Inflation Is the Cause

August 12, 1963

The Administration would be well advised if it dropped entirely its unfortunate proposal for a tax of up to 15 percent on foreign securities sold in this market. If it nonetheless persists, Congress should certainly not enact it in any form. It is already so riddled with exemptions that it has become “more holes than cloth,” but though this means that it could have at best a negligible effect in “saving dollars,” even if it worked the way the Administration expects, it does not mean that it cannot do great harm.

It is a misfortune that it was ever proposed. For it has convinced both Americans and foreigners that a dollar emergency must exist to make such an emergency measure necessary. And it has raised fears both at home and abroad that still more drastic controls will be resorted to if this one does not work—which few expect it to do.

SOURCE OF STRENGTH

The President’s message asking for this control was, in fact, full of inconsistencies and contradictions. At the very moment when he was asking for a barrier to trade and to capital movements he announced: “This nation will continue to adhere to its historic advocacy of freer trade and capital movements.” And in the very message in which he asked for a tax intended to discourage or inhibit further long-term foreign investment in order to protect our balance of payments, he was explaining how lucky it was that we had made precisely such foreign investments in the past:

“Our payments deficits, measured in terms of our loss of gold and the increase in our short-term liquid liabilities to foreigners, have consistently been equaled or exceeded by the growth of our long-term high-yielding foreign assets—assets which have been and will continue to be an increasing source of strength to our balance of payments. Today, Americans hold more than $60 billion of private investments abroad, and dollar loans repayable to the U.S. Government total over $11 billion. At the end of 1962, all of these assets exceeded our liabilities to foreigners by an estimated $27 billion. And they have shown an increasing strength over the years: our total income from these sources in 1959 was $3 billion; in 1962 it had risen to $4.3 billion, and we expect further substantial increases in the coming years.”

What the President is proposing is that a prohibitive tax now be put on voluntary private foreign investments, likely to bring in such future dollar income in interest and dividends, in order that the government may continue to tax this money away and pour it into “underdeveloped” countries—from which it is highly unlikely that we will ever get a dividend or interest return.

EXCHANGE CONTROLS?

The tax on foreign securities would not work; but the danger is that in trying to make it work the government would move deeper and deeper into exchange controls. We have already gone far. Under Republican and Democratic administrations, the government first made it a crime for Americans to buy or hold gold at home. Then to buy or hold it abroad. Then Americans traveling abroad were only allowed to bring in $100 of duty-free goods. Now we are to tax foreign security purchases. Will the next step be to limit the amount of money our tourists and businessmen may spend abroad? (This has already been suggested by Senator Javits.)

The whole compartmentalized item-by-item approach to the balance of payments is fallacious. In his message the President had to confess, at the same time he was estimating that the $100 limit on duty-free goods “achieved a saving” last year “of more than $100 million,” that our “total tourist spending in foreign countries rose another 10 percent . . . to nearly $2.5 billion.” And overlooked by the sponsors of the tax on foreign investments is that these investments have made possible a large part of our export surplus.

We can solve the balance-of-payments problem only by dealing with its basic cause—our domestic inflation. If we were to halt this inflation—by stopping budget deficits and cheap money—we could cure the balance-of-payments deficit overnight. But this is the one course that the Administration will not take.