Volume Summary

(This is not an official statement of policy by the Department of State; it is intended only as a guide to the contents of this volume.)

Since 1861, the Department of State’s documentary series Foreign Relations of the United States has constituted the official record of the foreign policy and diplomacy of the United States. Historians at the Office of the Historian collect, select, arrange, and annotate the principal documents that make up the record of American foreign policy. The standards for preparation of the series and general guidelines for the publication are established by the Foreign Relations of the United States statute of October 28, 1991. (22 USC 4351, et. seq.) Volumes in the Foreign Relations series are published when all necessary editing, declassification, and printing steps have been completed.

The documents in this volume are drawn primarily from the Nixon Presidential Materials Project at the National Archives and Records Administration and from the Department of the Treasury records at the Washington National Records Center. Also included are records from the Department of State Central Files and the decentralized lot files of the Department of State, which are also available at the National Archives. Several Nixon White House tape recordings of conversations between President Nixon and his key economic advisers are summarized in Editorial Notes printed in the volume.

Almost all of the documents printed here were originally classified. The Information Response Branch of the Office of IRM Programs and Services, Bureau of Administration, Department of State, in concert with the appropriate offices in other agencies or governments, carried out the declassification of the selected documents in accordance with the applicable provisions of Executive Order12958.

This is the first volume in the subseries of the Foreign Relations series that will document the Presidential administrations of Richard Nixon and Gerald Ford. The documents in this volume cover only the first Nixon administration, 1969-1972. The following is a summary of the most important issues covered in the volume. Parenthetical citations are to numbered documents in the text.


On January 18, 1969, Arthur Burns, who would be Counselor to the President until appointed Chairman of the Federal Reserve Board in 1970, forwarded to President-elect Nixon one of a series of Transition Task Force reports, this one dealing with balance-of-payments policies. The Task Force report called Nixon’s attention to the precarious U.S. balance-of-payments position and the de facto inconvertibility of the dollar to gold. (1)

On January 21, 1969, the President’s Assistant for National Security Affairs, Henry Kissinger, issued National Security Study Memorandum (NSSM) 5 informing addressees that the President had mandated a review of the full range of U.S.-Japanese issues that would include trade and “US balance of payments considerations, particularly the implication of US military expenditures in Japan.” (20)

On the same day, Kissinger sent NSSM 7 to Secretary of State William Rogers and Secretary of the Treasury David Kennedy, Chairman of the Council of Economic Advisors Paul McCracken, and Chairman of the Federal Reserve Board William McChesney Martin, informing them that the President had directed the creation of a permanent working group, chaired by Under Secretary of the Treasury for Monetary Affairs Paul Volcker, “make recommendations on U.S. international monetary policy to the NSC and to implement policy decisions.” (109) The Volcker Group, successor to the Deming Group of the Johnson administration, met frequently and was a major player in formulating U.S. balance-of-payments and international monetary policy during the Nixon administration.

Economic policy issues were among those addressed from the outset of the Nixon administration. This first compilation deals primarily with U.S. balance-of-payments policy and relations with the major industrial countries, particularly France, Germany, the United Kingdom, the European Community as a whole, and Japan. As these policy issues were developed, issues related to international trade policy, foreign economic and military assistance, and relations with developing countries inevitably came up and are prominent in a number of documents in this volume, but their systematic treatment is in Volume IV, scheduled for publication in 2002.

The second compilation in this volume, International Monetary Policy, 1969-1972, is closely related to balance-of-payments issues and relations with the major industrial democracies.

Foreign Economic Policy, 1969-1972

The Nixon administration inherited a number of programs from the Johnson administration aimed at improving the U.S. balance-of-payments position. One of these, REDCOSTE (Reduction of Costs in Europe) was replaced by OPRED (Operation Reduction), and the President in July 1969 ordered a reduction by 10 percent in civilian overseas employment by government agencies. (2, 22, 25) The new administration disliked other Johnson administration policies, such as the interest equalization tax and limitations on direct foreign investment by U.S. corporations, and from the outset it launched plans for their mitigation and removal, despite concerns that other nations would be upset. (3-6, 8, 10-12, 14-16, 54) True to expectations, there were misgivings abroad about the “benign neglect” of the U.S. balance of payments. (29, 63)

