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

224. Letter From President Nixon to President Pompidou¹

Washington, February 16, 1972.

Dear Mr. President:

My intensive preparations for my trip to China have somewhat delayed a response to your message of February 4.² I have wanted to consider that important communication with care and now, just before my departure, I should like to reply in the same spirit of candor and friendship which you displayed in your message. I assure you that I remain convinced that maximum mutual understanding between us on these difficult issues is essential.

I recognize the force of the concern you express that the prosperity of the United States and the stability of the dollar are important to the entire Western world. I also can well appreciate that, viewed from abroad, the high level of our prospective budgetary deficits in the United States could raise questions. Yet, viewed in the perspective of economic conditions in the United States and in the framework of our total economic policies, I am convinced these deficits are appropriate. To a considerable extent, the new forecast of a higher deficit in the current fiscal year is merely the reflection of reports received since our meeting in the Azores, indicating slower growth than had been estimated earlier for the second and third quarters of 1971. The slower growth in those quarters leads automatically to an expectation of lower tax receipts in the first half of 1972. In part, however, the new forecast of a higher deficit this year is the result of a purposeful acceleration of Government expenditures to provide some needed impetus to nudge the economy on to a more satisfactory recovery path. Under the circumstances, I believe the deficit is of an appropriate size not just in the context of our domestic needs but in terms of a broader view of the evolution of the monetary system and the world economy.

You have emphasized that the prosperity of the United States and the value of the dollar are of fundamental importance to the Western world. I agree, and I believe the force of the point is redoubled at a time of sluggishness and even fear of recession in some important countries. Steadily rising levels of business in the United States will help assure growth in markets for our trading partners—and confidence in that growth—even as the effects of the currency alignment are absorbed.

As our joint press statement at the Azores (as well as our private communication)³ emphasized, the most important contribution the United States Government can make to the stability of the monetary system and the defense of the newly fixed structure of exchange rates is through vigorous efforts to restore price stability and productivity to the United States economy. Without reviewing all the details of our present programs, I assure you that these fundamental objectives remain the basis of our domestic policies. We shall break the back of inflation in the United States. We shall seek new breakthroughs in productivity growth. These steps seem to me the indispensable backbone for any realistic defense of the dollar.

This defense will have many facets. New tax measures and new regulatory approaches have been adopted to spur productivity. To assure that the economic expansion is accompanied by further progress toward price stability, we are maintaining our price and wage controls, and I have requested of the Congress a firm expenditure ceiling for fiscal year 1973 at a level only 4 percent above this year’s expenditures. This will assure that revenues come into line with spending as the slack in the economy dissipates.

In view of the objectives of our total economic program, I have been pleased to receive reports that the Organization for Economic Cooperation and Development, in the meeting in Paris of its Economic Policy Committee a few days ago, found general accord with its forecasts that, in 1972, the United States will succeed both in having the most satisfactory recovery of economic growth and in having the lowest level of price inflation of any of the major member countries.

As we see the coming months, our forecast budgetary deficit will insure that we do not have to place undue reliance on monetary policy for promotion of economic expansion. Indeed, the financing of the deficit is likely to force some increase in short-term interest rates, to which international exchange markets are sensitive. I frankly hope this adjustment can be made without disturbing our long-term rates, which remain high. But my advisers tell me that conditions in a number of countries abroad are likely to lead to a reduction in their interest rates, a development which will reduce present disparities in interest rates among major countries.

In view of the major disturbances which were experienced during 1971, we have recognized that the foreign exchange markets could not be expected to return immediately to entirely settled and normal attitudes. For this reason, since December 18, we have refrained from any steps to relax our controls on capital, despite the doubts I expressed to you as to their effectiveness and usefulness and despite my strong wish to move away from these controls as promptly as possible. The small technical change in our regulations which you mention in your letter had actually been announced some days before our meeting in the Azores. Our general objective remains, however, the gradual relaxation of these controls, and we must, within the coming weeks, announce the details of our direct investment control program for the calendar year 1972.

In the light of conditions in the exchange markets in recent weeks, I believe we are fortunate that our compromise has permitted a wider band of fluctuation to absorb and diffuse movements of funds without requiring large scale central bank intervention. I confess that your concern over the comments on flexibility in the recent report of my Council of Economic Advisers surprises me in the light of our conversation, since I believe we both recognized this question would need to remain an open issue for the planned discussions of the future of the international monetary system. Similarly, I believe that I made clear in our conversation that it is our view that questions of convertibility of the dollar should be discussed in the context of broad consideration of the many inter-related aspects of future reform of the monetary system. Now, however, that the period of intensive short-term trade discussions is behind us, we are intensifying our deliberations and preparations within the United States Government for these important international deliberations on monetary reform, including various proposals for the consolidation of dollar balances, the desirability and feasibility of various measures to deal with short-term capital movements, and the appropriate exchange rate regime.

To assure the maximum accomplishment in these discussions, and to help deal with current issues of monetary cooperation as they arise, I have asked Secretary Connally and his staff to remain in close consultation with your advisers in the months to come.

Mr. President, you played a crucial role in preparing the ground for the Smithsonian Agreement. With transmittal of the formal request for dollar devaluation to the U.S. Congress, this should be a time of personal satisfaction to you.⁴ I hope for speedy action on that request, although I must in frankness confess my own disappointment that the European Community has apparently taken the decision that, in the important area of agriculture, the normal competitive benefits of a devaluation will be denied to us.

Plainly, we have many fundamental issues before us, both in the monetary and trade areas—issues, indeed, that cannot be disassociated from each other. We have no choice but to attack them openly and frankly.

We have, I believe, made good progress in recent months. I hope we can continue to convert old issues into new agreements.

I look forward to staying in close communication with you on the entire range of issues that concern both our countries and would, of course, welcome your further views on the subject matter of this message. I expect to communicate with you concerning my impressions in China as soon as I have returned from there.

With warm personal regard,

Richard M. Nixon ⁵

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 356, Monetary Matters. Secret. “HOT LINE” is typed at the top of the page. Earlier drafts of this letter and Sonnenfeldt’s comments on the drafts, which express concern that they did not adequately address measures to defend the dollar and the U.S. position on convertibility, are ibid. Sonnenfeldt thought Pompidou would view those inadequacies as evasive and unresponsive to his concerns.
2. Document 223.
3. Document 220.
4. Legislation to increase the dollar price of gold was sent to Congress on February 9, under cover of a letter from Secretary Connally to Vice President Agnew in Agnew’s capacity as President of the Senate. Connally’s letter, the draft legislation, and background material were circulated to the Volcker Group as VG/Uncl. INFO/72-1 on February 10. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, 1972) Congress completed action on the legislation on March 31, and President Nixon signed it into law on April 3. See Public Papers of the Presidents of the United States: Richard M. Nixon, 1972, pp. 513-514.
5. Printed from a copy that bears this typed signature.