Foreign Relations of the United States, 1969–1976, Volume III, Foreign Economic Policy; International Monetary Policy, 1969–1972

123. Action Memorandum From the President’s Assistant for National Security Affairs (Kissinger) to President Nixon¹

Washington, May 2, 1969.

SUBJECT

• U.S. Policy Toward the Present European Currency Situation

The attached memorandum from Secretary Kennedy summarizes the European monetary situation and suggests a possible course of US action.

Speculation on a revaluation of the German mark has increased tremendously in the past two days, in response to statements by Strauss openly raising the possibility of an early German move “in a period of calm, and in company with other countries”.² Renewed speculation on a French devaluation has resulted from the exit of De Gaulle plus the expected DM revaluation. The main danger, however, is that both events—which are probably inevitable—will not occur soon enough to prevent a massive run on the British pound, which could force the UK to abandon its fixed exchange rate, devalue by a sizable amount, and/or apply import restrictions.

The direct economic effect on the US of any or all of these changes would be small and certainly manageable. A major problem for us would arise only if a forced British move disrupted confidence in the functioning of the entire international monetary system, which could lead to efforts by foreign monetary authorities to convert their dollar reserves into US gold. A failure of the three main foreign governments to respond responsively to the situation could, in the extreme, generate widespread financial chaos with deleterious political and economic effects on the US. (The economic effect would be much more serious in all other countries than in the US. However, the plain fact is that only the US will take responsibility for the functioning of the entire system.)

Secretary Kennedy proposes that we encourage the Germans and French to change their exchange rates as soon as possible and by appropriate amounts. The amount cited in the Treasury memorandum—a move of 10 percent by each—is about right. It would be desirable for the Germans to revalue by a bit more, but it would be undesirable for the French to devalue by very much more.

Secretary Kennedy’s memorandum recommends only that we try to energize the French and Germans to reach bilateral agreement on the questions, and asks for approval to indicate your support for the approach.

I will not dispute the economic analysis involved in making this recommendation. The basic issue is how close Western Europe is to a financial panic. But any move toward French devaluation and German revaluation will be extremely difficult politically for both countries.

In my judgment Strauss would not have publicly mentioned revaluation (before discussing it with the Chancellor) if he were willing to move quickly. Furthermore, it is highly doubtful that France will devalue one or two weeks after De Gaulle unless forced to do so by a financial panic. A basic question is who would make the decision: Couve would not reverse his mentor and Poher’s position is clearly not sufficiently strong. And neither Germany nor France will act in order to save Britain. The threat to Britain and ultimately the U. S. could thus develop as outlined above. (I have checked my political judgments with the State Department, which agrees.)

If massive speculation becomes a virtual certainty, it may become necessary for us to weigh in with an effort to convince the Germans and/or French to move in order to avoid the major risk already cited, despite the political risks of so doing. Such an effort might require your personal involvement. Our main pressure would probably have to be applied to Germany, and the offset negotiations which began yesterday would provide an opportunity to give them something in return.³ (NSDM 12 has already directed that we indicate to Germany our willingness to broaden our offset negotiations in future years to include overall monetary cooperation, and you asked to review this year’s negotiations for the possibility of doing so sooner. The timing may prove to be extremely fortuitous.)

But such a U.S. effort would have highly sensitive foreign policy implications—since we would in essence be trying to get other countries to change their exchange rates—and the politics of any move to do so should be considered extremely carefully before you decide to pursue it. Until it is clear that we face a major crisis, we should keep our profile as low as possible, since any major U.S. involvement—no matter what its purpose—would almost inevitably be used by the French left as an example of U.S. involvement in France’s internal affairs.

Recommendations⁴

1. That you authorize a low-key effort to encourage the French and Germans to get together to work out a solution, without, however, trying to tell them what that solution should be or using your name explicitly.

2. That you direct Secretary Kennedy, that if your low-key approach fails, he must come back to you for explicit approval before taking further steps.

3. That you direct him to develop a contingency plan for use if a crisis were to develop and further U. S. action were needed, and assure him of your personal intervention if and when needed.

Attachment

Washington, May 1, 1969.

Memorandum From Secretary of the Treasury Kennedy to President Nixon ⁵

The unsettling effects of the French election on the exchange markets were greatly aggravated yesterday by statements of German Finance Minister Strauss openly raising the possibility of an early German revaluation. While the May Day holiday on the Continent is providing limited respite today, it now seems likely that speculation will gather force until the anticipated revaluation (and French devaluation) takes place. The main danger is that, unless the impasse is broken shortly, there may be a forced devaluation of the British pound, posing a clear risk of a series of other devaluations at the expense of the dollar and exchange stability generally.

This potential crisis comes at a time when intensive conversations with the British and Germans give us a clear sense of their own objectives and possible actions.⁶ On the other hand, contact with the French Government has been circumscribed by their transition and the difficulty of identifying those currently most influential in this area.

We are initiating contacts with all the principal parties against the background of the following objectives:

1. The German mark should be revalued by 10 percent. The French franc should be devalued by 10 percent. The Netherlands guilder and Swiss franc should be revalued (by lesser amounts), if possible, recognizing this probably cannot be achieved before German action.

2. The French-German action should take place as early as this weekend, or as soon as possible thereafter.

3. The British pound should hold at its present parity.

Our contacts would be directed at energizing the main parties at interest—the French and Germans—to reach a bilateral accommodation on these lines.

The main stumbling blocks are (1) German insistence heretofore that their revaluation must not be in isolation, (2) French paralysis during the transition, and (3) the unwillingness of the Dutch or Swiss to “make company” for the Germans at this time. As part of our effort to meet German resistance, we would indicate to them our willingness to accept a relatively “soft” military offset, along the lines of their present proposal. We have also initiated other contacts with finance ministers and central banks. However, it would be desirable if we could indicate your personal knowledge and support of this approach. While we hope it will not be necessary, we also hope we could count on your personal intervention, if required at a critical point.

This approach has been discussed with and is supported by the State Department, the Federal Reserve, and the Council of Economic Advisers.

David M. Kennedy

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 289, Treasury, Volume 1. Secret. A stamped notation on the memorandum reads: “The President has seen,” and the President wrote: “Excellent analysis.”
2. Strauss’ statements were not further identified.
3. See Document 18.
4. There is no indication the President approved or disapproved these recommendations.
5. Secret. Volcker, Bergsten, Samuels, Houthakker, Daane, and Cooper discussed the substance of this memorandum on May 1. (Note to Willis; Washington National Records Center, Department of the Treasury, Deputy to the Assistant Secretary for International Affairs: FRC 56 83 26, Contingency Planning, Current Problems and Contingency Planning 4-10/69)
6. See Document 122 for a record of talks with British officials. Otmar Emminger and Johann Schoellhorn, accompanied by Ambassador Pauls, met with Secretary Kennedy and Under Secretary Volcker on April 19. A memorandum of their conversation is in the Washington National Records Center, Department of the Treasury, Secretary’s Memos/Correspondence: FRC 56 74 7, Memcons 1969. Kennedy met with Emminger and Schoellhorn again on April 29; see footnote 5, Document 122.