London, September 17, 1971, 1124Z. 

/1/Source: National Archives, RG 59, Central Files 1970-73, FN 10. Confidential; Limdis; Greenback. Repeated to Bern, Bonn, The Hague, Ottawa, Paris, Rome, Stockholm, Tokyo, USEC, and USOECD.

8639. From Under Secretary Volcker to Treasury for Petty. Subject: Meeting of Ministers and Governors of the Group of Ten. 

1. Other G-10 Ministers generally followed lines foreshadowed by Deputies meeting and EC Finance Ministers meeting./2/ With varying emphasis, they suggested that (A) United States adjustment goal too ambitious particularly in short time, (B) realignment should include U.S. action to change dollar parity in terms of gold, (C) U.S. import surcharge should be eliminated as part of multilateral realignment, (D) effort should be made to return to fixed parities as soon as possible, to avoid tendencies to build in restrictions on trade and investments if present situation continues long time. Some countries, notably Italy (speaking as Chairman of Six Finance Ministers) and Japan, sought improvements in monetary system by greater reliance on Special Drawing Rights.

/2/The G-10 Ministers met in London September 15-16. The G-10 Deputies met in Paris on September 3; see footnote 3, Document 173, and Document 174. According to a September 11 memorandum from Hormats to Kissinger, on September 10 the Executive Commission of the European Community proposed a U.S. devaluation of the dollar as part of an international currency realignment in the context of a system of fixed parities, albeit with wider margins. The Commission also recommended prompt lifting of the U.S. 10 percent import surcharge, an expanded role for SDRs, and the phasing out of national currencies as sources of international liquidity. Hormats noted that the EC Finance Ministers would consider the Commission's recommendations on September 13 prior to the G-10 Ministerial meeting. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218, Council on International Economic Policy) 

2. Secretary Connally, speaking from notes, stated U.S. position in statement covered in full in separate message./3/

/3/Not found. The full text of Secretary Connally's statement, along with those of other Ministers, Chairman of the G-10 Deputies Ossola, and IMF Managing Director Schweitzer were circulated to the Volcker Group as VG/LIM/71-35 on September 20. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/LIM/71-1-) See Document 78 for a summary of Connally's remarks on the balance of payments.  

3. On procedural problems, Schweitzer listed number of main issues and proposed division of issues into three groups-immediate, intermediate, and longer run. First group concerned realignment, price of currencies in gold, wider margins and abolition of U.S. surcharge. Intermediate group included B/P adjustment measures other than exchange rates (presumably including defense burden-sharing), the future type of convertibility, and methods of handling flows of capital. Long-range group was future role of reserve currencies and other basic reform of international monetary system. Barber (U.K.) and Schiller (Germany) pushed for prompt action on first group of issues, and France and others gave milder support.

4. Secretary Connally felt division of issues into separate groupings was premature, prejudiced substantive judgments and priorities, and concentrated too much attention on further U.S. contributions to equilibrium through change in dollar price of gold and abolition of surcharge. Such proposed work programs did not give adequate effective and prompt attention to issues of special interest to U.S., such as sharing of defense burden and elimination of unfair trade practices on part of other countries. Secretary Connally also stated President's position in opposition to change in dollar price of gold was absolutely clear. He suggested that Working Party Three examine statistics on size of correction needed and Deputies meet to prepare a work program that might meet with general acceptance. This was agreed and stated in communique (see separate text). 

5. Deputies meeting scheduled for 3:30 p.m. September 25, Ministerial September 26.

Annenberg 

176. Action Memorandum From the President's Assistant for National Security Affairs (Kissinger) and the President's Assistant for International Economic Affairs (Peterson) to President Nixon/1/

Washington, September 20, 1971. 

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218, Council on International Economic Policy. Confidential. Attached to a memorandum from Peterson to Kissinger that indicated Peterson had discussed the joint memorandum with Secretary Connally, who found it acceptable. Peterson noted that Connally thought it urgent to decide what to say to the Japanese on Saturday (September 25) and at the IMF, and Peterson wanted to call a meeting on September 22 if the President approved. (Presumably Connally was referring to bilateral meetings with Japanese officials who would be in Washington for the Annual Meeting of the IMF the following week.) Peterson asked Kissinger, if he approved the joint memorandum, to "please sign it now and I will have somebody waiting outside to get it into the President's office." Peterson wrote at the bottom: "Sorry to bother you."

SUBJECT
Negotiating the New Economic Policy Abroad 

As the shock effect of August 15 wears off and other countries develop their negotiating strategy, defining where we want to go becomes increasingly essential. We need to:

1. Refine our objectives: what exactly do we want others to do? 

2. Define our priorities: which objectives should we push hardest, and in what time frame?

3. Determine our own negotiating strategy: how do we achieve our bilateral aims vis-a-vis countries in a variety of different areas (monetary, trade, and defense) in the same time frame we are negotiating multilateral understandings? 

We propose making a hard-hitting analysis of the leverage we have gained by making the dollar inconvertible and by imposing the surcharge. Relations with our allies and friends could deteriorate if we have an inadequate understanding of what we can reasonably expect to achieve by our actions.

Recommendation 

That you approve establishment of a small coordinating committee, chaired by Peter Peterson and including high-level representatives from Treasury (Volcker and Petty), State (Samuels and Trezise), CEA (Solomon), OMB (Dam), and the Federal Reserve Board and NSC Staff. This group will develop and refine the options available to us in the near term, with a view to presenting them to the Quadriad augmented by Secretary Rogers, Henry Kissinger and Peter Peterson. Secretary Connally has agreed that in view of the broad range of issues involved, this kind of White House-chaired coordinating committee is necessary and desirable. Secretary Rogers, deeply concerned about the foreign policy aspects, concurs in the need for such a committee. George Shultz and Paul McCracken also agree./2/

/2/There is no indication if the President approved or disapproved the recommendation, but a Coordinating Committee was soon established; see Document 179. 

177. Memorandum From the President's Assistant for International Economic Affairs (Peterson) to President Nixon/1/

Washington, September 20, 1971. 

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 216, Council of Economic Advisers. Confidential. An accompanying September 22 handwritten note to Kissinger initialed by Kennedy reads: "This is of interest in view of your discussions in the 'Breakfast Group'." Also attached are a September 22 note from Jon Huntsman to General Haig indicating Peterson's memorandum went to the President that day along with a September 22 memorandum from Kissinger to Connally, Shultz, and McCracken transmitting some slightly redrafted proposed remarks for the President that Kissinger thought they should discuss "at our meeting in the morning." The draft Presidential remarks were intended for President Nixon's use at a question-and-answer session at the Economic Club of Detroit on September 23; see Public Papers of the Presidents of the United States: Richard M. Nixon, 1971, pp. 965-980. On September 21 Federal Reserve Chairman Burns had also provided the President proposed remarks for Detroit, and underlining by the President indicates that he read them. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 289, Treasury, Volume II) Burns' proposed remarks for Detroit were attached to a September 23 memorandum from Kissinger to Connally suggesting he "work some of these thoughts into the speech that is being prepared and which will be discussed at the meeting tomorrow." Presumably Kissinger was referring to the President's remarks during his September 29 reception for principals attending the IMF and IBRD Annual Meeting; see Public Papers of the Presidents of the United States: Richard M. Nixon, 1971, pp. 1014-1016.

SUBJECT
Coordinating Group-Planning the Negotiations for the New Economic Policy Abroad 

It is agreed by all of us that we do not want a patchwork settlement that would only lead to another financial crisis in a few years. However, it is increasingly apparent that it is not enough to say that we need a $13 billion swing in our balance of payments, exchange rate realignment, reform of the monetary system, and more equitable deals on trade and defense sharing. So far, we have left it to others to adjust to the situation we have created. But soon we will have to clarify what we want multilaterally and what we want bilaterally from key countries. Most feel that having taken the essential but shock-producing moves of August 15, we should be prepared to propose some positive initiatives in the reasonably near future.

We need to define more precisely four areas: our objectives, our priorities among them, our negotiating leverage, and our negotiating strategy. 

1. Refining Our Objectives (including the magnitude and timing of the balance of payments swing)

a. In the exchange rate area, we first need to determine whether our interests are best served by a prolonged float or an early return to a realigned, fixed rate system. If the latter, we need precise ideas about how far each major country is prepared to go in revaluing now, and how far later. What combinations of revaluations are the minimum acceptable to us at this point in time? 

Is some exchange rate action by us needed to assure achievement of our parity realignment objectives? (Most feel this should only be considered as part of a long-term basic reform of the system.)

Related to these exchange rate questions is the position we take on investment controls. 

b. On monetary reform there are many tough interrelated questions. For example, do we or don't we want to return to fixed parities? In what circumstances? Should the dollar as a major reserve component be gradually phased out, along with gold, in favor of SDRs? A composite reserve unit? What precise actions by ourselves and others are needed to accomplish this objective? Over what time frame?

c. Defense is a major drain on our balance of payments. With a big trade surplus it is manageable. But that surplus is at least 18 months off. What do we mean by increased defense burden sharing? This might take the form of larger purchases of U.S. equipment by those countries where our expenditures are high (e.g., Germany, Japan). Offset negotiations with Germany are well along. Alternatively, we could try to get direct contributions from NATO as a whole. Do we now want to place greater emphasis on budget contributions as opposed to balance of payments offset purchases? Essentially, we must be more precise about what we want and can get in relation to action on the surcharge and dollar convertibility, what is not feasible in that context, and what may be negotiable over a longer period. 

d. What are our specific trade objectives, and with which countries? For example, a change in the Common Agricultural Policy of the European Community is one of our high priority objectives. Yet, this is likely to be a long-term negotiation. On the other hand, could we get agreement on stopping any further agricultural price increases? and/or on a longer-term target of moving toward direct European budget support of agricultural subsidies? Others include a reduction or complete removal of the discriminatory aspects of European Community preferential arrangements; a reduction in trade restrictions, including non-tariff barriers by Japan, revising the Canadian automobile agreement, etc. Which of these actions, if any, do we expect to achieve now in exchange for removing the surcharge or otherwise, and which must we carry over for later negotiation? Also, what, if anything, are we willing to put on the negotiating table? Finally, we cannot ignore the less developed countries where there are some special problems.

e. Longer term, what kind of future economic/political model of the U.S. in relation to other major trading blocs (in particular the EC) should guide us? How do we want the whole international economic system to evolve? A new U.S. centered bloc? A much larger free trading area including the EC, Japan, U.S.? 

2. Defining Priorities Among These Objectives

For example, agreeing to major revaluations now may in practice preclude certain reforms of the monetary system. 

Should we push hard for the reforms, recognizing that they will take time to negotiate, in the meantime encouraging other countries to float their currencies upward, without declaring a formal revaluation? What emphasis should be put on trade barriers, as opposed to financial issues?

If our negotiating strength is insufficient to achieve all our objectives in the near term, where should we put the emphasis? 

3. Negotiating Leverage

What negotiating instruments are at our disposal, and how much leverage do they give us? Negotiating concessions we can make include: (a) removal of surcharge; (b) reduction of surcharge in stages; (c) restoration of "limited" dollar convertibility into gold, or other reserve assets; (d) restoration of "full" convertibility into gold, or other reserve assets; (e) removal of the "buy American" aspect of the Job Development credit; (f) differential (i. e., for some countries but not others) removal of surcharge, action on job development credit, restoration of convertibility; (g) devaluation of the dollar vis-a-vis gold. 

We need to be clear about the risks and advantages, domestic and foreign, economic and political, involved in the use or rejection of each option, and the timing involved in each. We need to explore the legality of undertaking each. We also need a clearer idea of how much leverage each gives us, and what combinations add most to that leverage in general and with which particular countries. With time other countries may learn to live with the surcharge and their resentment may lead to stubborn refusal to give up anything for its removal, or even to retaliation. Domestically, it may become addictive and encourage protectionism, raise costs, weaken our competitiveness, and worsen our problem of inflation.

4. What is our negotiating strategy? 

Up to this point, we have been imprecise about both what we want from others and within what time frames we want it. In addition, if the assessments resulting from the answers to the questions posed above lead us to conclude that we should ask for different actions from different countries, we will have to develop a strategy for making our specific bilateral demands clear-e.g., from Canada, from Japan, from Germany, from Britain-and for the kinds of actions we will take if particular countries either meet or refuse to meet these demands. At some point, we must know when and how to compromise without prejudicing the achievement of those fundamental objectives which are more clearly longer-term than others. Any negotiating strategy must weigh carefully the effect of what we are doing and how we do it on our foreign relations and security policies. For example, it should include the possibility of forthcoming Presidential initiatives at appropriate times.

