U.S. Department of State
U.S. Department of State
Other State Department Archive SitesU.S. Department of State
U.S. Department of State
U.S. Department of State
U.S. Department of State
U.S. Department of State
U.S. Department of State
U.S. Department of State
Home Issues & Press Travel & Business Countries Youth & Education Careers About State Video
 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 222-244

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

Washington, January 24, 1972.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Country Files--Europe, Box 678, France Volume 9 Jan-July 72. Secret.

French Concern about Strength of the Dollar

We want to be sure that you focus urgently on a growing problem between us and the French arising from the decline of the dollar since the Azores and Smithsonian agreements. The precise issues are explained below but the political point is that spirit of U.S./French and President/President relations achieved in December runs grave risk of being undermined. Indeed the process is well underway. We think you need to get together urgently with John Connally, and also Arthur Burns, on this matter.

A number of high-level French officials, including President Pompidou, have expressed concern about continued decline in value of the dollar./2/ They have indicated that while it was clear to them at the Azores that the U.S. could not return to convertibility at this time, it was expected that the U. S. would act to maintain the strength of the dollar at the new parity. In their view, low U.S. interest rates are forcing dollars abroad in order to push up the value of other currencies and push down the dollar's value. (Between January 7 and 21 the Swiss franc appreciated by 1.1 percent, the Belgian franc by 1.5 percent, the French franc by 0.8 percent, and the guilder by 1.7 percent.) If the outflow of dollars continues, and our low interest rates, and the expectation of continued inflation resulting from the large budget deficit announced by the President have led some to believe that it will, pressure will increase on France and other European countries to purchase dollars in order to keep the value of the dollar from depreciating further within the "band" set as the result of the Smithsonian Agreement./3/

/2/In a brief telegraphic message Ambassador Watson advised the Department of State that President Pompidou had taken him aside at a dinner Pompidou hosted for Chiefs of Mission on January 15 to express concern over the international monetary situation and his hope that the understandings reached with President Nixon in the Azores with respect to the dollar could be fully carried out. (Telegram 1250 from Paris, January 20; ibid.)

/3/Nearly a month later, on February 22, Hormats and Sonnenfeldt sent a similar memorandum to Kissinger informing him of Ambassador Rush's February 18 farewell call on Economics and Finance Minister Schiller during which the latter expressed concern about the inflow of dollars to Germany. (Ibid., Agency Files, Box 290, Treasury Volume III)

France may see a sinister plot behind our actions. A number of the officials fear that they are the work of Secretary Connally, and others who believe that the realignment agreed upon in Washington was not large enough. If this distrust of our moves is not rectified, it is bound to cause political friction. Moreover, if the dollar outflow continues, thereby widening the difference between the value of the franc and the dollar, Pompidou could be prompted to reconsider whether to devalue the franc. This would completely destroy the Group of Ten agreement.

The problem is complicated by several additional factors:

--There is some talk in the Congress that the dollar was not devalued enough and that whatever legislation is submitted to formalize the devaluation should be amended to devalue the dollar by an amount greater than that decided on at the Smithsonian, which the French and other G-10 countries could not tolerate.

--We still have not reached the desired trade agreements with Japan, Canada and the European Community./4/ The longer we wait, the greater the pressure on the dollar and the greater the possibility of an increase in speculation.

/4/On December 15, 1971, following the Azores Agreement (of which he had not been apprised) and prior to concluding the Smithsonian Agreement, Hormats sent an information memorandum to Kissinger with his view that convertibility of the dollar to gold was the major U.S. lever "in Round II for securing the type of new international monetary system we want for the future." He cautioned against pressing too hard on broad trade issues. (Ibid., Subject Files, Box 402, Trade, Volume IV 7-12/71)

Given the fact that the low interest rates are primarily the result of large increases in the monetary supply necessary to boost our domestic economy, it is highly unlikely that Arthur Burns or any other official in this Government would attempt to raise interest rates at this time merely to satisfy the Europeans. However, it is necessary to restore European confidence that we intend to carry out the Smithsonian Agreement by requesting of the Congress in the very near future (pending the desired trade concessions) the precise amount of dollar devaluation we are committed to seek and that we will press the Congress to pass this legislation without any deviations from that Agreement. There must also be a show of confidence in this country that the realignment agreed upon by the Smithsonian was completely satisfactory and that we expect it to result in an improvement in the U.S. balance of trade and payments. Without a display of commitment and confidence, the Europeans will continue to distrust our motives. Speculation against the dollar may again grow to significant proportions, and the entire Smithsonian Agreement may come apart.


223. Letter From President Pompidou to President Nixon/1/

Paris, February 4, 1972.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 290, Treasury, Volume III. No classification marking. The French text of Pompidou's letter was sent telegraphically. (Ibid., Subject Files, Box 356, Monetary Matters) This translation is attached to an undated memorandum from Haig to Kissinger, which indicates that the translation, made by Sonnenfeldt, is a "slightly sanitized" version of Pompidou's message, which Kissinger could give to Secretary Connally. Haig reminded Kissinger that an interim response had been sent to Pompidou indicating his message would be given "careful and serious consideration" when Connally returned from Texas. The interim response was not found. Additional documentation concerning this letter, including a memorandum from Kissinger transmitting this "hot line" letter to Connally, drafts of President Nixon's response, and Sonnenfeldt's comments on the drafts are ibid.

My dear President,

At the time of our meeting at the Azores, we reached agreement on two texts, namely an official communique and a document intended, in principle, to remain confidential./2/

/2/Document 220.

But the essential fact in my opinion is that our conversations of December 13 and 14, 1971, were characterized by a frankness and mutual understanding that were particularly useful on account of the very general character of most of the problems which were raised.

It is notably within this framework that the international monetary problems were touched upon in a more technical and precise fashion. Without doubt, it was impossible in our brief conversations to discuss these questions in detail. Nonetheless, very important accords were concluded on numerous points.

For these reasons, I feel obliged to describe to you more than six weeks after our conversations my uneasiness with regard to the evolution of the international monetary situation. I should like to call your attention to certain shortcomings which risk weakening the correct implementation of our agreements as well as to my preoccupation over steps taken or of positions envisaged by your administration and which, at first glance, do not seem to me to be consistent with what we agreed.

First, however, I would of course not permit myself to pass a judgment on your internal economic policy. I know that you have obtained remarkable results insofar as the movement of prices and salaries are concerned. Nevertheless, I am not confident that the combination of a large budgetary deficit and of a policy of systematically low interest rates can strengthen the confidence of the international financial community, always very sensitive. Nor do I believe such a course affords in the best of circumstances for the defense of the new parity of the dollar which you yourself have fixed.

At the time of our Azores conversations, I well understood that there was no question of the complete convertibility of your currency. But I did indicate to you that if you agreed to control the movements of capital, initiate a system which would permit the consolidation of dollar balances and also the defense of your currency, the dollar balances notwithstanding, this would in effect mean a convertibility from currency to currency.

I also told you that I understood very well that you insisted on refraining from an official and immediate declaration but that all these things were understood. [I also said] that failing these steps there would be no real defense of the dollar and it would become necessary for the Federal Reserve Board to defend your currency by exchanging it, if need be, against other currencies./3/

/3/Brackets in the source text. In addition to some "editorial" changes that were made in translating President Pompidou's letter from French to English, at this point a phrase in the French text was omitted to the effect that Kissinger had also made this point. According to the memorandum of the Presidents' conversation on the afternoon of December 13, during his review of the current international economic problems Pompidou said he understood that during a discussion that morning (presumably the meeting with Giscard), "Secretary Connally had said that we would defend the dollar." At the conclusion of Pompidou's intervention, "Dr. Kissinger said that we would have to buy dollars with other currencies in order to defend it. President Pompidou replied that this was correct. There was no other defense." See Document 219.

It was my understanding that you understood well/4/ that in the new monetary system the dollar would be defended pursuant to the methods that I had described; that it appeared evident that there was no other method and, not counting the existing dollar balances, the new methods on which agreement had been reached represented in a way a form of convertibility.

/4/The language in the French text for this phrase indicates that after he discussed this matter with President Nixon and Secretary Connally, Kissinger had assured Pompidou the next morning that these were President Nixon's understandings. According to the memorandum of Kissinger's December 14 breakfast conversation with Pompidou, Pompidou opened the discussion noting that he had talked with Connally and thought Connally had then talked with Kissinger. Pompidou said "he had found someone who had firm ideas. He had said that the U.S. would defend the dollar after devaluation." Kissinger replied that "he understood what President Pompidou was saying. After talking to him he had spoken to the President and the President's view is that when we speak of defending the dollar, as he understood it, we are talking about what happens in the new monetary system. The President believes that as long as there is the expression on our part that is what President Pompidou described as defending the dollar, but President Pompidou seemed to feel that there were others. Leaving aside the present balances, the way to defend is to buy when it falls." In the ensuing discussion President Pompidou said "he understood that the present dollar balances would not be included as they were too big. The President apparently felt we were thinking of something else. " Kissinger replied "that his impression after talking to Secretary Connally is that the Secretary feels if the exchange alignment is correct then we will be prepared to operate the system." Kissinger then read Pompidou item 6 of the draft Framework Agreement, with Connally's formulation on "what we were prepared to do as part of a general package on margins and rates." See Document 219. For the Framework Agreement, see Document 220.

In any event, these intentions have not for the moment come into play since, on the money markets, the dollar is not at its support level and the problem therefore has not posed itself for the United States to defend its currency as any other country would, by intervening to preserve the dollar rate within the margins defined by the Washington accords.

Nevertheless, the reversion of floating capital towards the United States which you and I expected has not yet occurred, perhaps for psychological reasons but also because of the interest rates that prevail, in practice, in your country. Moreover, the widening of the dollar margins, which was decided in Washington following our meetings, gives speculators the possibility to realize more substantial gains in capital without a new modification of the parity of your currency.

You yourself proposed setting the enlargement of these margins of fluctuation at 2.25 percent on either side of parity which represented on your part, as on mine, an important sacrifice in relation to our initial positions of principle. Therefore, I could not fail but note that in the report of your advisors which accompanied the message you addressed to Congress on January 27 on budgetary and economic problems,/5/ note was made of a growing consensus in favor of greater flexibility in exchange rates. This does not seem to conform to the undertakings that were reached between you and me. I would add that the experience of the last six weeks gives me reason to believe that, setting aside these formal considerations, the above mentioned remark (by the President's advisors) does not correspond to a clear analysis of the present situation.

/5/The President's "Annual Message to Congress: The Economic Report of the President," dated January 27, is printed in Public Papers of the Presidents of the United States: Richard M. Nixon, 1972, pp. 111-114.

You must no doubt be impressed to see the extent to which we Europeans are directly interested in the strength of your currency. This is true because it is evident that it would be disastrous for the international monetary system and thus for the entire free world should the accords of December, whose historic character you yourself noted, become only a precarious pause along the path towards a new crisis.

The central problem of course remains that of your balance of payments, which, all things being equal, one cannot expect with certainty to correct in a short period of time. For that reason I suggested to you that you increase your controls on the movement of capital. You indicated to me that you were initiating certain measures in this regard which were not substantial, but that you were ready to go further. This course would have clearly improved the situation of your balance of payments, and therefore the level of the dollar on the exchange markets. It was for this reason that I was surprised to see not only that nothing has started in this direction, but that the Treasury of the United States has--at a moment where for psychological and technical reasons, it would seem necessary to improve confidence in the dollar--postponed from December 31, 1971 to February 29, 1972 the date at which the subsidiaries of American corporations established abroad must repatriate their profits. Such a measure taken at such a moment does not appear to me consistent with the objectives we set.

Lastly, I would add that you provided me with certain details about the procedure, which you obviously are alone competent to judge, that you intended to pursue with respect to Congress regarding the legal devaluation of the dollar. You also indicated to me in this connection that you would convene the Committee Chairmen with a view to speeding consideration of a bill which, according to you, was desirable since the Congress was adjourning immediately after the conclusion of our conversations. Thus have I welcomed with all the more pleasure the February 3 notification from Mr. Connally to Mr. Giscard d'Estaing, of the transmission in the very near future of this text to the Congress.

I wish in closing to emphasize the point that my concerns are those of a friend, that the prosperity of the United States and the maintenance of the value of the dollar are of fundamental importance for the entire Western world, and I would thus be happy if you could dispel these concerns which I have very freely brought to your attention in the spirit of our good conversations of 13 and 14 December, 1971.

Please, my dear Mr. President, accept my highest regards.

Georges Pompidou/6/

/6/Printed from a copy that bears this typed signature.


224. Letter From President Nixon to President Pompidou/1/

Washington, February 16, 1972.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 356, Monetary Matters. Secret. "HOT LINE" is typed at the top of the page. Earlier drafts of this letter and Sonnenfeldt's comments on the drafts, which express concern that they did not adequately address measures to defend the dollar and the U.S. position on convertibility, are ibid. Sonnenfeldt thought Pompidou would view those inadequacies as evasive and unresponsive to his concerns.

Dear Mr. President:

My intensive preparations for my trip to China have somewhat delayed a response to your message of February 4./2/ I have wanted to consider that important communication with care and now, just before my departure, I should like to reply in the same spirit of candor and friendship which you displayed in your message. I assure you that I remain convinced that maximum mutual understanding between us on these difficult issues is essential.

/2/Document 223.

I recognize the force of the concern you express that the prosperity of the United States and the stability of the dollar are important to the entire Western world. I also can well appreciate that, viewed from abroad, the high level of our prospective budgetary deficits in the United States could raise questions. Yet, viewed in the perspective of economic conditions in the United States and in the framework of our total economic policies, I am convinced these deficits are appropriate. To a considerable extent, the new forecast of a higher deficit in the current fiscal year is merely the reflection of reports received since our meeting in the Azores, indicating slower growth than had been estimated earlier for the second and third quarters of 1971. The slower growth in those quarters leads automatically to an expectation of lower tax receipts in the first half of 1972. In part, however, the new forecast of a higher deficit this year is the result of a purposeful acceleration of Government expenditures to provide some needed impetus to nudge the economy on to a more satisfactory recovery path. Under the circumstances, I believe the deficit is of an appropriate size not just in the context of our domestic needs but in terms of a broader view of the evolution of the monetary system and the world economy.

