179. Memorandum From the President’s Assistant for International
Economic Affairs (Peterson) to the President’s Assistant for National
Security Affairs (Kissinger)1
Washington, September 24, 1971.
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.
Attachment
SUMMARY5
We can, perhaps summarize the present status of discussion within the
Government as follows:
A. Areas of Agreement
- 1.
- 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.
- 2.
-
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).
- 3.
- The highest priority Phase I objective is an exchange rate
structure that promises to redress the United States balance of
payments.
- 4.
- We need tangible trade and defense achievements in Phase I, as
well as significant exchange rate realignment (in fact or
through a credible process).
- 5.
- 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.
- 6.
- 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.
- 7.
- In addition, in Phase II we want far-reaching trade
liberalization and a significant shifting of defense
responsibilities to our allies.
- 8.
- 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
- 1.
- 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.
- 2.
- 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.
- 3.
- 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.
- 4.
-
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.
[Page 503]
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.
- 5.
- What we mean by “limited convertibility” and how far we would
go in what circumstances is also an issue.
- 6.
-
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.
- 7.
- 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.
- 8.
- 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.
- 9.
- 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.
- 10.
- 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?
