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Brimmer, Andrew, Oct. 1969 - April 1971 (4)
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Brimmer, Andrew, Oct. 1969 - April 1971 (4)
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This file contains material related to the Governor, Federal Reserve Board.
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Arthur F. Burns Papers
Federal Reserve Board Staff Files
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Africa
Federal Reserve System. (1913 - )
African Americans
Commerce
Interest rates
Finance
Banks and banking
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The original documents are located in Box C2, folder "Brimmer, Andrew, Oct. 1969 - April
1971 (4)" of the Arthur F. Burns Papers at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Arthur Burns donated to the
United States of America his copyrights in all of his unpublished writings in National Archives
collections. Works prepared by U.S. Government employees as part of their official duties are in
the public domain. The copyrights to materials written by other individuals or organizations are
presumed to remain with them. If you think any of the information displayed in the PDF is subject
to a valid copyright claim, please contact the Gerald R. Ford Presidential Library.
NATIONAL ARCHIVES AND RECORDS SERVICE
WITHDRAWAL SHEET (PRESIDENTIAL LIBRARIES)
FORM OF
CORRESPONDENTS OR TITLE
DATE
RESTRICTION
DOCUMENT
1. memo
Governor Brimmer to Records Section re developments in
7/7/70
C
the commerical paper market
2. memo case, Solomon to Burns, 8/13/70
3a. telegram
American Embassy Monrovia to Sec. of State,
7/30/70
A
Monrovia 3133, re Brimmer's talks with financial
officials (3 pp.)
3. memo case, Broida to FOMC, 8/27/70
3a. paper
"Highlights of Visit to West Africa" by Andrew F.
8/70
C(A)
Brimmer (14 pp.)
3b. memo
Michael O'Connor toFiles re the African Development
8/19/70
C(A)
Bank (4 pp.)
FILE LOCATION
Arthur Burns Papers
SRM
Federal Reserve Board Staff Files, Box C2.
3/20/85
Brimmer, Andrew (4)
RESTRICTION CODES
(A) Closed by Executive Order 12356 governing access to national security information.
(B) Closed by statute or by the agency which originated the document.
(C) Closed in accordance with restrictions contained in the donor's deed of gift.
GENERAL SERVICES ADMINISTRATION
GSA FORM 7122 (REV. 5-82)
GERALD R. FORD LIBRARY
This form marks the file location of item number
as listed on the pink form (GSA Form 7122, Withdrawal Sheet)
at the front of the folder.
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
DATE July 17,1970
TO Chairman Burns
FROM Andrew F. Brimmer atB
Attached is the correspondence
from Elmer Staats concerning the
proposed GAO audit of the NAC. I am
waiting for Elmer to return my call.
I have discussed the procedure
with Assistant Secretary Petty in the
Treasury Department, and we have reached
basic agreement with respect to the
procedure.
LIBRARY GERALD R. FORD
UNITED STATES
GENERAL ACCOUNTING OFFICE GENERAL
441 G. Street, N. W.
Room 7000
0 STATES
Washington, D. C. 20548
C. 20548
July 1, 1970
Dear Andy,
Attached is the exchange of corres-
pondence with Secretary Kennedy to which
I referred in our telephone conversation
yesterday. I am also enclosing a copy of
the statement which was presented yesterday
by Secretary Kennedy before the House
Banking and Currency Committee which touches
on the same subject.
I am also enclosing a copy of the
statement which I presented before the House
Foreign Affairs Committee which is related
to our earlier work with United Nations
agencies. Should you be interested in
individual reports, please let us know.
We believe we can perform a useful
role, and I am certain that the long-
standing issue on access to records in the
Federal Reserve Board should not be a handi-
cap.
Sincerely,
Twen
Elmer B. Staats
&
FORD
Enclosures
GERALD
LIBRARA
The Honorable Andrew F. Brimmer
Board of Governors of the Federal
Reserve System
COMPT
TRANSPORT
COMPTROLLER GENERAL OF THE UNITED STATES
STATES
WASHINGTON. D.C. 20548
NIVER,
B-161470
April 27, 1970
Dear Dave:
In our meeting a week or so ago, I told you I would explore the
feasibility of our undertaking & study of the organization and pro-
cedures of the United States' participation in international lending
institutions without the necessity at this time for access to indi-
vidual loan files.
While we do not concede that this Office does not have a right
of access to all files that are relevant to the direction and manage-
ment of United States interests in international lending institutions,
we do appreciate your views that our access to information in individual
loan files could be an extremely delicate issue with the international
institutions. Accordingly, we are agreeable to undertaking our study
without access to the individual loan files, provided that other
reports and management data furnished United States officials by the
lending institutions would be available for our review.
The subject is a very important one, particularly in light of
comments on this general subject made in the Pearson report, the
Jackson report, and the more recent Peterson report, along with the
increasing interest and concern being expressed in the Congress.
Moreover, we feel that we have developed a series of most constructive
reports relating to United States' backstopping of various United Nations
organizations, and these reports have been well received in the State
Department and in the interested committees of the Congress.
While it is unnecessary to emphasize that our objective here is
to explore ways of improving coordination, with all that is at stake
and as an arm of Congress, we feel that it is important that we proceed.
I think it is increasingly urgent that we be able to have a working
understanding that will permit our CAO staff to proceed without con-
tinuing impodiments. Enclosed is an outline of the alternative for
this immediate study which we believe can be accomplished without
access to the loan files.
