Foreign Relations of the United States, 1969–1976, Volume XXXI, Foreign Economic Policy, 1973–1976

17. Conversation Among President Nixon, the President’s Assistant for National Security Affairs (Kissinger), and Secretary of the Treasury Shultz¹

Washington, March 3, 1973.

[Omitted here is discussion unrelated to international monetary affairs.]

Nixon: Henry, did you listen to these gentlemen?²

Kissinger: Yeah. We had an hour’s talk about it.

Nixon: What’d you come up with?

Kissinger: Well, I told them that I don’t know anything about the substance of the—of the substantive—

Nixon: Consequence?

Kissinger: Of the merit between our acquiescing in a common float or intervening. I read the letter,³ and I came to the judgment that the Europeans are going to take a common position, or are going to try to take a common position, but they think that position will be unpalatable to us, and that they are trying, or that Brandt is trying, to buy us off in phrases about European integration and world stability for what he knows we won’t like in the position they’re going to come up with. Now, I knew nothing about the substance when I said this, and George agrees that we probably—there’ll be unpalatable features in this common float. My view from the political point of view is that there’re two aspects: one is, we don’t look strong if, two weeks after the devaluation there’s another speculative wave that then, again, changes the exchange rate. I’ll put that aside. The thing that bothers me most about the letter is that I think the time has come where we must make clear to the Europeans that they cannot take a common position without consultation with us on a matter that vitally affects our interest and buy us off in currency of abstract European integration, and that sort of thing. And, therefore, leaving aside now the question of whether we should intervene or not, I think we must in any event make clear to Brandt that this procedure is unacceptable to us.

Nixon: I know. Um-hmm.

Kissinger: Even if we lose on the issue, we then have a basis of maybe—as George explains it, the common float as such isn’t so much against our interests. We then might have a—we will have a basis for doing other things later on.

Nixon: Hmm.

Kissinger: I don’t like the letter. I think it sort of assumes that we’re idiots that can be paid off by phrases. I don’t like the fact that Heath isn’t in touch with us at all.

Nixon: We haven’t heard from him?

Kissinger: We have not heard from Heath. You called Barber—

Shultz: I called Barber this morning.

Nixon: Yeah, but you think Heath would—what’s he thinking? I don’t know, maybe he isn’t for it?

Kissinger: Well, but why doesn’t he tell us that?

Shultz: Barber—

Kissinger: It’d be easy enough for Heath to communicate with us and to say, “Whatever happens there, you tell us privately whether you [unclear].” And—so, as between whether we acquiesce in a common float, or whether we intervene, or—or we have nothing to acquiesce in yet, because they [unclear]. On the issue of whether we intervene or not, let me put that aside. I think, at a minimum, we ought to reply to Brandt by saying, you know, “Thank you for your communication,” and so forth, “but, change in the exchange rates between Europe and the United States is a matter of general interest; it is not a unilateral decision by the Europeans. It affects us and the Japanese.” I’d get the Japanese involved and score some points with the Japanese—

Nixon: That’s right.

Kissinger: —and inform the Japanese that we’ve done that. “That, therefore, we believe that before you make a decision, we must be consulted.”

Nixon: Yeah.

Kissinger: Or, if you wanted for me to say we are prepared to defend the present exchange system, this depends on what decision you make with it. But as a minimum, I would say, “We must be consulted.” Then, if we should object to whatever the unpalatable features are, which they haven’t told us yet, but Paul Volcker and, I guess, you think are certain. If they are nominally agreed to it, and then if we—we’ve established our principles. If they are, we object to it. If they then go ahead anyway, we then have the choice of either offering to intervene at that moment as an alternative. And above all, we will have created the basis for cracking down on them later on on something else. But I don’t think it is good policy for us to acquiesce in such a soppy palaver, which in effect says to us, “You’re so interested in European integration that as long as we do it together, as Europeans, you shouldn’t worry too much about what the substance is.”

Nixon: Through telling us that we’re interested in European integration?

Kissinger: In effect—

Nixon: To hell with that.

Kissinger: In effect, what he’s telling us—

Nixon: We always say that because we have to, but we’re not so sure of it ourselves.

Kissinger: In effect, what he’s telling us is—he isn’t saying, “We are making—we’re going to come up with a solution that protects your interests.” He isn’t saying, “We want to hear what you—”

Nixon: “Let’s do all of this in the—for the cause of European integration,” is what he’s saying.

Kissinger: He says, “What we will do will strengthen European integration. Therefore, it will help birth political stability. Therefore, you ought to be happy no matter what else it adds.”

