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 You are in: Under Secretary for Public Diplomacy and Public Affairs > Bureau of Public Affairs > Bureau of Public Affairs: Office of the Historian > Foreign Relations of the United States > Nixon-Ford Administrations > Volume III
Foreign Relations, 1969-1976, Volume III, Foreign Economic Policy, 1969-1972; International Monetary Policy, 1969-1972
Released by the Office of the Historian
Documents 63-81

63. Telegram From the Department of State to Certain Posts/1/

Washington, April 21, 1971, 1630Z.

/1/Source: National Archives, RG 59, Central Files 1970-73, FN 12 US. Confidential. Drafted by G.H. Willis and W.C. Cates (Treasury); cleared by Under Secretary Volcker, Deputy Assistant Secretary of State Weintraub (E), and Curran (S/S); and approved by Deputy Under Secretary of State Samuels. Sent to the Embassies in OECD capitals, the USEC Mission in Brussels, and the OECD Mission in Paris.

67590. For Ambassador From Treasury Secretary Connally. Subject: U.S. Balance of Payments.

1. In light increasing attention being given abroad, publicly and privately, to U.S. balance of payments problem,/2/ appropriate Embassy personnel need to be able to draw on the following background concerning the immediate and longer range aspects of this problem and with principal elements of U.S. policy.

/2/In late March and early April a number of posts reported on foreign concerns about the U.S. balance of payments. Telegram 68708 to The Hague, April 22, noted that telegram 67590 should help answer a number of questions about the balance of payments and measures taken. (Ibid.)

2. During week ending April 2, there appeared to be some movement of funds into Deutschemarks and Swiss francs for short-period speculation, whereas earlier movements were primarily in response to differentially high short-term interest rates in Germany. Because of this sudden burst of speculation, Treasury made available the following statement in response to inquiries.

Begin Verbatim Text. "Current rumors and speculation apparently grow out of large recent flows of interest-sensitive short-term capital. This is a matter that can be and is being dealt with on its own terms. This essentially short-term problem will not bring any change in the basic policies of the United States, which are well known, with respect to gold and the foreign exchange markets. Nor, as they have made clear, is it a cause for changes in the exchange rates of other countries." End Verbatim Text.

3. During week ended April 9, exchange markets much calmer, and flows reduced. Interest differentials narrowed between Euro-dollar market and German money market as result of (1) U.S. Treasury borrowing of $1.5 billion from foreign branches of American banks, (2) large withdrawals of funds from Euro-dollar market through previous week's flows into Germany that reduced supply of dollars in Euro-dollar market, and (3) market realization that monetary authorities now taking steps to reduce differentials, as indicated by reductions in German and U.K. discount rates, and can take additional measures if desired. Nevertheless, markets remain highly sensitive and nervous.

4. U.S. Missions not expected to take initiative in discussions of this matter, but if questioned, should take the line indicated in Treasury statement as well as drawing on elaboration below.

5. Official view is that recent large accumulations of dollars in Europe are primarily due to short-term capital movements growing out of different cyclical circumstances in U.S. and Europe. These movements should be distinguished from the basic balance of payments positions on current and long-term capital account which are more persistent and much less volatile.

Basic Payments Positions

6. The United States basic deficit for 1970 is in the neighborhood of $2-1/2 to 3 billion. This is not satisfactory but is not significantly larger than average of past five years. U.S. current account surplus excluding government grants, at $2.3 billion in 1970, was higher than average of 1968-69 by over $1 billion, though smaller than 1961-65 average of $5.7 billion.

7. Basic balance of payments positions are not especially strong in Europe. A major part of offsetting surpluses to the U.S. basic deficit will probably be found, though data uncertain, in Canada and Japan. Continental European basic surpluses have been held down by U.S. restraints on long-term capital outflows. Large, current account surplus of Germany was nearly halved in 1970 as compared with 1969, and appears to be weakening somewhat further. Although current account surplus of EC as a whole remains large, this surplus now roughly balanced by aid and large long-term capital outflows, leaving basic balance in balance. Wage and price movements in Europe now suggest a more rapid pace of inflation relative to the U.S. and Canada and such movements also weigh against upward revaluations of European currencies. United States has exercised restraint on inflationary demand in 1969 and 1970 and unemployment has reached levels substantially higher than those experienced in Europe.

8. However, the U.S. basic balance remains unsatisfactory, reflecting serious deterioration in U.S. trade surplus from levels of early 1960's. This deterioration shows up primarily with Japan and Canada, although European agricultural policies present the threat of further deterioration. In addition a primary cause of current difficulties is our continuing large military defense burden including particularly in such surplus areas as Europe and Japan. Despite their surpluses many other developed countries, including both Japan and the EC, still have important restrictions against our imports.

9. USG is not following "passive" policy or policy of "benign neglect" as some Europeans assume on basis recent articles of some U.S. academics. U.S. has taken actions to limit basic balance deficit including renewal of IET, and extension of Commerce and FRB programs covering corporate and bank capital flows. Administration hopes Congress will authorize DISC proposal to improve export performance and is working to make U.S. export credit facilities more competitive. Beyond that, negotiations must be pursued bilaterally and multilaterally to defend U.S. export interests, and to seek improvements in military burden-sharing arrangements. Our trade position is very different than it was in the early postwar period. The United States should not and will not seek solution by depressing the U.S. economy. In fact, such action would aggravate net capital outflow. It would also reduce U.S. imports, thus tending to depress the economies of some exporting countries.

10. Through its demand management policies, the United States has slowed down the U.S. economy markedly and we are now experiencing improved price performance that can only be helpful to balance of payments. The Administration has also taken steps to deal with inflationary pressures in construction and called attention to other specific points of inflationary pressure in the economy, with an eye to international as well as domestic implications of excessive price and wage advances. If further stimulus to the economy should be needed in the future, fiscal rather than monetary action would certainly be considered.

Short-Term Capital Flows

11. While short-term capital flows more transitory problem, large flows do represent serious problem for several European countries and for international monetary system. U.S. concern with this problem evidenced in President's report on "U.S. Foreign Policy in the 1970's" in which he listed objective of cooperation in monetary sphere "to handle large-scale shifts of liquid capital without exchange crises or losses in the ability of individual nations to pursue their monetary policies." President called for "an intensive examination to determine whether there is need to reinforce the present techniques and procedures of international monetary cooperation to enable us better to cope with such movements." This problem, though serious, is fundamentally different from the basic balance problem. It results from fact countries in different cyclical situations tend to different interest rate levels and monetary policies must have scope for domestic requirements. In 1970-71, this has meant substantial differential between U.S. interest rates which have been relatively low reflecting sluggishness of economy and our need for economic stimulus, and interest rates in certain European countries, which have been high reflecting continuing inflationary boom and desire for continued restraint in those countries. These divergencies in money market conditions are the major source of the massive U.S. official settlements deficit of 1970.

12. Even with available techniques for dealing with short-term capital flows, all nations must be prepared to ride out large swings in payments positions in such divergent cyclical situations. This is not something that can or should be dealt with by changes in exchange rate parities. If expansion of U.S. economy is accompanied by firming of U.S. money markets and there is an easing of monetary conditions in foreign financial centers, U.S. official settlements deficit should be substantially reduced. Questions of the appropriate policy mix as between fiscal and monetary policy are relevant for all advanced countries, not merely for the United States.


13. While we are concerned over both the basic balance and short-term capital flows, we are attacking problems in cooperation with others. Solution not seen in dramatic action in areas of international monetary system, and no emergency measures or special international meetings under consideration.

14. Recognizing there are no quick or easy answers to world balance of payments adjustment problem, USG intends to carry out its part of responsibility for improved structure. Orderly growth with price stability in U.S. is essential underpinning in such improvement. The extremes of slack and overheating offer no salvation for the balance of payments. A combination of orderly growth with better price stability than other leading industrial nations will be achieving in years ahead should move the U.S. along the desired path toward a stronger current and basic balance position.



64. Memorandum From C. Fred Bergsten of the National Security Council Staff to the President's Special Assistant for National Security Affairs (Kissinger)/1/

Washington, April 21, 1971.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Country Files-Far East, Box 530,  Japan Volume IV 1/71-6/71. No classification marking. The memorandum is Tab B to the "Additional Information" memorandum cited in footnote 2 below.

Your Lunch With Pete Peterson--April 22

There are no specific issues on which decisions are pending which you need to raise with Pete. You might, however, wish to stress to him your interest in early submission of our generalized tariff preferences legislation in view of the implications for Latin American policy. You might also wish to get his reading on the outlook for success of our latest textile gambit.

There is, however, a deeper and more philosophical point which will continuously pervade your relationship with Peterson: the relationship between foreign economic policy and overall foreign policy. It is roughly accurate to say that foreign economic policy has been the handmaiden of overall U.S. foreign policy throughout the post-war period; all of our great "economic" initiatives (IMF-IBRD, Marshall Plan, Kennedy Round, SDRs, etc) have been undertaken for essentially foreign policy reasons, and foreign policy considerations have dictated the U.S. position on virtually all issues of foreign economic policy.

There is now great and increasing pressure to change this relationship. In fact, it probably must be changed to some extent--to increase the "economic" content of foreign economic policy--for the same reasons that we are now seeking to share our global role in political and security matters. The creation of Peterson's job, of course, is an important indicator of this trend, and adds to the pressures for moving in such a direction.

However, some go so far as to say that foreign policy should now become the handmaiden of foreign economic policy;/2/ that we should use our political and military muscle to pursue basically economic objectives. Pete himself believes that a trend in this direction is inevitable. There is certainly wide support for it in the Congress.

/2/On April 22 Bergsten sent Kissinger a memorandum with "Additional Information" for his luncheon with Peterson that day. After commenting on NSSM 122 on Japan (Tab A), Bergsten wrote:

"Pete also wishes to raise with you major questions about the State Department. He already despairs at State's ability to carry out negotiations with sufficient toughness to get acceptable results and present a respectable image. He clearly views this as an institutional problem rather than simply one of present personalities, though he is fully aware that present personalities exacerbate the difficulty. He hopefully speaks of getting an Under Secretary who understands economic issues and could hold to a tough line on them.

"This line of Pete's thinking raises two problems for you. The first is the substantive problem I mentioned in my memorandum of yesterday (Tab B): his growing desire to use overall foreign policy to pursue economic objectives, which will cause you increasing problems in the future.

"The second is the problem of who does what in this field. I am more pessimistic than Pete about State. It is my view that their internal pressures will always cause them to soften in tough negotiations, whether on economic or other issues. I therefore suggested that Pete essentially forget about State and revitalize the Office of the Special Trade Representative by replacing Carl Gilbert with a tough negotiator who would be both effective and respected on the Hill. He could operate de facto as Pete's deputy and operating arm. I recommend that you promote this line when you discuss the matter with Pete today." (National Archives, Nixon Presidential Materials, NSC Files, Country Files--Far East, Box 530, Japan Volume IV 1/71-6/71)

The obvious answer is that a new balance must be found between the economic and foreign policy components of foreign economic policy. This will often invade the heart of foreign policy, on such issues as German offset, general trade policy and therefore overall relations with key countries such as Japan and the Common Market; specific commodity problems such as meat, textiles, shoes, sugar, etc.; and East-West trade policy, on which the President has asked for a special CIEP meeting.

The important thing at this point is simply for Pete to know that you are aware of this problem, and the need to work it out with him on essentially a case-by-case basis. I see no general formula, or method for getting one, which can resolve the issue on a broader basis. You should make it clear, of course, that you are not prepared to see economic issues dominate foreign policy in areas where our political interests are sufficiently important.


65. Action Memorandum From the President's Assistant for International Economic Affairs (Peterson) to President Nixon/1/

Washington, June 2, 1971.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 273, OECD. Confidential. A copy was sent to Kissinger. Attached to a June 5 memorandum from Huntsman to Peterson setting out marginal comments the President had written on Peterson's memorandum, but the source text bears no marginal comments.

