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

199. Telegram From the Embassy in Germany to the Department of State¹

Bonn, November 17, 1971, 1450Z.

14309. Subj: Emminger on international monetary question.

1. Summary: In a conversation with the Financial Attache, Bundesbank Vice President Emminger outlined the type of agreement on international monetary problems which the EEC thought possible now along lines similar to those previously reported and stressed that in his view the deteriorating economic situation in Germany and pressure for an interim EEC solution would make it impossible to arrive at even this type of agreement by the spring of 1972. If an agreement along the lines outlined is not acceptable to the US, everyone, therefore, would have to make his arrangements for a long period of non-agreement. The Bundesbank would have to start to drive the appreciation of the Mark down to lower level. End summary.

2. Emminger said he felt that the postponement of the G-10 meeting had been due to a great misunderstanding by those (he specifically mentioned the Dutch) who had suggested it to us. Actually, Europe was now as prepared as it would ever be and it was in everyone’s interest to meet quickly and if at all possible to settle the currency issue within the next six weeks or so. With recessionary tendencies coming more and more to the fore in Germany and elsewhere in Europe, it would be politically impossible next spring for the European governments to settle on as high a parity change vis-à-vis the dollar as they would be willing to do now.

3. Emminger confirmed what we had previously heard in Bonn and what has also been reported from London and Paris concerning the outcome of the last EEC Finance Ministers’ meeting. Giscard for the first time clearly indicated that France would “hold still” for a modest dollar devaluation provided that the UK and Italy also would “hold still” and the DM would appreciate by 5-6 percent vis-à-vis the French franc (always compared to the pre-float parities). While Emminger did not specify the degree of dollar devaluation in such a package, he mentioned 6 percent “as an example.” Emminger said that he had calculated that—assuming a 12-14 percent Japanese appreciation (vis-à-vis the dollar, less vis-à-vis gold)—the kind of package envisaged at the EEC Finance Ministers’ private meeting would involve an average 9 percent “devaluation” of the dollar. It would take some hard negotiations to persuade the UK that the pound should “hold still” in such a situation. Hard bargaining might also succeed in adding another percentage point, or at the very most 2 percentage points, to the average dollar “devaluation” versus other currencies. Finally, it might be possible to get “something”, but not very much, on trade policy and burden sharing (mainly in the form of promises to try to work something out) as part of such a package and some agreement on wider bands, continued dollar non-convertibility into gold, and on the general direction of the reform of the international monetary system (which, however, would take two years or so to work out and agree in detail).

4. It was important for the Europeans to know if such a package was acceptable to the US as a basis for the quick return to fixed parities and including the dollar devaluation involved (and presumably also the removal of the surcharge). Emminger stressed that in his opinion such a package was possible only if agreed quickly. The business cycle situation would make it politically unsaleable in Europe next spring. Germany, for one, could not wait that long. While Germany was willing to see a 10 percent appreciation of DM vis-à-vis the dollar, it could not continue to accept such an appreciation vis-à-vis other currencies, and particularly vis-à-vis the franc. French steel imports were already causing serious difficulties and automobile imports were next. Schiller would not be in a position to resist pressure for help from these two important industries. In the absence of an agreement now, Germany, therefore, would have to start to drive the DM rate of appreciation down from its current level. Emminger professed great confidence that this would be done relatively easily through monetary policy. He pointed to the present DM 19 billion short term indebtedness of German industry abroad. By lowering the German interest rate below those abroad, the Bundesbank could induce the outflow of these funds and a consequent easing of the DM rate of appreciation. The Bundesbank was reluctant to do this now because it foresaw a 10 percent revaluation of the DM against the dollar in a general settlement and this would be psychologically difficult if the rate now dropped significantly below this. But in the absence of a quick general settlement, the Bundesbank would have to proceed.

5. In the absence of a general settlement, Emminger felt it would also be impossible to resist a “European solution” now. Such a solution most likely would involve an appreciation against the dollar considerably less than that in the type of international solution outlined in para 3 above, with some more controls and some very sticky and relatively small outside flexibility. While Emminger felt that Germany could live with such a solution, it would be definitely a second best from everyone’s point of view.

6. In this connection Emminger warned that one should not over-estimate the strength of Minister Schiller to insure that whatever would be done would not be too nonsensical. Schiller’s position in the Cabinet now was weaker than Emminger had ever seen it. He was under vicious attack by the SPD left (Economics Ministry Parliamentary Under Secretary Rosenthal’s resignation and criticism of Schiller had been announced just prior to the conversation). He was under constant attack by the “Europeans.” Industry and the right were attacking him for a float. Schiller, according to Emminger, simply was not in a position to continue the float. He had to return quickly to a fixed rate or the Cabinet would disavow him. Emminger almost visibly shuddered at the thought of what might happen in the economic policy field if Schiller, with his constant liberal and outward (beyond the EEC) looking influence, should be forced from office.

7. Emminger reiterated that for all of these reasons, the US would not be able to get a better deal by next spring than it could now. If the US now indicated that the type of deal outlined in para 3 was not acceptable (with minor improvements), then everyone would have to settle down for a long period with no worldwide agreement and make his arrangement accordingly. Emminger urged that in looking at the deal, the US bear in mind that: (A) wide margins would in effect make it possible to increase the “dollar devaluation” 2-3 percent beyond the parity changes agreed, and (B) the US “concession” of a dollar devaluation in fact would work out to an advantage since it would increase the value of our gold reserves. Emminger said that all their reports and conversations with visiting American bankers indicated that a gold price increase had become much less of a political issue in the US, and he hoped this would not be a stumbling block. It was the only way by which Germany could upvalue 10 percent against the US without also doing so against France, the UK and the rest of the EEC. Emminger (protect) mentioned that while he realized Congressman Reuss was not the US Congress, it was interesting that Reuss had told him that he, Reuss, could “guarantee” that Congress would pass a dollar devaluation bill within two days, provided it was vigorously supported by the administration and it was part of a sensible package of international parity realignments and at least some elements of international monetary reform. The Financial Attache asked Emminger whether he had the impression that Reuss would consider the kind of realignment outlined in para 3 above as sufficient and whether Reuss would also “guarantee” no Congressional amendments to an “insufficient” package. Emminger replied that, of course, Reuss wanted a larger realignment, but with strong administration support and the further flexibility provided by wide margins, he, Emminger, hoped that the type of realignment now negotiable could be made acceptable to the Congress.

8. Emminger asked that he should not be quoted to any German or foreign official. Please protect.

Rush

1. Source: National Archives, RG 59, Central Files 1970-73, FN 10. Confidential; Limdis; Greenback. Repeated to London, Paris, Rome, Brussels, The Hague, USEC, and USOECD.