12. Memorandum From the President’s Assistant for National Security Affairs (Kissinger) to President Nixon 1


  • Reductions of Controls on U.S. Capital Outflows: Foreign Implications and a Note of Caution


I understand that you will discuss the reductions of our present capital controls with your economic Quadriad tomorrow afternoon.2 There are major foreign policy implications of our moving in this direction. As a result of the considerations outlined below I recommend that you not commit the Administration irrevocably to the abolition or large scale reduction of the controls until an alternative solution to our international monetary problems is in sight. I have no objection to the limited reduction which is proposed for the near future although I agree fully with Secretary Rogers that it should not be undertaken until after full consultation with our European allies.3

Foreign Policy Aspects

Eliminating restraints on private investment abroad has three foreign policy aspects. The first is that the initial effect of easier monetary conditions in the U.S. in the absence of controls would be an enlarged payments deficit, to which most of the countries of continental Europe would object strongly. Foreign disapproval would be expressed relatively quickly, even before the emergence of a large deficit, since foreign officials can look ahead. The move would be interpreted as a disavowal of our earnest intentions to maintain a strong payments position.

[Page 30]

Such officials, incidentally, do not share U.S. antipathy to controls over capital movements. Nor does the foreign business community. Except for Germany, all the European countries maintain some form of restraints on international capital movements. Even Switzerland, the citadel of free enterprise, controls the access of foreigners to the Swiss capital market.

The main effect of this reaction would be a setback to our efforts to improve the monetary system through cooperative steps with the Europeans. Thinking that the U.S. no longer cares about its payments position, their propensity to cooperate even in the activation of Special Drawing Rights, let alone more far-reaching reforms such as adoption (or even serious study) of greater exchange rate flexibility, will be sharply reduced. In short, we may be circumscribing our option of a cooperative solution—forcing us inevitably toward the kind of unilateral action described below. (The counter-argument is that a cooperative approach will not work anyway and that unilateral U.S. moves are inevitable. I do not share this pessimism.)

Second, many—probably most—Europeans welcome U.S. controls on direct investment (i.e., investment involving U.S. management control) as providing some slowdown to the takeover of European industry by American firms. This potentially explosive anxiety is by no means confined to government officials. To be sure, Europeans are ambivalent about American investment. Except for those firms feeling the direct competition, they generally welcome the infusion of technology and even new management techniques. But, because of the central position of the U.S. dollar in the international monetary system, we are open to charges of dollar imperialism if American capital is permitted to move to Europe without restraint—at least as long as our balance of payments is in sizable deficit. Some kind of restraint on direct investment-even the pre-1968 voluntary restraints were helpful in this regard—provides the necessary ambiguity on our side, combined with their own ambivalence, to diffuse the issue.

Finally, and most important, the alternative policies which we might be forced to adopt in lieu of capital controls could be much more damaging to U.S. foreign policy. Troop withdrawals, additional pressure on Germany and others for “better” offset arrangements, and further restrictions on the aid program are only the most obvious possibilities—and ones which we should reject for obvious foreign policy reasons. Unilateral U.S. suspension of gold convertibility—essentially adoption of a floating exchange rate of the dollar—would represent a massive display of U.S. power and rupture all our efforts to forge a new partnership with Europe on the basis of greater equality. An increase in the official price of gold—which would represent only a temporary solution anyway—would also be a unilateral act rejected by most official [Page 31]Europeans and would betray $15 billion worth of dollar holders from Germany to Thailand. Adoption of trade controls, such as export subsidies and import surcharges, would be no economic improvement over capital controls and would be much more damaging to our foreign policy, because of the network of international rules which govern trade and which would be broken in the process.

As I understand it, the present proposal of the Secretary of Treasury is for some relaxation in all three of the present control programs but mainly affecting direct investment. The estimated gross cost to the balance of payments is about $400 million. The relaxation would come against an agreed projection of significant deterioration—at least $1 billion and possibly more—in our payments position in 1969. This first step will raise the problems outlined above to only a minor extent, but I recommend that you not commit yourself irrevocably to the abolition of investment restraints until a clear alternative is in sight.

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 309, BOP. Confidential. Drafted by Bergsten who, in his March 17 cover note to Kissinger, wrote: “Pursuant to your instruction, attached is a memo to the President informing him of the major foreign policy implications of the proposed line of action and advising him to adopt a ‘go slow approach’ in implementing it.” There is no indication that the President saw the memorandum; an undated cover note to Colonel Haig reads: “I don’t think you want this to go to the President now—it was being provided for his meeting with the Quadriad on 3/18. If the information is still valid for the President, perhaps the reference to the Quadriad meeting should be deleted.” Haig wrote on the note “OBE—File.”
  2. The President met with McCracken, Kennedy, Martin, Mayo, and Burns in the Cabinet Room from 4:18 to 6:06 p.m. on March 18. (Ibid., White House Central Files, President’s Daily Diary)
  3. See footnote 4, Document 8.