151. Editorial Note

On March 22, 1971, Charles A. Coombs at the Federal Reserve Bank of New York sent a memorandum to the President of the New York Bank, Alfred Hayes, entitled “The Outlook for the Dollar.” In his memorandum Coombs noted that the United States could probably finance its balance-of-payments deficit in 1970 and early 1971, but reported the 1971 deficit seemed to be running well above the 1970 levels and thought the United States was “moving into the danger zone.” Coombs discussed ways to obtain balance-of-payments equilibrium and defend the dollar, but then went on to consider options in the event the judgment was made that “the dollar was hopelessly overvalued.” After reviewing the options, he concluded that suspending the dollar’s convertibility to gold, “which could be made effective by executive decision from one minute to the next without prior consultations abroad,” would be the preferred course over arduous and possibly confrontational negotiations [Page 422]for currency realignments that would be disruptive of foreign exchange markets. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, 1971 Contingency Planning Papers) Federal Reserve Chairman Arthur Burns provided a copy of Coombs’ memorandum to Treasury Under Secretary Paul Volcker on March 24. (Ibid.)

At this time many G-10 countries were faced with rising dollar inflows. These inflows were discussed by European Community Finance Ministers when they met in Hamburg on April 26 and 27. The Embassy in Bonn provided a summary of the meeting in telegram 5156 from Bonn, April 30. German Finance Minister Schiller reportedly suggested two approaches to dealing with the dollar inflows, a temporary joint float of EEC currencies or a multilateral parity adjustment, and personally preferred the former. Only the Netherlands supported Schiller’s position, and France was opposed to any measures that would reduce the competitiveness of French export industries “and when pressed declared that if the choice were between inflation and a parity adjustment, they would prefer inflation.” (National Archives, RG 59, Central Files 1970-73, FN 10)

The dollar inflows continued, and on May 5 Henry Kissinger sent a memorandum to President Nixon advising him that “Germany, Switzerland, The Netherlands, Belgium and Austria today suspended dollar operations of their central banks. They did so because of the tremendous inflow of dollars which reached $1 billion in Germany yesterday. It now appears that the dollar operation will continue suspended at least through this weekend.” Kissinger informed the President that the capital inflows were due to speculation that the Mark, and perhaps other European currencies, would be appreciated against the dollar. He posited possible approaches by France and Germany and suggested that France might use its veto power over British entry into the European Community “to get German acquiescence on French monetary views.” In the end, however, Kissinger concluded no U.S. action was required at that time and “we need only watch the situation carefully and await word on what the Europeans plan to do.” (Ibid., Nixon Presidential Materials, NSC Files, Subject Files, Box 309, Balance of Payments)

When foreign exchange markets reopened on May 10, the Mark was allowed to float (see Document 155). The Embassy in Bonn on June 15 reported one responsible German official’s view that the Mark would float for an extended period, possibly beyond the end of the year, and that German industry was becoming reconciled to the float as preferable to exchange controls or a large revaluation. (Telegram 7249 from Bonn, June 15; National Archives, RG 59, Central Files 1970-73, FN 10)

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Continuing throughout the summer of 1971 until the New Economic Policy was announced on August 15 and beyond, the visible thrust of U.S. activity on international monetary policy continued to be the initiative for greater exchange rate flexibility. The Volcker Group discussed the subject on June 29, and draft position papers reflecting that discussion and proposed amendments to the Articles of Agreement on wider margins and floating rates were circulated to members of the Group as VG/LIM/71-21 on July 2. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/LIM/71-1) See Documents 162 and 163 regarding the U.S. initiative at the IMF Board meeting on July 19.