129. Action Memorandum From the President’s Assistant for National Security Affairs (Kissinger) to President Nixon 1
- The International Monetary Situation
Memoranda from Paul McCracken
Attached at Tabs A and B are information memoranda from Paul McCracken on the international monetary situation.2 Their major points are:
- The U. S. balance of payments was in deficit by the incredible amount of $2.1 billion in the two weeks ending May 14. (The deficit has never been more than $4 billion in any previous year.) The U. S. was thus the source of about one-half the money which flowed into Germany during that period. For the year to date, we are now in small surplus on one of our payments definitions and in deficit by about $4 billion on the other.
- Germany has lost about $1.2 billion of the $5 billion inflow of those two weeks. The market is not convinced that the DM will not be revalued and most of the speculative money is sitting tight to await further developments.
- The UK has regained about $400 million of its $600 million loss. France has regained about $100 million of its $500 million loss.
Memorandum from Secretary Kennedy
Attached at Tab C is an earlier information memorandum from Secretary Kennedy which gives his views on the international monetary situation.3
The Secretary concludes that our short-term interests lie in promoting capital reflows out of Germany and into the UK. He thus:
- Sees no alternative to accepting the German decision against revaluation, privately as well as publicly.
- Notes that the issue of additional credits to the UK is bound to arise; their “new” $1 billion credit from the IMF contains at best $300 million of really new money.
- Feels that the German decision will change only if an even more severe crisis develops or if other countries decide to change their exchange rates as well.
- Suggests that an orderly exchange rate realignment may be possible this summer, implying (per 3) either that a severe crisis lies ahead or that countries other than Germany will decide to change their rates.
- Judges that we will continue to face formidable uncertainties until the exchange rate situation is resolved.
Developments since the German decision give little hope that the immediate problem of exchange rate disequilibrium has been solved.
- First, the “recycling” of speculative funds agreed upon by the central bankers at Basel on May 11 is very meager. The Bundesbank has agreed only to recycle $500 million to countries other than the UK and $120 million to the UK. They will not agree to any recycling for the UK unless the German government guarantees the credit against UK default. Coming against the total inflow of $5 billion since the French referendum, the amount is thus grossly inadequate and, unless Britain is better provided for, may not be adequately distributed.
- Second, as noted by Dr. McCracken, the market is clearly skeptical that exchange rate changes will be avoided. Only about 25 percent of the inflows have moved back out through the market. Most of the speculative money, at least for the moment, is awaiting further developments.
- Third, there are additional uncertainties:
- —Dr. McCracken relayed the bad U.S. balance of payments figures.
- —The British trade figures are bad for the third month in a row and will heighten doubts that Britain has solved its balance-of-payments problem.
- —The French trade figures for April are also bad and have intensified the view that devaluation of the franc must occur fairly soon.
- —The additional German economic measures, adopted “in lieu of revaluation”, are aimed mainly at their domestic inflationary pressures and hence will further increase their external surplus; their measures to deal directly with the external position are puny.
The one ray of hope is that Germany, despite its public avowals that its decision not to revalue is “eternal”, has already indicated privately that it will still consider revaluation if it can get company from other countries. But no “company” seems interested and the Germans have also indicated that “eternal” means “until after its election in [Page 339] September.” There is virtually unanimous agreement that a DM revaluation is inevitable; hence a new speculative crisis is certain to develop as the election approaches.
What France will do regarding devaluation, after the runoff election, is unclear. Some experts think that Pompidou would devalue quickly and pin the blame on De Gaulle. And Poher has begun to echo the Strauss call for a “multilateral realignment”.
Any new French government, however, would probably wish to deal with the pending wage negotiations before devaluing and would also need time to prepare a plan for supplementary domestic measures to make any devaluation work. (Such a position is quite defensible.) By the time these two problems are met, the Bonn elections may be close at hand and Germany will probably not wish to move even in concert with others. In short, there is no certainty that France will provide Germany with its desired “company” very soon.
