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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 158-174

158. Memorandum From Secretary of the Treasury Connally to President Nixon/1/

Washington, June 8, 1971.

/1/Source: Washington National Records Center, Department of the Treasury, Records of Secretary Shultz: FRC 56 80 1, JBC-Memoranda From the White House 71. Attached to a June 8 note from Peterson to Connally regarding McCracken's June 2 memorandum to the President (Document 157). Peterson reminded Connally that "a couple of weeks ago" they had discussed the Council's role in international monetary reform. Peterson noted that he and Connally "agreed that I would prepare a study memo in draft form that would suggest a broader frame of reference than just monetary--to include discussion of the causes of the persistent problem and a projection of the future balance of payments situation--including defense, trade balances, etc. The monetary approaches would also have to be included as one part of this but I see it in this broader context and something that you approve in advance. I hope to have a draft in your hands next week." No such paper was found. Also attached to Peterson's June 8 note to Connally is Connally's June 9 memorandum to Huntsman (see footnote 4, Document 159), Huntsman's June 8 memorandum to Connally (Document 159), and McCracken's June 2 memorandum to the President (Document 157).

A memorandum addressed to you by Paul McCracken on June 2 on international monetary reform has just come to my attention./2/ I must take vigorous personal exception to its premises and conclusions.

/2/Document 157.

The simple fact is that, given our present international economic and financial position, some monetary disturbances--which the press will label "crises"--are virtually inevitable. The test is whether these can be met without impairing our basic domestic (or international) objectives.

Far from "muddling through" the recent disturbance, I believe these essential objectives were maintained:

(1) Quite deliberately, we avoided a strong reaction. By maintaining, insofar as possible, the focus in Europe, we helped deflate concern over a "dollar crisis." Pressures for strong domestic action, either with respect to higher interest rates or strongly intensified controls (or both) never built up.

(2) International sentiment was calmed fairly quickly and effectively in the circumstances.

(3) By making the point that the "crisis" grew most immediately out of domestic German political and economic concerns, we helped limit the repercussions on the dollar and set the stage for maintaining the IMF's role in exercising surveillance over exchange rate practices. The latter seems to be Mr. McCracken's principal objective.

(4) Finally, and not least important, a basic spirit of cooperation has been maintained. Thus we retain a base for dealing promptly with two major problems:

(a) Achieving more influence over the Eurodollar market and short-term capital flows generally.

(b) Reaching a consensus on methods of attaining some needed flexibility in the exchange rate structure, without simply falling into the trap of "everyone for himself."

Changes in our present international economic and financial position must be achieved without--and this is the key--undermining confidence in the dollar and the general stability of the monetary system. Should we fail, forces of economic nationalism and isolation in one country after the other--including the United States--could become unmanageable.

I do not underestimate the extent to which the problems are complicated by differing views among economists and businessmen, and among countries. In particular, I believe we must realize there is a strong element of thinking within Europe that would take advantage of weakness or clumsiness on our part to promote the Common Market not as a partner but as a rival economic bloc, competing vigorously with the dollar and reducing or shutting out, as best it can, U.S. economic influence from a considerable portion of the world.

These threats to monetary and economic order will require action in a wide variety of areas. Most important is success in dealing with inflation and growth at home. In the vital areas of trade, aid, and a better sharing of defense costs, where a clear focus for Government policy-making has been absent, the Council on International Economic Policy obviously has a lead role.

 But one distinction should be clear. As I have understood it, the genesis of CIEP did not lie in an idea it could or should take over the role of responsible operating agencies. In the international monetary area, that role, by law and tradition, lies under your direction with the Treasury, which, in turn, must operate in close coordination with the Federal Reserve.

Specifically, I fail to see the merit in convening CIEP to "reassert" in general terms a position with respect to exchange rate flexibility that only a few days ago I reiterated in Munich./3/ In view of recent developments, it is hard for me to see how informed observers could think the flexibility issue is dead. But its specifics do involve difficult tactical as well as substantive questions upon which important countries are not agreed. These questions are under active review within the Treasury and in the Volcker Group.

/3/Reference is to Connally's address to the Annual Meeting of the American Bankers Association in Munich on May 28; see Document 155.

Obviously, relevant CIEP agencies and Peter Peterson are being and will be kept informed--they are, indeed, participating. But I do not think it useful or productive to convene a CIEP meeting for the purpose of issuing a broad public statement reaffirming what everyone already knows but leaving unanswered all those difficult questions of substance and tactics that are the heart of the matter at present.

My understanding has been that you believe it is appropriate and desirable to continue to proceed in this area in the manner I have outlined. If this understanding is not correct, I assume you will so advise me.

John B. Connally/4/

/4/Printed from a copy that indicates Connally signed the original.


159. Memorandum From Jon Huntsman of the White House Staff to Secretary of the Treasury Connally/1/

Washington, June 8, 1971.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218, Council on International Economic Policy. Confidential; Eyes Only. A copy was sent to Peter Peterson.

International Monetary Reform Memorandum submitted to the President June 2, 1971 by Paul W. McCracken

Memoranda from both the President/2/ and you/3/ crossed my office desk today relative to the above subject. In order to make you fully aware of the President's views on the subject I am noting below the comments he made after reading the McCracken paper. You may, after reviewing them, want to alter your memorandum. Then again, you may not. I will hold it here in my confidential file until I hear from you regarding disposition./4/

/2/Reference is to the President's marginal comments on McCracken's June 2 memorandum; see Document 157 and footnote 1 thereto.

/3/Document 158.

/4/In a June 9 memorandum to Huntsman, Connally expressed his appreciation for being informed of the President's reactions to McCracken's memorandum and requested that Huntsman forward his June 8 memorandum to the President. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218, Council on International Economic Policy) Huntsman forwarded Connally's memorandum to the President under cover of a June 10 memorandum, which reminded the President of his handwritten "notations and directives" on McCracken's memorandum and informed him that Connally was "well aware of your reaction to the McCracken memorandum" and had requested that his memorandum go forward. (Ibid.)

Specifically, the President requested that you consult with Paul McCracken, Arthur Burns, George Shultz, Peter Peterson and your own experts. . . . then give him a "recommendation for action." The President further suggested that we "move on the problem, " not "just wait for it to hit us again--e.g. in the fall of '72."

He noted particularly the last paragraph of page 2--the part which recommends that he convene the Council on International Economic Policy to reassert our position in favor of an updating of IMF rules. His (the President's) comments were: "No--this is too large a group with too many people who talk a lot about subjects they know little about".

The President went on to say, in writing, "The Connally 1-man responsibility route is the best. This is an area in which he should be the lead man. Peterson, of course, should be consulted."

I am taking the liberty of sending Mr. Peterson a copy of this memorandum and would suggest that you contact him directly regarding the matter.

Thank you.

Jon M. Huntsman


160. Memorandum From Ernest Johnston of the National Security Council Staff to the President's Assistant for National Security Affairs (Kissinger)/1/

Washington, June 23, 1971.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218, Council on International Economic Policy. Confidential.

International Monetary Reform

Attached at Tab III is an exchange of correspondence involving Paul McCracken, Secretary Connally, Jon Huntsman and the President on the question of international monetary reform./2/

/2/Tab III, not printed, is a June 10 memorandum from Huntsman to President Nixon with Tabs A-D; see footnotes 3-5 below.

 Paul McCracken wrote to the President on June 2 (Tab A) that we have just "muddled through" another international monetary crisis./3/ He recommended that we move immediately in the IMF toward exchange rate flexibility and suggested that we work out a position in the CIEP. On June 8 Connally commented to the President on McCracken's memorandum (Tab D)./4/ Connally defended U.S. reactions to the crisis, stated that we had come out quite well, and argued that there should be no such review in the CIEP.

/3/Document 157.

/4/Document 158.

(The two memoranda bear out the usual positions on this issue: CEA using all occasions to press flexibility, Connally defending the status quo.)

The President (Tab B) rejected McCracken's proposal that action be given to the CIEP, but suggesting that we "move on the problem", not "just wait for it to hit us again, e.g. in the fall of '72."/5/ He requested that Connally consult with McCracken, Burns, Shultz and Peterson, and give him a recommendation for action. Responsibility is to lie with Connally. Unfortunately the President did not recommend that Connally confer with you or Secretary Rogers, so that the foreign policy community has been omitted from the exercise./6/ This raises a major problem, since any new U. S. action in this field--including no action--will have major consequences for overall U.S. foreign policy.

/5/See Document 159.

/6/Kissinger's handwritten note at the top of the page reads: "All of this (illegible word) be handled informally. State, Peterson and I should be involved."

If we are to change the current system or respond to crises in new fashions, there are several paths we could follow:

1. An economic solution could lie in "benign neglect" of our balance of payments problems, as George Shultz maintained./7/ This, however, would thoroughly anger the Europeans and might be the cause of a general run on our gold stock, forcing us to close the gold window and initiate a U.S. float in the midst of serious international ill-will. It would clearly spill over into our political relations.

/7/Not further identified.

2. We could institute even tighter capital controls and perhaps institute trade controls, which I suspect might be Secretary Connally' s preference--it was the preference of the last Administration. Tough capital controls might be welcomed in at least some quarters abroad, but not in most, and trade controls would cause serious international repercussions--in the current political climate, they could decisively tip the scales in favor of protectionist pressures and trigger major trade war.

3. A doubling or tripling of the dollar price of gold, toward which Arthur Burns has in the past inclined, is one response to a crisis, though it would be ineffective over any length of time and would be very damaging to those countries (such as Germany) which at our urging have held large quantities of dollars. Their governments would suffer sharp criticism from a U.S. policy that doubled or tripled the dollar value of the reserves of the gold countries, while the value of their own reserves remained stable.

4. The best solution from the foreign policy standpoint is continued slow progress toward greater exchange rate flexibility, as pushed by McCracken. This is the most probable outcome and one we could expect if the more eccentric positions of the advisers cancel each other out, but the consequences are too serious to neglect should this not prove the result.

Fred Bergsten feels strongly that you, and perhaps the Secretary of State, should be involved in any recommendations on this issue so that the foreign policy consequences are given due weight. I agree with Fred. My own time here is very short; but Fred's replacement should have the opportunity to comment to you, and you to the President, on any Connally recommendation./8/

/8/Johnston, a career Foreign Service officer, was completing a tour at the NSC and was about to be reassigned. Bergsten moved to the Brookings Institution during this time, and Hormats, who had joined the NSC Staff in 1969, assumed his responsibilities.

You may wish to raise this with the President verbally; if not, I have included a memorandum plus a notification to Connally, if you wish to handle it that way, though it is of course delicate bureaucratically.

The memorandum for the President requests that Connally seek your comments before presenting his recommendations. This is an awkward procedure for it means that you would be one of a number of persons whose views would be included in Connally's memorandum. However, since Secretary Connally seems to have made arrangements to send his memoranda to the President without internal White House staffing, this seems the only way to make sure you are involved./9/

/9/Johnston's memorandum and its attachments were attached to an August 2 memorandum from Jon Howe to General Haig that reads: "Per your instructions, I talked to Jon Huntsman who assured me that he would provide to both Peterson and HAK staffs any memoranda received from Secretary Connally concerning international monetary reform or related subjects."


/10/There is no indication of Kissinger's approval or disapproval of the recommendations and the memoranda at Tabs I and II, not printed, are unsigned.

1. That you seek the President's concurrence in requesting that Connally seek your views before presenting recommendations to the President on international monetary reform. (You may wish to use the memorandum at Tab I.)

2. That, subsequently, you inform Secretary Connally of the President's decision. (You may wish to use the memorandum at Tab II.)


161. Memorandum From the Assistant Director of the Office of Management and Budget (Schlesinger) to the President's Assistant for International Economic Affairs (Peterson)/1/

Washington, July 20, 1971.

/1/Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, CIEP. No classification marking.

Hidden in the minds of economists are certain presuppositions from the theory of international trade--inclusive of obsolescent elements--which many of us carry about as relics of our graduate student days. The basic premise is the existence of self-equilibrating mechanisms bringing appropriate adjustments of trade and payments--and operating without fail on all nations. (There should be no exception, at least among nations that adhere to the rules of the game.) Flowing from this premise are entrancing visions of adjustments achieved through smoothly-functioning monetary and price mechanisms. The vision is commendable; the departure from reality is substantial; so that the overall impression approaches "the dreamland of equilibrium" as Arthur Burns phrased it in another connection./2/

/2/Not further identified.

The processes of adjustment, whether price-level or exchange rate, are based on the presumed willingness of all major trading nations to adhere to the rules of the game. Earlier theorists did not envision the range of measures available to put off the required day of adjustment. No nation, guilty of deviant behavior, would have a major share of trade or of capital flows. If necessary, enlightened self interest would elicit the appropriate degree of game-plan behavior. A situation such as the present in which one nation, the United States, serves as international banker and upholds a system of relatively fixed exchange rates on which it has virtually no direct influence was not envisaged.

