39. Memorandum From Secretary of the Treasury Shultz to President Nixon1


  • Monetary Discussion with President Pompidou

Dr. Kissinger reports that President Pompidou wishes to stress international monetary matters in your discussions in Iceland. As you know, monetary and trade issues are critical to Mr. Pompidou not just on economic and domestic political grounds, but because he believes them critical to his vision of the role in the world of France, Europe, and the United States. Mr. Pompidou will probably probe for specific and substantive concessions to his monetary views in return for vague and imprecise relaxation of resistance to our diplomatic and defense objectives.

We must be alert to this tactic, particularly since French monetary objectives are in large part designed to undercut the ability of the United States to exert effective leadership in world affairs. The substantive French monetary position—more than that of any other country—is opposed to ours. While there is some recent evidence of growing French isolation in their more extreme views, and possibly those views are in the process of softening, Mr. Pompidou can be expected [Page 139] to press them strongly. Hence, I am outlining in some detail the existing situation and a proposed approach.

General Approach

I recommend that you convey to Mr. Pompidou the impression that you welcome his personal attention to this subject, in the sense that the economic dimension is crucially important in laying the basis for lasting peace. It is imperative at this time for the leaders of the free world to seek better understanding of each other’s positions and provide the political impetus toward equitable and workable monetary reform. In the broadest sense, a well functioning monetary and trading system is necessary to support the common defense effort and Atlantic harmony.

It is desirable that the two Presidents make known publicly their joint determination to achieve success in the scheduled international monetary and trade negotiations. You might privately recognize the particular importance of France and Mr. Pompidou to a successful resolution.2

On the other hand, I think it would be a serious mistake to attempt to settle bilaterally with President Pompidou in Iceland any of the concrete issues in these negotiations. He may have hopes of repeating what he probably regards as his coup in the monetary area in the Azores meeting, but the situation now is markedly different. The issues are now far more complex, and less ripe for decision, than the specific percentage dollar devaluation/gold price change negotiated then.

An agreement with the French is not forced upon us by the pressure of markets, negotiating strategy, or of public opinion. We see no probability for striking a monetary deal satisfactory to President Pompidou on significant issues today that would not undercut our entire position. Moreover, there is no doubt a separate deal with him would cause grave diplomatic and substantive setbacks in our relations with other governments and with the Congress, with whom we have been working closely.3 An appearance of conceding to France in areas where we are publicly known to be opposed would only undermine credibility in other areas.

Mr. Pompidou may well recognize himself that concrete bargains cannot be struck in Iceland, but may nevertheless press hard for inclusion in the communiqué of language emphasizing convertibility and fixed4 exchange rates, arguing in part they are a prerequisite for successful trade negotiations. While these are legitimate subjects for [Page 140] discussion, our effort should be to avoid one-sided emphasis on these elements in an ultimate monetary accord.

I suggest below, in some draft communiqué-type language, some general statements of objectives on which you might usefully seek agreement.

Background and Status of Monetary Negotiation

After the Azores meeting there was some evidence of muted ill-feeling by the other European nations, and after the subsequent Smithsonian meeting there were loud public complaints from many of those governments which were not represented. This was understandable and acceptable in terms of our particular problem at the time. But, bearing these feelings in mind, the United States took the lead in promoting the formation of the Committee of Twenty (C–20), which is composed of representatives of all segments of the free world, and which is now actively under way. The ministerial participants in the C–20 think that they are now conducting the international monetary negotiations, and would react vigorously against any agreement which they felt sought to settle the basic issues without their participation.

The C–20 has not been breaking any speed records, but it has been progressing in a workmanlike fashion. There was a successful minis-terial meeting here in late March and the deputies to the ministers just completed last week a good 5-day working session here in Washington. Another working session and provisionally a key ministerial meeting is scheduled for July. Early in June, I have a non-publicized meeting scheduled with the French, English, and German ministers in France where we can personally assess prospects and options.