You have emphasized that the prosperity of the United States and the value of the dollar are of fundamental importance to the Western world. I agree, and I believe the force of the point is redoubled at a time of sluggishness and even fear of recession in some important countries. Steadily rising levels of business in the United States will help assure growth in markets for our trading partners--and confidence in that growth--even as the effects of the currency alignment are absorbed.

As our joint press statement at the Azores (as well as our private communication)/3/ emphasized, the most important contribution the United States Government can make to the stability of the monetary system and the defense of the newly fixed structure of exchange rates is through vigorous efforts to restore price stability and productivity to the United States economy. Without reviewing all the details of our present programs, I assure you that these fundamental objectives remain the basis of our domestic policies. We shall break the back of inflation in the United States. We shall seek new breakthroughs in productivity growth. These steps seem to me the indispensable backbone for any realistic defense of the dollar.

/3/Document 220.

This defense will have many facets. New tax measures and new regulatory approaches have been adopted to spur productivity. To assure that the economic expansion is accompanied by further progress toward price stability, we are maintaining our price and wage controls, and I have requested of the Congress a firm expenditure ceiling for fiscal year 1973 at a level only 4 percent above this year's expenditures. This will assure that revenues come into line with spending as the slack in the economy dissipates.

In view of the objectives of our total economic program, I have been pleased to receive reports that the Organization for Economic Cooperation and Development, in the meeting in Paris of its Economic Policy Committee a few days ago, found general accord with its forecasts that, in 1972, the United States will succeed both in having the most satisfactory recovery of economic growth and in having the lowest level of price inflation of any of the major member countries.

As we see the coming months, our forecast budgetary deficit will insure that we do not have to place undue reliance on monetary policy for promotion of economic expansion. Indeed, the financing of the deficit is likely to force some increase in short-term interest rates, to which international exchange markets are sensitive. I frankly hope this adjustment can be made without disturbing our long-term rates, which remain high. But my advisers tell me that conditions in a number of countries abroad are likely to lead to a reduction in their interest rates, a development which will reduce present disparities in interest rates among major countries.

In view of the major disturbances which were experienced during 1971, we have recognized that the foreign exchange markets could not be expected to return immediately to entirely settled and normal attitudes. For this reason, since December 18, we have refrained from any steps to relax our controls on capital, despite the doubts I expressed to you as to their effectiveness and usefulness and despite my strong wish to move away from these controls as promptly as possible. The small technical change in our regulations which you mention in your letter had actually been announced some days before our meeting in the Azores. Our general objective remains, however, the gradual relaxation of these controls, and we must, within the coming weeks, announce the details of our direct investment control program for the calendar year 1972.

In the light of conditions in the exchange markets in recent weeks, I believe we are fortunate that our compromise has permitted a wider band of fluctuation to absorb and diffuse movements of funds without requiring large scale central bank intervention. I confess that your concern over the comments on flexibility in the recent report of my Council of Economic Advisers surprises me in the light of our conversation, since I believe we both recognized this question would need to remain an open issue for the planned discussions of the future of the international monetary system. Similarly, I believe that I made clear in our conversation that it is our view that questions of convertibility of the dollar should be discussed in the context of broad consideration of the many inter-related aspects of future reform of the monetary system. Now, however, that the period of intensive short-term trade discussions is behind us, we are intensifying our deliberations and preparations within the United States Government for these important international deliberations on monetary reform, including various proposals for the consolidation of dollar balances, the desirability and feasibility of various measures to deal with short-term capital movements, and the appropriate exchange rate regime.

To assure the maximum accomplishment in these discussions, and to help deal with current issues of monetary cooperation as they arise, I have asked Secretary Connally and his staff to remain in close consultation with your advisers in the months to come.

Mr. President, you played a crucial role in preparing the ground for the Smithsonian Agreement. With transmittal of the formal request for dollar devaluation to the U.S. Congress, this should be a time of personal satisfaction to you./4/ I hope for speedy action on that request, although I must in frankness confess my own disappointment that the European Community has apparently taken the decision that, in the important area of agriculture, the normal competitive benefits of a devaluation will be denied to us.

/4/Legislation to increase the dollar price of gold was sent to Congress on February 9, under cover of a letter from Secretary Connally to Vice President Agnew in Agnew's capacity as President of the Senate. Connally's letter, the draft legislation, and background material were circulated to the Volcker Group as VG/Uncl. INFO/72-1 on February 10. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, 1972) Congress completed action on the legislation on March 31, and President Nixon signed it into law on April 3. See Public Papers of the Presidents of the United States: Richard M. Nixon, 1972, pp. 513-514.

Plainly, we have many fundamental issues before us, both in the monetary and trade areas--issues, indeed, that cannot be disassociated from each other. We have no choice but to attack them openly and frankly.

We have, I believe, made good progress in recent months. I hope we can continue to convert old issues into new agreements.

I look forward to staying in close communication with you on the entire range of issues that concern both our countries and would, of course, welcome your further views on the subject matter of this message. I expect to communicate with you concerning my impressions in China as soon as I have returned from there.

With warm personal regard,

Richard M. Nixon/5/

/5/Printed from a copy that bears this typed signature.


225. Editorial Note

On February 22, 1972, Treasury Under Secretary Volcker sent a memorandum to Dewey Daane, William Dale, Kenneth Dam, Peter Flanigan, Nathaniel Samuels, and Marina Whitman regarding "Development of Proposals for U.S. Positions in Further Discussions of International Monetary Reforms." Volcker proposed they constitute a group known as "Volcker Group Alternates" (VGAs) to meet three times a week for several hours to draft papers for consideration by the Volcker Group on various aspects of the long-range reform of the international monetary system. Volcker proposed that Deputy Under Secretary for Monetary Affairs Jack Bennett would represent Treasury on the VGAs, and asked each addressee to designate a representative who could devote considerable time to the endeavor in the coming months. Volcker's February 22 memorandum is attached to a March 7 memorandum from Willis to the Volcker Group Alternates. (VGA/72-1; Washington National Records Center, Department of the Treasury, Volcker Group Masters: RG 56 86 30, 1972, VGA/72-1-VGA/72-50) As the VGAs came into being, the four Volcker Group WGs established in 1969 and 1970, which had not met for some time, were terminated.

In his February 22 memorandum, Volcker proposed a series of papers for the VGAs and an early meeting of the Alternates to discuss the proposed papers as well as a recent Treasury paper on "a desirable organizational framework for international negotiations on international monetary reform." The Treasury paper was revised several times in March. Its final version, a 14-page March 20 memorandum from the Volcker Group Alternates to the Volcker Group, entitled "Organization for Negotiations on Monetary Reform," considers options and provides ample scope for U.S. support for creation of the C-20 at the IMF annual meeting in September 1972. (VGA/7-19 Rev.; ibid.)

On February 22 Deputy Under Secretary of State for Economic Affairs Samuels also sent a memorandum to Under Secretary Volcker regarding "A Start Toward Negotiating International Monetary Reform." Samuels thought an early start could help stabilize current short-term capital flows and address European concerns. He proposed a series of topics for discussion in the Volcker Group (many of them similar to those proposed by Volcker for the VGAs in his February 22 memorandum) and discussed at length the "forum" question with a sympathetic leaning to "the idea advanced by the IMF management and others of using a so-called Governors Committee (G-20) within the IMF." On February 24 Samuels sent a memorandum to Volcker welcoming "the convergence of thought" in their respective February 22 memoranda and suggested an early meeting of the Volcker Group to discuss the suggested topics for the VGAs. On February 29 Samuels sent a letter to Volcker proposing a restructured list of Volcker's suggested papers for the VGAs, and designated Deputy Assistant Secretary Weintraub as the State representative on the VGAs. Samuels' two memoranda and letter are in the National Archives, RG 59, Central Files 1970-73, FN 17 US.

On February 24 Dean Hinton sent a memorandum to the President's Assistant for International Economic Affairs, Peter Flanigan, in response to Volcker's February 22 memorandum. Hinton wrote that "Treasury seems to be pulling itself together" for the international monetary reform negotiations and recommended that Flanigan inform Volcker that Richard Erb would represent the CIEP on the VGAs, but that Hinton might also attend from time to time. Hinton said he would like to continue as the CIEP member of the Volcker Group, but recognized that Flanigan would wish to participate occasionally. (Ibid., Nixon Presidential Materials, White House Central Files, Federal Government Organizations, Treasury, 11/1/71-2/29/72, Box 2)

The forum for negotiation of long-term international monetary reform was as important an issue in early 1972 as the shape of reform itself. On January 12 Bundesbank President Carl Klasen, thinking in the G-10 context, told the Financial Attache at the Embassy in Bonn that "he could see adding a country like Australia, but he could not see adding Brazil or other LDCs. The G-10 as the body of the major industrial and monetary powers was sure to be needed in future crises and its usefulness would be destroyed by opening it to LDCs." (Telegram 474 from Bonn, January 12; ibid., RG 59, Central Files 1970-73, FN 10)

By contrast, in the United States there was some concern that European interests were disproportionately reflected in the G-10 and on balance might be inimical to U.S. reform interests. The OECD was another possible forum, but monetary reform was not obviously part of its mandate and taking it up in that also-Eurocentric organization could raise hackles in the IMF. With an eye to forthcoming positions toward the LDCs at the UNCTAD III Ministerial scheduled to convene in Santiago in April, and in the hope of lessening the chance the United States might be isolated in more Eurocentric fora, there was some sentiment, clearly reflected in Samuels, February 22 memorandum to Volcker and the March 20 memorandum to the Volcker Group, for finding scope for LDC participation in the forthcoming international monetary reform negotiations.

On March 8 the Volcker Group Alternates met with British officials at the Treasury Department to discuss a U.K. paper on international monetary reform. The paper and the discussion were wide-ranging and included liquidity creation and distribution, an aid link, convertibility, and gold. Regarding the forum for discussions, the paper noted that the "discussion cannot be restricted to a small group of developed countries. Arrangements must be made for the developing countries and others outside the Group of Ten to make their voices heard." The U.K. paper and a record of the discussion are Volcker Group paper VGA/72-14. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, 1972, VGA/72-1-VGA/72-50)


226. Editorial Note

On March 11, 1972, Ambassador Watson sent a telegram to the Department of State on the subject of "French Reaction to International Monetary Developments Causing Growing Strain on Franco-American Relations." Following a summary the opening paragraph read: "With increasing frequency and virulence, media here have been criticizing US for A) 'benign neglect' re international position of dollar; B) failure support dollar devaluation with appropriate monetary and fiscal policies, as evidenced by our large budget deficits and low interest rates; C) unwillingness to commit ourselves to even partial return to convertibility; and D) indifference to problems caused for Europeans by their role in defending new exchange rate structure." Ambassador Watson thought none of these criticisms well-founded but emphasized they were not limited to the press and had been made by a number of official and non-official contacts in Paris. He recounted steps the Embassy had taken to counter the arguments, but concluded with the recommendation that the time had come "for more intensive high-level US effort to counter European charges that US is indifferent to fate of dollar." He also recommended making clear that the United States was "fully committed to continued cooperation with them in interest of restoring stability to the system and indeed improving it." (Telegram 4718 from Paris; National Archives, RG 59, Central Files 1970-73, FN 10)

In a March 14 memorandum Sonnenfeldt and Hormats summarized Ambassador Watson's message for Kissinger and called his attention to the general weakening of the dollar abroad and the interventions required by European and Japanese authorities to keep exchange rates within the agreed Smithsonian margins. Sonnenfeldt and Hormats noted that "the public atmosphere in Europe to which the Ambassador refers has become unpleasant enough to warrant your talking with Secretary Connally about it as soon as possible, if you have not already done so." They recommended that Kissinger speak to Connally prior to his Council on Foreign Relations speech on March 15 and suggest Connally make positive remarks on "our dedication to cooperative restoration of stability to the international monetary system." A typed notation on a note attached to the memorandum reads: "Action Requested Is Phone Call Today." Kissinger wrote on the note: "Time is not yet ripe." (Ibid., Nixon Presidential Materials, NSC Files, Subject Files, Box 356, Monetary)

On March 24 Hormats sent an information memorandum to Kissinger informing him of a marked improvement in the international monetary situation, with the dollar having strengthened against all major currencies except the yen. Hormats attributed the improvement to Burns' assurances at the Bank for International Settlements on March 11-12 that the United States was not "neglecting" the situation, Connally's "more cooperative posture" in his March 15 speech, and President Pompidou's "more optimistic" stance in a March 16 speech. (Ibid.) Burns' intervention at the BIS has not been identified. Connally addressed the Council on Foreign Relations on March 15; the text of his remarks is in Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30, 1972, pages 411-416.


227. Telegram From the Embassy in Italy to the Department of State/1/

Rome, April 26, 1972, 1857Z.

/1/Source: National Archives, RG 59, Central Files 1970-73, FN 10 EEC. Confidential; Limdis; Greenback. Repeated to Bern, Bonn, Brussels, Copenhagen, Dublin, The Hague, London, Luxembourg, Ottawa, Oslo, Paris, Santiago (where the UNCTAD III Ministerial was getting underway), Stockholm, Tokyo, Vienna, USEC, and USOECD.

2398. Pass Treasury and Federal Reserve; also IMF for Dale, Santiago for Zagorin. Subject: EC Finance Ministers meeting April 24-25.

1. Summary: Informal EC FinMins meeting April 24-25 touched virtually all current topics of interest this group. No definite actions taken. Ministerial views expressed on international monetary matters coincided with those expressed to Volcker over weekend at margins Ditchley Conference,/2/ i.e., large agreement to creation G-20 as "emanation of IMF," to discuss monetary questions (taking into account commercial and others matters) but with Secretariat that would draw on other institutions and agencies. No definitive views on SDR creation, but France in favor and Italy revived Colombo's link proposal. Ministers approved continuation by Benelux of narrower 1.5 percent currency margins. Most EC countries in favor declaration new parities to IMF, soon as US has done so. EC FinMins will hold special informal meeting in London mid-July to discuss international monetary questions. End summary.

