183. Letter From the Chairman of the Board of Governors of the Federal Reserve System (Burns) to President Nixon1
Dear Mr. President:
I have been so busy of late that I have not found the time until now to give you a few quick impressions of the IMF meetings.
In general the atmosphere improved during that week in comparison with the period following the Group of Ten meeting in London. This improvement showed up in the agreement by the Group of Ten Ministers and Governors on the agenda of immediate issues that require resolution: the magnitude and method of a realignment of currencies, the adoption of somewhat wider exchange rate margins around par, the discontinuance of the import surcharge, and measures in the field of trade and defense burden sharing. At the same time the Ministers instructed their Deputies to explore the problems of longer-term reform of the international monetary system. The improvement also showed up in the tone of the comments, both public and private, of numerous officials. Certainly, Secretary Connally’s speech contributed to the better atmosphere by its indication of a readiness to negotiate on the part of the United States.[Page 516]
I turn now to a summary report on my private discussions with foreign officials.
Many Europeans stressed that Europe is on the edge of a distinct slowdown in economic activity, if not a recession. The relevance of this observation is that, as time goes on, it will become increasingly difficult for European governments to agree on a significant upvaluation of their currencies in relation to the dollar, since such a change in exchange rates will aggravate recessionary correlations. The same is true of Japan. This consideration reinforces what is already a good case for getting ahead with serious negotiations as quickly as possible.
In a lengthy discussion with the French (Finance Minister Giscard d’Estaing and central bank Governor Wormser), I was told that the price of gold in terms of francs is an important political issue in France, given the widespread and long-standing custom of the French population to hold gold as a hedge against inflation and political uncertainty. This makes it difficult, if not impossible, for a French political leader to agree to a revaluation of the franc against an unchanged dollar, since the franc price of gold would then fall. On the other hand, I came away from this candid conversation with the definite impression that the French Government would stand still for a 5 or 6 per cent increase in the dollar price of gold, leaving the franc price where it is. The British and the Italians are likely to follow the French lead.
The Japanese (Finance Minister Mizuta and Governor Sasaki) were not ready to talk seriously but stressed to me the uncertain durability of Japan’s large trade surplus. It is notable, however, that the Japanese authorities have been permitting the market rate of the yen to creep upward day by day, so that it is now 9 per cent above the old parity. Moreover, I received indications from some dependable (I think) emissaries that the Japanese will be willing to settle for a 15 per cent appreciation, provided other countries move at the same time.
The Germans (Bundesbank President Klasen) have permitted their currency to float up about 10 per cent since May and are coming under severe pressure from businessmen, who are feeling the effects not only of the exchange rate change but also the surcharge and the job development credit (which, as you know, does not apply to imported equipment). The Germans are particularly sensitive about the movement of their exchange rate against the French franc. For these reasons, as well as the prospective slowdown in the economy, their officials indicated that they are anxious for an early settlement.
Secretary Connally and I met with the assembled Finance Ministers and central bank Governors of Latin America. We explained the rationale for the U.S. program and, after the Secretary left, I took their questions. The main concerns they expressed were: Why should the surcharge [Page 517]apply to them and other developing countries when we do not expect them to appreciate their exchange rates or take other actions to improve the U.S. balance of payments? How can the LDC’s participate in the negotiations about both the immediate problems and reform of the international monetary system? I reassured them on the last point, and some overt moves in this direction are now being considered.
There is one highly important matter—regarding the arrangements for negotiations—on which I need to report to you in person. It is a matter which I arranged with foreign representatives and of which Secretary Connally has full knowledge.2