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International Monetary Crisis, 1971 (1)
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International Monetary Crisis, 1971 (1)
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Arthur F. Burns Papers
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The original documents are located in Box B65, folder "International Monetary Crisis,
1971 (1)" of the Arthur F. Burns Papers at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
STRICTLY CONFIDENTIAL (FR)
DRAFT :RS:nss
3/21/71
This paper examines the options open to the United States
in dealing with what may be an emerging international monetary crisis.
Nature of Problem
The U.S. balance of payments deficit was very large in 1970
and even larger in early 1971, and foreign central banks are piling up
dollars at an extremely rapid rate. Although much of the deficit re-
flects short-term capital outflow, which cannot go on forever, there
has also been a deterioration of the U.S. trade balance at a time when
it was expected to improve because of the sluggishness of the domestic
economy. Meanwhile inflation goes on, even if at a slower pace than
abroad.
In these circumstances, a crisis of confidence in the dollar
could begin at any time; that is, both foreigners and Americans could
begin to shift financial assets out of dollars into foreign currencies
and gold in order to profit from an expected change in the value of
the dollar. Such a run on the dollar would seriously disrupt U.S.
financial markets and would require intensive negotiations with foreign
monetary authorities. But, even if such a crisis does not occur, it
appears increasingly likely that the U.S. balance of payments cannot
be restored to health without some fundamental policy changes in the
United States or abroad. Three broad strategies, and the various
options under those strategies, are outlined in the next section,
FORD is LIBRARY 07V839
STRICTLY CONFIDENTIAL (FR)
-2-
The pros and cons of the options open to the United States are
examined in greater detail later.
Three Possible U.S. Strategies
The possible strategies are: (A) to try to preserve the
status quo by taking various actions to hasten the restoration of
price stability and to reduce the balance of payments deficit; (B)
to initiate action designed to achieve a realignment of exchange
rates between the dollar and the major foreign currencies; and, (c)
to do nothing but to wait for other countries to initiate action or
for the crisis to develop.
Strategy A (Preserving status quo) What would be in-
volved here would be a package of measures to be taken by the U.S.
Government for the specific and announced purpose of improving the
balance of payments and protecting the dollar without interfering
with the recovery of the domestic economy. Such a package of measures
might include:
--further steps toward an incomes policy;
--support from the Administration for further
fiscal actions. tax reductions--as a way of
shifting some of the burden of generating
GERALD FORD LIBRARY
economic expansion from monetary to fiscal
policy and therefore achieving recovery with
somewhat higher short-term interest rates
than would exist in the absence of such fiscal actions;
STRICTLY CONFIDENTIAL (FR)
-3-
--a tightening of existing controls on U.S.
capital outflows to developed countries.
This would include a tightening of the OFDI
program and the VFCR, and an increase in the
Interest Equalizati on Tax;
adoption by the U.S. Government of additional
measures to discourage repayment of liabilities
by U.S. banks to their branches or to absorb
such funds so as to keep them out of foreign
hands.
This stragegy might be adopted for a number of reasons:
-uncertainty as to how serious the fundamental
problem is and hope that, as inflation pro-
ceeds in Europe, the U.S. balance of payments
will improve;
--a belief that adoption of this stragety will
strengthen the U.S. international negotiating
position for achieving a more fundamental
correction of the imbalance in U.S. accounts;
--a belief that a satisfactory solution of the
fundamental problem is not achievable now and
that a holding action is both necessary and
feasible as a way of preventing the develop-
ment of a crisis.
FORD & GERALD LIBRARY
STRICTLY CONFIDENTIAL (FR)
-4-
The pros and cons of this strategy are presented below
(pages 7-11).
Strategy B (Action initiated by U.S. designed to achieve
exchange-rate realignment) --What is considered here is specific
U.S. action (as distinguished from attempts to persuade other
countries to act, which is covered in Strategy C) that will begin
the process of realigning exchange rates so that the dollar will
depreciate relative to a significant number of other major currencies
(these currencies will appreciate relative to the dollar).
The process could begin with a decision that the Federal
Reserve would not cover further foreign dollar accruals with drawings
on the swap lines. This decision might in turn lead to a decision
by the U.S. Government to suspend gold payments and purchases as
well as use of SDRs and other reserve assets.
The pros and cons of this strategy are presented below
(pages 11-13).
Once the gauntlet had been thrown down, a period of in-
tensive negotiations with foreign monetary authorities would begin,
at their initiative if not that of the United States. The possible
outcomes under this strategy may be classified as follows:
--the Unit ed States does nothing further,
adopting a purely passive policy towards
its balance of payments position and leav-
ing it to other countries whether to main-
FORD :- LIBRARY GERALD
STRICTLY CONFIDENTIAL (FR)
-5-
tain their existing exchange rates against
the dollar (which would require that their
central banks purchase large amounts of dollars)
or let their exchange rates appreciate. For
the indefinite future, the United States would
neither accumulate nor sell reserve assets.