In recent discussions there has been considerable progress in terms of recognition that the reformed system must be considerably more flexible, must actively promote adjustment to balance of payments dis-equilibrium, and must move away from “gold domination.” Nevertheless, the French are at the opposite extreme. Moreover, we have not yet faced up to the “gut” decision, either within the United States or internationally, as to whether we can negotiate adequate safeguards and even-handed “adjustment discipline” to make a return to convertibility and par values successful and durable. In that connection, we and some other countries consider a viable alternative is possible—namely, working more largely in the framework of institutionalizing and improving the more flexible “interim” arrangements.

While we have not yet gained acceptance of the comprehensive proposals I presented last year,5 there has been a growing recognition [Page 141] of the intellectual logic of our position. In particular, our basic point that par values and convertibility must be accompanied by firm rules to limit reserve accumulations by surplus countries and to force balance of payments adjustment is more accepted. Nonetheless, it is necessary for us constantly to remind other nations that our offer to return to a convertible system was completely contingent upon development of the system in other respects that would insure adjustment, provide sufficient flexibility, and avoid heavy use of controls.6

In the C–20 meetings recently,7 there has been noticeable progress with respect to the future role of gold in the system. The French and South Africans have been becoming more isolated on this subject, not only from the views of the United States and the less developed countries but also from the views of other members of the European Community. In particular, apart from the French and South Africans, there is now widespread agreement on the objectives of moving to other reserve assets and not setting a new and higher official price. The discussion is focused on how best to reach that objective in a practical way.

A seeming reversal or new emphasis in the U.S. position, for example by our agreement to some statement that seems to suggest the role of gold in the system will not be decisively diminished, would greatly damage the credibility of the entire U.S. position and of U.S. negotiators, not only in the C–20, but also in the Congress and in the public, for our position has been widely publicized. (As you know, both Houses of Congress have indicated their desire to permit private ownership of gold in the United States on the premise of its diminishing monetary role. The only question is whether the legislation which they will enact, probably within the next two weeks, will—as we desire—leave the date for private ownership entirely at your discretion or will set a date at the end of this year or next year, beyond which you would not be empowered to prevent such ownership.)

We feel existing monetary arrangements are best suited for present problems. The foreign exchange markets have been somewhat disturbed in recent weeks in the face of the recent sharp run-up in the private market price of gold, bad news on inflation, and the Watergate.8 But there was no crisis. Instead, there has been widespread recognition (including French officials) that the pressures might have led to another severe crisis had we not had the benefit of the flexible exchange [Page 142] rate arrangements which went into effect several months ago. There have also been many observations that the recent volatility in the gold price provides additional confirmation that gold cannot safely be made the center of the monetary system.

In recent days the dollar has actually strengthened considerably as a result of the release of the new trade figures showing continued sharp improvement in the U.S. trade position.

President Pompidou’s Probable Position

President Pompidou will probably approach the international monetary discussion partly out of doctrinal belief in the discipline of reliance on gold, fixed exchange rates, convertibility, and the necessity to subject international transactions to tight controls. I suspect, however, that his position will be strongly influenced by two other driving forces:

  • —A belief that he could increase the relative stature of France and Europe by cutting down the stature of the dollar and the ability of the United States to undertake international initiatives by imposing on us obligations for convertibility and balance of payments discipline; and
  • —A fear that the EC itself, and the privileged position of French farmers in the EC, is jeopardized by trade negotiations in the agricultural area threatening the CAP.

Under the pressure of these forces, and perhaps with some realization of the French government’s increasing isolation from others in the trade and monetary discussions, President Pompidou probably hopes he can use the meeting with you either to find an excuse to postpone the trade negotiations, limit their scope, or at least establish as a prerequisite a deal to his liking in the monetary area. He is probably realistic enough to know that he can’t accomplish his full objective. For instance, he apparently failed to make any progress on postponing the trade negotiations in his recent discussions with Prime Minister Heath. Nevertheless, we still hear reports of European fears that he may be unrealistic enough to think that he can still bring about delay of the trade negotiations, or sharply reduce the agenda. In gambling on a tough approach with you, President Pompidou may possibly feel that he has a good chance of success, at least in achieving some present “monetary reward” for a promise of future trade negotiations, and/or a conciliatory diplomatic tone, because it will be obvious that international monetary matters are high on his priority list, while he may hope that they are low on your list.