In one sense, the older attitude was enshrined in the Bretton Woods agreement. The notion of "fundamental disequilibrium" was more than a technical concept; it was a moral concept in that it distinguished between proper and improper behavior and pointed directly to those nations which were failing to adhere to the rules of the game. In the Bretton Woods concept no nation was to be permitted to follow beggar-my-neighbor policies. In this concept, use of an undervalued exchange rate to enhance domestic employment and production at the expense of others was clearly proscribed./3/

/3/Although he did not use these terms, Bank of Italy Governor Carli seemed to agree with this approach during a meeting in Rome with an Embassy officer on October 16, 1971: "According to Carli, basic cause of current monetary and other economic problems is mercantilist approach adopted by most countries over past decade or more. Other countries have allowed exports lead their economic growth and have enjoyed U.S. deficit while complaining about it. President Nixon's program has exposed this contradiction and has engendered process of adjustment in thinking and policies which not yet completed." (Telegram 6622 from Rome, October 18; National Archives, RG 59, S/S Files: Lot 73 D 153, Box 124, Morning Summaries)

How different is our world today in which undervalued exchange rates are employed by major states engrossing a considerable share of international trade. These are clearly beggar-my-neighbor policies in the older conception and (you should try to make it so) in the new. Undervaluing the yen, for example, by a full 20 percent is a beggar-my-neighbor policy. There is no reason that the United States should be willing graciously to tolerate such a condition. While the methods of adjustment today, self-equilibrating or otherwise, are much weaker than hitherto, the case for moral and political force grows so much stronger. I would take it to be primarily your job to harness such moral and political forces.

The impact of undervalued currencies, perennially in a state of "fundamental disequilibrium" without adequate adjustment, underlies many of our trading problems. The undervaluing of foreign currencies works a particular hardship on producers of goods as opposed to producers of services. The existence of palliatives and patch-up mechanisms means that such producers of goods are subject year after year to these hardships, which might as well be described as an unfair degree of competition.

The fundamental point, however, is the following: these hardships ought not to be dealt with and cannot be cured by patch-up adjustments on the trade side. This would lead only to a jerry-built structure of controls and to inefficiencies. One must go to the heart of the matter--i.e., the monetary machinery and adjustments of the structure of exchange rate. This is the kernel of truth in the observation of your economist critics, that too much stress is being given to the decline of American competitiveness and that monetary adjustments should substantially alleviate the problem. By and large this is true. But such adjustments do not come about automatically; there are no self-equilibrating mechanisms. That is what is wrong with their arguments. What is required is a code of behavior or a new set of rules to which the major nations will adhere either voluntarily or per force. To develop such a code and provide vitality for it is your principal task.

It is a truism that comparative advantage varies with and depends upon the exchange rate. An adequate set of exchange rates would eliminate many of the problems of the producer groups--in autos certainly and in steel to a lesser degree. It would also lead us very close to a balance of payments equilibrium that would be maintainable in the long run.

Under such conditions many problems associated with the so-called "U.S. loss of competitiveness" would disappear. Of course, the standard of living in the United States would grow in ratio to increased efficiency in production, but the pace of efficiency in the U.S. vis-a-vis the other countries would no longer be the type of problem that it is today. From the standpoint of self-esteem and perhaps national power, the problem would remain, but it would not spill over into crippling of the performance of the economic machinery.

This also bears immediately and directly on the structure of U.S. trade. The undervaluing of foreign currencies has fostered an undue dependence upon high-technology products. Rather than cure the disease, we seem ready to embrace the effects of the disease. Since we have steadily in the years after World War II, in effect, subsidized high technology products, it should come as no surprise that these products make a major contribution in the sale of U.S. goods abroad.

However, a goal of achieving balance by the subsidization of high technology products to compensate for the discrimination practiced against our products in general seems less than ideal. Once again, the moral seems clear: elimination of the discrimination practiced through undervalued currencies or quantitative restrictions against U.S. products is the way to proceed. This is economically more efficient and politically more reasonable than reliance upon and subsidy of high-technology products. High-technology products, which others cannot produce and are inclined to accept, are a desirable part of our trade pattern; they should not be viewed as a means of deliverance from undesirable conditions created by persistent exploitation of the U.S. international position as banker and world leader.

What should be done about these matters? It is inefficient and unjust to use tariffs, or general trade barriers, or general adjustments of the exchange rate to deal with the problems created by the violation of the rules of the game by a few of the major trading states who in the present era are consciously exploiting the absence of self-equilibrating mechanisms. To deal with beggar-my-neighbor policies and the maintenance of fundamental disequilibria for exploitational purposes requires a sense of discrimination in the better meaning of that word. Given the structure of the international economy at the present time, the most favored nation clause provides unintended protection for the very nations which are indulging in exploitative practices. We should recognize the problem and deal with it on that basis. A Tariff Commission finding, for example, which hurts all nations is not the most desirable way to proceed--when the fault lies with a single nation which has a drastically undervalued currency. To proceed in that manner is inefficient and unfair. We should deal with the real problem without hurting bystanders. If this requires reexamination of the traditional bromides, so be it. This will require careful examination of the arsenal of tools which can deal specifically with the offenders. And these tools should be employed in such a manner that they deal with the fundamental problems--of monetary and price maladjustments--so that they contribute directly or indirectly to a closer achievement of equilibrium. The importance of avoiding further expanding of a jerry-built structure of trade and capital restraints should be kept in mind.



162. Telegram From the Department of State to the Embassy in France/1/

Washington, July 26, 1971, 2156Z.

 /1/Source: National Archives, RG 59, Central Files 1970-73, FN 10. Confidential; Priority; Limdis; Greenback. Drafted in Treasury by Cross and cleared in draft by Volcker; cleared in State by Beigel (EUR/FBX) and approved by L. Kennon (E/IFD/OMA).

135133. Ref: Paris 12595./2/ Subject: Limited Exchange Rate Flexibility.


/2/Telegram 12595 from Paris transmitted a message from Giscard. (Ibid.)

Deliver McGrew 9:00 A.M. Tuesday, July 27.

Following is message from Under Secretary Volcker to Giscard d'Estaing in response to his message to U.S. financial authorities on limited flexibility exercise:

"We appreciate your concern and the difficulties to which you alluded. We recognize that pressing for a decision on limited exchange rate flexibility can create problem not only for you, but possibly also for others because of more general speculative pressure that could be induced by discussion of this matter. For that reason, our initiative in the Fund Board/3/ has not been paralleled by public discussion. Nevertheless, we felt several factors made it desirable to present to the IMF Board more concrete proposals on the flexibility question at this time.

/3/Reference is to the initiative of July 19; see Document 163.

"From past discussion, we were particularly aware of the problems which the French authorities have raised with respect to flexibility, and we felt important elements in our proposal would be more acceptable to French view than other flexibility proposals which have been discussed. Speaking frankly, we hoped we could identify some areas of common ground.

"In particular, wider bands would under our approach not be generalized but would be adopted at the option of an individual IMF member (or group of members) where, for example, that member felt the wider margins would be useful in dealing with disequilibrating movements of mobile capital.

"In the case of the transitional float, our approach envisages the float essentially as a method of changing exchange rates. Thus a finding of fundamental disequilibrium would be required (as with any exchange rate change). A Fund review process is envisaged, and the Fund would be empowered to set conditions on the float or to withdraw authority for a continuation of the float. This should provide protection against too frequent or too long floats.

"These conditions are designed to recognize and encourage fixed parities as the norm, with an explicit international code of good behavior with respect to the use of 'flexible' options.

"On the other hand, we recognize that the width of the band mentioned in our approach--up to 2-1/2 or 3 percent on either side of parity--goes beyond French thinking. Our view is that the short-term capital flow problem is of serious concern and that an option for margins of this size may be needed as one of the tools for dealing with it. We understand, of course, that the EC faces problems in dealing with the question of wider margins which do not confront individual countries. However, the framework we have proposed was designed to avoid any special difficulty for the EC beyond those posed by other proposals for wider margins.

"Throughout the discussions in the Fund and G-10, the U.S. had, as you know, refrained from presenting its views with any precision, in part to see whether a broader consensus might emerge among the G-10 members. However, if progress is to be achieved in September, we felt that this was the last opportunity to table a clear statement of U.S. thinking, prior to the August vacation period, in order to give foreign officials time to reflect on a specific proposal. We have no intention of pressing for agreement within the IMF Board during the present discussions; now that our suggested approach is on the table, we do not intend to take further initiative in the matter until we can see whether there is a possibility of reconciling present differences among the G-10 members in the G-10 meetings to be held in September. Meanwhile, the EC can shape its own views with some clearer indications of the views of its trading partners.

"I would not pretend that the approach we have outlined necessarily represents our final thinking on the subject. Nevertheless, we have been concerned that in the absence of some consensus on appropriate rules of conduct, individual countries, in response to speculative pressures or otherwise, may revert excessively to use of exchange rates as a supplementary tool of domestic policy, as recent events have demonstrated. We have tried to set forth an approach consistent with the general thrust and spirit of the Bretton Woods objectives. We are interested in hearing the reactions of others in the hope that a broad consensus can be reached in September. Certainly, an early resolution of this matter would be in the interest of all."/4/

/4/In Giscard's absence, the Embassy passed Volcker's message to Deputy Director of Treasury for International Affairs Larosiere on July 27, who said he would bring it to Giscard's urgent attention when he returned to Paris the next day. (Telegram 12952 from Paris, July 28; National Archives, RG 59, Central Files 1970-73, FN 10) Telegram 13154 from Paris, July 30, reported a discussion of Volcker's reply with Giscard on July 30. Giscard seemed to have a more open mind on limited exchange rate flexibility than his advisers. (Ibid.) In a July 22 letter to Sam Cross in the Office of the Assistant Secretary for International Affairs, Treasury Attache McGrew reported that a key member of Giscard's staff was as rigid as ever on limited exchange rate flexibility and speculated that at decision time Giscard had been unable to convince Pompidou on a compromise. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, France)



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

Washington, July 26, 1971, 2331Z.

/1/Source: National Archives, RG 59, Central Files 1970-73, FN 10. Confidential; Limdis; Greenback. Drafted in Treasury by Leddy and cleared by Cross and Volcker; cleared in State by Kennon (E/IFD) and A. Katz (EUR/RPE) and approved by Trezise (E). Sent to Bern, Bonn, Brussels, The Hague, London, Ottawa, Paris, Rome, Stockholm, Tokyo, USOECD, and USEC.

135453. Subject: U.S. Views on Limited Exchange Rate Flexibility.

1. There follows, FYI only, a brief summary of U.S. views on limited exchange rate flexibility as presented to IMF Executive Board July 19, 1971. Addressee posts should not take initiative to discuss subject, or to interpret U.S. position if questioned. We wish to maintain low profile, without public discussion.

2. Wider Margins. Margins should remain at present one percent under "normal" circumstances. A member of the Fund (or group of members) should have option to utilize margins up to 2-1/2 to 3 percent, temporarily or for longer period, by notifying the Fund and explaining its reasons for using wider margins, presumably in terms of actual or potential disequilibrating mobile capital flows facing the member. Fund would have residual right to challenge a member's use of wider margins.

3. Transitional Floats. Members of the Fund should be able to utilize floating rates as a transition between par values established in accordance with the IMF Articles of Agreement. Thus a member would be required to represent that it had an actual or emerging fundamental disequilibrium, and Fund concurrence with this representation would be necessary. During the period of a float, the Fund would review the country's situation and have authority to approve (or not object to) continuation of float or to prescribe conditions on float.

4. U.S. would be prepared to support an amendment of the IMF Articles which includes the points in paras (2) and (3) above. We believe that smaller and more frequent changes in par values than have generally occurred in the past are perfectly feasible under the existing Articles and that it is not necessary to envisage a specific provision in the Articles on this subject for countries that might want to make such changes.

5. In presenting these U.S. views, U.S. Executive Director made clear that he was mentioning number of details and elements of precision in order to give clear idea of main lines of U.S. approach, but in many instances these elements were tentative./2/

/2/France was not alone in raising questions about the July 19 U.S. initiative in the IMF (see Document 162). Responding to a German query on U.S. motives for taking its proposals to the IMF Board at this time, transmitted in telegram 9012 from Bonn, Treasury prepared the following guidance to the Financial Attache, transmitted in telegram 140323 to Bonn, August 3: "throughout the discussion of this subject in the IMF and the G-10, the U.S. had refrained from presenting its views with precision, in part to see whether a broader consensus might emerge among the G-10 members. However, if progress to be achieved in September, we felt that this was the last opportunity to table a clear statement of U.S. thinking, prior to the August vacation period, in order to give foreign officials time to reflect on a specific proposal." (Both in National Archives, RG 59, Central Files 1970-73, FN 10) The German response read in part: "the U.S. initiative, if anything, was proving helpful in pushing the EEC toward a common position since the EEC would not want to have only a U.S. proposal on the table." (Telegram 9516 from Bonn, August 4; ibid.)

