16. Conversation Among President Nixon, the Chairman of the Federal Reserve System Board of Governors (Burns), the Director of the Office of Management and Budget (Ash), the Chairman of the Council of Economic Advisers (Stein), Secretary of the Treasury Shultz, and the Under Secretary of the Treasury for Monetary Affairs (Volcker)1

[Omitted here is discussion unrelated to international monetary policy.]

Shultz: I thought we might let Paul give a brief description of what has happened, and where we are, and then I can summarize some of our thinking, and then there are a couple of developments [unclear] particularly your letter to Mr. Brandt 2 that I think—

Nixon: Good.

Shultz: —suggests the direction of their thinking very strongly. But Paul, why don’t you first describe the situation.

Volcker: Well, very briefly, the situation, basically, is that we made another exchange rate adjustment two weeks ago, which we thought was appropriate, which our trade department thought was appropriate, [Page 51] and, basically, changed the exchange rates into what everybody concedes, I think, is a better long-term realignment. But in the process, we ran into a little problem, which was not entirely unexpected; that you can’t devalue the dollar twice in two years without unsettling the psychology and creating doubts in many people’s minds about what’s going to happen next. And, why, it tipped either way for a few weeks and finally went—

Nixon: Down.

Volcker: —in the wild speculative direction.

Nixon: In other words, we were responsible for that to an extent.

Volcker: Well, I, I think—

Nixon: By creating a lack of confidence in our own [unclear]—

Volcker: I think we were forced to make an exchange rate change of a sizable amount over—in the past two years, looking at both of them together. And the United States changing its exchange rate is unsettling psychologically. I don’t think we can get around that—however necessary. And we see some of the results of this. We’ve done a few things: changing the discount rate; we put out reassuring statements—they weren’t quite enough to stabilize the psychology. So, we have a peculiar situation where everybody, basically—most people think that exchange rates are basically much sounder aligned then, but the nervous speculator is out to pick out any weak spot here or there, and he runs to the traditional havens. The Swiss franc has been strong for so many years; with Swiss francs it’s the same thing; and to the mark it’s the same thing; and to gold, the same thing. So, you’re now forced to the point of decision. And I think there are two possible courses here in the most general terms: we can go—in fact, complete the transition, which is half there, toward floating rates, at least as an interim measure, at the least as an interim kind of measure. And—but the major European countries have now fixed—moving in that direction, together or separately. Or, I think, potentially, one could get together with those countries and decide to stabilize these rates and, and hope, with a concerted effort, for an indefinite period. I think this could be done, if people wanted to do it. And, the two actions have, have different implications and different risks of—and so are very difficult to judge. You can tell there’s a risk “y” in either direction, but assigning probability to—is difficult, because we’re in unknown territory; we’re in territory we haven’t been in for many, many years, anyway. But, just the pros and cons, as I see them: first of all, I think you should say in the Brandt letter—suggest the Europeans [unclear] your thoughts. The Europeans really are in a mood where they think their floating is their first option. I think this is the first time they’ve been in this mood. And, not necessarily happily, but they, for one reason or another, are inclined to think that’s the primary direction in which to go. Now, the question that arises there—I think [Page 52] there are two, in my judgment: whether, given the upset state of market psychology, these float—floats will be smooth and stabilizing? Or, whether the market will take it as another indication of a kind of official weakness and be out to crack every exchange rate they can; push it all over too wide a spectrum of fluctuation and kind of undermine confidence in the whole system, which is already [unclear] and the lack of domestic confidence? In one sense, it leaves all our options open, I think, for future reform. In another sense, by leaving the European options open, too, it creates opportunities for others to try to impose their view on our domestic situation. So, it’s very fluid, both in the sense of, I think, immediate market responses, and its effects on financial confidence around the world, and in its potential for long-term economic reform—monetary reform. If it worked out smoothly, if you had smooth floats, that would be fine, and [unclear] in our interest, but I think basically it would—that says this is inherently a bad action, but you can’t be sure of that, because so much depends upon market psychology. Now, we can, I think, take the alternate course and make a dramatic gesture. More than a gesture: whatever we would make, we’d have to be willing to put money behind it. I don’t think there’s any great financial risk, but we could make a dramatic show against the speculators—and maybe win, in the short run. The question is we—whether we have given kind of hostages to fortune in the future by dedicating ourselves to this particular rate structure, but in a way that will give us problems a year from now.

Nixon: What is your [unclear]?

Shultz: Well, let me [unclear] I think from the group discussions that we’ve had: one, there is a general view that there’s nothing wrong with the present exchange rate relationships. Two, there is a general view that if any intervention is contemplated, it would have to be absolutely ball[s]-out if we’re going to win, and there’s no doubt about it; we’ll pour what resources there are into it. There’s no point in kind of nibbling around the edges of it in the way that we have done on at least one earlier occasion.

Nixon: Like [unclear].

Shultz: Now you have to be prepared to go one, two, five, ten—you have to be prepared to say, “We will, we will put up the money needed to do the job,” and—

Nixon: Right. Right. Right.

Shultz: —then proceed on that basis. And, there is a kind of irony to that, I suppose, in that if people are convinced that that is the attitude you have, it may be that you don’t have to spend very much money.

Nixon: Good. Yeah. Yeah.

Shultz: So that there’s—it’s sort of like a run on a bank, and the—

[Page 53]

Nixon: Um-hmm.