From several European sources, we have heard reports that the French representatives have been saying that now is the time to get tough with the United States in view of the present political distractions here. President Pompidou could try a repeat of the tactic used several times in the past within Europe—even though the attempt was [Page 143] unsuccessful last time—of threatening to veto a joint European summit meeting with you.9

In a seemingly more conciliatory vein, Mr. Pompidou may indicate urgency about, and French willingness to participate in, a large “consolidation” of dollar balances held by foreign central banks. This would entail a conversion of dollar balances into some other international asset (probably SDR’s) which would not be a direct claim on our reserves when and if convertibility is restored. Mr. Pompidou’s interest stems from a conviction such consolidation is a prerequisite to resumption of convertibility. While some form of consolidation will probably be a part of a monetary settlement, the issue raises difficult financial, tactical, and timing considerations that do not lend themselves to resolution at this time.

Although their public statements have shown no great divergence, there is evidence President Pompidou and Minister of Finance Giscard d’Estaing do not see eye-to-eye on international monetary matters. Giscard’s approach would appear to be somewhat more flexible and open. We have been told in the last few days by Giscard’s principal Deputy that he was most reluctant to go along on the Iceland trip, and he is at least able to visualize (as a poor option to him) a monetary agreement that does not re-enthrone gold.

Suggested U.S. Negotiating Strategy

In the light of our expectations of President Pompidou’s probable position, I would recommend that you take the initiative in the sense of displaying great interest in getting him to understand the virtues of the United States proposals, while making it clear that, of course, you expect no agreement on this complex, necessarily multilateral, matter in Iceland. At the same time, you could urge continued high level contact on the subject, and you could even hold out the possibility that further discussions at the Presidential level might be appropriate on some occasion before final agreement is reached on the future international monetary system.

In pursuance of this strategy, I urge that any further preliminary contacts before the meeting, while accepting his suggestion of stress on international monetary matters, hold out no hope of any significant agreement on the subject at this time.

In the actual discussions in Iceland, I suggest you stress the desirability of your understanding each other’s position. In particular, I suggest you urge his recognition of one simple truth; in developing the [Page 144] monetary plan which they have put forward, U.S. officials consciously sought to take French views into account and believe they have come a long way in that direction:

Nothing in the U.S. plan would endanger the Common Market or impede its moves toward monetary union. Indeed, in some ways, the unity of the EC would assist the workability of our proposals.10
The plan proposes no special privileges for the United States, and more effective payments disciplines all around. The U.S. has no desire to run deficits or to avoid payments discipline.11
The plan is consistent with cutting down the heavy use of the dollar as a reserve currency, and calls for equality of responsibilities and privileges among nations.12

At the same time, the French position has fundamentally differed with respect to the related questions of gold and the rigidity of exchange rates and with respect to the wisdom of the widespread use of controls on capital.

As you will recall, presentation of the United States plan was accompanied by a United States offer to restore convertibility to the U.S. dollar if adequate assurance of payments adjustment can be built into the reform and if the reform provides the flexibility which has now come to be widely recognized as necessary. We face the constant danger of being maneuvered into a position of accepting the convertibility obligation without the safeguards. Mr. Pompidou should be reminded of the necessity to view convertibility in the context of a total system.13

In that respect, we hope that France and the U.S. can provide leadership in building a monetary system to prevent crises, foster international trade and investment, and strengthen the Atlantic Alliance. No system will endure, however, unless it assures that balance of payments adjustment will occur and that responsibility for adjustment will be equitably shared. If the system is too rigid, or rests too heavily on government controls, it will break down. It would be a serious mistake to reach an agreement for the short-run appearance of political harmony if the agreement did not make sense economically and quickly collapsed.

On the specific issue of consolidation, you might respond to his initiative by agreeing that the subject is relevant, and ask the respective Finance Ministers to consider the matter more fully in the period ahead.