We also need to know the strong points of resistance by others, e.g., the EC has stated publicly that it will not agree to a major realignment of parities unless the U.S. participates by devaluing. Some other countries may also insist on additional action by us (e.g. eligibility for their exports to qualify under the full Job Development credit) before they will agree either to adequate revaluations, negotiations about monetary reform, defense burden sharing, etc. We need an assessment of how serious these demands are, and the risks and advantages to us involved in acceding or not acceding to them. 

Finally, we need to decide on a mechanism for carrying out the diverse and multi-faceted negotiations. Most of the issues are Treasury's main line of responsibility, but our objectives range also into the areas of trade and defense. This will create problems for other governments, whose internal division of responsibility is often quite strict, and will require a suitable mechanism on our part.

178. Memorandum From the Executive Secretary of the Department of State (Eliot) to the President's Assistant for National Security Affairs (Kissinger)/1/ 

Washington, September 24, 1971.

/1/Source: National Archives, RG 59, Central Files 1970-73, E 1 US. Confidential. Drafted by R.J. Smith and L.J. Kennon (E/IFD/OMA) and cleared by S. Weintraub (E/IFD) and Katz (E). 

SUBJECT
Foreign Reactions to the President's Economic Program-Afternoon September 24

Foreign official views (probably in part substantive and in part tactical on their part) about the international monetary situation as reflected at last week's meeting of the Group of Ten Finance Ministers/2/ are: (1) the US adjustment goal of a $13 billion turnaround, largely on trade, is too ambitious, particularly in the relatively short time frame of a year or two; (2) the general realignment of exchange rates should include US action to devalue the dollar; (3) the US import surcharge should be eliminated; (4) fixed rates should be quickly reestablished. Some countries, notably Italy and Japan, urged improvement in the international monetary system through greater reliance on Special Drawing Rights (SDR's). The Group of Ten will meet again in Washington on September 25 at the Deputy level and September 26 at the Ministerial level, in preparation for next week's IMF meeting. 

/2/The G-10 Ministers met in London September 15-16; see Document 175.

At the G-10 meeting, the Managing Director of the IMF, Schweitzer, suggested a procedural approach consisting of dividing the issues into three groups to be dealt with in stages: (1) realignment of exchange rates, relationship of currencies to gold, wider margins of fluctuation around par rates, and abolition of the US surcharge; (2) balance of payments adjustment measures other than exchange rates, such as defense burden sharing arrangements, future type of convertibility, and methods for handling flows of capital; (3) the future role of reserve currencies and other questions relating to basic reforms of the international monetary system. Secretary Connally noted that the United States did not agree with this approach and the placing of issues into separate groups. 

Governor Wormser of the Bank of France believes that an early settlement of the monetary crisis is essential to avert a worldwide recession and that there are only five or six months to negotiate a long term solution. Otherwise, he believes, the world economic situation will deteriorate markedly, with increasing national restrictions on trade and payments coming into being, partly in response to the US surcharge.

This week's meeting of the EC Council of Ministers (September 20-21) concluded that there was no need at this time to revise positions on the US economic measures. The French and Germans stressed the dangers of retaliation and no active consideration was given to retaliatory or compensatory measures at this time. The Community intends, however, to watch the evolution of the situation closely in order to adopt "any new decisions which may appear necessary". 

Our Embassy reports that large segments of Japan's business community, especially the trading companies, favor unilateral Japanese action to revalue the yen. The Bank of Japan and the Ministry of Finance are reported as resisting this pressure on the grounds that Japan should wait for further multilateral movement. Government officials believe any unilateral action to revalue the yen now would be treated by others merely as an opening bid.

The dollar weakened further today and the major trading currencies reached their highest levels since the floats began. The Deutschemark rose to nearly 10 percent above par following reported purchases yesterday by the German Central Bank of more than $100 million in the spot and forward markets. 

Further memoranda in this series will be submitted as warranted by developments.

Parker W. Borg/3/

/3/Borg signed for Eliot above Eliot's typed signature.

179. Memorandum From the President's Assistant for International Economic Affairs (Peterson) to the President's Assistant for National Security Affairs (Kissinger)/1/

Washington, September 24, 1971.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218, Council on International Economic Policy. Confidential.

This is about as hurriedly thrown together as anything can be since the Coordinating Group has only been in operation since yesterday morning./2/ It is so much a first draft that the rest of the Group are getting copies the same time you are./3/

/2/Presumably the group Kissinger and Peterson proposed in their September 20 memorandum to President Nixon, Document 176.

/3/A September 24 memorandum with similar wording directed the attached paper to Volcker and Petty at Treasury. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, CIEP)

However, given your Alaskan trip/4/ and the forthcoming IMF meetings, I felt that your looking at this might at least give you a preliminary glance of where we stand.

/4/Kissinger accompanied President Nixon to Anchorage for his September 26 meeting with Japanese Emperor Hirohito.

P

Attachment

SUMMARY/5/

/5/This is the summary of a 23-page paper, which is not printed.

We can, perhaps summarize the present status of discussion within the Government as follows:

A. Areas of Agreement

1. We agree on a two-phased Negotiation. Phase I, to be completed, hopefully, in 6 to 8 weeks and no later than Christmas would involve negotiations on monetary, trade, and defense issues that would provide clearly identifiable results of our negotiating efforts and a basis for removing the surtax and the discriminatory aspects of the investment tax credit. Phase II would involve long-range negotiations on key monetary, trade, and defense issues-the outline of which would hopefully be agreed to.

2. The surcharge-a domestic economic liability, although politically very popular-as an international asset will soon begin to deteriorate, unless constructive negotiations are underway promptly. Therefore, if we are to avoid serious complications, both internationally and domestically, we must promptly remove it in return for achievement of Phase I objectives.

Promptly means at the latest before Christmas. More desirable would be to end international Phase I simultaneously with the end of the 90-day domestic Phase I (November 15).

3. The highest priority Phase I objective is an exchange rate structure that promises to redress the United States balance of payments.

4. We need tangible trade and defense achievements in Phase I, as well as significant exchange rate realignment (in fact or through a credible process).

5. In no circumstances will we agree to more than "limited convertibility" in Phase I, since this is our major negotiating leverage for Phase II reform of the monetary system.

6. In Phase II highest priority attaches to reform of the monetary system so that we will not find ourselves in a few years back in the same situation which led to our August 15 actions.

7. In addition, in Phase II we want far-reaching trade liberalization and a significant shifting of defense responsibilities to our allies.

8. Finally, we want the President at the earliest possible date to put before the world a vision of our international goals for this country which would add to the Phase II elements mentioned above (trade liberalization, defense burden sharing, basic monetary reform), the prospect of the developed world more fully sharing its wealth with the less developed countries.

B. Issues

1. We have done considerable work but are not entirely agreed on specific trade and defense concessions we would want and expect as minimum consideration for removal of the surtax.

2. We have not defined precisely the minimum levels at which we would agree to return to fixed parities with limited dollar convertibility although the Deutsche Mark and the Yen both somewhere over 10%, agreement might be desirable . . . particularly if the outlines of an improved monetary system had been agreed to that would presumably correct any imbalances in the future.

3. Others argue that a continuing honest or bona fide float, particularly if it were agreed that reserve accumulation and any significant intervention would be ruled out for key countries, would, for now, be preferable to fixed parities at almost any level.

4. Although we have a clearly preferred view of not changing the price of gold in Phase I, there is an issue over what we would actually do if others insist, and this is a route to getting a substantial adequate realignment.

Why have others asked for devaluation of the dollar vis-a-vis gold? Politically, because such a move would appear to make the necessary exchange rate adjustments in other countries more easily tolerable. Also, the bookkeeping effects are certainly not negligible to some countries. Strategically, because some, i.e., the French, want to force us back to convertibility at a higher fixed gold price. The wealth redistribution effects of a price change are tolerable for us and others, although not desirable. Politically, devaluation is difficult for the President, but perhaps not impossible, and the atmosphere is clearly changing. There is a practical difficulty due to legislative requirements which argues for action only in the context of system changes which also would require Congressional approval but which would come near the end of the Phase II negotiation rather than Phase I.

5. What we mean by "limited convertibility" and how far we would go in what circumstances is also an issue.

6. While there are issues concerning our minimum trade terms, with respect to Japan, Canada, and the U.K., and some disagreement as to how much we originally ask for, the major trade issue concerns the European Community.

We know what we want from the Community but we recognize that the chances of obtaining much, if anything, on agriculture, preferences, and industrial policy in Phase I may be small.

A specific central issue here is whether or not to try to use the situation to seek a standstill on the European Community negotiations with the EFTA non-applicants. Success would be valuable, but the cost of trying and failing could be high, both on the monetary and political fronts.

7. Are there circumstances in which we would differentially lift the surcharge for some countries who had cooperated with us in making meaningful adjustments but not doing so for remaining countries ? This raises major policy and legal questions, including heightened dangers of retaliation and probable incompatibility with our international obligations. Fortunately, the decision is not needed now, but there are quite different legal and policy views on this within the government and we have much to do here.

8. While we prefer not to discuss our investment control programs and let the liberalization take place at a quiet but accelerating pace, others will probably make an issue of this. Eventually, we seek elimination of our controls and, indeed, action now would put more pressure on the rate structure, but it would also stimulate others to go even further in applying exchange controls.

9. We recognize that the existing situation inequitably places a large adjustment burden on developing countries, but until our Phase I objectives are achieved, most would agree that we cannot make major concessions through the less developed countries. However, if progress is not made promptly, further consideration of surcharge exemption for the less developed countries collectively or on products of major interest to them should be explored.

10. Last, but not least, there are issues concerning the negotiating scenario. How do we coordinate bilateral trade, defense, and monetary negotiations with the general multilateral discussions of questions involving the payments and trading systems? What is the proper role of various departments and individuals in Phase I? Phase II?

180. Memorandum From Lawrence H. Berlin of the Program and Policy Coordination Staff, Agency for International Development, to the Assistant Administrator for Program and Policy Coordination (Stern)/1/

Washington, September 24, 1971.

/1/Source: Washington National Records Center, Agency for International Development, Office of the Administrator: FRC 286 75 13, Box 10, PRM 7-2 July 1971-October 1971 FY72. Confidential.

SUBJECT
IBRD/IMF Annual meetings: Briefing of U.S. Delegation

The meeting of the U.S. delegation was chaired by Mr. Volcker, whose principal concern was with the questions likely to come up in corridor conversations among delegates concerning the new U.S. economic policies. He particularly stressed the danger that the press might be expecting some dramatic solution to the current world monetary crisis to come out of the Bank/Fund meetings, and will report failure when such a solution does not materialize. There is in fact no intention to seek answers to the monetary, trade, and defense burden-sharing issues next week; as always, the Bank/Fund meetings will be largely routine.

There will, of course, be side meetings of the Group of Ten, but this is purely incidental to the Bank/Fund meetings. Members of the U.S. delegation were specifically urged to express ignorance if any questions are asked by foreign delegates about the prospects for a resolution to be passed by the IMF Governors dealing with the international monetary system. (FYI: Such a resolution is expected, but the subject is highly sensitive; the resolution will in any case merely call for studies. End FYI)

Mr. Volcker stressed the official U.S. view that the balance of payments problem reflects not merely the need for changes in the international monetary system, but also foreign trade practices which are biased against the United States, and the U.S. defense burden. Fundamental rethinking of these issues is necessary, and while the U.S. Government has views, it is not deemed good tactics to propose a "U.S. solution" at this time, resistance to which might well kill off meritorious ideas prematurely. We seek solutions arrived at mutually, which accept the fact that the relative economic position of the United States in the world has changed even though we remain in a position of strength and leadership. We also wish to avoid a patchwork solution to the monetary problem alone which would leave other basic issues unresolved and could therefore prove unequal to the task of restoring basic equilibrium in our balance of payments. The result of such a failure could be demoralizing.

The following specific questions, which could come up at the meetings, were noted:

1--Were the recent European conferences of the Group of Ten/2/ a failure? Answer: No; there was no expectation that broad solutions would be reached so soon. There was agreement for the first time that a fundamental realignment of currency values is necessary, and it was agreed that the OECD, the Group of Ten, and the IMF would initiate needed studies.

/2/The G-10 Ministers met September 15-16; see Document 175.