/2/On the margins of the Ditchley monetary conference in London, held April 22-23, G-10 Deputies met and agreed to a new group in the IMF as a forum for negotiating international monetary reform. That agreement was further refined in informal discussion by Deputies on the margins of the American Bankers Association conference in Montreal in May. See Document 229 for the record of these discussions. See also Margaret de Vries, The International Monetary Fund 1972-1978, Volume I: Narrative and Analysis, pp. 153-155.

2. FinMins and Central Bank Governors of EC held periodic quarterly meeting in Rome April 24-25, under chairmanship Treasury Min Colombo. Reps from four applicant members attended for first time. According Italian sources (including Ossola) following were highlights of this "interesting meeting" at which, however, no definitive decisions taken:

Forum for discussing international monetary reform

3. Views expressed by Mins and Governors fully in keeping with those indicated to UnSec Volcker at margins of Ditchley Conference last weekend. All countries of present EC, plus four applicants, pronounced themselves favorable to creation of Group of 20 as principal forum for discussing international monetary reform. (In view Paris 7864/3/ we specifically asked whether Giscard d'Estaing was in accord with this view and our sources replied that Giscard clearly associated himself with those in favor of G-20.) Reasoning adduced by many spokesmen was that G-20 logical and necessary not simply because US had proposed it but in recognition that in such important discussions LDC's should have appropriate participation./4/

/3/Not printed.

/4/Telegram 1595 from The Hague, May 3, reported on a discussion with Netherlands Treasurer General Oort, who indicated that the Netherlands, along with other EC partners, was generally sympathetic to an IMF-based G-20, at least as a forum for working out a new international monetary system. The Netherlands representatives thought it might be "irritating" to continue to make use of the G-10 forum and hence were displeased with Ossola's proposal for a G-10 Deputies meeting in June. Regarding global liquidity, the Netherlands saw no need for additional SDR creation for 1973 but was willing to go along with a "token creation to keep the system alive." (National Archives, RG 59, Central Files 1970-73, FN 10 EEC)

4. Meeting reemphasized European view that G-20 should be "emanation of IMF," that chairman of G-20 should choose Secretariat which could call on institutions other than IMF (e.g., OECD) for necessary support and ideas and that mandate of group should be mainly focused on monetary system, although taking into account commercial and other relevant questions.

5. Mins did not discuss whether Deputies of G-20 group should be IMF Exec Directors or other competent persons nor did Mins delve into substance of international monetary reform. Not much emphasis given to question of what might be continuing functions of G-10. At invitation Chancellor Barber, Mins and Governors planning to hold special informal meeting in London in mid-July devoted to international monetary reform and progress of institutionalizing G-20. In addition EC Mins are meeting in Luxembourg in mid-Sept, prior to IMF annual meeting.


6. Considerable time devoted to whether or not opportune have new activation SDR's. On negative side, Germany (Schoellhorn) argued there was plenty of world liquidity and advisable have two year pause in SDR creation. Dutch advocated one year hiatus. UK, Belgium, Netherlands, Denmark, and Ireland supported SDR creation of token amount, particularly in order meet liquidity needs of LDC's. French (Wormser, representing Giscard who had left meeting at that point) in surprise move, reversing French position in EC Monetary Committee, advocated SDR duration of two billion dollars for two years, to complete first five year basic period. French indicated they hoped that (A) LDC's would in one way or another become beneficiaries such SDR activation and (B) those countries receiving allocations which have excess amounts of their currency held by other countries should utilize new SDR's to absorb such excess currency (finger obviously pointed to US). Colombo recalled his 1968 SDR-aid link proposal and suggested link question be studied again before decision is made on new SDR creation.

7. Thus SDR discussion inconclusive. However, Ossola noted he is planning to hold G-10 Deputies meeting on the subject June 13 in Paris.

Declaration of New Parities

8. Majority view in favor of formal declaration of new parities to IMF, as soon as US has done so./5/ Germany somewhat cautious and Italy indicated it would prefer to keep "central rate" for time being. However, all EC countries agreed they would act in common.

/5/Circular telegram 79216 to all posts, May 5, informed the posts that that day Secretary Connally had informed the Managing Director of the IMF that effective May 8, 1972, the United States would change the par value of the dollar from 1/35 to 1/38 of a fine troy ounce of gold. The telegram noted that this was the final step in implementing the Smithsonian Agreement to devalue the dollar and was made possible by the completion that day of necessary appropriation legislation in the Congress. (Ibid., FN 17 US)

Other Topics

9. Belgium and Netherlands proposed to continue narrower margins of 1.5 percent between Belgian franc and Dutch guilder. Other EC members saw no difficulty in accepting "Benelux worm, within EC snake, within Smithsonian tunnel."

10. Mins agreed work should continue on drafting scheme for creating EC central reserve fund, which would gradually be given progressively wider functions.

11. On other aspects of EC economic and monetary union, Mins focused on nature of directive on economic development and stabilization which EC Commission working on. Widely recognized that in order to be able to act promptly and in concert would be useful for EC member countries to have anti-cyclical instruments akin to those which govts possess in UK (e.g., regulator) and Germany. It was, however, emphasized that institutional framework varies from country to country and that specific recommendations to be made by Commission should take account of these divergencies while at same time being as simple and concrete as possible.



228. Volcker Group Paper/1/


Washington, April 27, 1972.

/1/Source: Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, 1972, VGA/72-1-VGA/72-50. Confidential. The April 28 cover memorandum from George H. Willis to the Volcker Group Alternates indicates these are revised recommendations for the VGA/72-34 paper on this subject prepared in OMB by Geza Feketekuty. VGA/72-34, dated April 12, was circulated to the VGAs on April 13. An earlier version of Feketekuty's paper, entitled "Methods of Inducing Surplus Countries To Adjust," was circulated as VGA/72-26 on April 5. (Both ibid.)


The United States should recommend that the reformed international monetary system include:

1. A ministerial committee on adjustment. This committee should monitor balance of payments developments and government policies in light of their contributions to adjustment, question member governments with respect to their policy objectives and policy measures, issue periodic reports regarding the adjustment policies of members, make recommendations regarding the appropriate adjustment measures to be taken by members, and make decisions regarding the application of sanctions.

2. A set of discretionary sanctions that encompass both capital and current account transactions. The adjustment committee should be free to decide whether the sanctions should be permissive, recommended or mandatory, depending on the degree of support in the committee for the imposition of such sanctions. One sanction would be the imposition of a tax on all purchases of a currency, and a subsidy on all sales of such a currency. Alternatively, restrictions could be imposed on all foreign exchange transactions along the lines of the scarce currency provisions of the IMF Articles of Agreement. In specific cases, where a country was attempting to prevent adjustment in the current account, or in the capital account, the committee should be able to recommend specific restrictions on current accounts or capital account transactions.

3. A set of presumptive criteria to guide the committee in making judgments regarding the adjustment required in the balance of payments positions of individual members. Ideally, such criteria would also provide the basis for a scale of reference that could indicate the degree of disruptiveness of a given country's failure to adjust. One possibility would be to establish a set of bands based on reserve holdings of members. There is some disagreement among members of the Volcker Group Alternates, however, over the suitability of reserve holdings as a measuring rod for the adjustment required.


229. Volcker Group Paper/1/

VGA/72-50 Rev.

Washington, May 10, 1972.

/1/Source: Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VGA/72-1-VGA/72-50. Confidential. Willis' May 31 cover note circulating the paper to the Volcker Group Alternates indicates the minutes are a revised version of the April 23 discussion in London. See footnote 2, Document 227.

(April 23, 1972)

I. Scope of future work on reforms

1. While the main task would no doubt be the reform of the international monetary system, there was a consensus that the future equilibrium of the world economy was also dependent on adequate trade rules, on rules for the responsibilities of surplus and deficit countries respectively ("burden-sharing" in the widest sense, as well as burden-sharing in the narrower sense of sharing aid and military burdens), rules on capital flows, etc. The U.S. representative mentioned also the relationship between the GATT and the IMF as a possible subject of review and reform. The close linkage of reform of the monetary system with other problems was generally acknowledged. However, there was a prevalent opinion to the effect that the preparatory work for solving the totality of these problems could not be entrusted to one single group but had to be delegated to several bodies.

II. Group of Twenty

2. There was general agreement that a new "Group of Twenty" (G 20) should be the main forum for discussing the reform of the monetary system. This Group should be set up by a decision of the Board of Governors of the Fund as a special committee of Governors of the IMF. Its composition should correspond to the regional composition (the "constituencies") of the Executive Board of the Fund. The Managing Director of the IMF would be an ex-officio member. Switzerland could participate as an observer.

3. There would be one chief representative for each constituency (and possibly one or two alternates). The Group would elect its own Chairman. As the Governor's Committee would hardly be able to assemble frequently and undertake the detailed work, a committee of deputies would have to be established which would prepare the work of the Governor's Committee. The idea was mentioned that the Chairman of the deputies should perhaps work on a full-time or nearly full-time basis and he should be assisted by adequate staff.

4. The terms of reference would request the G 20 to prepare proposals for reform of the monetary system. This could also include rules for balance-of-payments adjustment, for capital movements, etc. Adequate reference should also be made in the mandate to the close linkage with some non-monetary problems. The G 20 should be authorized to draw not only on the work and staff of the IMF but also on other international organizations and on work done outside such organizations. The Group would submit its proposals to the Board of Governors of the Fund who would decide upon them.

III. Other international organizations

5. It was emphasized that trade negotiations would fall within the competence of GATT, and that any proposal for changes in trade rules would also have to be acted upon by GATT.

6. It was recognized that the so-called "non-monetary problems" could not be thoroughly dealt with by the Group of Twenty which would mainly be occupied with problems of the international monetary system. There were suggestions that these "non-monetary problems"--and also rules for the respective responsibilities of surplus and deficit countries and for capital movements--could be discussed, and proposals could be worked out, by appropriate committees of the OECD. To this end, existing OECD groups could be re-structured, or a new OECD group could be established. The OECD would enter the picture only as a forum for preparatory discussion and it would submit its proposals to the appropriate organizations.

7. The Group of Ten should have no specific mandate for participating in the preparation of monetary reform. It should continue within its narrower mandates in the framework of the GAB and in the consultation procedure for SDR allocations. It was left open whether it should be used also for other tasks of coordination among the major industrial countries.

8. Several participants in the discussion in London emphasized that the work to be done in G 20 or in other groups should in no way impinge on the competence and work of other international organizations.

IV. Further procedure

9. Draft minutes of the discussion in London should be sent to the participants and, if possible, agreed upon in the course of May. A draft of possible terms of reference for the Group of Twenty should be prepared by one of the participants. Mr. van Lennep said that he will prepare a paper for the Council of OECD on how the OECD could contribute to the discussions on monetary and non-monetary issues and in particular their inter-relationship. As concerns the establishment of G 20 the aim was to have a decision by the Board of Governors of the Fund somewhen in June or July.

O. Emminger/2/

/2/Printed from a copy that bears this typed signature.


230. Volcker Group Paper/1/


Washington, June 5, 1972.

/1/Source: Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, 1972, VGA/72-51-VGA/72-107. Limited Official Use. Drafted by Jack F. Bennett. "Draft" is typed above the date. Willis' June 7 cover memorandum that circulated the paper to members of the VGAs indicated it was the latest version of the paper. Earlier drafts are ibid., and the text printed here seems to be the final revision. After the drafting exercise began in March, members of the VGAs contributed papers on U.S. objectives: Geza Feketekuty at OMB on March 6 (VGA/72-4); Robert Solomon at the Federal Reserve on March 6 (VGA/72-5); Jack Bennett at Treasury on March 13 (VGA/72-12); and Ralph Bryant at the Federal Reserve on April 5 (VGA/72-27). (All ibid., VGA/72-1-VGA/72-50)



In formulating recommendations on the objectives which the U.S. Government should seek in the forthcoming economic reform negotiations the Alternates have proceeded on the basis of a number of important premises:

A. that these objectives must seek to serve the U.S. national interest both in terms of the health of the U.S. economy and in terms of U.S. political relations with foreign nations;

B. that the U.S. national interest would be served by an international economic system providing an environment which

i. facilitated international trade and capital flows among nations;

ii. involved a minimum of governmental restraints and subsidies on international economic transactions;

iii. preserved the habit of cooperations which has become established in international economic fields; and

iv. did not contain features likely to lead to periodic political confrontations among governments; and

C. that, in the complex task of reshaping the world's economic system, a balanced "package" approach must necessarily be employed in judging proposals on specific aspects of the system; the full implications of no part of a proposed system can be judged fully until the broad outlines of the whole package are in view; in order ultimately to reach an agreement embracing all major trading nations, the U.S. may be faced with the necessity of accepting less than full achievement of some objectives.


With the premises in mind the Alternates have agreed that the objectives they recommend for the U.S. Government in the coming negotiations may usefully be summarized as follows:

1. reform of the international monetary system in a manner which will increase the probability that changes in exchange rates among major currencies, including the dollar, will in future more promptly reflect changing circumstances, such for example as differential rates of inflation and productivity among nations;

(Comment: the Alternates are of the opinion that increased flexibility for exchange rates will:

a) enhance economic growth and stability through more efficient allocation of resources and avoidance of the disruptive effects on resource use and capital flows of delays in exchange rate changes followed by large discrete adjustments of exchange rates;

b) impose fewer restraints on governments in attempting to choose the mix of domestic fiscal and monetary policies best suited to the goals of price stability, high employment, and improving standards of life; and

c) create an environment more resistant to special interest efforts to promote controls, subsidies, and other forms of governmental interference in international trade and investment transactions.

The Alternates have not included a recommendation with respect to the extent to which multilateral agreement will be needed on the creation of additional international monetary reserves since it has been recognized that the extent of the need will depend upon the extent and nature of the additional rate flexibility provided in the reformed international monetary system. And the Alternates did not feel that either retention or phasing-out of the reserve currency role of the dollar should be regarded as a U.S. objective in the negotiations.)