The Articles of Agreement of the IMF would
either lapse altogether or be radically
altered. This outcome could be described
as a complete dollar standard;
--after other major countries revalue their
currencies vis-à-vis the dollar and agree-
ment is reached on other matters, including
concessions by the United States to other
countries, the convertibility of the dollar
into gold at $35 per ounce is restored;
--convertibility of the dollar into gold is
restored but at a price higher than $35 as
part of a package agreement with other
countries. The realignment of exchange rates
under this outcome could come about as the re-
sult of some appreciation of other currencies
relative to gold while the dollar depreciates
FORD is LIBRATE\ 9ERALD
STRICTLY CONFIDENTIAL (FR)
-6-
in terms of gold or it could come about
purely from a depreciation of the dollar
while other major currencies stand still.
Conceivably it could involve a depreciation
of all currencies in terms of gold but a larger
depreciation of the dollar.
In combination with some of these outcomes, related
agreements with other countries would be necessary or desirable.
These might involve the amount of SDRs to be created, future
policy regarding exchange rates, limitations on future increases
in the dollar component of foreign official reserves, movement
toward phasing out the use of gold as a reserve asset, movement
toward the consolidation of all reserve assets into a single
asset in the form of a claim on the International Monetary Fund.
It is possible that the restoration of the convertibility of the
dollar would be into other reserve assets but not into gold.
Strategy C (No action by the U.S.) -Under this strategy,
the United States would for the time being initiate no specific
action of its own. Even so, there are at least two quite different
options under this strategy:
--the United States, through negotiation
and persuasion, could try to engineer
a revaluation of other major curencies
GERALD FORD LIBRARY
prior to a crisis and as a way of fore-
stalling a crisis. Insofar as this
STRICTLY CONFIDENTIAL (FR)
-7-
outcome requires some quid pro quos from the
United States, it shades into Strategy B,
above;
--the United States does nothing. If the
crisis developes, the United States pays
out reserves for a while but at some point
ceases to draw on swap lines with other
countries and then suspends gold payments
and purchases.
The possible outcomes are similar to those listed under
Strategy B.
The pros and cons of Strategy C are presented below
(pages 13-14).
FORD & LIBRARY 976839
Strategy Pros and Cons
This strategy involves U.S. action to defend the dollar by
reducing the balance-of-payments deficit.
Pros--1. Perhaps the strongest argument for such action
is that it might strengthen the U.S. negotiating position in achiev-
ing more fundamental changes, which require cooperative action by
other countries. Many officials, and others, in Europe and Japan
believe that the United States has in the past year or so simply
ignored its balance of payments and the effects of its large deficit
on the rest of the world. Rightly or wrongly, these officials will
STRICTLY CONFIDENTIAL (FR)
-8-
be strongly motivated, in negotiations about the future of the
international monetary system, to impose constraints on the U.S.
payments position. This motivation could show up in various ways:
--an unwillingness to revalue their currencies
because this action seems to take the United
States off the hook;
--an insistence on strengthening the role of
gold in the system on the grounds that it is
only the threat of gold losses that induces
the United States to do something about its
balance of payments;
--an unwillingness to agree to adequate creation
FORD & LIBRARY GERALD
of SDRs on the grounds that more discipline is
needed;
--an unwillingness to contemplate greater flexibility
of exchange rates in the future.
2. Another argument in favor of Strategy A is that it may
be the only way to prevent a crisis. If the Government wishes at
all costs to avoid a crisis, if it is judged that the United States
is unable to persuade other countries to revalue their currencies
(as under Strategy C), if the United States does not wish to initiate
action on its own to engineer a realignment of exchange rates (as
under Strategy B), and if it is judged that doing nothing will bring
STRICTLY CONFIDENTIAL (FR)
-9-
on a crisis, the Government then has no other alternative to trying
to maintain the status quo with a strengthened balance-of-payments
program.
3. A related argument for Strategy A would run as follows:
the major European countries are experiencing inflation and are
quite uncertain about the future value of their currencies. This
makes them unwilling (except for Germany and Japan) to revalue. Re-
valuation by these two currencies alone would help the U.S. trade
balance, and thus probably the whole balance of payments, only a
little. Thus it is necessary to hold the fort for a while until
other countries are willing to revalue. To prevent the onset of
massive private speculation in the interim, a strengthened U.S.
balance-of-payments program is desirable.
Cons--1. To tighten the balance-of-payments programs--
particularly on direct foreign investment by U.S. corporations--
would run counter to Administration philosophy and policy and thus
have high political costs, even if a crisis were successfully avoided.
2. There is a significant risk that a crisis will occur
even if a new program is attempted. Announcement of a major new
package could conceivably trigger the speculative movements that would
lead to a crisis. There might be additional political costs to the
Administration if a new program were tried and then fails.
FORD & LIBRARY GERALD
STRICTLY CONFIDENTIAL (FR)
-10-
3. It is at least possible that the costs associated with
trying to avoid a crisis would be excessive when viewed in the light
of benefits that might be realized if a crisis occurred and were
resolved well and quickly. Hence it should not be too readily con-
cluded that distasteful measures should be adopted to avoid a crisis.
4. If the new balance-of-payments program were successful
enough in improving the U.S. payments position to prevent a crisis,
it would relieve the pressure on other countries (Germany and Japan
as well as other surplus countries) to revalue their currencies.
Thus we might be in the position of continuing a distasteful pro-
gram, while putting off into the future still further a more
desirable solution to the persisting U.S. payments imbalance.