2--Does the United States have solutions to propose? Answer: No; we believe the problems are difficult and require solutions which are carefully evolved and not rushed. Our minds are open.

3--Why won't the United States agree to increase the dollar price of gold? Answer: Our concern at this time, insofar as the monetary system is concerned, is with determining the magnitude of the changes in relative exchange rates which are required to re-establish monetary equilibrium, and with the basic direction of the international monetary system. We are also concerned about trade and about greater sharing of the defense burden. (FYI: Treasury, while recognizing that U.S. agreement to a token devaluation of the dollar at this time would ease the political problems of other countries in up-valuing their currencies, nevertheless believes such U.S devaluation could set a precedent and lead to demands for further  devaluation of the dollar, if efforts to re-establish equilibrium are not successful. End FYI)

4--Why won't the United States exempt LDCs from the 10 per cent surcharge? Answer: There has been no change in the basic U.S. position on trade policy, but we believe surcharge is required until the underlying issues are resolved in their totality and the prospects for the U.S. balance of payments have definitely improved. In the long run, the LDCs will be better off, since if satisfactory solutions are arrived at, the chances of a return to protectionism in world trade will be fewer. (FYI: Exempting LDCs from the surcharge would be interpreted by OECD as an indication that we intend to keep the surcharge indefinitely. End FYI)

Note: The U.S. delegation will have its offices in Room C-253 in the C Wing of the Sheraton Park. Delegates are asked to register there, on Monday morning, and AID officials who are not delegates can pick up badges at Room C-253 to permit them to attend sessions.

181. Memorandum of Conversation/1/

Washington, September 25, 1971.

/1/Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, Germany General. Confidential. Drafted on October 6 by Edward S. Hermberg, Financial Attache at the Embassy in Bonn. The meeting was held at the Department of the Treasury. A September 24 briefing memorandum for the meeting is ibid. The German officials were in Washington for the Annual Meetings of the IMF and the IBRD the following week. On the fringes of those meetings other bilaterals were held, including Connally's meetings with Chancellor of the Exchequer Anthony Barber on September 25, with Japanese Minister of Finance Mikio Mizuta on September 27, and with Governor of the Bank of England Leslie O'Brien on September 29. Memoranda of these and other conversations are ibid., Secretary's Memos: FRC 56 74 17, Memcons 1971.

PARTICIPANTS

Germany
Karl Schiller, Economics and Finance Minister
Karl Klasen, Bundesbank President
Johann Schoellhorn, State Secretary in the Ministry of Economics and Finance

U.S. Treasury
Secretary Connally
Under Secretary Walker/2/
Under Secretary Volcker/2/
Assistant Secretary Petty
Mr. Hermberg (Recording officer)

/2/Under Secretaries Walker and Volcker had to leave before the end of the meeting. [Footnote in the source text. The G-10 Deputies were meeting on the afternoon of September 25; presumably Volcker left to attend.]

SUBJECT
International Financial Situation

After welcoming Minister Schiller to Washington, Secretary Connally briefly reviewed the international monetary problems. The Secretary said that in talking to the Italians in London/3/ he had outlined these problems as including the U.S. import surcharge and the question of a U.S. "contribution" to a settlement by a devaluation of the dollar in terms of the price of gold. Both of the above-mentioned problems were tied in with the question of an international realignment of parities and the problem of how much each country would change in such a realignment. This was a most difficult question. Since Germany, Canada, Japan and the U.S. were already floating, the Secretary continued, he had therefore suggested in his conversation with the Italians that it might be worthwhile to explore whether everyone should take off all controls and freely float for a while.

/3/This meeting was presumably held on the fringes of the September 15-16 G-10 Ministerial meeting.

President Klasen interjected that such a proposition would be most difficult for most countries. Jokingly he continued that it would be more difficult for them than even a 20 percent devaluation would be for the U.S. Minister Schiller referred to the fact that some countries were even now floating "dirtily" and that what was needed was a "code of good behavior" for floating. In the present circumstances Germany was practically the only country which was floating freely and as a result the DM was appreciating at levels which everyone in Germany considered to be too high. As someone had said, everyone was cheating except Germany. State Secretary Schoellhorn interjected that as a result Germany might have to start cheating too. He said that the public mentioning of various suggested percentage figures for a DM appreciation by Reuss, the IMF, etc., was causing much trouble in the markets and driving the DM up. Schoellhorn observed that as a result of the DM appreciation during the last few days Japan in effect had devalued by 3 percent against the DM.

Secretary Connally said that the U.S. had talked with Japan and Canada, but that everyone wanted to proceed in a bloc and that we therefore had no one to talk to. President Klasen interjected that in the currency realignment it was necessary for everyone to know what everyone else was going to do. For Germany, thus for example, it was essential to know what France would do. Secretary Connally continued that we realized the difficulties involved for everyone. What was important was not to let these difficulties impair the excellent personal, political and military relationships between Germany and the U.S. We were flexible on how to get to a better alignment of parities and willing to do whatever would be helpful. We had talked bilaterally to the Canadians, Italians, and Japanese. We were prepared to talk and work with anyone bilaterally, multilaterally or both at the same time. But we could not go back to the old system and would have to work toward a new system which would satisfy us. Secretary Connally continued that he personally couldn't care less about the price of gold--which Klasen had raised previously--but this was a political matter. To change the price of gold the U.S. Government would have to go to the U.S. Congress and one could not know what would come out of the Congress if we did this. The import surcharge was a most popular measure in the U.S. There was much Congressional pressure to bring the troops home. While the price of gold in his view was not a big substantive issue, this was a touchy political question. Decisions on it could be made only on the political level. Minister Schiller said that he agreed that the price of gold was mainly a mythological matter, but it could help facilitate things.

Secretary Connally continued that as far as the import surcharge was concerned, before we could remove it, we would have some expression from others what they will do (in addition to the currency realignment). There were some special problems with Canada, Japan and Germany, but beyond that everyone was in the same boat. As far as Europe in general was concerned, there was not a great deal that we had to complain about aside from some specific cases. Thus, for example, France recently had told a major U.S. manufacturer that he could not sell in France unless he built a plant there. At the same time France constantly complains about U.S. foreign investments. We will have to work out such bilateral problems. Offset is one such problem which we have to work out with Germany. But beyond this what role do you want us to play? We are willing to talk with France, to negotiate, to do whatever is wanted. But it must be clear that we cannot go back to the old system.

Schiller responded by asking what would be the next step. The DM had now floated upward by 11 percent. This was too much. What would be the U.S. reaction if Germany would be forced to introduce capital controls? While he personally was opposed to using capital controls, the time might come when he would have to do so. The float of others was not an honest one. The continued deadlock was hurting Germany. Klasen interjected that through this deadlock the U.S. was punishing its best friend. Schiller said that in this situation it was essential to negotiate.

Secretary Connally replied that we were prepared to negotiate immediately. Schiller said that Germany could not negotiate unilaterally. What Germany could do depended, for example, very much on what Japan and France would do. It was necessary to talk about a deal in the Group of Ten. Klasen interjected that Secretary Connally had mentioned a G-10 meeting in November. Germany could not afford to wait that long. Schiller said that the combination of the current rate of revaluation of the DM, the import surcharge and the discriminatory aspects of the tax credit amounted to an embargo of German machinery exports to the U.S. Klasen again stressed the unacceptability of the current 11 percent rate of revaluation of the DM and said that Germany could not continue to take the burdens of currency readjustments alone.

Secretary Connally responded that the November date for the next G-10 meeting was an Italian proposal. He stressed the current health and strength of the German economy and our readiness to do whatever the Germans wanted us to do to help. Schoellhorn suggested that the U.S. could express a willingness to participate in a realignment through an increase in the price of gold. The Secretary remarked that that was a political, not an economic, problem and asked if the German problem was a political one. Schiller responded that Germany's problem was that it could not move without its partners. If he knew that the U.S. was prepared to move for such and such a price, then he, Schiller, might be able to make progress with his partners. In response to a question by Secretary Connally what he wanted us to do, Schiller responded "what is your price for the surcharge?" Secretary Connally replied that we must be assured that we can get our balance of payments into equilibrium within a reasonably short period of time. We must have a better burden sharing in defense, through arrangements arrived at with certain countries either in concert or individually. We must get certain trade restrictions removed, particularly by Japan and Canada. In the trade field we were not asking too much from the EC. We felt that their preferential trade arrangements with Morocco and Israel, for example, violated the GATT and there should be no increase in agricultural protection. Mr. Petty said it would be most desirable that the EC limit the product coverage of the common agricultural policy to those products now covered. Secretary Connally said he realized that we cannot turn the U.S. balance of payments around over night, but by 1973 we certainly must see some change. We must be sure of a formula which gives us a real assurance that in a reasonably short period of time we can look for equilibrium in our balance of payments.

Schiller said that it seemed as though there might not be a solution for some period of time. But in the meantime the economic situation in Germany would change. What would be the U.S. reaction if after its economy had broken down, Germany would return to its old parity. Mr. Petty asked how effective the French system of controls was. Schoellhorn answered that it was very effective. France actually had sold dollars last week. Klasen said that France and Italy could afford to wait. Germany could not. Now the country which had helped the U.S. the most was being hurt the most. Secretary Connally interjected that he appreciated the problems Germany was facing, but one should not lose sight of the fact that our relationship has been good to both of us and has made both of us pretty prosperous. Schoellhorn, while generally agreeing with the Secretary, mentioned German political sensitivity to inflation and the problems caused prior to the float by the inflow of liquidity. Schoellhorn continued that the Secretary had said that aside from the currency realignment we should look at problems of trade and burden sharing. Schoellhorn felt that it would not be possible to handle all three problems at once. He felt that we should start with the problem of the realignment of parities. If such a realignment could not be accomplished quickly, we would get a world of capital controls. There was very little time left.

Secretary Connally said that he felt we could do all three (trade, burden sharing and realignment) at the same time. It was not really as difficult as Schoellhorn implied. He, Connally, understood, for example, that we were very close on the offset problem--only $85 million apart. Schiller agreed that the offset was close to agreement. The Germans had adjourned the talks until just after the IMF meetings but then expected to conclude an agreement quickly. Nevertheless, Schiller felt that the conditions Connally had mentioned for the removal of the surcharge were very vague and hard.

Secretary Connally reiterated that in order to remove the surcharge the U.S. had to have a formula which gave real assurance that in a relatively short period of time we can look for equilibrium in our balance of payments. If others did not want to include trade restrictions and defense in the formula, then the currency realignment would have to be that much larger. Thus, for example, we could not get certain of our products--such as computers--into Japan at all. The Japanese tariff on our beef was over 100 percent. Exchange rate change alone could accomplish little in these situations. This was different in the case of Germany. With Germany we would not insist on including the question of burden sharing, but Germany should be interested in joining us to put pressure on Japan for the removal of trade restrictions. Schiller and Klasen agreed that pressure on Japan would be desirable.

Klasen asked the Secretary what ideas the U.S. had concerning the general realignment of parities, assuming that it received satisfaction on the trade and burden-sharing question. He felt that it was necessary to know a figure in order to have a framework. What average realignment of the dollar against the rest of world did the U.S. think to be necessary? Secretary Connally replied that we have not yet made such a calculation because we felt it would be presumptuous for us to tell others what to do. But we would now make such a calculation and tell our partners what we think they should do, what Germany should do, France, the U.K., Japan should do. One figure will indicate what we think it will take. Secretary Connally stressed that while our partners can, of course, question our figure, he hoped that they would not question the honesty of our intentions. We did not want to take advantage of anyone and our figure would be a reasonable one. We would get to work on the figures this afternoon and provide them before the Germans left Washington.

Schiller, in discussing the interdependence of various national parity changes, stressed the key position of France. Germany, for example, could not revalue by 10-11 percent vis-a-vis the dollar if France did not move at all. Germany had already substantially revalued against France in the last few years and a further move of such magnitude vis-a-vis the franc could not be sold to the German public--20 percent of German exports went to France, only 10 percent to the U.S.

Secretary Connally asked whether the Germans thought that in the hypothetical case of a U.S. devaluation, the French would stay put or also devalue. Klasen replied positively that France would stay put, while Schiller was not so sure. Both agreed that in such a case the U.S. should insist on a price agreement by France not to follow suit. Schiller indicated the German position on the increase in the price of gold was "cool" but they felt it could facilitate a realignment. Mr. Petty pointed out that an increase in the price of gold would be a step backward by also increasing its role in the monetary system. Klasen said that the Germans do not think that after an increase in the price of gold, the U.S. should restore the full gold convertibility of the dollar. The Secretary said he had hoped Klasen would say that, because we could not do it.