Shultz: —banker that puts his money in the front window and says, “Come on and get it; I’ve got plenty,” puts out the run faster than somebody who, who kind of puts it out piecemeal.

Nixon: Sure, it’s like, at that point, like a no-limit poker game, too. You’re sitting there and the guy, you know, will call you if he doesn’t think you’ve got enough. If you’ve got a—if you’ve got a hell of lot, chips and so forth, and then he’s ready to go in, and yet you’ve got enough to go all out, you’ll run him right off. Otherwise—but if he doesn’t think you might use it, he’ll call you every time. The same thing.

Shultz: We would, however, be [coughs]—excuse me—be running a risk if there were exchange rate changes after we acquired marks by borrowing, if we acquired on terms that had us bearing an exchange rate risk. And I think that the furthest anyone in our group has been willing to go is to say we should engage in a process of borrowing marks in order to intervene with them only if we assume no exchange rate risk, in effect. So, that is a different version of intervention. Whether that would be acceptable to the Germans is a question that might or might not—it would depend upon how desperately they wanted us to take that position.

Nixon: Let me ask a question: What are the Germans, in effect, oh, asking? They’re asking us to take the second option. Is that correct?

[unclear exchange]

Shultz: They have—they have met, and Mr. Brandt and Heath met the night before last, and in various statements—and you have this letter, which I don’t know whether—

Nixon: Yeah.

Shultz: —you’ve seen it or not, from Mr. Brandt, but I think that the key words are that they will—every conceivable effort to find a way out as a, as a European solution. So, I think that it’s very clear. I talked to Tony Barber this morning, briefly, and what they’re seeking is a method of working out some kind of a joint float. Now, our view is that that’s difficult for them to do, and no doubt Mr. Brandt is trying to persuade Heath to lock the pound in with the mark in some fixed relationship, and Heath is very reluctant to do that, and to assume just within Europe the costs of the intervention, and so on—which, as you remember his discussion, he feels very pleased with himself having floated and not having to lose reserves. Now, Barber, this morning, told me that he’s going to this meeting tomorrow.3 He said there are no working papers—

[Page 54]

Nixon: Heath is going?

Shultz: Barber is going—

Nixon: Barber. Yeah.

Shultz: —to a meeting of their Finance Ministers.

Nixon: Yeah.

Shultz: And that he is not going to get himself in a position where, either through the spending of British reserves or borrowing, he incurs a lot of cost. Now, I think what that adds up to is that a European float will be a rather restricted one and difficult for them to bring off, but that’s the course they’re on right now, and then they—

[unclear exchange]

Shultz: —structure it that way.

Nixon: Um-hmm.

Burns: Just, just a thought. You can have two kinds of European floats: you can have a joint float, where their currencies are tied together rigidly, more or less rigidly, and you float against the dollar. Or, each can go off, by itself.

Nixon: Right.

Burns: Several of them, perhaps, each one rigidly. And I think what George is saying is that a common float would be very difficult to carry out. [unclear]

Shultz: But, Germany, France—

Nixon: Do it as a common float? You mean a joint float?

Volcker: Joint float.

Nixon: That, by a joint float, you mean one where they all got together.

Shultz: It’s—it’s easier for them—

[unclear exchange]

Shultz: —to do it if England and Italy are allowed to be separate—

Nixon: Yeah. Yeah. Yeah.

Shultz: —than if they must be included. But, it’s still a difficult—

Burns: It’d be difficult, equally—

Shultz: Heath couldn’t.

Burns: It’d be difficult, really, even for the four, with the franc in one position, and the German mark in another position.

Volcker: Now, they may try to find a broker—

[unclear exchange]

Volcker: Have it broken apart by the [unclear]—

Nixon: Oh, yeah. Yeah. But that’s what they seem to think they’re [unclear]—

[Page 55]

Volcker: That’s what they would like to do ideologically. They may just do it [laughs]—

Nixon: Why do they—why would they like to do that?

Volcker: I think half ideology and half pure economics. If they want to be able to hang together and show their unity and push their unity—

Nixon: Yeah. Yeah. Yeah.

Volcker: And, the other part of it is, they are frightened to death if any one of their exchange rates is out of line with each other, because that’s where most of their trade is.

Nixon: Sure.

Burns: And they don’t want to take in more dollars [unclear].

Shultz: As we see [unclear] as I see it, the way in which the system has unfolded since August ’71, in effect, we have been moving toward more flexibility in the exchange rate system, and, leaving aside the amount of the changes in the exchange rates, there has been a great increase in the, in the flexibility of the system, and we now have the Japanese floating, the British floating, the Italians floating, the Swiss floating, the Canadians floating,4 so that I suppose it must be true that one reason for the pressure against those who aren’t floating is that that’s sort of the only pressure point there is, and they become more isolated. To this degree—

Nixon: But isn’t it—just, just to ask a question—isn’t it really in the interest of nations that float to have some that don’t? I mean, what the hell good does it do ’em to float the—you see what I mean? It’s—I would think the British and the Canadians probably like it, as far in relation to the U.S., right?

Shultz: Well, sudden [unclear]—

Nixon: They wouldn’t want us to—

Shultz: —hook themselves to—

Nixon: Do they want us to float?

Shultz: —a currency. We’re, in a sense, in the position, unless we engage in intervention where we’re floating as far as we’re concerned, and—

Nixon: Um-hmm?

