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

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

Washington, September 24, 1969.

SUBJECT

• International Monetary Situation—U.S. Policy Options

Secretary Kennedy has provided you with a contingency paper on the international monetary situation (Tab C).² He regards it as an information memo, not requiring action at this time, although it does make several specific recommendations. It has not been approved by any other agencies. (See cover note at Tab B.)³ Paul McCracken has also written to you on the subject (Tab D).⁴

Present Situation

Another major international monetary crisis is quite possible in the next few weeks.

Speculation that Germany will revalue after its election on September 28 has already begun to precipitate massive new inflows into Germany ($1 billion in the last two weeks) and they are likely to accelerate immediately after the election. The SDP, which openly favors revaluation, is doing well at the polls and there is a growing belief that it may gain in strength. This would give it a greater voice in an eventual coalition government, which is still the most probable outcome. There will be widespread speculation whoever looks like a winner, however, because the economic (if not the political) case for revaluation is so clear.

The UK and Belgium continue as the potential weak spots, although the UK is doing well for the moment as the result of good trade figures.

Italy is the latest problem, losing $250 million so far this month. Sweden has also been suffering losses which are large for it. And France has begun to lose again, only a month after its devaluation.

Any of these countries might conclude—as did France last month—that it is useless to defend exchange rates which are unviable in the long term without German revaluation. If any of them devalue or float their exchange rates, numerous other countries would follow. Only a few countries beside Germany could then avoid devaluation. The result would be a severe disruption of the international monetary system and a further weakening of the U.S. competitive position, already jeopardized by inflation.

Strategic Choices and Broad Options

We face a strategic choice whether to attempt to forestall the development of a monetary crisis or to let it develop and respond afterwards. We have three options under each of these two strategies. We cannot approach Germany just before its election, of course, and our ability to do so thereafter will depend on the balance of political forces which emerges from it.

Preventive Action

1. We could pressure the Germans for immediate revaluation.

2. We could seek immediate assurance that revaluation will be undertaken as soon as it becomes possible politically and finance weak countries through the interim period.

3. We could urge weak countries to hold their exchange rates even without any assurance of German revaluation, financing them as necessary, and be prepared to press Germany very hard on revaluation after a new government is formed. (This could require much larger loans than Secretary Kennedy mentions.)⁵

Response to Crisis

4. We could suspend convertibility of the dollar into gold as soon as we learned that any major country planned to devalue or float, announce our support for any sound currencies under pressure, and call for basic reforms of the monetary system. This would be an effort to pre-empt the collapse of the system by heading off the initial trigger.

5. We could suspend gold convertibility of the dollar in response to a forced devaluation or float of the British pound or another major currency, declaring our readiness to support financially other major currencies while basic reforms of the system are worked out. This would be an effort to limit the scope of the breakdown of the system. Secretary Kennedy’s paper implicitly favors this course.

6. We could suspend gold convertibility of the dollar after devaluation or floats by a number of the countries calling for urgent reform to regain stability. This approach would be the easiest to justify and would minimize charges of a unilateral U.S. “power play.”

7. We could doubleor possibly triple the official price of gold.

Conclusions

We cannot decide on a precise course of action in advance of the crisis. However, we should have a clear idea of the direction in which we want the international monetary system to move and, in light of that, how we should respond in a crisis situation.

You therefore need an interagency paper on the options we face and our choices in choosing among them. And you need it soon, because the crisis may be upon us quickly and because our position should be set before next week’s annual meeting here of the IMF, as background for the many talks our people will be having with foreign financial officials.

There is also one immediate problem. It was agreed at your June 26 meeting with your top financial and foreign policy advisors that Secretary Kennedy should make an early public call for an intensified official international study of greater exchange rate flexibility.

The Secretary has not implemented this decision, however. And—in response to criticism from some foreign central bankers—he is now wavering over how firmly to do so even at the IMF meeting. (See his memo at Tab E.)⁶ To pass by this obvious opportunity would clearly indicate that the U.S. is not going to take a lead in this area, and Paul McCracken urges at Tab D that the earlier decision be implemented rigorously.

Recommendation:

That you sign the memorandum to the Secretary of the Treasury at Tab A, directing him to submit (a) an interagency options paper by September 30 and (b) his proposed IMF speech by noon September 29.⁷

Approve⁸

Approve options paper only

Approve proposed speech only

Disapprove

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 215, Council of Economic Advisers. Secret.
2. Not printed, but see Document 136.
3. Tab B, not printed, is Kennedy’s September 3 memorandum to the President; see Document 136.
4. See Document 137 and footnote 1 thereto.
5. Secretary Kennedy mentioned up to $500 million for sterling; see Document 136.
6. Document 138.
7. Tab A, a two-paragraph memorandum, is not printed. No options paper was found. The annual meetings of the IMF and IBRD were scheduled to be held in Washington September 29-October 3. A first draft of Secretary Kennedy’s speech was circulated to members of the Volcker Group as VG/LIM/69-74 on September 25. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/LIM/71-VG/LIM/77) In an unsigned September 27 memorandum to Kissinger, Bergsten commented on a revised and expanded “near final draft” that “proceeds very cautiously.” He noted that the sense of the June 26 meeting with the President “was for a much clearer and more urgent call to action on this issue and three months have already elapsed.” Bergsten regretted rejection of the option for widening margins within which exchange rates could fluctuate but nonetheless recommended that Kissinger sign an attached memorandum to the President requesting authority to approve the proposed speech. No record of the President’s action was found. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 289, Treasury, Volume I) Separately, on September 27 the Department of the Treasury forwarded to the White House draft welcoming remarks for Secretary Kennedy to read at the opening of the IMF-IBRD meeting on the President’s behalf. In his covering memorandum to Kissinger, Bergsten commented that the President’s decision not to address the meeting was “a needless affront to these two valuable organizations.” He continued, “No US President in history has heretofore failed to address the meetings personally when they were in Washington.” Kissinger approved the text on the President’s behalf. (Ibid., Box 306, IBRD/IMF) See Department of State Bulletin, October 27, 1969, pp. 353-358, for text of Secretary Kennedy’s September 30 speech.
8. This option is checked and a note written next to it reads: “done via phone.” The memorandum for Secretary Kennedy (Tab A) did not go to the President for his signature.