The Nixon administration was predisposed toward macroeconomic monetary and fiscal policy measures to address the balance-of-payments problem, in lieu of more microeconomic policies. A March 17, 1969, Treasury Department paper argued that “the main thrust in our balance of payments adjustment will be on general measures rather than selective controls.” (10) Precise goals and measureswere difficult to set, however. In a March 26, 1969, memorandum to Kissinger regarding Secretary Rogers’ testimony before the Senate Foreign Relations Committee the next day, C. Fred Bergsten of the NSC Staff wrote: “There is no U.S. policy to ‘eliminate our balance of payments deficit’. The Johnson Administration sought a ‘sustainable balance’…. This Administration has not yet stated its objective … and the Secretary of State should definitely not say that ‘we are taking every feasible step to eliminate our deficit’.” (2)

The administration worked to formulate a balance-of-payments policy (25, 27, 29, 31-33, 39, 48, 63, 66), and during the international monetary policy crisis in August-September 1971, the administration finally adopted a clear objective, at least a $13 billion swing in the U.S. goods and services balance (about 1.3 percent of nominal GDP in 1971), as set out in a September 10, 1971, Treasury Department paper. (76) Despite earlier concerns about benign neglect of the U.S. balance of payments, the foreign reaction to this U.S. objective now was that it was too ambitious. (78)

A major concern during the Johnson and Nixon administrations was the impact of U.S. military expenditures abroad on the U.S. balance of payments. The concern was also frequently expressed in Congress where legislation, the Mansfield amendment, was introduced from time to time to reduce significantly the U.S. military presence in Europe to alleviate the U.S. balance of payments. (2, 48, 156) While both administrations resisted this legislation, the concern was real, and the United States negotiated offset agreements with Germany to provide balance-of-payments relief to the United States for the costs of maintaining the U.S. military presence there. The Nixon administration signed a first offset agreement on July 9, 1969 (13, 24, 45), and a second on December 10, 1971. (50, 68, 86) These were bilateral agreements with Germany alone, but forces were set in motion for a broader, NATO-wide burden sharing of defense expenditures. (45, 46, 50, 78, 84)

By 1969 Western Europe and Japan had recovered from the devastation of World War II and the view was emerging in the United States that both should more fully share in responsibility for international economic adjustment, military expenditures, and assistance to developing countries. As the documentation in the volume on balance-of-payments adjustment and international monetary policy demonstrates, the Nixon administration sought greater responsibility by others in many facets of international economic policies. The administration was fully supportive of continued expansion of the European Community (40, 47), and President Nixon told French President Georges Pompidou, during a White House meeting on February 26, 1970, that the latter should give no credence to statements “concerning fears and even opposition to the European Community by the United States.” (36) In late 1972 a major policy review of relations with the Community set out the policy clearly: “US policy has been to support Western European economic integration as a means to strengthen Western European ability to share responsibility for maintaining a stable and prosperous world order.” (108)

The Community, nonetheless, was a source of serious concern on a number of policy fronts. One major issue was the preferential trading relationships the Community was developing with Spain, Israel, Tunisia, and Morocco, which U.S. officials saw as inconsistent with Community GATT obligations and potentially damaging to U.S. exports. (40, 42, 43, 47) This issue festered without resolution until the end of the first Nixon administration. (101-106, 108) Another vexing issue was the border tax adjustments that various European nations made for their value added taxes, the relationship of these border tax adjustments to exchange rate policies, and their compatibility with GATT rules. (41)

Commenting on the policy paper prepared in response to NSSM 5 regarding relations with Japan (20), the Treasury Department position was that “Japan’s great economic and financial strength is new and the Japanese themselves are not yet accustomed to it…. The Treasury believes that [the paper] does not give adequate attention to the relative sharing of costs and benefits of the U.S.-Japanese partnership… It is the Treasury view that Japan is not carrying an equitable share of the financial burden of the partnership, either budgetary or balance of payments.” (17) In the paper itself, the authors recognized that trade, balance-of-payments, and aid policy issues were “an integral part of Japan policy and that they should be considered, particularly in developing a negotiating position on Okinawa.” (20) While economic policymakers recognized that reversion of Okinawa was a separate issue from the trade, exchange rate, foreign assistance, and balance-of-payments issues that were on the bilateral economic agenda, at least an implied linkage of progress on both fronts surfaced from time to time within the administration, as well as in Congress. (23, 75, 87)