2. a new international commitment to a set of basic guidelines and procedures:

a) which will both enhance economic standards of living and promote international payments equilibrium through reduction in governmental barriers and subsidies which distort international trade; (Comment: the Department of State recommends against inclusion of the reference to payments equilibrium in this paragraph.)/2/

/2/No further record of this dissent has been found.

b) which will avoid discrimination against or among investors from abroad while providing host governments with adequate control over business activities within their territories;

c) which will limit distortion of international transactions by tax and other forms of governmental incentives affecting location of economic activities and selection of markets for production.

3. agreement on procedures and guidelines for multilateral consultations and actions designed to stimulate corrective steps by governments pursuing seriously disruptive behavior in the international economic area; possible actions should include withholding of access to international assistance funds and placing burdens on the international transactions of the offending nations; and

4. provisions for continuing high level consultation with respect to the operations of and interrelations among the international monetary system and national laws and regulations affecting international trade and investment.

Continuing Work of the Alternates

In submitting these recommended general objectives the Alternates would like to make clear that they have not yet been able to reach agreement on:

--how the objective of flexibility can best be achieved in practice;

--how "presumptive," i.e. how near to automatic, should the actions be to induce corrective steps by disruptive governments;

--how detailed would be the guidelines for governmental trade measures, investment controls, and domestic incentive programs; and

--by what means the role of gold can best be diminished in the international monetary system.

Work has begun and is continuing on these subjects.


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

Paris, June 15, 1972, 1011Z.

/1/Source: National Archives, RG 59, Central Files 1970-73, FN 10. Confidential; Limdis; Greenback. Repeated to Bern, Bonn, Brussels, The Hague, London, Ottawa, Rome, Stockholm, Tokyo, and USEC.

11472. Treasury pass Under Secretary Volcker from Bennett. Subject: Highlights of G-10 Deputies meeting, June 13, 1972.

1. Summary: G-10 Deputies held half-day meeting June 13 under chairmanship Ossola (Italy). Bennett and Daane represented U.S. Principal subject for discussion was allocation SDRs in second basic period. Chairman emphasized this was first exchange of views without commitment. Deputies generally favored short allocation period, two years being most frequently cited. Views on amount varied rather widely from zero through "token" and "modest" to normal (i.e., approximately 3 billion SDR rate of first allocation period). U.S. leaned toward normal and indicated that if there were a zero allocation in 1973, it should be followed by 3 billion SDR creation in 1974. Little support for attaching to this transitional activation either SDR-aid link or proposal that industrial countries agree use at least portion their allocations to redeem foreign official balances in their own currencies. Chairman suggested another session at time IMF annual meeting in Washington, but timing and place left open. End summary.

2. Group first exchanged views on IMF projections re future reserve needs. IMF had calculated that global reserves at end March 1972, totaling 125 billion SDR, were about 15 or 20 billion SDR in excess of needed reserves. Extrapolating from three historical data series (global reserve growth, ratios of reserves to imports, and ratios of reserves to money), IMF estimated global reserve needs in 1977 in range of 150-185 billion SDR, meaning needed reserve creation in range of 6-12 billion SDR annually over next five years. IMF representative pointed out decisions on amount SDR allocations required to meet these needs would have to take account of expected changes in other forms of reserves, which IMF staff did not attempt to project.

3. In discussion on IMF projections, several Deputies emphasized that creation of reserves in other forms was very important element. There was, however, general recognition of difficulties in estimating this factor. Chairman suggested that perhaps SDR creation could be corrected year by year as function of reserve creation in other forms. Several speakers also expressed doubts about whether or not future needs could be extrapolated from past experience, citing possibility that reformed monetary system might be one that could be operated with lower level of global reserves than in past. Brossolette (France) and Emminger (Germany) both questioned whether or not any past period could be assumed to be one in which there was equilibrium between need for, and supply of, reserves. While questioning assumptions in this particular exercise, Oort (Netherlands) said methodology was sound.

4. Discussion then turned to exchange of views on length of next allocation period, amounts, criteria for distribution (whether on basis of existing quotas, as provided in Fund articles, or whether there should be some SDR-aid link favoring LDCs), and possible conditions, such as gentlemen's agreement among industrial countries to devote part of their allocations to redemption or balances of their currencies held by other central banks or IMF. Chairman emphasized this was first exchange of views without commitment.

5. In view of Chairman, principal conclusions of this phase of discussion were:

(A) Generally agreed that this was worst possible period in which to try to evaluate long-term reserve needs, given transitional phase through which monetary system passing and many uncertainties about its future shape.

(B) Probably not desirable that G-10 Deputies should reach unanimous conclusion on all questions re second SDR allocation period. In particular, G-10 must keep in mind sensitivities of LDCs. Aim should be to make G-10 views available to IMF managing director, so that he can take them into account, along with views of other IMF member countries, in formulating his proposals re next activation.

(C) Widely held feeling monetary system should be based on SDRs, and that SDRs should be strengthened. (In subsequent comment on Chairman's summary, Bennett cautioned against overstating, during this transitional period, desirability of strengthening SDRs, lest we prejudge shape of future monetary system; in U.S. view best way to avoid prejudging would be to continue allocations in previous range.)

(D) Gilbert (BIS) and Handfield-Jones (Canada) felt composition of reserves was important consideration bearing on decision re further allocations. If objective was system which relied less on reserve currencies, it was important to continue creation SDRs in significant quantities, regardless of additional reserves that might be created through U.S. deficits.

(E) Most Deputies favored short allocation period. Two years was length most frequently cited. Reasons advanced were transitional phase through which monetary system now moving and coincidence of this time period with next review of IMF quotas and GAB renewal.

(F) Views on amount were varied. Germany, Netherlands and Belgium favored zero. France said 2 billion SDR over two years could be considered for essentially political rather than economic reasons, but that an alternative would be simply to defer decision until economic need clearly emerged. U.K. favored "modest" amount (2 billion over two years). Italy suggested "disguised token" creation, which would consist of zero allocation for first year and 2 or 3 billion in second. Canada, Japan and Sweden favored "normal" amount, described as rate of creation during three-year period now ending. While preferring normal creation, U.S. said it could understand reasons why some countries advocated zero creation for one year; in that case, however, would want to see creation at normal rate of around 3 billion in second year.

(G) Italy, with support from France, argued merits SDR-aid link, at least on voluntary or indirect basis. However, prevailing feeling in group was that no attempt should be made to establish such a link for upcoming allocation period, and that link question was properly for agenda of long-term monetary reform.

(H) Suggestion that industrial countries agree utilize some portion of their allocation to redeem foreign official holdings of their own currencies received little support. Hosomi (Japan) said he had no objection if others agreed.

6. In presenting U.S. position, Bennett made following points:

(A) In present period of negotiation and discussion re future trading and payments system, we should avoid decisions on future SDR allocations that would prejudge long-term reform issues. Thus, next allocation period should not extend beyond two years, and U.S. could see merit in one year.

(B) U.S. recognized that SDR-aid link and "redemption" or "consolidation" were issues to be considered under heading of long-term reform, but they would not be suitable for inclusion in any decision on allocations during this transitional period.

(C) Re amounts for 1973 and 1974, strong economic case for activation at present is absent. However, positive decision would indicate continued interest in SDR as reserve asset and lessening dependence on gold, as well as underlining continued monetary cooperation.

(D) Taking all these factors into account, U.S. could support positive decision for next year or next two years. But we can understand why others may feel no allocation warranted in present circumstances. Since we believe choice would not have important economic impact, we could also join in decision to take no action for 1973, although we have slight preference for activation. Pure "token" allocation does not appeal to us, either psychologically or logically. Not clear whether "token" would be regarded as act of faith or lack of faith.

(E) In any case, we would want to review this year's decision again next year in light of both reform discussions and new developments.

7. Strongest plea for substantial allocations in next basic period came from Sjonander (Sweden), who based his argument on premise that SDRs were designed meet long-term reserve needs, and that dollar reserves, even if now excess, did not meet that need, especially considering possible extinction through reversal of capital flows. However, he also favored period of not more than two or three years, while labeling this issue as "minor." Handfield-Jones (Canada) also strongly advocated continuing at least allocation rate of first period.

8. Chairman raised briefly question of future role for G-10, both at Ministerial and Deputy level. He pointed out Deputies would presumably continue function as representatives of GAB participants if IMF had need for new call on GAB resources and would also be concerned with GAB renewal. He asked Deputies to reflect on what other tasks group might perform in connection with monetary reform process.

9. Chairman asked IMF representatives to report substance of discussion on SDR activation to Managing Director. Chairman suggested group might meet again for further exchange of views in Washington at time of IMF annual meeting. Was agreed date and place would be left open in light of further developments.



232. Memorandum From the President's Assistant for International Economic Affairs (Flanigan) to President Nixon/1/

Washington, June 23, 1972.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Country Files--Europe, Box 729, UK Volume VII 9/71-9/72. No classification marking.

Floating the English Pound

The British government announced early this morning (June 23rd) that the English Pound would be permitted to float. This action was taken after the Bank of England had bought $1 billion of pounds on Thursday, half that amount on Wednesday, with total Bank support during the week estimated by the Fed at $3 billion./2/

/2/In a June 24 telegram to President Nixon (dispatched at 1430Z and sent directly to the White House), Prime Minister Heath told the President that the Secretary of the Treasury and Federal Reserve Chairman had been informed of the decision to float late Thursday (June 22) night. The Prime Minister said that during 5 working days the outflow from sterling had reached $2.5 billion and the rate of outflow was accelerating. The Prime Minister concluded that this episode showed how urgent it was to achieve radical reform of the international monetary system. (Ibid.) Prime Minister Heath sent a follow-up telegram directly to President Nixon at the White House on June 26 (1620Z) emphasizing the need "to think in terms of much more radical changes than we have as yet envisaged" and the need to shorten the time frame for such reform from "that to which we are at present working." Prime Minister Heath indicated he would be interested in hearing President Nixon's thinking on substance and timing. (Ibid.)

The cause of the speculative run on the pound has been the decline during the past several months of Britain's visible trade balance from a healthy surplus to no surplus, the competitive prospect associated with entering the European Community, and the recent threat of a dock strike. The action is taken, however, when Britain's current technical position in terms of reserves and balance of payments had been considered relatively strong.

The British action shows the wisdom of U.S. refusal to consider convertibility until a new and stable monetary system is in place. The European community announced two months ago narrower bands for exchange rate parities between currencies of the ten members. These good intentions did not prevail against the massive movement of short-term funds, as the community had devised no mechanisms to give economic validity to the new parities. The central banks of the members did attempt to support the pound, with the Germans having bought $500 million worth on Thursday. It will be interesting to see to what extent the other central banks continue to support the pound.

The British action will have some negative effect on the U.S. balance of payments, undoing to some extent the effect of the December actions./3/ Arthur Burns expects the pound to devalue 5% to 8% against the dollar. The Smithsonian Agreement resulted in a revaluation of the pound by 8.6%.

/3/Reference is to the Smithsonian Agreement reached on December 18, 1971; see Document 221.

Among other results of the pound float, the Irish pound will undoubtedly follow the English pound, as may some Scandinavian countries, Portugal, and some others. The Community will clearly have to rethink its monetary arrangements. Arthur Burns is concerned that speculation against the lira could come shortly. George Shultz will head a small group considering what actions by this government are appropriate./4/

/4/George Shultz was sworn in as Secretary of the Treasury on June 12, replacing John Connally whose resignation had been announced May 16. The Shultz group, in effect chaired by Volcker, included Secretary of State Rogers, Federal Reserve Chairman Burns, CEA Chairman Stein, CIEP Chairman Flanigan, and the President's Assistant for National Security Affairs Kissinger or his designee. Secretary Shultz and the Shultz group increasingly became the forum for decisions on international monetary reform.


233. Letter From President Nixon to Prime Minister Heath/1/

Washington, July 10, 1972.

/1/Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, UK British Float. Confidential. There is no indication of when or how the letter was sent. It is attached to a July 10 note from Hormats to Volcker indicating that the text had been cleared by Flanigan, Kissinger, and the White House speechwriters but that Kissinger wanted Volcker to have "a final crack at it" before it was transmitted to London. The President was responding to June 24 and 26 messages from Prime Minister Heath; see footnote 2, Document 232. On June 30 Hormats had sent Volcker copies of Heath's messages and stated his assumption, "as in the case of similar missives in the past," that Volcker would want to draft the reply. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, UK British Float) An earlier draft was transmitted to the President in San Clemente under cover of a July 6 memorandum that proposed an equally forthcoming tone to Heath's acceptance of the need for radical reform. This draft includes language looking to the IMF Autumn 1973 meeting as a useful target date for an agreement, which was dropped in the final text. The final paragraph of the cover memorandum reads: "In general, the British have been one of our major substantive antagonists, while maintaining a facade of wishing to cooperate closely as a mediator between the Common Market and the U.S." (Ibid.)

Dear Mr. Prime Minister:

Thank you very much for your personal messages with respect to your decision on the pound.

I share your conclusion that this latest episode in a series of monetary crises over recent years illustrates the need for fundamental changes in the monetary framework. To the extent this point is generally grasped, the cause of practical reform will have been reinforced--and, I hope, speeded. This can be a highly constructive by-product of otherwise unfortunate turbulence. I particularly welcome your reaction because so much of my own concern in the period since last August 15 has been directed toward establishing the point that we need to go beyond a simple patching up of the Bretton Woods system.

Frankly, we have felt the point has not been generally accepted in the past, even though certain underlying problems--such as the large mass and volatility of short-term money that you mentioned--have become increasingly evident.

I recognize that our effort to focus thinking on underlying problems could be, and has been, interpreted in some public discussion as an attempt to block or delay progress on specific reform proposals, or to promote purely national goals. Yet, I have accepted that risk in the firm belief that the cause of lasting reform--serving the needs of all--will be advanced only by a willingness to face up to the fundamental issues, political as well as economic. Any other course invites failure. It is often said that a crisis is required to focus our minds and energies. I am confident we have within our power the ability to grasp this opportunity.