I would appreciate it if we could hear from you soon since our
ability to carry out our responsibilities in this instance will be
&
FORD
GERALD
dependent upon a working arrangement for cooperation within your
Department.
Best wishes.
Sincerely yours,
(SIGNED) ELMER B. STAATS
Comptroller General
of the United States
Enclosure
The Honorable David M. Kennedy
Secretary of the Treasury
GERALD R. FORD LIRRAMA
- 2 -
GENERAL ACCOUNTING OFFICE
STUDY OF UNITED STATES PARTICIPATION
IN INTERNATIONAL LENDING INSTITUTIONS
April 24, 1970
BACKGROUND
A primary function of GAO is to make independent examinations
for the Congress into the manner in which U.S. Government agencies
are discharging their responsibilities, and to review the manner in
which Federal programs are carried out.
An increasingly significant Federal program is that of providing
developmental assistance to foreign countries through international
lending institutions and other international organizations as dis-
tinguished from direct bilateral assistance efforts.
In its participation in international developmental assistance
organizations including the international lending institutions, the
United States participates with other member governments in the govern-
ing bodies. Generally the United States is the largest financial con-
tributor to the support of the organization. However, the information
obtained by the United States appears in most cases to have been minimal.
Recognizing the responsibility of U.S. officials for continuing
management by them of U.S. interests, the President in 1966 set the
goals for such management, stating several basic guidelines, among them,
the purposes to see that:
R.
FORD
LIBRARY
expansion of activities of the international organization
is governed by tests of fcasibility and reasonableness,
the programs are vigorously scrutinized, and
-each international agency operates with a maximum of effec-
tiveness and efficiency.
These responsibilities for managing U.S. interests have been reiterated
from time to time.
With the prospect of an increased proportion of U.S. developmental
assistance being channeled through international lending organizations
the mandate for effective management of U.S. interests becomes more
important. In its report to the President on March 4, 1970, the President's
Task Force on International Development stated that--
"***as these (international) organizations expand their
operations, they will have to prepare for a parallel
buildup in their control procedures so as to assure con-
tinued high operating standards. Also, member govern-
ments will have to become more fully involved in the
work of these international agencies."
Purpose and Objectives of GAO Reviews
In the simplest terms the GAO objectives in reviewing the management
of U.S. interests in international lending programs are to:
1. Ascertain how U.S. interests are being managed (not the
operation of the international organization, but the
operation and involvement of those U.S. agencies and U.S.
officials who are responsible for managing U.S. interests).
2. Evaluate the Executive branch systems and procedures,
including necessary coordination mechanisms among U.S.
federal agencies, that are being employed by the responsible
&
FORD
GERALD
- 2 -
executive agencies having financial and management
responsibilities from the viewpoint of the U.S.
participation.
3. Report to the Congress and to the heads of the agencies
concerned on how the U.S. participation operates, with
recommendations to the Congress or to the Executive
agencies wherever they appear to be needed.
In carrying out these objectives GAO staff members are expected to:
(1) Identify the U.S. agencies involved for the program
or entity being reviewed, such as Department of the Treasury,
Agency for International Development or Export-Import Bank,
and including the roles of the National Advisory Council,
the Bureau of the Budget, or any other participating unit
or group.
(2) Ascertain how the system and the various elements
function and whether they fit together or make an effec-
tive overall mechanism. What is the U.S policy or stated
program purpose, and is it being followed?
(3) Determine how the management of U.S interests is
carried out--for example, what is the U.S. role--how
information is obtained upon which to make informed U.S.
decisions--are informative management reports furnished by
the international organization to its component nations--
are there effective mechanisms for weighing or evaluating
program results, etc.?
LIDDRAY GERALD ? Foid
- 3 -
(4) Identify the extent of internal audit or other
review or evaluation information made available to
the U.S. as a member government.
Sources of Information
Information will be obtained by discussions with officials in the
respective agencies having responsibilities; by obtaining copies of
reports, instructions, procedures, and other pertinent documents used
by U.S. officials in carrying out their management responsibilities con-
cerning U.S. participation in and financial support of the institution;
and by information as to current policies, coordinating mechanisms,
and plans for financial support of the institution.
Examples of the types of information presumed- to be available in
Department of the Treasury or other participating agency, would be:
1. Identification of organizations and pertinent officials
having responsibilitics to the U.S. Government, and
statement of their functions and responsibilities.
2. With respect to these organizations or offices--operating
instructions, identification of operating or financial
reports prepared and received, and U.S. agency files or
records maintained for carrying out U.S. interests.
3. Information showing interrelationships between NAC,
Treasury Department, and other agencies or groups con-
cerned.
4. Statements of functions and responsibilities of the U.S.
Executive Directors of the various international lending
institutions.
5. Identification of reports, financial data, program results
or other management data currently made available to the
U.S. by the lending institutions for the U.S. officials
responsible for managing U.S. interests.
R.
FORD
GERALD
AMERICA
- 4 -
THE SECRETARY OF THE TREASURY
WASHINGTON
MAY 27, 1970
Dear Elmer:
Thank you for your letter of April 27, 1970, concerning the study
which the General Accounting Office wishes to undertake of the organi-
nation and procedures of the United States participation in interna-
tional financial institutions.
The international financial institutions play a significant and
growing role in the development process. Their objectivity, their
expertise and the vehicle they provide for an equitable sharing of the
burdens of providing development assistance are just a few of the many
important advantages that they have for both the United States and
other member countries -- developed and less developed. An essential
feature which makes all of these advantages possible is their multi-
lateral character.
