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

177. Memorandum From the President’s Assistant for International Economic Affairs (Peterson) to President Nixon¹

Washington, September 20, 1971.

SUBJECT

• Coordinating Group-Planning the Negotiations for the New Economic Policy Abroad

It is agreed by all of us that we do not want a patchwork settlement that would only lead to another financial crisis in a few years. However, it is increasingly apparent that it is not enough to say that we need a $13 billion swing in our balance of payments, exchange rate realignment, reform of the monetary system, and more equitable deals on trade and defense sharing. So far, we have left it to others to adjust to the situation we have created. But soon we will have to clarify what we want multilaterally and what we want bilaterally from key countries. Most feel that having taken the essential but shock-producing moves of August 15, we should be prepared to propose some positive initiatives in the reasonably near future.

We need to define more precisely four areas: our objectives, our priorities among them, our negotiating leverage, and our negotiating strategy.

1. Refining Our Objectives (including the magnitude and timing of the balance of payments swing)

a. In the exchange rate area, we first need to determine whether our interests are best served by a prolonged float or an early return to a realigned, fixed rate system. If the latter, we need precise ideas about how far each major country is prepared to go in revaluing now, and how far later. What combinations of revaluations are the minimum acceptable to us at this point in time?

Is some exchange rate action by us needed to assure achievement of our parity realignment objectives? (Most feel this should only be considered as part of a long-term basic reform of the system.)

Related to these exchange rate questions is the position we take on investment controls.

b. On monetary reform there are many tough interrelated questions. For example, do we or don’t we want to return to fixed parities? In what circumstances? Should the dollar as a major reserve component be gradually phased out, along with gold, in favor of SDRs? A composite reserve unit? What precise actions by ourselves and others are needed to accomplish this objective? Over what time frame?

c. Defense is a major drain on our balance of payments. With a big trade surplus it is manageable. But that surplus is at least 18 months off. What do we mean by increased defense burden sharing? This might take the form of larger purchases of U.S. equipment by those countries where our expenditures are high (e.g., Germany, Japan). Offset negotiations with Germany are well along. Alternatively, we could try to get direct contributions from NATO as a whole. Do we now want to place greater emphasis on budget contributions as opposed to balance of payments offset purchases? Essentially, we must be more precise about what we want and can get in relation to action on the surcharge and dollar convertibility, what is not feasible in that context, and what may be negotiable over a longer period.

d. What are our specific trade objectives, and with which countries? For example, a change in the Common Agricultural Policy of the European Community is one of our high priority objectives. Yet, this is likely to be a long-term negotiation. On the other hand, could we get agreement on stopping any further agricultural price increases? and/or on a longer-term target of moving toward direct European budget support of agricultural subsidies? Others include a reduction or complete removal of the discriminatory aspects of European Community preferential arrangements; a reduction in trade restrictions, including non-tariff barriers by Japan, revising the Canadian automobile agreement, etc. Which of these actions, if any, do we expect to achieve now in exchange for removing the surcharge or otherwise, and which must we carry over for later negotiation? Also, what, if anything, are we willing to put on the negotiating table? Finally, we cannot ignore the less developed countries where there are some special problems.

e. Longer term, what kind of future economic/political model of the U.S. in relation to other major trading blocs (in particular the EC) should guide us? How do we want the whole international economic system to evolve? A new U.S. centered bloc? A much larger free trading area including the EC, Japan, U.S.?

2. Defining Priorities Among These Objectives

For example, agreeing to major revaluations now may in practice preclude certain reforms of the monetary system.

Should we push hard for the reforms, recognizing that they will take time to negotiate, in the meantime encouraging other countries to float their currencies upward, without declaring a formal revaluation? What emphasis should be put on trade barriers, as opposed to financial issues?

If our negotiating strength is insufficient to achieve all our objectives in the near term, where should we put the emphasis?

3. Negotiating Leverage

What negotiating instruments are at our disposal, and how much leverage do they give us? Negotiating concessions we can make include: (a) removal of surcharge; (b) reduction of surcharge in stages; (c) restoration of “limited” dollar convertibility into gold, or other reserve assets; (d) restoration of “full” convertibility into gold, or other reserve assets; (e) removal of the “buy American” aspect of the Job Development credit; (f) differential (i. e., for some countries but not others) removal of surcharge, action on job development credit, restoration of convertibility; (g) devaluation of the dollar vis-à-vis gold.

We need to be clear about the risks and advantages, domestic and foreign, economic and political, involved in the use or rejection of each option, and the timing involved in each. We need to explore the legality of undertaking each. We also need a clearer idea of how much leverage each gives us, and what combinations add most to that leverage in general and with which particular countries. With time other countries may learn to live with the surcharge and their resentment may lead to stubborn refusal to give up anything for its removal, or even to retaliation. Domestically, it may become addictive and encourage protectionism, raise costs, weaken our competitiveness, and worsen our problem of inflation.

4. What is our negotiating strategy?

Up to this point, we have been imprecise about both what we want from others and within what time frames we want it. In addition, if the assessments resulting from the answers to the questions posed above lead us to conclude that we should ask for different actions from different countries, we will have to develop a strategy for making our specific bilateral demands clear-e.g., from Canada, from Japan, from Germany, from Britain-and for the kinds of actions we will take if particular countries either meet or refuse to meet these demands. At some point, we must know when and how to compromise without prejudicing the achievement of those fundamental objectives which are more clearly longer-term than others. Any negotiating strategy must weigh carefully the effect of what we are doing and how we do it on our foreign relations and security policies. For example, it should include the possibility of forthcoming Presidential initiatives at appropriate times.

We also need to know the strong points of resistance by others, e.g., the EC has stated publicly that it will not agree to a major realignment of parities unless the U.S. participates by devaluing. Some other countries may also insist on additional action by us (e.g. eligibility for their exports to qualify under the full Job Development credit) before they will agree either to adequate revaluations, negotiations about monetary reform, defense burden sharing, etc. We need an assessment of how serious these demands are, and the risks and advantages to us involved in acceding or not acceding to them.

Finally, we need to decide on a mechanism for carrying out the diverse and multi-faceted negotiations. Most of the issues are Treasury’s main line of responsibility, but our objectives range also into the areas of trade and defense. This will create problems for other governments, whose internal division of responsibility is often quite strict, and will require a suitable mechanism on our part.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 216, Council of Economic Advisers. Confidential. An accompanying September 22 handwritten note to Kissinger initialed by Kennedy reads: “This is of interest in view of your discussions in the ‘Breakfast Group’.” Also attached are a September 22 note from Jon Huntsman to General Haig indicating Peterson’s memorandum went to the President that day along with a September 22 memorandum from Kissinger to Connally, Shultz, and McCracken transmitting some slightly redrafted proposed remarks for the President that Kissinger thought they should discuss “at our meeting in the morning.” The draft Presidential remarks were intended for President Nixon’s use at a question-and-answer session at the Economic Club of Detroit on September 23; see Public Papers of the Presidents of the United States: Richard M. Nixon, 1971, pp. 965-980. On September 21 Federal Reserve Chairman Burns had also provided the President proposed remarks for Detroit, and underlining by the President indicates that he read them. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 289, Treasury, Volume II) Burns’ proposed remarks for Detroit were attached to a September 23 memorandum from Kissinger to Connally suggesting he “work some of these thoughts into the speech that is being prepared and which will be discussed at the meeting tomorrow.” Presumably Kissinger was referring to the President’s remarks during his September 29 reception for principals attending the IMF and IBRD Annual Meeting; see Public Papers of the Presidents of the United States: Richard M. Nixon, 1971, pp. 1014-1016.