211. Telegram From Secretary of the Treasury Connally to the White House1

456. To White House for Henry Kissinger and George Shultz.

U.S. Proposals for Settlement of Monetary and Related Issues2

Analysis of recent developments and statistics confirm, in the judgment of U.S. authorities, the basic validity of the analysis that a massive swing will be required in the underlying balance of payments position of the U.S. over the period ahead to assure a strong dollar, a firm basis for liberal trading policies and the continued discharge of the U.S. responsibilities for aid and defense, and international financial stability.

Over the first nine months of 1971, the U.S. basic deficit has run at an estimated annual rate of $10 billion or more.

The most recent forecasts suggest that, in the absence of exchange rate changes and the surcharge the deficit would remain in that magnitude in 1972.

For seven months, our trade position has been in deficit by some $3 billion at an annual rate, calculated FOB. (Calculated CIF on imports as is the practice of many other countries, the deficit rate would approximate $7 billion.)

Based upon earlier discussions and information available to us at this time, the principal trading partners of the U.S. apparently do not contemplate exchange rate and other actions that would permit adjustment commensurate to the forecasted need. At the same time, there is a widespread desire to achieve a prompt settlement of outstanding issues in a manner that will permit elimination of the U.S. surcharge and more fundamentally provide an environment in which trade and payments can proceed with reduced controls and greater certainty.

In the interest of expediting such an early settlement, the U.S. is making an integrated set of proposals to the Ministers of the Group of Ten countries.

The U.S. proposals must be considered an integrated package. They are based on the presumption of no change in the official dollar price of [Page 581] gold; in the present position of the U.S., there can be no presumption of convertibility of the dollar into reserve assets, nor is the U.S. in a position to offer exchange guarantees. United States policy also continues to be based on a presumption that its present restrictions on capital outflows will also be eliminated over time, and that some liberalization steps are anticipated shortly.


The U.S. will eliminate its ten percent surcharge and the related provision of the proposed investment tax credit.
To assure better a successful adjustment process consistent with freer and fairer trade, tangible progress is required in dealing with artificial restraints on the competitive opportunities of U.S. exporters. Early decisions on some matters of immediate consequence should be made, particularly with respect to agriculture, and commitments are necessary with regard to ensuing negotiations. These matters have been under intensive bilateral review with Canada and Japan. We have sought a similar review with the EC and its members. The U.S. is prepared to continue to negotiate intensively in coming weeks.
Progress is needed toward achieving a better sharing of mutual defense expenditures. To this end, certain bilateral matters are near decision, and multilateral efforts should be intensified at the forthcoming NATO meeting.3
A pattern of exchange rates should be established providing, at the minimum, a weighted average appreciation of currencies of all other OECD countries of eleven percent, measured in U.S. cents per unit of foreign currencies, with a base point of May 1, 1971. (The appreciation is calculated on the basis of weighted share of U.S. trade with these countries.) Based on an appraisal of individual country positions, depreciation of foreign currencies in terms of its own trading partners should not be contemplated.
The new exchange rates should be accompanied by margins of three percent, plus and minus. IMF surveillance should be directed to assure that there be no heavy market intervention in exchange markets within the band for the purpose of keeping market rates artificially low. There should be no manipulation or arrangements of exchange markets designed to maintain undervaluation of exchange rates for current account or trade purposes.
  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Back Channel Files, Box 423, Europe-Mid East-Latin America 1971. Secret. [text not declassified] According to a handwritten notation, the telegram was distributed to Kissinger, Haig, and Shultz, and an attached November 30 note indicates that Haig directed that a copy be given to Hormats.
  2. This is presumably the text of the U.S. proposal that Volcker gave to the G-10 Deputies on November 29; see Document 210.
  3. The NATO Ministerial was held in Brussels December 9-10. In the final communique, the Ministers “noted with satisfaction the further, specific and important efforts announced on 7th December by those European member countries which participated in the European Defence Improvement Program, and recognized the emphasis which the European member countries are placing on modernizing the equipment of their forces, land, sea and air.” (NATO Final Communiques 1949-1974 (Brussels: NATO Information Service))