During a September 10, 1971, meeting with the Japanese Finance Minister in Washington, Treasury Secretary John Connally, who succeeded David Kennedy in February 1971, told the Minister that the problems between the United States and Japan were divisible into three areas: the cost of defense, trade restrictions, and exchange rates. Connally thought the first two should be handled in bilateral negotiations but the third would have to be worked out in a multilateral context. (77)

President Nixon had several meetings with Japanese Prime Ministers. On November 20, 1969, during his State visit to Washington, Nixon told Prime Minister Sato that “Japan was now at a point where it could play a greater role … not just in Asia but on the world scene … [and] the world would be healthier if Japan could be added ‘as a fifth finger’ to the four existing areas of great power, the United States, Western Europe, the Soviet Union and China.” (30) Nixon and Sato also met at San Clemente on January 6-7, 1972. On the economic agenda they briefly exchanged views on defense burden sharing and Japan’s plans to increase its foreign economic assistance. President Nixon suggested that the great economic powers of the Free World—the United States, Japan, Germany, Britain, and France and, possibly Canada and Italy—should “look at the world as a whole … [and] consult closely if we are to build a stable and productive Free World economy with trade and monetary stability.” (87) Prime Minster Sato supported the idea of a conference of major powers.

President Nixon met with the new Japanese Prime Minister, Kakuei Tanaka, in Oahu, Hawaii on August 31, 1972, after extensive preparations. (92, 93, 95-98) The Prime Minister recognized that an excessive trade imbalance served neither countries’ interests, and would do his best to reduce the current bilateral imbalance. Nonetheless, he said Japan wanted to maintain an overall current account surplus of one percent of GNP to finance foreign assistance to developing countries by a like amount. He suggested specific Japanese cooperation in Southeast Asia and Korea on both foreign assistance and investment. President Nixon said a healthy Japanese economy was in the United States’ interest and, recognizing Japan had a problem with playing a military role in Asia, Japan’s economic influence could be decisive in the region. (99)

International Monetary Policy, 1969-1972

In the late 1960s and early 1970s U.S. policymakers anticipated policy responses to international currency crises, a run on U.S. gold reserves, and possible measures to restructure fundamentally the international monetary system. Despite the exchange rate stability that had been a cornerstone of IMF policy since its inception, U.S. policymakers actively considered currency devaluations and appreciations, suspending the dollar’s convertibility to gold and changing the official monetary price of gold. (110) President Nixon on several occasions specifically expressed his interest in a “new international monetary system.” (38, 51)

NSSM 7, which created the Volcker Group very early in the new administration, had directed preparation of a paper on international monetary policy to be considered by the National Security Council (NSC). (109) The NSC meeting was cancelled but the study papers were taken up in other fora, including a meeting with President Nixon on June 26, 1969. (16, 111, 115, 118, 119, 123-125, 128-131) Among the options considered on June 26 were activation of the new reserve asset, the Special Drawing Rights (SDRs) approved by the IMF Board in late 1968, appreciation of the German mark and devaluation of the French franc, and limited exchange rate flexibility to widen the bands within which IMF members would be permitted to let their currencies fluctuate around their official parities. (130)

During the spring and summer of 1969, a number of consultations advanced the agenda on SDR activation. (112, 113, 120, 132, 133) A July 23-24 G-10 Deputies meeting reached agreement on a 3-year plan to create $9.5 billion of the new reserve asset. (135) The IMF Board ratified the agreement on October 3. (140)

France devalued the franc on August 8, 1969. (123, 136) Germany allowed the mark to float on September 30, 1969; the mark was formally appreciated by 9.29 percent on October 24. (126, 139, 140, 143)

The U.S. proposal for increased exchange rate flexibility, albeit still in the context of fixed parities, encountered resistance. (121, 127, 137, 138, 147) During U.S.-French Ministerial-level consultations on international economic issues at Camp David May 3-5, 1970, the U.S. side said it was not advocating freely floating rates, but only a change in attitudes to be less rigid toward exchange rate changes. The French argued that it was “not clear whether widening exchange margins would discourage or encourage speculation” and, in any event existing IMF Articles were no obstacle to “small and frequent” parity adjustments. (146) Work on the issue went forward during the summer and fall of 1970 and into 1971, but without resolution. (148, 149, 157, 162, 163)

Following the exchange rate adjustments in 1969, foreign exchange markets were relatively quiet (147), although U.S. policymakers continued to consider additional adjustment measures. (150, 151) Faced with roiled foreign exchange markets in early May 1971 (151), the Treasury Department on May 8 prepared a paper entitled “Contingency.” (152) The paper proposed that the United States take advantage of the current crisis to achieve a lasting improvement in the U.S. balance of payments, a more equitable sharing of responsibilities for world security and economic progress, and a basic reform of the international monetary system. Among the measures proposed were suspension of gold convertibility, imposition of trade restrictions, and a reduction of the U.S. military presence in Europe and Japan.