5. To adopt a new program in order to strenghen the U.S.
negotiating position is to pander to European misconceptions about
the United States and about the workings of the monetary system.
Europeans fail to understand that the United States does not need
a balance-of-payments constraint in order to resist inflation.
This is a fundamental difference between European countries and the
United States. The sooner the Europeans understand this, the better
will be our relations with them. Similarly, the Europeans and the
Japanese are still too reluctant to recognize that changes in
relative exchange rates are a preferable means of dealing with
FORD i LIBRARY
large, persistent payments imbalances and that a change in the
exchange rates of the dollar vis-à-vis other currencies can, under
present institutional arrangements, only be smoothly accomplished
by revaluations of other currencies. The sooner the Europeans
STRICTLY CONFIDENTIAL (FR)
-11-
and the Japanese begin serious negotiations with us on changing
present institutional arrangements, the better off all of us will
be.
Strategy B--Pros and Cons on Seizing the Initiative--Under
this strategy, the United States would seize the initiative by taking
action designed to realign exchange rates before a crisis developed.
Such action could itself precipitate a crisis.
Pros--1. A case can be made that, for the restoration of
international balance, exchange-rate realignment is going to be
needed in any event and it is better from the U.S. viewpoint not
to wait until we are overtaken by events (in the form of a
speculative run on the dollar).
2. If we seize the initiative, we will catch other
countries, especially the EEC countries, before they have been able
to work out a coordinated position for dealing with a crisis and
we will be more likely to prevail in the ensuing negotiations.
3. It may be possible to initiate this strategy with
quiet negotiations that do not reveal to markets that an exchange-
rate realignment is imminent. In this way we may be able to secure
exchange-rate realignment without a crisis that would disrupt mar-
kets and hinder economic recovery. Such negotiations could be
carried out at a Group of Ten meeting called under the cover of
FORD & LIBRARY 978839
STRICTLY CONFIDENTIAL (FR)
-12-
another issue or, if a crisis has not yet begun by then at
the time of the annual Fund and Bank meetings in September,
when all leading officials will be in Washington anyway.
Cons--1. It will be impossible to conduct quiet negotiations
and once it has leaked out that the United States has suspended gold
convertibility, an enormous flight from the dollar will begin. This
will disrupt financial markets in the United States and set back
the fragile recovery that is under way. It will also flood foreign
central banks with dollars, undermining further their monetary
policies.
2. If the United States adopts the view that exchange-
rate realignment must come about from other countries revaluing
against the dollar, it makes more political sense to be passive
rather than to precipitate matters with a suspension. Our throwing
down the gauntlet would surely provoke much greater hostility, and
hence hostility to the crisis resolutions favored by the United
States, compared with a situation in which a, crisis had materialized
as a result of other countries' failure to act.
3. Related to this point just made, it may be argued
that suspension of gold-comvertibility, like the nuclear deterrent,
is better unused than used--better a bargaining threat than an
actuality.
FORD is LIBRARY GERALD
STRICTLY CONFIDENTIAL (FR)
-13-
A discussion of the options under Strategy B (the possible
outcomes) is presented below
Strategy C--Pros and Cons on Taking No Action-- Under this
strategy the United States would continue with present policies--
domestic and international.
Pros--1. There is little / that other countries can rationally
ask of the United States so long as we continue to strive to stop
inflation and to promote a moderate rate of economic expansion.
A few countries, like Belgium, Holland, and Switzerland will take
gold from us but these amounts are small relative to our total
reserves. Moreover, it is quite sensible to buy time by drawing
down, as necessary, the present reserves of gold, SDRs, and Fund
position.
2. In time other countries will realize that they must
revalue if they want to cut down on dollar accumulations. We
can, in private discussions, encourage them to do this.
3. Continuation of present policies keeps all our options
open and does not set us on a course that is irreversible. In
contrast, if we initiate a suspension in the absence of a crisis,
an increase in the gold price may become unavoidable even though
a judgment may be made that such a outcome is highly undesirable
(the pros and cons on this option are outlined below--(pages 21-28).
FORD is LIBRARY GERALD
STRICTLY CONFIDENTIAL (FR)
-14-
Cons--1. The dollar outflow is so large that a crisis
may be almost unavoidable if no action--à la Strategy A or
Strategy B--is taken.
2. Even if we can count on foreign central banks to
continue to be moderate in asking for conversion of dollars into
gold, SDRs and Fund positions, the private markets are likely to
decide soon that the situation is untenable and a massive
speculative flight from the dollar is likely to begin.
3. When that happens we will eventually be forced
to Strategy A and/or Strategy B anyway.
Realignment of Exchange Rates--General Considerations
Whichever of the above strategies is adopted, we may
find ourselves in a situation in which we are negotiating actively
with major foreign countries over exchange-rate realignment. As
noted above, the alternatives can be classifed as: (a) a
revaluation of other currencies against the dollar, which main-
tains its present value in terms of gold; (b) a devaluation of
the dollar in terms of gold, while other major currencies main-
tain their present gold parities; (c) a combination of these
two alternatives; and (d) a devaluation of all currencies in terms of
gold but a larger devaluation of the dollar than of other
currencies.
GERALD FORD LIBRARY
STRICTLY CONFIDENTIAL (FR)
-15-
Before examining the benefits and costs of these
alternative approaches to exchange-rate realignment, we may
first take note of the difficulties in the way of bringing
about a change in the exchange rate between the dollar and
other currencies.
