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

2. Editorial Note

The Nixon administration inherited a macroeconomic international economic environment characterized by declining U.S. merchandise trade and current account surpluses. The trade surplus declined from $6.8 billion in 1964 to $0.6 billion in 1968 and the current account balance had declined from a $5.8 billion surplus to, for the first time since 1959, a $0.5 billion deficit in 1968. The trade surplus remained constant at $0.6 billion in 1969 while the current account deficit mounted to just over $1.0 billion.

With postwar recovery, international capital flows had become an increasingly important part of international transactions in the 1960s. Many of these capital flows were associated with international direct investment on the part of the multinational corporations, and this issue came to a head in the 1970s under the rubric of economic nationalism in developing countries and the quest in UNCTAD and elsewhere for codes of conduct for multinational corporations. Other capital flows were associated with the increasing predilection of companies, financial institutions, and central governments to have portfolio and currency positions in other than their national currencies, in part related to the rise of the Euro-dollar market and the role of the U.S. dollar as a reserve currency. The U.S. balance on current account and long-term capital was in deficit most years from 1960, and increased from a $1.4 billion deficit in 1968 to a $3.0 billion deficit in 1969. The net liquidity balance-of-payments deficit increased from $1.6 billion in 1968 to $6.1 billion in 1969. However, the official reserves transactions balance of payments recorded a $1.6 billion surplus in 1968 and that surplus increased to $2.7 billion in 1969. U.S. monetary gold reserves had declined from $17.8 billion at the end of 1960 to $10.8 billion at the end of 1968, but then increased to $11.9 billion by the end of 1969. (The Economic Report of the President, 1973)

The perception of an increasingly precarious U.S. balance-of-payments position led the Johnson administration to take a number of measures to encourage exports, stem imports, and restrict international capital flows. Regarding these measures, see Foreign Relations, 1964–1968, volume VIII. The new administration in 1969 was faced with the question of whether or not to intensify these measures, roll them back, or adopt a new approach. The aforementioned measures, which were microeconomic in nature, were directed at single items that go into the balance of payments rather than the overall bottom line; as such they tended to be resisted by those who agreed the balance of payments needed correction but who favored a more free market-oriented, macroeconomic approach.

As to how to approach the balance of payments, one view was set out by C. Fred Bergsten in a March 26, 1969 (mistakenly dated April 26, 1969), memorandum to Kissinger commenting on Secretary Rogers’ Briefing Book for his March 27 testimony before the Senate Foreign Relations Committee:

“There is no U.S. policy to ‘eliminate our balance of payments deficit’. The Johnson Administration sought ‘a sustainable balance’ in our position. This Administration has not yet stated its objective. There is a highly significant difference between the two, and the Secretary of State should definitely not say that ‘we are taking every feasible step to eliminate our deficit’. This is a very important point.” (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, State, Vol. II, Box 279)

In many quarters foreign assistance was viewed as an important source of the problem and there were many members of Congress in 1969 who favored sharp cut-backs in economic and/or security and/or military assistance.

U.S. military expenditures abroad (aside from issues related to Vietnam) were seen by some as an important factor in the balance-of-payments equation. Senator Mike Mansfield would again sponsor legislation to reduce U.S. forces in Europe for balance-of-payments reasons. The Johnson administration had already adopted a policy for the Reduction of Costs in Europe (REDCOSTE) and had negotiated an offset agreement with the Federal Republic of Germany to compensate for the balance-of-payments cost of maintaining a U.S. military presence in Germany. President Nixon soon ordered a 10 percent reduction in official, non-military personnel abroad, Operation Reduction or OPRED, for much the same reasons.

The Nixon administration from the outset was faced with next steps in the REDCOSTE program and negotiation of a new offset agreement with the FRG. With time, and the refinement of the Nixon doctrine, military burden-sharing with Europe and Japan became an important aspect of the foreign policy dialogue. In Europe this was part of NATO strategy and policy, but the underlying balance-of-payments problem was central to the debate. An early input on this issue was given by Robert E. Osgood in a March 26, 1969, memorandum to Henry Kissinger on the “Briefs for Secretary of State” before the Senate Foreign Relations Committee on March 27:

“In late 1968 the Secretary of Defense put forward a series of proposals, known as REDCOSTE, which would ‘streamline’ administrative and logistics and support elements….

“Congressional pressures for reduction of U.S. forces in Europe have been based on the general objection that the U.S. is overcommitted and carrying an inequitable proportion of the collective defense burden in Europe. They have focused on the balance-of-payments difficulties that result from maintaining American forces in Europe. These pressures were manifested in Senator Mansfield’s Resolutions of 1966 and 1967, calling for ‘substantial’ reductions and by the Symington Amendment, which would have denied Executive funds for more than 50,000 troops in Europe beyond December 31, 1968 (vice 405,000 in 1955, down to 320,000 in early 1969). The Soviet invasion of Czechoslovakia has blunted pressures for withdrawal, but they could well revive if projected European defense contributions are not forthcoming and the offset problem is not resolved.” (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, State, Vol. II, Box 279)

Regarding the Nixon administration’s handling of REDCOSTE and the German offset problem in its first months, see Documents 18 and 22.

The U.S. balance-of-payments deficit and the increased foreign holding of dollar-denominated assets was a major source of new international liquidity in the 1960s, but was increasingly seen as a source of instability in the international monetary system as foreign holdings of dollars soon exceeded U.S. official reserve assets, calling the convertibility of dollars to gold into question. To help deal with this problem the Johnson administration had already set the groundwork for the creation of a new international reserve asset, the Special Drawing Rights (SDR) in the International Monetary Fund. Activation of the SDRs was one of the first tasks of the Nixon administration, and was one aspect of the new administration’s effort to reform the international monetary system. The concluding paragraphs of the Summary of the Report of the Task Force on the Balance of Payments (Document 1) pointed to greater exchange rate flexibility as central to solving the balance-of-payments problem and recognized that the already de facto inconvertibility of the dollar to gold might have to be replaced with de jure inconvertibility, presaging fundamental reform of the international monetary system.