OECD Ministerial Meeting

Secretary Rogers, who will head the U.S. Delegation to the June 7-8 OECD Ministerial Meeting, has submitted a memorandum outlining the proposed U.S. objectives and the issues to be discussed (Tab A)./2/ The Ministerial Meeting will involve a high-level exchange of views on three agenda items:

/2/The 12-page "OECD: Objectives Paper," dated May 25, is not printed. A copy attached to a June 1 memorandum from Johnston to Kissinger is accompanied by a May 29 memorandum from Rogers to the President informing him that he planned to use it as the basis for U.S. participation at the June OECD Ministerial. (Ibid.)

1. Economic policies and prospects in the OECD area;
2. Perspectives for international trade;
3. Policies for cooperation with developing countries.

In addition, Australia will be welcomed as the 23rd full Member of the OECD.

Commerce, Agriculture, Labor, OMB, AID, Council of Economic Advisers, Ambassador Gilbert, and the Federal Reserve Board concur in the State proposals.

Secretary Connally (Tab B) is opposed to the idea of an OECD restricted trade group. Treasury believes it would constrain our freedom of action, and that we should not commit ourselves to "an initiative which . . . may be doomed to impotence or acrimony." If, nevertheless, you decide to support creation of the group, Treasury believes it "should not branch out into areas beyond trade policy."/3/

/3/Tab B, a memorandum by Connally, is not printed. In a June 1 information memorandum to Kissinger, Johnston noted that the reasons for Treasury's opposition to the special trade group were not very clear, but he recommended that Kissinger support establishment in the OECD of a special group to study trade and related items. Haig approved for Kissinger. (Ibid.)

Apparently, Secretaries Rogers and Connally reviewed this with you on the plane to Austin, Texas,/4/ but they have rather different impressions about what was agreed.

/4/The President traveled to Austin on May 22 for the dedication of the Johnson Presidential Library. Rogers and Connally accompanied him, but did not return with the President later in the day. (Ibid., White House Central Files, President's Daily Diary)

Secretary Connally has also suggested "that the Delegation focus attention on the degree to which defense expenditures are to be taken into account in the OECD's examination of our economic and balance of payments position."

On May 1, you authorized State to conduct consultations concerning the practicability of establishing an OECD restricted study group./5/ Subsequently, the OECD Secretary General advanced the proposal for such a group on his own responsibility. While final positions are unlikely to be taken by governments until the meeting, the extensive consultations carried out by State indicate wide interest and substantial support for the proposal which, under OECD rules, requires unanimity for adoption. The European Community, some members of which have reservations, could still block action, but the French statement that this matter could be worked out by "reasonable men" indicates the likely outcome./6/

/5/Not further identified. Telegram 79858 to Paris, May 7, informed the Embassy and the OECD Mission that the President had authorized "consultations concerning the practicality of establishing an OECD restricted study group to examine international economic problems and to recommend methods and programs for dealing with them. The President did not wish the United States to push to establish such a restricted group in the OECD unless there were co-sponsors and good prospects for success." (Ibid., Nixon Presidential Materials, NSC Files, Country Files--Europe, Box 678, France, Volume VII 4/71-12/71)

/6/Not further identified.

I do not believe it would be desirable at this late date to oppose formation of the group. To do so might be interpreted both as backing away from an idea we floated and as a stand against positive initiatives at a time when monetary relations are strained. The restricted group would permit us to talk quietly with the European Community, Japan, Canada, and the U.K. about how we will deal with economic problems, including agricultural trade, after Britain enters the Common Market. It is important that we get at this now that British entry seems assured. Finally, I anticipate that the working group would assist in the domestic process of developing a U.S. position for a possible multilateral negotiation, much as the NATO examination of allied defense strategy proceeded in tandem with examination of the same issues in the NSC.

On the other hand, I share John Connally's view that we should make clear we are not foreclosing our right to take other trade initiatives while the OECD study proceeds, and that the group's scope should be narrowed. I also believe it would be well to focus some attention on the defense burden at the OECD Ministerial. Therefore I recommend that you approve Option 3. Henry concurs.

I have reason to believe that Option 3 is acceptable to Secretary Rogers. Acting Secretary Irwin states that Secretary Rogers is so strongly opposed to Option 2 that he would like, if necessary, to discuss the matter with you by phone prior to your decision.


Option 1: Approve State position, supported by all concerned, except Treasury, as submitted./7/

/7/The June 5 memorandum from Huntsman to Peterson (see footnote 1 above) indicates the President wrote "No" after Option 1.

Option 2: Agree with Secretary Connally that we should oppose creation of an OECD restricted Trade Study Group.

Option 3: Approve State proposal as modified in the attached draft telegram (Tab C)./8/

/8/The President initialed his approval of this option. The June 5 memorandum from Huntsman to Peterson indicates the President also wrote: "I agree in principle with Connally all the way. Tactically we are boxed in. But I want the Connally line to influence all our decisions in this matter." Tab C is not printed, but see Document 66 for the revised text.


66. Typescript of Telegram From the President's Assistant for International Economic Affairs (Peterson) to Secretary of State Rogers in Lisbon/1/

Washington, June 5, 1971.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218, CIEP. Confidential; Exdis; Immediate. Drafted by Hinton and initialed by Peterson, Kissinger, and Haig, who also wrote at the top, "LDX'ed to State." The telegram is a revision of Tab C to Document 65, pursuant to the President's instructions; see footnote 3 below. No telegraphic text of Peterson's message was found. The Secretary was in Lisbon attending the NATO Ministerial meeting.

Eyes Only for Secretary William P. Rogers From Peter G. Peterson. The President has approved the OECD objectives paper submitted by Secretary Rogers on May 29 with the following modifications:/2/

/2/See footnote 2, Document 65.

1. Under "Our Main Objectives" a new paragraph would be added:

We would seek bluntly and in a hard hitting manner/3/ in Secretary Rogers' statement and in other ways to promote better awareness and understanding of the relationship of our military expenditures to our economic and balance of payments position. We would thereby endeavor to begin working toward bringing all of our OECD partners to focus attention on the degree to which defense expenditures made for the mutual benefit are to be taken into account in the OECD's examination of a member's economic and balance of payments position. (FYI: The President wants the line taken by Secretary Connally in Munich to be followed by all U.S. representatives.)/4/

/3/The expression "bluntly and in a hard hitting manner" was inserted according to the President's instruction as set out in the June 5 memorandum from Huntsman to Peterson; see footnote 1, Document 65.

/4/According to Huntsman's June 5 memorandum, the President was referring to Connally's May 28 speech at the American Bankers Conference in Munich. See Document 155.

2. The Section on perspectives on international trade would be clarified by deleting the existing subparagraph (pages 8-9) which contains a reference to "fiscal, monetary and investment matters"/5/ and by inserting subparagraphs under "The US Views" along the following lines:

/5/The deleted language reads: "The Group should develop guidelines for an action program covering a wide gamut of policy issues posed by the new conditions of the '70's, including tariffs and tariff discrimination, non-tariff barriers, and agricultural policies, as well as related fiscal, monetary and investment matters, bearing in mind the importance of this activity for non-OECD member countries."

The purpose of the group should be to explore trade issues, including tariffs and tariff discrimination, non-tariff barriers, and agricultural policies in the light of the new conditions of the 70's. The group should seek to develop action program guidelines and to foster the political will to deal with trade problems of common concern, bearing in mind the importance of this activity for non-OECD member countries.

Establishment of the Group would in no way limit the U.S. Government, or any other Government, from pursuing its trade interests and rights in other ways, either bilaterally or multilaterally, including proposing trade or other initiatives in whatever forum considered appropriate.

The U.S. would interpret "trade related matters" narrowly. In particular, the group would be expected to avoid duplication of the fiscal and monetary policy work of the IMF, the Group of Ten, EPC, and WP-3./6/

/6/Telegram 9846 from USOECD, June 9, contained Secretary Rogers' report to the President on the June 7 OECD Ministerial meeting, which he had chaired. Rogers reported that the Group "was given a gratifyingly warm reception" despite U.S. statements that the United States would use it as a forum to seek reductions in agricultural protection and to deal with increased trade discrimination that would result from European Community enlargement. Rogers cited an American news agency's calling the agreement on the Special Group "a major diplomatic victory for the Nixon Administration." (National Archives, Nixon Presidential Materials, NSC Files, Country Files--Europe, Box 678, France Volume VIII 4/71-12/71)

3. The Assistant to the President for International Economic Affairs will review positions to be taken by the U.S. Representative on the Special Trade Group.

4. With respect to generalized preferences (page 11) it should be borne in mind that the reverse preference issue is currently being reconsidered within the CIEP.


67. Editorial Note

On June 30, 1971, Peter Peterson sent CIEP Study Memorandum 7 to the Council's members, to which he attached a draft of his 133-page briefing on "The United States In a Changing World Economy." Peterson noted that, at the President's request, the essence of the draft had already been used in briefings with Congress and business and labor groups, but that the paper had not yet been reviewed by the CIEP and at that stage was "a rather personal document." Peterson indicated that it was slated for discussion during an intensive Review Group meeting at Camp David July 9-10 and asked the Council members for their views on further dissemination of the document. (Department of State, S/S Files: Lot 82 D 126, Box 5195, CIEP Study Memoranda)

Peterson had discussed his briefing with President Nixon on June 29, and under cover of a July 2 memorandum forwarded a copy of the report, as the President had requested, for his trip to San Clemente. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218, CIEP) On July 3 Haig sent Peterson a memorandum suggesting some revisions in his transmittal memorandum to the President, particularly on the issue of publishing the briefing. (Ibid.) Peterson resubmitted his memorandum on July 6. (Ibid.) The President flew to Kansas City and then continued on to San Clemente on July 6. Haig accompanied the President. (Ibid., White House Central Files, President's Daily Diary)

In a July 8 memorandum to Haig (for wire), Ernest Johnston of the NSC Staff called attention to a number of deficiencies in the briefing paper scheduled to be discussed at Camp David. Johnston concluded that "during the meeting I shall discreetly argue that publication of the document would cause severe foreign policy problems and, even worse, would contribute to Congressional pressure for a nationalistic international economic policy. OMB, CEA and State expect to take the same line. Should Peterson suggest delayed submission of preference legislation or a revision of our preference scheme, I will argue, on foreign policy grounds, for prompt submission and no back down in our current proposal." On the July 8 cover note from Kennedy to Haig, which suggests Johnston's memorandum was sent telegraphically to Haig at the Western White House, Kennedy wrote: "AMH Comments: 1. Hold firm. 2. Peterson is amenable to no publication--we want none. Per tel con with John Howard 7/9/71." (Ibid., NSC Files, Agency Files, Box 218, CIEP)


68. Paper Prepared in the Department of State/1/

Washington, July 28, 1971.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Country Files--Europe, Box 685, Germany Volume IX 4-8/71. Confidential. Forwarded to Kissinger under cover of a July 29 memorandum from State Department Executive Secretary Theodore Eliot informing him the report was prepared by Nathaniel Samuels, chairman of the U.S. delegation to the offset negotiations. An attached July 31 memorandum from Sonnenfeldt apprised Kissinger of the current status of the offset negotiations in preparation for his August 3 meeting with Ambassador Pauls. Sonnenfeldt advised Kissinger to make it clear the Germans would have to improve their offer.

US-FRG Offset Negotiations--Current Status

U.S. and German delegations met in Bonn June 28-29 for a third round of formal negotiations on a new offset agreement. Presentations during the formal sessions consisted mainly of reiterating previously stated positions. The only new idea advanced by the German side was the suggestion that the gap between the U.S. target and FRG offer be filled by a four-and-a-half-year Bundesbank loan of DM 2 billion ($572 million). The FRG offer, on a two-year basis, would consist of the following:

Military procurement--$929.5 million
Budget support--228.8 million
Bundesbank loan--572.0 million

Total--$1,730.3 million

As previously reported,/2/ the FRG has proposed that a portion of the funds for military procurement and all of the funds for budget support be taken from money deposited in the Treasury under previous offset agreements. Thus, under the German proposal, only the following would be new money and constitute a balance-of-payments inflow for the United States:

/2/Reference is to an undated status report by Samuels sent under cover of a June 24 memorandum from Eliot to Kissinger; both attached but not printed.

