Foreign Relations of the United States, 1969–1976, Volume III, Foreign Economic Policy; International Monetary Policy, 1969–1972

174. Memorandum From Robert Hormats of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)¹

Washington, September 6, 1971.

SUBJECT

• Talking Points for CIEP Meeting—Tuesday, September 7, at 8:30 a.m. in the Cabinet Room

There are several issues which might be raised at the meeting on which you may wish to comment. On the first three issues your comments are particularly vital, since those primarily responsible for future plans regarding the New Economic Policy may have lost sight of, or given insufficient attention to, important foreign policy considerations.²

Foreign Response to New Economic Policy

Recent Events: The Deputy Finance Ministers of the Group of Ten agreed on Friday³ in Paris that their Finance Ministers should consider a general realignment of current parities at the forthcoming Ministerial Meeting in London on September 15 and 16. However, no agreement was reached on what sort of realignments are necessary. There was strong Japanese and European pressure for the United States to devalue the dollar outright—by raising the price of gold—in exchange for revaluation of the yen and major European currencies. Paul Volcker, the U.S. Representative, opposed this and indicated that the Administration is still planning to return to the $35 an ounce gold price, which was suspended on August 15. Volcker also added that the United States “did not have any particular plan” for solving the present crisis and believed the current phase was one of “consultation, not negotiation”.

The Common Market is locked in a stalemate between France—which opposes any revaluation of the franc because it feels its weak competitive position cannot stand it, and which continues to demand that the dollar be devalued vis-à-vis gold (thereby increasing the value of French gold reserves)—and Germany, which wants the Common Market to float against the dollar. The Europeans also claim that the large amounts of U. S. capital outflow, not improper currency values, are the primary reason for the dollar crisis, and cite the fact that the U.S. had a $1.7 billion surplus with Europe last year.

The present problems, as indicated in previous memos,⁴ are:

—Our major trading partners have not been able to agree on coordinated measures to meet the present crisis. This raises the possibility that one country or trade group such as the EEC might take actions which we consider acceptable, but we would be unable to remove the surcharge if another country such as Japan failed to take appropriate measures, thus making the EEC draw back and strengthening the hands of its domestic protectionist forces in Europe.

The longer the surcharge is in effect, the greater the possibility that our trading partners will institute export subsidies, capital controls on the inflow of dollars, or restrictions on the imports of U.S. products. In doing so they would strengthen their bargaining position in future negotiations and improve their economic positions vis-à-vis the U.S.; however, once instituted, such measures are politically difficult to remove, and will lead to a more restrictive trading world rather than the freer trading world which the President desires and which is most certainly in our interest. By the same token, the longer the U.S. surcharge remains in effect the stronger will be the vested interests in this country in retaining it, and the more difficult politically it will be for the President to remove.

With this in mind, it is important that you raise the following questions:

• —By not providing our major trading partners with a clear picture of what we expect from them (which the Europeans see as lack of leadership and evidence that the U.S. does not know what it wants), do we not run a major risk of their not being able to agree to reforms which are acceptable to us, and thereby prolonging imposition of the surcharge and raising the risk that our trading partners will institute measures which restrict trade and capital, or subsidize their own exports?
• —Is there at present a scenario for an integrating set of negotiations with our major trading partners should the forthcoming Group of Ten meeting in London and the IMF meetings in Washington at the end of September in Washington produce no results? If September passes without an agreement as to how to proceed, isn’t it possible that the situation will deteriorate into chaos?

Leverage Value of the Surcharge

Since the President’s speech, a number of USG spokesmen have indicated that we would remove the surcharge only after a major exchange revaluation by our trading partners plus a removal of trade barriers and a more “equitable” arrangement for sharing the burden of U.S. troops stationed abroad. It is, however, doubtful that the surcharge is a strong enough or appropriate lever for securing all of these goals. Moreover, as Vice Chairman Emminger of the Bundesbank has recently indicated, this may prove to be an “indigestible negotiating fare”, at least within the time span within which one would wish to move from the present provisional state of affairs. And continued use of the surcharge runs the risks discussed above.

