126. Memorandum From Secretary of the Treasury Kennedy to President Nixon1

The decision of the German Cabinet not to revalue the mark will leave an air of uncertainty over international financial developments for some time. The immediate outlook for the exchange markets is highly uncertain, and turns on the credibility of the German position. This will depend, in large part, on what other tax and financial measures the Germans are prepared to take. The Germans have been extremely vague on this, and no decisions are expected until the middle of next week, at the earliest.

While the German position on the mark parity is unsatisfactory, I see no alternative but to accept it as an accomplished fact for the time being, and to work as best we can within that framework in the days ahead.2 Revaluation has become a straight party issue, with Strauss leading the CDU opposition. While some reports indicate the Chancellor himself has some sympathy for revaluation, in the last analysis there seems little chance that he would reverse the decision, unless or until external conditions and pressures change. In practice, this would require an even more severe crisis in the exchange markets or changes in parity by other countries so the Germans have “company.”

Our interest for the short run lies in (1) promoting a reversal of the recent speculation into marks, and (2) building protection against the possibility that new speculative pressures will converge on sterling. To help achieve the former, in press statements and contacts we will cast no doubt on the ability of the Germans to sustain their position, accept it as a fact, and make plain the necessity for supporting measures to repel speculation.

The second objective is supported by the agreement now reached under pressure from events and the U.S., between the U.K. and the [Page 333] IMF in negotiations on a $1 billion credit package. This will be leaked to the press in London in time for the Monday papers.

The question of additional credit facilities for the British, by the U.S. and other countries, will also arise, especially if speculative pressures on sterling are not reversed. The Federal Reserve, in contacts this weekend at the regular Basle meeting of central bankers, will test sentiment on this difficult issue. With respect to “recycling” recent German gains, the question of a German government guarantee may arise.

If a calmer market atmosphere prevails in the days and weeks ahead, some orderly realignment of exchange rate parities still may be possible this summer. This would be a prelude to our efforts to achieve more fundamental reforms. But it is clear we will continue to face formidable uncertainties until the politically-charged impasse on exchange rates is resolved.

David M. Kennedy
  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 309, Balance of Payments. Confidential.
  2. According to a May 13 memorandum from Bergsten to Kissinger, the United States sought to influence the German Cabinet’s decision. Bergsten wrote: “the only feedback I have gotten from our intervention on Friday night [May 9] is that it came too late and hence was of no help. I do not know whether this means that the decision had really been made before the Cabinet meeting, as reported in some press stories, or that Ambassador Pauls failed to convey it to Kissinger promptly enough. This report came from Bundesbank Director Emminger, who with the rest of the Bundesbank firmly supported Schiller’s effort to get revaluation, to Federal Reserve Board Governor Daane at the Sunday meeting of central bankers in Basel.” (Ibid., Agency Files, Box 215, Council of Economic Advisers)