Military procurement--$715.0 million
Bundesbank loan--572.0 million

Total--$1,287.0 million

We informed the German side that we were unable to accept the offer because it did not contain sufficient balance-of-payments benefit and because interest-bearing loans have not proven to be very satisfactory offset features in the past. We suggested that the Germans make an effort to improve their offer by increasing the budget support component, using new money. The German negotiator replied that he was working under specific instructions from the FRG Cabinet and that he had little flexibility. He stated that he was authorized to make only "minor adjustments" in the German offer./3/

/3/Telegram 7765 from Bonn, June 25, reported that Herbst, the chief German negotiator, told an Embassy official in Bonn that he would not go into the June 28 negotiations "with significantly more to put forward." He said that the Cabinet had approved only a "very slight margin" of negotiating room; his instructions were "extremely rigid." (National Archives, Nixon Presidential Materials, NSC Files, Country Files--Europe, Box 685, Germany Volume IX 4-8/71)

At the conclusion of the formal sessions, the German chairman expressed concern that the two sides had not been able to reach agreement. He then informally outlined a "personal" proposal which he said had not been discussed with the Cabinet but which he believed the Cabinet might be persuaded to accept as an "alternate" German offer.

The following are the elements of this proposal:

Military Procurement--$929.5 million, of which $300 million would be taken from Treasury Accounts 1 and 2 and $629 million would be new German budget funds.

Budget Support--$314.6 million, of which $228.8 million would be taken from Treasury Accounts 1 and 2 and $85.8 million would be new German budget funds. Of the total, $228.8 million would be a lump-sum payment, $57.2 million would be utilized for rehabilitation of U.S. troop facilities in Germany during FY 1972 and FY 1973, and $28.6 million would be used to pay interest due the Bundesbank loan during FY 1972 and 1973.

Bundesbank Loan--$572 million for 4-1/2 years at 2-1/2% interest.

This proposal represents a slight improvement over the official offer. However, from the balance-of-payments point of view, the benefit to the U.S. would average only about $626 million per year (including the loan)--about half our estimated balance-of-payments costs in Germany. Therefore, State, Treasury and Defense prepared a counterproposal which was transmitted to the Germans on July 24./4/

/4/A letter from Samuels to Herbst was transmitted in telegram 133748 to Bonn, July 23, and delivered by the Embassy on July 24. (Ibid., RG 59, Central Files 1970-73, FN 12 GER W 4/1/71)

The counterproposal suggests a package comprised of the following on a two-year basis:

Military Procurement--$929.5 million, of which $14 million would be taken from Treasury Account 1.

Budget Support--$686.4 million, to be financed entirely from funds already on deposit in Treasury Accounts 1 and 2.

Bundesbank Loan--$572 million for 4-1/2 years at 2-1/2 interest. 

Under the counterproposal, the total of military procurement would remain the same, but the amount of new money required would be increased by DM 700 million ($200 million). The amount of budget support payments would be increased by the use of additional funds from Treasury deposits and Bundesbank credits would remain as proposed informally by Dr. Herbst. Treasury Accounts 1 and 2 would be almost entirely exhausted, so that in any subsequent offset agreement new money would be required and have a full balance-of-payments effect.

The counterproposal is substantially above either the formal offer or the personal Herbst proposal and there has been nothing in our negotiations thus far to suggest that the Germans might be prepared to improve their offer to this extent, if at all. However, we believe it is desirable to make this additional effort to bring about an improvement in their position.

The initial German reaction to our proposal has been very negative./5/ However, they are studying it further and we should have an official response soon. If our latest proposal is rejected, then a decision on our part to obtain this particular result would probably require intervention between the highest levels of both governments. Should we persevere, we would almost surely, at the least, pay a not inconsiderable price in terms of an irritated mutual relationship. It is our hope, however, that our proposal, even if not accepted in its present form, will provide a basis for a compromise within Presidentially approved guidelines.

/5/Reported in telegram 9070 from Bonn, July 24. (Ibid.) On July 21, as the U.S. proposal was being drafted, John J. McGinnis sent Secretary Connally a memorandum suggesting that the Germans would be unable to accept the proposal without a direct intervention by President Nixon with Chancellor Brandt. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 17, German Offset) During his August 3 meeting with Kissinger, Ambassador Pauls said the German view was that all the concessions had been made by the German side and none by the United States. Pauls urged compromise since "the Germans could not swallow the latest U.S. proposal." (Memorandum for the record by Sonnenfeldt, August 4; National Archives, Nixon Presidential Materials, NSC Files, Country Files--Europe, Box 685, Germany Volume IX 4-8/71)

We have just learned that the principal German negotiator, Dr. Herbst, has proposed to come to Washington for private talks next week. We have agreed that such discussions would be desirable and are in the process of making arrangements for meetings on August 3-4./6/

/6/On July 30 the Embassy in Bonn reported confirming these dates with Herbst. The Embassy also elaborated on the extreme negative reaction to the latest U.S. proposal. (Telegram 9349 from Bonn, July 30; ibid., RG 59, Central Files 1970-73, FN 12 GER W)


69. Editorial Note

National Security Study Memorandum 122, dated April 15, 1971, had called for a new review of policy toward Japan, taking account of the 1969 NSSM 5 study and developments in the bilateral relationship since NSDM 13 was issued on May 28, 1969. Text of NSSM 122 is in the National Archives, RG 59, S/S Files: Lot 80 D 212, NSSM 122. Regarding NSSM 5 and NSDM 13, see Document 20.

A response to NSSM 122, dated August 2, was sent to the Chairman of the NSC Senior Review Group under cover of an August 2 memorandum from Winthrop Brown, who reported that it had been approved by the Interdepartmental Review Group for East Asia and the Pacific. Because of the interest in the study, particularly the economic aspects, throughout the government, he recommended that representatives from interested agencies be invited to attend the Senior Review Group meeting on the study. (National Archives, RG 59, S/S Files: Lot 80 D 212, NSSM 122)

A revision of the "Economic Options" section (pages 16-25) of the summary of the response to NSSM 122 was distributed to the Under Secretary of State, the Deputy Secretary of Defense, the JCS Chairman, the DCI, the Under Secretary of the Treasury, the Assistant to the President for International Economic Affairs, the OMB Director, and the CEA Chairman under cover of an August 5 memorandum from NSC Staff Secretary Davis. She also provided comment on the "Economic" section from the State Department and CEA. (Ibid.) The revision of the "Economic Options" section proposed, among other things:

"Option 1. Take prompt, multilaterally-directed measures to eliminate or alleviate US trade and balance-of-payment problems, without directing actions at Japan in particular.

"Option 2. Increase pressure on Japan, in bilateral and multilateral forums, to stimulate its domestic economy (in order to achieve a better international balance) and to follow internationally-agreed rules of trade and investment. (This is in addition to the measures in Option 1.)

"Option 3. A CIEP-directed strategy for the negotiation, including the measures of Option 2 plus additional measures and a time schedule and targets."

The paper also listed several arguments for and against each of the three options but did not recommend approval or disapproval of any of them. A note at the end of the "Economic" section reads: "All of the above options assume a continuation of U.S. efforts to obtain satisfactory solutions to the textile and steel import problems."

In an August 5 memorandum to Under Secretary of State Irwin, Assistant Secretary Trezise and Deputy Assistant Secretary Brown summarized and analyzed among other things these three economic options and recommended that Irwin "set forth the case for Option 2, and urge an early Presidential decision in favor of this approach." They attached talking points for this presentation. (Ibid.)

The SRG met on August 6, August 27, and September 7 to take up policy toward Japan. At the August 6 meeting, "Kissinger made it clear from the outset that he wished to run the economic-trade section of the response [to NSSM 122] through the CIEP machinery, primarily to develop the kind of action plan envisaged by Treasury, Commerce, Labor and Agriculture in one of the options." Much of the discussion dealt with speculation about possibly loosening ties with Japan and the risks inherent in an independent Japan in Asia. At the close of the meeting, Kissinger said that the next SRG meeting would consider the paper being developed by the CIEP as well as one being written in the State Department on how the Asian situation might develop with an independent Japan. (Memorandum from Under Secretary of State for Political Affairs U. Alexis Johnson to Secretary Rogers, August 10; ibid.) The CIEP meeting took place on August 10; see Document 70.

The SRG meeting of September 7 focused directly on preparations for the bilateral ECONCOM meetings on September 9-10 in Washington (see Document 75). Papers for and resulting from these SRG meetings are in the National Security Council, Box 98 SRG Meetings, Japan 8/6/71, 8/27/71, and 9/7/71.


70. Information Memorandum From John Holdridge and Robert Hormats of the National Security Council Staff to the President's Deputy Assistant for National Security Affairs (Haig)/1/

Washington, August 10, 1971.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Country Files--Far East, Box 536, Japan Volume V 7/71-9/71. Secret. Initialed by Haig. For background on this meeting, see Document 69.

CIEP Review Group Meeting on Japan

The CIEP Review Group meeting which we attended today brought out the following:

--There is disagreement amongst the agencies as to precisely what reforms we wish Japan to undertake. Commerce would like Japan to allow in more American private investment; however, Treasury believes this would have a negative effect in the short run on our balance of payments. A number of agencies are pressing Japan to revalue the yen, although the amount of the revaluation acceptable to the agencies varies from Treasury's 20 to 25 percent (which Japan could not possibly accept) to State and DOD believing a 7 to 10 percent revaluation could be acceptable (which, if Japan liberalizes its import requirements and provides more foreign aid, seems to be a more logical position). Other suggested measures include a liberalization of imports and voluntary restraints by Japan on her exports. However, it is obvious that Japan will not do everything we seek and the agencies do not seem to be able to focus on which reforms we should press hardest for at the September Ministerial meeting.

--All agencies seem to agree that we have little effective leverage short of the threat of quota legislation or the Administration's imposing quotas under existing legislation (which Peterson and Commerce advocate).

--There is a great deal of concern with the U.S. balance of payments and trade situation in general, and with Japan in particular. Last year the U.S. balance of payments deficit was $3 billion and in 1971 the estimate is approximately $8.5 billion, while Japan is expected to realize a balance of payment surplus of approximately $7 billion in 1971. Approximately $2.5 billion of the U.S. deficit will be with Japan.

--There are basically two schools of thought as to how to handle the above problem: one advocates solving our balance of payments problems primarily through export incentives and border taxes on imports--which would not be directed specifically against Japan--but would affect trade with all our partners, along with requesting Japan to conform to accepted rules of international trade. The second school of thought says that since Japan is quite obviously the major problem, we should exert strong efforts to improve our trade and balance of payments with her and avoid invoking measures which would affect trade with the Europeans.


71. Editorial Note

On August 21, 1971, Henry Kissinger met with Japanese Ambassador Ushiba in San Clemente. Ushiba was en route to Tokyo for consultations. In an August 19 briefing memorandum for this meeting, Holdridge and Hormats told Kissinger of Japanese concern about the 10 percent import surcharge and the suspension of gold convertibility the President had announced in his New Economic Policy address on August 15 (see Document 168). The memorandum noted that Ambassador Ushiba would want assurances that the President's economic measures, especially the surcharge, were not intended to discriminate against Japan. In an August 21 cover note on the memorandum, Colman informed Kissinger that Ushiba might mention that the administration was considering an exemption for Canada from the surcharge. (National Archives, Nixon Presidential Materials, NSC Files, Country Files--Far East, Box 536, Japan Volume V 7/71-9/71)

The memorandum of the August 21 conversation indicates that except for a discussion of textiles, economic issues hardly arose. On textiles Kissinger said he did not know where the textile negotiations, which bored him, stood. Ambassador Ushiba said he would be the point of contact for private communications with Prime Minister Sato. Later in the conversation Kissinger said he knew nothing about economics and thought economic leaders were usually "political idiots." (Ibid.)


72. Memorandum From the President's Assistant for International Economic Affairs (Peterson) to the Under Secretary of the Treasury for Monetary Affairs (Volcker)/1/

Washington, August 25, 1971.

/1/Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, PAV--Economic Stabilization Program. Eyes Only.

