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

46. Memorandum From Charles Cooper of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)¹

Washington, July 11, 1973.

SUBJECT

• The Foreign Policy Importance of International Monetary Intervention

The Problem

We are well into the first full-scale currency crisis since the monetary system went on a modified floating basis last March. The result has been a gross misalignment of currency values. The value of the dollar has fallen drastically. European exchange rates have appreciated by as much as ten percent above the rates decided on in March. The implications of this are:

• —Europeans, citing the major competitive advantage provided the US as the result of the decline of the dollar, are expressing low-key reluctance to engage the US in trade talks. When such talks begin Europe will be extremely reluctant to make concessions in key areas.
• —The prospects for an international monetary system based on exchange rate flexibility have been weakened as the result of the instability which has characterized the present float.
• —To prevent their currencies from further appreciating vis-à-vis the dollar, European nations have given warnings that they might turn toward exchange controls.
• —The sharp decline in the value of the dollar has made US exports unusually competitive, which has contributed to the sharply increased foreign demand on US commodities and thereby to the need for export controls.² Conversely, this had led to a rapid increase in imports into other countries, thereby causing some to consider erecting new import barriers.

The Case for Intervention

We are now facing a problem based on a crisis in confidence in the political will of the US to act constructively, which the exchange markets have translated into a lack of confidence in the dollar. The apparent lack of US efforts to curtail inflation, or to defend the dollar, make speculating against the dollar a good bet and reduce the risk in doing so. This lack of confidence has prevented the equilibrating international market forces, which normally would take hold at this point from strengthening the dollar.

There are at present two schools of thought regarding what to do—noninterventionists and interventionists. While conceding that carefully timed intervention might correct exchange rate misalignments, the non-inteventionists, who prefer allowing the market to resolve the problem, point out that when a crisis of confidence becomes acute, as this crisis clearly is, there is no “easy way” out. Until confidence is bolstered by some improvement in either the fundamental causes of dollar weakness—i.e., our balance of payments deficit and domestic inflation—or in the more recent factors which exacerbate that weakness—Watergate and export controls—intervention would not succeed in strengthening the dollar. Moreover, if intervention were attempted and failed, lack of confidence would worsen and the situation would become less manageable.

Although there is some merit in the non-interventionist position, it seems clear to me that now is the time to intervene. My reasons for believing such intervention necessary are:

• —At this point speculators can be reasonably certain that by speculating against the dollar in favor of stronger currencies they can only gain; the very fact that intervention would take place would inject a downside risk. Indeed the mere rumor of possible intervention has contributed to a recent strengthening of the dollar. Intervention would encourage market forces that the downward drift of the dollar had come to an end, thereby providing some incentive for them to purchase dollars in the hopes that it would strengthen. This in turn would contribute to its strengthening.
• —The very fact that the US intervened would demonstrate our desire to help alleviate what has for Europe become a major economic problem and (because it has contributed to European inflation and placed stress on cooperative European monetary arrangements) a major political embarrassment.
• —This evidence of cooperation would strengthen the hand of those in Europe who oppose unilateral measures to restrict imports from the US and erect capital controls.
• —Successful intervention would decrease the need for US export controls.
• —It would convince nations that under a flexible system (which some countries fear would entail their loss of control over their exchange rates) actions can be taken to insure that rates do not remain in prolonged misalignment.

Implementation

To deal with the political and economic lack of confidence, we should at this point intervene to buy dollars without committing ourselves to maintain exchange rates at their current levels and without committing ourselves to any specific level of intervention. We would do so in cooperation with similar efforts by other major financial powers. The financing of this intervention could be accomplished through swap agreements (in which we borrow strong currencies such as marks, francs, or guilders and utilize them to buy dollars) or through gold sales in the free market. (My personal recommendation would be to sell US official gold on the free market up to a limit of, say, $1 billion, in addition to activating swaps.) Associating our intervention with Phase IV³ would give us a double-barrelled gain: demonstrating that we are prepared to act decisively both to support the dollar directly and to combat US inflation which is the basic economic factor underlying the present weakness of the dollar.

In order to get the foreign policy benefit we want from such intervention, we should privately consult with and seek the cooperation of key European officials, particularly the French and the Germans. In these consultations, we should stress that by taking action to strengthen the dollar we hope to provide a positive setting for progress in international monetary reform and trade negotiations. If we are successful in arranging an internationally agreed intervention effort in support of the dollar, we will have moved in a practical and tangible way to demonstrate that there is real meaning in our words about the Year of Europe. No other area of mutual interest this summer furnishes the same opportunity.

Recommendation

That you sign the memorandum to George Shultz at Tab A.⁴

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 290, Agency Files, U.S. Treasury, Vol. III, Jan. 1972–Sept. 18, 1973. Confidential.
2. On June 27, the Nixon administration instituted a temporary embargo on soybean and cotonseed exports. On July 2, it lifted the embargo, replacing it with controls on exports; at the same time, the administration also instituted restrictions on scrap metal exports. On July 5, the administration restricted the export of an additional 41 agricultural goods. (The New York Times, June 28, July 3, and July 6, 1973)
3. Phase IV of President Nixon’s Economic Stabilization Program was introduced on July 18. For the text of the President’s announcement of Phase IV, see Public Papers: Nixon, 1973, pp. 647–653.
4. Attached but not printed. There is no indication that Kissinger signed the memorandum, which summarizes Cooper’s arguments and asserts that the “continuation of what appears to be U.S. indifference towards the recent sharp decline and current under-valuation of the dollar will jeopardize our basic foreign and economic policy interests in Europe this year.” The memorandum proposed that “we should inform key European leaders that we are now prepared to take action in support of the dollar and to seek their counsel and cooperation in implementing such a policy” and requested an early meeting with Shultz to discuss the matter. Despite the return of relative calm to foreign exchange markets on July 11, occasioned by the Federal Reserve Board’s July 10 announcement that the value of its swap arrangements with its partner central banks had been increased by more than $6 billion, Cooper continued to press Kissinger, counseling him in a July 13 briefing memorandum to urge Shultz to support the dollar in cooperation with the Europeans. (National Archives, Nixon Presidential Materials, NSC Files, Box 290, Agency Files, U.S. Treasury, Vol. III, Jan. 1972–Sept. 18, 1973)