During the spring and into the summer of 1971, the administration struggled to deal with crisis in foreign exchange issues. (154-161) As the crisis progressed, President Nixon met with Treasury Secretary Connally and Office of Management and Budget Director George Shultz on August 2 to map out next steps. (164) Tapes of their conversations on August 2 reveal Connally as the primary architect of the essential elements in the New Economic Policy (NEP) the President would announce on August 15.

As the crisis continued, Connally and Shultz again met with the President on the afternoon of August 12 and agreed to convene a policy meeting of principals the next day to agree on policy. (165) The meeting was held in great secrecy at Camp David on August 13-15, 1971. August 13 briefing memoranda from their staffs to Rogers and Kissinger on the current crisis gave no indication that the staffs were aware of the Camp David meeting. (166, 167) The State Department and the National Security Council were not represented at Camp David where, according to Kissinger, “a decision of major foreign policy importance had been taken about which neither the Secretary of State nor the national security adviser had been consulted.” (168)

The New Economic Policy that President Nixon announced on August 15, 1971, had both domestic and international elements. On the international side the NEP closed the gold window, the suspension of convertibility essentially floating the dollar. It imposed a 10 percent surcharge on all dutiable imports, a measure described as a border tax adjustment during preparatory meetings, and reduced foreign assistance expenditures by 10 percent. (168) The sudden floating of the dollar had special impact on U.S. foreign relations. Under Secretary Volcker traveled to Europe for consultations on August 16 and 17 to explain the new U.S. program to European and Japanese officials. (170, 171) During the week following the NEP’s announcement, most foreign exchange markets remained closed as governments absorbed the new policies and explored next steps. (172)

The G-10 Deputies met in Paris on September 3, followed by a G-10 Ministerial in London September 15-16 to consider next steps. (173-175) Among the topics discussed was the U.S. objective to obtain a $13 billion turnaround in the balance on goods and services. (76, 78) There was no resolution and bilateral consultations and G-10 Deputies and Ministerial meetings during the fall sought agreement on a policy approach. The United States continued to develop its negotiating strategy and policy objectives. (176-197, 199-209) On November 2 President Nixon informed his advisers the presumption should be that there would be no change in the price of gold nor a return to some form of convertibility. (189)

On November 23-24, 1971, President Nixon had several meetings with his economic advisers, preparatory to meetings of the G-10 Deputies and Ministers in Rome November 29-December 1. (203) During those meetings they discussed the French gold “phobia” and the probable need for a change in the official price of gold, the magnitude of possible exchange rate changes, and the possibility of trading the import surcharge for sufficient exchange rate realignments. Press reports following the November 23-24 meetings noted that the President expected “definite progress” at the forthcoming G-10 meetings. Gold price issues are documented in this volume. (145, 153)

The G-10 meetings in Rome made substantial progress on the scope of exchange rate realignments and trade and burden sharing issues related to U.S. objectives. Treasury Secretary Connally on behalf of the United States put the hypothetical of a change in the official price of gold on the table, an offer that apparently caught some in Washington by surprise. (212) Nonetheless, sufficient progress was made on resolution of outstanding issues that the stage was set for a Summit between Presidents Nixon and Pompidou that would permit another G-10 Ministerial later in December to reach agreement on resolution of the issues that had vexed the international economic community during the latter half of 1971. (210-216)

Presidents Nixon and Pompidou met in the Azores December 13-14, 1971. At a breakfast meeting with President Pompidou on December 14, Kissinger marked up a draft set of undertakings that he had drawn up in consultation with Connally. (219) That markup was the basis for the “Framework for Monetary and Trade Settlement” signed by the two Presidents after they resolved final details later in the day. (220) The United States agreed to drop the 10 percent import surcharge and increase the official monetary price of gold from $35 to $38 per ounce. France would leave its gold parity unchanged (thereby allowing the franc to appreciate against the dollar, in French parlance devaluing the dollar), and the two Presidents anticipated that the mark and yen would appreciate as well. Provision would also be made for 2.25 percent margins for exchange rate fluctuations above and below the new exchange rates (accomplishing the U.S. objective of limited exchange rate flexibility).