I've tried to reach you a couple of times but am on my way to San Clemente, so I'll give you the essence of the two things I wanted to cover with you:

1. On Japan, there are some strong objections to the idea of bilateral balance goals on the part of OMB and George Shultz, on the grounds that it's bad policy that could haunt us later with other countries.

My response has been:

a. We start with overall balance of payments goals anyway on the multilateral scene for both countries;

b. We have done some detailed projecting that suggests balancing is a reasonable goal, so it's no doctrinaire commitment to zero balances. Besides, Japanese businessmen at the Hawaii Conference/2/ have said it is feasible.

/2/Not further identified.

2. I would strongly urge you, Paul, to convene soon Paul McCracken and his key people (who impress me a great deal), Arthur Burns and his representatives, Ken Dam (in George Shultz's absence) to discuss where we are going on:

a. Negotiations in the near-term on exchange rate and what the scenario is not only on the target but what we do vis-a-vis the surcharge;

b. Very important, what kind of an overall system we want to emerge from all this in terms of such issues as:

(1) Reserve currency status;
(2) How parities are set (including various automatic and/or more presumptive approaches);
(3) Gold and its role, including possible price changes;
(4) Dollar overhang;
(5) More flexibility, etc.

Paul, some of these people have strong and interesting views on these subjects. I suspect that Treasury's and the U.S. Government's best interests are best served if you chair a collaborative effort to come up with a paper that outlines the issues and various approaches that might be considered more or less in the "spirit of Camp David",/3/ rather than by inadvertence encourage these various departments to submit their own views to the President independently. In this way, I believe a paper can go forward in an orderly way from this group to John Connally and to the President.

/3/The details of the New Economic Policy President Nixon announced on August 15 had been worked out in meetings of the President with his key economic advisers at Camp David August 13-15; see Document 168.

I will be in California but I can pick up attendance at such meetings after I get back. In other words, please don't hold up anything on my account.


73. Editorial Note

Pursuant to a request arising from the August 6, 1971, Senior Review Group meeting on Japan (see Document 69), State Department Executive Secretary Eliot, under cover of an August 16 memorandum, sent Kissinger an undated Addendum to NSSM 122, "The Possibility of a Looser Relationship With Japan and Its Consequences." (National Archives, RG 59, S/S Files: Lot 80 D 212, NSSM 122) The paper, which had not been reviewed by the East Asia Interdepartmental Review Group, dealt primarily with political-military-security issues and included the following language: "The purpose of a deliberate decision on our part to loosen ties with Japan would presumably be: a) to improve our chances of achieving a detente with China; b) to give us greater freedom of action to deal with Japan's commercial aggressiveness; c) to force Japan, once out of the hot house of association with the United States, to realize that its own interests require Japan to assume a major degree of responsibility for the welfare and progress of its neighbors; and d) to reduce our defense expenditures in the rest of Asia. . . . The postwar US/Japan relationship has been a unique arrangement. It has permitted Japan to conduct an unprecedented experiment in the development of national power and influence by economic growth without commensurate military power." The paper was distributed to members of the SRG under cover of an August 26 memorandum from NSC Staff Secretary Davis informing them it was an "additional paper" for consideration at the SRG meeting on August 27 in San Clemente. (Ibid., S/S Files: Lot 73 D 288, SRG Memos)

On August 24 Peterson sent members of the CIEP Review Group a 22-page paper, with three annexes, entitled "The Approach to Japan--Next Steps." (Ibid., S/S Files: Lot 80 D 212, NSSM 122) Also on August 24 Eliot, in response to an oral request from Holdridge, sent Kissinger a more concise summary of the NSSM 122 Response in reply to four questions Kissinger posed at the August 6 SRG meeting. (Ibid.) The questions were: "Where is Japan Going?; What Kind of Japan Do We Want?; How Do We Get It To Go There?; and What Are the Costs?" Eliot noted that the State Department paper commented in only a very general way on economic matters because the CIEP was preparing a more detailed paper on the economic aspects. Peterson's and Eliot's papers were circulated to members of the SRG under cover of an August 24 memorandum from Davis informing them they would be the basis for discussion in the SRG meeting in San Clemente on August 27. (Ibid.)

Peterson's paper considered a variety of issues, including those in the trade area and military procurement, and included the following language on yen revaluation:

"From the standpoint of achieving significant reduction in Japan's overall trade and payments surpluses--and corresponding if somewhat smaller improvement in the U.S. balances (both directly and through effects in third-country markets)--revaluation of the yen is our highest priority negotiating objective. In fact, it is contemplated that the surtax will remain until we get a satisfactory resolution of the exchange rate problem. We estimate, assuming general rate equilibrium, that a 15% Japanese revaluation by itself in terms of the dollar will improve our 1972 bilateral trade balance by about $1.5 billion or perhaps $2 billion. Thus, by itself, yen revaluation could be expected to help attain about 20% to 30% of our overall U.S. trade balance improvement target of about $6-$8 billion."

The paper listed some advantages to revaluation including "substantially strengthen[ing] the precedent for revaluations within the world monetary system, clearly of special interest to the U.S." The paper then continued:

"Revaluation would have certain disadvantages, however, relative to other less comprehensive objectives and measures:

"--It may lessen or counteract pressures on Japan for accelerated removal of restrictions on product (but not capital) imports, and of promotion techniques for exports, especially if a large revaluation is taken. Also, over the short run, a revaluation could have some perverse effects.

"--While a substantial yen revaluation could make a decisive difference in the impact of imports on some of our basic U.S. industries--such as steel and automobiles--it is unlikely to have a sufficient effect on a few specific U.S. industries such as textiles where Japan already appears to have a substantial cost advantage. Therefore, some, but fewer U.S. domestic political problems raised by Japanese import penetration in particular sectors will remain to be handled with supplementary measures, either quantitative restrictions (such as the President's commitment on textiles) or other voluntary and adjustment assistance measures."


74. Memorandum From Secretary of State Rogers to President Nixon/1/

Washington, September 1, 1971.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 285, State Volume 13. Secret. Attached to a copy of a September 5 joint memorandum from Kissinger and Peterson to the President proposing NSDM 130 (Document 75). A handwritten note on the joint memorandum initialed by Kissinger and Peterson reads, "Sent forward 9/6/71."

Eighth U.S.-Japan Joint Economic Committee Meeting

With the assistance of my colleagues on the Cabinet Committee,/2/ as well as that of Peter Peterson and Henry Kissinger, we have been working at formulating the positions to be taken and the objectives to be sought in the meeting with the Japanese on September 9 and 10, which I will chair./3/

/2/Probably a reference to the members of the Cabinet who would comprise the U.S. delegation to the Joint Economic Committee Meeting.

/3/Documentation on the process of formulating position papers is in the National Archives, Nixon Presidential Materials, NSC Files, Country Files--Far East, Box 536, Japan Volume V 7/71-9/71. On September 1 Kissinger sent a memorandum to Peterson and Irwin informing them that the State Department was responsible for all issues other than economic ones, and that the CIEP Working Group would prepare the negotiating paper on economic issues. (Ibid., RG 59, S/S Files: Lot 80 D 212, NSSM 122)

In the light of this work I propose, with your approval, that the American delegation follow the guidelines set forth below. I am sending a copy of this memorandum to each member of the delegation, as well as to Mr. Peterson and Dr. Kissinger, for any comments they may desire to make. Additionally, I and my Cabinet Committee colleagues are meeting on September 2 with representatives of the non-governmental Advisory Council on Japan-U.S. Economic Relations./4/

/4/Not further identified.

Very simply stated, our underlying objective is to preserve and strengthen our vitally important relationship with Japan. We should stress the importance which we attach to close cooperation with Japan and our recognition of her role as a responsible, cooperative world power. At the same time, we should attempt to persuade Japanese ministers to accept the fact that such a role requires early and effective measures to establish an appropriate balance in its external economic relationships, including those with the U.S.

If we are to achieve these objectives, and recognizing there may be special characteristics of the Japanese system, we must avoid appearing to single out Japan for discriminatory treatment on economic matters. As when dealing with other major countries, proposals from our side should be consistent with a broader equilibrium in the world economy.

We must also remember the oft-repeated Japanese plea to the United States, "Tell us what you want us to do, but don't publicly press us to do it."

The Japanese ministers should be made to understand that the U.S. will have to achieve a major turn-around in its balance of payments. Speaking plainly, this will require that countries which have run huge surpluses in their balance of payments with us will no longer be able to do so. Some countries which have had deficits with us will have to see those deficits increase. Given the large trading relationship between Japan and the United States, which we wish to see expanded, and the U.S. need for a satisfactory multilateral equilibrium, we will require a reasonably balanced trading relationship between the two countries. Our analysis strongly indicates that a global trade surplus of the dimension necessary for the U.S. equilibrium cannot be achieved with a deficit in our Japanese trade. It is our intention to review constantly progress in our over-all balance, and to appraise the consistency of developments in important bilateral accounts, to assure achievement of our goal. We hope Japan recognizes the validity of this analysis and aim, and will periodically review progress with us.

To this end, we should seek as priorities:/5/

/5/In an August 31 memorandum Under Secretary Johnson reported to Secretary Rogers on the August 27 SRG meeting on NSSM 122. Johnson noted that the discussion of economic issues was "brief and inconclusive." Peterson stressed the seriousness of the balance-of-payments situation and thought U.S. and Japanese balance-of-payments objectives were incompatible. Kissinger asked: "(a) How much revaluation of the yen did we want?, and (b) Had the President ever been given the opportunity to decide whether we wanted a monetary system based on fixed exchange rates or one based on floating rates? The President didn't just want to patch up an old system. If possible, he would like a good new one." Johnson reported that there was further, inconclusive discussion of the size of the yen revaluation and whether it should be pursued multilaterally or bilaterally. (National Archives, RG 59, S/S Files: Lot 80 D 212, NSSM 122)

1) A clear understanding by the Japanese ministers that the United States considers a major revaluation of the yen in relation to the dollar to be a condition precedent to a satisfactory economic relationship with the United States. We would not at this meeting indicate the level which we would consider satisfactory or negotiate bilaterally on this subject. If the Japanese proposed a figure in the neighborhood of 10%, we would need to indicate a larger order of magnitude is necessary. We would also indicate that we feel negotiations on this subject should be carried out in whatever multilateral forum is agreed upon by Europe, Japan and ourselves, referring to the September 15 meeting of the "Group of Ten."

2) We should seek elimination of Japanese quotas and other restrictions illegal under the GATT as well as non-tariff barriers and export subsidies, including tax incentives for exports.

We are particularly interested in the removal of quotas on certain farm products, computers, aircraft, and integrated circuits.

Additionally, we should seek:

3) Significant unilateral reductions of Japanese tariffs.

4) Japanese encouragement of imports, especially by general stimulation of the Japanese economy and investment in social infrastructure.

5) We should recognize as constructive the establishment unilaterally by the GOJ of a system to monitor Japanese exports to the United States of sensitive goods; e.g., automobiles, calculators, consumer electronics.

6) We should seek substantial, indeed dramatic, increase in the amount of Japanese economic aid, especially in Southeast Asia. Even more important than the amount would be softening of terms; e.g., less emphasis on export promotion and more on simple grant assistance.

7) We should seek increased Japanese military procurement in the United States as the Japanese defense budget rises.

8) Elimination of restrictions on capital investment inconsistent with our Treaty of Friendship, Commerce and Navigation and with the obligations which the Japanese have assumed in the OECD.

Fortunately, all of the above, except for the degree of revaluation which we seek, are included to a greater or lesser extent in the GOJ's eight-point program already approved/6/ or in the package which the Foreign Office, the new Foreign Minister, and Sato are trying to get accepted.

/6/The Japanese positions were set out in telegram 8399 from Tokyo, August 26. (Ibid., Nixon Presidential Materials, NSC Files, Country Files--Far East, Box 536, Japan Volume V 7/71-9/71)

At this meeting the Japanese will above all want to know our price for removal of the 10% surcharge. This is however, important to us in our negotiations relating to our total position with other countries, as well as Japan, and must in any case await a satisfactory overall exchange rate settlement. All we can say at this meeting is to promise its removal, as soon as our external position is assured.