Shultz: He’s reporting a conversation with Heath and the key sentence is, “We agree that we must make every conceivable effort to find a way out of the crisis which strengthens European integration.” That’s—

Nixon: Well, now, let’s look at that for a minute here. I said to these fellows this morning the reason we had to get you into this is that we have to make this decision in terms of the international political situation, and that, in doing, we might as well make some points or lose some points. Whatever the case may be, we’ve got to know what the hell we’re doing. The—for—I would like to use it as a means to keep the Europeans closer to us, rather than having them push away. I’d approach it differently. In a sense, I’d say, well, if we indicate we don’t give one damn about Europe, in a sense, this would argue for the second option, of course, about what happens, then that—then inevitably, the Europeans pull together, say, “The United States doesn’t care,” and that hurts our bigger game with regard to Europe. You’re approaching it from another standpoint. You’re saying, why, this is a hell of a thing for them to do, and—

Kissinger: Well—

Nixon: —they ought to have consulted. And, in any event, and whatever we do, let’s give them that kind of an answer this way—

Kissinger: But that’s not it. We could put in all the right words about—we can say, “We are, of course, in favor of European integration. We are, of course, we are also in favor of closer Atlantic partnership.”

Nixon: Um-hmm.

Kissinger: “It is impossible, therefore, for either side of the Atlantic to take unilaterally decisions that basically affect the other without consultation.” Now, that is what they ask of us when we deal with the Soviets.

Nixon: That’s right.

Kissinger: Therefore—

Nixon: And I think your idea of the—putting the Japanese in is extremely [unclear]—

Kissinger: “Therefore, while we like the sentiments which you express here and share them—” I mean, I wouldn’t challenge the European integration idea.

Nixon: Yeah. Yeah.

Kissinger: “We feel that it is not a substitute for taking a—for, for settling those problems that affect the world on a general basis. And, therefore, while you, of course, will proceed in your European discussions, we believe we must have an opportunity, and we think so should the Japanese, to express their view on how this affects the entire monetary situation.” Then they have two choices. They can either say, “To hell with you; we’re proceeding unilaterally,” and that sort of European integration we’re not in favor of. Or, they’ll consult with us. In the mean—at the same time, we could inform the Japanese what we’ve done, and they can then see us as the protector.

Nixon: Um-hmm. We, in effect, tell the Japanese that we have this communication from the Europeans, that we have told the Europeans that we do not feel they should move without consultation with us and Japan. And that’s a very good point; with that, you make a couple of points. Now, let’s come to the fundamental thing. Would you rather have the United States take a position of “leadership,” of massively intervening to protect the exchange rates, and so forth? Or, would you rather do what George and Herb Stein as economists—of course, Arthur Burns argued the other way as an economist—and they would say, “No, let’s let the thing mush along.”

Kissinger: Well, if I understand George, he thinks that a common float is really not against—it’s really somewhat in our interest.

Nixon: George thinks?

Kissinger: George thinks that.

Shultz: A common float—when we negotiated this devaluation, we, basically—that was one of our possibilities. We said, “If you do this, that’s fine.” So, we didn’t—

Kissinger: What I don’t like about it—

Shultz: In the monetary plan, we have explicitly provided for cases where a group of nations may form a monetary unit and be dealt with as a unit. So, that is a bridge that you [unclear]—

Kissinger: What I don’t like about the passive position, and I’m not talking economics now, is—

Nixon: Yeah?

Kissinger: —that we’ve devalued the dollar fourteen months after the Smithsonian.

Nixon: Right.

Kissinger: And now, in effect, we are getting it devalued again three weeks after devaluing it. And it doesn’t make us look strong, either domestically or internationally. That’s—

Nixon: That concerns me, too.

Shultz: What describes—

Nixon: Yet, we don’t want to do something that’s wrong.

Shultz: This is not the way that—I don’t know how you can describe it this way to the public at large, but I think among economists, and at least some businessmen and financiers in recent years, what has happened since August of ’71 is that we have gradually made progress toward a more flexible system, and we made a lot more progress a couple of weeks ago. And hence, say, Milton Friedman would describe it—I checked with Milton; he thinks the situation is great. Let them float. Force them to float. And then, we will have a floating system of some sort that will have all kinds of problems connected with it, but at least it’s moved over in that direction. And that is progress towards the sense that the system that we proposed, although it doesn’t have in it the sense of order that is in the system we proposed, it’s more at loose ends with itself. That’s the difficulty.

Kissinger: Many of my concerns can be met, Mr. President, by that letter that I’m suggesting, because that would show the Japanese and the Europeans that we’re not in a passive position. I mean, just to sit there while the Europeans devalue us again and put in a few hookers and get pap like this, that isn’t very strong. But, if you—if you wrote a very polite, but very definite letter—

Nixon: Um-hmm?

Kissinger: And I’d send it to Heath, too.

Nixon: Yeah.

Kissinger: Say, “We’ve been informed by Brandt; we want you to know.”

Nixon: That’s right.

Kissinger: “That, Heath, there’s many reasons, as you know. That here’s a fundamental principle involved. That European integration was never seen as a substitute for Atlantic or world cooperation, and, therefore, we cannot accept the proposition that a decision like this should be taken without full consultation with the United States.” That doesn’t force—there is no objection to a common float if it’s—

Nixon: George, what—your, your concern about the intervention, besides, is that it moves toward convertibility again?