6. Fund document containing text U.S. statement will be pouched when available./3/ Caveat in first paragraph applicable to this document also.

/3/Executive Director Dale's July 19 statement was circulated to members of the Volcker Group as VG/WG/71-31 on July 26. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/WG/71-1-)



164. Editorial Note

The distressed foreign exchange markets of May 1971 had calmed in June and July but as August began were roiled again. President Nixon, on August 2, 1971, met several times with Secretary of the Treasury Connally and Office of Management and Budget Director Shultz. (National Archives, Nixon Presidential Materials, White House Central Files, President's Daily Diary) Haldeman concluded that the result of these meetings was a "huge economic breakthrough," which on the international side would provide for closing the gold window, floating the dollar, and imposing a 10 percent import tax. (The Haldeman Diaries: Inside the Nixon White House, pages 335-336) At Treasury, these measures had been anticipated in a contingency paper in May, Document 152.

Tapes of the President's conversations with Connally and Shultz on August 2 corroborate Haldeman's conclusion and portray Connally as the primary architect. The President met with Shultz and Connally at 9:58 a.m. on August 2. The discussion opened on domestic issues, specifically rail and steel strikes. During that discussion Congressional and private sector support for an incomes policy was raised, and the President was sympathetic, saying it was necessary to convince the public the administration was doing something. Shortly before his departure at 10:28 a.m., Shultz turned the discussion to international monetary policy and told Connally they needed, in the next few days, to discuss Connally's proposals, which needed careful consideration. Shultz thought that whether or not to do the "big steps" should be "examined carefully."

Following Shultz' departure Connally stayed on until 11:53 a.m. Haldeman entered late in this segment but was generally silent. Connally outlined forcefully for the President, with great specificity, virtually all the essential elements of the New Economic Policy the President would announce on August 15. On the domestic side Connally set out the wage/price freeze, reinstitution of the investment tax credit, and various expenditure reductions and/or deferrals, with numbers to illustrate exactly what would be the impact on the budget. On the international side he set out suspending convertibility and floating the dollar and the 10 percent import surcharge, which at one point he even portrayed as part of the domestic program, bringing $4 billion annually to the budget. On the international side the only missing element was the 10 percent reduction in foreign assistance expenditures. Connally insisted the domestic and international aspects of the program were linked, with the domestic measures indicating U.S. willingness to take difficult measures to defend the dollar. Connally thought convertibility could not be maintained through the 1972 election and probably would have to be suspended before the end of the year. He urged the President to act soon, to show that he was in charge of events rather than responding to them, and to show that he had the courage to take a position before being forced into it.

As Connally pressed his program, the President warmed to it, despite his reservations about a wage/price freeze and closing the gold window. They discussed alternatives: acting that week, before Congress adjourned on August 4, during the coming week, or during the week after Congress reconvened in September or in November, which would still allow time to lift the wage/price freeze before the election in November 1972. The President was inclined to favor a November/December timeframe, but Connally warned of the increasing danger of leaks if the program were delayed. As Connally prepared to leave, President Nixon was leaning toward acting during August if necessary, possibly as early as Friday of that week. The President said that if consultations abroad were required, Connally should take it up with Kissinger who had channels to Pompidou, Heath, and Brandt. Under no circumstances was the State Department to be consulted as that agency represented foreign governments. Within the administration, Connally thought Peterson and McCracken were on board for the program, but that Shultz and Burns would have to be convinced.

Following Connally's departure the President reviewed what would become the New Economic Policy with Haldeman. The latter viewed Shultz as a free trader. Nixon said Shultz would oppose the wage/price freeze and thought he was also concerned that during the 1972 Presidential campaign the President would be portrayed as the one who had devalued the dollar.

The tape log reports Connally's return to the Oval Office at 1:24 p.m. (which was not recorded in the Daily Diary), and when the discussion turned to the New Economic Policy, the President was hesitant to go with the international part of the program. He thought closing the gold window could be held in reserve, but the administration could go ahead with the domestic measures to strengthen the dollar. Connally pressed for a linked domestic and international program. He said that gold would have to be done within 3-4 months and that former Federal Reserve Chairman Martin agreed, but if that measure were undertaken alone it would have no concurrent domestic measures for cover. The President agreed, sent Connally off to bring Shultz along, and asked him to report back after 4 p.m. that day. (National Archives, Nixon Presidential Materials, White House Tapes, Recording of Conversation Among President Nixon, Secretary Connally, and others, August 2, 1971, 9:58 a.m.-2:05 p.m., Oval Office, Conversation No. 553-6)

The President met again with Connally on August 4 from 2:19 to 2:55 p.m. in the Oval Office. The two discussed several aspects of the program and the President seemed to be on board. Connally, thumping the desk, advised the President not to defend or explain what was happening, but instead simply to acknowledge there were problems that the administration will solve. He advised the President to create the perception that he was as interested in domestic as foreign affairs, where he already enjoyed high marks, and said that when they returned in September and the President took the strong actions, that perception would change overnight. Connally advised against attempting to change the perception during August, but told the President he would have no choice but to do something before bilateral meetings with the Japanese scheduled for September 9 (see Document 75) and before the Bank/Fund meetings in Washington at the end of September. The President said they needed to run against the tide; they needed to turn the tide. Connally used a stampede analogy: do not run in front of the cattle but alongside the cattle and gradually turn them. He said this "dramatic action" would do it.

Midway through that meeting they were joined by Shultz. The three then discussed several unrelated domestic issues before Nixon outlined for Shultz his discussion with Connally on the new program. The President thought the positives outweighed the negatives and that the day after Congress returned in September would be the best time to announce the program, which would give delegates to the Japanese bilateral meetings and the Bank/Fund meetings time to get instructions. Connally was to work it out. Shultz stated, somewhat in the form of a question, "You have decided to go with this big program, including the gold window and all that? Our task between now and September 8 is to think it through." The President said he needed to have it by August 23 to have time to reflect on it. He was concerned with leaks and said it was to be just between the three of them; Peterson was not to be told. (National Archives, Nixon Presidential Materials, White House Tapes, Recording of Conversation Among President Nixon, Secretary Connally, and Budget Director Shultz, August 4, 1971, 2:19-2:55 p.m., Oval Office, Conversation 554-7)

On Monday, August 9, Council of Economic Advisers Chairman McCracken sent a memorandum to President Nixon summarizing the weakening of the dollar against other currencies and the amounts of dollars that had been taken that day. (Ibid., NSC Files, Agency Files, Box 218, Council on International Economic Policy) McCracken thought the August 6 report of the Reuss Subcommittee on International Exchange and Payments of the Joint Economic Committee, which concluded that the dollar was overvalued and that unless exchange rates were realigned the United States would unilaterally have to suspend the dollar's convertibility to gold and establish new parities, contributed to the flurry of activity that day. The Reuss report is Action Now To Strengthen the U.S. Dollar: Report of the Subcommittee on International Exchange and Payments of the Joint Economic Committee, Congress of the United States, Together with Minority Views (Washington, U.S. Government Printing Office, 1971).

An August 7 Treasury press release regarding the Reuss report stated it did not reflect a "wide body of Congressional opinion" and there were no plans for discussions on exchange rate realignments at the IMF or elsewhere. The press release then noted that the U.S. approach to these matters had recently been discussed by Secretary Connally in Munich (on May 28; see Document 155) and claimed that the administration was constantly reviewing measures to strengthen the balance of payments and encourage a healthy, non-inflationary domestic economy. The press release (and the Subcommittee report) is with paper VG/Uncl. INFO/71-40 in the Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/Uncl. INFO/71-1-71-.


165. Editorial Note

Foreign central banks continued to take large dollar inflows during the week of August 9, 1971. In that atmosphere Office of Management and Budget Director George Shultz met with the President from 4:45 to 6:31 p.m. on Wednesday, August 11, in the President's office in the Executive Office Building. The tape of that conversation is of poor quality and many parts of the conversation are inaudible, but it is clear that the focus of the discussion was on the implementation of what the President would announce on August 15 as the New Economic Policy. The President acknowledged that "Arthur [Burns] is very nervous about this." Shultz said that if the United States took this aggressive act against its trading partners, it was to stabilize a situation all agreed needing correction, and that the United States would have to follow up with constructive proposals.

Shultz counseled the President that if he were to close the gold window and took no other action, he might not get the needed change in the exchange rate if others intervened to maintain the value of their currencies. Shultz told the President his instinct to equate a 10 percent border tax with a devaluation was exactly right, that other nations did the same thing. Shultz advised that it was better to get the desired change through a devaluation than through an import tax and suggested an immediate closing of the gold window and a temporary import tax, i.e., a devaluation, followed by negotiations. As the conversation concluded, the President seemed to lean toward undertaking some of the program as early as Friday, August 13, but also thought the program might be timed to coincide with the return of Congress in September. (National Archives, Nixon Presidential Materials, White House Tapes, Recording of Conversation Between President Nixon and Budget Director Shultz, August 11, 1971, 4:45-6:31 p.m., Executive Office Building, Conversation 272-17)

At noon on August 12 the President phoned Secretary Connally in San Antonio. Connally reported he would be leaving Texas by plane at noon to return to Washington. He informed the President that Volcker had all the information and they could expect a bad day on Friday. He thought "we are losing the initiative." The President and Connally exchanged views on doing the program piecemeal, perhaps as early as that evening or Friday morning, or doing the entire program at one time, the approach Connally preferred. Connally did not want to leave the impression they had acted "in haste" and "were unprepared." The President invited Connally to come directly to his office upon his arrival in Washington. (Ibid., Recording of Telephone Conversation Between President Nixon and Secretary Connally, August 12, 1971, 12:01-12:12 p.m., Conversation 7-112)

The President met with Shultz in his office at the Executive Office Building during the afternoon of August 12 and requested that Haldeman join them. Shultz reviewed the scale of dollar conversions since August 2 and thought the U.S. reserve and negotiating position were weakening. The President thought they should not panic. He said they were not ready to go ahead with the entire package, but that if all the key players went to Camp David they could be prepared to act by Monday. He thought September 7 was the right day to do the whole package, including the budget provisions, but that Connally could announce in a low-key way now that the gold window was closed due to speculation. He thought the wage/price freeze could also be done immediately and then on September 7 he could announce the remainder of the program. Haldeman recapped: close the window and slap on the freeze now and come back in 3 weeks with the rest of the package. The President thought most of his advisers would concur in the program but that Burns and Volcker, who was "obsessed" with international things, would have difficulty with its international aspects and would have to be brought along. Shultz should try to sell the program to Burns, who had to understand that there were only two or three choices, and the President wanted to know which one Burns would go along with. (Ibid., Recording of Conversation Among President Nixon, Budget Director Shultz, and Haldeman, August 12, 1971, 3:11-4:20 p.m., Executive Office Building, Conversation 273-7)

Connally and Shultz met with the President from 5:30 to 7 p.m. on August 12 in the Executive Office Building. The President set out three policy options. First, to prevent speculation Connally could make a low key, non-prime-time announcement that the gold window was temporarily closed and that the administration was prepared to discuss with other nations now a "new, better, more stable system." Connally could also say the administration would take action on the budget front when Congress returned, but remain silent on the wage/price freeze. The second option was to announce now the wage/price freeze and intentions to present a legislative package when Congress returned. International aspects could be negotiated as needed, in lieu of a unilateral closing of the gold window. The third option was to close the gold window and announce the wage/price freeze, which were the only actions required to deal with the current crisis, and the legislative package could be prepared for September 7. The downside of that approach, the President said to Connally, was that it missed his "big, bold" approach, but, he mused, could we do the whole program now, tonight? Tomorrow night? Let's go to Camp David tomorrow and announce the whole program on Monday, he continued.

Connally thought the President needed to convince the American people that he had thought through the entire program. If it were done piecemeal, the public would speculate on "what comes next." Ideally the entire package would be announced on September 7, he said, but due to international developments they could not wait that long. If they just did the gold window at that time, it would give the impression the President was "forced to do it" because of what had happened in Europe during the last 2 weeks, that he did not know what to do, and that it took until September 7 to figure it out. To date, Connally went on, there was no public speculation on a comprehensive package, and if the President did it all now it would give the impression he knew what was happening and was on top of it; "you picked the time."