Schiller said that in the last few days he had become very pessimistic. He was afraid there would not be any movement forward and Klasen stressed that the rest of the world had become accustomed to America taking the lead in a crisis. He felt the U.S. must make some proposal. Secretary Connally said that we will do this, even though the minute we do, everyone will accuse us of trying to dictate to the rest of the world.

Schoellhorn asked if it might be possible not to apply the discriminatory aspects of the investment trade credit. He said that $600 million of German exports are involved. In addition, there is the danger that others will copy this type of tax credit.

Secretary Connally indicated that he hoped to have some further discussions with Schiller during the week./4/

/4/No record of additional discussions was found.

Sy Cross/5/

/5/Cross signed for Hermberg above Hermberg's typed signature.

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

Washington, September 28, 1971.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 376, President's Economic Program. Confidential. A stamped notation on the memorandum reads: "HAK has seen."

SUBJECT
Progress in Developing USG Position on International Aspects of NEP

Events since Thursday

On Thursday,/2/ Ken Dam, Ezra Solomon (CEA), John Petty, Ed Cohen (Assistant Secretary of the Treasury for Tax Policy) and I met for approximately two hours to discuss our next moves on the international aspects of the New Economic Policy. Cohen relayed to Connally the conclusions of the meeting:

/2/September 23.

--The surcharge is a wasting negotiating asset since it is not as detrimental to most foreign economies as many felt at the outset, and other governments will institute measures to compensate for it.

--Our highest priority is an exchange rate realignment which redresses, or moves toward redressing, the U. S. balance of payments deficit.

--There are major economic advantages in other nations floating their currencies, rather than repegging in the very near future.

--The foreign policy costs of maintaining the surcharge without providing clear indicators of what we expect as quid pro quos for its removal are a decrease in the willingness of Europeans to cooperate with us and increasing foreign hostility to the U.S.

Since that meeting Connally has agreed in the Group of 10 meeting this weekend to negotiate removal of the surcharge./3/ However, it is unclear how forthcoming he will be in these negotiations. It is clear, however, that he will probably not accept the proposals contained in the Shultz/Dam memorandum which you, Connally and McCracken considered last Thursday./4/ For domestic reasons, it will be difficult for the President to remove the surcharge in exchange for other nations floating their currencies, as the OMB memorandum suggested. Nor do I believe that a free float would be accepted by the key trading nations, except perhaps Germany.

/3/The G-10 Deputies met Saturday afternoon, September 25, to develop an agenda for a G-10 Ministerial meeting on September 26.

/4/The meeting has not been further identified. The reference may be to an untitled paper transmitted under cover of a September 23 routing slip from OMB Director Shultz to Secretary Connally. The paper begins with the following proposal: "The United States declares that it stands ready to abolish its import surcharge and capital controls immediately with respect to imports from any country that permits its currency to float freely." The paper then explores a number of issues relating to the proposal, such as the operational definition of a free float, how to deal with developing countries that traditionally had pegged their par values to the dollar or another key currency, and the legality under GATT rules of lifting the surcharge for some but not all countries. (Washington National Records Center, Department of the Treasury, Connally Correspondence: FRC 56 74 4, OMB)

Also since Thursday, Pete Peterson's group has come up with suggestions on trade and defense burden sharing problems which can be negotiated with our major trading partners (Tab A)./5/

/5/Document 179.

The Present Problem

Following the Bank/Fund meetings we should have a better feel for how far the Europeans and Japanese are willing to go in meeting our demands. However, we will still be far from an internal USG position. Forces within the USG which wish to squeeze every ounce of blood out of Europe and Japan regardless of the political costs will vie with those who wish to lift the surcharge without the quid pro quos which the hardliners would regard as acceptable. The logic of the former group would lead to no removal of the surcharge for a long period--i. e. until major trade and monetary concessions are realized--and will exacerbate political and economic relations with our trading partners, as well as running the risk of a trade war. The position of the latter, although commendable for its economic logic, is destined to be rejected on domestic political grounds.

Specific problems to be reconciled are:

--How long can thesurcharge remain in effect before other governments are forced to take offsetting economic actions or retaliate. (The answer probably depends on how sincere and reasonable they believe we are in working out a solution which will enable us to remove the surcharge, but in any event the risk becomes greater if no significant progress has been made by the end of November.)

--Whether we can get a satisfactory repegging of other currencies without devaluing the dollar vis-a-vis gold. (The answer is probably negative, in which case a repegging exercise would be a long ordeal--with significant domestic political implications--during which the surcharge would probably remain in effect.)

--Whether we can negotiate within a reasonably short period of time significant trade and defense burden sharing arrangements which the President can point to as justification for removal of the surcharge. (On trade the answer is probably yes, although the hardliners might not be completely satisfied; on defense burden sharing we may have to settle for much less.)

Suggested Scenario

I have drawn up a brief scenario which provides the relative hard-liners some quid pro quos, but enables the President to remove the surcharge by the middle of November, when the domestic Phase I is completed. Under this scenario we would:

--Begin immediately to negotiate trade and defense issues which would provide us with tangible results within a period of 6-8 weeks. (Peterson has a list of such issues.)

--Indicate privately and at the highest levels to Canada, Japan, Germany, and perhaps one or two other of our trading partners, minimum acceptable levels to which we would expect their currencies to float within the next two months; and, that while we would have no objection to their maintaining their rates at these levels temporarily, through central bank intervention, we would expect that once the surcharge was removed they would float upwards by an agreed number of percentage points. (Floating is preferable to repegging in that repegging negotiations would be prolonged, raise sensitive questions about the gold value of the dollar, and might limit the President's future options should he decide in Stage II to press for a floating or very flexible exchange rate system.)

--Seek public assurances at the highest levels from the key members of the Group of 10 that negotiations would begin immediately on new international monetary system (which would have greater flexibility and greater liquidity than the present system) and on our major trade and burden sharing problems.

--We would not negotiate either convertibility or devaluation of the dollar vis-a-vis gold in the first round. The former is our major lever for securing the desired international monetary reforms in the second stage. The latter would raise issues which could not be resolved within a two or three-month period (thus prolonging the surcharge) and could cause adverse domestic criticism by those who regard the value of the dollar as a sacred and inviolable concept. Moreover, it is unnecessary to devalue in Stage I since the level of the float is a transitional "half-way house".

--When the trade and burden sharing negotiations had borne sufficient fruit and major currencies had floated above the minimum levels (by early November), the President could announce removal of the surcharge, point to its success on the monetary, trade and defense burden sharing front, and to public assurances by other nations that there would be future negotiations on an improved monetary system and on additional trade and burden sharing arrangements favorable to the U.S. He would not at that time announce the agreement that other currencies would continue to float upward to the agreed levels (because speculation would force them up too rapidly), but could point to the increases subsequently in order to justify, ex post removal of the surcharge should he be attacked domestically for doing so. We would not resume gold convertibility nor, under this scheme, devalue the dollar vis-a-vis gold (although this would be a conceivable fallback if necessary).

If you agree in principle with this approach, you might encourage Peterson to work up his 6-8 week time-frame trade and defense burden sharing options as soon as possible, and encourage Connally, McCracken and Shultz to consider this scenario--which I can sketch out in greater detail if you so desire./6/

/6/No record of Kissinger's action on Hormats' suggestions has been found, but see Document 186.

183. Letter From the Chairman of the Board of Governors of the Federal Reserve System (Burns) to President Nixon/1/

Washington, October 14, 1971.

 /1/Source: National Archives, Nixon Presidential Materials, NSC Files, Name Files, Box 810, Arthur Burns. Personal and Confidential. A copy was sent to Secretary Connally. A handwritten note by Haig reads: "Hormats--Went to Pres."

Dear Mr. President:

I have been so busy of late that I have not found the time until now to give you a few quick impressions of the IMF meetings.

In general the atmosphere improved during that week in comparison with the period following the Group of Ten meeting in London. This improvement showed up in the agreement by the Group of Ten Ministers and Governors on the agenda of immediate issues that require resolution: the magnitude and method of a realignment of currencies, the adoption of somewhat wider exchange rate margins around par, the discontinuance of the import surcharge, and measures in the field of trade and defense burden sharing. At the same time the Ministers instructed their Deputies to explore the problems of longer-term reform of the international monetary system. The improvement also showed up in the tone of the comments, both public and private, of numerous officials. Certainly, Secretary Connally's speech contributed to the better atmosphere by its indication of a readiness to negotiate on the part of the United States.

I turn now to a summary report on my private discussions with foreign officials.

Many Europeans stressed that Europe is on the edge of a distinct slowdown in economic activity, if not a recession. The relevance of this observation is that, as time goes on, it will become increasingly difficult for European governments to agree on a significant upvaluation of their currencies in relation to the dollar, since such a change in exchange rates will aggravate recessionary correlations. The same is true of Japan. This consideration reinforces what is already a good case for getting ahead with serious negotiations as quickly as possible.

In a lengthy discussion with the French (Finance Minister Giscard d'Estaing and central bank Governor Wormser), I was told that the price of gold in terms of francs is an important political issue in France, given the widespread and long-standing custom of the French population to hold gold as a hedge against inflation and political uncertainty. This makes it difficult, if not impossible, for a French political leader to agree to a revaluation of the franc against an unchanged dollar, since the franc price of gold would then fall. On the other hand, I came away from this candid conversation with the definite impression that the French Government would stand still for a 5 or 6 per cent increase in the dollar price of gold, leaving the franc price where it is. The British and the Italians are likely to follow the French lead.

The Japanese (Finance Minister Mizuta and Governor Sasaki) were not ready to talk seriously but stressed to me the uncertain durability of Japan's large trade surplus. It is notable, however, that the Japanese authorities have been permitting the market rate of the yen to creep upward day by day, so that it is now 9 per cent above the old parity. Moreover, I received indications from some dependable (I think) emissaries that the Japanese will be willing to settle for a 15 per cent appreciation, provided other countries move at the same time.

The Germans (Bundesbank President Klasen) have permitted their currency to float up about 10 per cent since May and are coming under severe pressure from businessmen, who are feeling the effects not only of the exchange rate change but also the surcharge and the job development credit (which, as you know, does not apply to imported equipment). The Germans are particularly sensitive about the movement of their exchange rate against the French franc. For these reasons, as well as the prospective slowdown in the economy, their officials indicated that they are anxious for an early settlement.

Secretary Connally and I met with the assembled Finance Ministers and central bank Governors of Latin America. We explained the rationale for the U.S. program and, after the Secretary left, I took their questions. The main concerns they expressed were: Why should the surcharge apply to them and other developing countries when we do not expect them to appreciate their exchange rates or take other actions to improve the U.S. balance of payments? How can the LDC's participate in the negotiations about both the immediate problems and reform of the international monetary system? I reassured them on the last point, and some overt moves in this direction are now being considered.

There is one highly important matter--regarding the arrangements for negotiations--on which I need to report to you in person. It is a matter which I arranged with foreign representatives and of which Secretary Connally has full knowledge./2/

/2/Not further identified.

Sincerely yours,

Arthur

184. Letter From the President's Assistant for International Economic Affairs (Peterson) to the Under Secretary of the Treasury for Monetary Affairs (Volcker)/1/

Washington, October 25, 1971.

/1/Source: National Archives, Nixon Presidential Materials, White House Central Files, Federal Government Organizations, Treasury 1/1/71-2/29/72, Box 2. No classification marking. Copies were sent to Shultz, Ezra Solomon, and Dam.

Dear Paul:

As you know from our various discussions, I would think it very desirable if you would use the Volcker Group to start some intense dialogue and work soon on what kind of reformed monetary system we want.

This seems awfully important in two different contexts: First, as we move ahead in our Phase I negotiations, it may well be that where we want to end up in Phase II will affect what we should be willing to do or not do in Phase I. Second, the President and John Connally have repeatedly emphasized their commitment to basic monetary reform and I think it is incumbent upon us to define what we want that system to be. I know that men like Ken Dam and Ezra Solomon have strong views about what the shape of such a system might be. There are certain key issues--like whether it is in the long-term U.S. interests to have any convertibility at all and the related issue of whether a reserve currency status is or is not in the interests of the U.S.--that I hear very different views on, as I listen to various experts.