One way of using the surcharge would be to regard it as a lever only for securing appropriate currency revaluations; subsequently, we would use the lack of gold convertibility as a lever for developing a new international monetary system, and negotiate away restrictions on U.S. exports by our trading partners by holding out the possibility of the removal of our own restrictions on imports as a carrot.

Should this issue be raised, you should question whether or not we are over-estimating the power of the surcharge to secure our major trade and monetary objectives.

New International Monetary System

There is considerable danger that the President will not be given a full range of choice in making the decisions on what sort of monetary system we wish for the future. There has been a “conventional wisdom” that a system of relatively fixed exchange rates allows for greater exchange rate predictability for traders and investors. Floating rates have been regarded purely as a transitional device for use in emergency situations in order to determine the “market rate of exchange” for currencies, and have been relatively unused.

Recently, however, we have learned more about floating rates:

• —Germany and Canada have been floating their currencies for the last several months. They have neither fluctuated erratically nor spiraled upward in value as some had predicted. In addition, they have posed no major problems for traders, who, with the help of banks which insure traders against changes in currency value, have shown little sign of discontent with the system.
• —We have become painfully aware of the costs of maintaining fixed exchange rates which are out of line with the market values of currencies:

  (a) An overvalued dollar has meant that the U.S. exports have fallen far below imports, which has had serious effects on U.S. employment, and has caused an increase in U.S. investment abroad—which also has a serious effect on jobs in this country.

  (b) Speculators, including large U.S. corporations, predicting large changes in the price of major currencies, have sold dollars and purchased such currencies as the franc, the yen and the mark, thereby causing the number of dollars held by foreign countries to expand absolutely and relative to the small ($13.5 billion) amount of reserves held by the U.S.

  (c) There has been increased pressure from at home and abroad to curtail military spending abroad, reduce troop levels, and decrease foreign assistance and security assistance because of the “dollar drain”.

• —The American public has become increasingly aware of the fact that floating exchange rates, by decreasing the value of the dollar vis-à-vis other currencies, can be used to increase U.S. exports and cut down the flow of foreign imports into the U.S.
• —The present fixed rate system, which had been praised for its ability to insure stability—so that foreign investment and industrial decisions can be made with a minimum of risk—has, by the inherent instability and inviability of fixed rates—actually caused more instability and greater risk in the monetary system than has floating rates—which when they change do so more gradually than “fixed” rates.
• —Monetary crises have aggravated political relationships between Europe, Japan, and the U.S. and have caused major domestic political crisis in our trading partners. Floating exchange rates would, by making exchange rate changes smaller and more frequent, eliminate most major political crises relating to monetary problems (i.e., in many Latin American countries a devaluation causes a major Governmental crisis; in Brazil, which devalues by small amounts monthly, it is regarded as routine. Britain suffers a Government crisis when it devalues. Germany, before the float, suffered similar crises when it revalued.).

Although you may not wish to advocate floating rates, you should indicate that there are strong arguments for a floating exchange rate and greater flexibility which you believe the President wants to hear before making any decision. And that you would like to have a look at whatever paper goes forward to the President, since there are important foreign policy implications to whatever we do.

[Omitted here is the concluding section concerning the forthcoming report of the Williams Commission on International Trade and Investment.]

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218, Council on International Economic Policy. Confidential. Some of the points in this memorandum were summarized in a multi-topic, September 7 memorandum from Jeanne Davis to Kissinger suggesting topics to discuss at a luncheon with Secretary Connally that day. (Ibid., Agency Files, Box 289, Treasury, Volume II, 1971) Hormats prepared another memorandum for Kissinger, September 11, containing many of the same points for Kissinger’s September 14 breakfast meeting with Peterson. (Ibid., Box 218, Council on International Economic Policy)
2. The President met with the Council from 8:33 to 10:35 a.m. (Ibid., White House Central Files, President’s Daily Diary) For Peterson’s report on the meeting, see Document 79.
3. September 3.
4. See Document 172.