock market is only one of a great number of indicators that the economists and analysts use in predicting psychological changes, and forecasting psychological changes, and that it has no more or less importance than 20 other economic indicators.

So, as far as we were able to see the situation, after an hour or so of fairly free and intensive discussion, I see nothing that I can add to the comments I made last week.

Senator Long. Well, now you say you see nothing on the horizon to be a substantial threat, that is to be—anything aside from the fact that there is something of a break in the stock market itself at the moment, you see nothing on the horizon to indicate that the economy is in any trouble.

Could you put that the other way around in the affirmative and say that all factors indicate that the economy is not in trouble?

Secretary FOWLER. Yes, sir.

Senator LONG. I am not a speculator and can't afford it but if I had something to speculate on I would assume that this would probably be a good time to buy some stocks at the time some of them went down.

Secretary FOWLER. Mr. Chairman, I have never allowed myself to be involved in any advice about the stock market and I don't think I want to begin now.

Senator Long. I don't blame you. As a matter of fact, it is kind of like somebody betting on a horse, you can't guarantee he is going to win.

But the question of our balance-of-payments question keeps coming up.

Would you mind telling us what is the latest indication with regard to our balance-of-payments problem?

Secretary FOWLER. I would like to answer that in two parts, and this is a pattern that I have found it necessary to follow in frequent discussions of this topic. First, insofar as the early returns from the balance-of-payments situation are concerned covering the months since the President's February 10 program was announced and the so-called voluntary program primarily affecting the banks and direct industrial and business operations abroad, our balance-of-payments picture has shown a very steady and encouraging improvement.

However, I think one must always add to that that there have been a number of factors at work in the March and April and May figures, particularly the March and April figures, which might have involved some reflect action from the situation that existed in the last quarter of last year, and the early months of this year. There was the reflect action from the interruption to exports due to the dock strikes early this year. There was a reflect action due to the fact that undoubtedly during the last quarter and the first month and a half of this calendar year, a good deal of money went overseas somewhere in anticipation, or in concern, as to whether or not there would be anything like a complete stoppage of transfers of capital overseas.

So the improvement which we have been able to notice in the figures for March and April and May to some extent perhaps reflects the so-called voluntary program and to some extent reflects these reflect actions.

I myself have taken the position consistently that I think we are in a much sounder position if we wait until the second quarter figures are all available which would be around August 20, covering the months of April, May, and June-to attempt to appraise what the improvements have amounted to as a result of the program, and to what extent the improvements in a given sector, such as foreign bank loans tend to be countered by losses in certain other sectors.

In other words, you have to look at this picture in its totality rather than taking too much early encouragement and too much early optimism from the known favorable results that we are getting in certain isolated sectors, however important they may be.

Governor Robertson, of the Federal Reserve Board, which is administering the bank program-the bank phase of the voluntary program--made a speech earlier this week indicating that very substantial progress is being made there.

Secretary Connor, who is in charge of coordinating the voluntary program as it has to do with direct business operations abroad, has indicated that the expectations of the 600-odd major companies that are cooperating with this program promise considerable improvement in that sector.

But we don't know what the impact is going to be, for example, in the import sector. We don't know what the impact is going to be in some of the additional requirements as a result of increased military operations, for example, in South Vietnam.

So, I would prefer to reserve any solid comment on whether we have this situation in hand until we see these second quarter figures, and then I would like to add a third point which I have tried to emphasize in speaking, particularly to industrial and banking groups, that coming into a balance or approaching a balance or equilibrium in any one quarter is not going to be an answer to this problem. We have been in deficit, and in substantial deficit, in this area for a period since 1958. So we are going to have to get into a balance, or an equilibrium as it is called, not for just one quarter, but for two, three, and four. And as long as one can see, we must try to maintain that balance because the dollar, as a key reserve currency, is going to have to continue to play a major role in our international monetary affairs.

So I simply utter this note of encouragement, but caution against assuming that we have the problem completely licked until we know the figures.

Senator Douglas. Mr. Chairman, would the Senator yield?
Senator Long. I am through.

Senator DOUGLAS. I don't wish to interfere but merely follow up the question. What are the figures for the first quarter, Mr. Secretary?

Secretary FOWLER. Well, the figures-Senator, we get into the problem of seasonal adjustment, and the figures for the first quarter showed that—taking into account the seasonal adjustments factorswe were running a deficit on an annual basis of better than $3 billion.

Senator Douglas. There would have been no improvement then?

Secretary FOWLER. That is accounted for by the fact that the first month, January, and really the second month, we were running at a very substantial deficit. The figures for March were of an entirely different order after the program had gone into effect. The figures for April on a seasonal adjusted basis showed a surplus as have the figures for May.

