160. Memorandum From Ernest Johnston of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)1

SUBJECT

  • International Monetary Reform

Attached at Tab III is an exchange of correspondence involving Paul McCracken, Secretary Connally, Jon Huntsman and the President on the question of international monetary reform.2

Paul McCracken wrote to the President on June 2 (Tab A) that we have just “muddled through” another international monetary crisis.3 [Page 444]He recommended that we move immediately in the IMF toward exchange rate flexibility and suggested that we work out a position in the CIEP. On June 8 Connally commented to the President on McCracken’s memorandum (Tab D).4 Connally defended U.S. reactions to the crisis, stated that we had come out quite well, and argued that there should be no such review in the CIEP.

(The two memoranda bear out the usual positions on this issue: CEA using all occasions to press flexibility, Connally defending the status quo.)

The President (Tab B) rejected McCracken’s proposal that action be given to the CIEP, but suggesting that we “move on the problem”, not “just wait for it to hit us again, e.g. in the fall of ‘72.”5 He requested that Connally consult with McCracken, Burns, Shultz and Peterson, and give him a recommendation for action. Responsibility is to lie with Connally. Unfortunately the President did not recommend that Connally confer with you or Secretary Rogers, so that the foreign policy community has been omitted from the exercise.6 This raises a major problem, since any new U. S. action in this field—including no action—will have major consequences for overall U.S. foreign policy.

If we are to change the current system or respond to crises in new fashions, there are several paths we could follow:

1.
An economic solution could lie in “benign neglect” of our balance of payments problems, as George Shultz maintained.7 This, however, would thoroughly anger the Europeans and might be the cause of a general run on our gold stock, forcing us to close the gold window and initiate a U.S. float in the midst of serious international ill-will. It would clearly spill over into our political relations.
2.
We could institute even tighter capital controls and perhaps institute trade controls, which I suspect might be Secretary Connally’ s preference—it was the preference of the last Administration. Tough capital controls might be welcomed in at least some quarters abroad, but not in most, and trade controls would cause serious international repercussions—in the current political climate, they could decisively tip the scales in favor of protectionist pressures and trigger major trade war.
3.
A doubling or tripling of the dollar price of gold, toward which Arthur Burns has in the past inclined, is one response to a crisis, though it would be ineffective over any length of time and would be very damaging [Page 445]to those countries (such as Germany) which at our urging have held large quantities of dollars. Their governments would suffer sharp criticism from a U.S. policy that doubled or tripled the dollar value of the reserves of the gold countries, while the value of their own reserves remained stable.
4.
The best solution from the foreign policy standpoint is continued slow progress toward greater exchange rate flexibility, as pushed by McCracken. This is the most probable outcome and one we could expect if the more eccentric positions of the advisers cancel each other out, but the consequences are too serious to neglect should this not prove the result.

Fred Bergsten feels strongly that you, and perhaps the Secretary of State, should be involved in any recommendations on this issue so that the foreign policy consequences are given due weight. I agree with Fred. My own time here is very short; but Fred’s replacement should have the opportunity to comment to you, and you to the President, on any Connally recommendation.8

You may wish to raise this with the President verbally; if not, I have included a memorandum plus a notification to Connally, if you wish to handle it that way, though it is of course delicate bureaucratically.

The memorandum for the President requests that Connally seek your comments before presenting his recommendations. This is an awkward procedure for it means that you would be one of a number of persons whose views would be included in Connally’s memorandum. However, since Secretary Connally seems to have made arrangements to send his memoranda to the President without internal White House staffing, this seems the only way to make sure you are involved.9

Recommendations: 10

1.
That you seek the President’s concurrence in requesting that Connally seek your views before presenting recommendations to the President on international monetary reform. (You may wish to use the memorandum at Tab I.)
2.
That, subsequently, you inform Secretary Connally of the President’s decision. (You may wish to use the memorandum at Tab II.)

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218, Council on International Economic Policy. Confidential.
  2. Tab III, not printed, is a June 10 memorandum from Huntsman to President Nixon with Tabs A-D; see footnotes 3 5 below.
  3. Document 157.
  4. Document 158.
  5. See Document 159.
  6. Kissinger’s handwritten note at the top of the page reads: “All of this (illegible word) be handled informally. State, Peterson and I should be involved.”
  7. Not further identified.
  8. Johnston, a career Foreign Service officer, was completing a tour at the NSC and was about to be reassigned. Bergsten moved to the Brookings Institution during this time, and Hormats, who had joined the NSC Staff in 1969, assumed his responsibilities.
  9. Johnston’s memorandum and its attachments were attached to an August 2 memorandum from Jon Howe to General Haig that reads: “Per your instructions, I talked to Jon Huntsman who assured me that he would provide to both Peterson and HAK staffs any memoranda received from Secretary Connally concerning international monetary reform or related subjects.”
  10. There is no indication of Kissinger’s approval or disapproval of the recommendations and the memoranda at Tabs I and II, not printed, are unsigned.