February marks the first anniversary of the Administration's program to attack the balance of payments problem through restraints on U.S. private investment abroad. In terms of payments improvement, the program was a success. The "overall" deficit declined from $2.8 billion in 1964 to $1.3 billion in 1965.

The main factor in this turnaround was a reduction in the flow of private investments abroad. This was achieved despite a weakening in our trade surplus and despite the foreign exchange costs of Vietnam.

Funds going into U.S. private investments abroad declined substantially over the past year-from $2.2 billion in the last quarter of 1964 to less than $400 million during the second quarter of 1965 (seasonally adjusted), the lowest amount for any quarter in the past decade.

During July-September 1965, the level of such funds rose to about $820 million because there was less impact from such special developments as the repatriation of short-term assets by American corporations.

At first glance, it would appear that in investment flows abroad, we have come upon the key to a solution of our balance-of-payments program. But a closer look shows this is not so. Investment abroad after all, is only one factor among many that shape our balance-of-payments.

Cutbacks in investments can only borrow time by helping the capital side of the balance of payments. In the long run, they are debilitating because they result in a reduction of exports and impair future investment income.

The Administration's program has provided an antidote, but not a cure. The antidote has also had some harmful side effects. We have been criticized abroad for overburdening the capital markets and reducing credit availabilities for European borrowers. Securities issued in Europe are, of course, subject to the interest equalization tax if purchased by Americans. Sometimes foreign investors sell American securities to obtain funds with which to subscribe to new foreign issues carrying higher interest rates.

In this respect, such switching causes a drain on the U.S. balance of payments.

U.S. commercial banks, for their part, have as a group stayed well under the suggested ceiling. During the first three quarters of 1965, short-term credits contracted; loans beyond one year rose moderately.

These trends compare with an expansion of total bank credit of $2.5 billion in 1964 and an annual average of $1.5 billion for the three years 1962-64.

But U.S. banking cannot long remain a one-way street. A foreigner who deposits money in U.S. banks should also be entitled to borrow. Private foreigners keep deposits in U.S. banks and hold short-term investments in this country in amounts that greatly exceed their borrowings: $11.4 billion as against $7.5 billion in November 1965. Some of these deposits are normally connected with loans.

With few exceptions, most nations hold short-term assets in U.S. banks in excess of the sums they borrow from them. As bankers to the world, we cannot continue to solicit deposits from abroad while declining to make loans. In short, we have to watch especially that temporary restraints do not become permanent ones.

To be sure, there is sometimes a case to be made for short-run restrictions on economic activities, providing it is clearly understood and agreed that temporary controls are designed to buy time during which more fundamental remedies can be applied. The current Administration guidelines on bank loans and commercial foreign investments fall into this category.

These programs within their own perimeters have been, and will be, successful in achieving their limited objectives. To load upon them the whole burden of solving our balance of payments problem is to ask too much.

While it is all very well to attack controls, what is the alternative?

The real answer to this is that we have to do a lot of different things and balance many factors.

The most important single thing we must do is to maintain our relative price stability which is the foundation of our ability to compete in the world.

At a time when the slack of industrial capacity has been greatly reduced, when available labor is being employed increasingly fully and when unit labor costs have begun to creep up, we must slow down substantially the rate at which our central bank creates money.

Another round of inflation would seriously threaten the balance of payments. It is, after all, our exports that pay the check for the public sector's spending.

In the past 12 months, Federal Reserve credit to the banking system exceeded $4.5 billion, portions of which make possible an outflow of dollars from this country. To the extent this money creation is slowed, we run the risk of producing side effects on our domestic economy, but in the end these side effects would be less destructive than the known result of controls.

We must make it more attractive for foreign investment in this country, realizing that the world has a limited amount of capital and a practically unlimited choice of where to put it.

There is legislation before Congress now designed to make it more attractive to foreigners to invest in the United States, and this should be supported.

It is not enough for the United States to have an efficient economy, stable prices and costs, and orderly finances, to redress its balance of payments. It is also necessary for the United States to have reasonably free access to markets abroad.

Quotas and other direct trade restrictions have now been largely abolished in the industrialized countries with regard to manufactured goods. This has not been a mean achievement, but barriers remain for agricultural goods, and tariffs are still high on industrial products.

These must be lowered through reciprocal bargaining if the world wants a steady fabric of multilateral global trade.

The judicious combination of these methods would produce equilibrium, as economists of almost every persuasion will agree.

Setting money policy is no less difficult than setting any other policy and the choices have wider implications. The implications are no less than the very stability of the U.S. dollar, and with it, the whole mechanism of the Free World monetary system.