Shultz: It is, exactly. Remember last summer, when we broke over in to this pattern; that was the concern. And that—so, that’s a part of it. Another part of it is that we are, in a sense, accepting the fixed rate concept, and I think there is also a fair degree of risk. Arthur feels that we could, possibly, make a deal with the Germans whereby they accept all of the genuine risk. Now, when the genuine risk is some percentage of billions and billions of dollars, it’s not negligible. [unclear]—

Kissinger: But as I understand it, the only risk is that we devalue again.

Shultz: Well, Arthur’s proposition is, and he doesn’t go further than this, is that we say, “We will accept a risk connected with a further change in exchange rates if that change results from a formal devaluation by the United States.” And, says Arthur, since we have no intention of a formal devaluation, in which we go to the Congress and go to the IMF, and so on, there’s no risk in that from us. The risk is if the Germans acquire a lot of dollars or loan us a lot of dollars at a rate of exchange which later changes as a result of some kind of common float, or some development in the system other than a formal devaluation, that they’ve acquired something at a price that changes. Suppose—I mean, look at the situation they are in now. They’ve acquired $6, $7 billion, and the value of those dollars has changed by ten percent; it’s gigantic. And it’s—and the Japanese are in the same position. And it’s surprising to me that the political figures in those countries aren’t being attacked as being stupid for having bought these dollars, which then were depreciated, and there they are stuck with them. They’ve lost a lot of money. But that’s the element of risk. Now, the—Arthur—the question is: would the Germans change the terms under which they loan us marks so that they accept all that risk, and we don’t accept any? Those are the conditions under which Arthur says we should be willing to borrow marks from them and then use those marks to intervene. It’s a question whether they would accept that. I think, as a bargaining proposition if we go forward with it, it’s almost certain they wouldn’t accept it. If they find that they can’t work out a common float, and the European way turns out to be no way, then they turn to us and say, “How about something like this?” Then we’re in a much stronger bargaining position. Or, if they try a float and it falls apart, and then they’re forced to a national float, which is so unacceptable to them, then we’re in a stronger bargaining position. I don’t think we’re in a very strong bargaining position on this with respect to the Germans right now. But, it can, nevertheless—it is true, as Arthur says, that we have disabused them of the idea that we would intervene. We went out of our way in your reply to Brandt, a couple of weeks ago,⁴ to deny that we had assumed an obligation to intervene in the Smithsonian. And we were clear in our own statement, along with the devaluation,⁵ that we had assumed—we didn’t say we wouldn’t intervene, we just said we had assumed no obligations to intervene. And, as a matter of fact, we’ve been under some attack in the Congress for intervening at all. And the people who follow this area, I think, on the whole, people are convinced that we ought to push it toward a floating kind of a system. But, at any rate, the Germans, undoubtedly, are laboring under the assumption that we would not intervene, that we would not go in with them and work on this.

Nixon: Now, why is it that the New York bankers—and Hayes, of course, is representing this, their view I presume—why is it that they overwhelmingly favor intervention?

Shultz: Well, I don’t know that they overwhelmingly do. He does, and he reported that he had talked to, he said, a number of—

Nixon: Right.

Shultz: —leading bankers, and they joined—

Nixon: Why do them—why do they—why do a substantial number of them favor it? [unclear] are the same reasons Arthur does, right?

Shultz: There is—well, there is the argument that if you have a known rate of exchange, it makes it easier to do business. There is the argument that’s what they’re used to.

Nixon: Yeah.

Shultz: There’s the argument that in the New York Fed, that’s one of the things they do. For years, they’ve been intervening in currency markets defending the dollar. That’s—

Nixon: Um-hmm.

Shultz: Like a boxer, they’re all set up to box [unclear]—

Nixon: Yeah. Yeah. Yeah.

Shultz: So, there is that. And then, I think there are the other considerations that Henry has mentioned, that Arthur has mentioned; that, that what kind of [unclear] are we anyway? The dollar getting punched around; we don’t do any—

Nixon: We’re not—we’re not moving to defend it against the speculators, and so forth.

Kissinger: And I must say—

Nixon: Moving to defend it against the speculators appeals to me.

Shultz: Yes. It [unclear] does—

Kissinger: Nor do I—you know, I’m no longer so sure that European integration is all that much in our interest.

Nixon: Oh, I’m not so sure of it at all.

Kissinger: And that, therefore, if we can force them to deal separately with us, whether that mightn’t be better for Atlantic unity.

Nixon: Which, basically, would mean not to intervene.

Kissinger: No, that might mean to intervene.

Nixon: Why?

Kissinger: Because, in either case—of course, I think one of the results of this crisis is that they’re going to move towards a common—

Nixon: You see, there’s the—I see your point.

Kissinger: No, what it would it mean—

Nixon: In other words, you mean [unclear]—

Kissinger: If you intervene, as I understand it, you must do it with the Germans. The Germans would be breaking ranks—

Nixon: Yeah.