I asked Dick Cooper, who works with us, if he couldn't summarize for me what some of the key issues are on this whole area. I've attached a copy and sent one to Ken Dam and Ezra Solomon./2/

/2/Not found.

I know how unbelievably busy you are, Paul, but I hope you can get the Volcker Group going on this whole issue of what kind of monetary system we want./3/

/3/The dominant topic in the Volcker Group papers for 1971, both before and after August 15, was the limited exchange rate flexibility initiative. None of the policy papers on negotiating the international aspects of the New Economic Policy prior to the Smithsonian Agreement on December 18 is part of this record. The dominant topic of the Volcker Group papers in 1972 was developing the terms of reference for the C-20 and drafting the IMF Report on International Monetary Reform paper for the 1972 Annual Meeting. None of the 1972 Contingency Planning papers for the currency crisis should the Smithsonian rates fail is included in the Volcker Group papers. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30)

Sincerely yours,

Pete

185. Memorandum From the President's Assistant for International Economic Affairs (Peterson) to Secretary of the Treasury Connally/1/

Washington, October 26, 1971.

 /1/Source: Washington National Records Center, Department of the Treasury, Records of Secretary Shultz: FRC 56 80 1, CIEP--Peterson. Confidential; Eyes Only.

SUBJECT
Negotiating the New Economic Policy Abroad--Work Group

You will remember our meeting in your apartment prior to the IMF meetings when I gave you a brief progress report on the staff work on this project./2/ The work is now much further along and ready for your review. I have talked to Rose about seeing you very briefly on a couple of delicate personal items relating to the planning for these negotiations.

/2/This meeting has not been further identified.

I know the tremendous pressure you are under prior to leaving for Japan and think we can limit our time to several issues that are now outstanding./3/

/3/Secretary Connally traveled to Asia October 28-November 14.

On the trade and defense side, there seems to be a large measure of agreement on the specific concessions and objectives we are after. State may still have a couple of reservations. But I'm not sure.

There are, however, several issues where there are differences of view, or at least questions:

1. Lifting the surcharge reasonably soon (next few months) vs. waiting. A particular question is the LDC's and Latin America where the President has some specific concerns./4/

/4/As soon as the New Economic Policy was announced on August 15 there were calls for special treatment for Latin America and/or developing countries. The September 12 State Department report to Kissinger on "Foreign Reactions to the President's Economic Program" contains the following: "The Latin American countries protested US economic measures in a Manifesto issued following a meeting of the Special Commission for Latin American Coordination (CECLA) on September 3 and 4 in Buenos Aires. The Manifesto called on the United States to exempt developing countries from the 10 percent import surcharge and reverse its decision to reduce the level of foreign economic aid. The meeting was called at the request of the Argentines, who along with the Mexicans and Chileans, were the most outspoken critics of the new economic measures, particularly the import surcharge." (National Archives, RG 59, Central Files 1970-73, E 1 US)

2. Changing the Price of Gold as part of an exchange rate realignment. If we get an average realignment of say 10-11% with a gold price change and 5-6% without it, are the benefits of the larger exchange rate realignment worth the costs of a gold price change? Can we devise ways of affecting a gold price change that minimize the costs and risks (political, implied movement toward gold and convertibility?)

3. Convertibility during the interim period? How much or little? How do you limit it? What are its implications? (Most agree there should be very little or none but some disagreement about how little and how.)

4. Capital controls? Take off very soon, i.e. now or with surcharge removal, or, take off as a goal in Phase II or, cut them back administratively and in a low profile way? What about interest equalization tax? What should we do about this?

I would propose getting the Quadriad together tomorrow (with Paul Volcker and anyone else you want, of course) but without the President. I see no point to bother him unless there are major differences of view. The meeting could be held at Treasury.

At that meeting, we would summarize briefly the outstanding issues and various approaches that have been discussed.

Then, depending upon the outcome, we could arrive at a set of marching orders on who does what while you are in Japan, vis-a-vis Canada, Europe, etc.

The attached paper has been given to Quadriad members only and has been read by them./5/ Obviously, Paul Volcker and John Petty have been deeply involved in all this and very helpful.

/5/Not printed; see Document 186. The Quadriad comprised Connally, Burns, McCracken, and Shultz. No record of a Quadriad meeting on October 27 has been found, but President Nixon met with the Economic Quadriad the next day; see Document 187.

186. Editorial Note

The 36-page draft paper attached to the October 26, 1971, memorandum from Peterson to Secretary Connally (Document 185) is dated October 25 and entitled "Negotiating the New Economic Policy Abroad." Classified Secret, it is divided into nine sections: Introduction--Some Backdrop, Objectives and Their Priority, Negotiating Levers and Issues, Overall Negotiating Scenario, Decision Points and Coordination, The Official Price of Gold, U.S. Convertibility in the Interim Period, Fundamental Monetary Reform, and Negotiating Strategies--Surcharge and Capital Controls. The scope of the paper is broad and deals with monetary issues, trade issues, defense burden-sharing issues, and the free flow of investment. There are sections specifically directed at objectives with Japan, Canada, and the European Community. The paper contains a number of specific negotiating strategies and objectives, including the following:

"The surcharge provides little leverage against France, and France does not abhor the trade wars and bloc formation which could develop. We can therefore achieve an effective French revaluation only by devaluing the dollar. . . . The United States should agree to devalue the dollar against gold by 5% to 8% if the following monetary conditions are met: 1. Simultaneous revaluations of at least 10% by Japan and 5% by Germany, leading to effective exchange rate changes of at least 15%-18% for Japan; 10%-13% for Germany; and 5%-8% for France, Italy, Britain (hopefully)." (pages 21-22)

These are, in effect, the measures agreed to by Presidents Nixon and Pompidou in the Azores (see Document 220) and by the G-10 in the Smithsonian Agreement on December 18 (see Document 221).

The draft paper received only limited distribution; another copy is marked "#2 of 5." On the cover sheet of that copy Kissinger wrote: "For meeting with Peterson," and Haig wrote: "HAK wants staffed (Bob--this came 'eyes only' from Peterson)" when he routed the paper to Hormats. (National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 376, President's Economic Program)

In his October 26 covering memorandum, Peterson noted that the attached draft paper had been given only to Quadriad members, but an October 29 memorandum from Deputy Under Secretary of State Samuels to Peterson entitled "Your Memorandum on the New Economic Policy," is presumably a State Department response to the paper. Generally, the State Department agreed with the basic conclusions and priorities set out in the draft paper. (National Archives, RG 59, Central Files 1970-73, E 1 US)

187. Editorial Note

OMB Director George Shultz discussed currency matters with President Nixon on October 25, 1971. He opened the meeting with the suggestion that they be prepared to lift the surcharge for any country that would conduct a clean float of its currency. The President thought that would be illegal under GATT rules, but Shultz reported that staff work at OMB suggested it could be done. He said it would not be discriminatory against any country and it would be a "way to get the ball rolling." Although not in agreement on this issue, the President nonetheless clearly wanted Shultz to take a more aggressive role in bringing the international monetary crisis to resolution. He said Shultz understood the subject and could better "broker" a solution than the others. He did not want to find himself in a situation where Peterson or Connally dictated what they were going to do. The President said "we have to get Connally on board" for finding a solution.

A major topic Shultz and the President discussed on October 25 was restoration of convertibility. Shultz was concerned that policymakers were "drifting back to the old system of parities, but with different exchange rates," the solution he thought was preferred by the "axis" of European bankers, Daane at the Federal Reserve, and Volcker at Treasury. Shultz was not sure where Burns stood on the issue and thought he was more concerned with maintenance of the wage/price freeze; he thought Connally would agree with the President there should be no return to convertibility and that Volcker would have to be instructed to work on a plan with that approach. Shultz carefully explained, and the President agreed, that if there were a return to fixed parities and convertibility, the only way to address a balance-of-payments deficit would be to deflate the domestic economy to lower prices, creating "unemployment to satisfy international pressure." The President said he did not want domestic policies to be affected by the outmoded system and "we can build a system without convertibility." Although he did not press the point, Shultz clearly favored a floating rate system.

Shultz and the President also discussed the price of gold. Shultz expressed the opinion that with all the gold in French "mattresses," gold was a big political problem in France, and it might be necessary to change the relationship of the dollar to gold in order to devalue the dollar. The President agreed that "damn gold has a mystique" but said "I'll be damned if we will raise the price of gold like Arthur wants." (National Archives, Nixon Presidential Materials, White House Tapes, Recording of Conversation Between President Nixon and Budget Director Shultz, October 25, 1971, 4:35-6:01 p.m., Executive Office Building, Conversation 304-17)

During this October 25 meeting with Shultz, the President made it clear he wanted to meet with Connally before the latter's trip to Asia October 28-November 14 (which would include stops in Vietnam for President Thieu's inauguration, Thailand, Indonesia, the Philippines, and Japan), and that a Quadriad meeting could be scheduled if necessary. Under cover of an undated, handwritten letter to the President, Connally provided "Suggested Talking Position for Meeting with Chairman Arthur Burns and Secretary Connally" that could "serve as a basis for your remarks to the Cabinet." Connally added that his points had not been seen by "Paul and Geo." (presumably McCracken and Shultz, the other two members of the Quadriad), and recommended the President get their judgment on them. Butterfield stamped "The President has seen" on Connally's talking paper. (Ibid., White House Central Files, Federal Government Organizations, Treasury 1/1/71-2/29/72, Box 2)

The Economic Quadriad met on the afternoon of October 28, prior to Connally's departure that evening. Those present were the President, Connally, Burns, McCracken, Shultz, Flanigan, and Peterson. Flanigan left at 4:24 p.m. and Peterson at 4:42 p.m. Kissinger joined the meeting at 5:02 p.m., and he and Connally remained with the President until 5:54 p.m. following Burns', McCracken's, and Shultz's departure at 5:20 p.m. (Ibid., President's Daily Diary) The President set the agenda for the meeting, announcing they would first take up international issues, followed by domestic issues. There would also be a short break for a photo opportunity of Connally with the President to bolster Connally's image, primarily for his visit to Japan.

The tape of the Quadriad conversation evinces a wide-ranging discussion of international economic policy issues. Connally was praised for bringing the issues forward from where they were in August, and Shultz said that now that "we have their attention" it was time to move vigorously on negotiations. While Connally was traveling, Shultz would work with Kissinger to see what leverage the United States had with France, which he said would not revalue (by changing the franc price of gold). Burns returned to that point later in the conversation and in a lengthy discourse explained how gold was a "huge political problem" for the French. He said his discussions with French officials convinced him France would settle for a stable price of gold in terms of French francs, and indicated that if the United States could otherwise get a good settlement, the United States should not be stuck on "gold theology." Burns said the French would let the franc appreciate in terms of dollars, thought the other Europeans and the Japanese would support France on this position, and said domestically France had less of a political problem than in 1968 when the market price of gold equaled the official price. Under the two-tier system, with the market price above the official price, Burns said Congressman Reuss and Senator Proxmire would support a small increase in the official price of gold. Shultz terminated that subject, noting that the President had said they would not increase the price of gold. He then posed the question of whether they were going to return to fixed parities or try to operate with floating rates. He said the price of gold was incidental to this more fundamental question and the complementary issues of trade and burdensharing agreements. He said the administration needed to have a clear picture of where it wanted to come out.

Connally set out a five-point program that he thought could be negotiated during the next few months: first, a significant realignment in currency parities; second, no return to convertibility for at least 2 years, other than small transactions in SDRs as required for technical purposes; third, an agreement on trade principles and the removal of trade barriers, with the details to be worked out later; fourth, an agreement on a substantial, if not complete, reduction in the role of gold in the international monetary system; and fifth, agreement that the dollar would no longer be the sole vehicle currency.

Connally said the average U.S. citizen neither understood nor cared about monetary policy, but did care about trade and the fact that the administration was looking out for U.S. interests. Politically, it was thus necessary to discuss trade and burdensharing even if that were to delay his negotiating strategy for another year. Currency realignment, he said, was much less important than not giving the impression the United States was losing ground. Connally noted that it would be a "mistake of major political importance" for the President to get just a currency realignment without also obtaining the other objectives.

The President concluded this segment of the discussion suggesting that in Connally's absence the others work on the process on a very confidential basis, and they not have a further discussion "at this level" until Connally returned. The official line would be that there would be no action in Connally's absence, the President was still examining the options, and would await a report from Connally when he returned from Japan.