I am the last to underestimate the difficulties ahead. In a situation permitting different avenues of approach and with success totally dependent upon a sense of shared responsibilities and benefits, we have not felt it useful to press for a specific single "American plan". Similarly, I trust that European thinking will not become frozen prematurely.

Against the background of recent events I do feel the time is ripe for engaging in open-minded and candid exploration of certain basic alternatives with our close partners. We should no longer be inhibited by the fear that certain approaches can be unthinkingly damned by some as too "radical" a departure from the past.

I know that Secretary Shultz looks forward to discussing these matters with the Chancellor at an early date and hope that our thinking can be tested against yours at all stages.


Richard Nixon/2/

/2/Printed from a copy that bears this typed signature.


234. Memorandum From Secretary of the Treasury Shultz to President Nixon/1/

Washington, undated.

/1/Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, UK British Float. Confidential. There is no indication that the memorandum was sent to President Nixon. Its probable date is July 18; see footnote 2 below.

Since the British decision on June 24 to float the pound, strong speculative pressures have again developed in the foreign exchange markets. In two days at the end of last week,/2/ $2-1/2 billion flowed into foreign central banks. The total flow of dollars into the central bank reserves in the past three weeks has amounted to almost $5 billion.

/2/July 13 and 14. Addendum A, not printed, is a tabulation by day of central bank interventions to buy dollars following the reopening of foreign exchange markets on June 28 after Britain floated the pound. The totals for the seven banks listed on July 13 and 14 were $1,090 million and $1,450 million, respectively. The seven central banks also took $217 million on July 17, suggesting that this memorandum was prepared on July 18. From June 28 through July 17 the banks' total purchases were $4,925 million.

In terms of the direct and short-term impact on the U.S. economy and trade position, this turmoil is of limited significance. It is quite possible that, without further action by us, the foreign central banks will continue to support the dollar until the present speculative pressures pass. They have a strong interest in not allowing the dollar to decline.

However, this outcome is not certain and the situation poses important potential difficulties for the United States and for the future evolution of the monetary system.

1) A breakdown of the pattern of exchange rates embodied in the Smithsonian Agreement could lead to some repetition of the general uncertainties evident last Fall. A tendency for countries to act unilaterally to protect their own interests, and for the Common Market to withdraw behind a defensive wall of controls, would be aggravated. Rightly or wrongly, fears accompanying a breakdown of the Agreement could affect domestic business sentiment and, more directly, the stock market.

2) This sense of failure of the Smithsonian Agreement, in circumstances in which the United States is widely felt abroad (and in some quarters at home) to be playing an entirely passive role, would be a poor launching pad for a constructive trans-Atlantic dialogue on longer-term reform./3/ Certainly, some antagonism in political terms could add to the economic uncertainty.

/3/On July 6 the Embassy in Bonn reported that President Pompidou reportedly had told Chancellor Brandt (during their Summit meeting in Bonn) "that he considered it an anomaly that the Europeans were now 'defending the dollar' while the US sat by and did nothing." The Embassy reported that Chancellor Brandt was considering a high-level approach to seek a U.S. "contribution" to the "defense of the dollar" and that the Embassy had been asked very informally how such an approach would be received in Washington. (Telegram 9346 from Bonn, July 6; National Archives, RG 59, Central Files 1970-73, FN 10)

We face an inherent dilemma in dealing with this situation. Our trade and balance of payments position is still very weak, and the prognosis is still not assured. Thus, we cannot assume present exchange rates are satisfactory--and, in the case of Japan, the rate probably sooner or later will need to change. Should a crisis result in further exchange rate revaluations abroad, these decisions would ultimately benefit our trade and balance of payments position. The dilemma is such benefits are improbable without a period of turmoil and tension, with the risks cited above.

In this situation, three general courses of action can be distinguished:

1) A relatively passive approach, leaving present crisis decisions virtually entirely to the Europeans. Within this general posture, we can, of course, try to convey an interested, if inevitably somewhat detached, attitude.

This approach would recognize the realities that, in present circumstances, our ability to assist in calming speculative fears is limited. In contrast, actions interpreted as acknowledging a responsibility for maintenance of present exchange rates could stimulate hopes and demands by others for limited forms of U.S. convertibility or for more generalized guarantees of foreign dollar holdings against exchange risks. In addition to the need to guard against unsustainable financial commitments, we do not want to take actions that might tend to prejudice some aspects of monetary reform in a direction against our long-term interests.

On the other hand a passive approach also means we lose an opportunity to resolve the short-run crisis and runs a large risk of encouraging already widespread beliefs that "we don't care."

2) Limited initiatives to intervene directly in foreign exchange markets to support the dollar. This would entail borrowing foreign currencies (either by the Federal Reserve or by the Treasury) and use of those currencies to buy dollars in selected exchange markets. The objective would be to obtain a favorable psychological impact both from a visible strengthening of the dollar exchange rate and from the mere knowledge in the market that the United States is prepared to take some financial risks in supporting the Smithsonian exchange rate structure.

The direct financial risks are limited to the potential loss on foreign currency borrowings if exchange rates do change. To have a reasonable chance of success, it is believed we should be willing to borrow at least $1 billion if this course is chosen. However, we would have serious reservations about extending this type of operation beyond, say $2 billion. The potential loss could range as high as 10 percent of the amount borrowed but would be expected to be much less. There is a good chance of no loss or small gain.

This approach is outlined in detail in Addendum B./4/

/4/Not printed. Addendum B, "Proposed U.S. Foreign Currency Operation," outlined use of a swap network to acquire foreign currencies, which in turn could be used by U.S. authorities to buy dollars, supporting the dollar's value.

In favor of this approach, our attitude would be visibly "cooperative" and "constructive." We should, therefore, have some greater chance of influencing European decision-making. If the operation is successful, we could obtain our immediate objectives with very little cost. If the operation is unsuccessful, in the sense that the Smithsonian rates break down anyway, the attempt to help salvage the Agreement could provide a more favorable atmosphere for the longer-term negotiations.

Against this approach, limited intervention by the United States could easily lead to demands for "doing more." The action proposed is technically neither convertibility nor a general guarantee of foreign dollar purchases. However, public pressures to move in those directions could well be heard again, on the argument the market needs still further reassurance. Moreover, chances of failure are appreciable, and our activity could possibly highlight any domestic political fallout from a breakdown of the Smithsonian arrangements.

3) A series of broader initiatives beyond that discussed above, or in lieu thereof. Possible actions, ranging from the small measures of largely psychological impact to more substantial action, fall into several categories:

A. More forceful U.S. and multilateral statements, following a special meeting of Finance Ministers. (However, a meeting, itself, would be dangerous and potentially counterproductive unless accompanied by more concrete actions.)

B. Borrowing of U.S. dollars abroad from foreign central banks or privately, at somewhat more favorable terms than we pay at home. Actions of this type would have numerous precedents and would not raise awkward questions of convertibility or guarantees of dollar holdings. However, while a useful supplementary action, such borrowings by themselves would probably not have a major impact on the current situation.

C. Some modification of domestic monetary and debt management policies, ranging from modest efforts to increase slightly short-term interest rates while depressing long-term rates to some visible tightening of monetary policy generally. Such actions, if important enough to have a significant impact, raise a question about consistency with domestic objectives.

D. Tightening of controls on banks or corporations in an attempt to reduce outflows of short-term funds. Foreign governments would particularly welcome this action. However, it would be difficult to implement and would not be consistent with our longer-range objectives.

On balance, the practical option in present circumstances is to engage in limited exchange market intervention, as described in Addendum A [B]. I would want to keep this operation under daily review, and would not want to borrow more than $2 billion without full review with you.


235. Information Memorandum for the Record/1/

Washington, July 20, 1972.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Country Files--Europe, Box 687, Germany Volume XII 5/72-12/72. Secret; Sensitive. Drafted by Robert G. Livingston on July 22. Attached to a July 22 memorandum from Livingston to Kissinger that indicates Kissinger's approval. As background for Schmidt's visit to Washington Ambassador Hillenbrand, on July 18, sent a telegram [text not declassified] to the White House that noted that on the economic side Schmidt was keeping his Washington appointments but had missed an EC Finance Ministers' meeting until he knew his new portfolio better. This gave the United States an opportunity to get across U.S. monetary and trade views before Schmidt was "subject within the EC to French conceptions." Ambassador Hillenbrand reported that Schmidt "told his Economics Ministry staff that his Washington discussions would be get-acquainted visits in which he himself would not raise specific issues." (Telegram [document number not declassified] from Bonn; ibid.)

Meeting between Helmut Schmidt, Minister of Economics and Finance, Federal Republic of Germany and Dr. Kissinger, July 20, 1972, 2:40-3:30 p.m., Dr. Kissinger's Office (Also present were Rolf Pauls, Ambassador to the United States, Federal Republic of Germany, and R. G. Livingston, NSC Staff (note-taker))

Minister Schmidt: I want to discuss international monetary affairs. We are facing a very bad situation.

Dr. Kissinger: The Minister now has an opportunity to talk with one of the leading experts in this field. But you probably don't know much more yet than I. Whenever you come through Washington you should come in for a talk. I value your opinion on the German and US political situation. If the monetary situation was indeed becoming very bad, I could help perhaps.

Minister Schmidt: It is bad and could become worse. I thought that even ten days ago before I took on this portfolio. Last year I tried to make you understand the political effects in Europe of Secretary Connally's actions. The United States cannot embark on international monetary reform before its elections. Nor is this necessary.

[Omitted here is discussion of the political situation in Germany.]

Minister Schmidt: I have a personal rule never to mind what others make of comments of mine which leak to the press. I want to turn the conversation back to international monetary issues, however. Billions of dollars are floating about the world and Germany is taking in too many of them.

Dr. Kissinger: What is the cause of this?

Minister Schmidt: The US economic situation is improving. Within two years or so this may have an impact on the US trade balances. Meanwhile, there are too many dollars circulating in the world. New York bankers are selling dollars and the German Federal Reserve System is having to buy them up at a fixed rate to prevent the dollar from falling below 3.15 against the DM. The German Federal Bank is handing out far too many DMark, billions in a week. This has a very bad internal effect. The German price level is rising far too fast. The inflation rate is 5.4 percent at present. This will be the number one campaign issue. If I am to survive politically, I will have to do something about this as Minister of Finance and Economics.

Dr. Kissinger: We want you to survive, which is not to say, necessarily that we want your government to do so. We appreciate how much you have done as Defense Minister.

Minister Schmidt: My main objective is to have US-German cooperation survive. The dollar problem remains and the German inflation rate may reach 6 percent. To prevent this I may have to cut off the purchase of the dollars "immediately." This will be done by means of regulations on capital inflows and corresponding regulations on trade.

Dr. Kissinger: Like the French.

Minister Schmidt: There is no other way. Schiller was against that but the whole cabinet was for it. That is why Schiller had to go. Last year there had been a DM float and DM revaluation. There can be no revaluation this year. I want you to understand the situation and the background to the action I may have to take.

Yesterday, however, Chairman Burns has done what I came to the United States to ask him to do. By intervening in the international monetary market to sell DM he took an action which serves as a token of US determination to defend the Smithsonian Agreement./2/ That is essential: to defend the Smithsonian Agreement and not let the situation get out of control.

/2/In a July 20 memorandum to Kissinger with "Additional Information" for his meeting with Finance Minister Schmidt, Hormats reported that on July 19 the U.S. Government for the first time, through the Federal Reserve Bank of New York, sold German Marks to buy dollars to help sustain the Smithsonian exchange rates. Hormats noted that this was "a departure from the Connally position, which had been that the Europeans should continue to bear sole responsibility for maintaining the Smithsonian rates." (Ibid.) On July 29 the Embassy in Paris reported that the Governor of the Bank of France thought the current calm in foreign exchange markets was due both to the strong support of European monetary authorities for the Smithsonian rates and U.S. moves to support the dollar and reopen the U.S.-German swap line. The Embassy also reported the irritable and disgruntled Governor had "no sympathy" with France's passively and unconditionally buying "inconvertible" dollars, which put him on a different course from Finance Minister Giscard d'Estaing and probably President Pompidou as well. (Telegram 14554 from Paris, July 29; National Archives, RG 59, Central Files 1970-73, FN 10)

There has as yet been no German cabinet decision to stop buying dollars. I am not going to ask for one, if the United States government continues actions such as the Federal Reserve Bank's of yesterday. The difficulties may be ironed out in that case. The problem is the rumor mill among international bankers. The meeting of the EEC finance ministers July 17-18, and the rumors coming out of it has made the July 19 intervention of the Federal Reserve Bank necessary

Ambassador Pauls: The Fed's action has raised the dollar by a point and a half.

Dr. Kissinger: Last year the situation had to get very bad before I was able to intervene within the government. Then the crisis was brought under control. You should know that Secretary of the Treasury Schultz thinks that floating is the right policy. However, I understand that a US float will make it impossible for the German government to control inflationary pressures. The Germans are saying to the US that either you defend the Smithsonian Agreement by intervention of your own to strengthen the dollar or we will defend it by means of controls.

Minister Schmidt: That is the choice. An important aspect is the psychological impact of US action on bankers in New York and in Frankfurt, whose psychology I do not understand very well.

Dr. Kissinger: I cannot give you an answer right now. What is required is day-to-day actions, a series of them. This is not an issue which you can bring up to the President in the form of a single paper to be signed. Secretary Shultz and Chairman Burns will have to take actions daily. It is the totality of these, no single action, which is important. This is different than the situation last year. Then there was a concrete set of decisions to be taken.

I will talk with Secretary Shultz and Chairman Burns. I need two weeks time for this.

Minister Schmidt: I want the White House to understand that even a strong supporter of cooperation with the United States such as I am may have to act suddenly in the international monetary field.