Kissinger: —with the others, isn’t that right?

Shultz: Well, it may be, but the situation is the Germans would like to have joint intervention and defend the present system. They assume that it’s impossible, without asking us, but that’s what their assumption is, and that they’re going on to this other approach. In that case, if we want to intervene we should let them know that this is at least a possibility, depending upon what they want. So, we don’t know that they’re necessarily determined, the Germans, on those things. They’re operating on an assumption about our attitude.

Kissinger: The—if the intervention works, as I understand it, it will delay at least for a bit—make it harder to get a common European monetary system.

Shultz: Well, not necessarily.

Kissinger: But it’ll—

Shultz: I think this is something they are striving for. They have been saying they’re striving for it for a long while. From—to the extent that we accept the fact that there is a Common Market, it’s—it is a logical objective to try to have a common monetary system. I think it’s a real question whether they can have one that ties together Italy on one extreme, Britain on the other extreme, and so on. There’s a tremendous amount of heterogeneity there that’s going to be difficult to hold in one place. And, I suppose, in a sense, there—the moment of truth is upon them. They have a crisis; they’re going to try to do this. Can they [unclear]—?

Kissinger: Right, at any rate—

Shultz: No.

Kissinger: —if the Germans play ball with us, they will not be able to use this crisis to accelerate the process. That’s one argument. But I can’t judge the economics of the intervention, whether it will work, whether the Germans will do it.

Nixon: Yeah, the point is, the point is, let’s suppose we do nothing. Henry’s concern is that this plays into the line, that the—that forcing the Europeans together to develop a common policy. Is that your instinct?

Kissinger: Well, doing nothing—doing absolutely nothing, just noting this letter and then letting nature take its course—doing absolutely nothing, a) not only forces the Europeans together but enables them to develop whatever policy they want and pay us off in constitutional currency; that is, it was integration and bye.

Nixon: Um-hmm.

Kissinger: If we—that, I do not believe we should accept, because if that works here, they’ll apply it all across the board, and increasingly, while demanding from us that in those areas where we have freedom of maneuver, we consult them. And that isn’t—that is one of our big NATO—that’s one of our big Atlantic crises. So, at a minimum, at—in any event, I think you should write a letter that puts you into a posture of—

Nixon: I agree—

[unclear exchange]

Kissinger: —as well as of maintaining Atlantic unity and, and triggering the Japs. That’s the min—that’s in any event. Now, as between that course, and that course plus offering intervention, because the way I would offer intervention is to say, “If you’re doing this only because you think we won’t defend the dollar, I want you to know that we are prepared to discuss joint steps with you in defending the dollar.” That—on that I’m not sold, absolutely. If George’s argument is right, that—after all this agony of the common float, if they come to us with a proposal on the common float that we can live with, and we think is constructive, and we then accept it—that I wouldn’t think is bad for us. What I don’t think we can accept is that they make a major decision, just send you a pappy letter by one guy, the other fellow doesn’t say anything, and then tell us, “Here it is.” That I think is unacceptable for us—

Nixon: Yeah. Yeah. Yeah.

Kissinger: And, also, we can maneuver with the Japs a little bit, too.

Nixon: Yeah. Yeah. This, this—that’s the, that’s the—what Henry just said. We certainly must do that, but—

Kissinger: And that, also, doesn’t make you look as, you know, it—you’re being active and constructive that way.

Nixon: Yeah, sort of halfway.

Kissinger: Well, no, it’s not necessarily halfway, because—

Nixon: Yeah.

Kissinger: —if George is right, and if a common float is ultimately in our interest, if it isn’t coupled with a lot of onerous conditions, then this is a perfectly responsible exercise of leadership—

Nixon: Yeah.

Shultz: Where we, we know it will be accompanied by—if the French have their way—by anti-American rhetoric and some further emphasis on the common things and the common market countries to our exclusion. So, we know there’ll be a bite in it of some sort, but I don’t—fight those things on their own grounds.

Kissinger: [pause] It is hypothetically possible, isn’t it George, that the Germans are acting as they do because they think we won’t intervene.

Shultz: Right. That’s [unclear]—

Kissinger: That the British would—since the British are floating anyway, that the British wouldn’t object to the Europeans staying at fixed rates vis-à-vis us, as long as they are free to float, which they are anyway.

Shultz: That was the situation before this last flare-up—

Kissinger: So that—

Shultz: —that they were quite content with.

Kissinger: So that the choice for the President is between, in any event, to write the letter which I suggested, and then adding to Brandt, and to Heath, so he’s playing with open cards, that, “If you’re doing this because, that—because you think we won’t intervene, then I want you to know that we’re willing to discuss with you—”

Shultz: Yeah. I think if the President says that, though, then he is willing to intervene.

Kissinger: That’s right.

Shultz: You don’t say that unless you were.