(1) The determination of the exchange-market
value of the dollar takes place in a unique way.
Most other countries maintain the value of their
currencies in relation to the dollar by having
their central banks stand ready to buy or sell
dollars. The United States does not do this and
the exchange value of the dollar in relation to
each other currency is determined by the market
intervention practices of other countries. That
this is the state of affairs is illustrated by
the fact that if one asks what is "the" exchange
rate of the dollar, one cannot give any answer at
all unless one specifies which other currency one
has in mind. But if one asks what is "the" exchange
rate of the pound or franc or mark, it is common
practice to answer in terms of the dollar value of
these currencies.
FORD & LIBRARY
STRICTLY CONFIDENTIAL (FR)
-16-
(2) The only way that the United States can
unilaterally act to try to change the exchange rate
between the dollar and other currencies is to change
the dollar price of gold while other countries (or
those willing to let their exchange rates be altered)
maintain the existing value of their currencies in
terms of gold. Those countries willing to let their
exchange rates be altered would have to change the
prices, in terms of dollars, at which their central
banks intervene in the exchange market.
Since an exchange rate is the price of one
currency in terms of another and its determination
depends on both countries, it is true that no country
can change its exchange rate if other countries are
unwilling to see their exchange rates altered. But
the United States may be different, at least in degree,
from other countries in the difficulties it would en-
counter in changing its exchange rate, especially in
a downward direction. One reason for this difference
has already been noted--countries think of their
exchange rates in terms of the dollar value of their
currencies. They may find such a change more difficult
to accept than a change in the sterling or franc or
QERALED FORD LIBRARY
peso value of their currencies. The second reason is
that the United States plays such a large role in the
STRICTL Y CONFIDENTIAL (FR)
-17-
trade of many countries that, quite apart from
technical monetary considerations, they are un-
willing to see their currencies appreciate in
relation to the dollar.
It has always been assumed, and there is little
reason to doubt it now, that if the United States tried
to devalue the dollar (by raising the price of gold),
all Latin American countries and many other less-
developed countries would also devalue, so as to keep
the dollar value of their currencies unchanged, and
therefore to keep from weakening their competitive
positions in the U.S. market.
It is a useful exercise to list those countries
that might potentially be willing to stand still for
a devaluation of the dollar relative to their currencies.
The EEC countries can probably be listed (though
question may be raised as to how long France would
hold its revalued rate); also Switzerland, Japan,
Austria. Canada has already appreciated and seems
unlikely to appreciate further relative to the U.S.
dollar. The United Kingdom is unlikely to let the
pound appreciate and this in turn raises doubts about
Australia, New Zealand, South Africa and the rest of
the sterling area. Spain and Portugal are also undertain.
FORD & LIBRARY 938670
STRICTLY CONFIDENTIAL (FR)
-18-
The Scandinavian countries cannot be firmly counted
on not to follow the dollar. What we might be left
with in practice is a handful of countries: perhaps
no more than Germany, Italy, France, Belgium, Nether-
lands, Switzerland, Austria and Japan.
Thus, whatever means are used to bring it about,
an exchange-rate realignment will probably involve
a change in the value of the dollar against no more
than 8 or 10 major countries and possibly a few small
countries (former French colonies, for example).
Whether the method chosen for bringing about
exchange-rate realignment affects significantly
the number of countries willing to countenance an
appreciation of their exchange rates relative to the
dollar is discussed further in the next section.
(3) If exchange-rate realignment, by what-
ever means it is achieved, arouses expectations
of early additional changes in exchange rates in
the same direction, considerable instability is
likely to be generated, since capital would tend to
move out of the currency expected to devalue again.
FORD & 076839 LIBRARY
STRICTLY CONFIDENTIAL (FR)
-19-
While this is a problem for any curency,
it is particularly important for the United
States because of the special role of the dollar
in the monetary system. Official and private
holdings of dollars by foreigners are extremely
large. An expectation of even one discrete change
in the exchange rate between the dollar and other
currencies could bring on a massive shift of funds
out of dollars into other currencies. If, after
an exchange-rate adjustment, there is a general
belief that one or a series of further adjustments
are likely, there could be a steady shift out of
dollars into other currencies, with consequent
pressure on U.S. reserves as the central
banks of the recipient countries convert their
dollar accruals into other reserve assets. In
other words, the willingness of private holders of
dollars to retain their holdings would be weakened
if there is an expectation of a series of devaluations
of the dollar or a series of revaluations of a par-
ticular foreign currency. (This point will be re-
ferred to again below, where the alternative
techniques of bringing about exchange-rate re-
alignment are discussed.)
FORD & LIBRARY GERALD
STRICTLY CONFIDENTIAL (FR)
-20-
(4) A change in the exchange rates of the
dollar vis-à-vis the countries listed above would
be designed mainly to bring about an improvement in
the U.S. trade balance. The effects on other
components of the balance of payments--service trans-
actions, remittances of earnings, capital flows--
are less certain and probably of smaller relative
magnitude. Thus the improvement in the overall
U.S. position would come mainly (although not entirely)
from an increase in earnings on trade, which would off-
set a greater portion of our net payments abroad on
capital account.
