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


  • U.S. Initiative on International Monetary Reform

We have now had an opportunity to sound out our partners in the Group of Ten on their likely reaction to a U.S. call for study of limited exchange rate flexibility at the forthcoming World Bank/International Monetary Fund Meetings. Their responses, as given to Under Secretary Volcker on a trip to Europe and as volunteered by central bankers meeting in Basle,2 are summarized in the attached table.

As you can see, in official circles there is widespread reluctance to deal with this issue. Except for the Italians and certain of the German [Page 370] officials, financial authorities in the rest of the Group of Ten countries are currently opposed to greater exchange flexibility in substance, and some are fearful that even study of the issue will be destabilizing.

To some extent, the adverse tone of the comments was an outgrowth of some unfortunate leaks to the U.S. and foreign press about our intentions,3 which failed to place the matter in appropriate perspective. In substance, the opposition has differing origins. Some officials simply think that greater exchange rate flexibility will create more problems than it will solve. Others, particularly those whose currencies are under pressure, are concerned that open discussion of greater flexibility will expose them to increased speculation and reserve losses. Still others are suspicious of our motives in raising this issue at this time, reading into our interest in exchange rate flexibility a defeatist attitude toward dealing with our internal inflation.

In contrast to these foreign official views, greater exchange rate flexibility has wide support in the academic community, has attracted interest in the business community, and has strong appeal to certain members of Congress. In the end, I believe most—if not all—of the leading countries will accede to our request for international study. I believe that our interests, and indeed theirs in the longer run, will be served by proceeding with such an exercise. However, the foreign official response does emphasize the importance of proceeding in this matter with considerable care respecting the reservations and sensibilities of our friends to elicit their cooperation.

For that reason, in asking for study, I plan to emphasize (1) that careful study is required, and this means that no one need fear early and potentially disturbing changes; (2) that we do not have preconceived ideas as to the “best solution”—at the same time we must rule out certain alternatives that would clearly be unworkable or work to the disadvantage of the United States; and (3) that the U.S. does not look upon greater exchange flexibility as an alternative to continued pursuit of anti-inflation policies domestically. I am now working on a draft speech for the Bank/Fund Meetings which I trust will make these points clear.

David M. Kennedy
[Page 371]


Concept of Flexibility Willing to Study
U.K. Strongly opposed Yes, but dangers
Germany Split internally; strong pressures on both sides Yes
France Minister’s position uncertain; technicians opposed Probably
Italy Sympathetic Favor
Netherlands Strongly opposed May oppose
Belgium Strongly opposed Probably
Sweden Opposed Yes
Canada Opposed Yes
Japan Opposed Yes
Switzerland Strongly opposed Yes
  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 289, Treasury, Volume I. Confidential. An attached September 24 note from Haig to Bergsten requested, “as a matter of urgency, a cover memorandum from Henry to the President,” presumably Document 139, to which a copy of this memorandum is attached as Tab E. Another copy is attached to a copy of the September 8 memorandum from McCracken to the President (Document 137) proposing a more forthcoming approach at the IMF and IBRD annual meeting, and this memorandum by Secretary Kennedy is presumably the Treasury Department reply.
  2. Volcker’s itinerary has not been fully identified, but he apparently met with Chancellor of the Exchequer Roy Jenkins. (Paul A. Volcker and Toyoo Gyohten, Changing Fortunes: The World’s Money and the Threat to American Leadership (Times Books, 1992), p. 69) The reference to the central bankers meeting is presumably to a meeting of the Bank for International Settlements attended by Daane and possibly Volcker as well.
  3. Not further identified.