171. Memorandum of Conversation1
- Under Secretary Volcker
- Governor Daane
- Mr. C. Petrow
- Valery Giscard d’Estaing, Minister of Economics and Finance
- President Nixon’s New Economic Program
Minister Giscard d’Estaing wondered whether the U.S. would completely refrain from intervention in the exchange markets. Mr. Volcker said normally we would not intervene, although there might be exceptional circumstances which he could not anticipate which might require intervention. Giscard asked what the difference was between the present dollar float and the Canadian float. Mr. Volcker said that in the legal sense our position was the same as the Canadian and the German, but the legal similarity did not mean very much. Basically, the U.S. had not changed the parity of the dollar. Others would make that decision; we could not. We did not assume that there would be no changes in parities. We simply didn’t know in which direction the dollar would move. Giscard asked whether we would request an exception from our obligation [Page 480]under the IMF to limit changes in parity to 1 percent. Mr. Volcker replied that the legal situation was difficult. The question is, who would be failing to fulfill his obligations—the U.S. or the other countries? To repeat, we don’t intend to intervene in the exchange market and, in that sense, our position is the same as the Canadians’ and the Germans’.
Giscard said that Canadians and the Germans had said that they were floating for a limited time and that the U.S. had not said this. Mr. Volcker on the contrary replied that, we had said that our action was for a limited time. Mr. Volcker then briefly reviewed the philosophy outlined in the President’s three-part program. He noted that the decision on suspending convertibility of the dollar was not in the original scenario but had been added because of the way the exchange markets were behaving in August. He said the U.S. appreciated what the French had been trying to do during that period. They had been very helpful in their efforts to deal with the problem of speculation. Other countries had been more nervous, however, so we had had to go ahead. In fact, if the Germans hadn’t begun selling dollars this summer, he wouldn’t be here now. As for how long it would last, the U.S. first must move decisively toward a strong external position after years of weakness and reestablish confidence in the dollar in some lasting form. Before we could terminate our measures, we had to be satisfied that the adjustment in the position of the dollar (i.e., the restoration of balance-of-payments surpluses) was assured. The burden of adjustment would lie less on Europe than on Canada and Japan.
Giscard referred to our decisions to suspend convertibility of the dollar into gold. Mr. Volcker reminded him that this included other assets as well, including SDR’s. Giscard asked why SDR’s were included. Mr. Volcker replied that we had to protect ourselves against total obligations against our gold stock. Giscard said we would not be able to adhere to this position very long. We would soon have to be discussing further SDR allocation. Mr. Volcker repeated that the question of how long the dollar would continue floating depended on the actions of the other countries.
Giscard asked whether we still adhered to the basic principle of the Bretton Woods system, namely, fixed parities. Mr. Volcker said, broadly speaking, “yes,” but the United States must reestablish a strong external position. Moreover, the system itself needed improvement. It had been subject to recurrent crises. We should take advantage of our present opportunity to reshape the system so that it could serve for the next twenty-five years. He was not advocating an international monetary conference at this time and not saying that we would continue the suspension of convertibility until the system had been reshaped. The ending of the suspension of convertibility would depend instead on the [Page 481]recovery of the dollar’s strength. Mr. Volcker said we had no plans to propose for reshaping the system. We wanted to hear the views of the other countries so that we could reach a consensus.
Giscard said that, because of our measures, daily life in the monetary system would be different now. Sixty to sixty-five percent of the world’s currency transactions would now be floating. He feared that we were in effect moving from a system of fixed parities to one of floating parities. What made the U.S. think that we could go back to a system of parities? Nations would accept the new situation and take whatever measures, such as border taxes, as were necessary to protect themselves. France was concerned that everything that the U.S. had achieved over the past twenty-five years in terms of monetary stability and free convertibility would be lost. Mr. Volcker replied that we equally recognized this danger, but there was an even greater danger of growing protectionism in the United States if we had not acted to prevent further erosion of our external position. The President felt that this latter danger was great enough to justify the risks inherent in the measures he had taken.
Giscard said that this was not the vein in which Mr. Volcker had spoken to the group in London yesterday. Yesterday he had said “we’ve made our move, now it is your turn”, and had shown no awareness of the dangers involved. Mr. Volcker replied that, if that was what Giscard had been told, then he had obviously failed to make himself clear. We were certainly aware of the dangers but we didn’t want to patch up another temporary settlement with a 4-5 percent change in parities. We wanted a long-term solution.
Giscard asked what would happen at next month’s IMF meeting. Mr. Volcker replied that we were ready at the appropriate time to go back to a system of fixed rates but with some changes, perhaps along the lines of our proposals on wider bands and temporary floats. He considered our proposal on floats more conservative than the Belgian proposal and more in line with French thinking. We had proposed that there be no float unless there was a fundamental disequilibrium, but our proposals were based on a strong presumption of fixed parities. We obviously could not settle everything at next month’s IMF meeting, but we ought to be thinking hard at that meeting about the direction in which we wanted to go.
Giscard said the French would have to consider what position they should take. It was a real problem. They didn’t like to let the market fix exchange rates. The German experience was an example of how bad this could be. The mark had floated much higher than the Germans had expected. Appreciation had not been 3, 4 or 5 percent but 8 to 10 percent. Now the Germans were unhappy. Mr. Volcker replied that they should have thought of that before they acted. If we are to return to fixed parities, we must convince the market that they are sustainable.[Page 482]
Giscard said France had warned the Germans they were headed down a dangerous path. He said France feared the current trend toward floating rates would lead to protectionism. If there were no clear determination that the U.S. was prepared, not necessarily to restore the old system in every detail, but at least to retain the principle of fixed parities, then there was a danger that we would go back to the chaos of the 1930’s. Mr. Volcker said the President was aware of the unpredictable elements in this program. Before going back to fixed parities, however, we have a sizable adjustment to make in our external position. We can’t solve the problem by little adjustments.
