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

173. Memorandum From Deane R. Hinton of the Council on International Economic Policy Staff to the President’s Assistant for International Economic Affairs (Peterson)¹

Washington, September 1, 1971.

SUBJECT

• Volcker Group

Pete:

The Volcker Group met for three hours August 31 for a lively, but as usual, quite inconclusive exchange of views. Paul obviously enjoyed himself playing games with the rest of us.

We began by discussing the August 28 paper on balance of payments equilibrium.² The main issue seemed to be whether this paper, or something like it, should be given to the Deputies of the Group of 10. It was agreed that there was a case for quantifying what we were after—apparently, Paul has previously only said “substantial improvement”—but it was also agreed that this paper would have to be rewritten before it could be passed out. As usual, Paul was left with a free hand to do what he thinks best, but it is possible that he will use the OECD Working Party 3 paper (attachment 1), and comment orally to the effect that the OECD estimates are very conservative.³

There was some discussion of the agenda (attachment 2)⁴ and what kind of answers Paul would give. If you have questions I could, perhaps, answer. He stressed that they would not discuss exchange rates leaving that for the Ministers at the September 15-16 meeting.⁵ Paul agreed that the issue of exchange rate realignments, at the best, would not be resolved before the IMF meetings at the end of September.

Paul noted that both the OECD and U.S. ideas of equilibrium call for the LDC’s to bear a significant part of the adjustment burden!

At one point, he introduced into the discussion some estimates of what we are after in “non-monetary areas” recognizing, however, that a large enough monetary adjustment would reduce the pressure to deal with these problems. His list, as I understood it, follows:

• Multilateral defense offset in Europe—$1-1.5 billion;
• Canadian trade practices, including auto agreement—$100 million;
• Japanese QR’s—$250 million;
• Dismantling the Common Agricultural Policy—$250 million;
• Eliminating European agricultural subsidies in third markets—$150 million.

There were some pointed remarks about the unlikelihood of accomplishing much on these in negotiations with the Europeans, at least in the short run.

The discussion then turned to the August 30 options paper⁶ and we went round and round with almost everyone but Paul arguing that these were not the kinds of options that should be put to the President. At the very minimum, we urged that Option 1 be developed to spell out the main elements of a possible new international monetary system, that is, to examine such questions as:

• Should the dollar remain a reserve currency and, if not, what should take its place?—i.e., how consolidate a new reserve unit?
• What is the future role of gold?
• What kind of convertibility for the dollar should be envisaged?
• Should there not be presumptive rules for exchange rate changes, particularly on the up side?
• How else to get more rate flexibility?
• How to provide sufficient liquidity, assuming the U.S. runs a large Current Account surplus?

Ezra Solomon, Nat Samuels, and Governor Daane also talked about the danger of the surcharge being frozen in the system. Paul just smiled.

Finally, you might find of interest two papers done in the Fed on reserve asset consolidation (attached),⁷ as well as the attached IMF paper on the future position of the U.S. dollar.⁸

1. Source: National Archives, Nixon Presidential Materials, White House Central Files, FG Federal Government Organizations, Treasury 1/1/71-2/29/72, Box 2. Confidential. A copy was sent to Richard Allen (without attachments).
2. Not found, but see Document 76 which is presumably the successor of the August 28 paper.
3. Not printed. The August 30 WP-3 paper is entitled “Brief Résumé of Material Relevant to Assessment of Present International Payments Situation.” The OECD WP-3 and the G-10 Deputies met in Paris September 2-4. According to a September 12 memorandum from Eliot to Kissinger on “Foreign Reactions to the President’s Economic Program—Afternoon September 10,” during the previous week’s G-10 Deputies meeting Volcker estimated the United States needed a $13 billion balance-of-payments adjustment, primarily in the trade account. (National Archives, RG 59, Central Files 1970-73, E 1 US 9/1/71)
4. Not printed.
5. See Document 175.
6. Not found.
7. Not printed. A paper entitled “Consolidation of Outstanding Official Dollar Balances,” forwarded to Under Secretary Volcker by Ralph Bryant on January 2, 1973, and circulated to the Volcker Group Alternates as VGA/73-1 on January 4 appears to be a successor to these papers. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VGA/73-1-VGA/73-25)
8. Not printed. The IMF paper, EBS/71/232, August 27, entitled “Some Thoughts on the Future Position of the U.S. Dollar in the International Monetary System,” was circulated to members of the Volcker Group as VG/LIM/71-28 on August 31. (Ibid., VG/LIM/71-1-)