Senator Douglas. Surpluses, there has been a surplus for March, April, May. Secretary FOWLER. Yes, sir.

Senator Long. You are actually showing a surplus for those 2 months?

Secretary FOWLER. Yes; that is right. But how much of that surplus is a reaction from the reaction before and how much is improvement I can't say.

Senator Long. Let me get this straight. The indicators you have indicate that you are showing a surplus for 3 months, March, April, and May.

Secretary FOWLER. That is right.

Senator Long. But you don't want to rely upon that as yet because you would rather wait until more figures come in and so you have a complete overall showing?

Secretary Fowler. That is right.

We have had in the past quarters in which we have been in surplus or approaching surplus and I don't think we are safe in assuming we have this problem in hand, while we have two, three, or four quarters running in a row showing pretty much a consistent pattern.

Senator Long. Senator Anderson?

Senator ANDERSON. I was very serious to get at that situation because one of the Senators last night said:

Fowler appeared before the Senate Committee on Foreign Relations 2 months ago and asked him if he did expect improvement in the balance of payments. He said he did. He asked them what they were on the day he appeared, he could not give the answer.

The answer is now the balance-of-payments problem is now worse than it was. Unfortunately some of us didn't have ways of getting to our information last night, the people in my office who keep track of those things had gone home. I had figures showing the situation was not worse than it was. Is it your information that the situation is worse than it was?

Secretary FOWLER. No, sir; my information is that there has been an encouraging improvement covering the months of March, April, and May. I see no reason to believe that that situation shouldn't continue but I much prefer to wait until we have the second quarter figures thoroughly in hand to give, I think, a more complete appraisal of the picture.

What we have up to now is encouraging, Senator Anderson.

Senator ANDERSON. Well, I agree with you we have to wait a while to be sure of it but the facts are right now it looks better even though there are factors that might maybe make it later look worse.

Secretary FowlER. It does indeed and I would suggest, perhaps I would like to provide for the record, if the chairman permits, some excerpts from the recent statement by Gov. J. L. Robertson of the Board of Governors of the Federal Reserve System in which he outlined the clear, very clear, evidence of the effect of the voluntary program among the banks which have been engaged in foreign lending activities.

Senator Long. I will instruct the reporter to put that in the hearings when you provide it.

(The information referred to follows:)

EXCERPTS FROM THE RECENT STATEMENT BY Gov. J. L. ROBERTSON OF THE

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM The basic objectives of that part of the President's program assigned to the Federal Reserve System are, I hope, fairly well known. We aim to reduce the expansion of bank credit from a rate of over $2 billion a year—which it attained in 196+to something in the neighborhood of $500 million in 1965. To achieve comparable results in the area of nonbank financial institutions, we asked them to reduce, in an orderly manner, their holdings of liquid funds abroad to the December 31, 1963, level, to refrain from increasing their holdings of short- and medium-term investments by more than 5 percent during 1965, and to exercise considerable restraint in increasing their long-term investments.

Barely 3 months have passed since the guidelines were distributed and we have data on actual transactions only for March and April, and that only for banks. It is already clear, however, that there has been a sharp reduction in the rate of expansion of bank credit; from over $2 billion in 1964, and about $400 million in just the first 2 months of 1965, the flow was reduced to $40 million in March and converted into a reflux of $140 million in April. We do not yet have specific data (but soon will) on capital flows through the nonbank financial institutions this year (their foreign credits increased 9.4 percent in 1964, from over $8 billion to over $9 billion), but the information we do have leads us to believe that they, too are cooperating wholeheartedly with the program.

We are keeping in close touch with all these financial institutions. Regular reports and hundreds of face-to-face meetings with top management give us every reason to believe that the guidelines are being followed, and that the program will be effective in achieving a substantial reduction in the rate of capital outflow while providing adequate financing not only for U.S. exports but also for the needs of the less developed countries of the world.

The reaction of the financial community to the program has been an encouraging example of the way in which American institutions can place the national welfare above their own shortrun economic interests. It is true that financial institutions recognize that their welfare is inextricably entwined with the preservation of a sound dollar and an effective international monetary system. Nevertheless, their willingness to cooperate and to refrain from taking competitive advantage of the situation exhibits an admirable sense of public responsibility.

Secretary FOWLER. The bankers have done a great job in the early months.

Senator ANDERSON. In your statement you say, "General reduction of debt is anticipated in the spring of 1966.”

Do you mean a reduction?

Secretary FowlER. That is a reduction from the peak level during this particular year.

Senator ANDERSON. It always reduces the peak level, doesn't it?
Secretary FOWLER. Sir?
Senator ANDERSON. It always reduces from the peak level?

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