The G-10 Ministers again met on December 17-18, 1971, at the Smithsonian Institution in Washington. At that meeting they essentially agreed to new exchange rates, at fixed parities, along the lines Nixon and Pompidou suggested at the Azores Summit, and agreed to work out modalities for increasing intervention margins from 1.0 to 2.25 percent. (221, 222) Despite the new agreement, international financial flows thwarted maintenance of the new parities during early 1972. (222)

On February 4, 1972, President Pompidou wrote President Nixon about his concerns that measures they had agreed on during the Azores Summit had not, “for the moment come into play.” Among Pompidou’s concerns was the fact that Congress had not yet been asked to increase the monetary price of gold, thereby legally devaluing the dollar, a measure he now understood, after a February 3 message from Connally, would soon be forthcoming. (223) In his February 16 reply, President Nixon cast recent developments in a positive light and noted that the legislation to devalue the dollar had been forwarded to Congress a week earlier. (224)

Faced with ongoing instability in foreign exchange markets, U.S. policymakers continued to develop positions on more fundamental, long-term reform in the international monetary system. As discussions in the European Community and the G-10 addressed the issues, proposals for what would become the C-20, a committee of the IMF, emerged that would consider fundamental reform of the international monetary system, bringing developing countries into the negotiations. (225-231)

By June 1972 Great Britain was no longer able to defend the new parity for the pound that was thus allowed to float on June 23. Prime Minister Edward Heath, in a June 26 message to President Nixon, thought it was time “to think in terms of much more radical changes than we had as yet envisaged” for reform of the international monetary system. (232) In his July 10 reply to Heath, President Nixon agreed that “this latest episode in a series of monetary crises over recent years illustrates the need for fundamental changes in the monetary framework.” Nixon said that ever since August 15 he had thought it important to establish the point that it was necessary “to go beyond a simple patching up of the Bretton Woods system.” (233)

In mid-July 1972 Treasury Secretary Shultz, who had replaced John Connally in June (90, 232), sent a memorandum to President Nixon informing him of recent speculative pressures in foreign exchange markets and cautioned him that if the United States were seen as playing too passive a role in defending the Smithsonian Agreement exchange rates it “would be a poor launching pad for a constructive trans-Atlantic dialogue on longer-term reform.” (234, 240) On July 20, 1972, German Minister of Finance and Economics Helmut Schmidt told Kissinger that it was necessary to defend the Smithsonian Agreement, at least until the U.S. elections in November. Kissinger noted that Secretary Shultz “thinks floating is the right policy” but promised to take the matter up with him and Federal Reserve Chairman Burns. (235)

On July 25, 1972, Kissinger and Burns had a tour d’horizon on international economic issues. Kissinger told Burns of Schmidt’s interest in restoration of convertibility but Burns thought this impossible at the time. Burns told Kissinger: “We have an opportunity to rebuild the world…. The IMF has been 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 establish rules … that surplus countries have an obligation to reduce and eliminate surpluses and deficit countries have a similar obligation to reduce their deficits. (236) At the end of July, under the rubric “Major Elements of Plan X,” the Treasury Department set out additional thinking on an exchange rate regime, a reserve asset regime, and a constitutional regime that might include a “completely new international monetary agreement … covering monetary and related broad trade principles.” (239)

On August 4, 1972, Treasury Secretary Shultz sent a telegraphic message to his French counterpart explaining U.S. perceptions on shortcomings in a paper under preparation for the IMF annual meeting in September. The French continued to resist increased exchange rate flexibility and sought an increased role for gold, and Shultz thought the draft report offered an inadequate “range of realistic options for an appropriate reform of the international economic and monetary systems.” (241)

The IMF held its 1972 annual meeting in Washington in late September. One decision at the meeting was creation of the C-20, an advisory committee on “all aspects of reform of the international monetary system, including those that involve international trade, the flow of capital, investment and development assistance.” The Indonesian Finance Minister, Ali Wardhana, was elected the C-20 Chairman at its first meeting on September 28. (237) President Nixon and Secretary Shultz both addressed the annual meeting calling for linkages between trade and monetary reform and “changes in reserves as a presumptive indicator of the need to make exchange rate adjustments.” World press reaction to their speeches was described as “mixed but generally positive.” (242, 243)