32. Backchannel Message From Helmut Sonnenfeldt of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)1

8. George Shultz would like you to read following message from Volcker urgently in light of message you had asked me to convey to Shultz in our last conversation Saturday.2

Shultz wants to call you to get your reaction and judgement sometime after our arrival in Bonn Wednesday 14 March 1610 hours local Bonn time.

Shultz also wants you to be aware that he is seeing Brandt, Pompidou and Heath on Thursday, Friday and Monday,3 respectively. Your reaction to Volcker message will [be] relevant to those meetings.

Bill Simon at Treasury can provide you with technical advice on Volcker message, if necessary. Begin message from Volcker:

To: Immediate Moscow.

For Secretary of Treasury Shultz (eyes only)

From Paul A Volcker, Brussels 003

On basis of Deputies meeting,4 group clearly has little or nothing to offer at this stage on “set of mechanisms to ensure orderly system of exchange rates.” Specifically, there was a general impression [Page 121] that control of Eurodollar liquidity or central bank placement problem5 was not susceptible to practical short-term action unless the U.S. itself would be willing to take dramatic action entailing payment of attractive rates to foreign central banks—an approach I excluded. There was no real expectation or optimism on European side concerning U.S. controls.
In light of above, even more importance attaches to some gesture on intervention in minds of Europeans, although there is substantial disagreement as to wisdom of various conceivable tactics in that respect. This disagreement ranges all the way from some feeling that intervention signal could be counterproductively misinterpreted by market, to French view that general guidelines should be agreed with EC before Friday. Majority opinion probably lies in between; i.e., statement of principle should be made, to be worked out flexibly in light of emerging market situation. This course would hopefully require very little intervention in the event. There was recognition by several that large and early intervention could well be counter productive.
Situation is further complicated if German theorizing correct that pressures likely to develop in form of French franc, rather than DM, pressing on upper ceiling of snake. This was apparently major element in German revaluation decision.6 While I personally feel that strategy may backfire on the Germans, we cannot exclude real possibility that, in terms of any market operation, we will be under strong pressure to deal in French francs first, with all the negotiating complications that implies.
Plainly, if we are to be prepared for Friday meeting,7 we will need decision in principle on intervention very shortly after your [Page 122] arrival in Bonn. Present plan is that Coombs8 explore terms, with no commitment, in Frankfurt on Wednesday along lines of Burns’ thinking. However, I am doubtful, to the point of incredulity, that other EC countries, and particularly French, would find those terms in pure form acceptable. Moreover, we will be heavily pressed to explore question with other EC countries and most notably French, by Thursday evening, in preparation for Friday meeting.
One element in negotiating situation will be commitment to avoid premature appreciation of dollar when market turns. I suspect manner and approach of EC may be to hold this commitment hostage to satisfactory resolution of intervention question.
Almost inevitably, intervention on our part with appreciating European currencies will contribute to viability of the snake. By retaining flexibility and particularly refusing intervention in a particular currency at a particular time we can retain very substantial leverage in this respect. The question is whether we would or could practically use that leverage without political repercussion.
Given paucity of other practicable approaches, I am convinced that early domestic package, in line with domestic needs, remains of critical importance both in terms of assuring smooth transition to floating world and as gesture others can interpret as cooperative. I would, of course, also be ready to cross intervention bridge, despite complications, so long as we retain maximum flexibility as to use and meet our basic objectives as to terms. This, combined with stronger approach toward consolidation and/or funding and toward Eurodollar market as part of intensified long-term reform effort may be enough.
Expect to be in Bonn early Wednesday afternoon.
Report of Deputies meeting follows by State cable.

End of message from Volcker.

Secretary Shultz advises that telephone contact will be made with

Dr. Kissinger upon arrival in Bonn at approx. 1610 hours or thereafter (Bonn time) regarding contained message.

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 424, Backchannel Files, Backchannel Messages—Europe—1973. Secret; Immediate; Very Urgent. Received at the White House on March 14 at 0113Z.
  2. March 10. The message was not further identified.
  3. March 15, 16, and 19.
  4. On March 9, G–10 financial representatives, as well as representatives from Denmark, Ireland, Luxembourg, Switzerland (as an observer), the IMF, the OECD, the BIS, and the European Commission, met at the Ministerial level in Paris to discuss the monetary crisis. Shultz, Burns, and Volcker represented the United States. At the end of the meeting, the Ministers issued a communiqué that reads in part: “They agreed that the crisis was due to speculative movements of funds. They also agreed that the existing relationships between parities and central rates, following the recent realignment, correspond, in their view, to the economic requirements and that these relationships will make an effective monetary contribution to a better balance of international payments. In these circumstances, they unanimously expressed their determination to ensure jointly an orderly exchange-rate system.” The Ministers instructed their Deputies to prepare a study on how such a system might be effected. The study was to be completed by March 16, when the Ministers would reconvene. (National Archives, RG 56, Office of the Under Secretary of the Treasury, Files of Under Secretary Volcker, 1969–1974, Accession 56–79–15, Box 2, G–10, EPC, WP–3 (General) The text of the communiqué is also printed in The New York Times, March 10, 1973, p. 46. See also Document 35.
  5. During the 1960s, offshore financial institutions were increasingly regarded as an attractive destination for dollars held outside the United States. As dollar deposits in such institutions (known as “Eurodollars”) increased, the level of international liquidity also increased, as these Eurodollar deposits were converted into loans. Foreign central banks were an important source of these Eurodollar deposits. The “central bank placement problem” refers to the effects on international liquidity that resulted from foreign central banks placing large sums of dollars into Euromarkets. (Robert Solomon, The International Monetary System, 1945–1976, pp. 177–178; John Williamson, The Failure of World Monetary Reform, 1971–74, pp. 156–157)
  6. On March 11, six members of the EEC—Belgium, Denmark, the Federal Republic of Germany, France, the Netherlands, and Luxembourg—announced that after March 16 the values of their currencies would jointly float vis-à-vis the value of all other currencies, while remaining relatively fixed vis-à-vis one another. That is, their currencies would form a “snake,” whose value in relation to non-snake currencies would be determined by market forces. The Federal Republic of Germany also announced that it would revalue the mark within the snake by 3 percent.
  7. The G–10 meeting in Paris; see Document 35.
  8. Apparently a reference to Charles A. Coombs, Senior Vice President of the Federal Reserve Bank of New York.