Shultz: —we’re not, actually, with respect to the mark, only because the Germans intervene so heavily.

Burns: I put this—

[unclear exchange]

[Page 56]

Volcker: These smaller countries like a big stable unit against which they can operate.

Nixon: Yeah. Sure.

Volcker: And the more people that are [laughs] fixed while they’re floating the better they like it. [laughs]

Burns: [unclear] The Europeans are doing their trading primarily with one another. It’s their trade with one another that counts in the aggregate, rather than their trade with the U.S. Trade with the U.S. is a small part, relative to their trade with one another. If they had a joint float, they would have stable exchange rates with their major trading European partners. And, they would be able to have achieved stability, and the exchange rate with the U.S. would vary, but with one another, where it counts most, the exchange rate would be stable. I think that’s the way the Europeans look at it.

Nixon: Right.

[unclear exchange]

Shultz: Well, I think from our standpoint, to the extent that we think that a flexible system is a desirable thing to have, in some ways, you can say we’re almost there, and if they were able to have a successful, modified joint float of some kind, we would be there. And we should—

Nixon: Encourage Brandt?

Shultz: Well, we can, we can—where if you sit back, if you view it this way, and say, “Look, fine, they’re working at it. Let them work at it, and let them see what—”

Nixon: But that raises the problem that Paul has raised, that the risk there is the psychological one; that psychological one that, maybe, we just don’t care that much about things and are not going to exert “leadership” to bring stability that the world’s major economy should bring. Is that the argument—?

Volcker: They’d focus, I think, on political, and economic, and monetary risk. There’s this kind of political risk—

Nixon: Um-hmm?

Volcker: —that it can be said, “The United States didn’t care and let things go to hell—”

Nixon: Um-hmm.

Volcker: The economic risk is that, in fact, traders are so nervous from the previous—well, shaken up, that they can’t take this much flexibility this quickly—

Nixon: Yeah.

Volcker: And you get gyrations in exchange rates that really don’t make much sense and, and do—

[Page 57]

Nixon: Um-hmm.

Volcker: —damage economic and political relationships. It’s just very hard to predict whether—

Nixon: How they’ll react?

Volcker: How they’ll react. Would we react in a stabilizing or destabilizing way—?

Nixon: Right. Right. Right. Right.

Shultz: The probability of, let’s say, some modified joint float which falls apart is not a—that would be kind of a further deterioration. So, it would be better if they, surely, did something that could last and that didn’t hold their currency together so tightly if they’re determined to try to do that. The—Mr. Hayes, the head of the New York Federal Reserve,5 called yesterday, urging that we take this course of massive intervention. That is his view, and he said that he, he was reflecting the views of the New York community of financiers, a wide range of them who have some that do not agree with that. But, anyway, that is—that is a view from an informed source as to what we might do. I think that if we were to decide on a massive intervention technique, the question is whether or not we could, at this point, persuade the Germans to go along—and they’re going down their own track. But, I think it’s probably so, from our statement at the time of devaluation,6 that they don’t regard this as a real option. That is they think that we have probably foreclosed this option and are not considering it.

Nixon: What—just looking at the options, what would the British think of our massive—what would the—and what would the French think of it?

Shultz: The French would probably like it—

Nixon: Yeah.

Shultz: —because they like the idea of a relatively fixed exchange rate.

Nixon: What about the British?

Shultz: The British—

Nixon: How would they feel?

Shultz: —they’re floating, and they’d be content to see us do it. And I think that—

Nixon: Okay.

Shultz: —Heath might think that we’re wasting a lot of money; he’s not willing to waste any.

[Page 58]

Volcker: Well, I think they’d be delighted for the very reason you suggest: that it’s no skin off their back and [unclear]—

Nixon: How does it affect—how will this affect the Japanese? Which way do they—would they want us to go?

Shultz: Well, they are people who are, who are minded for orderliness, and I suppose they would probably—

[unclear exchange]

Shultz: Yes, they’ve been—are alleged to be very heavy speculators in this game, themselves. Whether that’s true or not, we’re not sure; there’s very little—

Nixon: [unclear]—

Shultz: —evidence that they are.

Nixon: I never questioned [unclear].

Shultz: Right.

Ash: Why do the New York bankers, expressing themselves through the Fed, that it was—it’s to their advantage?

Shultz: Because they—

[unclear exchange]

Nixon: Let me ask this question. That we—in Paul’s discussion of short- and long-term, let’s look at it that way just a moment. Let’s suppose we did go the course of massive intervention. All right, I think, I think the Germans would roll. I’m not—I know nothing about the financial side, but I think that Brandt, from a political standpoint, would roll. That’s my view. But, nevertheless [unclear] we could—we have ways to talk to Brandt. If Brandt—Brandt will not stand against us if we decide that this is the way we’re going to go.

Volcker: No, I don’t think we should go that way [unclear] Mr. President, unless he was pretty enthusiastic about it.

Nixon: Right.

Volcker: Because he’s going to take most of—carry most of the [unclear].

