What the Restrictions Mean

President Johnson's moves to correct the U.S.'s balance of payments deficit were painful to some, controversial to many, and likely to damage the nation's own interests if left in effect too long. Yet the objective was beyond cavil: to prevent recent attacks on the dollar and the speculative rush for gold from growing into an international financial crisis that could undermine prosperity around the world.

Having temporized for years, the President finally was forced to act under the goad of unexpected pressure. During the fourth quarter of last year, the deficit soared to the alarming rate of $5.7 billion a year, giving the nation a total deficit for 1967 of between $3.5 and $4 billion, the highest in seven years. By coupling his New Year's Day announcement of those figures with his stern prescription for lopping $3 billion off the deficit in 1968, the President managed to minimize the consequences. Despite the Treasury's subsequent disclosure that the U.S. lost nearly $1 billion of gold during November and December, one-twelfth of its dwindling hoard, the dollar rose strongly on the exchange markets of London, Paris and Frankfurt last week.

The main elements in Johnson's com plex bag of restrictions:

sbBUSINESS SPENDING. The President's goal is a $1 billion reduction in corporate investment overseas, which reached $5 billion last year. Under an obscure provision of the 1917 Banking Act, he decreed the first mandatory controls in U.S. history on such outlays, replacing the half-effective "voluntary" restraints in force since 1965. In South Africa and continental Western Europe (except for Greece and Finland), new investments of money from the U.S. were barred completely. Companies may finance new projects from foreign earnings and depreciation allowances, but only up to a ceiling of 35% of the average level of such expenditures in 1965 and 1966. In Latin America, Africa and Asia, investments will be held to 110% of the 1965-66 average without regard to the source of funds. Anxious not to deal the British pound another blow, the President in his edict allowed U.S. business investment in the U.K., Canada, Australia and oil-producing countries up to a maximum of 65% of the 1965-66 base period. On top of that, U.S. companies were ordered to reduce foreign bank balances to their 1965-66 average and to repatriate at least 65% of their European profits. The order, affecting about 1,000 U.S. firms, will be enforced by a new Commerce Department Office of Foreign Direct Investment. Violators face criminal prosecution and fines up to $10,000.

sb BANK LOANS. In hopes of achieving a $500 million contraction in last year's $9 billion of bank loans to foreigners, President Johnson ordered a tightening of still voluntary controls administered by the Federal Reserve Board. As with investment controls, the new rules will hit Europe hardest. The Reserve Board asked banks to refuse to renew outstanding loans on the Continent when they mature and to reduce their short-term (less than a year) loans in the region by 40% during 1968. Just to make sure banks cooperate, the President also gave the Fed stand-by power to make the restrictions compulsory.

sb TOURIST TRAVEL. The President wants a $500 million drop in the $2 billion-a-year payments deficit caused by the U.S. penchant for globetrotting. He not only urged Americans "to defer for the next two years all nonessential travel outside the Western Hemisphere," but also promised to ask Congress to put teeth in the ban. Most likely: a head tax of $100 or more per person per trip. If Congress enacts effective curbs, the $14 billion world tourist industry, among the largest ingredients of world trade, will suffer quite a jolt. Some 3,000,000 U.S. tourists spend 20% of the annual total, including $800 million in Europe.

The President proposed to save another $500 million by reducing the number of American civilians working for the Government overseas and by persuading the nation's NATO allies to buy more U.S. weapons or Government bonds to offset the cost of the 350,000-man U.S. garrison in Europe. The final $500 million would come from stepped-up exports, which already give the U.S. a strong (but lately shrinking) trade surplus of $4.3 billion a year.

The 59th Minute. Though the President labeled his restrictions temporary, many businessmen were openly skeptical. Such measures, observed former President Allan Sproul of the New York Federal Reserve Bank, "are always presented as being temporary. The war is forcing us into actions which are undesirable--at the 59th minute of the eleventh hour." Former Commerce Secretary John Connor, now president of Allied Chemicals, said the investment crackdown "really amounts to wartime controls."

The general reaction among businessmen was mixed--half resigned, half resentful. "Some new, strong measures had to be applied," said President John M. Meyer Jr. of Manhattan's Morgan Guaranty Trust Co. "This turn hurts, but those most affected understand the compelling reasons." Complaining that "the fundamental cause of our deficits is Government spending abroad at twice the rate that the private sector can create surpluses," Chairman Ward Keener of B. F. Goodrich argued that compulsory investment controls risk "permanently weakening the American industrial structure." Grumbled United Fruit President John Fox: "The whole thing is very unfair, both to companies and to the countries. Washington always works the business community over first."

Although many Western European governments, most notably the French, have been saying that Washington must take stern action against the balance of payments deficit, they could only be taken aback at the extent of what Paris' Les Echos called Johnson's "anti-Marshall Plan." The cut off of dollars will curtail industrial expansion on the Continent by forcing interest rates up (Eurodollar bond-yield rates climbed 1%, to 7.2%, last week). Declining tourism and tougher competition from U.S. exporters are considered likely to depress business revenues. Italy expects the U.S. controls to tip its precarious balance of payments from surplus to deficit. Japan and Britain foresee a slowdown in trade--and resulting larger payments deficits of their own.

Attacking the Symptoms. Nevertheless, the dollar's increasing exposure as the bastion of international monetary arrangements gave the President little choice but drastic action. Again and again since 1961, the Administration has promised that the dollar-weakening payments gap would be closed or greatly narrowed. Tinkering and tightening toward that end, the Government put a 15% tax on purchases of foreign securities by its own citizens, cut duty-free allowances on tourist purchases abroad, and finally imposed the "voluntary" curbs on bank loans and corporate investing. Balance, however, remained elusive and the cumulative deficit, after losses in 17 of the past 18 years, now stands at $36 billion.

Having decided to switch from mild restraints to harsh controls, Johnson cloaked his planning in warlike secrecy. While the President was in Australia, Treasury Secretary Henry Fowler, Commerce Secretary Alexander Trowbridge, Secretary of State Dean Rusk, Federal Reserve Board Chairman William McChesney Martin Jr. and White House Aide Walt Rostow stitched to gether a list of recommendations.

President Johnson's ensuing actions were a final--and belated--admission that the U.S. cannot, in fact, easily afford both guns and butter. Still, the President's bitter medicine contains no long-range or permanent remedies for the payments deficit. Temporarily effective though it should be, last week's package of controls attacks selected symptoms rather than the fundamental causes. At an unknowable price, it buys extra time for the nation to cope with the real problems: inflation arid the massive federal deficit.

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