60. Memorandum From the Under Secretary of the Treasury for Monetary Affairs (Volcker) to the President’s Assistant for International Economic Affairs (Peterson)1


  • Capital Controls Program

In CIEP Study Memorandum No. 1, you requested comments on a paper by Mr. Shultz which recommended abandonment of the capital control program.2 Although the Treasury fully concurs in the view that these controls should be removed as soon as the U.S. balance of payments position permits, we believe that it would be a serious mistake to remove them at the present time.

The issue at present is not simply one of the statistical or even economic effectiveness of the controls.3 It seems to me unavoidable that removing the controls at this time would be interpreted abroad as “malign neglect” of our responsibilities as a key currency country for the stability of our currency and the monetary system and as an overt affront to other countries dealing with what they consider to be highly excessive dollar inflows. Beyond any effort on our part to explain the “ineffectiveness” of the controls, action could not only trigger loss of confidence in the dollar and a major international financial crisis, but, in the eyes of much of the world, cast us in the role of initiating villain. As you know, our official settlements deficit last year, excluding the SDR allocation, was $10.7 billion. In the first three months of 1971, the rate is, unfortunately, much higher. While we do not expect the deficit to continue at anything like this level, there is grave concern among foreign monetary authorities at the present time.

It is important to note that the Congress accepts the need for retaining the controls at present without a murmur and, in fact, insisted upon giving us more authority to apply controls over our objections. The [Page 147]Interest Equalization Tax extension passed the House without dissent.4 In the hearings, there was specific recognition of the inadvisability of eliminating the controls, and even directly affected financial houses did not ask for elimination at this time but, rather, accepted the need for continuance.

Finally, on the issues raised by Mr. Shultz, we simply do not find the evidence presented persuasive, although I suspect we can all agree there is very considerable “slippage” in controls of this type.

Paul A. Volcker
  1. Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, CIEP Study Memoranda. Confidential. A 17-page, March 23 analytical memorandum from Wilson Schmidt to Volcker on the “Effect of Capital Controls Program” is attached but not printed.
  2. Documents 55 and 54, respectively.
  3. On March 18 Federal Reserve Governor Brimmer sent Assistant Secretary Petty a letter to which he attached the Federal Reserve’s preliminary conclusions regarding Shultz’ paper. The preliminary conclusions were that the paper was “superficial,” failed “altogether to do justice to the analytical complexity of the questions raised by the [capital controls] program,” and was “deliberately misleading.” (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, CIEP Meetings)
  4. The vote on HR 5432 was 393 to 5, with 34 members voting. See Congressional Record, March 10, 1971, pp. 5859-5866.