Following a brief photo opportunity for Connally with the President, the Quadriad then discussed domestic economic issues. Connally and Kissinger stayed on after the meeting concluded. Connally reported on his conversation with Shultz the previous day, and explained their recommendation that the President should say there should be no discussion of the price of gold or convertibility. See Document 189.

The President, Kissinger, and Connally then commented briefly on aspects of international economic policy before turning to Connally's forthcoming trip. Japan was central, and the President expressed the opinion that Burns was incorrect in his view that Japan would not deal on the international economic issues unless Europe also made a deal. Connally agreed. The President suggested that Connally take the approach that "this President intends to keep the United States in the Pacific and the Pacific should receive more attention." In that context, what sort of deal could Japan make. Connally requested the President's authority to tell the Japanese that with European consolidation European nations were increasingly speaking with one voice and should have only one vote in the G-10. The President agreed the G-10 should be changed. He also requested that Connally raise the SST with the Japanese (see footnote 1, Document 194) and instructed him to meet with Sato privately without the Ambassador being present. (National Archives, Nixon Presidential Materials, White House Tapes, Recording of Conversation Among President Nixon, Secretary Connally, and others, October 28, 1971, 3:03-5:54 p.m., Oval Office, Conversation 606-2)

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

Washington, November 1, 1971.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 268, Office of Management and Budget. Confidential. Initialed by Haig. A stamped notation on the memorandum reads: "HAK has seen."

SUBJECT
Talking Points for Your Meeting with George Shultz, Tuesday, November 2, at 8:45 a.m.

Shultz apparently wants to inform you of the results of the Quadriad Meeting which took place last Thursday,/2/ and get your views on the present international economic situation. With regard to the latter, there are two points which you might stress.

/2/October 28; see Document 187.

--The longer the surcharge is retained, the less of a bargaining asset it is and the greater the risk that it will harm our overall economic, foreign policy and security interests.

--Recognizing this, the surcharge should be removed in return for small amounts of additional depreciation of the yen, mark, and Canadian dollar, plus a minimum list of additional desiderata in the area of trade and defense burden sharing which can be negotiated within four to eight weeks.

Background

Secretary Connally seems to have departed from what many had perceived to be a more "cooperative" line. Last week in San Francisco he told the American Bankers Association that the surcharge "is going to stay on for a while because it frankly is to our advantage to keep it on for a while."/3/ The Europeans, Canadians, and Japanese, as the result of this and other such statements, increasingly believe that the U.S. is unwilling to cooperate with them to bring about conditions for removal of the surcharge. And there are indications that they feel that even if they are forthcoming, the U.S. will maintain an unreasonable posture and retain the surcharge indefinitely.

/3/No text of Connally's remarks has been found. According to The New York Times, October 21, Connally delivered some extemporaneous remarks at the closing session of the American Bankers Association Annual Meeting on October 20. The focus of the article is on changes in the prime lending rate, but the language Hormats quotes in his memorandum is in a brief section on international economic policy, followed by: "It is going to come off when this nation has some assurance that our balance-of-payments deficit will indeed be rectified or until we can be assured that the mechanism is established by which it can be rectified."

Disadvantages of retaining the surcharge

--Many of our key trading partners (including Italy and Germany) are faced with economic recessions and growing unemployment. While the U.S. surcharge is obviously not the main cause of these problems, it may be a partial cause. At any rate, because of it the U.S. will be used as a scapegoat, thus making it increasingly difficult for other nations--no matter how well disposed they or their leaders have been toward us--to cooperate with us on economic, political, or security matters.

--Canada and others are taking, or are considering taking, countermeasures such as instituting restrictions on monetary or trade flows. Vested interests in those countries will seek to maintain these controls thus making future negotiations more difficult. And such negotiations could become primarily efforts to eliminate countermeasures rather than the trade barriers and exchange rate inequities which were our original targets. [State (Tab A) indicates that Germany, as well as other European nations, may soon be forced to take such measures.]/4/

/4/Brackets in the source text. Tab A, not printed, is another of the end-of-the-week Department of State reports from Executive Secretary Eliot to Kissinger entitled "Foreign Reactions to the President's Economic Program" for October 29. The report indicated that about 20 diplomatic notes had been received protesting one or more U.S. actions and most of the U.S. major trading partners had threatened "appropriate compensatory measures should the DISC proposal be enacted." The report noted that a senior German official told the Embassy in Bonn that the European Community had turned its attention to internal solutions, was hardening its position toward the United States, and that "Germany's ability to urge a flexible EC position toward the U.S. was weakened by confusing reports of a possible deal between the U.S. and the FRG for selective removal of the surcharge."

--As other nations institute countermeasures, and become less disposed and less able to cooperate with us to bring about the changes we desire, the surcharge becomes a wasting asset. In addition it becomes increasingly detrimental to our overall economic and political interests. By contributing, even at the margin, to a deterioration in international trade and in the economies of our major trading partners, which will decrease U.S. exports, it runs the risk of harming our overall economic interests and, rightly or wrongly, increasing the intensity of domestic and foreign criticism of the President. And to the extent that the international political system is harmed by the spillover effect, the same reaction will occur. Far from being in our interest, long-term retention of the surcharge can be extremely detrimental to our interests.

You might, therefore, indicate to Shultz that our economic, foreign policy, and security interests will best be served if we move promptly to negotiate conditions which will allow us to remove the surcharge by the end of the year.

Conditions for surcharge removal

There are several conditions for surcharge removal which would a) be acceptable on domestic political grounds, b) allow us to realize some significant gains in terms of international economic policy, and c) we could reasonably expect to obtain by the end of the year:

--A small increase in the parities of the yen, mark, and Canadian dollar./5/

/5/All three had already floated to new parities since May.

--Additional trade measures with Japan as a follow-up to the ECONCOM.

--An understanding with the Common Market about future negotiations on the reduction of tariff barriers, plus a reduction in their export subsidies on agriculture.

--An agreement with Canada relating to the Canadian-U.S. Auto Agreement.

--A favorable offset agreement with Germany.

--A commitment from Japan (already made in principle) to purchase additional military equipment in the United States.

You might wish to determine what conditions Shultz would attach to surcharge removal, whether he would agree with the above, and, if you agree with one another, the best method of getting Secretary Connally to act on the basis of your views./6/

/6/No record of a meeting between Kissinger and Shultz was found.

189. Memorandum From President Nixon/1/

Washington, November 2, 1971.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 268, Office of Management and Budget. Secret. Attached to a November 3 note from Shultz to Kissinger that reads, "I know you will be interested in the attached."

MEMORANDUM FOR

Honorable John Connally
Honorable Arthur Burns
Honorable George Shultz
Honorable Paul McCracken
Honorable Peter Peterson
Honorable Peter Flanigan

After our discussion in the Quadriad meeting October 29, 1971,/2/ I believe it is essential that there be no further speculation within the Administration which might get into the press or into foreign circles with regard to changing the price of gold or a return to some form of convertibility. Our planning at this time should proceed on the assumption that we are not going to move in that direction./3/

/2/The Quadriad meeting was on October 28; see Document 187. President Nixon met again with Arthur Burns from 11:01 to 11:30 a.m. on October 29 and with George Shultz from 4:15 to 5:16 p.m., but there was no meeting of the Quadriad. (National Archives, Nixon Presidential Materials, White House Central Files, President's Daily Diary) Connally was out of Washington on his Asian trip.

/3/In an undated memorandum from Shultz to President Nixon, Shultz suggested four points he and Connally thought the President should make at the Quadriad: "you have thought and read a great deal recently about international monetary matters; you continue to feel that it is a mistake to make a change in the price of gold and do not want discussions going on that would lead people to think the President might recommend a change; you also will not entertain suggestions for even limited forms of convertibility; you want work to proceed on the assumption of these two conditions: no convertibility, no change in the price of gold." (Ibid., Federal Government Organizations, Treasury 11/1/71-2/29/72, Box 2) Shultz' memorandum is stamped "The President has seen."

Richard Nixon

190. Telegram From the Embassy in Germany to the Department of State/1/

Bonn, November 5, 1971, 1716Z.

/1/Source: National Archives, RG 59, S/S Files: Lot 73 D 153, Morning Summaries. Secret; Immediate; Exdis.

13810. Department pass Treasury for Under Secretary Volcker and State for Deputy Under Secretary Samuels. Ref: Bonn 13633./2/

/2/Not printed.

1. Summary: During the EEC Finance Ministers' meeting/3/ Giscard gave an indication of the degree of a dollar devaluation France would be willing to accept on the basis of which Schiller believes a package can be put together at the November 22 G-10 meeting involving a 10 percent improvement in the US competitive position which he hopes the US can accept as a quid pro quo for the removal of the import surcharge.

/3/The meeting was held in Paris on November 4.

2. Economics Ministry Deputy Assistant Secretary Tietmeyer gave the Financial Attache today the following information concerning the EEC Finance Ministers meeting in Paris. Tietmeyer said that he had discussed with State Secretary Schoellhorn the question of informing the Financial Attache and that Schoellhorn had agreed provided the information would be held very closely and "not reported through normal diplomatic channels."

3. At the outset of the meeting Giscard reported on the Pompidou letter to Brandt./4/ The Dutch, Belgian, Italian and Luxembourg Finance Ministers thereupon suggested that the EEC countries should suggest to Secretary Connally to cancel the November 22 G-10 meeting if no decision can be made until after the Brandt-Pompidou meeting./5/ Giscard and Schiller felt the G-10 meeting should proceed as scheduled and this was agreed at the end of the Finance Ministers' meeting. The Germans feel this correctly reflects the progress made by the Finance Ministers which now brings an agreement at the G-10 meeting into the realm of the possible.

/4/Not further identified.

/5/Brandt and Pompidou met in Paris on December 4. The G-10 Ministerial was held in Rome November 30-December 1.

4. At the restricted session of the Finance Ministers, Schiller took the position that in calling for a US contribution (i.e., devaluation) to the currency realignment, the EEC must be able to tell the US for how large a devaluation of the dollar in terms of gold its members would be willing to stand still (i.e., not also devalue their own currencies). In the ensuing discussion Giscard gave the other Ministers a clear idea how large a US devaluation France could accept. While Tietmeyer was not willing to give the Financial Attache the exact figure, the Financial Attache gained the impression that it is more than 5 percent (a change of the dollar parity to 37 or possible 37-1/2 ounces of gold). Giscard also indicated that France could accept a devaluation of this magnitude only if the following other conditions are met: (A) France's competitive position vis-a-vis Italy and the UK is not impaired, i.e., Italy and the UK also do not devalue their currencies in terms of gold; (B) France's competitive position vis-a-vis the Benelux countries is slightly improved, i.e., these countries revalue by at least 2 percent; (C) France's competitive position vis-a-vis Germany is improved substantially--Tietmeyer did not specifically indicate by how much, but the Financial Attache gained the impression that the figure is in the 5-6 percent range.

5. Schiller feels that with a French position as outlined by Giscard an agreement might be possible at the November 22 meeting of the Group-of-Ten provided that (A) Giscard's position at the EEC Finance Ministers meeting has or will receive the blessing of Pompidou and (B) the US would be willing to make the "contribution" of dollar devaluation of this magnitude and would be willing to remove the import surcharge in return for a package of revaluation and "standing still" by the other industrial countries which together with the US devaluation would improve the competitive position of the dollar by roughly 10 percent vis-a-vis the other major industrial countries as a group. On the basis of his conversations in Washington Schiller apparently has gained the impression that while the US would like to gain more, such a package or something close to it might be a minimum acceptable to the US./6/

/6/Presumably a reference to Schiller's meeting with Secretary Connally on September 25; see Document 181.

6. Schiller will be going to London on Monday in the hope of selling this position to the UK. There also is still some difficulty whether Italy would be able to "stand still" for a US devaluation of this magnitude. Finally, Germany could make its contribution only if Japan is willing to at the very least match the German revaluation and Canada revalues substantially. But Schiller is relatively hopeful that it will be possible to put together a package leading to agreement at the G-10 meeting. The EEC Finance Ministers are scheduled to meet in Rome at 11:00 a.m. on November 22 to review the situation just prior to the G-10 meeting.

Rush

191. Editorial Note

A meeting of the G-10 Ministers, chaired by Secretary Connally, was scheduled for November 22-23, 1971, in Rome. In view of an anticipated, but still unscheduled meeting between Chancellor Brandt and President Pompidou and general uncertainty on whether the Ministers would be able to close on a solution, some thought the Rome Ministerial should be postponed. Secretary Connally concurred and informed Prime Minister Sato during their November 12 meeting he had just taken that decision (see footnote 3, Document 194). Alternative dates were considered and the Rome Ministerial was rescheduled and held November 30-December 1.