Kissinger: No, no—

Shultz: That’d be—

Kissinger: He might make the decision that he would—

Shultz: Putting it forward that way, it seems to me, will have a bearing on the terms of trade and the assumption of risk that gets worked out. Because we’re offering, they’re going to be less willing to change the present arrangements under which we borrow marks. Now, I think it also has to be considered that all this ratchets back in to the Congress, and they know about swap arrangements, and how it works, and the fact that we assume some risk, and it costs us something, and how much does it cost us, and so on. And that is a point to bear in mind. Poor Arthur is tortured by the fact that he is scheduled to testify next week on the par value act [laughs] that changes the, the price of gold,⁶ and he hates the prospect.

Kissinger: If you write it without a letter of—without an offer of intervention, the practical result will be, well, you might affect the onerous conditions they put on us. You will force them in to talking to us, I believe.

Nixon: Well, the point is, I think without an offer of intervention, I don’t see what much they’ve got, what we have to bargain with in talking to them.

Kissinger: But we could keep the offer of intervention for later. I mean, we could, if they attach a lot of unpleasant conditions to a common float, we could then.

Nixon: Hmm.

Kissinger: Well, a number of things are possible. They might not agree on a common float—

Nixon: Among themselves?

Kissinger: Among themselves. And secondly, they might—

Shultz: They might agree on one which falls apart. And the Germans then are left in the position of having a national float, which they don’t like.

Kissinger: It’s impossible—

Shultz: And at that point, they might turn to us and say, “Will you defend this rate?”

Kissinger: Another thing that your letter might do, minus the offer of intervention, will be that it will affect the terms they may be willing to put to us. I think the Germans will be less willing to yield than the French if they know it’s going to involve us in a brawl—involve them in a brawl with us.

Nixon: Um-hmm.

Kissinger: And that, then, they have to accept it. And that, then, they might—that going ahead would mean going ahead against our stated preference. That will be tough for them.

Nixon: You feel very strongly against the intervention [unclear]?

Shultz: Yeah, pretty strongly. I can see the arguments that Arthur makes, but I think we’re sort of on a different course, and we’ve decided to try a flexible type system, and we should keep pushing forward.

Nixon: And this, you think—you don’t buy Arthur’s view that if we did intervene that we should kick everybody around a bit and get some action in three or four months on a flexible—on a system. You don’t agree.

Shultz: [unclear]—

Nixon: You—you tend to go with the view that if you go for the intervention, everybody will sit back and do nothing.

Shultz: Well, it takes the pressure off them.

Nixon: That’s right.

Shultz: Internally, whatever they may say about the desirability of going forward, everybody knows that it’s desirable to go forward, but I think that we, we will not. I think on the monetary system that we need to think about it as going down two tracks: there’s a negotiating track; people are stating positions and whatnot. And then there’s this reality track of what is actually taking place as things happen. And our trick is to so manage the reality that it conforms more and more to the idea that we’re putting forward, until they begin to touch each other in important places, and that’s when we’re going to get this thing done. And, moving it in a flexible direction, I think, tends to move more toward our ideas.

Nixon: Well, I’m concerned—I mean, we have to put all this, of course, in a political context.

Shultz: Right.

Nixon: [unclear] I think except for the New York bankers and a few others, most people don’t understand international things and couldn’t care less.

Shultz: Well—

Nixon: And I think that’s what Arthur was admitting, to his chagrin. He found, as he called around the country, people weren’t all that stirred up about it. Correct?

Shultz: Correct. Although, I think that it gets big headlines everyday.

Nixon: Yeah.

Shultz: Most, most people—

Nixon: And so, the things that they don’t understand creates instability—

Shultz: They don’t understand it; they see that it’s some kind of a problem, and the dollar’s under attack—

Nixon: Now, now, so much for it. Let’s leave that out; we can handle that [unclear]. What I am thinking about is the, is the use of a more positive leadership role through possible intervention in order to serve our interests in keeping the Europeans apart; keeping them from developing a united policy against us. I wonder if you could really do it. As I say, I wonder if you can really do it if we say, “Look—” we write a letter to Brandt and the rest, and say, “Look, you should have consulted with us and with the Japanese,” so, so, that’s good. But, I wonder if what we are looking at here is a possibility that the Europeans, for a variety of reasons, even despite that letter, will say, “Well, the Americans are not going to play as positive a role as we think they should. And, consequently, we should develop our own system.” Now, maybe they can’t do it, but at least it would tend to put them in that direction. Or, if we go the intervention route—and, Henry, put your mind to this—suppose we did. It seems to me—it would seem to me that we have a—that that, in effect, a leadership role with the Europeans that we don’t have otherwise. Now, I don’t what the hell we do with it. I don’t know.

Kissinger: Well—

Nixon: What’s your feeling—?

Kissinger: Well, my feeling is you cannot, in any event, oppose what they—he says he’s doing.

Nixon: No [unclear]—

Kissinger: You have to do it indirectly. You have to—you have to write—unless you decide to do nothing, you have to write the letter I have in mind, anyway.

Nixon: I know. I know that.

