179. Memorandum From the President’s Assistant for International Economic Affairs (Peterson) to the President’s Assistant for National Security Affairs (Kissinger)1

This is about as hurriedly thrown together as anything can be since the Coordinating Group has only been in operation since yesterday morning.2 It is so much a first draft that the rest of the Group are getting copies the same time you are.3

However, given your Alaskan trip4 and the forthcoming IMF meetings, I felt that your looking at this might at least give you a preliminary glance of where we stand.




We can, perhaps summarize the present status of discussion within the Government as follows:

A. Areas of Agreement

We agree on a two-phased Negotiation. Phase I, to be completed, hopefully, in 6 to 8 weeks and no later than Christmas would involve negotiations on monetary, trade, and defense issues that would provide clearly identifiable results of our negotiating efforts and a basis for removing the surtax and the discriminatory aspects of the investment tax credit. Phase II would involve long-range negotiations on key monetary, trade, and defense issues-the outline of which would hopefully be agreed to.

The surcharge-a domestic economic liability, although politically very popular-as an international asset will soon begin to deteriorate, [Page 502]unless constructive negotiations are underway promptly. Therefore, if we are to avoid serious complications, both internationally and domestically, we must promptly remove it in return for achievement of Phase I objectives.

Promptly means at the latest before Christmas. More desirable would be to end international Phase I simultaneously with the end of the 90-day domestic Phase I (November 15).

The highest priority Phase I objective is an exchange rate structure that promises to redress the United States balance of payments.
We need tangible trade and defense achievements in Phase I, as well as significant exchange rate realignment (in fact or through a credible process).
In no circumstances will we agree to more than “limited convertibility” in Phase I, since this is our major negotiating leverage for Phase II reform of the monetary system.
In Phase II highest priority attaches to reform of the monetary system so that we will not find ourselves in a few years back in the same situation which led to our August 15 actions.
In addition, in Phase II we want far-reaching trade liberalization and a significant shifting of defense responsibilities to our allies.
Finally, we want the President at the earliest possible date to put before the world a vision of our international goals for this country which would add to the Phase II elements mentioned above (trade liberalization, defense burden sharing, basic monetary reform), the prospect of the developed world more fully sharing its wealth with the less developed countries.

B. Issues

We have done considerable work but are not entirely agreed on specific trade and defense concessions we would want and expect as minimum consideration for removal of the surtax.
We have not defined precisely the minimum levels at which we would agree to return to fixed parities with limited dollar convertibility although the Deutsche Mark and the Yen both somewhere over 10%, agreement might be desirable … particularly if the outlines of an improved monetary system had been agreed to that would presumably correct any imbalances in the future.
Others argue that a continuing honest or bona fide float, particularly if it were agreed that reserve accumulation and any significant intervention would be ruled out for key countries, would, for now, be preferable to fixed parities at almost any level.

Although we have a clearly preferred view of not changing the price of gold in Phase I, there is an issue over what we would actually do if others insist, and this is a route to getting a substantial adequate realignment.

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Why have others asked for devaluation of the dollar vis-à-vis gold? Politically, because such a move would appear to make the necessary exchange rate adjustments in other countries more easily tolerable. Also, the bookkeeping effects are certainly not negligible to some countries. Strategically, because some, i.e., the French, want to force us back to convertibility at a higher fixed gold price. The wealth redistribution effects of a price change are tolerable for us and others, although not desirable. Politically, devaluation is difficult for the President, but perhaps not impossible, and the atmosphere is clearly changing. There is a practical difficulty due to legislative requirements which argues for action only in the context of system changes which also would require Congressional approval but which would come near the end of the Phase II negotiation rather than Phase I.

What we mean by “limited convertibility” and how far we would go in what circumstances is also an issue.

While there are issues concerning our minimum trade terms, with respect to Japan, Canada, and the U.K., and some disagreement as to how much we originally ask for, the major trade issue concerns the European Community.

We know what we want from the Community but we recognize that the chances of obtaining much, if anything, on agriculture, preferences, and industrial policy in Phase I may be small.

A specific central issue here is whether or not to try to use the situation to seek a standstill on the European Community negotiations with the EFTA non-applicants. Success would be valuable, but the cost of trying and failing could be high, both on the monetary and political fronts.

Are there circumstances in which we would differentially lift the surcharge for some countries who had cooperated with us in making meaningful adjustments but not doing so for remaining countries ? This raises major policy and legal questions, including heightened dangers of retaliation and probable incompatibility with our international obligations. Fortunately, the decision is not needed now, but there are quite different legal and policy views on this within the government and we have much to do here.
While we prefer not to discuss our investment control programs and let the liberalization take place at a quiet but accelerating pace, others will probably make an issue of this. Eventually, we seek elimination of our controls and, indeed, action now would put more pressure on the rate structure, but it would also stimulate others to go even further in applying exchange controls.
We recognize that the existing situation inequitably places a large adjustment burden on developing countries, but until our Phase I objectives are achieved, most would agree that we cannot make major concessions [Page 504]through the less developed countries. However, if progress is not made promptly, further consideration of surcharge exemption for the less developed countries collectively or on products of major interest to them should be explored.
Last, but not least, there are issues concerning the negotiating scenario. How do we coordinate bilateral trade, defense, and monetary negotiations with the general multilateral discussions of questions involving the payments and trading systems? What is the proper role of various departments and individuals in Phase I? Phase II?
  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218, Council on International Economic Policy. Confidential.
  2. Presumably the group Kissinger and Peterson proposed in their September 20 memorandum to President Nixon, Document 176.
  3. A September 24 memorandum with similar wording directed the attached paper to Volcker and Petty at Treasury. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, CIEP)
  4. Kissinger accompanied President Nixon to Anchorage for his September 26 meeting with Japanese Emperor Hirohito.
  5. This is the summary of a 23-page paper, which is not printed.