Dr. Kissinger: Our situation with the Europeans is precarious. I know that. A unilateral European move in the monetary field could trigger an unexpected reaction in the United States. Strangely, the old internationalists in the United States have now become isolationists. And the old isolationists, who have become internationalists now, are good on defense but remain isolationists at heart in economic affairs. I hope you will hold off any restrictive move for at least ten days.

Minister Schmidt: I am not going to act within the next ten days.

Dr. Kissinger: I know that you are meeting with Shultz and Burns today. I will call Shultz and explain to him that you are no anti-American economic nationalist. Mr. Burns needs no convincing. The problem with him is the way he presents his views. He is a difficult personality to orchestrate in a coordinated policy. However, Burns favors the Smithsonian Agreement and the need to defend it.

Minister Schmidt: The Agreement must be defended until the elections.

Dr. Kissinger: After I have been in touch with Burns and Shultz I will inform you confidentially of the outcome through Rolf Pauls. That way the communication will remain completely private.

What do you think about European-American relations?

Minister Schmidt: The greatest present uncertainty is how soon the European Community will clarify its views on relations with third countries, particularly the United States, on European economic and monetary union, and on European political consultations. None of this depends on the United States; it depends on Pompidou's interpretation of France's interests and on the strength of the British Pound. I don't understand the significance of the French Cabinet reshuffle.

Dr. Kissinger: It may be a move in the Gaullist direction.

Minister Schmidt: The central problem is whether the European Community would be outward-looking, as Germany wants, or inward-looking, as the French want. Germany does not want the European Community to become a currency bloc against the dollar. Schiller's problem was his inability to deal with the French tactfully on this issue. As Economics and Finance Minister I will try to establish cooperation with Giscard as I did with Debre.

Dr. Kissinger: I want you to know that we will miss you in the Defense Ministry. As far as you personally are concerned, I am happy you can leave this suicidal post.

What do you think of US policy?

Minister Schmidt: You made two mistakes in 1971, the first in handling of Japan and the second in handling the Europeans until Secretary Connally was called home.

Dr. Kissinger: To some degree the Japanese are making a profession out of being hurt. What could we have done to handle them better?

Minister Schmidt: When I was in Japan I got the impression that the Japanese are somehow stirred up, intrigued with the potentiality of relations with mainland China. They couldn't seem to see that mainland China can't buy any more from Japan, that it is no bigger a market than Taiwan. Somehow the Japanese have lost direction and feel dropped by the United States.

This year the United States has done well--with the Moscow Summit and the Berlin Agreement, on which the Germans and the Americans had cooperated. You helped Brandt to carry out his Eastern policy while strengthening the security foundation in the West.

Dr. Kissinger: We helped the Eastern policy as much as we could without going public about it.

Minister Schmidt: We have nothing to complain about.

Dr. Kissinger: As far as our handling of the Europeans last year is concerned, you should understand that Texans like Secretary Connally are used to dealing with problems in a forceful way. The Secretary is a strong, able, and attractive man.

Minister Schmidt: Yes, he is. I advised the Chancellor last year that financial and economic matters should be taken out of the hands of men like Connally, Giscard and Schiller and put into the hands of statesmen. With billions of dollars floating around, the monetary crisis of 1971 can easily repeat itself.

Dr. Kissinger: Give me two weeks time to determine attitudes in the United States on international monetary policy. I will let you know candidly about these attitudes.

[Omitted here is discussion of the U.S. presidential campaign and Vietnam.]


236. Memorandum of Conversation/1/

Washington, July 25, 1972, 4:30 p.m.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Country Files--Europe, Box 687, Germany Volume XII 5/72-12/72. Secret. No drafting information appears on the memorandum.

Henry A. Kissinger
Arthur F. Burns, Chairman, Federal Reserve System
Robert D. Hormats, NSC Staff Member

B: I wanted to see you to bring you up-to-date on the international monetary situation. You and I talked about that last before the Smithsonian agreement.

K: Yes, I recall. We settled on your scheme, but Connally got the credit.

B: I am not concerned about credit.

K: As I recall, I convinced Pompidou to agree to your scheme./2/

/2/Presumably a reference to Pompidou's statement in his February 4 letter to President Nixon that Kissinger had told him "the following morning" that President Nixon's understanding was that the United States would intervene to support the dollar at the new exchange rates. See footnote 4, Document 223.

B: The fact that you have not been involved in the last several months has made it difficult for me.

K: The reason I could become involved last time was that we were moving toward the Summits, and that imposed a need for a solution to the monetary problem. Also, I could tell the President that unless we did something we were clearly headed for a crisis. Now these conditions do not exist.

B. But there was a blow up. The system was in disarray. I had to put it together again last week. I went to Basel in March./3/ The thing nearly exploded then, but I talked frankly to the central bankers and we were able to hold it together.

/3/See Document 226.

K: What made it explode?

B: The situation was delicate. Once there was speculation against the dollar, it shook the entire financial community. People did not have confidence in the Smithsonian rates. I told the central bankers what the Fed was doing about the interest rate, and of the President's plans to get hold of the budget. I also told them that they had made a few mistakes of their own. They respect me and know that I deal frankly with them. That was good for a few weeks. But we had to do something more tangible. I got Connally to make a good speech at the Council on Foreign Relations to indicate that we would help Britain repay its obligations to the IMF and get monetary reform talks underway./4/

/4/Secretary Connally addressed the Council on Foreign Relations on March 15; see Document 226.

K: I have never understood Connally.

B: I understand him. There are numerous problems. He wants these problems to go away. He resents people fooling around with these issues and just hopes that they can go away.

K: Has the system been patched up now? Will we have a crisis the next time there is a run on the dollar? I spoke with Finance Minister Schmidt recently. He said we should go back to convertibility./5/

/5/See Document 235. There is no record that Schmidt recommended restoration of convertibility.

B: That is impossible. We can't go back to convertibility at this time.

K: Or some other means of defending the dollar.

B: We are defending the dollar. It was under attack. Foreign central banks had to take in over $6 billion since December. The system just won't work if this sort of thing keeps up. On Thursday, two weeks ago, they took in $1 billion-$1.5 billion./6/ This couldn't go much further. I went over the map of possibilities and decided that the best way to deal with this was to have the Fed borrow currencies from foreign governments to intervene in the currency market. This was done without committing our reserve assets. The response around the world was one of jubilation.

/6/July 13; see footnote 2, Document 234.

K: Did you do this on your own discretion?

B: No, I needed the consent of the Treasury. I previously had had endless conversations with Paul Volcker, who is negative about everything. I experienced some difficulty with Shultz, but won him over. We took this to the President and he agreed./7/

/7/On July 18 the President was in San Clemente and called Shultz in Washington and talked with him from 8:45 to 9:24 a.m. PDT. (National Archives, Nixon Presidential Materials, White House Central Files, President's Daily Diary) This is the only recorded contact the President had with Shultz or Burns before the United States intervened in foreign exchange markets to support the dollar on July 19.

K: Will this keep things in balance?

B: It should, but we can't be sure. We committed a negligible sum--less than $50 million--but got remarkable results. We are ready to commit a sizable sum. But we can't categorically say it will be successful. However, the chances of success are very good. Also, there is some movement on reform of the Treasury. Before I couldn't get Connally or Volcker to move on a plan for reform or to determine the US position.

K: Why?

B: They thought it would be leaked. However, they had no position of their own. I gave a talk in Montreal which I wanted Treasury to give./8/ They had no objection to what I was saying. Later they began fussing about it, but there was nothing that they really objected to.

/8/Burns addressed the 1972 American Bankers Association International Monetary Conference in Montreal on May 12. In his prepared remarks Burns set out ten elements he "would expect to find in a new monetary system that met the test of both practicality and viability." Under Secretary Volcker also addressed the Conference on May 12 and made similar remarks. Volcker was questioned closely on Burns' ten elements during a press conference later in the day. Volcker said he would share some of Burns' principles but distanced himself from endorsing the ten elements. The texts of Burns' and Volcker's prepared remarks and a transcript of Volcker's press conference are in the Volcker Group Papers (VG/Uncl. INFO/72-26 and VG/Uncl. INFO/72-27); they were circulated to members of the Group on May 15 and May 22, respectively. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, 1972, VG/Uncl. INFO series) Volcker's remarks are printed in Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30, 1972, pp. 436-440.

K: What is the schedule for proceeding now?

B: There will be a meeting of the Group of 20 in September. But I want to add that although the President approved my plan to do what I did, I need continuous support from the President. If I lose it, Shultz will back off at once. The Fed in the international area can't move without the Treasury. Shultz and I have worked well together and will continue as long as I have the President's support.

K: I can be helpful there.

B: I have held this together since December.

K: After December there were people trying to break the thing up. I have never understood Connally. Connally was attempting to use Canada as a key element in breaking up European policy. But at the same time he was attacking Canada.

B: Connally uses brutal techniques. He did well on his trip to Brazil but in Peru, shortly after he left, the President made a violently anti-American speech./9/ When I was there, the speech was repeated three times over the air. I was told numerous times that this speech was an answer to the Connally visit. In Argentina Lanusse, after I was in his office two or three minutes, told me that he had found out where I spent my first day in Argentina and where I will spend my remaining days. He was very pleased that I was talking to Argentine officials and businessmen. He said to me, "Do you know what Connally did? He went to see a ranch--a ranch!" The President said he was very angry. When Connally gets into foreign relations, God help us. When Shultz got in, I was quite negative. He did not know much about this. Before he was very difficult to deal with, very theoretical. Now he thinks more pragmatically.

/9/After he stepped down as Treasury Secretary, Connally was sent by President Nixon as his personal emissary to 14 countries in Latin America, Oceania, and South and Southeast Asia.

K: I was concerned he might be too doctrinaire. What is the schedule of meetings?

B: There will be nothing substantive until next year.

K: This is after the German, US elections, and a Canadian election. Are the Canadians having an election?

H: I recall that Trudeau said recently there would not be an election this winter, at least not in the fall.

K: They have to give two months notice so that means there probably won't be one.

B: We have an opportunity now to rebuild the world.

K: Which direction should we move?

B: The IMF is the only thing which stands for international law in the monetary area. There should be established the principle of symmetry between deficit and surplus nations. Right now, when a country has a deficit, it is an international sin. With a surplus, it is practicing an international virtue. We should do away with morality in our thinking. Apply rules that surplus countries have the obligation to reduce and eliminate surpluses and deficit countries have a similar obligation to reduce their deficits. We should establish rules to achieve this.

K: Like what?

B: In the first year, a warning. In the second year, if it continues, then withdraw convertibility. Previously convertibility has been taken for granted. It was felt there was a right to convertibility. No longer should it be an automatic right. The country would have to accumulate foreign currencies and could not necessarily convert them.

K: This wouldn't stop the Japanese-type of accumulation, would it?

B: No, but convertibility would be a privilege in some circumstances. We must also recognize that this is a delicate problem since it means sanctions against surplus countries and some loss of sovereignty. But there was some loss of sovereignty in the SALT Treaty in Moscow.

K: Any treaty limits a nation's scope of action. You give up something you otherwise would have the right to do.

B: But we should be careful. While the degree of sovereignty would have to be limited, we should be careful in the way we present this to Congress. It is a delicate matter.

K: This is the way I see it. We can't afford a blow up in the monetary area since it affects relationships in the non-Communist world. Without reform there will be a blow up. I respect your judgment and expertise. I can't get involved all the time, but I will if need be.

B: I will get you involved only when necessary. It has been a lonely battle for me.

K: When you want to see me, we will fix a time within twenty-four hours. We will meet within twenty-four hours whenever you request a meeting.


237. Editorial Note

Pursuant to preparatory work by the G-10 Deputies (see Documents 227 and 229), the Executive Directors of the International Monetary Fund, at their meeting on June 23, 1972, decided to submit a resolution on the establishment of a committee of the Board of Governors (which became known as the C-20) to the Board of Governors for a written vote to be received on or before July 28. IMF Document SM/72/122, Supplement 3, dated June 26, was sent to members of the Executive Board explaining the voting procedure, with the draft resolution attached. This document, which was circulated to the Volcker Group Alternates as VG/INFO/72-36 Supp. 3 on June 27, is in the Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/INFO/72-1-VG/INFO/72-39. A number of earlier drafts of the resolution and commentary by members of the VGAs are ibid.

On July 27 IMF Document SM/72/122, Supplement 4, was sent to all members of the Executive Board informing them that 308,766 votes had been cast in favor of the resolution, far more than the 2/3 majority required for its approval. There were no negative votes and 1 abstention, and 11 members had not voted. The votes of three members were not counted for technical reasons. The IMF document was distributed to members of the Volcker Group Alternates as VG/INFO/72-36 Supp. 4 on July 28. (Ibid.) France cast its 15,250 votes in favor of the resolution.

The resolution was adopted by the Governors of the International Monetary Fund during the Fund's Annual Meeting in Washington in September. The resolution established an ad hoc Committee of the Board of Governors on reform of the international monetary system. The Committee was to "advise and report to the Board of Governors with respect to all aspects of reform of the international monetary system, including those that involve international trade, the flow of capital, investment, or development assistance." The resolution provided for a Chairman and a Deputies Committee to prepare the work of the Committee. At its first meeting on September 28 Mohammed Ali Wardhana, Finance Minister of Indonesia, was elected Chairman of the C-20. Jeremy Morse of the Bank of England was selected to chair the C-20 Deputies. Draft minutes of the first C-20 meeting and the Deputies meeting on September 29 were circulated to members of the Volcker Group Alternates on October 10 and October 11 as VGA/72-90 and VGA/72-91. (Ibid., VGA/72-51-VGA/72-107)


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

Paris, July 31, 1972, 1716Z.

/1/Source: National Archives, RG 59, Central Files 1970-73, FN 10. Confidential; Immediate; Limdis; Greenback.

14620. Subject: IMF Report on International Monetary Reform. Pass Treasury for Secretary Shultz.

1. The Director of the French Treasury has asked us to transmit a personal letter from Finance Minister Giscard d'Estaing to Secretary Shultz regarding the report of the IMF Executive Board on International Monetary Reform. An Embassy translation of letter follows. French text being forwarded by air pouch to Treasury/OASIA./2/

/2/Not found.