Nixon: [unclear] then we would have to work that out. Okay. Now the same—the second point is, though, that having done that, the—does that then, does that then destroy the option of working out on—at a later time, a new world monetary system that has more flexibility, et cetera? What I—about the—what concerned me about your suggest—talking about this option is, let’s say, well, it would be good for a while, but then we’d have another one next year. I think what is the—speaking just again as one who observes these things and obviously knows very little about it, but the thing that concerns me about it is that the goddamn crises come one year, two years, so forth. And so we go on and on and on and on. So, we had Smithsonian, and we thought, “Well, now, we got things settled for a while.” So, it was settled for a [Page 59] little while, and then off something else, and another one, and another one. And I think that even a bad stable program is better than a good unstable one. Now, you’re right, I argue against the general proposition that, you know, which view—the Milton Friedman view, and I know others have suggested it, too—where they said, “Well, here we are—why do we get battered around, and why we do react to everything that’s done at this international [unclear]? And let’s just float; just—let ’em go?” Well, the point that—I guess the thing that unnerved me is that, from a foreign policy standpoint, just to get that in, that if we could make, if we could exert what we call leadership, and if it worked now, but then, if it could be used—if we could go from there to something else later, that’d create a more stable situation, then, that option would have to be considered. If, on the other hand, exerting leadership now means only that, well, we bought off this problem, but then a year from now, we may have it again. And that’s the thing that concerns me about it.

Burns: Excuse me—

Nixon: And the other thing is that I don’t want the dollar, to us in this country, to be in a position, again, where we always take the heat. In other words, that’s why the whole business of convertibility concerns me. I mean, I know, I know the arguments about gold, and all that sort of thing, but we just can’t have the American domestic economy constantly hostage to the manipulations of international monetary situation. So, you see, I have a mixed feeling about this. From a political standpoint, internationally, I would much rather exert the leadership, you know, and create some stability and see that our friends abroad, and so forth, play the game. From the standpoint of the domestic situation, I’d rather see that the—that we not be hostage to these things abroad. So—and then, let me just complete the circle. On the other hand, I would hate to be here, eight years in this office, without having done something about a more stable system. In other words, maybe there is a need for a new—what do you call it? Bretton Woods?

[unclear exchange]

Burns: We’re getting a new Bretton Woods. I think, I think—

[unclear exchange]

Volcker: We’re out of the old one anyway. [laughter]

[unclear exchange]

Nixon: Hell, we’re out of the woods, but we’re in the damn slum.

[unclear exchange]

Stein: We’re negotiating [unclear]—

Nixon: It’s a swamp, now.

Stein: —and it seems to me that we took the leadership last September to say we have the vision of a better system—

[Page 60]

Nixon: Um-hmm.

Stein: —a system in which there’s flexibility and rules—

Nixon: Yeah.

Stein: —rules governing flexibility. And, we have made it a condition of our later entering into more responsibility for the maintenance of our par value that it should be done as part of a general system of rules, which apply symmetrically to everybody and so on. And that the thing that we, we have to avoid now is, is getting back into a kind of de facto resumption of these old obligations—

Nixon: Yeah.

Stein: —in the midst of crisis without having made any progress towards this ultimate system. And I think we—our chance for getting to the ultimate system is better if we go through this float than if we buy [unclear].

Burns: I’d like to—I’d like to put the opposite position forward, Mr. President. If we should decide to intervene now to stabilize the foreign exchange market, which I think we can do, and we can make the speculators run for cover, the great risk is, as Paul indicated, we may have another crisis 3 months later, 6 months later. If we go the route of intervention, a second component of that route would have to be a joint declaration by the heads of state that we would establish rules for the new international monetary system, rather abruptly; in, let’s say, 3 months [unclear]. You know, these conversations, they move forward [unclear]—

Nixon: Yeah, I know.

Burns: They’re leisurely—

Nixon: Yeah.

Burns: —nobody wants to [unclear]—wants to move, knows how to. On the other hand, hell, you can just sit down and hammer this thing out if the will is there. So, if we decided to intervene, that second component is essential to take care of the long-term problem. And you can take—look, you can take 30 years, you can take 3 years, and you can take 3 months to do the job.

Volcker: That’s right.

Nixon: Hmm. Well, at least.

Shultz: Well, I agree with Arthur that the—that it’s important to work on this currency reform and work on it hard, and we have been, we have been doing that, and we have been using these periodic crises as a way to highlight the importance of doing that.

Nixon: Um-hmm.

Burns: We haven’t gotten enough cooperation from the others.

Nixon: No, no, no.

[Page 61]

Shultz: We are not the foot-dragger here, at all.

Nixon: No.

Shultz: We have been the most forthcoming, the most constructive—

Burns: Absolutely.

Shultz: —the most [unclear]—

Nixon: Yeah.

Shultz: —the most demanding.

Nixon: Well, what—to address the, to address the major problem of the choice [unclear]. I would gather from your previous positions, you would tend to, shall we say, let the dust settle.

Shultz: I think that’s right.

Nixon: You would not interfere—

Shultz: I would not interfere—

Nixon: You would not inter—

Shultz: Particularly since we’re not being invited to, so to speak. And then—and, I agree with Arthur—that if we were to do it, it should be only under the kind of risk conditions he specified. With the Germans having decided on a different route, I think it’s doubtful that we could get those conditions. But, in any case, I think I would be inclined to let the dust settle.

