Foreign Relations of the United States, 1969–1976, Volume XXXI, Foreign Economic Policy, 1973–1976

10. Notes of a Telephone Conversation Among Secretary of the Treasury Shultz, the Deputy Under Secretary of the Treasury for Monetary Affairs (Bennett), and the Under Secretary of the Treasury for Monetary Affairs (Volcker)¹

February 11, 1973, 9 a.m.

PAV reported that he had a long, rough, and tough session with the French Finance Minister Giscard d’Estaing.

PAV had stressed that a turning point had been reached. He said we seem to have three options:

• 1. Do nothing, i.e. attempt to maintain present parities
• 2. A joint European float plus a Japanese float
• 3. The U.S. proposals: a U.S. devaluation, plus a substantial Japanese revaluation.

Giscard said that the French, British, and Germans had been discussing concerted European non-intervention in dollars (what we would call a joint float) to be explained as a European effort to construct its own monetary system after a breakdown of the dollar.

Giscard accused the U.S. of not doing enough recently to support the existing exchange rate pattern and of not living up to our obligations under the Smithsonian Agreement. He alternated between strong statements and conciliatory words.

Volcker stated that we had not failed to live up to our Smithsonian obligations. At the Smithsonian, we had undertaken to contribute to stability through restraint of price increases and since that time we had had a record of which we are far from ashamed. Furthermore, a joint European float would be fine with the U.S., and it would be consistent with the evolution of international monetary arrangements.

Giscard stated, in relation to the U.S. proposals, that a 10% devaluation would be all right, but not more. He recognized that the Japanese would have a problem in moving outside of a multilateral framework and that Europe and the U.S. would have to join together to insure Japanese revaluation.

Giscard asked repeatedly whether, after a realignment, the U.S. would begin to live up to its Smithsonian obligations and institute at least some form of partial convertibility.

Volcker replied strongly that we would not. We would restore convertibility only when it could be sustained and only when our payments position was strong. That is not now.

Giscard stated that France was determined to have an aircraft producing industry and that if we devalued by as much as 10%, France would have to put on a 5% import tariff on aircraft.

Volcker said such a move by France would inevitably raise the question whether the U.S. shouldn’t raise its tariff on automobiles to the European and Canadian level. An agreement on an aircraft tariff increase for France could not possibly be included in a monetary agreement. France could bring the subject into trade negotiations if it wanted to, but to bring the matter up in monetary negotiations would create the wrong kind of atmosphere. (Later Volcker learned that the European Community countries had some time ago voluntarily suspended their tariff on imported aircraft to assist their state-owned airlines. Recently the French have been urging restoration of the tariff. Under the GATT, the Community could legally restore the tariff without being obligated to pay compensation to the U.S.)

Giscard also expressed concern about the U.S. proposal to allow authorities to sell gold into private markets, arguing that this is a long-range reform proposal which should not be decided in a short term exchange rate agreement.

Volcker pointed out the U.S. was merely proposing a return to the literal legal framework for gold in the IMF articles.

Giscard pointed out that the French really are not directly affected by the current monetary turmoil and could just stand aside.

Volcker replied that U.S. could also adopt the same posture, but we felt a cooperative approach would be beneficial.

Giscard then quickly responded that the choice really lies between options 2 and 3. The technical problems of the European float could be solved in a couple of days. There is no real exchange rate misalignment in Europe. The DM may be undervalued by 2 or 3 points but that is not a problem. There are 2 requirements for the 3rd option: the U.S. must resume some form of partial convertibility in line with U.S. obligations under the Smithsonian, and the U.S. must not try to eject gold from the system. Giscard’s first reaction to Volcker’s mention of the proposed removal of U.S. controls was, like Schmidt’s and Barber’s, that he didn’t know that we had any. Later he said he didn’t like precipitous abandonment of U.S. controls and that removal of French controls would be impossible.

Giscard tried to end the meeting with Volcker on a friendly note and said he would not rule out the 3rd option. He said he would discuss the subject further with Barber and Schmidt but first would have a discussion with Pompidou.

At some point in the conversations Giscard said bitterly that the U.S. doesn’t follow the rules as evidenced, for example, in U.S. handling of Schweitzer.² He also repeatedly lamented that the C–20 discussions were going nowhere and that the U.S. was being unfair in its trade demands.

On the phone Volcker noted that Giscard had repeatedly made strong statements and then backed away. In Volcker’s judgment the discussions had not revealed any weakness in the U.S. position.

Secretary Shultz instructed Volcker to continue putting forth all the components of the U.S. plan as previously discussed.

1. Source: National Archives, RG 56, Office of the Under Secretary of the Treasury, Files of Under Secretary Volcker, 1969–1974, Accession 56–79–15, Box 1, 1973 Devaluation. No classification marking. Shultz presumably took the notes on the conversation. Volcker was in Paris; Shultz and Bennett were in Washington.
2. The United States opposed the appointment of Pierre-Paul Schweitzer, IMF Managing Director since 1963, to a third 5-year term as Managing Director at the end of his second term in September 1973. This was a controversial decision. At the September 1972 annual meeting of the IMF and World Bank, “Giscard d’Estaing, noting the support Schweitzer had received from previous speakers, said, ‘In an international organization governed by democratic principles, it would be inconceivable that the attitude thus taken by the great majority should ultimately be disregarded.’” (Robert Solomon, The International Monetary System, 1945–1976, p. 225. See also de Vries, The International Monetary Fund, 1972–1978, Volume II, pp. 1002–1004)