It is for these reasons and others that recent United States and
international reports analyzing the development process have recommended
that a greater part of development assistance be channeled through inter-
national financial institutions. The President has decided to place more
emphasis on United States development assistance through these agencies
and the Congress already has specific proposals before it and in the
future additional proposals will be made to implement this objective.
Because the multilateral banks will be undertaking even greater
responsibilities in the future than they have in the past, it is
essential that they continue to meet the highest standards of perfor-
mance in fulfilling their responsibilities. The international financial
institutions themselves have recognized that as their responsibilities
have grown so has the need for internal controls and other mechanisms
for assuring that their work is carried out effectively and efficiently.
They already have provision for financial audits by independent outside
auditors of international reputation, as well as for internal perfor-
mance evaluation. Because the expert management of these institutions
is acutely aware of the need for these procedures, existing arrangements
will evolve to meet the new problems that may arise as a result of
breadened responsibilities.
In approaching the United States role in assuring high standards
or performance, I must bear in mind twin objectives. The first is that
making every effort to assure that the U.S. taxpayers' investment in
se institutions is expertly managed. The second is that of preserving
GERALD FORD IBRARY
- 2
the international character of the multinational banks GO that they
may fulfill the purposes assigned to them by international agreement.
These objectives are not exclusively those of the Treasury or the
Executive Branch. Indeed, the Congress has a vital interest in assuring
that these twin objectives are fully implemented. I welcome the interest
of the GAO in helping to meet these objectives, knowing that your efforts
will contribute to our own self-examination and through us to the multi-
Interal institutions.
However, I have been concerned that a GAO review of United States
rerti ripation in these agencies might be so broad in scope as to consti-
tute a GAO review of the institutions themselves, thus raising the
possibility that it would jeopardize the international character of the
institutions. Consequently, I have emphasized that such a review should
be confined to Executive Branch organization and procedures. Because
I consider this to be such a fundamental point, I would like to review
the reasons why I have taken this position.
GAO review of the international financial institutions would be
inconsistent with their international status and would violate the
purpose behind the privileges and immunities, such as the immunity of
their records from disclosure, that have been accorded to them by inter-
national agreement and by Congress. It would also be inconsistent with
the objective of carrying out the work of these institutions through
the use of expert and impartial management staffs. It is also important
to note that the administrative budget of these institutions is supported
through earnings from lending and investment operations rather than from
funds appropriated by member governments and that they are subject to
the discipline of the private capital markets of the world which are a
major source of their funds. Congress has, through legislative action,
already recognized that a review of the international financial insti-
tutions should be done through multilaterally established processes of
the multilateral banks and not through a governmental agency of any one
member.
I would also be concerned that a unilateral review by a United
States agency could result in a breach of confidential banking relation-
ships and a threat to the banks' sources of information. It could also
provide the impetus for unilateral investigations by the national govern-
ments of other participating members, particularly those for whom the
loans are destined.
For these reasons, the suggestion you have made for limiting the
scope of the GAO review to the procedures followed by the Executive
Branch is a useful one, although I feel that some further modifications
are necessary in the approach you suggest. I believe that there is a
basis for our staffs to work out a procedure for your study, operating
FORD
GERALD
LIBRARY
- 3 -
within the basic framework which I have outlined above. In order to
be consistent with this framework, the GAO staff access to the documents
should be confined to those initiated within the Executive Branch.
However, I am sure that without access to specific documentation of
the international organizations, your staff, through cooperation with
my staff, should be able to obtain adequate knowledge of the extent
and types of information which the United States obtains from them.
With these guidelines in mind, I suggest that your staff contact
Mr. John R. Petty, Assistant Secretary for International Affairs, for
the purpose of working out detailed procedures.
With best wishes,
Sincerely,
David
The Honorable
Elmer B. Staats
Comptroller General of the
United States
Washington, D.C. 20548
LIBRARY GERALD ? FORD
For Release on Delivery
Wednesday, July 29, 1970
12 Noon (Monrovia); 6:15 a.m. (E.D.T.)
ECONOMIC TRENDS IN THE UNITED STATES AND THE
OUTLOOK FOR DEVELOPING COUNTRIES
Remarks By
Andrew F. Brimmer
Member
Board of Governors of the
Federal Reserve System
Before the
Hungry Club
Ducor Hotel
Monrovia, Liberia
July 29, 1970
GERALD R. FOR
ECONOMIC TRENDS IN THE UNITED STATES AND THE
OUTLOOK FOR DEVELOPING COUNTRIES
By
Andrew F. Brimmer*
I am flattered by the opportunity to address this assembly
of Liberian business and professional men and Government officials.
I am especially pleased to see so many Americans in the audience.
Unlike many American Negroes who have only recently discovered the
rich traditions which have bound our countries together for nearly
150 years, I was introduced to Liberia as a small child. I learned
of your legacy not simply as a story of black people returning to
Africa but as the romance of an epic journey from slavery to freedom.
So for a number of years, I have looked forward to the day when I could
visit this land.