Ash: I would agree with that with some application to what Herb has said. I think that the trouble of getting to—from no float to float is what we’re right in now—or, let’s say, no float to flexibility. But once—if we do persist in going toward that greater flexibility, then the very kind of problems that we’re talking about won’t be as big as they are now. We’re in the transitional phase of a fixed set of relationships to a more flexible one, and we’ve got to get over the transition and get there, and if we persist enough getting through it, then I think that we won’t get to the ultimate, different kind of stability that there will exist when we get in to the position of greater flexibility. It’s a matter of getting across that transition, and if we now intervene in a massive way we’re once again—well, not quite during the [unclear]—

Nixon: Let me ask—let me ask another question. Paul, failing to intervene in a massive way, does that mean that we do not, then—that we just continue to have this, this filibustering that Arthur’s running into?

Volcker: On Arthur?

Nixon: Yeah. Yeah. I mean, what I—

Volcker: Well, I—

Nixon: What I’m—I’m just trying to see—

Volcker: Yeah. The worst—

[Page 62]

Nixon: —is, looking at the long-term situation, I would—I mean, it’s always a better course of action to do nothing.

Volcker: Sure.

Nixon: But, you know. But on the other hand, in terms of the long, long-term—looking at the long-term situation, but don’t we want to work out a better system here?

Volcker: Oh, yes, we do.

Shultz: And we proposed one.

Nixon: We proposed one, but Arthur’s—what Arthur’s argument, I think, is to give them a shock. And that’ll get ’em off their butts so that they work with us. Is that it?

Stein: Well, I, I think it works the other way. I think that, that for us to intervene relieves them of a shock. And to let them float is their shock. And I think that Brandt’s letter gives you a great opportunity to say, “Well, we understand that these are circumstances that would lead you to the European solution, but I think we all agree that this is not the permanent state—”

Nixon: Yeah—

Stein: “—in which we’d like to be. We want a world solution, and we want to work on it, and George will come to Europe, and we’ll all get it going.”

Nixon: Paul [unclear]—

Volcker: It could work either way. I think you’ve got a difficult political problem here, which gets far beyond the monetary system in some of its implications—

Nixon: Um-hmm.

Volcker: The pessimistic view of this, the danger, the—what we have to guard against, is that this so-called European solution—

Nixon: Might—

Volcker: There will be one view in Europe, namely the French view—

Nixon: Um-hmm.

Volcker: —that will make that, to a greater or lesser degree, quite antagonistic. And the European solution is a euphemism for saying, “Let’s leave the United States out of the world—”

Nixon: Yeah.

Volcker: “—and go our independent course.”

Nixon: Yeah.

Volcker: Now, that is not a uniform view in Europe, but to the extent that you get kind of a chaotic feeling here, and that the United States hasn’t given a damn, you tend to maximize that view’s bargaining leverage, which is bad for the kind of reform we want.

[Page 63]

Burns: And this is—this is the way in which Europe is moving.

Volcker: Uh—

Nixon: Yeah, I know; it’s terrible.

Volcker: You know, that’s not the only view in Europe. But, I think—

[unclear exchange]

Volcker: —the danger is you give, you give support to that view. It can be pushed that way. And that’s why the way we handle this is pretty—

Nixon: In other words, your point is that the “leave-it-alone” deal might drive the Europeans together, as against us.

Volcker: The French will try to play it that way, I’m quite sure. Now, of course, against that, you’ve got the fact that Britain and others have, you know, kind of put this forward as their preferred choice, and you say, “[unclear] well, this is your preferred choice for the moment, now let’s get together on the general rules for this system and, and don’t go off by yourself politically and economically in the long run.” You’ve got to play on those forces as against the French kind of forces.

Burns: They put this forward as their preferred choice, either because it is actually their preferred choice, or because they have been going on the assumption, which we have encouraged, that the U.S. is not going to intervene, and they’re just not considering that. They think that’s out of the question.

Volcker: I think there is some evidence that the Germans are less staunch in [unclear] a cooperative role with us than they were. They feel very seriously squeezed between the United States and France. And you’re going to have to deal with the politicians, now in the majority, particularly Schmidt, that are willing to compromise on it much more on the French side, now, than used to be the case.

Nixon: Um-hmm.

Burns: I agree with that.

Shultz: That was something that we have seen, despite the fact that three or four weeks ago, we took the initiative; we did something that bailed them out of a serious political problem they’d gotten themselves into and reconstructed the situation with the devaluation and with the pressure on the Japanese that, on the whole, was a beautiful solution from their standpoint. It was politically—it was designed politically to break up this battle, and it did. They—they see it as very much in their interests, and yet we had—

Burns: [unclear] the—sure, our solution was attuned to their political views. And they recognize that.

Volcker: They do.

[Page 64]

Burns: But, underlying it all, they have come to view the U.S. as a locus of unsettling forces in the monetary world for years; and you can’t rely on the U.S.; and they’ve got to work out their own problems. Now [unclear] to expand a little on what Paul said, I think that there is a fair chance—I don’t know how to evaluate it as a probability—that the Europeans may now move to construct a new monetary system of their own. The French—if the French were in a stronger position than they are, I would bet on that. It’s a little uncertain whether they can carry it off. If they do, here it is, and then the U.S.—well, we—the U.S. can join them if we want to. And our leadership would be gone. Now, I want to talk a little about the, about the politics of this as well as the economics. To me, a floating world is not a good world from—economically.

Nixon: Economic or political?

Burns: Economic.

Nixon: Yeah.

