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

124. Action Memorandum From the President’s Assistant for National Security Affairs (Kissinger) to President Nixon¹

Washington, May 7, 1969.

SUBJECT

• The Present International Monetary Situation

Issue

Attached at Tab A is a memorandum from Paul McCracken which reviews the present status of the international currency difficulties and makes three recommendations:²

1. That we inform the United Kingdom, which is the main potential crisis point, that:

(a) We hope they will continue to defend their present exchange rate.

(b) We are opposed to their adopting any new import restrictions.

(c) We are willing to help them manage a floating exchange rate for the pound, if they are forced to abandon their present parity, presumably by making available to them enough money to moderate any decline in its value.

2. That we make no statements supporting the present structure of exchange rates (except for the gold-dollar price) or minimizing the seriousness of the situation.

3. That we come out more openly for the “crawling peg”, a basic reform of the international monetary system which would permit gradual adjustment of exchange rates and hence help avoid future crises.

Present Situation and Analysis

Dr. McCracken’s memorandum is contradictory on one of the crucial elements of the situation. It states at one point that “there are no indications” that Germany will revalue unilaterally, and at another that they “will probably change their view if more money flows in”. I share the former judgment; the present monetary system puts very little real pressure on surplus countries to act short of intense political pressure from the rest of the world. In the case of Germany, this means in practice that the US would have to involve itself deeply—probably including your personal intervention—to change their minds.

Second, the memorandum indicates only by omission that the US is well shielded from any direct effects of the present European currency problems. Our exceedingly tight monetary policy is keeping the dollar extremely strong in the exchange markets. Thus our only purely national worry is the possibility that a real financial panic will ensue and lead foreign monetary authorities to lose their nerve and seek to convert their dollars into US gold. We might then be forced to suspend the convertibility of the dollar into gold, which would risk major foreign policy problems as outlined in my memo last Friday.³

Third, I fully endorse Dr. McCracken’s conclusion that the UK is the major potential crisis point in the system and therefore agree with his recommendation that we express our hope that the UK will hold its present exchange rate.

However, I do not agree with his recommendation that we tell the UK that we would prefer a floating exchange rate for the pound to new import restrictions, if they are forced to do something. Even on purely economic grounds, it is not clear that our balance of payments would be hurt more by restrictions than by a change in the exchange rate of sterling. More important, however, a UK decision to float would represent a major break with the present monetary system and is much more likely than new restrictions to induce other countries to follow. Thus, a decision to float is much more likely to touch off a panic. It is true that import restrictions would only buy time for the UK, but there is good economic reason to believe that they are finally on the right track and that a bit more time will permit them to hold their present exchange rate.

Finally, I agree that we need to move specifically toward reforming the monetary system so that such crises will not recur continuously and that the “crawling peg” is a desirable element in such reform. There are two problems with his recommendation that we come out more openly for such an approach, however.

One problem is that we should be very cautious about openly advocating the “crawling peg” at the present time. Any US statement on exchange rates would increase market nervousness and run counter to Dr. McCracken’s other recommendation that we avoid making any statements on the present situation. (We should, however, be alert to opportunities afforded by the present situation to increase support for our reform ideas.)

The other problem is that you have not yet received the options paper on monetary issues which you asked the Treasury to provide a month ago. As a result, you have not had an opportunity to consider the subject systematically and we have no agreed policy. We need to move on this quickly before a real crisis overtakes us.

Recommendations:⁴

1. That we inform the UK, in low key, of our hope that they can maintain their present exchange rate.

2. That we go no further in our policy recommendations to the UK.

3. That we make no statements at all concerning the present European currency situation, or, for the moment, our specific proposals for international monetary reform.

4. That you convene an early meeting to consider overall US international monetary policy.⁵ I recommend that such a meeting include the Secretary of Treasury, the Secretary of State, the Chairman of the Federal Reserve Board, the Chairman of the Council of Economic Advisers, and myself.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 309, Balance of Payments. Secret. Drafted by Bergsten.
2. McCracken’s May 5 memorandum is not printed. McCracken began by referring to a May 2 meeting at the Treasury Department that “brought out the political difficulties in getting France to devalue, a solution about which we had no doubts in any case.” McCracken noted that the action Kennedy had proposed on May 1 (see the attachment to Document 123) was therefore ruled out for the time being. In a May 6 memorandum to Kissinger, Bergsten characterized some of McCracken’s analysis as inadequate and some of his recommendations as extremely dangerous politically, and recommended Kissinger sign the May 7 memorandum to the President. (National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 309, Balance of Payments)
3. Document 123.
4. The President approved all four recommendations and wrote “OK” at the end of the memorandum.
5. Such a meeting convened on June 26; see Document 131.