157. Memorandum From the Chairman of the Council of Economic Advisers (McCracken) to President Nixon1
SUBJECT
- International Monetary Reform
We have just muddled through another international monetary crisis. We can congratulate ourselves that we have so far escaped the worst of outcomes—which would have been commitment to restriction of the domestic economy and widespread controls both at home and abroad. However, we cannot be sure of having escaped entirely or permanently. Several countries, notably Japan, have introduced new controls. Protectionists in Congress and elsewhere interpret the event as additional evidence that the U.S. cannot hold its own in an open world economy. On the other hand the experience of the last few months, allowing a “crisis” to develop and then floating outside the rules of the system, is too uncertain and risky to be repeated.
A system that combines rigidly fixed exchange rates with free trade and capital movements appears to be unworkable. But the recent practice of unregulated exchange rate changes and floating disrupts the monetary order that has generally prevailed so far. There seem to be two alternatives—either more extensive use of direct controls to support a system of fixed exchange rates or an internationally—agreed upon system of greater flexibility. You recognized this two years ago and opted for the second alternative when you decided (in June 1969)2 that the U.S. would propose and support a study of greater flexibility in the IMF. This study was made but it has not so far led to concrete results because some countries do not like its conclusions while the attitude of some of our own representatives has been lukewarm at best.
If we allow things to drift further we may well wind up with more extensive use of direct controls, which would be highly burdensome to our trade and investment interests. Our businessmen and bankers also appear to be generally opposed to wider use of floating rates.3 However, the prospects of going back to the existing rules are dim. [Page 439] Unless timely reforms are made the IMF could easily go the way of the United Nations.
I believe a decision has to be made urgently on the direction in which we would like the international monetary system to develop. In my opinion our best course would be to support implementation of the IMF’s flexibility study, published last year.4 This requires prompt action since the IMF annual report is now being written. Unless recommendations can be brought before the IMF meeting this coming September the public is likely to assume that the flexibility study is dead.
I recommend that you convene the Council on International Economic Policy to reassert our position in favor of an updating of the IMF rules. Most of the preparatory work has already been done so there is no need for another lengthy in-house study. The immediate result of the CIEP meeting could be a public statement reaffirming our attachment to the basic principles of the Bretton Woods System, our opposition to extensive controls, and our interest in working with other nations to adapt the international monetary system to contemporary needs.5
P.S. Read to Paul McCracken, who is currently in Europe, and approved by him.
- Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218, Council on International Economic Policy. No classification marking. A stamped notation reads: “The President has seen.” He wrote extensive marginal notes which were covered over and cannot be read on the source text, but see Document 159.↩
- Presumably a reference to the international monetary policy meeting on June 26, 1969; see Documents 131 and 140.↩
- A handwritten note in the margin reads: “not so clear.”↩
- Presumably a reference to the paper for the Annual Meeting in Copenhagen; see footnote 4, Document 148.↩
- A handwritten note in the margin reads: “I doubt usefulness of CIEP but such a statement would be good.”↩
- The memorandum bears McCracken’s handwritten signature despite the typed postscript.↩