Shultz said Burns thought they should do the domestic program now, including the border tax, and see if that would stabilize the dollar. Connally argued that if they were to do the domestic program now, they should go ahead and close the gold window as well, rather than wait until the following week, a point the President thought was well taken. The President proposed, and Shultz and Connally concurred, that they meet at Camp David over the weekend "to set the whole thing up." The only participants were to be the three of them, plus "Arthur and McCracken and Peterson," and as for staff "the fewer the better." Connally suggested that at Camp David all should be encouraged to participate in the discussion, without their letting on that the decisions had already been made. Shultz said that at Camp David it would be necessary to set up sub-meetings to develop the specifics of various parts of the program. The President agreed and said he had pretty much decided what he wanted to do; following perhaps a 3-hour meeting beginning at 3 p.m. on Friday to develop an agreement, they would break into groups and reconvene Saturday at 3 p.m., which would give him time to prepare his speech. Shultz suggested giving the speech on Sunday night to prevent speculation on Monday, a point the President took, provided they could get it ready. The conversation concluded with the three discussing the essential modalities for secrecy surrounding the Camp David meeting. (Ibid., Recording of Conversation Among President Nixon, Secretary Connally, and Budget Director Shultz, August 12, l971, 5:30-7 p.m., Executive Office Building, Conversation 273-20)

Shortly after the conversation the President phoned Connally and reported on his discussions with Shultz on the border tax and how it would give them negotiating leverage, which the President characterized as the program's best element politically. He said he wanted to be sure Connally understood the President's signal that Connally should take the lead in the general discussion Friday afternoon. A clearly elated President told Connally the economic program would be like the "China thing," totally unexpected coming at that particular time. (Ibid., Recording of Telephone Conversation Between President Nixon and Secretary Connally, August 12, 1971, 7:22-7:26 p.m., Executive Office Building, Conversation 273-24)


166. Memorandum From the Acting Assistant Secretary of State for Economic Affairs (Katz) to Secretary of State Rogers/1/

Washington, August 13, 1971.

/1/Source: National Archives, RG 59, Central Files 1970-73, FN 10. Confidential; Nodis. Drafted by Deputy Assistant Secretary Weintraub.


 The Setting

The dollar is under severe pressure in major financial markets in Europe and Japan. By pressure I refer to the fact that the dollar is worth less in terms of such currencies as the German mark, Dutch guilder and Canadian dollar, which are floating, and that enormous amounts of dollars are being purchased by central banks in other financial centers in order to comply with the IMF rules of maintaining parity relationships between their currencies and the dollar.

In this atmosphere impressive sums are moving speculatively, betting that the dollar will be devalued. Large companies are hedging in order not to lose money should this occur. Countries like Japan, which hold large amounts of dollars as a proportion of total foreign reserves, are uncertain as to what to do since a devaluation of the dollar could be costly to them by reducing the real value of these reserves.

This uncertainty in Japan and elsewhere makes countries reluctant to reach agreements with us on other economic and political issues until they can see the overall situation more clearly.

There are many reasons for the weakness of the dollar. These include our persistent and growing balance-of-payments deficits; the fact that our trade account has moved into deficit, with every indication that this deficit will grow; our gold stock is diminishing; respectable voices in the financial community and in academia are asserting with some vehemence that the dollar is overvalued and that this situation should be corrected; there was a report last week by a subcommittee of the Joint Economic Committee, chaired by Congressman Henry Reuss, which advocated the devaluation of the dollar./2/ That our economy is sluggish and our inflation continuing does not help.

/2/See Document 164.

Most observers expect us to do something, and foreign governments and private traders are now behaving under the assumption that we will do something; this heightens the speculative fever.

What Can We Do?

The classic remedies for persistent balance-of-payments deficits are either devaluation of one's currency and/or slowing down internal economic activity. A devaluation makes imports more expensive and exports more lucrative, thus helping to shift output from internal to external markets. Deflation, by reducing demand pressure, works in much the same way. Because of the central role of the dollar as the currency to which most other currencies are pegged, we have always felt that devaluation of the dollar was not a proper course. We have tried deflation over the past several years but it has not worked. We have had the worst of all worlds, a sluggish economy with more inflation than desirable, and a growing balance-of-payments deficit. It is this demonstration that past policy has not accomplished its balance-of-payments function that heightens the present unease.

The President, for political as well as technical reasons, may be reluctant to devalue the dollar, despite the fact that we are getting such advice from many in Europe and at home. The dollar could be devalued by raising the price of gold (which would require Congressional approval) only if other countries consented not to similarly raise the price of gold in relation to their currencies; that is, the relationships among currencies would thus be altered. We also could devalue by closing the facility which permits foreign central banks to convert their dollar holdings into gold at $35 an ounce, if other countries then permitted the dollar to float vis-a-vis their currencies until it found a new devalued level, or if we then devalued outright. This is essentially what Congressman Reuss advocated. Since other countries would have to consent to letting the dollar depreciate with respect to their currencies, a dollar devaluation would require some advance negotiation among the major countries.

If other major currencies revalued upwards in relation to the dollar, such as Switzerland and Austria recently did, and which Germany and Canada and the Netherlands are in fact doing through their present floats, this in effect means devaluation of the dollar. The one important currency that all agree is now undervalued is the Japanese yen. One major problem with revaluations by others is that we leave the initiative to them, and in the case of the Japanese are put in the position of demandeur.

In addition, changes in currency relationships operate effectively only with time lags so that the impact on our balance of payments might take some time, perhaps even a year or so, to work itself out.

Another set of possible correctives would be to change only the prices of imports and exports, which in effect would be a devaluation of the dollar only on trade account, rather than across-the-board, to include as well such things as tourism and capital transfers, in which our accounts also are in deficit. Under the GATT, countries in balance-of-payments difficulties are authorized to impose quotas on their imports. However, this requires complicated administrative machinery to institute. Quotas also operate through controls rather than through the marketplace. For these reasons, in recent years countries which have taken trade actions have preferred not to use quotas.

One trade technique now under intensive examination, and which Wilbur Mills and the Williams Commission have advocated, is to impose a surcharge on all imports of an amount sufficient to have a significant effect in diminishing imports. The surcharge would raise the price of imports, and thus operate here the way a devaluation would. The trade impact could be even more powerful if we were also to give a subsidy to exports as an initiative to encourage these. I use the word "could" since other countries could take action to offset the effect of an export subsidy. The combination of import surcharges/export subsidies could have a powerful trade effect if it were large enough, say of about 15 percent. The budgetary cost of the export subsidies (say 15% of about $40 billion of exports, or $6 billion a year) could be met mostly by the extra revenue raised from the import surcharges. The two need not go together, and indeed there is much more international experience with import surcharges, but the two in tandem on all imports and exports are more powerful than either alone. We expect that were the United States to impose a surcharge this would be understood by most important foreign countries despite its lack of explicit GATT sanction; an export subsidy would be more controversial. A subsidy/surcharge system also could have a stimulative domestic psychological impact.

I will not go into the complex detail here on how surcharges or subsidies might work administratively. We would have to make clear that these trade actions were intended to be temporary until the situation was corrected, and that the rate of surcharge/subsidy would decline over time. These assurances would not be easy to accomplish legislatively. The initial rate would have to be sufficiently large to convince the world that it would work. We think such trade action on our part would be credible only if it were accompanied by further domestic measures to cope with inflation; these might include some policy on prices and wages.

Action only on trade account would maintain what others would consider to be an overvalued dollar for capital movements, and this certainly would lead to criticism by others that it permits U.S. investors to buy up foreign enterprises cheaply.


The choices open to the U.S. at present thus fall into one or a combination of three overall categories.

The first is that we do nothing and ride out the present storm. I doubt that this is feasible since everybody now anticipates that we must do something; and if the Executive does not act, it is probable that the Congress will act, such as by imposing import quotas on a haphazard basis. Much more significant than this, however, is the danger that the speculation against the dollar will continue and perhaps accelerate, and the Europeans and Japan could force us to take action by demanding that we exchange the dollars they are getting for other reserve assets, such as our declining gold stock.

The second choice is to alter exchange rate relationships, either by devaluation of the dollar, or upward revaluation by others (particularly the yen), or most likely a combination of these. Any effective U.S. devaluation would require consent of others.

The third choice is some partial action, such as dealing primarily with the trade account. (In the past we have taken partial actions to limit capital outflow, such as our foreign direct investment controls, and theoretically capital controls could be further tightened. We doubt that the President would wish to do this.) Many would interpret trade measures as a precursor to dollar devaluation.

We are urgently proceeding with analysis of these options and we know that other agencies are doing the same. We are in touch with them./3/

/3/On August 13 Volcker sent the following note to Connally: "I just got a call from Jack Irwin urgently requesting that State be involved in any decision-making in the international monetary area. He had been talking with Rogers, who is at home. I simply told him I would not be making this decision but would pass it on to you but also said I understood his concern." (Washington National Records Center, Department of the Treasury, Records of Secretary Shultz: FRC 56 80 1, Economic Game Plan Background, Camp David 8/13-15/71)


If you have not already done so, you should speak with George Shultz about this subject (a) to reflect our great interest in making an input as the choices are examined; and (b) to make certain that our expertise on how one would implement any scheme internationally is brought into play sufficiently early no matter what choice is made./4/

/4/Although there is no indication if Rogers approved or disapproved the recommendation, he wrote in the margin, "This was done," and initialed. The date of August 17 is stamped below the Secretary's initials. 

167. Information Memorandum From Robert Hormats of the National Security Council Staff to the President's Assistant for National Security Affairs (Kissinger)/1/

Washington, August 13, 1971.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 376, President's Economic Program. Confidential. Initialed by Kissinger. A copy was sent to Sonnenfeldt.

International Monetary Crisis

Although I recognize that the subject of this memorandum is far from your major areas of interest, you might wish to be kept abreast of the current international monetary crisis, since it does have major foreign policy implications for the U.S.

 The Problem

Throughout 1971 there has been an erosion of European confidence in the stability of the dollar. This has worsened since May, as it became apparent that the U.S. inflation was not being contained, that wage settlements in this country were extremely high, and that the U.S. balance of payments deficit was worsening. The latter is extremely important. Under the present system central banks of other governments purchase dollars when an over-supply of dollars causes the value of the dollar to drop below a given point, i.e. Britain will, if the value of the dollar falls below a specified point, buy up excess dollars and thereby raise the price of the dollar to within one percent of its established parity vis-a-vis the Pound. Thus European central banks have been taking in large amounts of dollars in order to keep the value of the dollar from falling vis-a-vis their own currencies. However, because Pounds, Marks, etc. must be spent by the central banks in order to purchase these dollars, the money supply of the major European countries has increased significantly, and severe inflationary pressures have resulted.

The crisis of this spring came when on May 3 and 4 alone, about $1 billion flowed into Germany and greater amounts were expected to follow. The Germans were thus forced to close their foreign exchange market and, on May 10 they floated the D-Mark., i.e. the Bundesbank did not purchase dollars when the price of the dollar fell and thereby allowed the value of the dollar to fall still further vis-a-vis the value of the Mark. Thus, because individuals wished to rid themselves of dollars and purchase Marks, the value of the Mark increased vis-a-vis the dollar and is now approximately seven percent above its value at the close of April. Other European countries have been forced to hold large amounts of unwanted dollars which they are legally entitled to demand that the U.S. redeem in gold.

The Present Crisis

Last week, with no end to the U.S. inflationary and balance of payments problem in sight, there was another rush by speculators to sell dollars for European currencies. Then, on Saturday, Henry Reuss, Chairman of the Joint Economic Committee on Exchange and Payments, released a report which:

--suggested that the dollar was overvalued and should be allowed to "float" downward in value;
--criticized the Treasury for doing too little to correct the balance of payments deficit (which could amount to $7 or $8 billion this year as compared to $3 billion last year).

On Monday, August 9-with confidence in the stability of the dollar further eroded by this publication--the sale of dollars increased and the value of dollars decreased (i. e., holders of dollars used them to purchase Pounds, D-Marks, Swiss francs, etc. because they felt these currencies would either be revalued or the dollar would be devalued in the near future). The dollar fell to its lowest point vis-a-vis D-Marks since World War II. On the same day the Treasury stated that the Reuss report did not represent Congressional views on the subject and pointed out that the reduction in the balance of payments deficit depends not on modified exchange rates but on a healthy and non-inflationary domestic economy.

On Wednesday, August 11, speculation against the dollar abated somewhat--one reason being that the central banks of France and Switzerland instituted measures to prevent domestic banks from purchasing speculative dollars. However, on Thursday over $1 billion were again forced on European central banks. 

There is little likelihood that the situation will work itself out without either a revaluation of European currencies (which is the most probable course of action for the Europeans, given the present crisis); a devaluation of the dollar; or U.S. measures to restrict the imports of foreign goods to this country and encourage U. S. exports (which will take legislation). There will also probably be strong efforts on the part of the Europeans to restrict the amounts of dollars held by their central banks and to apply other stringent measures against the dollar.


