236. Memorandum of Conversation1


  • Henry A. Kissinger
  • Arthur F. Burns, Chairman, Federal Reserve System
  • Robert D. Hormats, NSC Staff Member

B: I wanted to see you to bring you up-to-date on the international monetary situation. You and I talked about that last before the Smithsonian agreement.

K: Yes, I recall. We settled on your scheme, but Connally got the credit.

B: I am not concerned about credit.

K: As I recall, I convinced Pompidou to agree to your scheme.2

B: The fact that you have not been involved in the last several months has made it difficult for me.

K: The reason I could become involved last time was that we were moving toward the Summits, and that imposed a need for a solution to the monetary problem. Also, I could tell the President that unless we did something we were clearly headed for a crisis. Now these conditions do not exist.

B. But there was a blow up. The system was in disarray. I had to put it together again last week. I went to Basel in March.3 The thing nearly exploded then, but I talked frankly to the central bankers and we were able to hold it together.

K: What made it explode?

B: The situation was delicate. Once there was speculation against the dollar, it shook the entire financial community. People did not have confidence in the Smithsonian rates. I told the central bankers what the Fed was doing about the interest rate, and of the President’s plans to get hold of the budget. I also told them that they had made a few mistakes of their own. They respect me and know that I deal frankly with them. That was good for a few weeks. But we had to do something more tangible. [Page 640] I got Connally to make a good speech at the Council on Foreign Relations to indicate that we would help Britain repay its obligations to the IMF and get monetary reform talks underway.4

K: I have never understood Connally.

B: I understand him. There are numerous problems. He wants these problems to go away. He resents people fooling around with these issues and just hopes that they can go away.

K: Has the system been patched up now? Will we have a crisis the next time there is a run on the dollar? I spoke with Finance Minister Schmidt recently. He said we should go back to convertibility.5

B: That is impossible. We can’t go back to convertibility at this time.

K: Or some other means of defending the dollar.

B: We are defending the dollar. It was under attack. Foreign central banks had to take in over $6 billion since December. The system just won’t work if this sort of thing keeps up. On Thursday, two weeks ago, they took in $1 billion-$1.5 billion.6 This couldn’t go much further. I went over the map of possibilities and decided that the best way to deal with this was to have the Fed borrow currencies from foreign governments to intervene in the currency market. This was done without committing our reserve assets. The response around the world was one of jubilation.

K: Did you do this on your own discretion?

B: No, I needed the consent of the Treasury. I previously had had endless conversations with Paul Volcker, who is negative about everything. I experienced some difficulty with Shultz, but won him over. We took this to the President and he agreed.7

K: Will this keep things in balance?

B: It should, but we can’t be sure. We committed a negligible sum—less than $50 million—but got remarkable results. We are ready to commit a sizable sum. But we can’t categorically say it will be successful. However, the chances of success are very good. Also, there is some movement on reform of the Treasury. Before I couldn’t get Connally or Volcker to move on a plan for reform or to determine the US position.

[Page 641]

K: Why?

B: They thought it would be leaked. However, they had no position of their own. I gave a talk in Montreal which I wanted Treasury to give.8 They had no objection to what I was saying. Later they began fussing about it, but there was nothing that they really objected to.

K: What is the schedule for proceeding now?

B: There will be a meeting of the Group of 20 in September. But I want to add that although the President approved my plan to do what I did, I need continuous support from the President. If I lose it, Shultz will back off at once. The Fed in the international area can’t move without the Treasury. Shultz and I have worked well together and will continue as long as I have the President’s support.

K: I can be helpful there.

B: I have held this together since December.

K: After December there were people trying to break the thing up. I have never understood Connally. Connally was attempting to use Canada as a key element in breaking up European policy. But at the same time he was attacking Canada.

B: Connally uses brutal techniques. He did well on his trip to Brazil but in Peru, shortly after he left, the President made a violently anti-American speech.9 When I was there, the speech was repeated three times over the air. I was told numerous times that this speech was an answer to the Connally visit. In Argentina Lanusse, after I was in his office two or three minutes, told me that he had found out where I spent my first day in Argentina and where I will spend my remaining days. He was very pleased that I was talking to Argentine officials and businessmen. He said to me, “Do you know what Connally did? He went to see a ranch—a ranch!” The President said he was very angry. When [Page 642] Connally gets into foreign relations, God help us. When Shultz got in, I was quite negative. He did not know much about this. Before he was very difficult to deal with, very theoretical. Now he thinks more pragmatically.

