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

156. Memorandum of Conversation¹

Washington, May 20, 1971, 11:30 a.m.

PARTICIPANTS

• France
  • Giscard d’Estaing, Minister of Economy and Finance
  • Marc Vienot, IMF Executive Director
• United States
  • Secretary of the Treasury Connally
  • Under Secretary for Monetary Affairs Volcker
  • Assistant Secretary Petty
  • Deputy Assistant Secretary Cates

M. Giscard explained that he was here to promote a French export drive in the United States, adding that France is one of the U.S.’s best trading partners. The U.S. has a surplus of $800 million in trade. Secretary Connally asked if this included tourism and remarked that tourism was a sizable offset to the trade surplus. M. Giscard remarked that the U.S. main bilateral deficit was with Japan and Canada. He added that France is not bilateral minded, but he believes that exports are a good test of competitiveness. He is promoting sales of electrical and other machinery and also steel. Secretary Connally remarked that the Japanese will run both the U.S. and France out of business in steel if we are not careful. There was a discussion of Japanese wage levels and competitive ability.

M. Giscard turned to the subject of the recent monetary turmoil saying that this had been felt much more acutely in Europe than in the U.S., insofar as he gathered from reading the U.S. press. In Europe there was a feeling of real crisis. France, however, had remained calm as she was not directly concerned, having been insulated from the monetary flows. While France agreed with her Common Market partners not to let her views be openly known, Giscard felt that some parts of the German Government want the float to end up in a revaluation while other parts do not. This ambiguity on the part of the Germans is likely to impair the European monetary union.

M. Giscard felt there was a new feeling in the (Saturday night) Ministerial meeting.² Hitherto the French had been the “bad boys,” by being relatively inflexible in their views while the Germans were in part more flexible. In the recent crisis the Germans spread rumors and declared that the real cause of inflation was the inflow of dollars. The American attitude for some time, said Giscard, had been to pursue discussions of exchange flexibility in the expectation that other countries could be induced to revalue their currencies from time to time as necessary, but for the first time Giscard detects a willingness in Europe not to revalue. Notably, the Italians were very firm on this point and some of the Germans as well. Therefore, said Giscard, the route of revaluation is closed.

At the same time the attitude of central banks will change. They will not want to accumulate any more dollars. This will lead us to a multiplication of restrictions and regulations in the Western world, a very unpleasant development in Giscard’s view. While France has maintained currency restrictions, Giscard does not feel they are a good thing in the long run and if they proliferate it would be very damaging.

Mr. Volcker objected to the idea that the U.S. had engaged in discussions of exchange flexibility in an effort to induce expected revaluations. He could understand confusion on this point because some individuals have made statements to this effect, but it is not the view of the government. Indeed, it was difficult for him to visualize effective arrangements if other currencies were repeatedly revalued against the dollar. Secretary Connally expressed his agreement with Mr. Volcker’s statement emphasizing that he could name individuals who believe in a high degree of exchange rate flexibility and that revaluation by other countries are the basic answer to our problems. These statements are misleading because they do not represent government policy. Government policy, the Secretary added, was made in the Treasury, the White House and the Federal Reserve Board. He had had many discussions with Dr. Burns and the two were in agreement in opposing floating rates.

The Secretary added that it is, in his opinion, impossible to expect monetary arrangements to deal with all of the economic conflicts among nations. For example, the Germans have their problems with inflation. We have ours, which are the reverse. Many of the problems are political in nature. The Secretary pointed out that the U.S. Government had taken very tough political decisions in 1969 and 1970. In order to cure inflation we have a 6 percent unemployment rate, which is a politically difficult situation.

The Secretary emphasized that we have not been practicing benign neglect for the past 25 years. He reiterated that monetary means alone are not enough to solve the problem. He added that we do not like to see $50 billion in the Eurodollar market with no controls. The steps we have taken during the crisis were designed to calm the waters, but it might be that greater flexibility around parities would serve to counter the enormous capital flows of the type we have been seeing. The U.S. does not want to see exchange controls if they can be avoided.

The Secretary pointed out that the monetary system is tied to the dollar not because we wanted it that way, but because it grew up that way. What good would it do, he asked rhetorically, if we should devalue? He pointed out for example that yen revaluation would in itself not much help the U.S. because of the many Japanese restrictions on imports.

The Secretary emphasized that this government does not want go back to isolationism and that the Mansfield Amendment³ defeat was a reflection of that. However, basic trade adjustments are needed and the U.S. spends too much abroad. As an example of the needed adjustments in trade, he cited the fact that five years ago Canada was in trouble while we had a $640 million surplus with Canada. As a result we signed the Auto Agreement and now that surplus has been turned into a substantial deficit. This Agreement was unfair and has to be restructured.

Turning to the subject of inflation, the Secretary complimented the Minister on his recent analysis of his internal inflation problem, pointing out that the U.S. and France had the same problems—built in wage demands by labor. He cited in the U.S. the construction industry, the railroads and steel. He added that with regard to incomes policies, President Nixon does not want to take half-way measures. But if the President decides to have an incomes policy, he will go all the way to some kind of mandatory system rather than take half-way measures such as some wage price advisory board where he could not enforce the recommendation. This is the reason for the President’s hesitation.

The Secretary said that we are trying to expand the economy gradually. The inflation rate is down to 3 percent in the first quarter but will go up somewhat for the year. We will stabilize, but we cannot expect to cure the balance of payments problem this year. That situation should be a lot better in 1972 and 1973. In the meantime, we must get back to stability with perhaps a little more flexibility by way perhaps of wider bands or otherwise.

M. Giscard said that he does not oppose wider bands per se. However, the problem lies in whether international public opinion will believe that a currency going to one margin of a wider band will return to its parity again. Otherwise flexibility may lead to further speculation. For example, if the DM after the present float returns to its former parity, this will be a good lesson and a good argument for greater flexibility. If however the DM does not, the speculators will remember and will not believe that the next currency which floats or moves will return to its parity.

M. Giscard pointed out that over the past ten years there has been a U.S. balance of payments deficit. This gives rise to skepticism about the U.S. desire not to have others revalue. It also has given rise to saturation of the rest of the world with dollars. Now, said M. Giscard, we need proposals for the use of the dollars thus accumulated. Others do not want to hold more dollars. The recent problems are likely to recommence and therefore we must think about this in advance.

Secretary Connally pointed out that in 1969 we had sopped up dollars from the Eurodollar market and in 1970-71 we paid them back again. Now we will have to prove to the skeptics about our balance of payments. To do this we must cut back foreign spending and that means other countries, in particular Japan, Canada and Germany, must contribute more to defense and aid. Twenty years ago, said the Secretary, we were relatively rich in productive capacity and reserves but this is no longer the case. The Mansfield Amendment is in part a reflection of the reality that we have been spending too much.

M. Giscard warned that if there are no joint actions to stabilize the international monetary system he foresaw increasing exchange controls on the European side.

(N.B. During his press conference⁴ M. Giscard said it was regrettable that the European monetary union had been damaged, the more so because of (interesting phrase, spoken in French and not translated) Britain’s imminent entry into the Common Market.)

William C. Cates

1. Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, France. Confidential. The meeting was held in Secretary Connally’s office. Drafted on May 21 by Cates and approved, as amended, by Volcker.
2. Presumably a reference to a May 8 European Community Ministerial meeting; see Document 154.
3. Not further identified. Mansfield and a number of other members of Congress had proposed amendments restricting U.S. activities overseas to curtail U.S. involvement in Southeast Asia.
4. Not further identified.