168. Editorial Note 

From 3:15 to 7 p.m. on August 13, 1971, President Nixon met with a number of his economic advisers and three members of his White House staff at Camp David to detail the New Economic Policy the President had agreed to in his meetings with Shultz and Connally on August 2 and August 12 (see Documents 164 and 165) and would announce during a 9 p.m. television address on Sunday, August 15. According to the President's Daily Diary for August 13, Connally, McCracken, Burns, Volcker, Stein, Peter Peterson, Haldeman, Ehrlichman, Shultz, and Safire attended the Camp David meeting. (National Archives, Nixon Presidential Materials, White House Central Files, President's Daily Diary) William Safire recalled that the President directed all participants in the meetings to sign a guest book, according to which Caspar Weinberger, Arnold Weber (OMB), Kenneth Dam, Michael Bradfield (Treasury), and Larry Higby (Haldeman's assistant) also attended the August 13 meeting. (Safire, Before the Fall: An Inside View of the Pre-Watergate White House, page 511) The meeting continued intermittently, with a few changes in attendees, until 11:30 a.m. on August 15.

No comprehensive options papers for this meeting were found, although some materials were assembled at the Treasury Department for Connally's use. (Washington National Records Center, Department of the Treasury, Records of Secretary Shultz: FRC 56 80 1, Economic Game Plan Background, Camp David 8/13-15/71). During an April 8, 1998, interview with the editor, Stein confirmed that there were no options papers for the Camp David meeting, but added that some aspects of the program had been worked on earlier in the year. Stein said that in response to Congressional interest in a wage price freeze, some thinking on modalities had been done at the Council of Economic Advisers, and he thought the Office of Management and Budget had worked on the issue as well. At Treasury, considerable thought had also been given to the international dimensions. See, for example, Documents 152 and 153. 

The Department of State and the National Security Council were not represented at the Camp David meeting and, according to memoranda to Rogers and Kissinger (Documents 166 and 167), they were unaware the meeting was taking place when it began. Kissinger's memoir corroborates this: "a decision of major foreign policy importance had been taken about which neither the Secretary of State nor the national security adviser had been consulted." (White House Years, page 954)

Haldeman reported that the President decided to go ahead with the NEP the following week after meeting with Connally late in the afternoon on August 12. The Camp David meeting was then set up, in the greatest secrecy, around the Economic Troika, to begin on the afternoon of August 13. (The Haldeman Diaries: Inside the Nixon White House, page 340) Haldeman took detailed handwritten notes of the key NEP planning meeting which lasted for nearly 4 hours that afternoon, as well as more limited notes later in the weekend. (National Archives, Nixon Presidential Materials, White House Special Files, Haldeman Notes) Haldeman also prepared full diary entries for the weekend, which were later included as part of a compact disc publication, The Haldeman Diaries: Inside the Nixon White House, the Complete Multimedia Edition, pages 340-346. The President's leadership in formulating the execution of the NEP, Connally's role, especially on the NEP's international aspects, and Burns' lonely and unsuccessful attempt to keep the gold window open are among the highlights in Haldeman's notes. Haldeman's handwritten notes and diary also reveal that on August 14 President Nixon said Secretary Rogers should be informed and asked whether he agreed with a 10 percent reduction in foreign aid. Apparently Deputy Under Secretary of State Samuels was away from Washington, as Haldeman's subsequent notes indicate Rogers should call him back. 

The President's August 15 address to the nation announcing the NEP is in Public Papers of the Presidents of the United States: Richard M. Nixon, 1971, pages 886-891. On the domestic side the NEP imposed a regime of wage and price controls and established the administrative machinery for their monitoring and enforcement; on the international side the NEP imposed a 10 percent import surtax on all dutiable imports from most-favored-nation countries, suspended the dollar's convertibility to gold, and reduced foreign assistance expenditures by 10 percent. During the April 8, 1998, interview, Stein indicated he thought it was unclear to attendees at the Camp David meeting if closing the gold window implied a floating of the dollar. He said that at Camp David there was no discussion of what outcome was sought in the international economic policy arena and that in the absence of representatives from the State Department and the National Security Council there was little consideration of international political implications.


169. Telegram From the Department of State to the Embassy in Germany/1/ 

Washington, August 16, 1971, 0245Z.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Country Files--Europe, Box 685, Germany, Volume IX 4-8/71. Confidential; Exdis. Drafted and approved by U. Alexis Johnson. Identical cables with this message from President Nixon to certain other heads of government were also sent on the evening of August 15. (Ibid.) The originals of the typed messages sent to the Department of State for transmission are in the National Archives, RG 59, Central Files 1970-73, E 1 US. Circular telegram 149446 to all diplomatic and consular posts, August 16, transmitted a summary of Under Secretary Volcker's briefing of the Washington diplomatic corps at 10 p.m. on August 15. (Ibid.) The full transcript of Volcker's briefing was sent to all posts in telegram 156086, August 25. (Ibid.) 

149439. Please deliver soonest following personal message from the President to His Excellency Willy Brandt:

"Dear Mr. Chancellor: 

I am tonight announcing a comprehensive program to curb inflation, increase employment, restore strength and confidence in the United States dollar, and improve the international monetary system. This major action is necessary to preserve confidence in the dollar and to maintain an international monetary system which will serve the world's needs. It was our responsibility to act and we have done so.

I am imposing a 90-day freeze on wages and prices in the United States. I am cutting certain taxes to stimulate consumption and employment and I am sharply curtailing US Government expenditures. I am also levying temporary surcharge on all dutiable imports not already subject to quantitative limitations by the United States, and I have directed that the convertibility of the dollar into gold or other reserve assets be suspended. 

I recognize that these actions will be of concern to Germany as they are vital to us.

What we need now is an early agreement on improvements in the international monetary and trading system. I have asked Treasury Secretary Connally immediately to get in touch with your Finance Minister to consult on how we can bring about these improvements. 

I am sure you will find that what we have done will contribute to economic expansion in a world at peace.

I look forward to continuing to work with you on these matters of such concern to both of our countries as well as to the rest of the world. Sincerely, Richard Nixon." 

FYI. Under Secretary of Treasury Volcker is proceeding immediately tonight to London and hopes to have a meeting tomorrow at 1500 London time with financial authorities of France, Italy, Germany, Canada, and Japan./2/ Arrangements are being made through Treasury-Ministry of Finance channels.

/2/See Document 170. 



170. Memorandum of Conversation/1/ 

London, August 16, 1971, 4 p.m.

/1/Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, France. Confidential. Drafted on August 23 by Cross and approved by Volcker. The meeting was held at Wychwood House. 


Under Secretary Volcker
Governor Daane
Sam Y. Cross

Mr. Pierre-Brossolette, Ministry of Finance
Mr. Clappier, Bank of France

Dr. Schoellhorn, Ministry of Economics
Dr. Emminger, Bundesbank
Dr. Hankel, Ministry of Economics
Dr. Neubert, German Embassy

Dr. Ossola, Bank of Italy

Mr. Hara, Embassy of Japan
Mr. Iyami, Bank of Japan

U. K.:
Mr. Neale, HMTreasury
Mr. Morse, Bank of England
Mr. Kirbyshire, Bank of England

President Nixon's New Economic Program

Mr. Volcker said he had suggested the meeting because he thought it would be a good idea to get together promptly, to explain the reasoning behind the President's new economic program and hear any initial reactions of other participants. He had not come for the purpose of negotiations and one question to be considered was what kind of negotiating group would be appropriate when it was time for negotiations. The U.S. did not presently have a fixed view on that question.

Mr. Volcker explained the reasoning behind the President's program. Everyone was familiar with the domestic background in the U.S. of excessive unemployment and an expansion which was proceeding but not with great speed. There was considerable pessimism about the strength of the expansion and bad psychology had developed about the inflation problem. Our progress on both the inflation and unemployment problems had been disappointing, and some measures which seemed to help on one of those problems hurt on the other. On top of this domestic situation, there was a difficult external problem. There had been a persistent erosion in the U.S. external position since the mid-1960's and this had been aggravated by two factors. First, our trade position had moved into considerable deficit in the second quarter, and even if the second quarter figures exaggerated the difficulty, the trade position was far from satisfactory. Secondly, protectionist pressures had increased in the past two years, and some had pointed to the difficult external situation as an excuse and justification for protectionist moves. We had been conscious of all these problems for some time but our concern had intensified in recent months. Thought had been given to various measures, particularly on the domestic side, for some time. The situation over the past couple of weeks had brought several of these problems into a single focus. The President had decided not to act in a piecemeal fashion dealing with each of these various problems but to adopt a comprehensive and integrated program. The most controversial measure was the convertibility decision. That decision was taken with the full knowledge of the President that one could not fully predict all the results and implications for the future. The President came to the conviction that now was the time to face the convertibility problem since if it were not faced now, it would have to be faced at another and perhaps more difficult time. 

Mr. Volcker said he was impressed by the headlines in two adjoining articles which he had seen in this morning's Times, which expressed very clearly the U.S. situation as he saw it. The first was that "it was time for the U.S. to face facts," and the second was that "the U.S. needs growth and competitiveness." He could not improve on those two headlines as a theme for his view of the present situation.

Discussing the components of the program, Mr. Volcker said that the President had decided to go all the way on wage-price policy and establish a freeze. Even though the freeze was only for ninety days, it would have a psychological shock effect while the follow-on program was set up. The President had taken a few selective revenue measures which would spur the economy both now and in the long run. All three of the proposed tax cuts required legislative action, but the prospects for that action were good. On the expenditure side, the President had taken some measures which were politically very difficult in deferring his revenue sharing and welfare programs. These were his two prize domestic programs. While the tax and expenditure actions balanced in amount, the stimulation from the tax cuts would be greater than the drag from the expenditure changes. 

On the external side, the Administration had felt that the strong domestic measures included in the new program alone would have stopped the speculation of the past couple of weeks. But the President had looked beyond the next few weeks or months and had decided to go ahead with the convertibility decision, which he felt would release some of the inhibitions and free the world's hands to deal with matters of exchange rates and the monetary system, without such concern about speculation. It had been very difficult even to consider possible measures for reform of the monetary system when the possibilities of speculation were so great, and our move should remove some of these inhibitions.

On the surcharge, the Trade Expansion Act had been used for the authority since the President wanted to act by executive action rather than legislation. While it would not be difficult to get Congress to authorize a surcharge, it would be very difficult to get authority to end the surcharge when the time came. 

On the international monetary system, all were conscious of the desire to restore a sustainable stable system. The U.S. had not spelled out any program in the President's message or elsewhere. The U.S., at this stage, had no program which it was going to spring on anyone. The background material explaining our new program said that some changes in exchange rates might take place and might be helpful to stable functioning of the system. From the U.S. point of view, after years of erosion, we wanted a fundamental strengthening of our position. We had balance-of-payments deficits for a number of years and a declining trade position for a number of years, and we would not be satisfied without a reform that could repair the erosion which had taken place in the U.S. position over the years. We did not want a short-run solution that would deal with the immediate market situation but not lead to long-term improvement. We want to restore stability to the system for a period of years. If we did not get a lasting solution, the problems would simply reappear in a month or six months or a year.

The President had instructed us to put clearly in our explanatory documents that there would be no change in the price of gold. We were aware that in the very immediate market sense, a change in the price of gold might temporarily restore exchange market equilibrium. But we were firmly opposed to that solution for three reasons, any one of which was sufficient to assure our opposition to the move: first, there was a political inhibition to such action in that some legislative action would be required. Second, even if there were no political problem we were opposed because what might look like a quick and easy solution would leave one vulnerable to the same problems in three months or six months or a year. Third, the world had been on a course of evolution which had gradually reduced the importance of gold in the system over the years and we were not going to move in the opposite direction of moving toward rebuilding a system based on gold. Although some argue that changing the price of gold is a clean and quick solution which would stabilize the system over night, that view did not prevail with us. 

Mr. Volcker said investment restraints would remain in effect but their future disposition would be under review. Certain of the programs were crumbling. They were adopted as emergency measures and not expected to be sustained for a long period. Bills recently passed in Congress would decimate certain parts of the program. We don't like such restraints philosophically, and we would be reviewing this whole question.

Dr. Schoellhorn asked whether there had been any decisions on monetary policy. 

Mr. Volcker said the discount rate had not even been discussed at Camp David. Since the President was announcing a freeze, he would not want to flaunt this by raising interest rates.

Governor Daane said that Chairman Burns fully supported the new program. On monetary policy the money supply had been growing more rapidly than we would like but the latest figures indicated progress in getting it under better control. 