Burns: And I want to talk about the politics of this. And here is the position of the U.S.: we carried off the Smithsonian Agreement. Now, it’s regarded, generally, as a failure that collapsed. We worked out a new arrangement, and now, it’s a failure. Then, the Europeans go off on their own, and we’re on the sidelines. And where they will go, eventually, I don’t know. Now, politically, I think we were in a very weak position. And I—and I must say, I must say, I don’t like it. From an economic viewpoint, you know the—just think of a—think of a Swiss businessman, at the present time, with the Swiss franc possibly depreciating 23 percent against the dollar. Where are they? Now, I must say to you, in all candor, Mr. President, that the—I carried out a survey yesterday, a quick survey of business economists and of businessmen around the country. And, uneasiness—but, the degree of concern that I feel, I have not found among others. That’s true, and you ought to know that. But I want you to know something else. I’ve worked with these businessmen and these business economists for more years than I care to remember. And I have found businessmen and business economists to be very poor, as a group, in judging trends. They’re always late in sensing a situation. And I think this is a negative factor as far as the domestic economy is concerned, and as far as the international economy is concerned. However, current forces in the economy, expansionary forces, are so strong that we probably will be able to take this in stride. But, over the longer run, I would expect deterioration. And, ask yourself this question: how do you get back to a stable system of parities, if this is what you want—and I think we will want that because the experiment is not going to work. The—it’ll cause political frictions; it’ll cause all kinds of controls to spring up. And how do you work back to a system of parities? The, the—here is a given government, [Page 65] who wants to settle on the new parity. It doesn’t know how to settle on the new parity because it doesn’t know what other countries are going to do. The theory just doesn’t work out. On the other hand, the other part of the argument is that we’re halfway there—we’re three-fourths there already, you see, and it may be difficult to shore this thing up. To fight back, to fight back a little more strongly than I [unclear] about the negative influences, I say, let’s go in on a massive scale and take sizable exchange risks. Now, I’m not prepared to recommend that. The only exchange risk that I’m prepared to recommend is risk against devaluation, because of the position you’ve taken. You don’t want another devaluation, you’re not going to take it, I don’t think—

Nixon: [laughs]

Burns: You see? All right, so I don’t—

Nixon: We’ve already crossed that bridge.

Burns: I—so, I don’t think we’re taking much of a risk in terms of dollars. To ensure what we do is to borrow, but we’ll—assuming we have no other devaluation, it’ll not cost us one dollar.

Nixon: Let me ask a question, George and Herb: [pause] suppose that I determine from, not so much a domestic political standpoint, which I think we can handle—it’s tough, but we can handle it—but from an international political standpoint, that we ought to take a, shall we say, a positive leadership role at this time. How would you feel about that? Understand this: if that consideration, which I, of course, would have to judge, that [unclear] as to how it’s going to affect the Germans, the British, the French, you know, a few other people, and the shape of Europe, and how we deal with Europe, et cetera, et cetera, et cetera. Would you still say, “Don’t go [unclear]?”

Shultz: Well, I think you’re in the best position to weigh—

Nixon: [unclear]—

Shultz: —the constellation of factors.

Nixon: Yeah. Well, I understand.

[unclear exchange]

Nixon: I don’t know how—whether that would be the judgment. But I’d just like to know if, as I—as we consider that side of it, how strongly—whether the economic factors, which you’re basing your judgment on, are so strong that we ought to say, “No, we must go the other way.” You see what I mean?

Shultz: Well, I think that then—

Nixon: In other words, could you support the other way in the event that we go the other way. Could you, or, I mean, could—could you make an argument for it? You can—

Stein: Oh, yes, you could make an argument for it—

[Page 66]

Shultz: I reckon what we would say is we think the rates that have been established are approximately right, and we think that this is a speculator disruption based on uncertainty about the ability of governments to defend these rates, and we’re going to show them that we are able—

Nixon: Let me, let me ask: does that—?

Shultz: But that—of course, against that—

Nixon: Yeah?

Shultz: —if we ever said that, is by way of saying, “Well, we give up on the idea of a more flexible system, and we need to have a—”

Nixon: That worries me.

Shultz: I think, I think—

[unclear exchange]

Shultz: —and you have a system that is like the one we had. It has a rigid set of rates that are fixed and defended, and that can work, and it did work quite well, as long as we were a dominant economic power able to assert that and make a go of it. I think that a flexible system can work. We’ve tried to design something that is like a flexible system that has the—some of the reassurances in it of a par value system. I think that could work. I don’t see how we have the muscle to so dominate the situation to make a real fixed rate system of the kind we had in the post-war period, when we were.

Burns: George, the [unclear]—

Shultz: And that is a big consideration on my mind.

Burns: The plan that you advanced at the IMF meeting is a flexible system—7

Shultz: Yes—

[unclear exchange]

Burns: It’s that system the IMF worked hard to achieve.

Shultz: So do I.

Nixon: Good.

Burns: If, therefore—if—

Nixon: But then don’t you think, don’t you, don’t you—wouldn’t you agree, though, that coming in with this massive intervention—well, any kind of intervention at this time—is going to really, very strongly reduce that option?