I have long been aware of the close economic ties between
our countries. Against this background, it might be helpful to sketch
the main contours of economic trends in the United States and to assess
their implications for Liberia -- and for other developing countries
as well. Clearly the prosperity and growth of these nations depend
heavily on the economic well being of the advanced countries which
provide the major export markets as well as the principal source of
capital and technological resources to promote rapid economic develop-
ment. Therefore, it is important that the advanced countries maintain
their own economic strength, if the developing countries are to prosper.
i
FORD
GERALD
-2-
I am fully conscious of the crucial role of the United States
in aiding the growth of the developing countries. At the present time,
our responsibilities in this respect require that we being an end to
the inflationary pressures which are still present in our own economy.
This is proving to be a longer and more difficult task than some of us
had hoped.
Even a brief survey of the economic scene in the United States
provides a resonably firm basis for assessing the outlook for the next
few years:
- The American economy is finally responding to the
restrictive monetary and fiscal policies followed
for the last year or so, and we are making genuine
progress in moderating an overheated economy. Yet,
strong upward pressures on costs and prices are
still evident. Thus, the time has not come for
us to give up the campaign against inflation.
- While the distortions produced by inflation are
still being corrected, several indications
suggest that moderate economic expansion will
resume in the near future. For example, the
output of goods and services (corrected for
price changes) apparently rose slightly in the
last quarter -- after declining during the
preceding six months.
- Looking farther ahead over the next two or
three years, we can expect continued strong
demands for goods and services in the United
States. In fact, it seems highly likely that
total demands on the American economy will far
exceed the economy's potential. Thus, the
shadow of persistent inflationary pressures will
continue to cloud the outlook. Consequently, we
will have to continue our reliance on stabiliza-
tion policies to keep inflation under control.
&
FORD
GERALD
-3-
- Moreover, it appears that the United States
will not face these difficulties alone. Most
of the other major industrial countries may
also have to cope with the same kinds of demands
on resources -- which might generate the same
kinds of upward pressures on prices and interest
rates.
- Under these circumstances, the road ahead for
developing countries may be a difficult one to
travel. While they will face increasingly strong
needs to lift their standards of living, the
availability of financial and other resources
from developed countries to assist them may be
considerably less than required.
- Expanding demand in industrial countries may
provide a growing market for the exports of
developing countries. However, there is a
real danger that spreading protectionist
devices in developed countries -- including
the United States -- may undercut the progress
already achieved at such substantial costs.
- The heavy demands for capital on all fronts
may seriously limit the pace of development
for most countries struggling to get ahead.
Given the unpromising outlook in most advanced
countries for further expansions in official
foreign aid, it appears that developing nations
will have to rely increasingly on private
investment if they are to make genuine headway.
- Because of this conjuncture of circumstances,
the international financial policies of the
developed countries will be of vital importance
to developing areas. In the particular, the
industrial nations -- including the United States --
will have to ensure that measures taken to protect
their own balance of payments do not place undue
burdens on those countries trying to enter the
mainstream of economic progress.
In the rest of these remarks, these main points are amplified
further.
i
FORD
GERALD
-4-
The Battle Against Inflation in the United States
For this audience, there is no need to dwell on the origins
of the current inflation in the United States. It will be recalled
that it was propelled by a business investment boom and the accelera-
tion of the Vietnam War in mid-1965. At that time, the economy was
already on the eve of full employment, pushed forward partly by pubic
policies designed to stimulate fuller use of the nation's physical and
manpower resources. The rapid rise in demands for goods and services
for military and business purposes added to an already expanding
economy and resulted in the rapid acceleration of inflation we have
seen in the last five years.
Over the last year, however, as a result of restrictive
monetary and fiscal policies, we have been making significant progress
in eliminating excess demand in the American economy. The rate of
economic expansion has slowed appreciably, and some slack has developed
in markets for labor and other resources. There has been no growth
in real output for the last nine months. Employment has declined, and
the unemployment rate has risen significantly. Unused industrial
capacity has increased, profits have fallen, and investment in plant
and equipment has begun to slow appreciably. Thus, measured by any
standard, the economy has been operating well below its potential.
However, while we have succeeded in erasing excess demand
in our economy, we are still experiencing strong upward pressures on
costs and prices. The distortions resulting from the past persistent
&
FORD
GERALD
-5-
rise in prices have become deeply rooted. Expectations of consumers,
businesses, and workers have not yet fully adjusted to the current
balance of aggregate demand and supply.
Progress in getting inflation under control in the United
States has been slow, and the effort itself has caused difficulties
in many sectors of the economy. But there is reason to believe that
we are making headway. The rate of productivity growth in manufacturing --
which showed little change last year -- is now improving noticeably.
This turnaround has been reflected in a slowing in unit labor costs --
which in turn should temper price rises. There have also been a
number of signs recently of a moderation of increases in prices in
several major areas. Wholesale foods prices have declined, and
especially encouraging has been the slower rise in the prices of a
number of important industrial commodities.
There are also indications that economic progress will be
resumed in the near future. Real output which declined for two
quarters rose slightly in the April-June months. To an important
extent, the economic adjustment that has been underway reflected
efforts of businesses to bring excessive inventories into better
balance with final sales. This apparently has been largely accom-
plished, and as sales strengthen, inventories are likely to be
replenished. In addition, both monetary and fiscal policies have
become somewhat less restrictive in recent months, and interest rates
have begun to decline. With rates declining and money more readily
GERALD FORD
-6-
available, a significant recovery in home construction and State and
local government outlays should become more apparent in the near future
and should act to bolster aggregate demands. At the same time, prob-
able declines in capital spending and in defense outlays should serve
to limit the upswing.
