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

202. Information Memorandum From Robert Hormats of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)¹

Washington, November 22, 1971.

SUBJECT

• Talking Points for your Meeting with the President and Secretary Connally, Tuesday, November 23, at 10:00 a.m.²

The meeting will focus on negotiations on the international aspects of the New Economic Policy—specifically, conditions for removal of the surcharge. There are several points which you might wish to make:

• —It would be useful to view the international negotiations connected with the New Economic Policy in terms of two “rounds”—a surcharge round (in which we achieved conditions which would allow us to remove the surcharge), and a gold-convertibility round in which we achieved reform of the international monetary system and negotiated trade concessions. We should not expect in round one to achieve all we want in terms of exchange rate adjustments, trade, or defense burden sharing. Our objective should be to arrive at an interim solution which enables us to get a significant appreciation of exchange rates and some trade measures while remaining firm in our intention not to restore convertibility. With regard to gold we should be in a position to discuss raising the dollar price of gold and perhaps reach tentative agreement to do so but not, in any case, resume gold convertibility. Convertibility will be our major point of leverage in bringing about the exchange rates we want in the second round and in achieving major reforms of the international monetary system.

• —When we remove the surcharge, there is still significant pressure on Europe to resolve the monetary situation in a way which is favorable to our interests. The EC has five basic options:

  • —Each country could continue to do as it is doing (i.e., no European “solution”).
  • —The EC countries could return to fixed parities vis-à-vis one another, but float together against the dollar.
  • —The EC countries could return to fixed parities against one another and float together against the dollar with capital controls, and perhaps trade controls, to decrease the appreciation of their currencies.
  • —The EC countries could return to fixed parities vis-à-vis one another and the U.S. without trade and capital controls (which would mean that Europe would again take in large amounts of dollars, unless the new parities were fixed above present levels).
  • —The EC countries could fix parities vis-à-vis themselves and the U.S., with capital and trade controls to limit the intake of dollars.

  In the long run, Europe will probably be unwilling to take in large amounts of dollars and probably unable to maintain capital controls. It is thus likely that there will be pressure on it to float collectively against the dollar or to appreciate their currency values so that capital controls are unnecessary and they do not accumulate larger amounts of dollars. The one thing we should guard against is an EC-wide dual rate system (which means one exchange rate for trade transactions—a commercial rate—and another presumably higher rate—a financial rate—to reduce the inflow of capital). Such a system would reduce the pressure on Europe to float their trade (commercial) rate upward, and thereby be counterproductive in our efforts to realize a trade surplus.

• —If we do not make any moves at all to accommodate the Europeans on the gold question, we must recognize that we will not get the amount of dollar devaluation vis-à-vis the other currencies which we believe is necessary. France has stated that it does not intend to revalue the franc vis-à-vis the dollar, but instead wants the dollar to be revalued with respect to gold. If France will not revalue, Germany will probably reestablish the value of the mark at no more than 6 percent higher than the value of the franc (it is presently about 9 percent above the franc and dollar), and Japan will permit the value of the yen to rise no higher than 5 percent above the value of the mark. These appreciations will be far less than will be adequate to bring about the improvement we seek in our balance of payments. (The value of the dollar is now approximately 3.5-4 percent below the overall value of the other major currencies as of April.) Treasury estimates that for every 1 percent devaluation in the value of the dollar, our balance of payments improves by $800 million dollars. Thus, we should seriously consider measures to devalue the dollar, if possible, without having Congress involve itself in our negotiations, and without going back to convertibility.
• —The negotiations should be handled in such a way that we do not attempt to play one European country off against another. Any scheme to deal harshly with one European will lead all Europeans to believe that we are attempting to split the Common Market countries, and is likely to lead to a severe reaction in Europe. Throughout these negotiations we should consider the EC as one entity and, while we may wish to use Brandt as an instrument for influencing Pompidou and the others, we should not attempt to split Germany and France.
• —We can get maximum economic advantage out of the surcharge within the next month or so. If we go beyond that, countermeasures will increase, there may be an increasing number of retaliatory actions, and the U.S. will be increasingly viewed as a “scapegoat” for Europe’s economic woes. This will certainly make negotiations difficult, and it will be less easy for us to accomplish our economic objectives.
• —On the political side, the longer we go without a reasonable U.S. position, the more confused our friends become, the more skeptical they are that we want to cooperate to solve the present problem, and the more vulnerable they are to the importunements of those who wish to develop a European position counter to our interests on economic issues, and political/security issues as well.
• —We should be careful not to demand too much in the area of trade. Other nations feel that we have as many restrictions on imports of their products into this country as they do on our products. And, they view trade as an area in which reciprocal quota and tariff reductions should be negotiated, not as an area in which countries should make unilateral concessions. (The Common Market feels especially strongly about this, while Japan seems somewhat less reluctant to move unilaterally on specific issues.) While we may be able to get some concessions, and the promise of negotiations on a number of issues, we should not make removal of the surcharge contingent upon a long list of major concessions from other nations.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 289, Treasury Volume II, 1971. Secret.
2. On November 22 Kissinger and Shultz sent a joint memorandum to President Nixon with talking points for his meeting with Connally. Their talking points were similar to those that Hormats suggested. (Ibid.) President Nixon met with Secretary Connally from 10:04 to 11:40 a.m. on November 23. Kissinger joined the meeting from 11:11 to 11:39 a.m. For a summary of the discussion, see Document 203. Shultz did not attend, but met with the President later in the day from 5:38 to 6:07 p.m. The President also talked with Connally by phone from 5:44 to 5:47 p.m. and again from 5:58 to 5:59 p.m. (National Archives, Nixon Presidential Materials, White House Central Files, President’s Daily Diary)