On November 12 Peterson sent Kissinger a memorandum informing him the November 22 G-10 Ministerial had been postponed and speculated it would not take place until after the Brandt-Pompidou meeting. He considered the need for sending them some high-level communication" before their meeting, a communication that proved unnecessary when the G-10 meeting took place before the Brandt-Pompidou summit in Paris December 3-4. Peterson concluded his memorandum to Kissinger with the following: "What I would appreciate from you, Henry, is your sense of the politics and your reaction to the idea since this issue has become so highly political. Frankly, I am worried that the channels between Treasury and European Finance Ministry people and between Arthur Burns and Central Bank Governors, good as they are, may not be giving full weight to the political dimension of the situation in Europe." (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 289, Treasury Volume II)

President Pompidou also had some views on scheduling the G-10 Ministerial. On November 2 Kissinger had sent a back channel telegraphic message to Ambassador Watson in Paris informing him that President Nixon was considering initiating a series of bilateral discussions with principal European leaders prior to his visits to China and the Soviet Union in February and May 1972 and wanted the first bilateral to be with President Pompidou. Kissinger suggested the meeting take place in French Guyana December 3-4 or during a 2-day period between December 10 and 14. (Ibid., President's Trip Files, Box 473, Azores--Pompidou Dec 13/14, 1971)

After 10 days of discussions about a venue outside France and the United States, including a quick trip by Watson to Washington to consult on the matter, Watson sent a back channel message to Kissinger on November 12 informing him Pompidou had agreed to meet President Nixon in the Azores (in a hotel, not on the U.S. base) between December 11 and 15. Watson added, however, that Pompidou had a problem with the timing of the G-10 Ministerial and wanted the Rome meeting to be held on November 30, not December 7-8, because the monetary meeting had to take place before he met with Chancellor Brandt in early December. (Telegram 1853 from Paris, November 12, 2005Z; ibid.)

Another copy of Ambassador Watson's November 12 message is attached to a November 13 memorandum from Kennedy to Kissinger regarding "Your Meeting with Secretary Connally." Kennedy noted that Connally had been delaying the G-10 meeting and that Sonnenfeldt thought Kissinger should take it up with Connally in view of the message from Paris. Kennedy added, parenthetically, that Watson probably had not used the State Department communication channel to avoid disclosing he had been talking with Pompidou. Kennedy told Kissinger the issue was whether U.S. interests were best served by having the monetary meeting before or after the Brandt-Pompidou summit. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 289, Treasury Volume II 1971)

On November 17 Kissinger sent a back channel message for delivery to Watson at the opening of business on November 18 informing him that he, Kissinger, hoped to have a decision on the timing of the G-10 Ministerial early the following week. Kissinger noted that he would be meeting with Connally on November 19, with the intention of obtaining an early decision on the G-10 meeting and a position on related economic problems. (White House telegram 11024, November 18, 0300Z; ibid., President's Trip Files, Box 473, Azores--Pompidou Dec 13-14 1971)

On November 18 Kissinger sent another back channel message to Watson informing him that he had "succeeded in having the President direct Secretary Connally to proceed with the G-10 meeting in Rome on November 30th." Kissinger asked Watson to confirm the December 13-14 dates with the French and to work with them (and keep secret until then) on a joint announcement for November 24 that, on the U.S. side, would also include announcements of meetings with Prime Minister Heath in Bermuda December 20-21 and with Chancellor Brandt at Key Biscayne December 28-29. (White House telegram 11026, November 18, 2051Z; ibid.)

The President met with Kissinger from 10:13 to 10:50 a.m. and again from 11:40 to noon on November 18. (Ibid., White House Central Files, President's Daily Diary) Haldeman was present at both meetings, and his handwritten notes indicate that one of the points Kissinger raised in the first session was Pompidou's insistence that the G-10 Ministerial be held on November 30. Later in the morning Haldeman's notes indicate Pompidou should be scheduled for December 13-14. (Ibid., White House Special Files, Box 44, Haldeman Notes, Oct-Dec 1971) The President phoned Secretary Connally and talked with him from 4:17 to 4:24 p.m. that day. (Ibid., White House Central Files, President's Daily Diary)

Prior to Kissinger's arrival for his first meeting with the President on November 18, the President discussed with Haldeman having Connally, Shultz, and Kissinger come to Key Biscayne Friday night (where the President went on the afternoon of Thursday, November 18, returning on Sunday, November 21) for a meeting on either Saturday or Sunday. The President then considered having that meeting on Monday, November 22. See Document 203 regarding the President's meetings with his economic advisers on November 23 and 24.

192. Letter From the Vice President of the Deutsche Bundesbank (Emminger) to the Under Secretary of the Treasury for Monetary Affairs (Volcker)/1/

Frankfurt, November 12, 1971.

/1/Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, Germany General. Personal. An attached note, dated November 16, reads: "Informed by Mr. Bennett that he has been instructed by Mr. Volcker to give Dr. Emminger an oral answer in Paris this week." No record of Volcker's answer was found.

Dear Paul:

Attached please find my understanding of the present situation as concerns exchange rate re-alignment. You will understand that I could not put in any more concrete figures; but the attainable magnitudes have now become fairly clear.

This is, of course, only for your personal information.

With best regards,

Sincerely

Otmar Emminger

Attachment/2/

/2/No classification marking.

November 11, 1971.

The strategic situation on re-alignment

After the meeting of the Finance Ministers of the Six in Versailles on November 4, the situation regarding further progress has become much clearer. It can be summed up as follows:

1. No move can be expected in the gold parity of the French Franc. This has to be taken--and has been accepted (willy-nilly) by the Six--as an immovable corner stone of any future arrangement. However, in the case of a downward adjustment of the dollar parity, the French are prepared to maintain their present gold parity, or in other words, to tolerate a de-facto appreciation in relation to the dollar (this has been told by Giscard d'Estaing, although indirectly, even to the press).

2. The French Franc will serve as a "leading indicator" (or example) for the exchange rate policies of Italy and Britain. Neither of the two is prepared to move its parity up in relation to the Franc (which they, rightly, consider to be inherently stronger than their own currencies). Both these other countries seem, however, to be prepared to maintain, in case of a downward adjustment of the dollar, their previous parity, provided the French do the same. Some other European countries are likely to take their cue, too, from the French Franc (plus the Lira and the Pound).

3. The readiness of the French to stay put as concerns their gold parity depends, of course, on the amount of the downward adjustment in the dollar parity. No one could at present say whether the "threshold of tolerance" is 5 or 6. There are, however, enough signs to the effect that the tolerance level would be high enough to permit an average shift between the dollar and the other G 10 currencies (incl. the Swiss franc) of 9 to 10%. The exact magnitude of the French "tolerance level" can only be found out once it is assured that the dollar itself moves.

4. A de-facto appreciation of the French Franc in the foreseeable magnitude would in all probability allow the German DMark to be raised sufficiently high vis-a-vis the dollar, while attaining a more reasonable relationship vis-a-vis the Franc and other important European currencies. This would then also permit to bring the Japanese Yen into the proper line, viz. a fairly high appreciation in relation to the dollar, a more moderate upvaluation in relation to the main European currencies.

5. If on the American side there were no readiness to reduce the dollar parity, then the whole negotiating process would get stuck. It is simply erroneous to believe, that a German-French tête a tête could in any way break the deadlock. Even if it were to lead to an agreement on the future relationship between the DMark and the Franc (which would certainly be on a lesser disparity than at present), there would be no way from there to a satisfactory collective agreement on the re-alignment question.

6. It is, therefore, a misjudgment to believe that a German-French summit, if it preceded the G 10 meeting, could do much good for the latter. Ideally, the time sequence should be reversed: If the G 10 meeting should end in visible failure, then a subsequent German-French meeting might perhaps lay the foundation for a regional (European) monetary set-up.

193. Telegram From the Embassy in the United Kingdom to the Department of State/1/

London, November 12, 1971, 1744Z.

/1/Source: National Archives, RG 59, Central Files 1970-73, FN 17 UK. Confidential; Limdis; Greenback. Repeated to Bern, Bonn, Brussels, The Hague, Ottawa, Paris, Rome, Stockholm, Tokyo, USEC, and USOECD.

10453. Dept pass Treasury and FRB. Subject: UK reaction to Secretary Connally's Tokyo press conference./2/

/2/Tokyo was the last stop on Secretary Connally's Asian tour.

1. A.D. Neale, Second Permanent Secretary, HMTreasury, called in Treasury Attache to express their concern over today's Times report on Secretary Connally's remarks at press conference in Tokyo. Derek Mitchell, HMT Rep in Washington, was also present. Times reports Secretary Connally saying that settlement of monetary crisis depends entirely on other nations and that European countries were having difficulty in finding common position. Hence, he would not be surprised if the present unsettled situation dragged on beyond the end of the year. On G-10 postponement, Times says Secretary said reports from Europe had indicated that substantive progress would not be possible (septel gives full report on press coverage of G-10 meeting)./3/

/3/Not found. No G-10 meeting in London during this time has been identified. The reference is probably to press coverage of Connally's postponement of the G-10 meeting. See Document 191.

2. Neale said Chancellor Barber had found this report most disturbing. He realized that Secretary had been in Far East and was not sure how much he had been able to keep in touch with most recent developments but felt that the French willingness to hold the present gold parity of the franc in face of increase in dollar price of gold was very significant concession on their part. He was thus puzzled by press report that Connally was attributing the delay to difficulties within Europe. He said that the G-10 participants had been quite willing and prepared for November 22 meeting and that the postponement was attributable to the US.

3. In response to questions to what extent Europeans had agreed on actual numbers among themselves, Neale said his feeling was agreement between French and Germans on franc-DM differential was in the offing and could be realized fairly quickly. He said that on dollar-franc differential, thinking centered around figure of 5 percent but he did not have figure for franc-DM differential. The other European exchange rates, he felt, would come along and fall into line without much difficulty. He pointed out that all this, of course, depends on how far the Japanese are prepared to move since the thinking is there must be some differential between European rates and the yen. Hence, in his view, the key rates were the franc-DM rate and the DM-yen rate. But the European settlement was dependent on the US being prepared to raise the price of gold (implicitly 5 percent).

4. We pointed out that US continues to feel that it is incumbent on the other countries to take initiatives and make constructive proposals. We were aware that French reportedly prepared to maintain the gold parity of franc but this did not seem to us a move so significant as to put the ball back into our court. Apart from the substantive issues, there was some feeling in Washington that the Europeans were approaching the problem entirely in terms of individual national interests whereas we felt a more constructive multilateral approach to a common world problem was in order. We also noted that trade and burdensharing were factors in the overall settlement and we had seen no disposition on the part of the Community to even consider what they might do in the trade area. Neale said he was not familiar with precisely what the US was pressing the Community for on trade and said he understood that we were not gunning for the UK in this area. Mitchell said that his discussions in Washington had revealed a good deal of naivete about what could be done on trade matters in the Common Market. He said they don't seem to realize that the obverse of their various demands on the CAP were very difficult political problems for the EC countries.

5. Neale summed up by saying that if Secretary Connally is reported accurately and continues to take such a viewpoint, it would be very discouraging to all the participants and makes for a bleak outlook for a settlement./4/ He felt that continuation of uncertainty on the international monetary front was affecting domestic economic situations, that businessmen in Europe, and he understood in the US, were holding back because of this uncertainty. He was most anxious, therefore, for some indication from the US that some progress could be made fairly quickly.

/4/In a November 12 memorandum to Kissinger regarding the surcharge, Huntsman wrote: "The President noted in the November 12 News Summary that Paul Samuelson, Henry Wallich, and Milton Friedman said the surcharge must soon be ended or the nation will face a trade war that could hurt the world. Samuelson denounced as 'a bad way to negotiate,' Connally's statement in Japan that the surcharge will continue until the US wipes out its payments deficit. The President suggested that you note the above remarks in your talks with Secretary Connally." (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 289, Treasury Volume II, 1971)

6. Comment:

British had read into US postponement of G-10 meeting possibility, or at least hope, that US reassessing its position and/or some behind the scenes discussions going on that required more time for fruition. Secretary Connally's press conference remarks, if made in knowledge that French willing to hold franc-gold parity in face of dollar devaluation, appears to them to preclude both these possibilities. Neale today did not emphasize necessity of US declaring itself first on gold price increase, as he has before. Their immediate concern now appears to be that the US not preclude the possibility ahead of time.