Dr. Emminger said he was impressed at the comprehensiveness of the program. He was concerned about reopening foreign exchange markets on a credible basis. The markets could not be reopened at present parities without large movements of dollars and the credibility of the fixed parity system would be in doubt. Also markets could not be kept closed for a long time. Although Germany was not tied to a parity at this time, the Japanese had apparently taken in $700 million today and the Swiss had taken in a large amount last week. How could those countries reopen on the old parity system without floods of dollars? Would it be possible to reopen the markets without changes in parities? Could we envisage these parity changes would come about in the next few days?

Mr. Neale asked what sort of changes were going to be required if the U.S. was to be free of its deficits? He agreed with the importance of building a lasting system but said this was a big agenda which went beyond the three or four days which markets could be kept closed. 

Mr. Volcker said he had not come for the purpose of trying to negotiate changes in parities. We had worded our statement as mildly as possible to avoid prejudicing any more than necessary the position of other countries. It would not be credible for the U.S. to say there would be no changes in parity. In the end our view is that after years of deficits, the U.S. is entitled to run surpluses./2/ Our aim is to establish the conditions to run such surpluses. Apart from that basic proposition we were not going to say that one parity should change by this amount and another parity by that amount. The basic dilemma was with the entire system. We must repair the erosion that had taken place over a period of years in the U.S. position. Beyond that we did not want to prejudice what changes must be made. This quickly got into the question of what was the proper negotiating forum. He had talked to Schweitzer before leaving Washington. We made clear we did not want a new Bretton Woods conference. One potential group for negotiation was the Group of Ten. This had some defect in that there was no LDC participation and it was a little bit large but it certainly was a possible forum. He did not think the IMF Board was a possible forum since the Executive Directors in many cases did not have sufficient authority of their governments and there was probably too much LDC representation for this kind of negotiation. We would like to keep the IMF in the center as much as possible and perhaps one possibility would be a special committee of governors. The U.S. had no fixed view at this time on the question of the negotiating forum, but would like to know what others thought. Perhaps some ad hoc arrangements would be best.

/2/See Document 76, which sets out the U.S. balance-of-payments objectives adopted in September. 

Mr. Volcker said that if the others present thought it was a good idea Secretary Connally would be receptive to inviting their Ministers to go to the U.S. and to talk these matters over during the coming weekend (August 21-22). Certainly we did not say that the problem could necessarily be resolved by the half dozen main countries in brief informal discussions but if there was a strong consensus that such a meeting would be useful, Secretary Connally would be prepared to host it.

Dr. Schoellhorn thanked Mr. Volcker for the elaboration of the U.S. views. He could give only a personal reaction since there had been only a few hours to think about the U.S. moves. On the wage price freeze, he thought the U.S. might find that 90 days may not be sufficient. The experience in Europe had been that it takes a longer time. He noted that monetary policy had apparently not been revised in a way which would increase U.S. interest rates and impede the flow of funds. Perhaps the most serious measure announced was the 10 percent surcharge. Germany had had a revaluation in excess of 7 percent and now an additional 10 percent resulting from the U.S. surcharge added up to a large amount. Germany already had strong pressures from German exporters for some form of export program, and these pressures would now become irresistible. Also it would be most difficult to find any willingness of countries to revalue their currencies as long as the U.S. 10 percent surcharge existed. And there might not be any positive proposal about what to do with the monetary system as long as there was the surcharge. The position of the dollar as a key currency was now unclear. When markets were reopened, the U.S. program might stop speculation but there were many dollars floating around and there could be many unquiet weeks. He wondered what would be decided in Washington at the September IMF meeting. 

Mr. Volcker asked whether any markets were open at the present time.

Mr. Emminger said no markets were open in Europe. However, it would not be possible to keep the German markets closed for more than about three days unless there were going to be some major changes to announce. 

Dr. Ossola said that it might be possible to keep the Italian market closed for about four days.

Mr. Volcker said there was no intention to keep the New York market closed for any extended period, but if one of the governments represented at the meeting felt that a day or two closing of the New York market would be essential to their decision making, we would ask that trading in New York cease for a day or two. 

Dr. Ossola said that the urgent problem in Italy was tourism. Italy had a free market for bank notes and banks were buying dollars at 600 lire to $1. He asked whether Mr. Volcker was content to let the market set that bank note rate. Mr. Volcker indicated that he did not see the Italian bank note rate as a particular problem.

Mr. Morse said he was surprised at the timetable. Mr. Volcker seemed to envisage a period of weeks or months before a return to fixed parity. He thought the danger was that if there was no agreement within a week or so there would be a situation of general floating of all currencies, from which it would be very difficult to get back to a fixed parity system. 

Mr. Volcker said there was a credibility problem which began with the devaluation of sterling and other currency changes. Markets could no longer be convinced that exchange rates would not be changed. In some cases letting the markets tell us what would be a credible rate might not be entirely bad. If all the questions could be resolved soon that was fine, but we did not want to be jumping from one financial crisis to another. We should not come out with an announcement that we had created a system as follows, and then six months later have it collapse.

Mr. Kirbyshire said it would be difficult for the markets to show what the proper rates were since there were many dollars floating around. 

Mr. Volcker said there were tremendous problems of the monetary system and these questions were not going to be decided in a short-run time. A sustainable system implied a sizable change in the U.S. position. The U.S. position had been both weak and eroding.

Mr. Morse asked whether there was a pattern of exchange rate changes which would be sufficient in Volcker's mind to make the system a credible one within a short period of time so that the U.S. would reopen the gold window, or was there no such pattern. 

Mr. Volcker said he had no little piece of paper in his pocket about what rate changes were needed. He recognized that it was conceivable that credibility in the immediate market might be temporarily restored by small revaluations by certain countries and by the U.S. domestic program, but would it make sense to restore convertibility in the same way we had it. The U.S. needed to reverse the long-term erosion in its position. Other countries might have other issues which they felt should also be considered, and these also should be on the table.

Dr. Emminger said this resolution of all these problems might take a year or two. 

Mr. Volcker said that the basic condition was the system would have to be sustainable.

Dr. Emminger asked what the U.S. would do to maintain the parity of the dollar. Would we maintain parity in the same way as most other countries, e.g., market intervention. 

Mr. Volcker said we would not do so immediately. We would be in the same position as Germany or Canada already was in.

Dr. Emminger reiterated the importance of the 10 percent surcharge. He asked how long was "temporary" and whether there was a connection between the surtax and the restoration of a credible system. 

Mr. Volcker said the elimination of the surcharge did not depend on the restoration of the system. We needed to restore a strong U.S. position and the surcharge would go off as soon as we made the judgment that our position was the one we were seeking.

Dr. Schoellhorn said every government would be reluctant to revalue because of the surcharge. Even though the overall percentage of total German exports covered might not be so large, the surcharge would be very important in particular industries and regions in Germany. 

Mr. Volcker said the problem of particular industries and regions was precisely the one the U.S. had had in its problems with protectionist pressures and had to be resisted aggressively. The surcharge was one action the U.S. could take unilaterally toward getting a strong position.

Dr. Emminger said there was a danger that we would be building the surcharge permanently into the system. 

Mr. Volcker agreed that was a danger if the surcharge lasted too long. The President wanted to utilize his present authority to apply the surtax rather than seek new legislative authority in order to reduce the danger that the surcharge would be kept on too long.

Dr. Ossola said he shared Dr. Schoellhorn's views about the surcharge. He could understand the closing of the gold window as a measure, and he could understand the application of the surcharge as a measure, but he could not understand both since they seemed contradictory and countries might not move on the exchange rate.

Mr. Volcker said it was a sort of simultaneous equation. It was not clear that some countries would want to move on the exchange rate. 

Mr. Morse said Mr. Volcker said the surcharge would be removed when the U.S. got a strong position and asked what that meant.

Mr. Volcker said the U.S. should have a period of surplus. We have had an extended period of basic deficits and we needed a period of surpluses. In addition there were questions of financing the defense shield and some trading arrangements and obstacles around the world which must be dealt with as well. One example was the agricultural arrangements in Europe which caused problems for the U.S. Agriculture was not the only problem. There were many outstanding issues of that sort on which we would like to work and see progress in developing the framework within which the U.S. could develop a strong balance of payments. 

Dr. Schoellhorn said our governments did not know what was required to get rid of the surcharge. He asked whether there was any relationship to the non-tariff barrier discussions which were going on.

Mr. Volcker said it would not depend on those discussions. 

Governor Daane said we were not looking at adjustment just for the short run but one that was sustainable for a long period of time.

Dr. Schoellhorn asked what we would do if others introduced surcharges. 

Mr. Volcker said that we had been told for many years that the U.S. had a balance-of-payments emergency. We had a long period of deficits. No other country was in that position.

Dr. Emminger said all countries were interested in the restoration of strength of the dollar. They had found out that difficulty for the dollar meant difficulty for their own currencies and they understood that the monetary system could only be based on a common position. He was concerned about the immediate problem of how to reopen exchange markets on a credible basis that would not require first one country and then another to take measures to protect itself. We were all in a position of interdependence. The dollar position must be credible and the position of other currencies must be credible. 

Mr. Neale referred to Mr. Volcker's discussion of a possible meeting of ministers in Washington. He said there should not be a meeting until we knew where we were going. There had to be preparations. It would be tragic if a meeting were held and nothing happened.

Mr. Volcker said the meeting he had suggested would not be designed to settle all problems necessarily though if problems could be solved that would be fine. He did not agree with Mr. Neale that we could not have a small and informal meeting of the kind he had envisaged. If we couldn't even meet on these problems because we think the problems are too difficult, we may never get them resolved. We in the U.S. have thought that one advantage of biting the bullet and suspending convertibility was that it would eliminate some of the inhibition and we would be freer to talk about the problems and try to solve them. 

Mr. Morse said from the technical viewpoint he would expect to open the market on Thursday unless there was clearly something to expect very soon. If markets were reopened now, there was no chance that the old parity would be credible. He thought there was a grand prize in getting quick agreement to avoid that situation. He hoped the U.S. would want a quick solution.

Mr. Volcker said we would want a quick solution consistent with the premise within which we operate of needing a world-wide framework within which a sufficient strengthening of the U.S. position can take place. 

Mr. Morse said the U.S. needed an effective and sizable devaluation relative to other currencies.

Mr. Volcker said he should make clear he had no authority to negotiate exchange rate changes and no intention of trying to do so. 

Dr. Schoellhorn said he was in the same position.

Mr. Neale said the representatives other than the U.S. may want to talk among themselves about these matters. 

Mr. Volcker said they were welcome to remain in the meeting room as long as they wished for any further discussion.

Mr. Iyami said the Tokyo market had been the only one open on Monday and the banks had bought $700 million. However, there was no inflow from abroad and the $700 million was purchased from local people and banks. 

Mr. Morse said no answer could be given to Mr. Volcker's offer of a meeting in Washington until after the Monetary Committee meeting on Tuesday.

Mr. Volcker said he did not have in mind a grand and formal ministerial meeting with fixed agenda and large staff. It might be helpful in permitting Secretary Connally to express his views directly and get the views of others directly. If this would help resolve the issue that would be excellent, but we should not make any promise that such a meeting would resolve the issues. 

(The U.S. representatives left and the others remained for further discussion.)

S.Y. Cross 


171. Memorandum of Conversation/1/

Paris, August 17, 1971. 

/1/Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker 1969-1974: FRC 56 79 15, France. Confidential. Drafted by Petrow on August 26 and approved by Volcker. A similar, telegraphic version of the memorandum of conversation was transmitted to the Department of State in telegram 14016 from Paris, August 18. (National Archives, RG 59, Central Files 1970-73, E 1 US) Paris was Volcker's only stop after the meeting in London (see Document 170). Italian Treasury Minister Ferrari Aggradi found his bypassing of Rome "not acceptable" in view of Italy's "friendly" approach to U.S. monetary issues and the facts that Italy at that time chaired the EC Council and Aggradi would preside over the EC meeting in Brussels on August 19 to decide the EC's stance on the New Economic Program. (Telegram 5208 from Rome, August 18; ibid., POL 7 US/VOLCKER) Perhaps in response to these concerns, following the WP-3 and G-10 Deputies meetings in Paris September 2-4 (see footnote 3, Document 173 and Document 174), Volcker continued on to Rome for a "friendly, frank exchange" with Italian officials who "emphasized the feeling that size of adjustment U.S. wants of other countries so large and issues (including political ones of burden sharing, etc.) so complex that reasonable time-span must be allowed for process to work out." (Telegram 5601 from Rome, September 6; ibid., FN 10 9/1/71) Daane briefed Netherlands official Zijlstra by phone from Paris, and Zijlstra told Ambassador Middendorf he was quite satisfied with the briefing he received. (Ibid., FN 17 US 1/1/71)


Under Secretary Volcker
Governor Daane
Mr. C. Petrow

Valery Giscard d'Estaing, Minister of Economics and Finance 

President Nixon's New Economic Program

Minister Giscard d'Estaing wondered whether the U.S. would completely refrain from intervention in the exchange markets. Mr. Volcker said normally we would not intervene, although there might be exceptional circumstances which he could not anticipate which might require intervention. Giscard asked what the difference was between the present dollar float and the Canadian float. Mr. Volcker said that in the legal sense our position was the same as the Canadian and the German, but the legal similarity did not mean very much. Basically, the U.S. had not changed the parity of the dollar. Others would make that decision; we could not. We did not assume that there would be no changes in parities. We simply didn't know in which direction the dollar would move. Giscard asked whether we would request an exception from our obligation under the IMF to limit changes in parity to 1 percent. Mr. Volcker replied that the legal situation was difficult. The question is, who would be failing to fulfill his obligations--the U.S. or the other countries? To repeat, we don't intend to intervene in the exchange market and, in that sense, our position is the same as the Canadians' and the Germans'. 