Kissinger: But then, you could add to the letter that I have in mind a paragraph that says, “As you gentlemen consider what to do, we want to make sure you’re not under a misapprehension. I want you to know we are now prepared to, now that there has been devaluation, to defend the dollar. That we have to put it within certain limits or with—under certain conditions.” And then have them come back to us saying they do not want us to defend the dollar, and they want to go to that system. We cannot say that we will not accept a European proposal no matter what its content is.

Nixon: Yeah.

Kissinger: That seems to me to be your choice, and I would do that. I would send that to both Heath and Brandt. Now, that in itself—

Nixon: And to the Japanese.

Kissinger: And to the Japanese. Now, that in itself is a pretty assertive role and more than we have done in the past and would stake out a leadership position, because even if you lose on this, you can then invoke it in other negotiations, on other subjects where the cards are not so. Eventually we can force them into a position where they have to talk to us on these matters, or we will talk separately on our matters. And they can’t insist that MBFR, nuclear treaty, and so forth, we cannot operate without consultation, but on things like this they can. And since we have to get more sanity into this other picture, I would use this, at least—at a minimum, you’ll get out of it a better tone in the other discussion.

Nixon: You see, George, in this international thing, the reason we’ve got to—I want you to put your mind to it in a different way than you usually do. Not—and we can’t think—you can’t think of this, basically, as an economist. The whole European relationship is in a state of, I think, very profound change at this point. And to the extent we can, we should use our economic and monetary stroke to try to affect that change in a way that will be—will serve our interests. I don’t know. Maybe, it may—but if the price is too high, if we’re getting a little [unclear]—

Kissinger: My—my instinct from this letter—and I’m really going much too far [unclear]. My instinct is that he’s made a deal with Heath for something—I don’t know what it is—that he thinks we won’t like. Therefore, I believe the offer of intervention won’t be accepted. I do not believe that the first theory—I think it’s too far gone for that.

Nixon: Well, then—

Shultz: Well, what seems to—

[unclear exchange]

Kissinger: But that isn’t bad.

[unclear exchange]

Kissinger: That wouldn’t be bad to offer—

Nixon: Tell him just to make the offer anyway?

Kissinger: Well, you’d make the offer because you have in Germany a massive domestic problem. According to George, one of the possible outcomes of this, of this whole sequence, whichever way it goes, is that the Germans will have to float nationally. Isn’t that right?

Shultz: That’s a possibility—

Kissinger: That’s a possible outcome. That, Brandt has sworn he wouldn’t do. Therefore, he sure as hell is going to blame somebody if it happens. Now, if we put before him a—if we force him into a position where he’s done a number of things against—either against us or hasn’t taken up certain options we’ve given him, it’s a hell of a lot harder for him to make us the villain. We can’t say, “It must be intervention.” That we are—it’s too far gone, in my view, for that. All we can do is offer it. Then, let them say, “We’ll do the float anyway.”

Nixon: Then?

Kissinger: Then, if on top of the float, they refuse to consult with us on it, at a minimum, we have greater freedom of action in some of the other games we are playing. We’ll get ourselves paid somewhere along the line—

Nixon: [unclear] because we will have acted responsibly, and they will have turned it down.

Kissinger: The answer to this letter is, yes, we are for integration. We’ve always been for integration. I’ve said it to you, and we’ve practiced it. But we’ve always seen it as a step towards Atlantic cooperation. And in this case, moreover, it’s world cooperation. And we’ve never interpreted European integration to mean that Europe takes unilateral decisions—

Nixon: Good.

Kissinger: —that affect us and, in this case, affect even the Japanese—

Nixon: Right.

Kissinger: —without prior consultation. Therefore, we insist—or, to phrase it nice, more nicely, that we have a chance to express the conditions of that solution. They haven’t told us what the solution is; they haven’t even said it’s a float. Then, you have—

Shultz: Suppose you put into that, “On this and other alternatives that may be available,” or something like that—

Kissinger: Well—

Shultz: —without offering intervention.

Nixon: Right.

Shultz: We just suggest that there is something broader, and maybe they would come back and say, “Well [unclear]—”

Kissinger: And I—I’d say, “I’m willing to reconsider—”

Nixon: Yeah. We would—

Kissinger: “—some of the positions I’ve taken.”

Nixon: Yeah. We could say, “We would like to—we feel that we ought to consider not only what you plan to do, but we ought to consider what we might do as well,” or something like that, or other—that’s your [unclear]—

Kissinger: Yes, you have to be sure they don’t then say convertibility. So—

Nixon: Well—

Shultz: Well, intervention is [unclear]—

Nixon: Intervention is—

Shultz: —convertibility. That’s the trouble with it.

Kissinger: Yeah. Yeah. Well, then—

Nixon: I think George is [unclear]—

Kissinger: Right. Well, you can either have that sentence in it or not have the sentence in it. The advantages of the letter are, well, they’re obvious. As you have Japan [unclear]—you’ve done something you can—

Nixon: Right.