We should stress, however, the very important steps which we are taking within the United States to correct the contribution of our own inflation to our trade imbalance.

On the side of our cooperation with Japan, we should offer cooperation with the Japanese in the following areas in which we have mutual interests.

a) Joint effort to seek liberalization of the trade policies of the European Community.

b) Work within the OECD High Level Group to prepare the way for a major multilateral attack on trade barriers.

c) Development of international procedures for adjudicating investment disputes in developing countries.

d) A program to encourage private investors of both countries to establish joint ventures in less developed countries in an effort to obtain greater security for these investments.

e) Closer scientific collaboration in seeking solutions to common problems in the fields of transportation and ecology.

f) In the field of nuclear energy we should reaffirm the offer which we have made to ten countries--the EEC, UK, Canada, Australia, and Japan to discuss the possibility of selling them classified U.S. technology for use of the gaseous diffusion process for enrichment of uranium on a multilateral basis.

g) We should assure the Japanese that immediately upon the completion of the ECONCOM Meeting, the President will send the Agreement for Reversion of Okinawa to the Senate with a very strong recommendation for its early ratification./7/

/7/There is no indication of Secretary Rogers' approval or disapproval.

William P. Rogers


75. National Security Decision Memorandum 130/1/

Washington, September 7, 1971.

/1/Source: National Archives, RG 59, S/S Files: Lot 83 D 305, NSDM 130. Secret. Copies were sent to the Secretaries of Treasury, Defense, Agriculture, Commerce, Labor, Interior, and Transportation; Ambassador at Large Kennedy; the OMB Director; the Chairmen of the Council of Economic Advisers and the Council on Environmental Quality; the Special Trade Representative; the Assistant to the President for Domestic Affairs; the Director of Central Intelligence; and the Chairman of the Joint Chiefs of Staff. On September 9 Peterson sent a memorandum to Kissinger complaining that this Decision Memorandum should have been signed jointly by the two of them (or should have been a CIEP Decision Memorandum signed by Peterson), because the CIEP members looked to him as their spokesman. (Ibid., Nixon Presidential Materials, NSC Files, Agency Files, Box 218, CIEP) On a September 10 memorandum from Hormats regarding Peterson's complaint and another procedural issue, Kissinger wrote, "Life is too short for this sort of thing." (Ibid.)

The Secretary of State

U.S.-Japan Joint Economic Committee Meeting

The President has reviewed your memorandum of September 1, 1971 on this subject, as well as the CIEP paper of August 24, 1971./2/

/2/Rogers' memorandum is Document 74. The August 24 paper is not printed, but see Document 73. On September 3 Hormats sent Kissinger a memorandum regarding the "bureaucratic problem" Rogers' memorandum (which had "circumvented" Peterson) had created. Noting that Peterson was attempting to reconcile the CIEP paper with Rogers' memorandum, Hormats indicated that if agreement could be reached, he would recommend a joint memorandum from Kissinger and Peterson to the President summarizing the agreed objectives. (National Archives, Nixon Presidential Materials, NSC Files, Country Files--Far East, Box 536, Japan Volume V 7/71-9/71) Agreement on most issues was reached, and a draft joint Kissinger-Peterson memorandum to the President, September 5, became NSDM 130 after some revisions. (Attachment to memorandum from Hormats to Kissinger, September 4; ibid.) See also footnote 1, Document 74.

The President has directed that in the ECONCOM meetings, the U.S. Delegation be guided by the following principal points:/3/

/3/The meetings were held in Washington September 9-10. See Department of State Bulletin, October 4, 1971, pp. 346-354, for the joint communique and statements by President Nixon, Secretary Rogers, and Foreign Minister Fukuda at the conclusion. The President's and Foreign Minister's remarks are also in Public Papers of the Presidents of the United States: Richard M. Nixon, 1971, pp. 945-947. Kissinger sent a September 10 memorandum to the President calling his attention to the "more salient aspects of the communique" and concluded: "On the whole discussions were amicable, but pointed up several unresolved economic issues, the most important being how much the yen will be revalued and how far Japan will move in the future to liberalize imports." (National Security Council, Box 98, 8/27/71 SRG Meeting--Japan)

1. Throughout the meetings, as proposed by the Secretary of State, we should endeavor to re-establish in the minds of the Japanese the significance and closeness of the U.S.-Japanese relationship through a series of forthcoming political and psychological measures. We should:

--Assure the Japanese that shortly after the ECONCOM meeting the President will send the Agreement for Reversion of Okinawa to the Senate with a strong recommendation for its early ratification.

--Reaffirm our offer to explore with Japan and other countries the possibility of selling them U.S. technology for use in gaseous diffusion plants in third countries for enrichment of uranium.

--Indicate our desire for closer scientific collaboration in seeking solutions to common problems in the fields of transportation and ecology.

--Indicate our desire to cooperate to seek liberalization of the trade policies of the European Community.

--Indicate our desire to work within the OECD High Level Group to prepare the way for a  major multilateral attack on trade barriers.

--Indicate our desire to develop international procedures for adjudicating investment disputes in developing countries./4/

/4/Two additional points were included in the September 5 draft (see footnote 2 above). The first dealt with satellite television coverage of the Emperor's visit. The second concerned the election of a Japanese Chairman of the GATT in November, a proposal made in the August 24 CIEP paper.

2. The U.S. new economic policy, with special emphasis on our balance of payments goals, should be clearly explained to the Japanese delegation. We should state strongly that it is our conviction that a reasonably balanced trade account between our two countries is necessary, and feasible by the end of 1973. It should be pointed out that, as we understand Japanese balance of payments and trade projections, they are incompatible with our objectives. It should be proposed that we work together to achieve mutually agreed compatible balance of payments goals.

3. The overriding U.S. objective is to obtain a revaluation of the currencies of our major trading partners, which will include a substantial revaluation of the yen. While negotiations on the exact amount of yen revaluation sought should be carried out multilaterally, Secretary Connally is authorized privately, if he wishes, to inform the Japanese Ministers that a revaluation in the range of 15 to 20 percent is necessary.

4. We should indicate that we would remove the 10 percent surcharge only when our external position is assured.

5. Beyond this, we wish to achieve our balance of payments goals primarily through trade liberalization, and we expect the Japanese to remove quotas and other import restrictions illegal under the GATT. We are particularly interested in prompt removal of quotas on agricultural items, computers, aircraft, and integrated circuits.

6. We should welcome the Japanese eight-point program, commend their efforts so far, and urge them to go further.

7. It should be made clear to the Japanese that we still seek a negotiated voluntary restraint agreement for textiles but will be prepared to solve the problem in other ways if an agreement is not forthcoming. Our continuing need for a voluntary restraint agreement for steel exports should also be made clear.

8. We should stress our desire for even closer economic cooperation in the future. To this end, we should propose periodic meetings with the Japanese,/5/ starting with a special interagency mission to Japan by next January to assess with the Japanese specific progress toward agreed upon balance of payments goals, compatible economic policies and the eight-point program, to identify remaining or emerging trade problems, and work out constructive, timely solutions to common economic problems.

/5/According to Hormats' September 4 memorandum to Kissinger, the State Department opposed this proposal "on the grounds that it is unnecessary and it would circumvent State's apparatus." Hormats noted that Peterson and the economic agencies saw this as their only remaining new initiative for the ECONCOM and recommended it be retained despite the State Department's objections.

9. In discussing lower priority economic objectives, including increased Japanese defense procurement in the United States, increased aid on such terms, and investment liberalization, our delegates should make clear our wishes in low key, relating such secondary points to our overall balance of payments goals.

Henry A. Kissinger


76. Paper Prepared in the Department of the Treasury/1/

Washington, September 10, 1971.

/1/Source: Washington National Records Center, Department of the Treasury, Office of International Monetary Affairs: FRC 56 77 68, Briefing Book for the October 18-20 WP3/G-10 Deputies. Confidential. An earlier draft of this paper is presumably the August 28 paper discussed in the Volcker Group on August 31; see Document 173. In a September 8 letter to Volcker, OMB Assistant Director Dam cautioned against using the paper in G-10 discussions because focusing on quantitative goals before agreeing on the type of international monetary system the administration wanted might constrain long-term options. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, PAV--Economic Stabilization Program)


The purpose of this note is to set forth U.S. views regarding the requirements for a secure U.S. balance-of-payments position. We view such a position not simply as in the interests of the U.S. but as a prerequisite for a return to a smooth and orderly functioning international monetary system. Actions are needed which both compensate for the past erosion of the U.S. external position and offer the prospect of a strong position in the future. To achieve these results after years of deficit, the U.S. will require the reasonable prospect of some surplus in its basic external accounts for several years.

Achievement of a secure U.S. payments position presupposes an improved performance of the domestic economy. The President has taken such action. However, success plainly also requires the correction of certain elements which adversely affect U.S. international transactions. It is not proposed to deal here with the nature of the actions required but with the magnitude of the adjustment problem. For its part, the U.S., of course, remains determined to follow those domestic economic policies necessary to control inflation and make the economy more competitive. This paper is developed on that basis.

This paper does not deal with the future shape of the monetary system. No matter what the system, an improvement in the U.S. position along the lines described below will be necessary.

The Erosion of the U.S. Position

The deterioration of the U.S. external payments position is traced in the table on the following page./2/ The United States recorded persistent but not unmanageable balance-of-payments deficits throughout the 1960s. From 1960 through 1969, the net liquidity balance was in continuous deficit, averaging $3.1 billion per year. The official settlements balance was also in deficit during most of that period, averaging $1.1 billion per year. The deficit on current and long-term capital accounts (the basic balance) averaged $1.4 billion per year. A deterioration in the U.S.' basic position since 1964 is evident, with current and long-term capital accounts in deficit by $3 billion in 1970.

/2/The table is not printed.

The situation turned sharply worse in 1970 and 1971. By the first half of 1971, the deficit on current and long-term capital accounts rose to an annual rate of $8.6 billion. While temporary factors presumably contributed, these data confirm an eroding trend.

With continuing payments deficits, the United States reserve position has been severely and persistently weakened. Gross reserves have fallen from a high of $26.2 billion in 1949 to the present level of $12.2 billion and now stand at about 27 percent of estimated 1971 imports, well below other countries' average level of reserve holdings relative to trade. Furthermore, liquid liabilities have risen sharply, from $21 billion in 1960 to more than $60 billion; liabilities to official holders amount to more than $44 billion.

The erosion of the merchandise trade position has been a primary element in the unsatisfactory U.S. balance of payments in the past several years and the major source, directly or indirectly, of the recent deterioration in the basic balance. The trade balance has deteriorated by more than $8 billion in the seven years 1964-1971 and is now in deficit. In 1964, the U.S. had a trade surplus of $6-3/4 billion, which amounted to 1.1 percent of GNP. In the entire first half of 1971, the trade deficit was running at a seasonally adjusted annual rate of $1.5 billion.

As in the case of the overall balance of payments, the deterioration in the trade position has accelerated recently. Before the President's new program was announced, trade deficits were forecast by U.S. Government experts of about $2 billion for 1971 and $3.5 billion for 1972. The forecast deterioration from 1970 to 1971 was $4 billion, partly attributable to special factors and partly to cyclical factors. Nevertheless, quite apart from the cyclical influences, the U.S. merchandise trade position is experiencing a continuing trend deterioration of more than $1 billion annually. This trend has also been observed by the OECD Secretariat and the IMF.

Over the years, the deterioration in the U.S. trade position is most pronounced in trade with Japan, Canada, and the European Community, although the recent sharp deterioration has been more widespread. The following table traces the deterioration in the trade balance between 1964, when the U.S. trade surplus reached its peak, and 1970, and more recently, by area:

Change in U.S. Trade Balance
($ millions)


Between 1964 and 1970

Between 1970 and Second Quarter 1971 (Annual Rate)










Other W. Europe



Rest of World



The deterioration in the trade position has carried through into the balance on goods, services and private remittances. The contribution to an improved position from rising investment income receipts has been insufficient to overcome mounting outpayments resulting from the rapid growth of U.S. liabilities and high interest rate levels. The heavy burden of defense expenditures abroad has also served to offset potential improvements in the services accounts.