Burns: Oh, yeah? All right. That’s my suggestion to you, Mr. President. First of all, about the massive intervention: by massive intervention, [Page 67] all that any one of us means is to be prepared to do it. You know, the—in June of last year, we were—we decided we would risk $2 billion. The actual amount that we had to put up was around $30 million. And that was enough to quiet markets because we blew a trumpet, and we indicated we were in the market to achieve stability, and we’ll do it on whatever scale is necessary. Now, if we intervene now, we prepare to do so on a massive scale, if necessary. And if you, at the same time, can get an agreement to go to work on this promptly—not drag this thing out—on permanent reform and try to sew it up within three months, then I think that we would get—you’d have the leadership, and we’d have a good chance of working out a new system which could work over the years. We don’t have to take three years to do this—

Nixon: Yeah. You would disagree with that, wouldn’t you, Herb?

Stein: Well, I think that—I think that a great deal of incentive for the rest of the world to adopt something like the Shultz plan would be lost once we had committed ourselves to this support. And also, I’m not sure whether you’re being offered a—an existent option, as whether there is a kind of “free lunch” here in the form of massive support by us which does not involve any risk to us, because it implies somebody’s going to take the risk; it implies that the Germans, presumably, are going to take the risk of a massive intervention. And I don’t know whether that’s an option that’s available to us; to support, on a massive scale, without taking any risk except one that we voluntarily accommodate—undertake, it’s assumed, by devaluing, which we said we’re not going to do. So, that’s a question that’s in the picture. Also, whether this thing really exists [unclear]—

Burns: Well, I think that’s a fair statement, but there’s only one way to find out, and that’s to talk to other people, which we haven’t done.

Nixon: What do you think?

Volcker: Well, I don’t think there’s any question. I think for intervention to actually work, we really need their enthusiastic desire for this. I don’t think it’s something for us to press upon—

Nixon: Let me ask you, let me ask you: is it—is it really possible to talk to ’em?

Volcker: Well—

[unclear exchange]

Volcker: —you can talk to them—

Nixon: Well, certainly, I would say that on the massive intervention—well, strike the word about massive—on the intervention option, assuming that you might, would the—it wouldn’t make a great deal of sense to do it unless we were pretty confident it was going to work [Page 68] and unless there was, as you put it, enthusiastic support from our European friends on it, because that bears on the political decision.

[unclear exchange]

Nixon: The only purpose of this, unless it’s going to—let, let me—let me be—let me just fold in the political thing. We’re getting into Europe now; we’ll be in it very heavily over the next few months about NATO and MBFR, and all—the European Security Conference. We’re in a watershed period with regard to our relations to Europe. Now, the problem with Europe is that Europe today—and we’ve got to look at their psychology; leave out the economics—the Europeans are terribly frustrated, because the Germans can’t have an international policy; they can only look outward because they have no power. The French are parochial; after they were kicked out of Algeria and Vietnam, they have nothing. The British take the world view only because they’re British and have always thought big, and not just about Europe; they have thought internationally rather than in European terms. But here, but here they are, all of them now forced in a very—a lurch to the Left, also, in all of these countries. The Germans are already socialists, or at least have a soclalist-leaning government. The French may damn well get one this weekend.8 The Italians, of course, are being hit by the socialists. The British would be if they had an election today, but fortunately, their Labour government, the socialists, are so goddamn divided, and Heath is a decent fellow that he stands on.

All right, looking at the mess that’s in Europe, and it is a mess in my opinion, politically they’re concerned about our deal in a month with Russia, which we’re going to have when I—we’re gonna have another meeting with the Russians later this year. The—I’m trying to put the political factors into context here. You have to realize that when the European leaders—oh, like Heath—comes here, he loves to talk about, “Oh, how was your trip to China?” He likes to talk about the Russian arms, what we’re going to do about [unclear] of course he does. And what’s going to happen in the Mideast, and what can we do. But he knows, as he talks to me, that what the British do doesn’t make a damn bit of a difference in the world anymore. It’s too bad, but it’s true. What they do in Europe might, but not in the world. And he knows, too, that even if Europe united—which is, of course, a likelihood 10, 15, 20 years from now—more politically than it is today, that they aren’t going to be a major factor, because they’re never going to have the domestic opinion to have the punch-crunch power in a military sense that will make them a major factor. They know that what really matters is what—today is what the U.S. talks as says to Russia, and 10 years from now what we may say to China, so forth and so on.

[Page 69]

So, put yourself then again in the position of the Europeans. There is a—there is going to be a great tendency for them, now, to turn inward; to—and, frankly, despite all of their nice things they say about the U.S., and all that state business and tipped glasses, and all that stuff, all in all, by all the personal relationships and so forth, there’s a tendency for, for the Europeans to, frankly, become isolationist. Now, this could, this could jeopardize the NATO commitment on their part; block other things. Now, I’m painting a black picture here—

Volcker: Oh, I think it’s [unclear]—

Nixon: —but I think, as I judge the European politicians, except for Heath, every one is a parochial; every damn one. I mean, Brandt doesn’t understand anything. He’s a nice, pleasant face, and all that sort of thing, but he’s a dullard. In terms, except just through Berlin and the rest, he doesn’t understand the world and never will. The Italians did two thousand years ago, and they were finished. [unclear]