Kissinger: —with the Japanese, and you’ve got yourself a platform where you can argue with them about their terms and [unclear] and I’m—I think Brandt is willing to make an agreement without us. Whether he’s willing to implement an agreement, the terms of which we’ve opposed, at a minimum, it may—will stiffen his back against the French. And, given all the things Heath wants from you in the nuclear field, he’s got to be damned careful about crossing you—

Nixon: Yeah.

Kissinger: —when you show your teeth.

Nixon: Yeah. Yeah. Right. George, let’s come to the merits. Your view is that if we did have an intervention, that it’d work for a while, and then, probably, have another crisis in a year. Correct?

Shultz: Probably. Although I think the exchange rates now existing are, pretty reasonable. So, there isn’t pressure from the—

Nixon: All right, let’s come at it another way. You just feel that intervention is bad, because you believe that convertibility was a bad track for us, and we should get the hell off of it. Is that it?

Shultz: I think that, that convertibility is something that is important to have in a monetary system. If the system is so constructed that it has the kind of equilibrium that makes convertibility unnecessary, it is sort of applying a psychological edge to something that doesn’t need it. Where you don’t need it, you can have it. Where you need it, in a sense that people want to convert, as now, you can’t have it, because we don’t have that much to convert with.

Kissinger: You can’t use convertibility—

Shultz: It’s literally impossible.

Kissinger: —as a substitute for equilibrium, as I understand it—

Shultz: That’s right.

Nixon: Right.

Shultz: Exactly. That’s very well put.

Kissinger: —’cause it’s bound to drain somebody to a point where you don’t—

Shultz: So you have to first construct a system that—that it is an equilibrium system, and then you can have convertibility. And that’s what we said.

Kissinger: Of course, one argument—

Shultz: The French say they don’t believe in an equilibrium system, because the elements of equilibrium not only include trade, but they include our military operations, they include our aid operations, and they include our investment. And they don’t agree that, somehow or other, the exchange system should give us a hand to play in those three fields.

Nixon: Let me ask you—

[unclear exchange]

Nixon: That—that raises a different point. You mean that for us to intervene, which means a step toward convertibility, would give us—would play to, which is not only the French but the British view too, the European view generally, the monetary thing should be handled separately from trade, military, et cetera, et cetera. In other words, is that true?

Shultz: A little bit, but I wouldn’t make that point too much. I was just pushing—putting this to you in terms of the nature of the French objection to our plans.

Nixon: Yeah.

Shultz: It is a very political—

Nixon: Any way that we can keep—

Shultz: It’s a very political objective.

Nixon: Any way that we can keep all this stuff linked, we want to do. That’s my point. It’s—

Kissinger: That’s right. That’s why—

Nixon: I’m—I’m for the [unclear]—

Kissinger: —why I was so eager to get the letter in.

Nixon: The letter is very important, and it’s a very—yeah. I couldn’t agree more with that.

Kissinger: And to Heath—to both of them.

Nixon: And to the Japs.

Kissinger: And—

Nixon: Send one to them.

Kissinger: And send copies of the letter to the Japs [unclear]—

Nixon: Damn right.

Shultz: It seems to me that you can, you can do [unclear]—

Kissinger: Little—

Shultz: Imagine this—

Nixon: [unclear]—

Shultz: You send the letter to Brandt, Heath, and so on, and say, in effect, “We think we should be consulted,” or have all the things Henry said—

Nixon: Um-hmm.

Shultz: —about what you’re considering and any other alternatives that may be available. Period. And then, presumably, they’re going to respond to that. If they don’t even respond, I don’t know what.

Kissinger: They’ll respond. They will.

Shultz: Presumably, they will respond.

Kissinger: There’s no way they cannot respond.

Shultz: Okay. So, what can they respond with? Well, on the one hand, they can respond by saying, “Here is what we are planning to do,” and give us information. They can respond by saying, “Well, are you willing to intervene or not? We assumed you weren’t.” It would be better, I think, to have it come up that way—

Nixon: Yeah.

Shultz: I’m thinking about the bargaining over the terms of this—

Nixon: Yeah.

Shultz: —than for us to put it forward.

Nixon: Yeah. Than to throw in that chip ourselves, now. You’ve got a good point there. All right.

Kissinger: I can live with that.

Nixon: Let’s write—

Shultz: And then we have to say—suppose they did that, and they came back, and they asked a question about intervention. What would we say? Would we say, “Well, if we can arrange the right kind of terms, we will?” Or should we say, “No, that was not what we had in mind?”

Nixon: Right.

Kissinger: At that point, we have to make this decision. What we have to avoid—the advantage of my approach is—I mean, my approach is—well, of the approach that I mentioned—is that if we can get them to put their proposal forward first, we can’t lose, because either the proposal is acceptable to us on objective grounds, and then we say, “Fine.” Or, the proposal has a lot of hookers in it, which we don’t like, in which case we can at least alleviate those. And, if failing alleviating them, we’ll get ourselves compensation in some other field.