Giscard said that one consequence of our measure would be a reluctance by central banks to hold dollars in the future. This was how the U.S. had financed its deficit during the last ten years. It would have to find a new way of doing this now. Mr. Volcker replied that we didn’t want to finance our deficits, we wanted to eliminate them. Giscard said that would take 10 to 18 months and we had to find a way to finance them in the meantime. Mr. Volcker said we wouldn’t have to wait that long. Once people were sure that the tide had turned there would be a reflux of short-term dollars. Giscard said the market was likely to push the dollar down farther than we wanted. Mr. Volcker said it might well go down, and maybe it needed to go down. No one could say now how much it would go down. However, the U.S. must have an adjustment. He did not think this adjustment would have a major effect on Europe.
Giscard said jokingly that France had anticipated our program and was selling only luxury goods to the United States. Mr. Volcker said the major effect would be on Japan and Canada. Giscard added “and the Germans.” Mr. Volcker replied that German exports did not loom so large in the total picture except for automobiles.
Returning to the U.S. proposals to the IMF Directors,2 Giscard said we had spoken of temporary floats to prepare a change of parity. In the case of the dollar float, were we preparing to move to a new parity or to return to the old one? Mr. Volcker replied that the parity of the dollar was normally expressed in terms of gold. We did not intend changing that parity but that wasn’t the parity that counted. The one that counts is the parity between the dollar and the other currencies. As for the dollar-gold ratio, we believe that small changes in that parity would be destabilizing. They brought about temporary solutions but they created the expectation of further changes the next time the dollar came under pressure and thus provoked speculation. Moreover, the monetary system had been gradually moving off gold. The U.S. wanted this evolution to continue. Possibly the present dependence on the reserve currencies also needed to change. [Page 483]This was something the U.S. was prepared to look at. Perhaps SDR’s provided a possible future base for the system. For these reasons there was no prospect of a change in the gold-dollar ratio.
Giscard replied that, be that as it may, we could not escape questions. He also asked about the IMF obligation of other countries to support the dollar. As a result of our measures, they would be faced by a need to buy immense quantities of dollars to meet this obligation. Mr. Volcker replied that the quantities might not be immense. We were aware of the problem and it had not been easy for us to make the decisions that we had. What other countries would now do he could not say.
Giscard replied that nonetheless, we must think of the problems of people who have believed for years that they must respect the rules and who now realize that, if they continue to respect the rules, they will be creating enormous problems for themselves. Something will have to be done. Mr. Volcker said we understood this, but Giscard should remember that our action in suspending convertibility was tied to a domestic program. That program was our contribution to restoring the international stability of the dollar. It was the instability of the dollar that had been causing the influx problem that France had been fighting for the past month or so.
Giscard observed that, in the present circumstances, a Group of Ten meeting would probably be useless since there was no possibility of taking common decisions at the present moment. Mr. Volcker said we were looking ahead to an extended period of negotiations on possible changes in the system. He asked what Giscard thought of trying to form a new group, perhaps under IMF auspices, possibly with some LDC representation, though not too much to make it unmanageable, rather than sticking to the Group of Ten.
Secondly, he asked whether Giscard thought it would be useful for him and some of the other Finance Ministers to go to Washington to meet with Secretary Connally. Obviously it was impossible to settle everything in an afternoon, but would such a meeting be useful?
Giscard replied that it was too early to decide either of these questions. The dust had to settle first. The European governments had to devote themselves to practical decisions in the days immediately ahead. He thought it better to let things take their natural shape. Mr. Volcker said this was all right so long as the shape did not turn out to be a bad one. Giscard said he thought there was no danger of this, at least not right away. Another reason for not convening the Group of Ten was that the Europeans were particularly concerned about the import surcharge, which was not a matter for the Group of Ten.
Giscard also mentioned that in the last few weeks the French had been concerned about the mounting pressures on the dollar and had [Page 484]taken measures to prevent the situation from being aggravated. Mr. Volcker replied that the U.S. was very conscious of this. Giscard promised that France would continue to cooperate in the coming days and would refrain from comments which might aggravate the situation.
- Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker 1969-1974: FRC 56 79 15, France. Confidential. Drafted by Petrow on August 26 and approved by Volcker. A similar, telegraphic version of the memorandum of conversation was transmitted to the Department of State in telegram 14016 from Paris, August 18. (National Archives, RG 59, Central Files 1970-73, E 1 US) Paris was Volcker’s only stop after the meeting in London (see Document 170). Italian Treasury Minister Ferrari Aggradi found his bypassing of Rome “not acceptable” in view of Italy’s “friendly” approach to U.S. monetary issues and the facts that Italy at that time chaired the EC Council and Aggradi would preside over the EC meeting in Brussels on August 19 to decide the EC’s stance on the New Economic Program. (Telegram 5208 from Rome, August 18; ibid., POL 7 US/VOLCKER) Perhaps in response to these concerns, following the WP-3 and G-10 Deputies meetings in Paris September 2-4 (see footnote 3, Document 173 and Document 174), Volcker continued on to Rome for a “friendly, frank exchange” with Italian officials who “emphasized the feeling that size of adjustment U.S. wants of other countries so large and issues (including political ones of burden sharing, etc.) so complex that reasonable time-span must be allowed for process to work out.” (Telegram 5601 from Rome, September 6; ibid., FN 10 9/1/71) Daane briefed Netherlands official Zijlstra by phone from Paris, and Zijlstra told Ambassador Middendorf he was quite satisfied with the briefing he received. (Ibid., FN 17 US 1/1/71)↩
- Reference is to the July 19 proposals on wider margins and transitional floats; see Documents 162 and 163.↩