No Help to the Dollar

August 5, 1963

The Administration’s proposal to tax foreign securities is unfortunate from every angle. It is a further abridgment of the economic liberties of American citizens. It is another roadblock to free markets. It is a clearly protectionist measure. It is a beggar-my-neighbor policy. It seeks to cure our balance-of-payment problems at the cost not only of increasing such problems for other nations but of disrupting their economies.

There were so many leaks in the proposal, even before the President announced the Canadian exemptions, as to make it futile in accomplishing its intended purpose of “helping the balance of payments.” The attempts to plug these leaks would lead inevitably to exchange controls. The proposal to give the President discretionary powers to discriminate as among securities and countries would substitute uncertainty and administrative favoritism for a rule of law.

The tax would, of course, do nothing to cure the balance of payments. On the contrary, its mere proposal has undermined confidence in the dollar. And the irony is that all punitive measures of this kind would be entirely unnecessary if the Administration had the courage and understanding to take the proper measures.

HURTING OUR CUSTOMERS

The proposal to impose a so-called “interest equalization tax” of 2.75 to 15 percent on foreign securities offered in the American market had all the earmarks of a panicky idea that no one had thought through. Immediately after the President’s message, stocks collapsed on the Canadian and Japanese markets. Within three days the President announced that “new” Canadian security issues would be exempt from the tax. The Canadians had meanwhile pointed out that while $457 million in new Canadian issues were purchased by U.S. citizens last year, Canada still had a $565 million deficit in her trade with the U.S.

In other words, Canada was buying from us more than she was selling to us—and our loans and investments made part of this excess buying possible. But this also applies to Japan, which also buys from us more than she sells to us, and also partly because of our loans to her. And this applies to still other countries.

When one contemplates all its loopholes and exemptions—all direct investment, all securities or loans of less than three years, loans of commercial banks, securities of “less developed” countries—it is hard to understand what compensation even the Administration expects from its disruptive proposal.

INFLATION CONTINUES

And all such measures are quite unnecessary. The deficit in the balance of payments could be stopped overnight if the government would halt the inflation. It took a timid step in this direction when the Federal Reserve increased the discount rate from 3 percent to 3½ percent. But this move was too little, too late, and too isolated. In such a situation the raise should have been at least one full percentage point. It should not have been accompanied by assurances that long-term interest rates were going to be kept down. It should not have been preceded and contradicted by the Federal Reserve’s inflationary policy of buying Federal securities and so increasing the paper money supply. (The Federal Reserve held $31.7 billion of government securities on July 17, an increase of $2.7 billion in twelve months. In the same period the money supply has increased about $4 billion.)

In the same week that the Federal Reserve raised the discount rate, moreover, the world learned that our Federal budget deficit in the fiscal year ended June 30 was $6.2 billion, with the prospect of a deficit twice as big in the new fiscal year. Yet on top of all this the Administration is recommending increased expenditures and has renewed its suggestion for a substantial tax cut.

It is continuing this policy of inflation, which is the basic cause of the dwindling confidence in the dollar, as the result of the quite false Keynesian idea that inflation is the cure for unemployment. Because it will not accept the only real cure, it is plunging deeper and deeper into dangerous and disruptive expedients.