204. Memorandum From the Chairman of the Council of Economic Advisers (McCracken) to President Nixon1
At the Economic Policy Committee meeting of the OECD in Paris last week two matters emerged that are worth calling to your attention.
First there is growing concern among the major industrial nations about their own domestic economic conditions, and this does have implications for the exchange rate appreciation, relative to the dollar, that we can expect from them. As they become more worried about rising unemployment, they will tend to become less generous about the appreciation they will accept—with its adverse effect on their international competitive position relative to the United States.
Because of these growing domestic economic concerns, these countries will tend to pursue more expansionist monetary policies. This is particularly true in Germany, where not too long after the turn of the year, easier monetary policies can be expected. In private conversations they made this clear to me. As these occur, international monetary flows will be induced that will tend to move the exchange rate of the D-mark downward. It is not reasonable to expect the Germans to agree to any change in the exchange rate pattern which would require their moving the D-mark exchange rate up above its then present level. Their exporters are already bringing heavy pressure to bear on the German government because the D-mark appreciation is giving their exports an increasingly hard time in world markets.
[Page 568]The clear implication of these developments is that the exchange rate adjustments we can expect from other industrial nations are apt to be smaller as we move beyond the turn of the year.
Second, a pro-American French line2 was evident at the meeting. Traditionally in these Economic Policy Committee meetings the French delegation could be expected to flay the American position at some point in the deliberations. This time any intimation of any anti-American comment from the French spokesman was conspicuous for its complete absence.
Moreover, at his initiative, I had dinner (at Laserre) with M. Jean Rene Bernard, Economic Adviser to President Pompidou. This dinner was at M. Bernard’s initiative, and he came to the dinner from having been in bed with the flu. I know him well enough for a serious conversation, but not well enough for him to have arranged a purely social evening. The dinner was, therefore, presumably arranged for him to communicate a basic message.
M. Bernard also took the same intensely pro-American line. While this might be dismissed as tactical, I believe it was more than that. The French do seem genuinely worried about the political implications of a continued international monetary problem. For one thing, he considered it quite important that the G-10 meetings November 30 and December 1 should at least start the process for an orderly solution in order that the Pompidou-Brandt meeting on December 3 would not take place against the backdrop of a continued international monetary impasse. He also expressed the view that if this could be resolved, the United States could then resume its overall international leadership without which, in his judgment, it might be difficult for European unity to survive.
He was cool to “regional” solutions (including a European regional system), and not optimistic about their workability. And he seemed concerned about longer-run relationships between France and Germany.
I pass these observations along because they may be pieces of a larger jigsaw puzzle that carry implications beyond economic policy in the narrow sense.
- Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 216, Council of Economic Advisers. No classification marking. The memorandum is Tab A to a December 1 memorandum from Hormats to Kissinger that summarized three reports on foreign reactions to the international aspects of the New Economic Policy. McCracken’s November 24 note sending Kissinger a copy of this memorandum noted that he was sending it to Kissinger “because my major impressions from this meeting seem to center more in the political than in the economic domain.” Tabs B and C were papers from the Department of State.↩
- On another copy of the memorandum the President circled this phrase and in the margin wrote: “K-note.” (Ibid.)↩