The long-term capital account was not a factor in the deterioration of the overall U.S. position until 1971, when uncertainty about exchange rates apparently had a large adverse effect. The net private long-term capital outflow declined from $4.5 billion in 1964, before comprehensive restraints on capital outflows came into effect, to $1.5 billion in 1970.

In 1964 the U.S. was a net supplier of long-term private capital to all areas of the world. Canada received $1.1 billion, Europe and Japan $2.2 billion and the rest of the world $1.2 billion. With capital restrictions, higher interest rates in the U.S., and a surge of investment in U.S. securities, this situation shifted sharply. From 1968 through 1970 the U.S. was a net importer of private long-term capital from the major industrial countries other than Canada, as follows:

Net Movements of Private Long-Term Capital
($ million)





5-year Average











U.K. and EC





Total, these areas





The Importance of Adjustment

The deficit in the U.S. balance of payments could not be allowed to continue: (a) It was leading to rapid depletion of U.S. reserve assets and the accumulation of an unstable mass of liquid liabilities. (b) Its nature and extent became so widely recognized as to generate speculation. (c) It led to an intensification of protectionist pressures within the U.S. (d) It intensified the difficulties in maintaining an appropriate share and level of both international assistance to less developed countries and responsibilities in the area of global military security. (e) It subjected the economic foundations of the international monetary system to recurrent shocks. (f) It is not compatible with a sustainable world payments equilibrium required for the fulfillment of mutually shared national objectives.

Because the deficit has been so large and has continued for so long, the solution of these problems now requires a complete and convincing elimination of the deficits; this cannot be achieved without aiming at some period of surplus in the U.S.' basic accounts. Sustained reductions of liquid liabilities would of course require significant surpluses continued for a period of several years.

The world financial community should recognize that a period of unquestioned strength in the U.S. external position is a necessary condition for a strong and stable financial system. Although a U.S. surplus would require temporary deficits (exclusive of SDR allocations) on the part of some countries which have experienced the surpluses which were the mirror image of past U.S. deficits, it should be fully compatible with the legitimate balance-of-payments aims of other nations.

The U.S. cannot be put in the position of running further deficits however reasonable its domestic performance, as a means of reconciling the goals of other countries. Such a result would be financially unsustainable.

The Extent of the Improvement Required to Meet U.S. Needs

In specific terms, the U.S. will need a balance-of-payments position which for some years assures, at a minimum: (a) at least a modest surplus in its basic accounts. Statistically, this is taken in this paper as a surplus of around $3 billion annually on current and long-term capital accounts, or less than $2 billion after allowing for errors and omissions./3/ (b) a surplus on goods, services and private remittances sufficient to finance a foreign aid program appropriate to the United States position and to accommodate foreign demands for U.S. long-term private capital in the absence of U.S. Governmental restraints. Thus, the U.S. requires a surplus on goods, services and private remittances of roughly $2 billion more than the net deficit on government grants and capital, direct investment and other private long-term investment and errors and omissions.

/3/A $3 billion surplus on basic balance would be equivalent to less than $2 billion after allowing for errors and omissions because the latter have shown a persistent deficit averaging well over $1 billion annually. This is believed to comprise in the main unidentified current and long-term capital transactions. [Footnote in the source text.]

Such a position allows for no net short-term capital outflows, and thus would approximate equilibrium on official settlements and only a modest reduction in official dollar balances. Thus, it appears a minimum target for the initial adjustment.

While a surplus on merchandise trade account is not necessary in theory, there is no prospect at this time, particularly with the current net expenditures on military transactions, that these requirements can be met unless the U.S. has a substantial merchandise trade surplus. Without a surplus on merchandise trade (and therefore in the U.S. current account) and an end to the trend deterioration in the trade balance, payments on foreign investments in the U.S., including interest on liquid liabilities, are likely to rise as much as the income from U.S. investments abroad, eliminating the likelihood of net improvement in the services accounts.

Before recently announced actions, the U.S. balance-of-payments position and prospects as appraised by U.S. Government experts internally were as follows:


($ billions)





Goods, services and private remittances




of which:




Merchandise trade




Government grants and long-term capital




Current and long-term capital account




The U.S. economy has not been operating at a high employment level. Adjusting for cyclical factors--estimating what the figures would be if the U.S. economy and those of all of its major trading partners were operating at levels of capacity consistent with domestic objectives--the U.S. payments position and prospects, prior to the recent actions, were as follows:/4/

/4/The OECD Secretariat, in CPE/WP3(71)13 suggests that adjustments in the U.S. balance-of-payments figures for 1970 to correct for cyclical factors should be somewhat larger than those used in the U.S. calculations. The Secretariat's cyclical adjustment for the goods, services and remittances balance in 1970 is about $1 billion larger than the U.S. figure, largely because the U.S. estimate provides for a downward adjustment of extraordinarily high interest payments in that year. (The figures for this balance used by the U.S. and the Secretariat also differ because the U.S. includes U.S. Government pension payments whereas the Secretariat does not.) [Footnote in the source text.]

($ billions)





Goods, services and private remittances


-2-1/2 to -3


of which:




Merchandise trade


-3-1/2 to -4


Grants and long-term capital




Current and long-term capital account


-7-1/2 to -8


Normal errors and omissions








The foregoing suggests that the U.S., taking account of no adverse trend beyond 1972, needs an improvement in its current and long-term capital account in 1972 of $13 billion to achieve a minimal surplus in its basic accounts (and therefore assured equilibrium in its official settlements accounts) for a period of years. A measure of improvement based on the actual U.S. position in 1970 or even on the cyclically adjusted position in that year would not be adequate. It would not take account of the very serious trend deterioration in the underlying position which must be expected to continue until a fundamental correction is achieved.

If the improvement required to meet U.S. objectives were to be brought about through exchange rate action and U.S. domestic measures or through trade measures, the improvement would have to be found predominantly in the merchandise trade account. Although the dollar income from foreign investment could be expected to rise and travel expenditures might decline somewhat with an exchange rate realignment, the increased dollar equivalent of foreign currency costs of U.S. military expenditures abroad together with increased shipping costs would be likely to offset much of these improvements. The only foreseeable means of reducing to some extent the required adjustment in trade would be a modification of arrangements for financing U.S. military expenditures in NATO countries or in Japan.

An improvement of $13 billion in the U.S. merchandise trade position from the cyclically adjusted deficit projected for 1972 would mean a surplus of only $8 billion. Such a surplus would be little more than the surplus which the U.S. had in 1964 ($6.8 billion) when the total volume of world trade and production was much lower. Prior to recent developments, Germany and Japan were expected to have trade surpluses of around $6 billion in 1971. It would also be much less in relation to U.S. GNP--less than 0.65 percent--than the surpluses which many other countries have been running, none of which has anything approaching U.S. responsibilities for defense nor a role as a major private capital supplier for LDC's and others. In 1970, for example, Germany had a trade surplus in excess of 3 percent and Japan one in excess of 2 percent.

The $6 billion allowance made in the above calculations for net private capital outflows and government aid amounts to about 1/2 of 1 percent of estimated high employment GNP (approximately $1.2 trillion for 1972). As a proportion of GNP, this would represent a substantial reduction from earlier years. In the 1960-1964 period, such flows averaged $5-3/4 billion annually or 1.04 percent of GNP; in the 1965-1970 period, with U.S. capital restraints programs in effect, they averaged $5-1/2 billion or 0.65 percent of GNP.

The net outflow on Government grants and capital is expected to rise, from $3.7 billion in 1970, to $3.8 billion in 1971, and $4.1 billion in 1972. If the net outflow on all long-term capital plus government grants is not to exceed $6 billion, net private long-term capital outflows cannot exceed $2 billion. That figure will have to allow for both private investment in developing countries and resort by international lending institutions to the U.S. capital market.

In recent years net flows of capital and government grants to LDC's have averaged over $5-1/2 billion annually. Increased borrowing on the U.S. capital market by international lending institutions is possible. Thus an expected net grants and long-term capital flow in the $6 billion range in 1972 represents essentially a flow to LDC's, without significant net capital outflows to industrial nations. In fact, a level of grants and long-term capital outflow of 1/2 percent of GNP--even though it all goes to LDC's--is likely to be subject to criticism as being grossly inadequate in comparison with 1 percent of GNP targets accepted by a number of other donor countries.

The improvement in the U.S. position to be achieved would thus be:

($ billions)




Goods, serv & remittances

Grants & long-term capital

Current & long-term capital

High employment position in 1972 expected in absence of corrective action





Position required for surplus of $3 billion on basic balance/*/





Improvement required





/*/Equivalent to less than $2 billion after allowing for E & O. Does not allow for short-term capital outflow.

The $13 billion estimate for the amount of improvement needed in the goods and services accounts in the U.S. views is a minimum, and may be conservative.

a. The full impact of changes in exchange rates is not felt immediately but only with a considerable lag. The full effects of any such change in 1971 would probably not be realized until 1973 or even beyond. If the trend deterioration in the U.S. position continued through 1972, an additional $1 billion or more would need to be added to the $13 billion figure for the improvement needed to produce the required surplus in 1973.

b. The assumption is optimistic that there will be no net outflow of long-term capital to industrial nations. The U.S. wishes to remove its temporary restraints on long-term capital outflows, and believes any long-term equilibrium must properly assume such removal. We cannot be certain that a change in exchange rates would so shift the attractiveness of the U.S. relative to other industrial countries as a site for investment in manufacturing industries that U.S. restraints on capital outflows (including the interest equalization tax) could be removed without resulting in substantial net flow of long-term capital from the U.S. to other industrialized countries, taken as a group. In particular no allowance is made for repayments of foreign debts incurred by U.S. corporations in financing foreign investments over the past few years when the capital controls program was in effect. Moreover, no allowance is made for future Canadian use of the New York capital market nor for any net use of this market by European borrowers. The U.S. has supplied an average of $1.2 billion per year net of private long-term capital to Canada. If this were to continue the U.S. would need a correspondingly larger goods and services surplus (unless long-term funds moved to the U.S. from the EC and Japan). The possibility that net long-term capital outflows are being underestimated is further supported by the fact that improvements in the goods and services balance have almost always been accompanied by substantial increases in net long-term capital outflows. Certainly to the extent that a new increase in exports may involve an increase in outstanding trade credits, an increase would be expected.

c. The estimates take no account of the adverse effects upon U.S. trade of the contemplated enlargement of the European Common Market or any preferential trade arrangements concluded or which may be concluded between the enlarged EC and other nations.

d. No allowance has been made for any offsetting measures or other actions by any other country, or for any automatic effects on foreign business activity and the related foreign import demand. It may be necessary to take measures which are strong enough to compensate for offsetting actions by or developments in other countries in order to achieve the desired improvement in the U.S. position.

e. In previous instances of extended disequilibrium, the normal expectation has been that, in moving for readjustment in exchange rates, countries properly err on the side of safety. A period of sizable surplus to repay debts or rebuild reserves is anticipated. This statement of requirements makes no such allowance.

Prudence would suggest that a swing in U.S. goods and services accounts significantly larger than $13 billion should take place to provide for the lags in effectiveness of measures, the possibility of continuing Canadian borrowing, some repayments of U.S. borrowing in Europe, and a margin of safety./5/

/5/On December 16 a longer, revised version of this paper was circulated in the Treasury Department by F. Lisle Widman, Director of the Office of Industrial Nations, who noted that the purpose of the paper was to meet inquiries from the public. (Washington National Records Center, Department of the Treasury, Office of the Assistant Secretary for International Affairs: FRC 56 76 108, US/3/005 Studies and Reports, Volume 9) Volcker was opposed to issuing the paper publicly. (Memorandum from Wilson E. Schmidt to Volcker, December 22, and letter from Volcker to Schmidt, December 28; ibid., US/3/006 Commentaries and Reports Volume 2)


77. Memorandum of Conversation/1/

Washington, September 10, 1971.

/1/Source: Washington National Records Center, Department of the Treasury, Secretary's Memos: FRC 56 74 17, Memcons 1971. Confidential. Drafted by Cates on September 13 and approved by Volcker. Copies were sent to Volcker, Petty, Willis, Schmidt, Dale, Meissner, and the Executive Secretary. The conversation was held in Secretary Connally's Dining Room.


