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

137. Memorandum From the Chairman of the Council of Economic Advisers (McCracken) to President Nixon¹

Washington, September 8, 1969.

SUBJECT

• A U.S. Initiative on International Monetary Reform

In the remaining weeks prior to the German election, it is evidently important to avoid initiatives which might be construed as exerting pressures on the German electorate.² It is no less important, however, to maintain the momentum which has been built up for international monetary reform, to assert U.S. leadership, and to prevent the reassertion of natural tendencies to avoid rocking the boat while nebulously hoping for the best. As decided at your June 26 meeting,³ a major initiative towards greater exchange rate flexibility should be presented at the IMF meetings (which take place immediately after the German elections). While avoiding advocacy of any particular scheme, this initiative should suggest that the United States considers such a reform to hold promise for eliminating some of the patent defects in the present system.

Because of the central position of the United States in the international monetary system, and our great interest in monetary stability, it is essential for us to provide leadership in the quest for a better adjustment mechanism. Without our leadership, there is a tendency for other countries to hold back from innovations. At the same time, we should recognize that, because we want the dollar to remain the pivot of the entire system (and hence not subject to flexibility), we would in effect be suggesting to other countries that they consider amending their exchange rate policies without our having to make a similar change. In this situation, it is appropriate for us to make our view clear, but to avoid exerting strong pressures on other countries to adopt the innovations which we consider desirable.

The circumstances are favorable for a U.S. initiative at the IMF meeting later this month. There is widespread recognition that present methods of balance of payments adjustment are inadequate. The exchange markets are temporarily quiet, but strong doubts about the future of the German mark and the pound sterling remain. The liquidity problem has become much less urgent, thanks to the recent agreement on Special Drawing Rights.⁴ Several authorities in Italy, Germany, Japan and France have expressed interest (sometimes amounting to explicit advocacy) in greater flexibility of exchange rates. American businessmen and bankers have become increasingly aware of the disadvantages of frequent monetary crises and are willing to consider alternatives to present arrangements. The press is full of rumors and speculation on our official attitude towards reform.

Finally, I should mention that a U.S. initiative on the exchange rate mechanism would be truly an achievement of your Administration. Although the final agreement on international liquidity was completed this year, the original initiative is generally credited to the previous Administration. Consequently unfavorable comparisons would be invited if we did not come up with new ideas at the IMF meeting. Needless to say a more compelling argument for these ideas is that they will serve our own interests and those of the world as a whole.

Accordingly, I suggest that the Administration make a strong and forward looking statement, at the forthcoming annual meetings of the International Monetary Fund, on needed changes and strengthening of the international monetary system. Secretary Kennedy could make such a statement timed to avoid any relationship to the German election. It would, I believe, be received sympathetically by member nations generally.

Paul W. McCracken

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 215, Council of Economic Advisers. Confidential. This memorandum was sent to the Treasury Department under cover of a September 9 memorandum from Ken Cole. It is attached to a copy of Secretary Kennedy’s September 19 memorandum to the President (Document 138). A September 8 draft, which forms Tab D to Document 139, is identical to the text printed here but without the final paragraph. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 215, Council of Economic Advisers)
2. The election was scheduled for September 28.
3. See Document 131.
4. See Document 135.