2. "Dear Mr. Secretary. The Executive Board of the International Monetary Fund is now completing the report it was asked to prepare on reform of the international monetary system. This is the culmination of a lengthy project begun last spring on the basis of a text which, in accordance with normal procedures, the Fund staff prepared. The initial text has been substantially modified during numerous discussions of the Executive Board, in which the Directors designated by the United States and France played an active part.

3. No one considers the result of this work completely satisfactory. It could not be otherwise considering the difficulty of the subject and the varying conceptions of the member countries. Moreover, we are still beginning the process of study and reconciliation of ideas to be undertaken by the Group of Twenty, the organ we have created specifically for this purpose.

4. I note, however, that the imperfections of the report, particularly the fact that it poses numerous problems without resolving them and does not exclude a priori and feasible reform of the international monetary system, make it nearly acceptable to everyone. In certain respects, this preserves the possibility of a subsequent agreement on the modalities of reform.

5. I am informed that, at the end of last week, the Executive Director nominated by the United States proposed to introduce numerous additions to each of the five chapters of the report, on which the Board had virtually reached agreement. These belated proposals, which very naturally reflected the views of your government, jeopardized the equilibrium which until then had been preserved among conflicting views. For this reason, they threatened the whole project. In any case, the French Executive Director could not approve a report which included both the present text and the numerous paragraphs proposed by your Executive Director.

6. I understand, of course, that it is completely normal for the United States to take a position on international monetary reform. In fact, I would say it is desirable for your colleagues to be better informed on this point than they have been until now. But, insertions in the document being discussed at the Fund are not the appropriate means to do so and, in my view, these insertions have been introduced at a time when they cannot validly be considered.

7. In addition, I fear that difficulties at this stage would be badly interpreted by the general public and thus would risk compromising recent efforts undertaken on various sides to bring more order to exchange markets. Neither would they represent an encouraging introduction to the work of the Group of Twenty.

8. I strongly hope that you will give the present message all the importance it merits and that you will reconsider the means at your disposal to make your positions on international monetary problems known. Let me add that I am looking forward to meeting you in Washington at the end of September under circumstances which will allow us to lay out and discuss these problems at a suitable level within reasonable bounds. Sincerely yours, Valery Giscard d'Estaing."



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

Washington, July 31, 1972.

/1/Source: Washington National Records Center, Department of the Treasury, Deputy to the Assistant Secretary for International Affairs: FRC 56 83 26, Contingency Planning, 1965-1973. Confidential. The paper bears no drafting information.


A. Exchange Rate Regime

1. General rule: Countries will declare central values for their exchange rates expressed in SDR's, with permissible margins of 3-4 percent on each side.

2. Floating rule: With permission a country can float:

a) transitionally to new central value

b) indefinitely if it declares willingness to avoid "balance of payments" controls on capital and trade and obeys more restrictive reserve management criteria--both subject to special surveillance.

3. Unit rule: A group of countries wishing to maintain narrower margins and declaring intention to move toward reserve pooling, can be declared "monetary and trading unit" and treated as single country.

4. Intervention: Countries with central values will be expected to intervene in their domestic markets to avoid depreciation beyond lower margin of currencies of leading trading partners with central values.

B. Reserve Regime

1. "Primary reserves" would consist of gold, SDR's and IMF gold tranches.

2. Each country would have a "normal level" of primary reserves related to IMF quotas (e.g., 4 times each country's quota).

3. Total world "normal" reserve must equal total world primary reserves. Dollars and other foreign exchange can be converted into SDR's during a limited "open season." SDR allocations will make up any shortfall of primary reserves below world "normal reserves."

4. Countries acquiring foreign exchange can present it to the issuing country for primary reserves, so long as both countries are maintaining central rates.

5. Negotiated official credits permitted.

6. Foreign exchange holdings are neither encouraged nor prohibited. Countries would need to respect any limits established by the issuing country, and U.S. would negotiate limits on foreign official holdings of dollars. Foreign exchange holdings include all commitments and forward controls.

7. Adjustments would be called for at certain thresholds:

a) total reserves (primary plus forex of a country at 50 percent of "normal level": devaluation required--3-4 percent per year without approval, more (subject to approval) if underlying conditions so justify.

b) primary reserves at 75 percent of "normal level": devaluation permitted--3-4 percent per year without approval, more (subject to approval) if justified.

c) __reserves at (unspecified) level and after drawing of say 50 percent of IMF and capital controls in effect: surcharge permitted.

d) primary reserves at 150 percent of "normal level": revaluation required--at least 3 percent per year.

e) primary reserves at 175 percent of "normal level": no right to convertibility.

f) primary reserves (primary plus forex) at 200 percent of normal level and maintained for period (e.g., 6 months) would indicate persistent surplus country, which would be expected, e.g., to increase aid, liberalize imports and unless corrected, subject to discriminatory restrictions (e.g., surcharge).

8. Gold would be sold by official holders only at official price to IMF, which would be free to sell in private market with profits going to IDA.

9. SDR's created for "open season" conversion of foreign exchange should be extinguished, up to a fixed amount per year, as the country with the currency liability obtains primary reserves above its "normal level." Total SDR volume would be maintained by equivalent new allocation distributed by the usual formula.

10. Holding limits and restrictions on use of SDR's by official institutions would be abolished.

11. An SDR-aid link could be grafted onto the system, but would not be proposed.

a) No country expected or compelled to maintain restrictions on outward flow of capital (though permitted to do so) except that countries applying surcharges (in addition to IMF borrowing) should be willing to apply internationally sanctioned capital controls.

b) Countries with below normal reserve holdings over a period should not be permitted restrictions on inward flow of capital imposed for balance-of-payments purposes. (Restrictions defined to include special interest incentives or penalties.)

c) In other circumstances, presumption (but not prohibition) against use of controls on inward flows. Presumption expressed by international review and surveillance when controls enforced for more than six months, and maintenance justified only by showing exchange rate not fundamentally undervalued. Sanctions, including elimination of right to hold foreign currencies before other countries could discriminate on trade, should be included.

d) Two-tier exchange markets would be treated as form of capital control and treated as above.

e) Nations should apply consistent set of regulatory standards on "foreign banks" to assure equitable treatment of Euro-currency markets.

C. Constitutional Regime

1. Completely new international monetary agreement needed covering monetary and related broad trade principles.

2. Parallel restructuring of GATT required.

3. Articles of two institutions should interact; joint meetings and working parties should be sought.

4. Monetary organization should be "politicized"

--maintain Executive Directors at Deputy Minister level
--Keep C-20 in being.


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

Bonn, August 1, 1972, 0935Z.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 356, Monetary. Secret; Exdis. Attached to an August 2 memorandum from Hormats to Kissinger apprising Kissinger of the increase in the free market price of gold to $70 per ounce and reminding him of the need to contact Schmidt, pursuant to his July 25 conversation with Arthur Burns, regarding U.S. willingness to defend the dollar lest the Europeans come "to believe that we are returning to Connally's policy of letting them bear the sole burden of defending the Smithsonian rates." See Documents 235 and 236. Kissinger wrote on Hormats' memorandum: "Hormats--Let's do it. Draft something." No record of a written reply has been found. On August 9 Hormats sent Kissinger a briefing memorandum for his August 10 breakfast with Shultz, which inter alia, suggested he sound out the Secretary on his agreement with Burns to commit a "sizable amount" to support the dollar. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 299, Treasury Volume III) No record of the August 10 meeting was found, but on September 1 Hormats sent Kissinger talking points for his meeting with Ambassador Pauls, indicating that Kissinger had discussed the international monetary system with Burns and Shultz and the United States would cooperate in the effort to defend the dollar rate, including, when appropriate, selling currencies drawn under swap agreements. The talking points continued: "However, the major responsibility for defending present rates should continue to lie with nations whose currencies might be under upward pressure in the market." (Ibid., Country Files--Europe, Box 687, Germany Volume XII 5/72-12/72)

10466. Subject: Conversation with Economics and Finance Minister Schmidt.

1. The new FRG Economics and Finance Minister Helmut Schmidt used the occasion of my first call on him on July 31 to press home his views on the international monetary situation. He began by saying that, although he had had good and full conversations with Secretary of the Treasury Shultz, Federal Reserve Board Chairman Burns, Peter Flanigan, Henry Kissinger, and others, during his recent visit to Washington, there had since been a further evolution in his thinking which he wanted to bring to our attention. Since we had known each other personally for nearly 20 years,/2/ he felt he could be absolutely frank.

/2/A career member of the Foreign Service, Ambassador Hillenbrand had been assigned several times to posts in the Federal Republic of Germany, including Deputy Chief of Mission at the Embassy in Bonn in the mid-1960s.

2. He could not understand the passivity of the US in the international monetary field during recent months. This had made it extremely difficult for our European friends to believe that the US really wanted to adhere to the Smithsonian Agreement. The recent intervention of the Federal Reserve on behalf of the dollar had been a good thing psychologically, even if it had but only a symbolic effect quantitatively considered, but even that would be lost quickly if it were not repeated from time to time. One point on which he wanted to be absolutely frank was that, if a heavy flow of dollars into Germany should resume for whatever reason, he would not hesitate to impose controls even though these would inevitably also have some trade impact. The former Minister of Economics and Finance had fallen on precisely this issue. He had been opposed by the majority of the Cabinet and the German banking community.

As far as Schmidt was concerned, he approached this whole question from the viewpoint of a politician who had not asked for his present post but had accepted it out of a sense of obligation to his party. The political stakes were simply too high to leave the subject to the technicians or even to a conventional Minister of Finance. This was the position he had taken with Brandt before the Schiller showdown and was one he would maintain in his present office. There were two major reasons why he could not accept the possibility of a further German float and would have to resort to exchange controls if necessary: (A) the "already not so good prospects" for Brandt in the forthcoming elections would be completely ruined if the European Summit were not to take place, and it could not take place unless the German position on dollar inflow were to come closer to the French, and (B) the long-range requirements of the German economy and its export potential likewise were not compatible with a further float.

3. He was aware of course, Schmidt continued, that no fundamental action could be expected in the monetary field before the American and German elections, but he was concerned about the possibility that pre-electoral rumors, perhaps in October, would set off another wave of speculation against the dollar. This would trigger the kind of German reaction which he had indicated he would be forced to take. If it were possible to get through the fall period without such a development, then 1973 would be a year in which there would be real need for an inconspicuous but real American leadership in the international monetary field. Without it, any hope of basic reform would be illusory. He was not certain, after his visit to Washington, which line of thinking would prevail, but it was clear that it was in our common interest to change a situation which, from the European point of view, had become untenable.

4. I observed that since he had had an opportunity, during his recent trip to the US to receive at first hand the views of the senior American officials whom he had met, there was little I could add at this time to what they had told him. We are not indifferent. We too consider international monetary reform and trade negotiations a matter of urgency and want to get on with them as expeditiously as possible. I would report his views and hoped that he would feel free in the future to convey any information or thoughts which he might have through me to my government. He said he would not hesitate whenever he felt it necessary to get in touch with me immediately. Comment: It is clear that Schmidt is not particularly happy in his new role as Minister of Economics and Finance. I believe he is sincere in saying that he took this position mainly out of loyalty to his party and to the Chancellor. He would be the first to acknowledge that his understanding of the complexities of international finance is still elementary, but he is a quick learner as well as one of the most articulate politicians on the current German scene. His influence with the Chancellor will be very great in the months to come, and the views he expressed will carry much weight in cabinet deliberations. In talking about his health, Schmidt could only say that while he felt better than he had in many months, he had come to appreciate that he is no longer a young man. He intended to go off on a month's leave immediately after his appointment with me, but added, somewhat apologetically, that he would be in constant touch with his Ministry and prepared to return to Bonn at any time if necessary.



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

Washington, August 4, 1972, 1933Z.

/1/Source: National Archives, RG 59, Central Files 1970-73, FN 10. Confidential; Priority; Limdis; Greenback. Drafted in Treasury by Under Secretary Volcker on August 4, and cleared in State by Armstrong (E), Weintraub (E/IFD), Springsteen (EUR), and Curran (S/S) and approved by Acting Secretary Irwin.

142290. Subject: IMF Report on International Monetary Reform. Ref: Paris 14620./2/ For FinAtt.

/2/Document 238.

1. Please transmit following letter dated August 4 (and attachments) from Secretary Shultz to Finance Minister Giscard d'Estaing.

2. "Dear Mr. Minister: Thank you for your letter of July 31 concerning the work of the Executive Board of the Fund on its report concerning international monetary reform. I appreciate the frank and direct expression of your view.

You have certainly been correctly informed that the U.S. Executive Director has recently put forward in the Fund certain views of the U.S. Government concerning the questions which are at issue in the projected international economic and monetary reform./3/

/3/On August 11 the Embassy in Paris reported on an article in that day's issue of Le Monde, based on "rumors from Washington," that the U.S. Executive Director at the IMF had proposed about 20 changes in the Board's report on international monetary reform, and that the French Executive Director had objected that these reflected the U.S. viewpoint but would not be so identified in the report. (Telegram 15401 from Paris, August 11; ibid.) The Department of State responded, informing the Embassy that following Giscard's July 31 letter to Shultz the French Executive Director had proposed two inserts to the IMF report to make it clear the French did not believe "exchange rates in the past had been sticky and that the U.S. should not expect to correct its balance of payments problems only by current account improvements." The French statement also made it clear France wanted to increase the role and price of gold in the international monetary system. (Telegram 146942 to Paris, August 12; ibid.)

In this effort, I fully share your wish that the report, however imperfect, pose relevant problems, explore feasible alternatives and, especially, 'preserve the possibility of subsequent agreement on the modalities of reform.' This is our entire purpose in the drafting proposals we have made. The apparent question in your mind as to our purpose can perhaps be answered most clearly by reviewing the background of this matter, and the manner in which our own concern with this objective has been expressed.