In UK view, there are no real difficulties within Europe, rather the basic obstacle is the US and possibly Japan. If the US is prepared to move on the dollar gold price and the Japanese revalue enough to leave a sufficient DM-yen differential, the intra-European exchange rate realignment could be agreed among the Europeans fairly quickly. While Neale did not say how much differential between the DM and yen was required, he gave as illustrative figures 15 percent for the yen and 10 percent for the DM./5/

/5/On November 12 President Nixon sent Kissinger a memorandum that reads: "Before Connally returns it might be well for you to go over and have a talk with Volcker if he is in town and if not with Walker, and if both are here with both of them, to get them programmed for some of the problems we will have to discuss with Connally when he returns. It is important that Volcker and Walker not set up a cabal against the White House as we make these very important decisions." (Ibid., Subject Files, Box 341, HAK/RN Memos 1971)

Annenberg

194. Memorandum of Conversation/1/

Tokyo, November 12, 1971, 6:05 p.m.

/1/Source: Washington National Records Center, Department of the Treasury, Records of Secretary Shultz: FRC 56 80 1, Subject Files 1971-74. Secret; Nodis. Drafted by Wickel; a typed note indicates the memorandum, which is marked "Draft," was not cleared by Secretary Connally. The meeting was held at Prime Minister Sato's residence. Another memorandum records the section of the conversation on economic matters in which Connally, at President Nixon's behest (see Document 187), asked if Japan would like to join the United States in a joint venture to develop and produce an SST. Connally explained that Boeing had developed a better prototype than either the Concorde or the Soviet TU-14 but Congress had refused to appropriate additional funds for tests and manufacturing and the project had been set aside. The United States would contribute the $1 billion in research data already in hand if Japan was prepared to finance the next stage. Connally noted that the President had discussed this with very few persons and asked the Prime Minister to keep it in strictest confidence. Sato agreed to keep the proposal in confidence, expressed some interest, but said he would have to study the proposal and would respond later. (Ibid.)

PARTICIPANTS

Prime Minister Eisaku Sato
Ambassador Hideki Mazaki (Interpreter)
Terou Kosugi--Private Secretary to the Prime Minister (Excused himself after opening remarks)

Secretary of the Treasury John S. Connally
Ambassador Armin H. Meyer (Excused himself after opening remarks)
James J. Wickel--American Embassy, Tokyo (Interpreter)

SUBJECTS
(1) Opening Remarks
(2) China
(3) Vietnam and Korea
(4) Second Kissinger Visit to Peking
(5) President's Moscow Visit
(6) Economic Matters
(7) Okinawa: Nukes and Bases
(8) Closing Remarks

[Omitted here is discussion of the first five subjects.]

(6) Economic Matters

The Secretary explained that the President had to take the steps he did on August 15 to prevent any decline in our ability to maintain adequate military strength to ensure security, and to avoid the destruction of our ability to maintain an economic assistance program. Only by maintaining a strong economy, he reasoned, could we support our economic assistance efforts and even some increase in our defense establishment. The President is now able to move to reduce tensions with the USSR and the PRC because he is dealing from strength, but he cautioned the American economy must be kept strong.

The Prime Minister said that the Secretary bears a heavy responsibility on his shoulders. He appreciated that the President's peace diplomacy depended on the continued maintenance of a strong deterrent posture in the interest of peace, and agreed that the American economy must be kept strong to ensure that purpose.

The Prime Minister said that Finance Minister Mizuta had informed him of his earlier discussions with the Secretary./2/ He speculated that the present monetary situation would not be easily resolved, since the EEC tends to move as a bloc, but one of its members, France, does not understand why it should move at all. He recalled meeting General DeGaulle, who threw out his chest and proclaimed that France would develop nuclear weapons to ensure its own defense; even though he admitted that France was too poor to afford a nuclear parity with the United States, DeGaulle wanted a force d'frappe to free France from its dependence on NATO. He commented that France is incapable of cooperating with anyone, even in economic matters. Japan is cooperating, he noted, but there is a need to persuade France to do so, much more than Germany.

/2/No record of this conversation was found, but a memorandum of Connally's 6:30 p.m. November 11 conversation with Foreign Minister Takeo Fukuda indicates that Connally met with the Finance Minister prior to his meeting with Fukuda. The memorandum records that Connally told Fukuda "there is a strong feeling in the United States that the United States has given freely of its natural resources and its people these past 25 years and that frankly this is being abused by some of our friends around the world. For example, he said, in 1971 Japan's growth included a 25% increase in exports, and the accumulation of foreign exchange assets at the rate of $1 billion per month, to the point that Japan's foreign exchange totals $13.5 billion, more than any other country except Germany, and greater than the United States. The American people don't understand Japan's restrictions against computers, aircraft and agricultural products." (Ibid.)

The Secretary agreed completely, and said that it is easier to persuade all the other European countries than France, which seems to have a fixation about nuclear weapons as well as gold.

The Prime Minister said that the United States had been generous with many countries, and that Canada and Japan, and the NATO countries, including Germany, would cooperate in an effort to rebuild the United States economy, but he feared that this objective could not be easily achieved in the G-10. He asked for the Secretary's frank and confidential appraisal of the prospects and of the role he expected Japan to play.

The Secretary replied that he had just postponed the G-10 meeting supposed to be held November 22-23, because discussions with the representatives of its members gave clear signs of a direct collision with France over the gold and monetary problem./3/ The other nations feared that no good would come of a meeting at this time, he said, and presently consideration is being given to a meeting December 7-8, although a new date has not been fixed.

/3/During Connally's conversation with Foreign Minister Fukuda the previous evening (see footnote 2 above), the Secretary said he had been discussing postponing the G-10 meeting with Under Secretary Volcker, and Fukuda, also referring to France, had agreed there was no point to a G-10 meeting without some prospect for success.

The Prime Minister agreed that it would be best not to meet until adequate preparations had been made. He apologized for not catching the news story about the postponement by explaining that he rarely reads newspapers because he finds their excessive hostility to his government distasteful.

The Secretary, by way of clarification, said that a meeting for the G-10 was not planned for November 22-23; the members were merely being sounded out, but the French leaked a report that it would be canceled.

The Prime Minister said little good would be served by speaking ill of France, but he noted that General DeGaulle, indebted as he was for the help of the Allied Powers, never thought of returning any favors.

The Secretary said that France had its problems, and that the UK would probably follow the French lead, at least until it obtained full membership in the EEC.

The Prime Minister said that the UK could probably play a useful role in the EEC vis-a-vis France in view of its special relationship with the United States.

The Secretary replied that one would think so, but these days, with its membership in the EEC pending, the UK could hardly be called helpful.

Still the Prime Minister thought that UK membership in the EEC would be beneficial in the long run since its presence would make it easier for the United States to present its views to the EEC.

Changing the subject, the Prime Minister said that he is deeply concerned that Japan and many other countries are feeling a sharp recession, which could, if unchecked, slip into a world depression. The United States economy is fundamental to this situation, he observed, but it could not be called bankrupt. Nevertheless mounting waves of recession could be seen on all sides and a reliable world system had to be rebuilt quickly. He did not believe that a breakdown in the system would lead to war at this late date in history.

The Secretary agreed that the United States had to correct its imbalance. Had it not acted August 15 to suspend gold convertibility it would have been exporting its depression to the world, he said, and the President felt that he had to act to bolster our own economy which was weakening to the danger point.

The Prime Minister said that he fully understood the need to suspend gold convertibility, but felt that the time had come to consider replacing it with a new system, based perhaps on SDRs.

The Secretary agreed.

The Prime Minister felt that it might get easier to deal with floating rates, and as more experience is accumulated exchange rates might be decided more naturally on that basis. He suggested considering a new system because there could be no return to gold convertibility, and perhaps floating exchange rates would provide a self-adjusting basis for realignment. He had not given up hope of a return to fixed rates (but not gold convertibility) although he conceded that the day of fixed rates might also end at some point.

The Prime Minister added that monetary adjustments are also of vital concern to the one million Okinawans who live on a dollar economy. Fortunately he worked out an arrangement with Finance Minister Mizuta to provide for the Okinawans to exchange their dollar holdings for yen upon reversion at the old rate, 360-1.

The Secretary then told the Prime Minister that he had made no specific suggestions about currency adjustment, burden sharing or trade liberalization in his discussion of United States economic problems with the GOJ Cabinet Ministers he had met; he had only outlined the nature of the United States problem and expressed the hope that they would consider how best Japan could help. He said that he informed all the Ministers that the United States seeks only to balance its payments, not to gain advantage over any other country, and looked forward to receiving suggestions on how Japan would help in whatever manner is politically acceptable and least offensive and economically feasible.

The Prime Minister asked whether all the Ministers passed this examination.

The Secretary said that all were interested in the amount expected of Japan. Our own study, he explained, disclosed that the Yen would have to be revalued 24%, the Mark 18% and the Franc 13% to yield the $13 billion swing the United States needed in its payments, but he conceded that this much might not be politically feasible for Japan, in one bite. Although the OECD and other international agencies disagreed with our own $13 billion figure, nevertheless he noted they did agree that the United States needed a swing ranging from $8-$10 billion to balance its payments. Of all the Ministers he met, he said he only informed Minister Mizuta of this 24% figure; he listened without comment.

The Prime Minister asked whether Minister Mizuta fainted, and whether the Secretary is serious about the 24% figure.

The Secretary replied that Minister Mizuta might have been shocked, but he didn't faint. He is quite serious about his figures, the Secretary said, because a Federal Reserve Board computer study showed that the United States needed a $13 billion swing to balance its payments. Even after deducting the $1 billion allowed for errors and omissions, and $1 billion for safety, the figures showed, to be objective, a need for an $11 billion swing, which is not too far out of line with the $8-$10 billion swing the IMF and OECD admit the United States needs. Calculations based on the $13 billion figure showed that the Yen had to be revalued 24%, the Mark 18% and the Franc 13%, but he admitted that 24% might be unrealistic to expect of Japan in one step.

The Prime Minister noted the September improvement in the United States balance, and asked whether this trend is expected to continue, or whether it resulted from special circumstances.

The Secretary did not know the cause, but did not believe that the September improvement was that great. Our Balance of Trade for the first six months was in deficit, he said, and this year for the first time since 1893 it was expected that the United States would run a trade deficit. In a sense there had been some revaluation, with the Yen floating upward some 9-1/2% and the Mark upward some 9%, all of which helped, he said, toward balancing our payments, but these floats amounted to less than what should be made. Politically and economically he supposed that 24% would be difficult for Japan.

The Prime Minister asked whether the United States would leave the surcharge.

The Secretary said that we would remove it, with adequate revaluation.

The Prime Minister, almost thinking aloud, said that the 10% surcharge, plus the float, almost equaled the Secretary's figure.

The Secretary observed that the situation might correct itself if the Yen floated freely for a number of months, without government intervention; realignment might thus become unnecessary.

The Prime Minister hoped that Minister of International Trade and Industry Tanaka had explained what a great effect the surcharge is having on Japan's trade and economy; he also hoped the Secretary understood the impact of the Yen float on Japan's export contracts, which had declined some 40%.

The Secretary observed that Japan's export customs clearance figures for September and October didn't show any appreciable decline.

The Prime Minister said that September was too early to show a decline, which only began to show up in October.

To be fair, the Secretary wondered whether both nations could agree to a relatively short bilateral arrangement, say for two years, with a trigger point for reappraisal if the agreement turned out to be bad for either side. He emphasized that he was thinking of a short term arrangement, which would not lock either side into a precise long-term position, because situations do change.

The Prime Minister said that he would have more to say about Yen parity later, but now wished to ask whether the United States is considering any more voluntary restraint requests, similar to the one presented through Ambassador-at-large David Kennedy.

The Secretary said that he hoped that it would not take three years to negotiate trade liberalization, since the GOJ is on record with its own trade liberalization program. There are a number of ways to correct the United States balance of payments situation, he said, but at the moment there are no product lines as urgent as textiles. However, he hoped that Japan would accelerate its tariff reductions and relax its administrative restraints as soon as possible. He then expressed appreciation for the Prime Minister's efforts to successfully conclude the textile agreement.

[Omitted here is discussion of the last two subjects.]