201. Paper Prepared in the Department of the Treasury1


This memorandum outlines briefly proposed initiatives in the immediate future for a resolution of the pending issues in monetary, trade and burden-sharing matters. It is hoped that these proposals would be negotiable; they do involve a limited movement on the gold issue. The basic objectives would be: [Page 558]

  • If the negotiations are successful: Substantial improvement in our external position; removal of the surcharge, retention of leverage for subsequent negotiations; avoidance of extended uncertainty; and forestalling of political tension that could accompany a prolonged impasse.
  • If the negotiations are unsuccessful: More favorable U.S. position to the public; better base for continuation of the present situation, or for alternative strategies, including interim settlements with particular countries or areas entailing selective removal or reduction of the surcharge.

I. The Present Setting

Since August 15, the yen has appreciated about 9-1/2%, but the overall exchange rate change (in terms of our weighted OECD trade) has been only about 3%; since May 1, 1971, it has been about 4-1/2%. This is well below the needed adjustment.

France has managed to avoid revaluation, at least on trade transactions, and has enjoyed some depreciation relative to Germany and some other competitors. Thus France, with some other countries, can bring pressure on their trading partners. France, Japan, and some other countries have instituted new controls. These conditions, together with the existing uncertainty and fears of recession, limit the maneuvering room for Germany and some other countries and increase the pressures for settlement.

The principal negotiating obstacle is the inflexible position of France, its pressure on its immediate trading partners, particularly Germany, and its emphasis on the gold price.

Despite a strong urge for an interim settlement evidenced by our leading trading partners, especially Canada and Japan, and the general awareness of a firmer U.S. position than we have taken in the past, there is still an unwillingness or inability to recognize the size of the needed adjustment, as we perceive it.

A continuing impasse, without an American initiative based upon a proposal that can be publicly defended as “reasonable,” courts the risk of increasing criticism of the U.S. for blocking agreement. If other matters (i.e., the exchange rate realignment and trade and burden-sharing issues) could be resolved, a strong effort is warranted to unblock the opposing positions of the U.S. and France for an interim settlement regarding gold.

II. Our Judgment of Present Negotiating Positions

Canada. Will continue to float and perhaps make some commitments to keep float “clean,” but adamantly opposed to overt revaluation. Will likely make some trade concessions of high symbolic importance, but it is doubtful we can attain our full objectives.

Japan. Willing to appreciate by some 15% and, under pressure, slightly higher (perhaps to 300 yen to the dollar), provided they are within 4 or [Page 559]5 points of Germany. Extent of trade action uncertain, but some movement likely.

Germany. Flexible on exchange rates, provided mark revaluation not more than 4 or 5 points above the French franc. Cannot long tolerate present differential of some 9% revaluation above the French franc; continued impasse would probably trigger controls and lower exchange rate.

France. Will accept exchange rate revaluation of 5%, or perhaps slightly higher, if achieved entirely through U.S. devaluation relative to gold, and franc maintains present relationship to sterling and lire.

United Kingdom. Likely to adhere to the French line and maintain present exchange rate with French franc.

Common Market. Intransigent on short-term trade adjustments, apart from the marketing of current surplus crops. We seek a commitment regarding any change in the support price under EC Common Agricultural Policy (CAP). Agreement upon framework for subsequent negotiations on CAP appears very difficult. No “give” apparent on preferences for remaining EFTA countries, African affiliates, etc.

III. Proposals

Trade. Trade negotiations must proceed bilaterally and intensively in coming weeks. While we are flexible, some “tangible progress” must result with Japan, Canada, EC, and LDC’s, and a framework established for longer range negotiations. Key issues:
  • Canada
    • Auto Agreement
    • Used Cars
    • Defense Production Sharing
    • Industrial Policy
    • Tourist Allowances
  • EC
    • Disposal of Current Surplus
    • CAP Price and Unit of Account
    • Preferences (pursue GATT remedies and seek compensation)
    • Steel Accord
  • Japan
    • Agricultural Quotas and Tariffs
    • Numerous High Technology Industrial Items
    • Commitment to Bilateral Trade Balance
  • LDC’s
    • U.S. Car Discrimination
    • Mexico Tourist Allowance
    • Longer Term Review of LDC Commercial Policy
Defense-Burden Sharing. We must decide promptly if U.S. wants to press beyond the European Defense Improvement Program. If so, we should so state in the G-10, laying the basis for subsequent NATO discussion. Most promising, but still difficult approach: NATO assumption of bases (and related costs) where manned by troops in a foreign country (e.g., U.S. bases in Germany).2 Maximum savings from this approach would run above $600 million annually.

Exchange Rates. An average exchange rate depreciation of the dollar vis-à-vis G-10 countries of 10%, as compared to May 1, 1971. This would indicate 17% against Japan, 13% against Germany, and 8% against France, U.K., and Italy, if Canada revalued (which is unlikely). These figures are consistent with $9.6 billion adjustment on IMF calculations, which we consider optimistic. Probably counter-offer will be 15% Japan, 10% Germany, and 5% France, U.K., and Italy, and Canada will presumably only agree to float.

All rates agreed upon would be provisional, subject to review before long-term reform.

Wider Bands. We should propose 3% bands, although the French and others will resist 3%. Persistent one-way intervention within the band should be avoided, with IMF surveillance. Two-tier markets of the French variety should be forbidden.
Convertibility. We should insist on absence of convertibility, stressing probable inadequacy of the exchange rate adjustment. We should have support from Japan, Canada, and (apart from a probable common EC position) Germany; but the issue is extremely sensitive for others, because of the connotation of a full “dollar standard.”
Gold. An immovable U.S. position on the gold issue may well prevent any monetary solution for some time, or at least prevent an adjustment of a size adequate to justify removal of the surcharge. Some U.S. flexibility on this issue may substantially improve our bargaining strength on other matters and permit satisfactory interim solution.

To reach some accommodation with the French (and the French-dominated EC position), the U.S. could offer to put to a vote of the IMF Governors a proposal to declare a modest de facto devaluation of the dollar. The amount of the devaluation to be voted on would be determined either (a) on a “horse-trading” basis by agreeing upon an arbitrary figure, perhaps arrived at by “splitting the difference” with the lowest revaluer (the French), or (b) a formula approach aimed at keeping the price of gold unchanged in terms of a weighted average of all relevant currencies. With such a vote free of entanglements with other [Page 561]elements of the bargain, the LDC’s might join with us to keep the dollar price of gold unchanged.

An alternative possibility would be to put to an IMF vote an increase in the dollar price and the gold price of the SDR, and thus to “devalue” the dollar against the SDR instead of against gold. This would be accomplished by raising the gold content of the SDR. Such a change would boost the role of SDR’s without boosting gold. Procedurally, relying on emergency provisions of the IMF Articles, it would require unanimous approval by the IMF Executive Board and by 80% of the IMF Governors.

In any event, we should insist upon establishing a framework for negotiation of long-term monetary reform, including perhaps an enlargement of the G-10 membership.

Attached is a possible scenario for the proposed initiatives.3

  1. Source: Washington National Records Center, Department of the Treasury, Records of Secretary Shultz: FRC 56 80 1, Rome G-10 Meeting 11/30-12/1/71. No classification marking. Prepared as background for the G-10 Ministerial meeting; see Document 200.
  2. See Document 84.
  3. “Scenario for G-10 Meeting and Aftermath”; not printed, but see Document 200.