Giscard said that Canadians and the Germans had said that they were floating for a limited time and that the U.S. had not said this. Mr. Volcker on the contrary replied that, we had said that our action was for a limited time. Mr. Volcker then briefly reviewed the philosophy outlined in the President's three-part program. He noted that the decision on suspending convertibility of the dollar was not in the original scenario but had been added because of the way the exchange markets were behaving in August. He said the U.S. appreciated what the French had been trying to do during that period. They had been very helpful in their efforts to deal with the problem of speculation. Other countries had been more nervous, however, so we had had to go ahead. In fact, if the Germans hadn't begun selling dollars this summer, he wouldn't be here now. As for how long it would last, the U.S. first must move decisively toward a strong external position after years of weakness and reestablish confidence in the dollar in some lasting form. Before we could terminate our measures, we had to be satisfied that the adjustment in the position of the dollar (i.e., the restoration of balance-of-payments surpluses) was assured. The burden of adjustment would lie less on Europe than on Canada and Japan.

Giscard referred to our decisions to suspend convertibility of the dollar into gold. Mr. Volcker reminded him that this included other assets as well, including SDR's. Giscard asked why SDR's were included. Mr. Volcker replied that we had to protect ourselves against total obligations against our gold stock. Giscard said we would not be able to adhere to this position very long. We would soon have to be discussing further SDR allocation. Mr. Volcker repeated that the question of how long the dollar would continue floating depended on the actions of the other countries. 

Giscard asked whether we still adhered to the basic principle of the Bretton Woods system, namely, fixed parities. Mr. Volcker said, broadly speaking, "yes," but the United States must reestablish a strong external position. Moreover, the system itself needed improvement. It had been subject to recurrent crises. We should take advantage of our present opportunity to reshape the system so that it could serve for the next twenty-five years. He was not advocating an international monetary conference at this time and not saying that we would continue the suspension of convertibility until the system had been reshaped. The ending of the suspension of convertibility would depend instead on the recovery of the dollar's strength. Mr. Volcker said we had no plans to propose for reshaping the system. We wanted to hear the views of the other countries so that we could reach a consensus.

Giscard said that, because of our measures, daily life in the monetary system would be different now. Sixty to sixty-five percent of the world's currency transactions would now be floating. He feared that we were in effect moving from a system of fixed parities to one of floating parities. What made the U.S. think that we could go back to a system of parities? Nations would accept the new situation and take whatever measures, such as border taxes, as were necessary to protect themselves. France was concerned that everything that the U.S. had achieved over the past twenty-five years in terms of monetary stability and free convertibility would be lost. Mr. Volcker replied that we equally recognized this danger, but there was an even greater danger of growing protectionism in the United States if we had not acted to prevent further erosion of our external position. The President felt that this latter danger was great enough to justify the risks inherent in the measures he had taken. 

Giscard said that this was not the vein in which Mr. Volcker had spoken to the group in London yesterday. Yesterday he had said "we've made our move, now it is your turn", and had shown no awareness of the dangers involved. Mr. Volcker replied that, if that was what Giscard had been told, then he had obviously failed to make himself clear. We were certainly aware of the dangers but we didn't want to patch up another temporary settlement with a 4-5 percent change in parities. We wanted a long-term solution.

Giscard asked what would happen at next month's IMF meeting. Mr. Volcker replied that we were ready at the appropriate time to go back to a system of fixed rates but with some changes, perhaps along the lines of our proposals on wider bands and temporary floats. He considered our proposal on floats more conservative than the Belgian proposal and more in line with French thinking. We had proposed that there be no float unless there was a fundamental disequilibrium, but our proposals were based on a strong presumption of fixed parities. We obviously could not settle everything at next month's IMF meeting, but we ought to be thinking hard at that meeting about the direction in which we wanted to go. 

Giscard said the French would have to consider what position they should take. It was a real problem. They didn't like to let the market fix exchange rates. The German experience was an example of how bad this could be. The mark had floated much higher than the Germans had expected. Appreciation had not been 3, 4 or 5 percent but 8 to 10 percent. Now the Germans were unhappy. Mr. Volcker replied that they should have thought of that before they acted. If we are to return to fixed parities, we must convince the market that they are sustainable.

Giscard said France had warned the Germans they were headed down a dangerous path. He said France feared the current trend toward floating rates would lead to protectionism. If there were no clear determination that the U.S. was prepared, not necessarily to restore the old system in every detail, but at least to retain the principle of fixed parities, then there was a danger that we would go back to the chaos of the 1930's. Mr. Volcker said the President was aware of the unpredictable elements in this program. Before going back to fixed parities, however, we have a sizable adjustment to make in our external position. We can't solve the problem by little adjustments. 

Giscard said that one consequence of our measure would be a reluctance by central banks to hold dollars in the future. This was how the U.S. had financed its deficit during the last ten years. It would have to find a new way of doing this now. Mr. Volcker replied that we didn't want to finance our deficits, we wanted to eliminate them. Giscard said that would take 10 to 18 months and we had to find a way to finance them in the meantime. Mr. Volcker said we wouldn't have to wait that long. Once people were sure that the tide had turned there would be a reflux of short-term dollars. Giscard said the market was likely to push the dollar down farther than we wanted. Mr. Volcker said it might well go down, and maybe it needed to go down. No one could say now how much it would go down. However, the U.S. must have an adjustment. He did not think this adjustment would have a major effect on Europe.

Giscard said jokingly that France had anticipated our program and was selling only luxury goods to the United States. Mr. Volcker said the major effect would be on Japan and Canada. Giscard added "and the Germans." Mr. Volcker replied that German exports did not loom so large in the total picture except for automobiles. 

Returning to the U.S. proposals to the IMF Directors,/2/ Giscard said we had spoken of temporary floats to prepare a change of parity. In the case of the dollar float, were we preparing to move to a new parity or to return to the old one? Mr. Volcker replied that the parity of the dollar was normally expressed in terms of gold. We did not intend changing that parity but that wasn't the parity that counted. The one that counts is the parity between the dollar and the other currencies. As for the dollar-gold ratio, we believe that small changes in that parity would be destabilizing. They brought about temporary solutions but they created the expectation of further changes the next time the dollar came under pressure and thus provoked speculation. Moreover, the monetary system had been gradually moving off gold. The U.S. wanted this evolution to continue. Possibly the present dependence on the reserve currencies also needed to change. This was something the U.S. was prepared to look at. Perhaps SDR's provided a possible future base for the system. For these reasons there was no prospect of a change in the gold-dollar ratio.

/2/Reference is to the July 19 proposals on wider margins and transitional floats; see Documents 162 and 163. 

Giscard replied that, be that as it may, we could not escape questions. He also asked about the IMF obligation of other countries to support the dollar. As a result of our measures, they would be faced by a need to buy immense quantities of dollars to meet this obligation. Mr. Volcker replied that the quantities might not be immense. We were aware of the problem and it had not been easy for us to make the decisions that we had. What other countries would now do he could not say.

Giscard replied that nonetheless, we must think of the problems of people who have believed for years that they must respect the rules and who now realize that, if they continue to respect the rules, they will be creating enormous problems for themselves. Something will have to be done. Mr. Volcker said we understood this, but Giscard should remember that our action in suspending convertibility was tied to a domestic program. That program was our contribution to restoring the international stability of the dollar. It was the instability of the dollar that had been causing the influx problem that France had been fighting for the past month or so. 

Giscard observed that, in the present circumstances, a Group of Ten meeting would probably be useless since there was no possibility of taking common decisions at the present moment. Mr. Volcker said we were looking ahead to an extended period of negotiations on possible changes in the system. He asked what Giscard thought of trying to form a new group, perhaps under IMF auspices, possibly with some LDC representation, though not too much to make it unmanageable, rather than sticking to the Group of Ten.

Secondly, he asked whether Giscard thought it would be useful for him and some of the other Finance Ministers to go to Washington to meet with Secretary Connally. Obviously it was impossible to settle everything in an afternoon, but would such a meeting be useful? 

Giscard replied that it was too early to decide either of these questions. The dust had to settle first. The European governments had to devote themselves to practical decisions in the days immediately ahead. He thought it better to let things take their natural shape. Mr. Volcker said this was all right so long as the shape did not turn out to be a bad one. Giscard said he thought there was no danger of this, at least not right away. Another reason for not convening the Group of Ten was that the Europeans were particularly concerned about the import surcharge, which was not a matter for the Group of Ten.

Giscard also mentioned that in the last few weeks the French had been concerned about the mounting pressures on the dollar and had taken measures to prevent the situation from being aggravated. Mr. Volcker replied that the U.S. was very conscious of this. Giscard promised that France would continue to cooperate in the coming days and would refrain from comments which might aggravate the situation. 

S.Y. Cross


172. Editorial Note 

During the week following announcement of the New Economic Policy on August 15, 1971, most foreign exchange markets were closed. Beginning on August 17, over the signature of Executive Secretary Theodore L. Eliot, Jr., the Department of State sent daily memoranda to Henry Kissinger summarizing foreign reactions to the President's program, and Hormats, in turn, summarized developments as he transmitted the memoranda to Kissinger. In general, media reaction was highly critical but official reaction centered more on how to cope with the new situation; criticism was directed more at the 10 percent import surcharge than at suspension of the dollar's convertibility to gold. The European Community, at its Ministerial meeting on August 19, was unable to agree on a common approach, but decided that when foreign exchange markets reopened on Monday, August 23, each member would adopt its own approach. (National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 376, President's Economic Program)

On August 18 Canadian Acting Prime Minister Mitchell Sharp, following consultations with Prime Minister Trudeau, wrote a letter to President Nixon endorsing the U.S. program's objectives for improving the international monetary system, but expressing grave concern over the import surcharge, which he thought would be very damaging to the Canadian economy and the American economy in turn. A Canadian Ministerial delegation, headed by Minister of Finance Benson, was coming to Washington to discuss the program with Secretary Connally. (Ibid.) Mexican President Echeverria also wrote President Nixon that he was sending a delegation to Washington to seek exemption from the surcharge. Echeverria's letter has not been found but is summarized in an August 18 memorandum from Executive Secretary Eliot to Kissinger regarding foreign reactions to the President's program. (Ibid.) 

On Friday, August 20, Ambassador to Luxembourg Kingdon Gould, Jr., cabled that he would be seeing the Prime Minister on Saturday and thought that in view of the inconclusive and uncoordinated EC reaction to the U.S. program the United States had an opportunity to make an input to the "eventual nature and direction" of the Community's response. Ambassador Gould asked for guidance on how the administration would like the Community to respond in both the short and long run. (Telegram 467 from Luxembourg, August 20; ibid., RG 59, Central Files 1970-73, FN 10 8/18/71) Telegram 153872 to Luxembourg, August 21, informed Gould the United States was not yet ready to put forward specific ideas on how the international monetary system might develop, and repeated the theme that in view of the "years of erosion" in the U.S. international position, substantial modifications in the international monetary and trading systems, which were interrelated, were required. Citing Connally's response to a question on the August 19 Today Show, the cable noted that "other countries are going to have to recognize that so long as we bear the burden of providing the defense shield for the free world that one way or another they're going to have to help pay for it." (Ibid., FN 10 8/21/71)

In an August 21 memorandum to Kissinger summarizing foreign reactions to the NEP, Hormats reported on an August 19 request by the Canadian delegation for an exemption for Canada from the surcharge. Connally reportedly told the Canadians the United States thought it important to have no exemptions, but "for diplomatic reasons did not flatly turn down the request and assured the Canadians that we would consider their problem and that further discussions could take place." Hormats concluded his memorandum by raising the danger of unleashing protectionist forces abroad if others chose to defend themselves against the U.S. actions. He noted that IMF Managing Director Schweitzer had proposed drawing up an integrated plan on exchange rates, the surcharge, temporary widening of margins, gold prices, and restoration of convertibility. Hormats agreed with the Treasury Department "that a large meeting at this time would probably not be productive" but continued that "if Treasury argues that an IMF paper would be unacceptable, since it might lean toward the European position, Treasury should come up with a similar document which lays out in broad terms what we expect of others and where we hope to come out of this exercise." In sum, Hormats concluded, the United States needed to give its trading partners "a clear picture of what we expect from them" and develop an integrated negotiating scenario lest "protectionist forces get out of hand with the serious foreign policy and economic costs which will result." (Ibid., Nixon Presidential Materials, NSC Files, Subject Files, Box 376, President's Economic Program) 


173. Memorandum From Deane R. Hinton of the Council on International Economic Policy Staff to the President's Assistant for International Economic Affairs (Peterson)/1/

Washington, September 1, 1971. 