Nixon: Right.

Kissinger: Uh—

Nixon: Right. They’ll know that we objected.

Kissinger: That’s the advantage—

Nixon: They owe us one.

Kissinger: They owe us one, and we have a lot of things coming up in which it doesn’t hurt us to have that psychological edge, because we may have to do a few things they don’t like. Now, if they can get us into a haggle, and this is actually arguing against now putting forward intervention—supposing they get us into a haggle about the terms of intervention, we put forward terms they won’t accept. Then they say, “Hell, we tried. Now, you have to accept anything we put forward on the common float.” So, I’d rather, from the negotiating point of view, when they come back, get them to spell out all their options in detail—

Shultz: I agree with that. I—

[unclear exchange]

Shultz: I think we’re getting somewhere. I think the right approach is to have the kind of letter Henry said, with no mention of intervention or anything, and try to draw from them what it is that they have in mind. And then have a chance to have some input in—

Nixon: Um-hmm.

Shultz: —and go [unclear]—

Nixon: Then we can see—

Kissinger: And we could put in the phrase—

Nixon: Maybe we might use the intervention option then, maybe—Kissinger: Yeah.

Shultz: Well, I think—

Nixon: —if we get a hell of a lot out of it.

Shultz: Our sort of technical analysis is that the probability of them being able to work out a genuine joint float including all their countries, Britain and Italy, is like point two, and the probability of it working are two chances out of ten. The probability of them doing it, and it working, is like one chance out of ten. The probability of working out something involving Germany, France, and Benelux, says Arthur, is probably, say, six chances out of ten, or maybe seven. And the probability of it working is, perhaps, five chances out of ten. So, I think there is a very strong likelihood that their efforts at a joint float are going to be fruitless. They’re going to—they’re gonna have an awful lot of trouble with it. Now, at that point, we want—we might want to have thought right here, that if Brandt finds himself in serious difficulty with something like that—but the British won’t, because they’ll just go right to their float and they’re going to be fine—but if Brandt gets into real difficulty, then we might put ourselves in the position of bailing him out with intervention and agreeing to do it on a massive scale and getting things straightened out. And, in that process, you would have shown him, “Look, we tried to do this with Europe and work everything out. But, no, you fellows worked that out. And look what happened to you. And you got in trouble, and the U.S. came along and we [unclear]—”

Kissinger: We have to have a sentence in there about other alternatives. We don’t have to say we’re willing to intervene. I’d say—

Nixon: “We need to examine.”

Kissinger: —“We’re willing to examine all alternatives that may occur to you,” or something like that—or “many,” or something.

Shultz: Well, why can’t we just put it in terms of that framework and draw their plan the way you said?

Kissinger: Well, but that framework is—premised on European integration, entirely.

Shultz: Well, but we’re not objecting to European integration.

Kissinger: Not formally. I think—

Shultz: It isn’t that—the thing is that they have been talking about a common monetary system, about common economic policies, and so forth, all along. There’s nothing novel about them just trying to do that.

Kissinger: But they’ll never get it done unless they’re under pressure for—from something. We have—this isn’t nobody’s fault here, but we’ve worked ourselves for twenty years into the position where we have fostered European integration in the area where it’s against our interest and have discouraged it in the area, mainly defense, where it is in our interest.

Nixon: That’s right.

Kissinger: So, we’ve made the Europeans depend on us in defense, which even works against our economic interest, and given them a free hand in the economic field, where it’s a—

Nixon: Where it’s against our interest [unclear]—

Kissinger: Where it’s against—so, the priorities have been totally wrong.

Nixon: You really got it on the head there. I agree with that.

Kissinger: But that’s what we’re stuck with now.

Nixon: [pause] Well, shall we go on a letter then?

Kissinger: Yeah—

Nixon: Will you—will you prepare it tonight, or Henry will get it—?

Kissinger: George and I will work on it tonight.

Nixon: Sure, well—

Kissinger: [unclear]—

Nixon: —why don’t you do that.

[Omitted here is discussion related to Shultz’s forthcoming trip to Europe and the Sovet Union.]

1. Source: National Archives, Nixon Presidential Materials, White House Tapes, Oval Office, Conversation 868–15. No classification marking. According to the President’s Daily Diary, Nixon met with Kissinger and Shultz from 1:10 to 2:07 p.m. (Ibid., White House Central Files) The editor transcribed the portion of the conversation printed here specifically for this volume.
2. At the President’s request (see Document 16), Kissinger met with Shultz, Burns, Stein, and Ash on March 3 from 11:55 a.m. to 1:03 p.m. (Library of Congress, Manuscript Division, Kissinger Papers, Box 438, Miscellany, 1968–1976, Record of Schedule)
3. A reference to Chancellor Brandt’s March 2 letter to President Nixon, Document 15.
4. See Document 9.
5. See Document 12.
6. Burns testified before a House of Representatives banking subcommittee on March 7.