To that end, I asked that a short memorandum be prepared reviewing our approach. I attach it for your interest.

I should note that the substantive views put forward in writing by the U.S. Director are entirely consistent with those which have been articulated for many months by high U.S. officials in public and private statements.

In the light of our experience, I believe you will agree that, since the staff draft failed to take adequate account of our views, we had no alternative to proposing such additions as we felt essential. Indeed, we have found others welcomed this direct expression of views on matters of such direct concern to us.

If the draft Fund report had, in fact, left open an adequate range of realistic options for an appropriate reform of the international economic and monetary systems, we would have been satisfied. That is all we seek. But we are convinced the drafts at hand did not accomplish that purpose. We are frankly very disappointed at this./4/

/4/Draft chapters of the IMF Report on International Monetary Reform and Commentary of U.S. Officials are in the Volcker Group Alternates papers from the summer of 1972. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, 1972, VGA and VG/INFO series)

I look forward to the opportunity to discuss these questions with you directly, and you may be assured we will bend every effort to speed the process of reconciling views and achieving fundamental reform. In that process, all my experience in other areas of public policy and negotiation suggests the wisdom of openly addressing the basic issues involved, and patiently seeking a sound solution, rather than accepting at the start a formula for discussion that obscures important dimensions of the problem. Sincerely yours, George P. Shultz".

Begin text first attachment.

Memorandum (dated August 2, 1972) for Secretary Shultz. Subject: IMF Board of Executive Directors Consideration of Report on International Monetary Reform.

From the very first suggestions that a report on this subject be completed by the Executive Board prior to this year's Governors' meeting and before the agreed negotiating forum was established, I have expressed serious doubts that the Executive Board should try to reach definite conclusions in a report at this early stage. These views were repeated in the Executive Board in May, when I suggested "only a report providing a genuinely neutral description of various policy options would have any chance of being adopted."

We were therefore disappointed, when the original staff draft of the report was issued in early June, that instead of developing underlying issues and basic options the draft adopted a narrow focus pointing almost exclusively toward a particular form of an asset settlements system and a confined range of technical possibilities relevant thereto. With this in mind, on June 19, I distributed a written statement (copy attached) expressing our views on the report, emphasizing our belief that the most useful contribution of a report would be to identify and reach a consensus on the essential nature of the problems, without foreclosing policy options. I urged a "less technical" but "more fundamental" approach concentrating on achieving an agreed description of the kind of world to which the reforms must be addressed and developing the key policy issues which the Governors would wish to address.

In addition to my written and oral comments in the Fund Board, our concern over the direction of the draft report was also strongly stressed in direct discussions with the Managing Director and top Staff of the Fund, and with a number of Executive Directors, by the Under Secretary for Monetary Affairs.

We were aware that the approach adopted in the draft, if pressed, would inevitably place the primary burden on the U.S. to inject other and broader viewpoints by a process of addition and amendment. While we were willing to accept that responsibility, we also recognized some misunderstanding or question of our motives could arise. We, therefore, greatly preferred to work with staff drafts that more fully developed the problems and basic options.

These strongly stated views were not adequately reflected in the revised draft distributed in the first part of July. Accordingly, to achieve the analysis and balance we felt necessary, we had no alternative to submitting written material reflecting U.S. views, attempting to focus more attention on what we consider to be the real issues and appropriate policy options. In this process, I have, in important areas, taken care to emphasize the United States, itself, had reached no conclusion and final judgment. William B. Dale. End Text First Attachment.

Begin Text Second Attachment

Mr. Dale's Overall Comments on Report to Governors--June 19, 1972

With the opening of discussion based on four draft chapters for a report to assist in the reform discussions, it is important to consider what kind of product we can realistically hope to agree on that would also be helpful--not only to the Governors in general, but in particular to the prospective Governors' Committee as it begins its work. At this early stage of work on reform, the critical task is to insure a fully adequate--a wide enough--variety of approaches to the problem so as not to preclude options at too early a stage.

We are not satisfied that the draft as it stands does that adequately. While it leaves some options open, it basically narrows down the discussion quite rapidly--prematurely in our view--to only one set of basic options, a somewhat improved par value system coupled with a reserve asset settlement mechanism with the SDR at its center. We do not deny that such a system has certain attractions, but so may other combinations that have not been considered in the draft, and in any event it is by no means evident to us--from reading the draft and from other thoughts and sources--that such a system could in fact be made to work realistically even assuming it were generally considered desirable after examination of the alternatives.

There seem to me to be four main possibilities for a report:

1. One which puts forward a full and really open-minded discussion of a range of technical and policy options adequately broad for the depth and scope of the reform negotiation which lies ahead;

2. One which would be a mish-mash of undigested and inconsistent ideas, which might be the result if everyone simply tossed his favorite idea into the hopper;

3. A less technical and perhaps shorter report, but quite possibly a more fundamental one, concentrating on:

a. a description of the world which the trading and monetary systems must be addressed to; and
b. discussing in reasonably brief and non-technical manner the key policy issues to which the Governors' Committee will wish to direct its attention.

4. No report, because in the end we found ourselves unable to reach sufficient agreement.

The first outcome, while ideal, may as a practical matter be out of reach. The second or fourth outcomes constitute very real possibilities, neither of which would be particularly useful from any point of view.

The third option may well be the most realistically useful, and could provide very helpful material indeed for the work that lies ahead. End Text Second Attachment.



242. Editorial Note

The float of the British pound in June 1972 and German Economics and Finance Minister Schmidt's remarks to Henry Kissinger and Ambassador Hillenbrand (see Documents 232, 235, and 240) were two examples during the summer of 1972 of the fragility of the foreign exchange parities in the Smithsonian Agreement of December 1971. In the exchange of messages between President Nixon and Prime Minister Heath following the float of the pound, the two leaders agreed that "radical reform" going "beyond a simple patching up of the Bretton Woods system" was required. See footnote 2, Document 232.

Under Secretary of the Treasury Shultz' oversight, planning got underway during the summer of 1972 on how to respond to a breakdown of the Smithsonian Agreement and move ahead on a specific international monetary reform agenda. Central to the latter was building significantly greater exchange rate flexibility into a reformed international monetary system than had been envisaged and provided for in the Bretton Woods system. Providing scope for greater flexibility had been one of the major drafting objectives behind U.S. proposals for revisions in the IMF's Report on Reform of the International Monetary System, which was released in Washington on September 6. See Document 241. Secretary Shultz addressed this, the use of changes in reserves as a presumptive indicator of the need to make exchange rate adjustments, and other reform issues in a speech to the Governors on September 26. Shultz' address, entitled "Needed: A New Balance in International Economic Affairs," was printed in The New York Times on September 27. It is also printed in Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30, 1973, pages 400-404.

Treasury Department records from this time period relating to international monetary reform are in the Washington National Records Center, Department of the Treasury, Deputy to the Assistant Secretary for International Affairs: FRC 56 83 26, Contingency Planning, 1965-1973. These include the following three sets of papers:

"Papers Related to Plan X (July 1972 through May 1973)." These 34 papers dating from July 20, 1972 to May 11, 1973, were to be prepared in Treasury at the staff level. Paper #3, "Major Elements of Plan X," is printed as Document 239.

"Briefing Book--Special Working Group--August 1972." The Briefing Book is divided into two parts: first are "Papers Prepared for Top Level" consisting of four "International Monetary Reform Issue Papers" as follows: "Discussion Outline of Proposed Monetary Plan," "Outline of Proposed Plan," "Questions of Negotiating Strategy," and "Broad Policy Issues Raised by U.S. Participation in a New International Monetary Agreement." (These four papers are also in the Washington National Records Center, Deparment of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, PAV--International Monetary Reform 1972.) The second section of the Briefing Book contains Selected Papers and Documents, generally prepared at the staff level in Treasury, OMB, the Federal Reserve, STR, and CIEP.

"Briefing Book--Papers Relating to International Monetary Reform Prepared by Special Working Group--August, September, October 1972." This set of papers was compiled against an August 30, 1972, list of 13 papers that was revised and expanded on September 20 to include 19 papers. They were generally drafted at the staff level in the agencies listed above. The Special Working Group has not been identified with any precision. Among the persons to whom specific drafting assignments were made are Bennett, Willis, Cross, Nelson and Bradfield at Treasury, Dale at the IMF, Erb at CIEP, Bryant at the Federal Reserve, Dam at OMB, Whitman at the CEA, and Malmgren at STR. These may have been the staff for the small group headed by Shultz; see footnote 4, Document 232.


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

Washington, October 3, 1972.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 306, IBRD/IMF. Limited Official Use.

World Press Reaction to the President's and Shultz' IMF Speeches

World press reactions to President Nixon's speech and the proposals for monetary reform outlined by Secretary Shultz at the annual IMF/IBRD meeting have been mixed but generally positive./2/ (State and USIA summaries are attached at Tab A.)/3/ European comment was generally favorable while a more negative tone came from Japan, Australia, and the developing countries. The Japanese felt that there was an anti-Japanese tone to the emphasis on the need for adjustment by surplus countries, enforced by sanctions if necessary, while the developing countries have stressed the lack of attention to their problems in the two speeches.

/2/President Nixon addressed the opening session of the Annual Meeting of the Fund and Bank Boards on September 25. See Public Papers of the Presidents of the United States: Richard M. Nixon, 1972, pp. 907-911. The President made a strong linkage between trade negotiations and monetary reform and said Secretary Shultz would outline proposals on the latter, "which represent the best thinking of my top economic advisers," during his speech later in the meeting. Secretary Shultz addressed the Annual Meeting on September 26; see Document 242.

/3/Not printed.

There was a widespread feeling of relief that the United States had decided to resume a position of leadership in monetary affairs. Most commentators felt that the United States' proposals provided a basis upon which serious negotiations could begin, even if they disagreed with specific portions of the proposals. Several reports credited the American initiatives with giving the IMF meeting a sense of direction which had previously been missing. A recurring theme was that the President's and Secretary Shultz' speeches reflected increased American confidence based on improvements in American economic performance and our diplomatic initiatives with the USSR and the PRC. Some reports noted that the speeches had firmly defended American interests, while abandoning the extremes of the "Texas approach".

European commentators generally felt that the Shultz proposals were basically constructive and welcomed the evidence that the U.S. is willing to move forward in monetary reform. The initial French reaction was negative or neutral, but after the speech of Minister of Finance Giscard d'Estaing, French commentary became more optimistic. The French felt that the generally conciliatory Giscard speech had sidetracked the gold price issue, while Shultz had opened the door toward dollar convertibility. There was speculation in the press that the atmosphere of cooperation is the result of a recent Kissinger-Pompidou agreement./4/

/4/Not further identified. The point was made in a September 30 "Foreign Reactions" report from the Executive Secretary of the Department of State to Kissinger: "There is speculation in the press that the 'atmosphere of cooperation' is the result of a recent Kissinger-Pompidou agreement. The newspaper France-Soir stated that the success of U.S. diplomacy and economic policy in the last year allowed the U.S. to be conciliatory while guarding the essential elements of U.S. demands." The report is included in Tab A.

The Canadian press generally felt that the American proposals provided a framework for negotiating monetary reform, while reacting with concern to Shultz's call for "more stringent" standards for countries that float their currencies (as Canada is now doing).

The Japanese appear to view the Shultz proposals as threatening. Several press comments referred to the anti-Japanese tone of the speech and worried that it was an effort to set the stage for unilateral imposition of import surcharges on Japanese products or for increased pressure for yen revaluation. There was some worry that the Europeans may now support these efforts (a Newsweek story quoting a top U.S. official at the meetings "as saying the U.S., Britain, and West Germany planned to force a revaluation of the Japanese yen" will fuel these fears). The Japanese press felt that the Shultz proposals represented an effort to make the surplus nations bear the adjustment burden, although many Japanese commentators called for increased Japanese government action to reduce that nation's trade surplus. The Australian press echoed the Japanese press in worrying about being the target of rules against surplus countries, while calling the Shultz speech "demanding but reasonable".

The developing countries, while generally welcoming the U.S. decision to move forward on monetary reform, were disappointed by the lack of attention to development problems in either speech. This omission, coupled with Chilean attacks on the U.S. for blocking IBRD lending to Chile and the general lack of progress on the question of a link between Special Drawing Rights and development, seemed to some LDC's to confirm their fears that the U.S. is not greatly interested in the problems of the developing countries.


244. Editorial Note

On October 3, 1972, Hormats sent a memorandum to Kissinger apprising him that, in contrast to the roiled foreign exchange environment during the summer, the dollar had recently strengthened in European foreign exchange markets. During the previous week it had strengthened against all major European currencies and none of the European central banks had been required to purchase dollars to support their exchange rates. Hormats attributed this to an improving trade position and President Nixon's and Shultz' positive approaches at the IMF-IBRD meetings. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 306, IBRD/IMF)

As 1972 ended, the newly established C-20 and its Deputies Committee began its work on international monetary reform, but the pace was slow. The first Ministerial on September 28 (see Document 237) was the only Ministerial during 1972. A second Deputies meeting was held November 27-29. The Embassy in London reported that during an EC Monetary Committee meeting on November 21 there was a constructive exchange of views on monetary reform. The Embassy noted there was scope for fruitful analysis of reserve gains and losses at the forthcoming Deputies meeting, but U.S. insistence on rigid, automatic criteria (for exchange rate adjustments) would not be acceptable. (Telegram 11273 from London, November 22; National Archives, RG 59, Central Files 1970-73, FN 10)

Return to This Volume Home Page

  Back to top

U.S. Department of State
USA.govU.S. Department of StateUpdates  |   Frequent Questions  |   Contact Us  |   Email this Page  |   Subject Index  |   Search
The Office of Electronic Information, Bureau of Public Affairs, manages this site as a portal for information from the U.S. State Department. External links to other Internet sites should not be construed as an endorsement of the views or privacy policies contained therein.
About state.gov  |   Privacy Notice  |   FOIA  |   Copyright Information  |   Other U.S. Government Information

Published by the U.S. Department of State Website at http://www.state.gov maintained by the Bureau of Public Affairs.