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

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

Washington, September 28, 1971.

SUBJECT

• Progress in Developing USG Position on International Aspects of NEP

Events since Thursday

On Thursday,² Ken Dam, Ezra Solomon (CEA), John Petty, Ed Cohen (Assistant Secretary of the Treasury for Tax Policy) and I met for approximately two hours to discuss our next moves on the international aspects of the New Economic Policy. Cohen relayed to Connally the conclusions of the meeting:

• —The surcharge is a wasting negotiating asset since it is not as detrimental to most foreign economies as many felt at the outset, and other governments will institute measures to compensate for it.
• —Our highest priority is an exchange rate realignment which redresses, or moves toward redressing, the U. S. balance of payments deficit.
• —There are major economic advantages in other nations floating their currencies, rather than repegging in the very near future.
• —The foreign policy costs of maintaining the surcharge without providing clear indicators of what we expect as quid pro quos for its removal are a decrease in the willingness of Europeans to cooperate with us and increasing foreign hostility to the U.S.

Since that meeting Connally has agreed in the Group of 10 meeting this weekend to negotiate removal of the surcharge.³ However, it is unclear how forthcoming he will be in these negotiations. It is clear, however, that he will probably not accept the proposals contained in the Shultz/Dam memorandum which you, Connally and McCracken considered last Thursday.⁴ For domestic reasons, it will be difficult for the President to remove the surcharge in exchange for other nations floating their currencies, as the OMB memorandum suggested. Nor do I believe that a free float would be accepted by the key trading nations, except perhaps Germany.

Also since Thursday, Pete Peterson’s group has come up with suggestions on trade and defense burden sharing problems which can be negotiated with our major trading partners (Tab A).⁵

The Present Problem

Following the Bank/Fund meetings we should have a better feel for how far the Europeans and Japanese are willing to go in meeting our demands. However, we will still be far from an internal USG position. Forces within the USG which wish to squeeze every ounce of blood out of Europe and Japan regardless of the political costs will vie with those who wish to lift the surcharge without the quid pro quos which the hardliners would regard as acceptable. The logic of the former group would lead to no removal of the surcharge for a long period—i. e. until major trade and monetary concessions are realized—and will exacerbate political and economic relations with our trading partners, as well as running the risk of a trade war. The position of the latter, although commendable for its economic logic, is destined to be rejected on domestic political grounds.

Specific problems to be reconciled are:

• —How long can thesurcharge remain in effect before other governments are forced to take offsetting economic actions or retaliate. (The answer probably depends on how sincere and reasonable they believe we are in working out a solution which will enable us to remove the surcharge, but in any event the risk becomes greater if no significant progress has been made by the end of November.)
• —Whether we can get a satisfactory repegging of other currencies without devaluing the dollar vis-à-vis gold. (The answer is probably negative, in which case a repegging exercise would be a long ordeal—with significant domestic political implications—during which the surcharge would probably remain in effect.)
• —Whether we can negotiate within a reasonably short period of time significant trade and defense burden sharing arrangements which the President can point to as justification for removal of the surcharge. (On trade the answer is probably yes, although the hardliners might not be completely satisfied; on defense burden sharing we may have to settle for much less.)

Suggested Scenario

I have drawn up a brief scenario which provides the relative hard-liners some quid pro quos, but enables the President to remove the surcharge by the middle of November, when the domestic Phase I is completed. Under this scenario we would:

• —Begin immediately to negotiate trade and defense issues which would provide us with tangible results within a period of 6-8 weeks. (Peterson has a list of such issues.)
• —Indicate privately and at the highest levels to Canada, Japan, Germany, and perhaps one or two other of our trading partners, minimum acceptable levels to which we would expect their currencies to float within the next two months; and, that while we would have no objection to their maintaining their rates at these levels temporarily, through central bank intervention, we would expect that once the surcharge was removed they would float upwards by an agreed number of percentage points. (Floating is preferable to repegging in that repegging negotiations would be prolonged, raise sensitive questions about the gold value of the dollar, and might limit the President’s future options should he decide in Stage II to press for a floating or very flexible exchange rate system.)
• —Seek public assurances at the highest levels from the key members of the Group of 10 that negotiations would begin immediately on new international monetary system (which would have greater flexibility and greater liquidity than the present system) and on our major trade and burden sharing problems.
• —We would not negotiate either convertibility or devaluation of the dollar vis-à-vis gold in the first round. The former is our major lever for securing the desired international monetary reforms in the second stage. The latter would raise issues which could not be resolved within a two or three-month period (thus prolonging the surcharge) and could cause adverse domestic criticism by those who regard the value of the dollar as a sacred and inviolable concept. Moreover, it is unnecessary to devalue in Stage I since the level of the float is a transitional “half-way house”.
• —When the trade and burden sharing negotiations had borne sufficient fruit and major currencies had floated above the minimum levels (by early November), the President could announce removal of the surcharge, point to its success on the monetary, trade and defense burden sharing front, and to public assurances by other nations that there would be future negotiations on an improved monetary system and on additional trade and burden sharing arrangements favorable to the U.S. He would not at that time announce the agreement that other currencies would continue to float upward to the agreed levels (because speculation would force them up too rapidly), but could point to the increases subsequently in order to justify, ex post removal of the surcharge should he be attacked domestically for doing so. We would not resume gold convertibility nor, under this scheme, devalue the dollar vis-à-vis gold (although this would be a conceivable fallback if necessary).

If you agree in principle with this approach, you might encourage Peterson to work up his 6-8 week time-frame trade and defense burden sharing options as soon as possible, and encourage Connally, McCracken and Shultz to consider this scenario—which I can sketch out in greater detail if you so desire.⁶

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 376, President’s Economic Program. Confidential. A stamped notation on the memorandum reads: “HAK has seen.”
2. September 23.
3. The G-10 Deputies met Saturday afternoon, September 25, to develop an agenda for a G-10 Ministerial meeting on September 26.
4. The meeting has not been further identified. The reference may be to an untitled paper transmitted under cover of a September 23 routing slip from OMB Director Shultz to Secretary Connally. The paper begins with the following proposal: “The United States declares that it stands ready to abolish its import surcharge and capital controls immediately with respect to imports from any country that permits its currency to float freely.” The paper then explores a number of issues relating to the proposal, such as the operational definition of a free float, how to deal with developing countries that traditionally had pegged their par values to the dollar or another key currency, and the legality under GATT rules of lifting the surcharge for some but not all countries. (Washington National Records Center, Department of the Treasury, Connally Correspondence: FRC 56 74 4, OMB)
5. Document 179.
6. No record of Kissinger’s action on Hormats’ suggestions has been found, but see Document 186.