If we continue to pursue appropriate stabilization policies,
and I think we will, there should not be any reemergence of excessive
demand pressures later this year or in 1971. Thus, with reasonable
confidence, I look forward to a resumption of sustainable economic
growth as well as to further diminution in the rate of advance in
prices over the next year and a half.
A Longer View of Economic Prospects
-
Looking farther down the road perhaps two or three years
from now, internal demand for improving our standard of living and
increasing our productive capacity will continue to provide stronger
underpinnings to the United State's economy. Of course, both internal
and external demands are limited by the real rate of growth in the
economy. Over the next few years, it seems highly likely that total
demands on the economy will far exceed the economy's potential. This
prospect raises the specter of continued inflationary pressures and
the need for the continuation of stabilization policies to keep infla-
tion under control. But it also means public policy will continually
be faced with establishing priorities among those competing for the
available goods and services.
GERALD FORD LIBRAR
-7-
It may be helpful to get a better grasp of some of the
constraints the United States is likely to face in the near future.
For this purpose, it would be useful to present some rough estimates
of the potential output 3 years from now and some of the more pressing
internal demands that we now foresee. With a resumption of real growth
in output, productivity in the private economy should climb again to
about 3.2 per cent per year by 1973. If unemployment is held to about
4.0 per cent of the labor force, the potential growth of real gross
national product (GNP) for our country in the next few years should
increase to about 4.3 per cent a year. By 1973, with allowance for
the present under-utilization of resources, this would mean a GNP in
1969 dollars of around $1.1 trillion. I realize that the prospective
rise in productivity in the United States may appear low in comparison
with trends in some other countries, but it mainly reflects a large
and growing percentage of personal consumption expenditures devoted
to medical, educational, and personal services where productivity gains
are limited by high labor intensity.
The potential growth of the American economy will also reflect
the expansion of resources available to the Government from what
economists have defined as a "fiscal dividend," a gain in revenue
that automatically accrues from our progressive tax structure as the
economy grows. Total receipts of Federal, State, and local governments
(excluding grants-in-aid to States and localities) are expected to
increase over the next decade at an average rate in real terms of
FORD & GERALD LIBRAR
-8-
around 5 per cent per year. Savings that might result from declines
in defense spending in the next year or two may be used fro other
social programs in later years. However, defense budgets will prob-
ably become stable and there are not likely to be continuous cutbacks
in defense spending that might yield funds for alternative uses in
the longer-run.
At first glance, it would seem that with all our available
resources, we could meet both public and private needs. But a brief
review of some of the major claims on national output (including public
programs already in existence) may help bring the problem into focus.
A projection of the claims on our national output suggests that the
Federal Government's budget will most likely be just as tight in 1973
as in the current year. So pressure on resources and the curtailment
of excess demands will have to be limited by appropriate monetary and
fiscal policies. In great part, these pressures reflect a greater
social awareness of the needs of the disadvantaged -- whether because
of advanced age, race, or urban locality -- and funds for these programs
are expected to compete with the more traditional requirements of
national security and health and welfare demands. To these demands,
the American people are also increasingly adding a high social priority
for clean air and water and the preservation of our natural resources
of all types.
These important social goals, moreover, must compete for
their share of GNP with the strong private demands. Demographic
GERALD FORD LIBRAR
-9-
factors in the United States are now particularly favorable to a
consumer boom, and the pent-up demand for housing (which has resulted
from the slowdown in residential construction activity in 1966 and
1969-70) will intensify the pressures. Business requirements for
expanding inventory outlays and plant and equipment expenditures are
also likely to be exceedingly intense.
Personal consumption. Significant changes in the age
composition of the population and labor force over the next few years
will contribute to a high rate of economic growth. But at the same
time they are likely to affect patterns of household consumption as
well as the level of investment in plant and equipment, the volume of
residential construction, and the types of public programs which will
be given high priority. Because of a large increase in births in the
immediate post-World War II years, the population between the ages of
18 and 35 is increasing rapidly -- an age group with a very high pro-
pensity to consumer. In the five years ending in 1973, the number in
this age group may increase by 7.5 million. Most of these young adults
will enter the labor force, a fact which explains the expected increases
in the growth of the civilian labor force from an average of 1.2 mil-
lion per year in the 1960's to 1.5 million per year in the decade of
the 1970's. The number of marriages will also increase sharply, and
as a consequence, net household formation is expected to jump by almost
20 per cent.
FORD & LIBRAR
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These demographic changes probably mean not only a higher
propensity to consume but also a lower saving ratio than we have
experienced in recent years. These young families, despite their
more altruistic ideals, for the most part will still want new cars,
appliances, furniture, recreation and all the other goods and services
which an affluent society had lead them to expect. These outlays will
probably result in a higher percentage of disposable income being
devoted to durable goods and a somewhat lower percentage to nondurables
and savings.
Business investment in plant and equipment. The growth in
real private business investment outlays in the United States has been
very rapid, averaging 6.5 per cent annually in the 1960's -- well above
the 2.7 per cent annual growth in fixed investment during the 1950's.
In 1969, real plant and equipment expenditures increased by 7.1 per
cent.
Part of this unusually large volume of investment in recent
years is undoubtedly attributable to inflationary psychology. The
rapid rise in the price of plant and equipment, especially in con-
struction costs, has caused business to push ahead with new programs,
even when the need for these facilities was not urgent. As price in-
creases moderate, this source of stimulus should fade.
