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

130. Memorandum From Secretary of the Treasury Kennedy to President Nixon¹

Washington, June 23, 1969.

I am transmitting herewith a memorandum (Annex I) prepared by an interagency group under the chairmanship of Under Secretary Volcker, setting forth your basic options in international monetary affairs.² The complexity of the issue will require some extended discussion. It may be useful to highlight a few points on which early guidance will be particularly useful.

The document suggests three major alternatives, which are discussed in paragraphs 25 to 50, and summarized in Attachment A.

The principal question for decision arising here is whether we should conclusively rule out any option at this stage.

Assuming that for the present Option I (a series of multilateral negotiations pointing toward a fundamental, but evolutionary change in the existing system) is to be pursued, these negotiating issues either will or may be faced in days or weeks:

(a) The SDR question: negotiations are beginning on June 27, and we should reach a decision on the amounts that we should propose to be activated for the first five-year period.

(b) The question of adjustment of exchange rates may be precipitated at any time by a French move; we need guidance on the extent to which we might bring political pressure on one party or another to achieve the desired result.

(c) A speculative crisis may at any time require additional credit support for the pound, to prevent a further depreciation; Europeans are very reluctant to go further, and additional extension of Federal Reserve short-term credit may ultimately require Congressional funding. What is our attitude?

What should our public posture be on proposals for limited exchange rate flexibility and how is it to be timed and handled?

These issues are discussed in paragraphs 51 to 65 of the attached memorandum.

Also, paragraphs 62 to 65 allude to the fact that payments of gold to the IMF in 1969-71, partly in connection with quota increases, and “nibbling” gold sales to central banks could possibly reduce our gold reserves as low as $8 billion. It is important for negotiating purposes to know whether this prospect is acceptable.

While I hope you will be able to read the memorandum to get the full flavor, I thought it would be useful if we started the meeting on Thursday³ by having Under Secretary Volcker review the main points orally, with the assistance of some charts, before proceeding with the general discussion.

I know you are aware of the sensitivity of some of the material included here, and we have safeguarded copies accordingly.⁴ Subject to your approval, I believe that the attendance should be kept very limited. The following are now expected to attend:

The Secretary of State

Federal Reserve Chairman Martin

Dr. Arthur Burns

Dr. Henry Kissinger

Dr. Paul McCracken

Budget Director Mayo

David M. Kennedy

Attachment A⁵

SUMMARY OF BASIC OPTIONS

[Paragraph notations refer to the basic document (Annex I)]⁶

I. Paragraphs 30 to 32. A series of multilateral negotiations pointing toward a fundamental, but evolutionary, change in the existing system. This would include:

(a) Early activation of Special Drawing Rights in a substantial amount. The U.S. asking figure would be $4 to $4-1/2 billion, as against a possible European starting point of around $2 billion a year, for 5 years.

(b) Realignment of exchange rates, with emphasis on a substantial appreciation of the Deutschemark (and other strong currencies if possible). We would acquiesce in a moderate French depreciation, which may be inevitable and perhaps imminent.

(c) After SDR activation, an active and sympathetic exploration of various forms of limited exchange rate flexibility designed for the longer term.

(d) Negotiations to expand IMF quotas in 1970.

(e) At some stage, possible exploration of the feasibility and desirability of “reserve settlement account” proposals designed to consolidate dollar balances and gold in a common reserve pool.

(f) Continued and strong efforts to remove structural impediments to our trade and to achieve better offset arrangements on military expenditures.

This approach, if successful, should restore considerable flexibility for U.S. policies and preserve a united world monetary structure. The main disadvantage is that the cautious pace of multilateral agreement may fail to move rapidly enough to achieve the objective and relieve the present strain.

II. Paragraphs 33 to 39. Suspension of the present gold convertibility at the request of foreigners. This might be forced upon us by reserve losses, or considered necessary because of insufficient results under Option I. It could take various forms ranging from continuing some convertibility on a negotiated basis, using gold, IMF drawings or other assets, to an entirely passive role that would make all foreign dollar holdings inconvertible. If successful, this move to a “dollar standard” would reduce gold losses, stimulate favorable currency realignment, and retrieve flexibility in financing U.S. deficits and influencing the international monetary system. Disadvantages would be the possible acceleration of divisive tendencies leading towards a dollar bloc and a European gold bloc, a general European reaction against financial cooperation, the possibility of foreign controls to limit dollar receipts from U.S. investment, and undesirable special exchange arrangements.

III. Paragraphs 40 to 50. A small or large increase in the official gold price. This would require formal Congressional approval, against probable strong resistance from important Congressional quarters in both parties.

The purpose of a small change would be to facilitate limited exchange realignment, but this would be achieved only with serious international political problems and at the risk of a run on our gold stock in anticipation of further changes.

A massive increase would be designed to strengthen our reserve position and flood the world with liquidity, thus potentially “buying time” for financing future deficits. On the other hand, such a change would add to the current world-wide inflationary potential and present extremely serious problems of equity for Japan, Canada and other dollar-holding countries. Progress toward the more basic monetary reforms under Option I would be shelved indefinitely, and any added financing flexibility could be short-lived. For these reasons, this option had no support in the “Volcker Group.”

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 215, Council of Economic Advisers. Confidential. Another copy is attached to Document 131.
2. The 48-page, double-spaced Annex I, entitled “Basic Options in International Monetary Affairs” and dated June 23, is not printed. An earlier, 33-page version was circulated to members of the Volcker Group as VG/LIM/69-66 on June 19 for discussion in a meeting of the Group on June 21. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/LIM/62-VG/LIN/70) On June 20 Bergsten provided Willis with written “Comments on Draft Options Paper.” (Ibid., Deputy to the Assistant Secretary for International Affairs: FRC 56 83 26, Basic Options 3-6/69-Confidential; LIMDIS) A revised version was circulated as VG/LIM/69-68 on June 22 for discussion by the Group on June 23. (Ibid., Volcker Group Masters: FRC 56 86 30, VG/LIM/62-VG/LIM/70)
3. June 26.
4. On June 23 Under Secretary Volcker sent a memorandum to the six principals listed below to the effect that Secretary Kennedy wanted the existence and contents of the Basic Options paper limited to the recipients, and that all earlier drafts should be destroyed or returned to his office. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 215, Council of Economic Advisers)
5. Confidential; Limdis.
6. Brackets in the source text.