152. Paper Prepared in the Department of the Treasury1


1. Our Basic Objective

To take advantage of the present crisis to achieve a (i) lasting improvement in the balance-of-payments position of the United States, (ii) a more equitable sharing of the responsibilities for world security and economic progress and (iii) a basic reform of the international monetary system.

2. Our Basic Premise

Given our defense and economic assistance burden, the underlying balance of payments of the United States is in basic disequilibrium and likely to get worse rather than better without substantial realignment of exchange rates of a number of countries. Even then a lasting equilibrium may depend on a reassessment of defense and other burdens. Furthermore, it is only in an atmosphere of crisis and disturbance that other important changes in the policies of European countries and Japan can be brought about.

[Page 424]

3. Specific Objectives

To achieve:

A significant revaluation of the currencies of major European countries and Japan as a result of floating rates or other actions. (See Tab A for an analysis of U.S. balance-of-payments trends and the need for corrective action.)2
A fairer sharing of the balance of payments and budgetary costs of the military burden. (See Tab B.)3
An improvement in the trade policies of the European countries and Japan. (See Tab C.)4
A sharing of foreign aid, which takes into account U.S. defense burdens. (See Tab D.)5
Monetary improvements, including greater rate flexibility and phasing out of gold and avoidance of excessive use of controls. (See Tab E.)

The U.S. should prepare for intensive negotiations with other industrial countries in each of these areas.

4. Basic Approach

Accept and use the opportunity provided by the monetary crisis to undertake negotiations on these major issues. While it is hoped that the disturbances will not be great, one must be prepared for such a contingency.

5. Foreign Objectives

Generally speaking, the other major industrial countries can be expected to pursue the following objectives:

to maintain their competitive positions in international trade;
to minimize adverse effects of international trade and payments on their domestic economies; and
to minimize the assumption of financial burdens for military purposes, and to keep their economic aid burdens relative and modest.

The Common Market countries will attach great importance to the preservation of EC objectives, particularly the common agricultural policy and their hopes for establishing monetary unity. In the effort to preserve internal harmony, they may seek solutions through common, discriminatory controls on transactions with non-member countries. France, [Page 425]in particular, is likely to attempt to take advantage of the opportunity, for political reasons, to reduce U.S. hegemony in the international economic and financial area and to restrict U.S. freedom of action. These countries also wish to restore gold to the central role in the monetary system. They can be expected to seek to capitalize on any frictions which may develop to weaken U.S. ties with other European nations and to urge the use of restrictions on capital transactions as a device for restricting the operations of U.S. firms in Europe and reducing European dependence on U.S. high technology equipment (e.g., aircraft).

6. U.S. Tactics

Permit foreign exchange crisis to develop without action or strong intervention by the U.S.
At an appropriate time when there is growing realization that substantial changes will need to be made, the U.S. should indicate its own preferred solution.
At that time, the U.S. should be prepared to indicate and, if necessary, use the following measures as negotiating leverage:
suspension of gold convertibility;6
imposition of trade restrictions;
diplomatic and financial intervention to frustrate foreign activities which interfere with the attainment of our objectives; and
reduction of the U.S. military presence in Europe and Japan.
In the monetary area the “fall back” position would be simply to remain on the system of “floating rates” already largely in place under this scenario. It would be necessary in order to maintain our bargaining position taken through inconvertibility under (i) above, that the U.S. make clear from the start that the U.S. would be prepared to live with the floating rate systems indefinitely.

7. Procedure

The Secretary of the Treasury will be prepared, on short order, to begin negotiations on the monetary issues should the timing for such [Page 426]negotiations appear appropriate. While it seems likely that the Group of Ten (the EEC, the U.K., Canada, Japan, Sweden, Switzerland and the U.S.) would be the best forum in which to begin the negotiations, the Secretary of the Treasury should give consideration to the negotiating forum as well as strategy. Negotiations on the monetary issues should take into account the progress being made in the separate negotiations on the other issues.
To prepare for negotiations on the related issues the President should direct:
The Council on International Economic Policy to develop positions with respect to trade relationships with the European Common Market and Japan;
The National Security Council to develop positions designed to achieve objectives with respect to the sharing of the defense burden;
The Secretaries of State and Treasury to develop positions with respect to the redistribution of the burden of foreign aid for review by the Council on International Economic Policy.

Positions on these issues should be developed and approved by June 30 in order that international negotiations may begin shortly thereafter.

8. Probable Foreign Response

Other countries, led by the EC, would be likely to respond by:

Public attempts to place all responsibility for the monetary crisis on the U.S. as the deficit country and to argue that corrective action is a U.S. responsibility. The French would offer a change in the price of gold as the required action;
Introduction of common EC exchange controls on capital flows or a dual exchange rate market with a penalty rate for inward capital transactions (though the effectiveness would be uncertain);
Possible drive to exclude and isolate U.S. from the bulk of the trading world through enlargement of and association with the EC on a preferential basis;
Seeking to discuss the issues of trade policy, military expenditures and aid burdens in separate channels, wholly divorced from the monetary problems. They would hold that—
the U.S. has more restrictions on trade than the EC and any reduction of barriers must be matched by reductions in U.S. barriers of equal value;
they are already contributing larger shares of GNP to foreign aid than does the U.S. and military expenditures are not relevant.

Increases in defense budgets beyond those contemplated are not politically feasible in the present world climate and in any event [Page 427]increased expenditures designed to ease the financial burden on the U.S. are out of the question in part because of the appearance of paying “occupation” costs and in part because of public antipathy toward support of the U.S. while it continues to be involved in Viet Nam.

  1. Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, 1971 Contingency Planning Papers. Confidential; Eyes Only.
  2. Not printed.
  3. Not printed. Tab B, entitled “Sharing the Cost and Defense of the Free World,” discussed issues similar to those raised in the offset and burdensharing negotiations with the Federal Republic of Germany and the NATO allies. See Documents 18, 22, and 50.
  4. Not printed. Tab C, entitled “Trade Portion of a General Negotiation,” discussed the essential improvement in the U.S. trade balance and trading rules vis-à-vis the major U.S. trading partners.
  5. Tabs D and E were not found.
  6. On June 3 Congressman Henry Reuss introduced a “Sense of Congress Resolution” that said that if an international monetary conference was not promptly convened, the United States should terminate the convertibility of the dollar to gold; permit the dollar to float until any disequilibrium had been removed; and entertain claims for compensation by foreign official dollar holders only for those who cooperate on proper exchange rates and adhere to the March 1969 two-tier gold agreement (see Document 145). A copy of Reuss’ resolution was circulated to members of the Volcker Group and its Working Groups as VG/Uncl. INFO/71-30 on June 4. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/Uncl. INFO/70-1-) See also The New York Times, June 4, 1971, p. 45. No record of a vote on the resolution was found.