However, strong consumer demand -- especially for durables
with their greater capital investment requirements, the expected
demand from the public sector -- particularly for urban transportation
FORD & 936670 LIBRAR
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systems -- and requirements for changes in the production process
which will curtail pollution of the environment will undoubtedly
generate large capital requirements. In addition, the need to keep
up with accelerating technological advances implies large future
capital expenditures. Moreover, businessmen seem to be increasingly
aware of long-term trends in the economy and are planning their
investments accordingly, with less regard than previously to short-
term fluctuations, and greater attention to the prospective rise in
unit labor costs. All this suggests heavy demands for capital funds
and continuing pressure on capital markets.
Residential construction. The goals of the housing industry
are equally impressive, and they have been clearly defined by our
Housing and Urban Development Act of 1968. This legislation calls
for the construction of 26 million new homes over a 10 year period;
the rehabilitation of scores of urban centers throughout the country,
and the creation of 110 new cities. These requirements in part reflect
the backlog of housing demand from the severe curtailment of home
building in 1966 and again in 1969-70 due to restrictive monetary
policies. The legislation was also influenced by the recognition
that continued urban sprawl would create almost unsurmountable
transportation difficulties. For some time yet, workers will continue
to move farther and farther from their work into the suburbs, and in
some cases, factories have moved out to these workers -- but the
rehabilitation of center city housing must be part of the solution.
FORD is 076830 LIBRAR
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The public sector. As I have mentioned, governments at
all levels in the United States are under great pressure to expand
existing social programs and to embark on new ones. Yet, without
new changes in our tax laws, demands for personal consumption and
private domestic investment are likely to absorb most of the increase
in real GNP which may accrue by the end of 1973. When the Council of
Economic Advisers added up competing demands on output earlier this
year, they found that -- even with no increase in public expenditures
by governments -- claims against our potential GNP would just about
equal gross national product in 1972. Only in 1973 did the Council
suggest that an anticipated rise in public expenditures of $3 to $4
billion might be possible, and an additional $3 billion might be
available for allocation to high priority public programs. The
reason for this is that with actual GNP below potential and because
of the loss of revenue due to the changes in the tax law in 1969,
there will be -- at best -- only a modest net gain in revenue until
1973. In the interim, most of the additional Federal funds for social
and environmental problems must come from the projected decline in
defense spending.
In these projections, the Council of Economic Advisers also
foresaw a shift of funds from Federal expenditures to State and local
goverments. In 1969 dollars, actual Federal government purchases were
$102.0 billion, and State and local outlays were $112.7; by 1973 these
were projected to shift to $87 billion for Federal and $131 for State
FORD is GERALD LIBRARY
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and local. Despite an increase in grants-in-aid to the State and
local governments, which have primary responsibility for the
administration of many important social programs, the States them-
selves will have to raise considerably more funds. About one-third
of the projected increase in estimated expenditures will be directly
attributable to population increases, and the remainder was allocated
toward higher real per capita services provided by the State and local
governments. This increase in quality, however, is less than the
actual increase from 1962-1968, and it is certain that there will be
considerable pressure for additional funds to improve the standard of
living of poor families, to mitigate the hardships of the urban environ-
ment, and to preserve our natural environment for our expanding popula-
tion. All together, despite the substantial rise expected in the level
of public spending, this package will leave most Americans disappointed.
Outlook for Developing Countries
In the face of this inevitable and universal pressure of
demands for goods and services of all types in the United States and
other industrial nations, there will be even stronger desires and
greater needs for improvements in the living standards of developing
countries. What can we say about the ways in which flows of real and
financial resources between the developed and less-developed worlds
will be influenced by these intensified demands?
Let me stress at the outset that, in these general remarks,
I am aware of the great differences among the developing countries.
FORD is 078839 LIBRARY
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Some will be in a better position than others to benefit grom grow-
ing foreign markets or to take care of their own developmental needs.
On this occasion, my primary purpose is to assess in broad terms the
implications for developing areas over the next few years of trends
that are already under way in the industrial regions of the world.
Foreign trade. As far as trade flows are concerned, the
industrial countries will need much greater quantities of primary
materials produced in the rest of the world, and the prices of these
commodities are likely to rise substantially. Moreover, if we are
correct about the intense pressure on the availability of labor and
other resources to meet future demands in the industrial countries,
we should envisage a rising flow of manufactures into those countries
from the countries where such resources are underemployed. I will
come back to this point in a moment.
Meanwhile, the developing countries will have even faster
population growth and a much greater absolute gap between needs and
resources -- and they will have an accelerating demand for the products
of the industrial nations. Consequently, it would seem likely that
net merchandise imports of the developing countries as a group should
be expected to rise. This is simply another way of saying that
developed countries as a whole should be providing part of the real
resources needed for economic progress in the less-developed areas.
We are very much concerned in the United States that the
developed countries of the world recognize that these development
GERALD FORD LIBRARY
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needs have to be accommodated within the balance of payments objec-
tives that seem to be emerging. It seems to me that if we are not
careful the measures taken to deal with our excessive domestic demands
may conflict with the needs of the developing countries.
One obviously contradictory deomestic policy stand is the
attempt to protect industries from external competition. To do so in
the face of a long-term prospect of excessive pressure on domestic
supply capabilities is clearly counterproductive. It seems to me to
make a great deal of sense to open up our markets to goods available
abroad. Beyond that, we should make a special effort to encourage
countries with unemployed resources to develop them more effectively,
with the potential of export markets in the industrial countries
acting as an incentive. If we could move this process along fast
enough it could help to solve the problems of both groups of countries.
