Foreign Relations of the United States, 1969–1976, Volume III, Foreign Economic Policy; International Monetary Policy, 1969–1972

209. Information Memorandum From the President’s Assistant for International Economic Affairs (Peterson) to President Nixon¹

Washington, November 27, 1971.

SUBJECT

• IMF Views on NEP Abroad—Messages for You

Pierre-Paul Schweitzer of the IMF was particularly anxious that I convey some messages to you. Earlier, this same group met with Paul Volcker with the same messages for John Connally.²

First, there were the deep concerns about world recession, trade and investment retaliation, blocs, etc., but you’ve heard these more than once.

On the gold price issue, they were particularly persistent that you have their views. Schweitzer has just seen some of the European prime ministers and he wanted you to know why their revaluing was “politically impossible”.

(1) Italy—IMF claims Italy is already in a recession, with serious political problems with labor unions. A revaluation by Italy that makes their exports less competitive and generally deflates their economy and costs jobs would be “politically impossible”.

(2) France—Pompidou devalued in August 1969 and at “great political risk”—given de Gaulle’s adamant stand against devaluation. It is now argued that for him to reverse himself and revalue this soon would be “politically impossible”. The other reasons related to the “Gaullist gold mentality” you’ve heard before.

(3) England—Heath is in a major battle with the Labor Party over entry into the E.C. Unemployment is up significantly and any initiative on revaluation would make Heath look insensitive to the critical jobs problem.

You asked exactly what we would get out of a willingness to devalue. The IMF’s answer is as follows: the U.S. will get a substantially larger total exchange rate alignment since certain countries which agree to hold their exchange rates at present levels if the U.S. devalues by 5% or so, would not take the initiative and the political heat of revaluing on their own—even if the economic effects are the same. Also, certain countries (like Germany) are deeply concerned about their relative position vis-à-vis other countries (like France). Thus, the less the franc/dollar rate changes, the less Germany will do vis-à-vis the dollar.

Here are the kind of numbers they suggest:

Exchange Rate Realignment vis-à-vis the Dollar	With a U.S. Change in Price of SDRs or Gold	Without a Change in Price of SDRs or Gold
Japan	15%-16%	10%-11%
Germany	10%-12%	6%-7%
France, Italy, Britain	5%-6%	—

Various experts estimate that each additional percentage point of exchange rate realignment gets the U.S. an additional $800 million of positive trade effect. Thus, since a change in the dollar price of SDRs or gold reportedly buys us an extra 5% total realignment, it means about a $4 billion improvement in the U.S. trade picture. When you recall that our total 1971 basic balance of payments deficit is something over $8 billion, the gold price issue could be decisive.

In view of all this, the entire IMF group said they are at a loss to understand why we are being so difficult on the gold price issue, particularly since it is “no longer much of a political problem to the U.S.” They claim that Reuss, Proxmire et al now make it much easier, as does changing the price of SDRs (rather than the price of gold).³ I responded by saying (1) they were greatly underestimating the potential for U.S. political demagoguery, particularly in an election year; (2) they did not understand yours and John Connally’s resolve to reform the monetary system and to maintain non-convertibility during the interim period while the new system was being worked out. (They acknowledged that the climate for negotiation on non-convertibility was much better than it had been.)

Where do I come out? We should not yield on the gold/SDR price issue now since it will be taken for granted and we could get less in other areas, such as trade and defense.

However, if and when John Connally has clear evidence that the total deal is a good one that can be presented to the U.S. as a great Nixon Administration success, and if it can be orchestrated politically (by changing the price of SDRs, getting bipartisan support, etc.), then, but only then, would I recommend that you consider the gold/SDR price change.

In the meantime, unless you tell me differently, I tell anyone who asks that the U.S. position on a gold price change is negative and firm.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218, Council on International Economic Policy. Secret. Attached to a December 8 memorandum from Hormats to Haig recommending the NSC not object to Peterson’s memorandum going to the President.
2. No records of Schweitzer’s meetings with Volcker or Peterson have been found.
3. On November 18 Congressman Reuss and Senator Javits introduced legislation to permit the United States to change the price of gold in the context of an international realignment of currencies. A Treasury release that day said the administration did not support the legislation. (Volcker Group paper VG/Uncl. INFO/71-47; Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/Uncl. INFO/71-1-)