Mikio Mizuta, Minister of Finance
Takashi Hosomi, Vice Minister for International Finance
Kanzo Tanigawa, Director General, Customs Bureau
Koichi Inamura, Director General, International Finance Bureau
Toyoo Gyoten, Special Assistant to Vice Minister of Finance for International Finance Bureau
Michio Kondo, Counselor (Financial), Embassy of Japan

United States
Secretary of the Treasury John Connally
Under Secretary for Monetary Affairs Paul Volcker
Assistant Secretary John Petty
Deputy Assistant Secretary William Cates

The Secretary began by stressing that although exchange rate changes will have to be worked out on a multilateral basis, it is imperative that substantial changes be made. Another point he wished to emphasize was that the textile matter, which had not received much attention during the EconCom meeting, was of the utmost importance./2/ The U.S. Government all the way up to the President is seriously concerned about the textile issue. Minister Mizuta asked if textiles would be discussed at the Rogers-Fukuda lunch./3/ Secretary Connally replied he did not know and that the last he heard was that it would not be but he believed that, diplomatic niceties aside, if problems exist between our two countries, they should be fully and frankly discussed.

/2/In a September 10 briefing memorandum to President Nixon regarding his 7:30 p.m. meeting with Foreign Minister Fukuda just before a dinner for participants in the ECONCOM meeting, Kissinger suggested that the President "express regret that the ECONCOM did not achieve more substantial results." Kissinger then mentioned two items of "overriding importance": substantial revaluation of the yen and Japanese import liberalization. He also suggested the President make clear to Fukuda that there must be agreement on textiles no later than October 15. (National Archives, Nixon Presidential Materials, NSC Files, Country Files--Far East, Box 536, Japan Volume V 7/71-9/71) No record of the President's conversation with Foreign Minister Fukuda was found. Regarding the ECONCOM meeting, see footnote 3, Document 75.

/3/Secretary Rogers hosted a luncheon for Foreign Minister Fukuda on September 10 beginning at 12:45 p.m. (Personal Papers of William P. Rogers, Appointment Books)

Secretary Connally suggested the smart thing for the U.S. and Japan to do would be to get off in a corner and agree on a trade arrangement between themselves and invite in other countries, including LDCs. Japan and the U.S. should trade for each other and not in competition. Minister Mizuta replied that in the long future he felt that Japan, the U.S., Canada, and Australia might well get together on the Pacific Basin concept. Secretary Connally pointed out that Europe was forming a trading bloc against the U.S. and Japan. These two countries should protect themselves. However, he posed one condition: that the U.S. get a head start of six months because otherwise we would never catch up with Japan. Mr. Volcker doubted that six months would suffice.

Minister Mizuta said that when Ambassador Meyer visited him two weeks ago he had told the Ambassador that this was his third stint at being Japan's Finance Minister. The first two times Japan was in balance of payment difficulties and the U.S. was very helpful. He is grateful for that help and is the only Japanese Finance Minister who has had that experience. Now he is aware that the U.S. is in difficulty and he is willing to cooperate in turn. The argument he raised yesterday over fundamental disequilibrium was perhaps misunderstood. He meant to say that the Japanese performance in the first two quarters of 1971 has been extraordinary due to cyclical conditions. Discounting this extraordinary performance and adding the yen float and the surcharge, he thinks that the Japanese surplus would be even smaller than the normal surplus Japan should expect.

Secretary Connally replied that Minister Mizuta has had more than his fair share of bad luck in being Finance Minister three different times--once is plenty.

Secretary Connally wished to emphasize that regardless of U.S. attitudes in the past the time has come when we must seek correction for our balance of payments difficulties. While we understand Japanese political difficulties and the problems of the party and personalities governing Japan, we hope that Japan and other countries will recognize our problem and will help us now as we helped in the past. It is only fair to say, Secretary Connally went on, without in any way meaning to be threatening, once the President understood the problem and made his decision other countries would be very mistaken to assume that we are not determined to solve our problem. We have seen the U.S. trade account deteriorate steadily from 1964 to 1971. This has been a strong and lasting trend and is a serious warning to the U.S. Secretary Connally added that he, and in his opinion the President, are convinced that we cannot solve this problem with monetary or fiscal policy or exchange rate changes alone. Trade barriers including tariffs, internal taxes, non-tariff barriers, export subsidies, etc. of other nations were tolerated in the past by the U.S. because our position was so strong that we could afford to be tolerant. Now it is time for an appraisal of tariff and non-tariff barriers all around the world.

The Secretary said that he was not singling out Japan, but cited Japanese forecasts of a $12 billion trade surplus in 1975. There are other countries with whom we have similar difficulties--in particular Canada, whose automobile industry we helped set up and which now provides incentives for the Michelin Tire Company to come to Canada to make tires for the U.S. market. The Canadians are going to have to help us too.

The Secretary added that we are aware that thus far there is some question in the minds of governments around the world as to whether the U.S. is really serious in its determination to solve its balance of payments problem. There should be no question. The President is very concerned and completely determined to solve the problem. If other nations do not come to realize this, there will be great difficulties for all of us.

Minister Mizuta replied that, as Fukuda had said yesterday, we are fully aware of the implication behind the President's new economic policy and we are also aware that internal measures--fiscal and monetary--are not enough to solve the U.S. problem. The Japanese are ready to cooperate, but Minister Mizuta is not confident that the current favorable balance of payments for Japan will last another three years. He pointed out that Japan has historically had a balance of payments deficit and that the capital structure and income levels in Japan remain low. If the yen were as strong as others think, the announcement of the President's new policy would not have had such an unsettling effect in Japan. The stock market decline and general concern indicate that Japan is indeed vulnerable.

Minister Mizuta, however, added that he is pleased to be Finance Minister this time around because for the first time he is able freely to spend money in an effort to stimulate the Japanese economy. Minister Mizuta reiterated that Japan was willing to share the burden in an international cooperation effort but re-emphasized that he is not optimistic about Japan's balance of payments.

Secretary Connally said that the problems between the U.S. and Japan could be divisible into three areas: one, the cost of defense; two, trade restrictions; and three, exchange rates. The first two of these are best handled by bilateral negotiations between our two countries, while the third should be worked out in a multilateral context. Secretary Connally added, however, that Minister Mizuta could be very helpful in the latter area by making it clear to other countries that the U.S. problem is serious and that we are determined to solve it. No other Finance Ministers have had the opportunity for such a thorough exposure to the U.S. position as had occurred during this Ministerial meeting. Finally, the Secretary asked the Japanese Government to do some thinking about where we go from here. He pointed out that Common Market developments would change world trading patterns and that we and the Japanese should do some thinking about these developments.

In summary, Secretary Connally said that the U.S. and Japan should set about now to reconcile their first two problems (defense and trade barriers) in a bilateral framework, while the third (exchange rates) should be dealt with in a multilateral context in a different time frame.

Minister Mizuta said that his impression of the recent G-10 Deputies meeting was that the EC is not in much of a hurry to settle things. While the Minister is prepared to speak out for international cooperation, he hoped that the present uncertainty could be removed as soon as possible. What would be the American position at the G-10 Ministers meeting regarding the surcharge, the price of gold, a de facto devaluation?

Secretary Connally replied that although he would be talking to the President he did not expect to have a proposal for the G-10 meeting./4/ The U.S. is reluctant to table any proposal, for one good reason that other nations always complain that we are telling them how to run their business. Other countries kept saying that the U.S. should do something. Now we have done what we could to solve our problem and it is up to the others to cooperate. If we were to make any proposal, within 24 hours every nation in the world would denounce it and us.

/4/The G-10 met in London September 15-16; see Document 78.

Minister Mizuta pointed out that each country has its own domestic political problems and that while the U.S. is asking others to cooperate, from the point of view of other countries, it is important for the U.S. to pave the way. If a general realignment of currency parities is made in such a way that one country's parity remains unchanged while all others must change, this makes political decisions very difficult for the others. Therefore, all countries' parities should change. This is a contribution which the Secretary could make at the G-10 meeting.

Secretary Connally replied that realignment of exchange rates is actually only the second priority. Trade restrictions, tariffs, non-tariff barriers which discriminate against American products are the first priority. The yen-dollar parity has nothing to do with the freedom of an American to own 100 percent of a company in Japan nor with the freedom to export to Japan. The Secretary added that he was in no hurry to fix exchange rates until the basic problem was solved because any country could change its exchange rate--against the dollar--three weeks later.

Minister Mizuta said that his reference to realignment as the first priority was based on Secretary Rogers' opening statement at the EconCom 8. Secretary Connally replied that one should not believe what one reads in the public press.

Minister Mizuta said that he understood the U.S. argument about the removal of trade barriers but nevertheless realignment would also be important. Other countries in his opinion were seriously considering this. Secretary Connally reiterated that we do not want to tell other countries what to do. He mentioned the question of grants vs. loans and said that he could tell the Japanese that they should make more of their aid in the form of grants but he wasn't so sure the Japanese weren't right and that the U.S. shouldn't tie its own aid. But in any case although the Secretary could dictate a solution to the balance of payments problems of Japan, Korea, Canada, and every other country, the result would be a world uproar. It is, therefore, up to the other countries to come forward with ideas to solve the problem. In the meantime, the dollar, the yen, and the DM are all floating so we can live for a while until every nation has a chance to evaluate its own position. We are not going to push for anything at the upcoming

G-10 meeting. Minister Mizuta replied that though the Secretary had said that the U.S. economy is sick, the sick man is still very strong. He could prescribe the cure but he doubted the sick man would accept the prescription (laughter). Secretary Connally replied that the Minister was right. We probably wouldn't accept it: Japanese prescriptions have usually been in terms of what is good for Japan and we need something that will be good for the U.S.

Minister Mizuta thanked Secretary Connally for the Secretary's excellent explanation of the U.S. position and promised that in international meetings Japan would participate in a spirit of cooperation with the U.S. He looks forward to further exchanges like this.

Secretary Connally agreed that the present was a very good opportunity for himself and the Minister and their staffs to see more of one another. With the growth in power of Russia, China, and the EC, the Secretary expects that the U.S. and Japan will inevitably be pushed closer together.

William C. Cates


78. Editorial Note

The G-10 Ministers met in London September 15-16, 1971. In his prepared remarks Secretary Connally recognized the difficulties in achieving the $13 billion turnaround in the U.S. current account, but took strong exception to those who thought the U.S. goal overly ambitious. He said it was "important," it was "essential," it was "absolutely essential, that a formula be developed in the very near future that would anticipate that the balance of payments would be corrected in a relatively short period of time." Connally's statement, along with those of other Ministers and Governors of the G-10, are in the Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, 1971, VG/LIM/71-35.

Connally went on to say that he knew the G-10's purpose was to consider problems "strictly monetary in character" and that he did not want to inject items into the discussion that were not soluble in the

G-10, but he thought the G-10 ought to concern itself with other problems that at least were soluble in the Councils of the nations that the

G-10 represented. Connally mentioned two: restrictive trade practices and the need to promote free trade and a fair and equitable trading system and defense burdensharing. Concerning the latter, Connally noted that the United States devoted 8.9 percent of its GNP and 36 percent of its budget to defense, and no other industrial nation came close to those magnitudes. Connally asserted this should be discussed and considered as part of the overall realignments that were coming.

Separately, but related to defense burdensharing, National Security Decision Memorandum 133 on "U.S. Strategy and Forces for NATO: Allied Force Improvements" was sent by Henry Kissinger to the Secretaries of State and Defense on September 21. Kissinger noted that the President had decided the NATO Allies should be asked to commit a minimum of $2 billion during the next 5 years, in addition to the commitments already planned under the European Defense Improvement Program (EDIP), to correct deficiencies in NATO's immediate combat capability. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 289, Treasury Volume II 1971)


79. Memorandum From the President's Assistant for International Economic Affairs (Peterson) to the Members of the Council on International Economic Policy/1/

Washington, September 28, 1971.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218, CIEP. Secret. Attached to an October 5 memorandum from Hormats to Kissinger summarizing the memorandum.