The decision of other countries to permit a
change in the exchange rate between the dollar and
their currencies (and as brought out above, it will
be a joint decision whatever means are employed to
bring it about) will depend in large part on how
large a reduction in their trade balances they are
FORD is LIBRARY GERALD
willing to tolerate.
We must recognize the possibility that the other
major countries of the world have objectives for their
trade balances that are inconsistent with our objective.
For example, if the United States wishes to abolish its
restraints on capital outflow when a change in exchange
rates is brought about, the change in exchange rates
must be large enough to make possible a sizable U.S.
STRICTLY CONFIDENTIAL (FR)
-21-
trade surplus. If we are to achieve a sizable
tra de surplus, it must be at the expense mainly
of the other
industrial countries. Query:
are the European countries and Japan willing to
accept a sizable reduction in their trade
balances? If not, they will not permit a sizable
depreciation of the dollar relative to their
currencies. If this is so, it may have significant
implications for the method we choose to effectuate
a change in exchange rates, since it will be likely
that the initial exchange rate adjustment will not
be sufficient to restore equilibrium and another
adjustment will be needed before long.
We turn now to the alternatives for bringing about an
adjustment of exchange rates between the dollar and other major
currencies.
Realignment of Exchange Rates--Increase in
FORD is LIBRARY GERALD
the Official Price of Gold
As noted earlier, the United States cannot change"its"
exchange rate. All it can do, apart from using various forms of
leverage to persuade other countries to change their exchange
rates, is to change the dollar price of gold and, to the extent
that other countries either stand still or devalue less in
terms of gold than we do this action can bring about a change
STRICTLY CONFIDENTIAL (FR)
-22-
in the exchange rate between the dollar and the currencies of those
countries.
The pros and cons of adopting this approach are as
follows:
Pros--1. An increase in the price of gold, while adopted
for the purpose of bringing about an adjustment of exchange rates,
may also raise the dollar value of U.S. gold reserves and therefore
give the United States greater scope for financing future deficits.
2. Carrying this point further, one may argue that if
we raise the price of gold by a large amount, we may provide
assurance that the price will remain stable for many years (almost
two generations have elapsed since 1934). This in turn will
strengthen the willingness of other countries to hold dollars in
their reserves, which would also give the United States scope for
financing its balance of payments in the future.
3. If the United States agrees to raise the price of
gold, other countries will be willing to stand still for a larger
change in exchange rates (appreciation of their currencies relative to
the dollar) than if we refuse to act and insist that the entire
exchange-rate realignment must come from a revaluation of other
currencies relative to the dollar with no change in the dollar price
of gold. The reasons for this difference may be largely political,
but that makes them no léss real.
FORD is LIBRARY GERALD
STRICTLY CONFIDENTIAL (FR)
-23-
4. It may be argued by some (notably by Milton Gilbert)
that the SDR is not an adequate substitute for gold and that un-
less gold reserves rise steadily, other countries will adopt
policies that force a balance of payments deficit on the United
States. An increase in the official price of gold would not only
increase the value of existing reserves, it would call forth a
greater annual supply (in volume and price) of gold for additions
to reserves.
5. The free market price of gold is likely to rise
in the future as industrial and artistic demands increase against
a supply from new production that will not rise much at the
present price. As the free market price rises significantly above
the official price, instability will be generated as monetary
authorities and private dollar holders grow increasingly apprehensive
that, despite the two-tier system and the SDRs, the official price
will have to rise too.
Cons--1. The United States has firmly maintained, from one
Administration to another, that the official price of gold will not be
raised. Many foreign governments accept this as a commitment and
base their reserve management (willingness to hold dollars) on it.
There would therefore be political effects, at home and abroad,
from an apparent reversal of a long-standing U.S. policy.
FORD & LIBRARY GERALD
STRICTLY CONFIDENTIAL (FR)
-24-
2. The United States has led the rest of the world
toward the SDR system and away from heavy reliance on gold.
U.S. agreement to increase the official price of gold would
add to the prestige of gold as a reserve asset and turn the
clock backwards on the evolution away from dependence on gold
and towards a multilaterally-managed international monetary
system based on SDRs. What many regard as a noble development
of the 1960's would be discarded unless the increase in the
official price of gold were combined with agreement on other
measures that clearly accelerated the process of phasing-out
gold as a reserve asset.
3. An increase in the dollar price of gold would re-
sult in a pattern of capital gains and losses that does not
further the political or economic interests of the United States.
Russia and South Africa would be major gainers. So would the
gold bugs and the many elements in Europe, the Middle East and
elsewhere that have bet against a rational monetary order and even
against the United States over the years by investing in gold
and in gold-mining shares. Countries that have been least
cooperative with the United States in monetary matters and have
insisted on keeping a very high proportion of their reserves in
GERALD FORD VIBRARY
gold would have the largest relative gains (Belgium, Holland,
and Switzerland). While it is true that countries that have
held large shares of their reserves in dollars have earned interest
over the years, this fact in itself does not justify giving a greater
STRICTLY CONFIDENTIAL (FR)
-25-
capital gain now to countries that have not held dollars; presumably
the U.S. interest calls for continuing to see to it that dollar-
holding countries feel that they have been net-gainers over time.