But experience shows that it will take determined policy measures to
reduce exisiting barriers to trade. As you know, it is difficult at
times -- and the present is an example -- not to lose ground in the
movement toward freer trade.
By the same token, I do not believe that less-developed
countries can help themselves in the long run by trying to encourage
industrial development behind a barricade against imports. It will
certainly not be possible to create industries capable of competing
for export markets, or satisfying domestic requirements at reasonable
cost, if they are either inherently non-competitive for various
FORD
GERALD
LIBRARY
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reasons, or if their operating costs are raised by tariffs on the
materials or equipment they use in production.
For the foreseeable future, then, we must anticipate that
developing countries will be net importers of goods and services on
a large scale.
International capital flows. That brings us to the problems
of financing. What we have said about the intense demand pressures
to be expected in the industrialized countries implies a continuing
strong demand for capital. The cost of capital will be high, and the
task of allocating capital availabilities so as to satisfy high priority
social needs will be formidable. It will not be easy to fit into this
picture the mounting flow of financing to developing countries that
will be required. Unless strenuous efforts are made, I would doubt
very much that a sufficient flow of financing can be generated.
As I stressed above, national governments in industrial
countries are confronted with aggregate plans for expenditures at
home that will require very high levels of taxation if inflationary
borrowing in their own capital markets is to be avoided. There will
be considerable resistance to including in their budgets larger amounts
for foreign assistance.
According to reports of the Development Assistance Committee
of the OECD, the net flow of financial resources from member countries
averaged a little over $6 billion a year from 1961 to 1966 and was
about $7 billion in 1967 and 1968. There was only a small upward
LIBRARY GERALD ? FORD
-17-
trend over the period. I doubt that figures for 1969 and 1970,
which are not yet available on a global basis, will show much of a
change. Taking into account price increases over the period, and
rising interest charges on that part of the flow involving credits
rather than grants, there has probably been little if any increase
in the financing flow in real terms. Over the whole period, the share
of the United States in the resources provided by the DAC countries
has been about 50 per cent. For all DAC members together, the net
flow of financial resources to developing countries equalled about
1 per cent of their combined national incomes in 1968.
There are many efforts to find ways to increase this flow --
and to make it more productive. We would like to see more use of
the multilateral agencies in this process, less tying of aid to
exports of individual donor countries, and more recognition of the
problems of debt financing -- especially when credits are at high
interest rates and for relatively short maturities. I do not have
to recite all the problems -- they have recently been analyzed in
the reports of the Pearson Commission, sponsored by the World Bank,
and the Peterson Report, reviewing the United States' experience
with foreign assistance.
My point is that a very great effort will be necessary on
the part of the Governments of the developed countries to raise
future flows of developmental assistance. They will have to convince
their citizens that this is a high priority national objective; they
FORD & GERALD LIBRARY
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will have to make room in tight budgets; they will have to find ways
to make the aid process more efficient, and they will have to avoid
the build-up of crushing burdens of debt repayments. For my part, I
would be prepared to work very hard to bring about a larger and more
efficient assistance effort. But I also want to stress that recipient
countries must understand that we are not talking about providing
excess resources, we are talking about the sharing of scarce resources.
And this process will not work at all unless the resources are really
put to work in the recipient countries. The more evidence we can show
that the aid process is achieving its developmental goals, the easier
it is for us in the industrialized countries to cinvince our citizens
that they should finance the process through their tax payments.
Private capital movements. The place of private foreign
financing for development is a good deal more controversial, as we
all know, Nevertheless, I think we need to take a fresh look at both
the costs and benefits of such investment.
In the first place, if much more financing will be needed
by developing countries in the years ahead -- and the increase is
more than can be counted on from official sources -- there will be a
need to cultivate international capital markets to bridge the gap.
Again referring to the reports of the DAC, the net flow of private
capital from member countries to developing areas has been rising
over time, from about $3 billion on average in 1960-64 to $4 billion
FORD & GERALD LIBRARY
-19-
in 1965-67 and nearly $6 billion in 1968. In 1968, net private flows
were only $1 billion less than official flows, and for the whole
1960-68 period private flows accounted for about 40 per cent of all
financial flows to the developing countries from DAC members.
Undoubtedly, there are problems connected with rising flows
of private capital with which we have to cope. One obvious problem
is that a rising portion of the private flow seems to be export
credits -- many of which are relatively short-term with relatively
high interest rates. Although a rising volume of export credit out-
standing is a normal complement to an enlarged flow of trade, we
must be on our guard to avoid dependence on such credits as a
substitute for long-term financing. If not, before long, we will
find a larger and larger part of our developmental flows being
absorbed in repayment of commercial credits. Frankly, industrial
nations -- and not alone the United States -- that are supplying
long-term developmental capital will not be happy if they find they
are merely financing the repayment of export credits from other
countries.
Another potentially important source of capital for
developing areas is the public capital markets. Here we come directly
into conflict with the fact that interest rates even to well-known
domestic borrowers will probably remain very high. For most develop-
ing countries, there would need to be an expensive and extended effort
FORD & 076870 LIBRARY
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to create acceptance of bond issues by the general public in the
United States or European markets. One way out of this is to make
more use of the multilateral organizations as intermediaries in the
borrowing process. To the extent their debt is guaranteed by the
Governments of their members, and they are recognized entitites in
the market, they will be able to borrow on terms at least as goods
as those of other prime borrowers. Our capital markets in the United
States have been very receptive to the bond issues of these organiza-
tions -- principally the World Bank.
