158. Memorandum From Secretary of the Treasury Connally to President Nixon 1

A memorandum addressed to you by Paul McCracken on June 2 on international monetary reform has just come to my attention.2 I must take vigorous personal exception to its premises and conclusions.

The simple fact is that, given our present international economic and financial position, some monetary disturbances—which the press will label “crises”—are virtually inevitable. The test is whether these can be met without impairing our basic domestic (or international) objectives.

Far from “muddling through” the recent disturbance, I believe these essential objectives were maintained:

Quite deliberately, we avoided a strong reaction. By maintaining, insofar as possible, the focus in Europe, we helped deflate concern over a “dollar crisis.” Pressures for strong domestic action, either with respect to higher interest rates or strongly intensified controls (or both) never built up.
International sentiment was calmed fairly quickly and effectively in the circumstances.
By making the point that the “crisis” grew most immediately out of domestic German political and economic concerns, we helped limit the repercussions on the dollar and set the stage for maintaining the IMF’s role in exercising surveillance over exchange rate practices. The latter seems to be Mr. McCracken’s principal objective.
Finally, and not least important, a basic spirit of cooperation has been maintained. Thus we retain a base for dealing promptly with two major problems: [Page 441]
Achieving more influence over the Eurodollar market and short-term capital flows generally.
Reaching a consensus on methods of attaining some needed flexibility in the exchange rate structure, without simply falling into the trap of “everyone for himself.”

Changes in our present international economic and financial position must be achieved without—and this is the key—undermining confidence in the dollar and the general stability of the monetary system. Should we fail, forces of economic nationalism and isolation in one country after the other—including the United States—could become unmanageable.

I do not underestimate the extent to which the problems are complicated by differing views among economists and businessmen, and among countries. In particular, I believe we must realize there is a strong element of thinking within Europe that would take advantage of weakness or clumsiness on our part to promote the Common Market not as a partner but as a rival economic bloc, competing vigorously with the dollar and reducing or shutting out, as best it can, U.S. economic influence from a considerable portion of the world.

These threats to monetary and economic order will require action in a wide variety of areas. Most important is success in dealing with inflation and growth at home. In the vital areas of trade, aid, and a better sharing of defense costs, where a clear focus for Government policy-making has been absent, the Council on International Economic Policy obviously has a lead role.

But one distinction should be clear. As I have understood it, the genesis of CIEP did not lie in an idea it could or should take over the role of responsible operating agencies. In the international monetary area, that role, by law and tradition, lies under your direction with the Treasury, which, in turn, must operate in close coordination with the Federal Reserve.

Specifically, I fail to see the merit in convening CIEP to “reassert” in general terms a position with respect to exchange rate flexibility that only a few days ago I reiterated in Munich.3 In view of recent developments, it is hard for me to see how informed observers could think the flexibility issue is dead. But its specifics do involve difficult tactical as well as substantive questions upon which important countries are not agreed. These questions are under active review within the Treasury and in the Volcker Group.

Obviously, relevant CIEP agencies and Peter Peterson are being and will be kept informed—they are, indeed, participating. But I do not think it useful or productive to convene a CIEP meeting for the purpose of issuing a broad public statement reaffirming what everyone already [Page 442]knows but leaving unanswered all those difficult questions of substance and tactics that are the heart of the matter at present.

My understanding has been that you believe it is appropriate and desirable to continue to proceed in this area in the manner I have outlined. If this understanding is not correct, I assume you will so advise me.

John B. Connally 4
  1. Source: Washington National Records Center, Department of the Treasury, Records of Secretary Shultz: FRC 56 80 1, JBC-Memoranda From the White House 71. Attached to a June 8 note from Peterson to Connally regarding McCracken’s June 2 memorandum to the President ( Document 157). Peterson reminded Connally that “a couple of weeks ago” they had discussed the Council’s role in international monetary reform. Peterson noted that he and Connally “agreed that I would prepare a study memo in draft form that would suggest a broader frame of reference than just monetary—to include discussion of the causes of the persistent problem and a projection of the future balance of payments situation—including defense, trade balances, etc. The monetary approaches would also have to be included as one part of this but I see it in this broader context and something that you approve in advance. I hope to have a draft in your hands next week.” No such paper was found. Also attached to Peterson’s June 8 note to Connally is Connally’s June 9 memorandum to Huntsman (see footnote 4, Document 159), Huntsman’s June 8 memorandum to Connally ( Document 159), and McCracken’s June 2 memorandum to the President ( Document 157).
  2. Document 157.
  3. Reference is to Connally’s address to the Annual Meeting of the American Bankers Association in Munich on May 28; see Document 155.
  4. Printed from a copy that indicates Connally signed the original.