4. A related point is that those countries whose
monetary authorities have kept strict limits on their dollar holdings
will finally be vindicated and this will have a demonstration effect
on the behavior of other countries in the future. (It will be no
coincidence that the central bankers most vociferous in urging
the United States to raise the price of gold will be those that
have the highest ratios of gold to foreign exchange in their
reserves. They will be motivated not so much by a wish for
capital gains as for a demonstration to their own fellow citizens
that their policies over the years have been wise.)
5. An increase in the official price of gold will not
increase U.S. reserves (see point 1. under Pros above ), to the
extent that it leads countries to change their reserve management
policies and convert either outstanding dollars or new dollar
accruals into gold and other reserve assets. Such a change in
the willingness to hold dollars in official reserves could come
about for a variety of reasons: the EEC countries are more than
FORD is LIBRARY
likely to adopt a uniform policy of strictly-limited dollar
accumulations on the grounds that this is the only way to impose
balance-of-payments discipline on the United States and prevent a
repetition of what has happened in the last 10 or 15 years. Many
countries whose dollar holding were large at the time of the
increase in the gold price would be under political pressure to
STRICTLY CONFIDENTIAL (FR)
-26-
prevent a repetition of such a capital loss (or failure to gain).
The Netherlands reacted this way when sterling went off gold in
1931.
6. If a large increase in the gold price is sought
(for the reasons set forth under point 2. in the Pros' section
above), the net exchange rate advantage to the United States will
still be limited by how much of such an advantage other countries
are willing to give us. In other words other countries will raise
the price of gold in terms of their currencies by enough to limit
the extent by which their currencies appreciate relative to the
dollar. Thus if, as is likely, the dollar depreciation relative
to other currencies is no more than 10 per cent (plus and minus,
say, 5 percentage points), there is no assurance that even a large
increase in the price of gold will not be repeated soon, since
there is no assurance that the United States will have a healthy
balance of payments. In this case, the scope for future financing
of U.S. payments deficits will not be large, for two reasons:
other countries will convert existing dollar balances into gold
and other reserve assets; other countries will be reluctant to
add to their dollar holdings.
QERALD FORD CLERABY
STRICTLY CONFIDENTIAL (FR)
-27-
7. To argue that an increase in the price of gold will
enable the United States to achieve a larger depreciation of the
dollar relative to other countries is to say that we must bribe
other countries, by giving them a capital gain or by accepting a
political 1y and economically distasteful step, to agree to an
exchange-rate realignment that is in their interest as much as
ours. This would be an unfortunate basis on which to begin a
new era in international monetary relations. Could we ever again
expect other countries to revalue when in surplus if we accept
the notion now that they must be "bribed" with a U.S. devaluation?
8. If the United States takes the initiative by
changing the official gold price, the Government will at the
same time wish, and be required by political pressures, to abolish
the existing restrictions on the outflow of U.S. capital. While
this is clearly desirable for many reasons, this step will make
it appear less likely to the world that the new exchange rate
between the dollar and other currencies can be maintained for
a long period of time. Yet, other countries may not be willing
to stand still for a large enough depreciation of the dollar to
make possible a trade surplus large enough to cover an unrestricted
outflow, of private capital from the United States. In ths event,
the advantages attributed to an increase in the price of gold
under Pros above would not materialize.
FORD & LIBRARY 938870
STRICTLY CONFIDENTIAL (FR)
-28-
9. The international monetary system does not require
an increase in the official price of gold either for the purpose
of increasing reserves or preventing instability as the free market
price rises over time relative to the official price. Reserve
expansion can occur via SDRs and countries can be expected, as time
goes on, to treat SDRs as a full substitute for gold. Further-
more, in these circumstances, the two-tier system can continue to
function well. The only leakage that is likely is that some
countries may decide to sell gold reserves in the free-market
in order to take advantage of the higher price there. The monetary
system can easily adapt to such events. In fact such sales by central
banks could, in turn, be undertaken as a concerted policy.
Realignment of Exchange Rates--Revaluation
of other Currencies
Judgments on the arguments for and against this
approach are closely related to the judgments about an increase
in the official price of gold. The only way to achieve an
exchange-rate realignment in the absence of an increase in the
official price of gold is via a unilateral revaluation by a group
of other countries.
Many of the arguments for and against an increase in
the official price of gold are also arguments against and for re-
valuation of other currencies at an unchanged dollar price of
gold. These arguments will not be repeated in this section.
FORD i LIBRARY
STRICTLY CONFIDENTIAL (FR)
-299
There is one argument favoring revaluation of other
countries that is not brought out or implied in the analysis
of the gold price issue. A major problem in any change of the
exchange rate between the dollar and other currencies is to
avoid generating expectations of further changes in the same
direction. If the dollar is devalued, via an increase in the
price of gold, and there is an expectation that further devaluations
may be necessary, private and official entities can act to protect
themselves by buying gold.
If on the other hand, other currencies are revalued and
there is an expectation that further moves in this direction may
be ahead, buying gold will not be an attractive hedge. Further-
more, there will be no certainty regarding which foreign currencies
may be revalued in the future. Thus a revaluati on of other
currencies provides less scope for destabilizing future speculation
than a move by the dollar against gold.
