187. Editorial Note

OMB Director George Shultz discussed currency matters with President Nixon on October 25, 1971. He opened the meeting with the suggestion that they be prepared to lift the surcharge for any country that would conduct a clean float of its currency. The President thought that would be illegal under GATT rules, but Shultz reported that staff work at OMB suggested it could be done. He said it would not be discriminatory against any country and it would be a “way to get the ball rolling.” Although not in agreement on this issue, the President nonetheless clearly wanted Shultz to take a more aggressive role in bringing the international monetary crisis to resolution. He said Shultz understood the subject and could better “broker” a solution than the others. He did not want to find himself in a situation where Peterson or Connally dictated what they were going to do. The President said “we have to get Connally on board” for finding a solution.

A major topic Shultz and the President discussed on October 25 was restoration of convertibility. Shultz was concerned that policymakers were “drifting back to the old system of parities, but with different exchange rates,” the solution he thought was preferred by the “axis” of European bankers, Daane at the Federal Reserve, and Volcker at Treasury. Shultz was not sure where Burns stood on the issue and thought he was more concerned with maintenance of the wage/price freeze; he thought Connally would agree with the President there should be no return to convertibility and that Volcker would have to be instructed to work on a plan with that approach. Shultz carefully explained, and the President agreed, that if there were a return to fixed [Page 522]parities and convertibility, the only way to address a balance-of-payments deficit would be to deflate the domestic economy to lower prices, creating “unemployment to satisfy international pressure.” The President said he did not want domestic policies to be affected by the outmoded system and “we can build a system without convertibility.” Although he did not press the point, Shultz clearly favored a floating rate system.

Shultz and the President also discussed the price of gold. Shultz expressed the opinion that with all the gold in French “mattresses,” gold was a big political problem in France, and it might be necessary to change the relationship of the dollar to gold in order to devalue the dollar. The President agreed that “damn gold has a mystique” but said “I’ll be damned if we will raise the price of gold like Arthur wants.” (National Archives, Nixon Presidential Materials, White House Tapes, Recording of Conversation Between President Nixon and Budget Director Shultz, October 25, 1971, 4:35-6:01 p.m., Executive Office Building, Conversation 304-17)

During this October 25 meeting with Shultz, the President made it clear he wanted to meet with Connally before the latter’s trip to Asia October 28-November 14 (which would include stops in Vietnam for President Thieu’s inauguration, Thailand, Indonesia, the Philippines, and Japan), and that a Quadriad meeting could be scheduled if necessary. Under cover of an undated, handwritten letter to the President, Connally provided “Suggested Talking Position for Meeting with Chairman Arthur Burns and Secretary Connally” that could “serve as a basis for your remarks to the Cabinet.” Connally added that his points had not been seen by “Paul and Geo.” (presumably McCracken and Shultz, the other two members of the Quadriad), and recommended the President get their judgment on them. Butterfield stamped “The President has seen” on Connally’s talking paper. (Ibid., White House Central Files, Federal Government Organizations, Treasury 1/1/71-2/29/72, Box 2)

The Economic Quadriad met on the afternoon of October 28, prior to Connally’s departure that evening. Those present were the President, Connally, Burns, McCracken, Shultz, Flanigan, and Peterson. Flanigan left at 4:24 p.m. and Peterson at 4:42 p.m. Kissinger joined the meeting at 5:02 p.m., and he and Connally remained with the President until 5:54 p.m. following Burns’, McCracken’s, and Shultz’s departure at 5:20 p.m. (Ibid., President’s Daily Diary) The President set the agenda for the meeting, announcing they would first take up international issues, followed by domestic issues. There would also be a short break for a photo opportunity of Connally with the President to bolster Connally’s image, primarily for his visit to Japan.

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The tape of the Quadriad conversation evinces a wide-ranging discussion of international economic policy issues. Connally was praised for bringing the issues forward from where they were in August, and Shultz said that now that “we have their attention” it was time to move vigorously on negotiations. While Connally was traveling, Shultz would work with Kissinger to see what leverage the United States had with France, which he said would not revalue (by changing the franc price of gold). Burns returned to that point later in the conversation and in a lengthy discourse explained how gold was a “huge political problem” for the French. He said his discussions with French officials convinced him France would settle for a stable price of gold in terms of French francs, and indicated that if the United States could otherwise get a good settlement, the United States should not be stuck on “gold theology.” Burns said the French would let the franc appreciate in terms of dollars, thought the other Europeans and the Japanese would support France on this position, and said domestically France had less of a political problem than in 1968 when the market price of gold equaled the official price. Under the two-tier system, with the market price above the official price, Burns said Congressman Reuss and Senator Proxmire would support a small increase in the official price of gold. Shultz terminated that subject, noting that the President had said they would not increase the price of gold. He then posed the question of whether they were going to return to fixed parities or try to operate with floating rates. He said the price of gold was incidental to this more fundamental question and the complementary issues of trade and burdensharing agreements. He said the administration needed to have a clear picture of where it wanted to come out.

Connally set out a five-point program that he thought could be negotiated during the next few months: first, a significant realignment in currency parities; second, no return to convertibility for at least 2 years, other than small transactions in SDRs as required for technical purposes; third, an agreement on trade principles and the removal of trade barriers, with the details to be worked out later; fourth, an agreement on a substantial, if not complete, reduction in the role of gold in the international monetary system; and fifth, agreement that the dollar would no longer be the sole vehicle currency.

Connally said the average U.S. citizen neither understood nor cared about monetary policy, but did care about trade and the fact that the administration was looking out for U.S. interests. Politically, it was thus necessary to discuss trade and burdensharing even if that were to delay his negotiating strategy for another year. Currency realignment, he said, was much less important than not giving the impression the United States was losing ground. Connally noted that it would be a “mistake of [Page 524]major political importance” for the President to get just a currency realignment without also obtaining the other objectives.

The President concluded this segment of the discussion suggesting that in Connally’s absence the others work on the process on a very confidential basis, and they not have a further discussion “at this level” until Connally returned. The official line would be that there would be no action in Connally’s absence, the President was still examining the options, and would await a report from Connally when he returned from Japan.

Following a brief photo opportunity for Connally with the President, the Quadriad then discussed domestic economic issues. Connally and Kissinger stayed on after the meeting concluded. Connally reported on his conversation with Shultz the previous day, and explained their recommendation that the President should say there should be no discussion of the price of gold or convertibility. See Document 189.

The President, Kissinger, and Connally then commented briefly on aspects of international economic policy before turning to Connally’s forthcoming trip. Japan was central, and the President expressed the opinion that Burns was incorrect in his view that Japan would not deal on the international economic issues unless Europe also made a deal. Connally agreed. The President suggested that Connally take the approach that “this President intends to keep the United States in the Pacific and the Pacific should receive more attention.” In that context, what sort of deal could Japan make. Connally requested the President’s authority to tell the Japanese that with European consolidation European nations were increasingly speaking with one voice and should have only one vote in the G-10. The President agreed the G-10 should be changed. He also requested that Connally raise the SST with the Japanese (see footnote 1, Document 194) and instructed him to meet with Sato privately without the Ambassador being present. (National Archives, Nixon Presidential Materials, White House Tapes, Recording of Conversation Among President Nixon, Secretary Connally, and others, October 28, 1971, 3:03-5:54 p.m., Oval Office, Conversation 606-2)