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

222. Urgent Information Memorandum From Robert Hormats and Helmut Sonnenfeldt of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)¹

Washington, January 24, 1972.

SUBJECT

• French Concern about Strength of the Dollar

We want to be sure that you focus urgently on a growing problem between us and the French arising from the decline of the dollar since the Azores and Smithsonian agreements. The precise issues are explained below but the political point is that spirit of U.S./French and President/President relations achieved in December runs grave risk of being undermined. Indeed the process is well underway. We think you need to get together urgently with John Connally, and also Arthur Burns, on this matter.

A number of high-level French officials, including President Pompidou, have expressed concern about continued decline in value of the dollar.² They have indicated that while it was clear to them at the Azores that the U.S. could not return to convertibility at this time, it was expected that the U. S. would act to maintain the strength of the dollar at the new parity. In their view, low U.S. interest rates are forcing dollars abroad in order to push up the value of other currencies and push down the dollar’s value. (Between January 7 and 21 the Swiss franc appreciated by 1.1 percent, the Belgian franc by 1.5 percent, the French franc by 0.8 percent, and the guilder by 1.7 percent.) If the outflow of dollars continues, and our low interest rates, and the expectation of continued inflation resulting from the large budget deficit announced by the President have led some to believe that it will, pressure will increase on France and other European countries to purchase dollars in order to keep the value of the dollar from depreciating further within the “band” set as the result of the Smithsonian Agreement.³

France may see a sinister plot behind our actions. A number of the officials fear that they are the work of Secretary Connally, and others who believe that the realignment agreed upon in Washington was not large enough. If this distrust of our moves is not rectified, it is bound to cause political friction. Moreover, if the dollar outflow continues, thereby widening the difference between the value of the franc and the dollar, Pompidou could be prompted to reconsider whether to devalue the franc. This would completely destroy the Group of Ten agreement.

The problem is complicated by several additional factors:

• —There is some talk in the Congress that the dollar was not devalued enough and that whatever legislation is submitted to formalize the devaluation should be amended to devalue the dollar by an amount greater than that decided on at the Smithsonian, which the French and other G-10 countries could not tolerate.
• —We still have not reached the desired trade agreements with Japan, Canada and the European Community.⁴ The longer we wait, the greater the pressure on the dollar and the greater the possibility of an increase in speculation.

Given the fact that the low interest rates are primarily the result of large increases in the monetary supply necessary to boost our domestic economy, it is highly unlikely that Arthur Burns or any other official in this Government would attempt to raise interest rates at this time merely to satisfy the Europeans. However, it is necessary to restore European confidence that we intend to carry out the Smithsonian Agreement by requesting of the Congress in the very near future (pending the desired trade concessions) the precise amount of dollar devaluation we are committed to seek and that we will press the Congress to pass this legislation without any deviations from that Agreement. There must also be a show of confidence in this country that the realignment agreed upon by the Smithsonian was completely satisfactory and that we expect it to result in an improvement in the U.S. balance of trade and payments. Without a display of commitment and confidence, the Europeans will continue to distrust our motives. Speculation against the dollar may again grow to significant proportions, and the entire Smithsonian Agreement may come apart.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Country Files—Europe, Box 678, France Volume 9 Jan-July 72. Secret.
2. In a brief telegraphic message Ambassador Watson advised the Department of State that President Pompidou had taken him aside at a dinner Pompidou hosted for Chiefs of Mission on January 15 to express concern over the international monetary situation and his hope that the understandings reached with President Nixon in the Azores with respect to the dollar could be fully carried out. (Telegram 1250 from Paris, January 20; ibid.)
3. Nearly a month later, on February 22, Hormats and Sonnenfeldt sent a similar memorandum to Kissinger informing him of Ambassador Rush’s February 18 farewell call on Economics and Finance Minister Schiller during which the latter expressed concern about the inflow of dollars to Germany. (Ibid., Agency Files, Box 290, Treasury Volume III)
4. On December 15, 1971, following the Azores Agreement (of which he had not been apprised) and prior to concluding the Smithsonian Agreement, Hormats sent an information memorandum to Kissinger with his view that convertibility of the dollar to gold was the major U.S. lever “in Round II for securing the type of new international monetary system we want for the future.” He cautioned against pressing too hard on broad trade issues. (Ibid., Subject Files, Box 402, Trade, Volume IV 7-12/71)