[Page 145]

Finally, I suggest that the two of you seek agreement on some general language, such as that suggested below, for inclusion in a communiqué to be issued after your discussions.

In your discussions, I suggest that it would be helpful for you to make reference to President Pompidou that a number of European Ministers and I have already scheduled a meeting during my trip to Paris in the first week of June.

Possible Statement for Inclusion in a Communiqué

“The two leaders reaffirmed the commitment of their governments to strive for timely agreement in the far-reaching multi-lateral negotiations now under way to develop firm and clear rules for a reformed international monetary system. They agreed that these rules should apply equitably and evenhandedly to all nations and regional groups. In this context, they emphasized international economic collaboration and harmony required effective disciplines to maintain payments equilibrium and exchange rate stability, while also recognizing that the system must have the flexibility to respond to changing economic circumstances.”14

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 949, VIP Visits, Pompidou/Nixon Mtg., Iceland, May–June 1973. No classification marking. The memorandum is included in President Nixon’s Iceland meeting briefing book. A notation at the beginning of the briefing book indicates Nixon saw it. Copies of the memorandum were sent to Kissinger and Rogers. Rogers, Flanigan, and Kissinger also wrote briefing memoranda for the President on monetary and trade issues for Nixon’s meeting with President Pompidou, but none of them explores these issues in as forceful or concentrated a manner as does Shultz’s. (Ibid., Pompidou/Nixon Mtg Iceland PM Johanneson, May 31–June 1973 [1 of 3])
  2. President Nixon highlighted this paragraph.
  3. President Nixon underlined this sentence, beginning with “separate deal with him.”
  4. President Nixon underlined the portion of this sentence that reads: “for inclusion in the communiqué of language emphasizing convertibility and fixed.”
  5. A reference to the plan Shultz put forward at the IMF and World Bank annual meeting in September 1972; see Document 1.
  6. President Nixon underlined this sentence, beginning with “constantly to remind.”
  7. The C–20 Deputies met in Washington May 21–25.
  8. In May 1973, the Senate committee investigating allegations of abuse of power by the Nixon administration, popularly known as “Watergate” after the June 1972 break-in at the Democratic National Committee’s headquarters at the Watergate Hotel in Washington, began its public hearings.
  9. President Nixon underlined the portions of this paragraph that read: “is the time to get tough with the United States in view of the present political distractions here” and “threatening to veto a joint European summit meeting with you.”
  10. President Nixon underlined the majority of this paragraph.
  11. President Nixon underlined the first clause of the first sentence of this paragraph.
  12. President Nixon underlined the majority of this paragraph.
  13. President Nixon highlighted the majority of this paragraph.
  14. On May 29, Sonnenfeldt sent Kissinger a memorandum summarizing Shultz’s memorandum, which Sonnenfeldt criticized for its “atmosphere of confrontation and a seeming assumption that the basic relationship is one between adversaries or at least rivals.” While Sonnenfeldt agreed that the United States should not make “monetary concessions simply in return for French readiness to participate in the Atlantic project” or collude with France against the rest of the C–20, he asserted: “I think it is central to the conception of our European policy and to the game plan that we have been gradually evolving that we work with the French. At some point, not Iceland, therefore, the two main antagonists are going to have to talk to each other and see if compromises can be worked out. Isolating and confronting the French may be a sound strategy to help us get to that point, but it cannot be an end in itself.” (National Archives, Nixon Presidential Materials, NSC Files, Box 949, VIP Visits, Pompidou/Nixon Mtg Iceland PM Johanneson May 31–June 1973 [3 of 3]) Cooper also wrote a memorandum to Kissinger on May 29, which focused on the subject of Shultz’s memorandum. Like Sonnenfeldt, Cooper was concerned about its “somewhat contentious” tone and suggested that it could prove “very counter-productive” in the field of trade. Cooper suggested that Kissinger continue to allay French concerns about the possible imposition of uncooperative U.S. foreign economic policies. (Ibid., Pompidou/Nixon Mtg., Iceland, May–June 1973)