Another hopeful development is the extraordinary growth
of the European market for international issues, as well as the
increased effort to open up some national markets to foreign
borrowers. Here again, the international institutions are in the
best position to raise funds on reasonable terms. On the whole,
however, I believe it would be advisable for individual countries
to be very cautious about incurring a large bonded indebtedness. To
succeed in selling such issues, a country must be prepared to meet
the test of the market -- which will look to the expected performance
of the country in assessing the risk involved. In most cases, interest
rates will be high, and I would urge borrowers to be very sure that
the proceeds will have a productive use that will contribute --
directly or indirectly -- to the future ability of the country to
repay debt.
GERALD R. FORD LIBRAST
-21-
Finally, I would like to comment on the other principal
source of private capital -- private direct investment. This is
really more than a source of financing, because along with a capital
inflow comes the ability and knowledge to put idle domestic resources
to use and to bring a quick return in the form of both rising incomes
and balance of payments benefits. I know the historical record is
mixed: sometimes the foreign enterprise has taken out of the country
a disproportionate share of the product of the enterprise, and some-
times there have been undesired social or political consequences.
But I believe the Governments of the developing countries are now
better able to see to it that these investments are operated equitably
and maintain a proper role in the society of the host country. For
their part, the direct investors have learned, I believe, that their
long-run interest requires that they fit into the society of the
developing countries, and they recognize that their role must be
developmental rather than exploitative.
Direct investors are not philanthropists -- they will invest
because a profit can be made with reasonable security of capital. I
believe the record will show that on the whole such investment makes
a major contribution to foreign exchange resources -- even after
deducting remittances of earnings -- and that its potential for
generating employment, especially skilled employment, is substantial.
I am not here to promote direct investment as a cure-all for develop-
ment problems. But I believe it has an important place, and that
FORD is GERALD LIBRA
-22-
developing countries should consider its potentialities, in today's
circumstances, without prejudice but in a straightforward business-
like way. Calculate the costs and benefits realistically -- and
remember to compare these costs and benefits with those that must be
faced when one borrows abroad, or when one attempts to draw domestic
savings into the development process.
Balance of payments constraints. I mentioned earlier the
fact that mounting demands for more and better goods and services
in the industrialized countries will create opportunities for the
less-developed countries, but they will also create difficulties.
Another problem we face today in the United States is that our balance
of payments has been in deficit for a long time, and progress toward
a stronger balance is disturbingly slow. We have only recently begun
to improve our trade balance, and it will take careful demand manage-
ment in the years ahead to avoid deterioration. Imports have been
growing relative to our GNP -- particularly imports of finished goods --
and this has already triggered a strong protectionist drive. We have
had to put restraints on capital outflows in order to avoid even
larger deficits. Yet, I believe we have succeeded in confining the
restraints to flows to the other industrial nations without interfer-
ing with flows to developing countries.
These are immediate problems, but they also cast a shadow
on the prospects for the longer run that we have been discussing. It
FORD & GERALD LIBRA
-23-
seems to me that other industrial countries have to recognize that
the United States cannot shoulder a rising burden of development
assistance unless its export surplus on goods and services is
considerably improved. This is very difficult to accomplish if
competing countries also aim at rising export surpluses, and rising
reserves, and resist exchange rate or other adjustments that would
help to smooth the way for increasing world trade and capital flows.
Developing countries, therefore, have a direct interest
in seeing to it that the international adjustment process works
smoothly. More specifically, industrialized countries other than
the United States will have to be prepared in the years ahead to
finance their growing trade surpluses with long-term financing on
terms that meet the needs of developing countries.
Concluding Observations
I do not want to leave the impression that we will fail
to respond to the needs of the developing countries in the decade
ahead. We all hope it will be a decade of progress in all parts of
the world. I do want to emphasize, however, that there are not enough
resources in sight to satisfy the aspirations of all of our people,
and that it will take real statesmanship and determination to bring
about the redistribution of resources that will be called for.
FORD & GERALD LIBRA.
BOARD OF GOVERNORS OF THE DERAL reserve SYSTEM
[ 1970]
8/13
DATE
Chairman Burns
TO
FROM ROBERT SOLOMON
You may be interested in this
report on Governor Brimmer's visit to
Liberia.
Attachment.
FORD i GERALD LIBRA
GERALD R. FORD LIBRARY
This form marks the file location of item number
2a
as listed on the pink form (GSA Form 7122, Withdrawal Sheet)
at the front of the folder.
BOARD OF GOVERNORS
THE OF SYSTEM OF
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551
FEDERAL
RESERVE
August 27, 1970
CONFIDENTIAL (FR)
To:
Federal Open Market Committee
From: Mr. Broida
At the FOMC meeting of August 18, 1970, Governor
Brimmer mentioned that a report giving highlights of his
recent trip to Africa, which was then in preparation,
would be distributed shortly. A copy of that report is
enclosed.
On then L Broida
Arthur L. Broida,
Deputy Secretary,
Federal Open Market Committee.
Enclosure
GERALD R. FORD
Determined to be an
Administrative Marking
By TMH
NARA, Date 4/18/22
GERALD R. FORD LIBRARY
This form marks the file location of item number 3a-3b
as listed on the pink form (GSA Form 7122, Withdrawal Sheet)
at the front of the folder.