Foreign Relations of the United States, 1964–1968, Volume VIII, International Monetary and Trade Policy

221. Memorandum for the Record¹

Washington, November 23, 1968, 1 p.m.

Meeting with the President 1:00 p.m., November 23, 1968: Secretary Fowler’s briefing on the International Monetary Crisis (Secretaries Fowler, Rusk, and Clifford, Under Secretary Deming, Federal Reserve Chairman Martin, Robert Murphy, Walt Rostow, Ed Fried, George Christian)

The President asked Secretary Fowler to report on his mission. He said that he would like then to explore the monetary and any other implications arising from the crisis. He welcomed Murphy to the meeting saying that he was happy he had agreed to help us and his country in the transition process.

Secretary Fowler said he would like to begin by outlining the position he had taken at the start of his mission two weeks earlier and how it had ended up. This is what he had told Chancellor Jenkins in London on November 10 when they discussed contingency plans in the event of a franc crisis:

• —It was essential that any change in parities take place in a multilateral setting. The United States was not prepared to take any further disadvantages as a result of parity changes by others.
• —The best thing now would be a period of calm. This would provide time: for the new U.S. Administration to get into place and to see how the U.S. program was working out; to see how the UK program worked out; and to see how the French program worked out.
• —As we see it, the areas of possible change were the following:

  (a) A revaluation of the D mark. This would have disadvantages as a stimulus to flight capital movements, such as occurred in 1961. But over the longer term it would clearly help the system with immediate advantages to the pound, the franc and the dollar. It could take place alone or accompanied by the revaluation of other strong currencies—notably the lira and the guilder.

  (b) The devaluation of the franc.

  (c) A combination of a DM revaluation and a franc devaluation.

• —A revaluation of the D mark would have clear net advantages and could take the pressure off the franc and the pound. If the size of the move was credible and it was decisively made, it should be viewed as a substitute for any franc devaluation. Nevertheless, we would not push for it now because another period of indecision and leaks in Germany would be destabilizing to the system.
• —A unilateral French move had to be avoided. It is not justified on economic grounds and it could quickly lead to an impossible position for sterling and thus threaten to blow up the entire system. We are prepared to help France to work through her problems, but we are not prepared to accept a unilateral French devaluation.
• —If the French say they are going to unilaterally devalue, we must insist that the Germans call a G–10 meeting immediately.
• —If the Germans and the French work out a deal between themselves we would also insist that it be discussed multilaterally. Changes in rates are our affair as well as those of the specific countries involved.

Secretary Fowler went on to say that our position on a change in parities at the present time changed during the course of the NATO meetings.² Statements by German officials about the possibility of a mark revaluation created growing uncertainty in the markets and were a cause of very substantial French and British losses. By the weekend these losses were indicating the onset of a panic.

At the weekend the Central Bankers met in Basle. There was open discussion of a change in rates. The French representative said that the French would devalue by at least 15 percent. The Germans were talking about a mark revaluation. But in fact nothing happened after the weekend meeting and uncertainty grew.

Against this background, Secretary Fowler said that he greatly welcomed the President’s instruction when he reached Bonn on the night of November 18 to meet with Chancellor Kiesinger and propose a multilateral discussion of the problem.³ He felt that by that time such a meeting was essential to avoid the serious risk of a breakdown in the entire system.

Secretary Fowler said that he would not go over the developments during the meeting or the results of the meeting since these had been summarized fully in his reporting, and he knew the President had been fully briefed. He did want to point out one intervention he had made during the course of the meeting, when German Minister Schiller, as Chairman, complained that everyone said that they wanted multilateral decisions but in fact the only thing they seemed to want was a unilateral decision by Germany to revalue:

In reply Fowler had made the following points:⁴

• —We had not said that the German proposal was bad but merely that it was inadequate.
• —Nor did we believe that only the Germans should act. Others also should take measures that would help in this situation.
• —We welcomed the German move both for its substance and for the innovation it marked in balance of payments adjustment practices. We would welcome it more if it were larger.
• —We saw no reason for other parity changes but we would not resist one if it were moderate and if others agreed it were necessary.
• —We welcomed border tax adjustments by other surplus countries.
• —We were prepared to participate in any multilateral solution by participating fully in any credit package for countries under pressure.