K: I was concerned he might be too doctrinaire. What is the schedule of meetings?

B: There will be nothing substantive until next year.

K: This is after the German, US elections, and a Canadian election. Are the Canadians having an election?

H: I recall that Trudeau said recently there would not be an election this winter, at least not in the fall.

K: They have to give two months notice so that means there probably won’t be one.

B: We have an opportunity now to rebuild the world.

K: Which direction should we move?

B: The IMF is the only thing which stands for international law in the monetary area. There should be established the principle of symmetry between deficit and surplus nations. Right now, when a country has a deficit, it is an international sin. With a surplus, it is practicing an international virtue. We should do away with morality in our thinking. Apply rules that surplus countries have the obligation to reduce and eliminate surpluses and deficit countries have a similar obligation to reduce their deficits. We should establish rules to achieve this.

K: Like what?

B: In the first year, a warning. In the second year, if it continues, then withdraw convertibility. Previously convertibility has been taken for granted. It was felt there was a right to convertibility. No longer should it be an automatic right. The country would have to accumulate foreign currencies and could not necessarily convert them.

K: This wouldn’t stop the Japanese-type of accumulation, would it?

B: No, but convertibility would be a privilege in some circumstances. We must also recognize that this is a delicate problem since it means sanctions against surplus countries and some loss of sovereignty. But there was some loss of sovereignty in the SALT Treaty in Moscow.

K: Any treaty limits a nation’s scope of action. You give up something you otherwise would have the right to do.

B: But we should be careful. While the degree of sovereignty would have to be limited, we should be careful in the way we present this to Congress. It is a delicate matter.

K: This is the way I see it. We can’t afford a blow up in the monetary area since it affects relationships in the non-Communist world. [Page 643] Without reform there will be a blow up. I respect your judgment and expertise. I can’t get involved all the time, but I will if need be.

B: I will get you involved only when necessary. It has been a lonely battle for me.

K: When you want to see me, we will fix a time within twenty-four hours. We will meet within twenty-four hours whenever you request a meeting.

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Country Files—Europe, Box 687, Germany Volume XII 5/72-12/72. Secret. No drafting information appears on the memorandum.
  2. Presumably a reference to Pompidou’s statement in his February 4 letter to President Nixon that Kissinger had told him “the following morning” that President Nixon’s understanding was that the United States would intervene to support the dollar at the new exchange rates. See footnote 4, Document 223.
  3. See Document 226.
  4. Secretary Connally addressed the Council on Foreign Relations on March 15; see Document 226.
  5. See Document 235. There is no record that Schmidt recommended restoration of convertibility.
  6. July 13; see footnote 2, Document 234.
  7. On July 18 the President was in San Clemente and called Shultz in Washington and talked with him from 8:45 to 9:24 a.m. PDT. (National Archives, Nixon Presidential Materials, White House Central Files, President’s Daily Diary) This is the only recorded contact the President had with Shultz or Burns before the United States intervened in foreign exchange markets to support the dollar on July 19.
  8. Burns addressed the 1972 American Bankers Association International Monetary Conference in Montreal on May 12. In his prepared remarks Burns set out ten elements he “would expect to find in a new monetary system that met the test of both practicality and viability.” Under Secretary Volcker also addressed the Conference on May 12 and made similar remarks. Volcker was questioned closely on Burns’ ten elements during a press conference later in the day. Volcker said he would share some of Burns’ principles but distanced himself from endorsing the ten elements. The texts of Burns’ and Volcker’s prepared remarks and a transcript of Volcker’s press conference are in the Volcker Group Papers (VG/Uncl. INFO/72-26 and VG/Uncl. INFO/72-27); they were circulated to members of the Group on May 15 and May 22, respectively. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, 1972, VG/Uncl. INFO series) Volcker’s remarks are printed in Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30, 1972, pp. 436-440.
  9. After he stepped down as Treasury Secretary, Connally was sent by President Nixon as his personal emissary to 14 countries in Latin America, Oceania, and South and Southeast Asia.