The UK will also remain on the margin, with liquid debts swamping its meager reserves, especially if the Wilson Government continues to face major political problems. There is little chance of a discreet UK devaluation, however, which would provide “company” for Germany. The British would be more likely to impose additional import controls or let the pound float freely. A French devaluation without a German revaluation could force such action on the UK.
General uneasiness about exchange rates, especially if coupled with large U.S. deficits, could also jeopardize European agreement to early and sufficient activation of Special Drawing Rights and thereby exacerbate the jitters surrounding the system.
The United States has two tactical options in the present situation:
- We can attempt to apply pressure soon, during a period of relative calm, to try to pre-empt future crises. The pressure would be mainly on the Germans to revalue or take decisive alternative steps to reduce their payments surplus, but might have to extend to other countries to provide “company” for them.
- We can simply await the next crisis, which is virtually certain to occur by September and could come much earlier, and seek the desired changes then.
Experience shows that intervention in a period of relative calm—unless handled extremely deftly and with extremely good luck—can create the very crisis it seeks to pre-empt. Intervention during a crisis, however, could plunge us even more deeply into the midst of a major domestic political struggle in Germany.
Embassy Bonn has recommended against any U.S. intervention due to the possibility of fanning “nationalistic sentiments” in Germany and strengthening the right wing there. Our approach prior to the decision [Page 340] not to revalue was, of course, unsuccessful. We are thus threatened with policy paralysis in dealing with the immediate situation.
However, inaction carries serious risks. The certainty of renewed crises and the nearness of the UK to bankruptcy means that the system could suffer severe disruption. This could lead to renewed pressures on the U.S. gold stock, especially if our balance of payments were to deteriorate sharply, and force us to make some difficult decisions on our own international monetary policy.
And even if the system does not face fundamental disruption, there is likely to be a further escalation of restrictions on international trade and payments by other countries unless the necessary exchange rate realignment occurs and there is reform of the overall system.
The short-term threat of renewed crises highlights the more fundamental problems of the international monetary system. In fact, the short-term problem of exchange rate realignment probably must be solved before we can get the type of long-range reform favored by most of our officials—greater flexibility of exchange rates—or even before this kind of reform can be openly discussed internationally, because of the probability of kindling speculation if rates are out of line when such reform is discussed.
The time has thus come when the United States needs to define clearly its strategy on both the short-term and longer-term aspects of the monetary problem and pull the two together.
There are a number of important international monetary meetings in June. In addition, Secretary Kennedy’s speech to the American Bankers Association on June 20 provides an excellent opportunity for a major statement of the Administration’s international monetary policy. If we do not begin to move now, it will be difficult to do so before September. At a minimum, we should be ready to take major initiatives in the fall after the key European elections are over. We should thus try to make our decisions fairly quickly.
In early April, you asked the Secretary of Treasury to coordinate for you an interagency options paper on monetary reform.4 Two weeks ago you agreed to my recommendation to convene an early meeting to discuss overall international monetary policy, to be attended by the Secretaries of Treasury and State, Chairman Martin, Paul McCracken and myself.5
I now recommend, that you authorize me to: [Page 341]
Set up a meeting in about ten days to consider U. S. international monetary policy, both short-term and toward longer run reform of the system. (If our meeting slides beyond that point, it will be difficult to take any initiatives you might decide before summer.)
Ask Treasury to submit, as the basis of discussion for that meeting and sufficiently prior to it, the interagency paper you asked for earlier.
- Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 309, Balance of Payments. Secret. Drafted by Bergsten. A stamped notation on the memorandum reads: “The President has seen,” and a handwritten notation indicates that it was returned from the President’s office to Kissinger on June 11. The President wrote on the memorandum: “High priority.”↩
- Not printed. These were two of the more or less weekly memoranda from McCracken to the President apprising him of recent developments in international monetary or financial affairs.↩
- Document 126.↩
- See footnote 6, Document 16.↩
- See Document 124.↩
- The President initialed this option. The meeting was held June 26; see Document 131.↩
- The President initialed this option. See Document 130 for a discussion of the paper submitted for the June 26 meeting.↩