A major consideration in the minds of Europeans is that if they
agree to revalue their currencies in order to reduce present
imbalances in international payments, the United States will be
able to relieve its balance of payments problem too easily. In
their view, U.S. policy in the future would continue to ignore the
balance of payments, since we would always be able to count on
other countries to revalue.
FORD i LIBRARY GERALD
STRICTLY CONFIDENTIAL
-30-
While this view may be based in large part on a mis-
conception regarding what motivates U.S. policy makers (as
noted earlier), it is not easy to persuade Europeans that it is
completely without foundation.
It seems likely that, at a minimum, the United States
would have to make certain commitments to the rest of the world
in return for an agreement by other major countries to revalue.
These commitments would involve the future of the U.S. balance
of payments and in particular the future rate of growth of official
dollar holdings.
In this connection, however, it must be remembered that,
even if the U.S. agreed to raise the price of gold, European
countries would be determined to prevent a repetition of the
U.S. payments imbalances of the past decade. Thus even if they
did not extract commitments from us, they would probably act to
impose balance of payments discipline on us by insisting much more
than in the past on conversion of dollar accumulations into gold and
other reserve assets.
Among the demands that Europeans might put to us as
quid pro quos for revaluation of their currencies are the following:
1. A willingness by the United States to
adapt the mix of its fiscal and monetary policies
so as to avoid large monetary impacts on them (as
BERALD FORD LIBRARY
happened in one direction in 1968-69 and in the
other direction in 1970-71).
STRICTLY CONFIDENTIAL (FR)
-31-
2. A willingness of the United States to restrict
long-term capital outflows when necessary to prevent too
large a deficit in our balance of payments.
3. A willingness to use, more actively than in the
past, selective devices to try to regulate short-term
capital inflows and outflows.
4. A willingness to reform the international
monetary system in a way that changes the role of the
dollar and its relation to gold so that, in the future,
the United States could be expected to devalue the dollar
if our balance of payments is in persistent deficit.
The extent to which the United States should be willing to
accommodate to such demands is a matter for debate. But, as noted
above, we may be forced in any event to greater efforts to control
our balance of payments in the future.
Finally, it should be pointed out that the trump card
in U.S. hands is the ability to suspend gold sales and purchases.
Such a suspension could trigger a crisis or it could come after
a crisis has begun. In either event, it leaves it up to
other countries whether and how much to revalue in order
to restore order and balance in international payments.
Use of this trump card without accompanying concessions by the
United -concessions that would provide some assurance
to other countries that there will not be a repetition of the
FORD : 076830 LIBRARY
STRICTLY CONFI DENTIAL (FR)
-32-
developments that led to the crisis--would create strong resent-
ments abroad and in turn would probably lead to various policy
actions inimical tothe United States. These actions could include:
1. A turning inward by the EEC in an effort
to insulate itself and its satellites from the United
States in trade and investment.
2. The erection by European countries of
barriers to U.S. investment and capital flows
generally. These measures could go well beyond
the effects of existing U.S. restraints on capital
outflows, which affect mainly the locus of financing
of direct investment and bank lending. European
restrictions could act directly on the real activities
of U.S. corporations and banks in Europe.
3. Adoption of exchange controls in Europe
combined with a dual rate of exchange--one for
current transactions and one for capital transactions.
This could lead the world back toward the restrictive
climate of the 1930's.
It seems a safe conclusion that there is no simple way
to restore order in the international monetary system. While
the Europeans and the other major industrial countries may be
to some degree irrational in their attitude toward the United States,
GERALD FORD LIBRARY
STRICTLY CONFIDENTIAL (FR)
-33-
we must realize that they regard themselves as being "in a
boat with an elephant" and some of their demands for protection
are justified. The great need is to design a policy for dealing
with them that will preserve as much freedom in international
transactions as is consistent with harmonious relations while
avoiding either policies or market reactions that will hamper
non-inflationary growth here and abroad.
FORD & LIBRARY 938470
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date April 22, 1971
To
Board of Governors
Subject:
From
J. R. Coyne
The article below was transmitted on the Reuters News
Service wire early this morning. It was provided to us by the
Federal Reserve Bank of New York at our request.
-0-
United States willing to hold up short-term interest rates,
says Bundsbank head
Frankfurt, April 22-The United States is willing to hold up
short-term interest rates at the higher level seen in recent weeks in
the interests of international monetary cooperation, the President
of the West German Federal Bank, Karl Klasen, said.
He told newsmen that United States Federal Reserve Board
Chairman Arthur S. Burns told Central Bankers in Basle last week that
the United States would attempt to hold up short-term rates even though
it would probably find it easier or more desirable to allow them to
decline for domestic economic reasons.
Klasen added that Burns showed "understanding" of the aims
of international cooperation in the monetary field and that the United
States monetary authorities are not indifferent to the problems of the
United States balance of payments deficit.
-
prime NC ant vily L 100mg in and
any a buries
loans &
FORD is LIBRARY
May 4, 1971
TO:
Chairman Burns
SUBJECT: Notes on Conversation
FROM:
J. Dewey Daane
with Emminger
CONF IDENTIAL
At Volcker's suggestion, and with your approval, I
called Otmar Emminger, Deputy Governor of the Bundesbank,
this morning to find out how they viewed the most recent
developments. Emminger's comments ran as follows.