/1/Source: National Archives, Nixon Presidential Materials, White House Central Files, FG Federal Government Organizations, Treasury 1/1/71-2/29/72, Box 2. Confidential. A copy was sent to Richard Allen (without attachments).

Volcker Group


The Volcker Group met for three hours August 31 for a lively, but as usual, quite inconclusive exchange of views. Paul obviously enjoyed himself playing games with the rest of us. 

We began by discussing the August 28 paper on balance of payments equilibrium./2/ The main issue seemed to be whether this paper, or something like it, should be given to the Deputies of the Group of 10. It was agreed that there was a case for quantifying what we were after--apparently, Paul has previously only said "substantial improvement"--but it was also agreed that this paper would have to be rewritten before it could be passed out. As usual, Paul was left with a free hand to do what he thinks best, but it is possible that he will use the OECD Working Party 3 paper (attachment 1), and comment orally to the effect that the OECD estimates are very conservative./3/

/2/Not found, but see Document 76 which is presumably the successor of the August 28 paper. 

/3/Not printed. The August 30 WP-3 paper is entitled "Brief Résumé of Material Relevant to Assessment of Present International Payments Situation." The OECD WP-3 and the G-10 Deputies met in Paris September 2-4. According to a September 12 memorandum from Eliot to Kissinger on "Foreign Reactions to the President's Economic Program--Afternoon September 10," during the previous week's G-10 Deputies meeting Volcker estimated the United States needed a $13 billion balance-of-payments adjustment, primarily in the trade account. (National Archives, RG 59, Central Files 1970-73, E 1 US 9/1/71)

There was some discussion of the agenda (attachment 2)/4/ and what kind of answers Paul would give. If you have questions I could, perhaps, answer. He stressed that they would not discuss exchange rates leaving that for the Ministers at the September 15-16 meeting./5/ Paul agreed that the issue of exchange rate realignments, at the best, would not be resolved before the IMF meetings at the end of September. 

/4/Not printed.

/5/See Document 175. 

Paul noted that both the OECD and U.S. ideas of equilibrium call for the LDC's to bear a significant part of the adjustment burden!

At one point, he introduced into the discussion some estimates of what we are after in "non-monetary areas" recognizing, however, that a large enough monetary adjustment would reduce the pressure to deal with these problems. His list, as I understood it, follows: 

Multilateral defense offset in Europe--$1-1.5 billion;
Canadian trade practices, including auto agreement--$100 million;
Japanese QR's--$250 million;
Dismantling the Common Agricultural Policy--$250 million;
Eliminating European agricultural subsidies in third markets--$150 million.

There were some pointed remarks about the unlikelihood of accomplishing much on these in negotiations with the Europeans, at least in the short run. 

The discussion then turned to the August 30 options paper/6/ and we went round and round with almost everyone but Paul arguing that these were not the kinds of options that should be put to the President. At the very minimum, we urged that Option 1 be developed to spell out the main elements of a possible new international monetary system, that is, to examine such questions as:

/6/Not found. 

Should the dollar remain a reserve currency and, if not, what should take its place?--i.e., how consolidate a new reserve unit?

What is the future role of gold?
What kind of convertibility for the dollar should be envisaged?
Should there not be presumptive rules for exchange rate changes, particularly on the up side?
How else to get more rate flexibility?
How to provide sufficient liquidity, assuming the U.S. runs a large Current Account surplus?

Ezra Solomon, Nat Samuels, and Governor Daane also talked about the danger of the surcharge being frozen in the system. Paul just smiled.

Finally, you might find of interest two papers done in the Fed on reserve asset consolidation (attached),/7/ as well as the attached IMF paper on the future position of the U.S. dollar./8/ 

/7/Not printed. A paper entitled "Consolidation of Outstanding Official Dollar Balances," forwarded to Under Secretary Volcker by Ralph Bryant on January 2, 1973, and circulated to the Volcker Group Alternates as VGA/73-1 on January 4 appears to be a successor to these papers. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VGA/73-1-VGA/73-25)

/8/Not printed. The IMF paper, EBS/71/232, August 27, entitled "Some Thoughts on the Future Position of the U.S. Dollar in the International Monetary System," was circulated to members of the Volcker Group as VG/LIM/71-28 on August 31. (Ibid., VG/LIM/71-1-) 


174. Memorandum From Robert Hormats of the National Security Council Staff to the President's Assistant for National Security Affairs (Kissinger)/1/

Washington, September 6, 1971. 

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218, Council on International Economic Policy. Confidential. Some of the points in this memorandum were summarized in a multi-topic, September 7 memorandum from Jeanne Davis to Kissinger suggesting topics to discuss at a luncheon with Secretary Connally that day. (Ibid., Agency Files, Box 289, Treasury, Volume II, 1971) Hormats prepared another memorandum for Kissinger, September 11, containing many of the same points for Kissinger's September 14 breakfast meeting with Peterson. (Ibid., Box 218, Council on International Economic Policy)

Talking Points for CIEP Meeting--Tuesday, September 7, at 8:30 a.m. in the Cabinet Room

There are several issues which might be raised at the meeting on which you may wish to comment. On the first three issues your comments are particularly vital, since those primarily responsible for future plans regarding the New Economic Policy may have lost sight of, or given insufficient attention to, important foreign policy considerations./2/

/2/The President met with the Council from 8:33 to 10:35 a.m. (Ibid., White House Central Files, President's Daily Diary) For Peterson's report on the meeting, see Document 79. 

Foreign Response to New Economic Policy

Recent Events: The Deputy Finance Ministers of the Group of Ten agreed on Friday/3/ in Paris that their Finance Ministers should consider a general realignment of current parities at the forthcoming Ministerial Meeting in London on September 15 and 16. However, no agreement was reached on what sort of realignments are necessary. There was strong Japanese and European pressure for the United States to devalue the dollar outright--by raising the price of gold--in exchange for revaluation of the yen and major European currencies. Paul Volcker, the U.S. Representative, opposed this and indicated that the Administration is still planning to return to the $35 an ounce gold price, which was suspended on August 15. Volcker also added that the United States "did not have any particular plan" for solving the present crisis and believed the current phase was one of "consultation, not negotiation". 

/3/September 3.

The Common Market is locked in a stalemate between France--which opposes any revaluation of the franc because it feels its weak competitive position cannot stand it, and which continues to demand that the dollar be devalued vis-a-vis gold (thereby increasing the value of French gold reserves)--and Germany, which wants the Common Market to float against the dollar. The Europeans also claim that the large amounts of U. S. capital outflow, not improper currency values, are the primary reason for the dollar crisis, and cite the fact that the U.S. had a $1.7 billion surplus with Europe last year. 

The present problems, as indicated in previous memos,/4/ are:

/4/See Document 172. 

--Our major trading partners have not been able to agree on coordinated measures to meet the present crisis. This raises the possibility that one country or trade group such as the EEC might take actions which we consider acceptable, but we would be unable to remove the surcharge if another country such as Japan failed to take appropriate measures, thus making the EEC draw back and strengthening the hands of its domestic protectionist forces in Europe.

The longer the surcharge is in effect, the greater the possibility that our trading partners will institute export subsidies, capital controls on the inflow of dollars, or restrictions on the imports of U.S. products. In doing so they would strengthen their bargaining position in future negotiations and improve their economic positions vis-à-vis the U.S.; however, once instituted, such measures are politically difficult to remove, and will lead to a more restrictive trading world rather than the freer trading world which the President desires and which is most certainly in our interest. By the same token, the longer the U.S. surcharge remains in effect the stronger will be the vested interests in this country in retaining it, and the more difficult politically it will be for the President to remove. 

With this in mind, it is important that you raise the following questions:

--By not providing our major trading partners with a clear picture of what we expect from them (which the Europeans see as lack of leadership and evidence that the U.S. does not know what it wants), do we not run a major risk of their not being able to agree to reforms which are acceptable to us, and thereby prolonging imposition of the surcharge and raising the risk that our trading partners will institute measures which restrict trade and capital, or subsidize their own exports? 

--Is there at present a scenario for an integrating set of negotiations with our major trading partners should the forthcoming Group of Ten meeting in London and the IMF meetings in Washington at the end of September in Washington produce no results? If September passes without an agreement as to how to proceed, isn't it possible that the situation will deteriorate into chaos?

Leverage Value of the Surcharge 

Since the President's speech, a number of USG spokesmen have indicated that we would remove the surcharge only after a major exchange revaluation by our trading partners plus a removal of trade barriers and a more "equitable" arrangement for sharing the burden of U.S. troops stationed abroad. It is, however, doubtful that the surcharge is a strong enough or appropriate lever for securing all of these goals. Moreover, as Vice Chairman Emminger of the Bundesbank has recently indicated, this may prove to be an "indigestible negotiating fare", at least within the time span within which one would wish to move from the present provisional state of affairs. And continued use of the surcharge runs the risks discussed above.

One way of using the surcharge would be to regard it as a lever only for securing appropriate currency revaluations; subsequently, we would use the lack of gold convertibility as a lever for developing a new international monetary system, and negotiate away restrictions on U.S. exports by our trading partners by holding out the possibility of the removal of our own restrictions on imports as a carrot. 

Should this issue be raised, you should question whether or not we are over-estimating the power of the surcharge to secure our major trade and monetary objectives.

New International Monetary System 

There is considerable danger that the President will not be given a full range of choice in making the decisions on what sort of monetary system we wish for the future. There has been a "conventional wisdom" that a system of relatively fixed exchange rates allows for greater exchange rate predictability for traders and investors. Floating rates have been regarded purely as a transitional device for use in emergency situations in order to determine the "market rate of exchange" for currencies, and have been relatively unused.

Recently, however, we have learned more about floating rates: 

--Germany and Canada have been floating their currencies for the last several months. They have neither fluctuated erratically nor spiraled upward in value as some had predicted. In addition, they have posed no major problems for traders, who, with the help of banks which insure traders against changes in currency value, have shown little sign of discontent with the system.

--We have become painfully aware of the costs of maintaining fixed exchange rates which are out of line with the market values of currencies: 

(a) An overvalued dollar has meant that the U.S. exports have fallen far below imports, which has had serious effects on U.S. employment, and has caused an increase in U.S. investment abroad--which also has a serious effect on jobs in this country.

(b) Speculators, including large U.S. corporations, predicting large changes in the price of major currencies, have sold dollars and purchased such currencies as the franc, the yen and the mark, thereby causing the number of dollars held by foreign countries to expand absolutely and relative to the small ($13.5 billion) amount of reserves held by the U.S. 

(c) There has been increased pressure from at home and abroad to curtail military spending abroad, reduce troop levels, and decrease foreign assistance and security assistance because of the "dollar drain".

--The American public has become increasingly aware of the fact that floating exchange rates, by decreasing the value of the dollar vis-à-vis other currencies, can be used to increase U.S. exports and cut down the flow of foreign imports into the U.S. 

--The present fixed rate system, which had been praised for its ability to insure stability--so that foreign investment and industrial decisions can be made with a minimum of risk--has, by the inherent instability and inviability of fixed rates--actually caused more instability and greater risk in the monetary system than has floating rates--which when they change do so more gradually than "fixed" rates.

--Monetary crises have aggravated political relationships between Europe, Japan, and the U.S. and have caused major domestic political crisis in our trading partners. Floating exchange rates would, by making exchange rate changes smaller and more frequent, eliminate most major political crises relating to monetary problems (i.e., in many Latin American countries a devaluation causes a major Governmental crisis; in Brazil, which devalues by small amounts monthly, it is regarded as routine. Britain suffers a Government crisis when it devalues. Germany, before the float, suffered similar crises when it revalued.). 

Although you may not wish to advocate floating rates, you should indicate that there are strong arguments for a floating exchange rate and greater flexibility which you believe the President wants to hear before making any decision. And that you would like to have a look at whatever paper goes forward to the President, since there are important foreign policy implications to whatever we do.

[Omitted here is the concluding section concerning the forthcoming report of the Williams Commission on International Trade and Investment.] 


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