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


  • Foreign Policy Implications of International Economic Situation

The present international monetary crisis, the fourth since December 1971, has serious implications for our foreign policy. The announcement last week of Phase IV2 and the acknowledgment of [Page 184] Federal Reserve Bank intervention3 (still in view of many too little to do the job) strengthened the dollar briefly, but its decline has resumed. Our inability to deal with this situation affects foreign confidence in the United States, threatens trade and monetary negotiations, increasingly casts the U.S. as the villain in European attempts to curtail politically pernicious inflation, and will have serious long-term economic and political implications.

The Monetary Crisis

The monetary crisis—in which the major continental currencies have since February appreciated by an average of 14% vis-à-vis the dollar—reflects not only continuing U.S. balance of payments problems and domestic uncertainties but also a change in the psychology in the international currency market. Multinational corporations, banks, and a number of developing and oil-producing countries have come to believe that in the present monetary turmoil their best interests lie in moving funds into the strongest currencies, which they expect will appreciate in value. Doing so protects their assets from devaluation and provides a good chance for windfall profits. This psychology, to the extent that it has caused a move out of dollars and into such currencies as D marks, has become a self-fulfilling prophecy leading to a depreciation of the dollar and an appreciation of the mark.

The Effect on Europe

The resulting monetary instability has worsened the inflation problem in such countries as Germany, which have had to absorb massive currency inflows. This has complicated German efforts to slow the growth of its money supply as a means of combatting inflation. The appreciation of most European currencies vis-à-vis the dollar has not as yet harmed their trade balances since most of their trade is not with the U.S., and because of lags in the adjustment process. Also, the boom in the U.S. and most other economies has created a continuing high demand for imports and thereby prevented any diminution of European exports resulting from their currency appreciation. The fact that trade has not been affected explains the lack of strong countermeasures against what all agree is an excessive dollar depreciation. Nevertheless, some Europeans, the French in particular, believe that the United States has been given an unfair advantage by the low value of the dollar.

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The Effect on the U.S.

For the United States dollar depreciation has not been an unambiguous blessing. Imports are more expensive because of devaluation, and this contributes to U.S. domestic inflation. The price of oil imports in particular has increased because of successful contract negotiations by producing countries and the direct effects of devaluation. U.S. agricultural products are now selling at bargain international prices creating a greater foreign demand for them and thus contributed to the need for U.S. export controls. The controls themselves have dampened U.S. balance of payments prospects thereby intensifying downward pressure on the dollar, which in turn puts greater pressure on U.S. domestic agricultural supplies. Controls have also limited supplies abroad thereby contributing to inflation in many countries and undercuts our ability to press our legitimate long-term goal of freer access to foreign agricultural markets. On the other hand, after adjustment, a number of U.S. products will benefit from the fact that devaluation has increased foreign demand for our exports. Investment in the U.S. has also become more attractive to foreigners. These factors will help create jobs and reduce unemployment in the U.S.

Longer-Term Implications

In the longer run, the very low value of the dollar will adversely affect our trading partners. Although their trade position has been little damaged so far, cheaper U.S. goods and increased investment in the U.S.—rather than in the domestic economies of these countries—will eventually create more jobs in the U.S. and less job opportunities abroad. Other nations are now attempting to apply restrictions to curtail domestic inflation, the result of which would, under normal circumstances, bring about a slow-down in their economies. Such a foreign-created loss of job opportunities during this period could contribute to recession in their countries and cause some of the blame therefor to be shifted to us. The problem will become more acute as the slow-down in foreign economies becomes pronounced, but the fear is clearly there already.

The outgrowth of this concern by our trading partners is increased pressure, emanating chiefly from France, for Europe to take a harder position vis-à-vis the U.S. in trade and monetary negotiations and to avoid “giving away” any concessions to the U.S. which in their view will soon begin to reap the benefits of a devalued dollar.

This concern has colored relations in a number of policy areas:

  • —In Article 24:6 negotiations the French, and others, have been extremely reluctant to make concessions to the U.S.4 Although today [Page 186] we received information that Jobert had indicated to a high EC official his desire of avoiding a confrontation with the U.S. on this issue, little progress has as yet been made toward a solution.
  • —In discussions on trade negotiations, the French have taken the view that negotiations should not begin until currencies have returned to their rates agreed to by Finance Ministers in February,5 i.e., the over-devalued dollar appreciated by roughly 14% vis-à-vis the European. The other EC members have overruled the French on this, but the French can be counted on to reassert their position even more strongly if the dollar continues to decline.
  • —The U.S. Trade Bill, presently in the Ways and Means Committee, is moving more slowly than expected. This slow pace reflects in part a reluctance by the Congress to give the President a great deal of negotiating flexibility, but also has been influenced by the very unstable international economic climate.
  • —Monetary negotiations being conducted in the Committee of Twenty are going very slowly. No basic agreement will be reached by the IMF annual meeting in Nairobi in September. This slowness results in part from an inability of the major nations to agree, and from the preoccupation of many countries with the dollar’s decline.

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Kissinger Office Files, Box 55, Country Files, Europe, Meeting with French Finance Minister Giscard d’Estaing, July 31, 1973. Secret. Sent for information. Neither Cooper nor Hormats initialed the memorandum, which was included as Tab C in a July 30 briefing memorandum from Sonnenfeldt to Kissinger for Kissinger’s July 31 meeting with Giscard.
  2. See footnote 3, Document 46.
  3. On July 18, the Federal Reserve Board and Treasury Department announced that the Federal Reserve Bank of New York had been intervening in the foreign exchange market to stabilize the value of the dollar since July 10.
  4. See footnote 9, Document 40.
  5. See footnote 2, Document 7.