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

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

Washington, October 14, 1969.

SUBJECT

• International Monetary Developments

Recent Developments

Attached are memoranda from Secretary Kennedy (Tab A) and Paul McCracken (Tab B) on the international monetary developments of the past ten days:²

1. Germany’s floating of the mark. The mark has now risen in value by about 6%.³ The first act of the Brandt government is likely to be to fix a new parity 6-1/2-8% above the old rate of four DM equal $1.00. They will almost certainly also remove the 4% border taxes on trade which they adopted in November 1968 as a substitute for revaluation at that time—so the effective revaluation will be 2-1/2-4% on exports and imports and the full 6-1/2-8% on all other international transactions.⁴

2. The formal IMF decision to create $9.5 billion of Special Drawing Rights (SDRs) in 1970-1972.⁵

3. Laying of the groundwork for serious international consideration of greater flexibility of exchange rates.

Implications

Two of the three components of the U.S. international monetary policy agreed at your June 26 meeting with your financial and foreign policy advisers are now completed: a large amount of SDRs has been decided and a tenable exchange rate structure has been achieved through the French devaluation, German revaluation, and UK turn-around into sizable surplus.

In addition, the third point—greater exchange rate flexibility—has moved on to the front burner of the international monetary agenda.⁶

There is thus an excellent chance that the international monetary system will remain calm for at least six months and perhaps much longer. The task now is to use the available time to improve the basic structure of the system so that relative calm can prevail indefinitely. That task is underway with the study of exchange rate flexibility.

Another significant effect of the recent developments is that both France and Germany have now effectively withdrawn from the Common Agricultural Policy by fully offsetting the impact on their agricultural sectors of their exchange rate changes. The CAP—which many regard as the major impetus toward closer European integration now that their customs union is completed—is thus suspended for all practical purposes. It is quite unclear how and when the Europeans can put it back together. This raises important questions (and perhaps opportunities) for British entry to the EC, our own agricultural exports, and numerous other international political and economic questions.

Remaining Problems

A few problems remain, although they are of decidedly lesser magnitude at present:

1. Our own balance of payments deteriorated significantly in the third quarter. It will continue to deteriorate if we are able to ease our domestic monetary policy as inflation is brought under control. The deterioration will be exacerbated as we continue to liberalize our controls over capital exports.

McCracken in fact cites the need to improve our balance of payments as the main reason why we should push hard for greater exchange rate flexibility. Secretary Kennedy reports that he is working on export incentives and possibly other measures to help our payments position.

2. Germany’s revaluation may not be enough to hold speculation on the mark at bay for very long. A few other currencies, notably the Dutch guilder but perhaps also the Japanese yen, could come under pressure to revalue too. And the French franc is by no means safe, given widespread skepticism that the measures it has taken so far will bring its balance of payments into equilibrium.

3. We remain at loggerheads with South Africa over how its gold production should be marketed.⁷ Secretary Kennedy regards this as merely an “annoyance”, however.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 216, Council of Economic Advisers. Confidential.
2. Tabs A and B, both dated October 4, are not printed.
3. Following the West German elections on September 28, the Mark had been allowed to float on September 30.
4. After assembling a Parliamentary majority on October 3, Willy Brandt became Chancellor on October 21. Documentation on the German measures in November 1968 is in Foreign Relations, 1964–1968, vol. VIII, Documents 215, 216, and 219.
5. The IMF Board took this decision on October 3.
6. Secretary Kennedy discussed the question of “limited flexibility” of exchange rates in his September 30 speech at the IMF; see footnote 7, Document 139.
7. See Document 145.