Well, anyway, you now come to the point that what stroke do we have with Europe. And, basically, I come down to the fact that when you talk to the Europeans, the major stroke we have today happens to be in this field, you see. Now, if we—it’s very dangerous for us, basically, because we need a Europe that will maintain its military strength and so forth, and its ties to us and not be a pigeon for Soviet and/or socialist deterioration. We need a Europe that will have reasons to be—stay, close to the United States. Now, if—so, therefore, I would have to judge any decision we make here in terms of whether it will be interpreted by Europe as being, “Well, the U.S. doesn’t care.” Now, maybe that can be; maybe it isn’t. So, what I’d like to do is, if you fellows have the time, I’d like for you to run this by—now, not individually; don’t hit him on the blind side; if you get on one side, he’ll get on the other—but, I’d like for him, for Kissinger, to hear these arguments, if we could. I’d like—if you could, if you could—if this group could spend an hour with him, as you did with me, just laying out the options, and I will talk to him in the meantime, because we happen to be discussing Europe this weekend anyway [unclear] because I do not—I don’t—I don’t want to—I—I don’t want to be in a position of making a decision on this which is good economically. I happen to tilt more to the—to George’s view that—on the economic side. I tend to be very doubtful about, frankly, what role the United States can play today, because of the growing economies of the European production rates, but—but I could be wrong and Arthur could be right. So—but, but it’s a matter of degree, because, apparently, we all are working toward the realization of George’s speech at the IMF. But, on the other hand, as all of you can see, sometimes you have to do things economically in the world that will contribute to your political leadership. And it’s that factor—I don’t know, I don’t know, I don’t know whether this is that big or [Page 70] not, but I would like to run it by Kissinger, and I’m going to talk to him.

Volcker: Of course, this is very big in their view. [unclear]—

Nixon: Is it?

Volcker: —political implications, yes. And they—the only thing I think—

Nixon: You see, when you talk to a Finance Minister, George, and you talk to a banker, et cetera, or economist, they will—you’ll get only part of the picture. But we’ve got to—we’ve got to get ’em up here. I’ve got to feel the other side of it, too, as to whether anything we do here—whether, at this point, we’re at a situation, at a place where the Europeans might feel, “Well, we don’t give a damn about—”

[unclear exchange]

Volcker: In terms of the political dynamics—

Nixon: Yeah?

Volcker: —the French are absolutely, critically the toughest. They take views in substance opposed to ours, but their main preoccupation, I’m sure, is a political one: how to—

Nixon: Yeah.

Volcker: How to posture Europe vis-à-vis the United States politically.

Nixon: Sure.

Burns: Mr. President, on the question of intervention, if, let us say, we were to go any such route, there’s only one country that we have to convince.

Nixon: The Germans?

Burns: That’s how [unclear].

Nixon: Because the British will go in any event?

Shultz: Well, the British aren’t—

[unclear exchange]

Nixon: Well, that doesn’t mean anything to them, huh?

Burns: You see, the French will like it [unclear]—

Nixon: Although, although the British would like—I don’t know.

[unclear exchange]

Nixon: How soon do we have to answer Brandt’s letter [unclear]?

Shultz: Well, they’re meeting, their Finance Ministers are meeting tomorrow. [unclear]—

Nixon: How is your fellows’ schedule at the moment? Have you got a little time to extend—to see Kissinger now? And I’ll be available right afterwards if—I don’t know. Or, you all have luncheons, I suppose, and that sort of thing.

[Page 71]

Volcker: When we say “intervention,” I suppose it’s fair to say that virtually everyone thinks intervention have—would have to be surrounded by some other actions: tighten the Eurodollar market, or [unclear] for instance, or get other central banks to remove some money. Maybe we’d want to somehow encourage corporations or others to stop speculating by use of the controls we already have. Those issues are going to arise.

Nixon: Yeah.

Volcker: I just don’t want you to—

Shultz: This is an example of—

[unclear exchange]

Shultz: —can come in, and we—

Nixon: Yeah?

Shultz: —move right back into this business of controlling everybody.

Nixon: Yeah. [unclear]—

Volcker: Oh, I just don’t want to give the impression the Europeans would be happy with this completely naked—with nothing [unclear].


Nixon: Look, you don’t have to spend—spend—just spend thirty minutes, if you could. If I can get Henry, will you take thirty minutes with him if I can get him?

Volcker: Yeah.

[Unclear exchange. Pause as Nixon calls Kissinger.]

Nixon: Henry, we’ve got a major monetary matter we have to, which involves Europe politically. And, I’ve just been over it with the Quadriad here. I’d like for you to spend 30 minutes with them, and we could have an answer to the letter from Brandt. Could you do it now? Think it over. They’ll come over to you. They can come to your office [unclear]—

  1. Source: National Archives, Nixon Presidential Materials, White House Tapes, Oval Office, Conversation 868–8. No classification marking. According to the President’s Daily Diary, Nixon met with Burns, Ash, Stein, Shultz, and Volcker from 10:08 to 11:50 a.m. (Ibid., White House Central Files) The editor transcribed the portion of the conversation printed here specifically for this volume. The transcription is part of a larger conversation, 10:08–11:50 a.m.
  2. Apparently a reference to Document 15.
  3. On March 4, the EEC Finance Ministers met in Brussels.
  4. The Canadian dollar had been floating since June 1970.
  5. Alfred Hayes was the President of the Federal Reserve Bank of New York.
  6. See Document 12.
  7. Burns was referring to Shultz’s September 1972 address to the IMF and World Bank annual meeting; see Document 1.
  8. National elections were held in France on March 4 and 11.