Secretary Fowler listed our objectives as follows:

1. The meeting was called with our full support because we believed the decisions had to be multilateral.

2. We made clear that the U.S. was not prepared to suffer further disadvantages to its position as a result of devaluations of other countries. It is true that a country changing its parity had to get IMF approval, but this was a pro forma procedure. We made clear at this meeting that we would oppose a devaluation of a major currency if it was not considered in advance to be appropriate by the assembled group of major financial countries and if careful consideration was not given to offsetting actions by other countries.

3. We consistently made the point that the U.S. under the present rules cannot change its own parity. Therefore, we were not to be put in a constantly worsening position as a result of parity changes by others. We had to be parties to considerations of such changes. Fowler was confident that the other participants at the meeting were fully conscious of what we were trying to do. He read a note Minister Benson of Canada had written to him after the meeting in which Benson said that a precedent had now been clearly set and that he was sure that there never again would be a change in parity of a major currency without a meeting of this sort.

The President asked Secretary Fowler what he thought the French would do. Fowler said there were two general possibilities. First, a simple rate adjustment of something less than 11.11 percent. Second, no devaluation at all but presumably some trade measures. He said that the French had given an absolute guarantee that they would not go above 11.11 percent but beyond that had left their options open.

As far as the effect of these changes on our own trade, Fowler said our estimates suggested that the disadvantages we might suffer from the UK import measures and possible French moves would probably be offset by the trade advantages we would receive from the German action on border tax adjustments.

On the political side, he believed that considerable bitterness had developed during the meeting:

• —The conflicting German announcements before the meeting had unsettled the markets and put pressure on the French franc.
• —The French had acted badly in the tactics they used to put pressure on the Germans.
• —The Wilson letter to Kiesinger had infuriated the Germans. Jenkins’ strong words at the meeting created bitterness between the Germans and the British.
• —On the whole he did not think that U.S.-German relations had been appreciably affected.
• On the military side Fowler said that Strauss had strongly defended the German position and the need for large German trade surplus; among other reasons, because of the need to provide offsets for the $900 million of U.S. military expenditures in Germany.⁵ Fowler somewhat banteringly had reminded Strauss of this point after the meeting and said that we would keep it in mind in our future negotiations.

At this point in the meeting with the President the news came that the French had decided they would not change the parity of the franc. After some brief comments, the President suggested that the Group continue the discussion at lunch.

The President asked again about the political implications of what has happened. It was the general view that the de Gaulle decision was in part politically motivated and a response to the hard-headed German tactics at Bonn.

The President then asked the economic implications of the French move. Rostow pointed out that it probably presaged trade measures as a substitute for a change in the rate and that we had given a great deal of thought to the possibility of using such measures as a way of helping countries get out of temporary balance of payments difficulties.

Fowler pointed out again that we had consistently taken the position that no change in the French rate was necessary on economic grounds and that if market expectations could be overcome this would be the best solution both from the French and from our own point of view.

The President asked whether there was anything we should do at the present time. The general view was that we now had to wait on the specifics of the French measures and then take whatever actions were necessary in light of these measures.

The President asked Bill Martin whether he thought the French should have devalued. Martin said he thought they should have as long as it had gone this far. Fried said there was no reason why trade measures could not substitute for a rate move as long as the other countries showed they continued to back the French position. Deming and others pointed out that neither the credit package nor the German trade measures are dependent on the French devaluation. It was clear that the French had the option not to move at all. The only thing they guaranteed was that if they moved they would not move beyond 11 percent.

[Here follows discussion of the budget and the surtax.]

1. Source: Johnson Library, National Security File, Subject File, Monetary Crisis, November 1968, Cables and Memos, Vol. 1 [1 of 2], Box 22. Secret. Drafted by Fried on November 26. A transcript of a tape recording of this meeting, which provides additional detail and context, indicates that the meeting was held in the Cabinet Room of the White House. Unlike the memorandum printed here, the time of the meeting given on this transcript is 1:25 to 1:53 p.m. It begins at the outset of the meeting and concludes when the participants go to lunch. (Johnson Library, Transcripts of Meetings in the Cabinet Room) Notes of the same meeting, which were probably derived from the same tape recording and which cover only approximately the first half of the discussion, are labeled “President Johnson’s Notes …,” but more likely they were notes prepared for him. (Ibid.)
2. The North Atlantic Council, attended by Foreign, Defense, and Finance Ministers, met in Brussels November 15–16.
3. See Document 209.
4. Fowler covered these issues in his response to Schiller at the first November 20 meeting; see Document 214.
5. See Document 216.