The Secretary of State
The Secretary of Treasury
The Secretary of Defense
The Secretary of Agriculture
The Secretary of Commerce
The Secretary of Labor
The Ambassador-at-Large David M. Kennedy
The Director, Office of Management & Budget
The Chairman, Council of Economic Advisers
The Special Representative for Trade Negotiations
The Assistant to the President for Domestic Affairs
The Assistant to the President for National Security Affairs

Council Work Program

The President has directed the implementation of the detailed work program for the Council on International Economic Policy, as reviewed at the September 7, 1971, CIEP meeting./2/

/2/Members of the CIEP were invited to the September 7 meeting under cover of an August 30 memorandum from Peterson informing them its purpose was to review the current status of the CIEP's work program and to discuss priorities for the future. (Ibid.) The President chaired the meeting from 8:33 to 10:35 a.m. on September 7. (Ibid., White House Central Files, President's Daily Diary) Attendees included Rogers, Samuels, Connally, Volcker, Laird, Hardin, Stans, Hodgson, Kennedy, Shultz, McCracken, Gilbert, Ehrlichman, Haig for Kissinger, Peterson, Allen, Hinton, Webster, and Hormats. See also Document 174.

Within the next few days, we will be sending you a CIEP Study Memorandum with terms of reference of each project.

Timing of Legislative Proposals

Until significant progress is made on exchange rate realignment and negotiations related to the removal of the surtax, it may not be appropriate to submit important foreign economic and trade legislation. Presently, there is great uncertainty as to how long these negotiations will take. We are to work on the assumption that we should have in the President's hand a comprehensive outline of positive legislative recommendations by year end. Also, we should have defensive or contingency legislative plans in case the Labor Union's programs make major progress in Congress. Another consideration in this timing is the State of the Union Message. We are to assume further that the question of America's position in the world economy will continue to be sufficiently important to warrant emphasis in that message. For these reasons, we are directed to adhere to the schedules as outlined in the work projects.

Work Program--Major Elements

1. Planning a series of major bilateral negotiating initiatives--Japan (already completed), Canada, and EC--as well as multilateral initiatives at the OECD, GATT, and UNCTAD.

2. Defining specific policies and programs on foreign investment policy (particularly technology transfer, expropriation, multinational corporations and stimulating foreign investment in the U.S.).

3. Major programs on adjustment assistance for impacted industries.

4. Intensified export promotion program (incentives, financing, East-West trade, trading companies, antitrust, etc.).

5. Trade legislation contingency plan (labor unions are pushing ahead vigorously).

6. U.S. competitiveness, growth and productivity in the 70s. (Attached are copies of the charts used during our Council meeting to refresh your memories on the specifics.)/3/ It turns out these programs are essentially domestic in nature since, without a strong domestic economy, it will be very difficult to have a strong, outward-looking foreign economic policy. This also emphasizes the importance of emphasizing concern with job effects of our programs, since concern over loss of jobs due to imports and foreign investments is obviously an increasingly important issue. On most of these points, the Council's role will be to define and stimulate rather than to implement. Thus, we have and will continue to work very closely with the Domestic Council on most of these projects.

/3/Several lists of items related to this topic are attached (none printed) but no charts were found.

a. Enhancing U.S. industrial technological position. (This is nearly ready for Presidential review.)

b. Antitrust--(John Ehrlichman has work well along on this, though we have inputs to make on the international competitiveness aspects).

c. Long-term energy and raw material position, including technological development of raw material substitutes.

d. One hundred million jobs by the end of the next ten years--(U.S. manpower and educational policies).

e. Projecting the future development of U.S. economy in this decade--including the kind of industrial manufacturing and employment base the U.S. is likely to have (in basic sectors--steel, automobiles, electronics, etc.), the U.S. wants to have, and what price we are willing to pay for it.

Other Programs

7. These include such subjects as the development of improved government information systems on international economic performance, and improved organizational structure.

Outside Consultants

8. Because of the importance and complexity of these subjects, and the unique value of outside experience and inputs on most of them, the President has asked that a special effort be made to attract the best outside talent from business and universities to work on the various projects. We request that, prior to naming any specific consultant, a list of proposed consultants be sent to my office.

There is of course opportunity provided for the working groups to suggest additional terms of reference for each project, as well as to suggest specific priorities for the projects.

I would appreciate your assigning your best people to this effort and emphasizing the importance of meeting these deadlines. With the President's initiatives of August 15, we may well be in a unique position to put forward a positive foreign economic legislative program, something that seemed very unlikely even a few months ago.

Peter G. Peterson


80. Editorial Note

On October 18, 1971, Peter G. Peterson sent CIEP Study Memorandum 14 to the Secretaries of State, Treasury, Commerce, and Labor; the Attorney General; the President's Assistant for National Security Affairs; the CEA Chairman; the OMB Director; the President's Assistant for Domestic Affairs; and the Federal Reserve Chairman informing them the President had requested a comprehensive study of the issues involved in inward and outward international direct investment, and recommendations for U.S. policy. Peterson noted that Secretary Connally had made Wilson Schmidt available to chair a special, interagency task force to work on the issue. (Department of State, S/S Files: Lot 82 D 126, Box, 5195, CIEP Study Memoranda)

The Task Force's first order of business was to "identify those issues or questions which require further study or more sharply focused responses." Peterson suggested four major topics: A. Trade and Investment in the U.S. Balance of Payments; B. Multinational Corporations; C. Investment Issues in Foreign Relations; and D. Foreign Investment and the U.S. Economy. The Chairman was to issue biweekly progress reports and the final Task Force report was due on December 15, 1971.

Foreign direct investment had a central role in the Nixon administration's foreign assistance/economic development policy and an Expropriation Policy Statement was issued in January 1972, but no evidence of comprehensive work on foreign direct investment issues as envisaged in CIEPSM 14 was found. For documentation, see Foreign Relations, 1969-1976, volume IV.


81. Telegram From the Mission to the OECD to the Department of State/1/

Paris, October 20, 1971, 1617Z.

/1/Source: Washington National Records Center, Department of the Treasury, Office of International Monetary Affairs: FRC 56 77 68, Briefing Books, 1970-1975, EPC Meeting 11/18-19/71. Limited Official Use. Repeated to Ankara, Athens, Bern, Bonn, Brussels, Copenhagen, Dublin, The Hague, Helsinki, Lisbon, London, Luxembourg, Madrid, Oslo, Ottawa, Reykjavik, Stockholm, Tokyo, and USEC.

17682. Subject: WP-3 Meeting October 18-19.

1. WP-3 discussion of required balance of payments adjustments was recognized by all as prelude to exchange rate negotiations. Thus members protected their positions with zeal which resulted in wide discrepancies and inconsistencies in estimates of total adjustment required and in allocation of shares to individual countries.

2. Need for $13 billion turn-around in U.S. position/2/ (and corresponding adjustment by other OECD countries) was disputed by others on variety of grounds:

/2/See Documents 76 and 78.

A. That U.S. projection of $4 billion C/A cyclically adjusted deficit in 1972 was too high; did not appropriately judge 1971 situation; was based on extrapolation of existing trends without  sufficient account of self-correcting factors,

B. That might not be necessary to assume total OECD surplus limited at $11 billion,

C. That other OECD countries would not willingly accept situation whereby U.S. would have C/A surplus of $9 billion out of total OECD surplus of $11 billion,

D. That U.S. surplus of $9 billion was excessive in terms of GNP,

E. That policies needed to be considered to reduce net U.S. long-term capital outflow to contribute to solution,

F. That in calmer international situation, and appropriate U.S. monetary policy, portion of turnaround would be covered by return flows of funds, and by normal demand for dollars by dollar area countries and others,

G. That while small countries needed surpluses to protect currency, situation was different for large country with long-term deficit whose currency not presently convertible,

H. That SDR allocations might cover part of gap,

I. That account not taken of likely change in competitiveness resulting from improving relative price-wage performance of U.S.

3. These points were answered by U.S. and to some extent by Chairman and others./3/ U.S. pointed out reasons why $13 billion turnaround was conservative estimate; noted IMF estimate of starting point close to U.S. estimate of $4 billion deficit for 1972; that aim of $9 billion C/A surplus was for transitional period and not forever; that proposed U.S. share of total OECD C/A surplus was no higher than in the mid-60's; that return flows of funds and increased demand for dollars could not cover adjustment gap since there would be no such flow in absence of convincing elimination of U.S. deficit and in any event would be needed for financing of deficit in interval before impact of rate adjustment was fully felt; that our estimates took full account of expected strengthening of U.S. competitiveness; that no reason to assume every WP-3 member needed the same size surplus relative to GNP; that we looked toward situation of market equilibrium which required less rather than more reliance on capital restrictions. In response to suggestions by some delegates that "interim financing" might be available to ease U.S. transition during adjustment period, U.S. responded that we wanted to cover deficit by reversal of trade position rather than interim financing; i.e., "trade not aid."

/3/Under Secretary Volcker was head of the U.S. Delegation. Emminger was the WP-3 Chairman. Emminger's November 10 report on the October 18-19 WP-3 meeting is in the Washington National Records Center, Department of the Treasury, Office of International Monetary Affairs: FRC 56 77 68, Briefing Books, 1970-1975, EPC Meeting 11/18-19/1971.

4. On discussion of other countries "aims" and allocation of "required adjustment":

A. Germany accepted Secretariat allocation (which called for $1-1/4 billion adjustment by Germany) conditioned on acceptance of Secretariat figures by all,

B. Japan estimated adjustment need in range of zero to $1-1/2 billion (compared with Secretariat estimate of $3-1/4 billion),

C. Canada estimated adjustment need of zero (compared with Secretariat $1/2 billion),

D. Switzerland estimated adjustment need of $1/2 billion, which it said was covered by recent revaluation,

E. Italy estimated adjustment need of zero (compared with Secretariat $3/4 billion) and IMF zero, conditional on acceptance of OECD figures by all others. Otherwise Italians wanted improvement in their position of $.3 billion,

F. Netherlands agreed with Secretariat estimate of zero adjustment need,

G. France and U.K. estimated adjustment need in opposite direction, i.e., they wanted to increase their C/A surpluses (by about $1 billion together, according to Secretariat) whereas Secretariat called for $3/4 billion reduction in surplus for France and zero for U.K.,

H. Belgians appeared to acknowledge no need for adjustment (compared with Secretariat estimate $.6 billion) although statement not entirely clear.

6. In sum, others in total estimated adjustment need of only $3-1/4 billion before reducing that amount by $1 billion to cover France and U.K. estimates. (Secretariat estimated adjustment of $1/2 billion by small OECD countries not represented.) This meant discrepancy of almost $11 billion from U.S. estimate of $13 billion. Total estimates surplus of all OECD countries cyclically adjusted 1972 added to $5-1/2 billion total of targets added to $16-1/2 billion.

7. Revelation of such extreme differences made it clear to all that it was pointless to try to reach agreement on a set of numbers.

8. U.S. pointed out very hard to rationalize discussions with facts in real world; cited articles in papers about large Japanese and Canadian trade surpluses; noted countries apparently trying to use C/A surplus to stimulate domestic growth and expecting U.S. to absorb the unemployment consequences; said no question of dollar gold price arising since number of other OECD countries apparently wanted to devalue their currencies, and apparently U.S. could best help in their view by running deficit.

9. Several delegates (Sweden, Canada, U.K., etc.) and Chairman said results not surprising in view of fact that delegates were deputies, not ministers, and purpose was not to negotiate but to clarify issues. Could not expect agreement on figures at time exchange rate negotiations starting, and meeting had served useful purpose in better understanding of issues and each country's position.

10. Secretariat distributed projections of growth rates for major countries in 1st half 1971 which indicated adjustment could begin in context expanding economies. Conclusions, while not formally accepted, were warmly welcomed and given special emphasis by Emminger in subsequent press conference.

11. Secretariat pressed for experts meeting for further examination of estimates. Although U.S. indicated readiness have multilateral or bilateral review, others showed amusing reluctance to submit to technical examination of their calculations and proposal was dropped.


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