(1) Dollars had been piling up in the last few days
because of a lot of rumors that the German authorities
were going to take actions to stop or reduce such inflows.
Into this explosive situation several reports had been
introduced, the most important being that of the Five
Institutes who advised that the only way the German
government could stop the inflows and insure internal
stability was to resort to a temporary float. As
Emminger put it, this was "phrased in an unfortunate
way, suggesting that it could only lead to an up
valuation of the Deutschmark."
(2) The whole discussion, unfortunately, was now
taking place in the public arena due to the fact that
there had been leaks following the meeting in Hamburg
a week ago of the Finance Ministers of the EEC countries.
It was reported in the press that in an after dinner
debate in a closed session of the Ministers chaired by
Schiller, the latter had asked whether the EEC countries
would be prepared to take part in joint action (a) under
current circumstances and (b) in the exchange rate dis-
cussions in the Fund. When this had leaked, Schiller as
the chairman of the conference confirmed to the press
that this discussion had ended "in total disagreement."
DECLASSIFIED
E.O. 12338 See, 3.0
MR01-79, #8; 10/2/01
By due NARA, Date 10/25/01
In turn, this set the whole rumor machinery into action
since the market then concluded that, absent agreement
among the six, the only possibility was unilateral action
by the Germans. This market view was further reinforced
at that point by a report by the Organization for the
Protection of German Savers (representing all major
banking and insurance companies), making an urgent
appeal for a temporary float.
CONF IDENT IAL
FORD & LIBRARY
CONF IDENT IAL
2
(3) Emminger took nde of the very large inflows both
forward and spot, and particularly the inflows beginning
yesterday and leading to today's inflows which he labelled
"the largest for some time." He further noted that, to the
best of his knowledge, Schiller had only made a "noncommittal"
statement regarding their position; however, the front page
of the London Financial Times had carried a full excerpt
of the Institute's views and indicated that Schiller's
preference was for a common position of the six.
(4) Emminger then said that, frankly, the political
situation was an extremely difficult one. They had a full
discussion of this with Pierre-Paul Schweitzer of the IMF
last Friday night and Schweitzer had "all the inside
knowledge of their tactical and political difficulties."
The government and the Bundesbank currently were under
tremendous pressure to do something to break the inflationary
cycle. The most recent data indicated that the inflationary
pressures were stronger then before and there was a general
public call for immediate action to do something. There
would be a meeting of the Bundesbank central bank Council
tomorrow, but the Council members had divided views:
(a) some members were in favor of a temporary float
leading up to a modest revaluation;
(b) others favored capital import controls despite
the fact that they might not solve the problem
and could undermine their restrictive domestic
policy.
All of this was against the background of widespread talk
of devaluation of the dollar which had been the major
subject behind the scenes at the recent meeting of the
International Chamber of Commerce, aggravated perhaps
by a major speech there by Mr. Gaines, Senior Vice
President of the Manufacturers Hanover Trust Company.
(5) I asked Emminger whether there was any way we
could be helpful in the current atmosphere and he responded
that the problem was entirely inside Germany and that they
would have to sort it out themselves. He had made his
CONF IDENT IAL
FORD is LIBRARY GERALD
CONF IDENTIAL
3
own preference clear, namely in favor of the temporary
float to be followed by a modest revaluation. He then
spoke to me as follows: "May I ask you on an intimate
basis what your personal view would be if the decision
was to move in the direction of the float and revaluation?"
I responded that we did not have a consensus judgment on
this point but in the spirit of his question I would say
that looking at it only with my own personal eyes I could
perhaps answer no depending on whether this were done in
such a way as to avoid a protracted period of public
discussion and uncertainty that could only aggravate
the flows across the exchanges. Emminger concluded by
saying he thought stopping the flows could only be helpful
to the system and we should all try to do what we could.
FORD & GERALD LIBRARY
CONF IDENT IAL
May 4, 1971
STATEMENT IN RESPONSE TO PRESS INQUIRIES
Taking note of the large speculative movements of funds
into Germany today, Secretary of the Treasury John B.
Connally re-emphasized the view of the United States that no
change in the present structure of exchange parities is
necessary or anticipated. The United States will continue
its established policy of cooperation with other countries
in maintaining the stability of the international monetary
system. As necessary, the United States is prepared to
raise additional funds in the Eurodollar market and to
assist with appropriate investment outlets for foreign central
banks. In pursuing ourppolicies of orderly, noninflationary
expansion, the various tools of economic policy will be used
in a flexible manner, with due regard for external as well as
FORD is LIBRARY
- 2 -
internal needs. Measures to improve the balance of payments
will remain of high priority.
These measures are fully compatible with our objectives
at home.
000
FORD in LIBRARY
CONFIDENTIAL - LIMDIS
May 4, 1971
INTERNATIONAL MONETARY SITUATION AND OPTIONS
Massive speculative flows into Germany and, to a lesser
extent, into other Continental centers have recurred. This
consequence is clearly related to policy discussions within
the German Government -- much of it apparent to the press
and other observers -- concerning a possible "float" of the
German mark as a means of shutting off capital inflow and
establishing a basis for a more restrictive domestic credit
policy.
The German Government coalition feels politically
vulnerable. Its recent fortunes in regional elections have
been poor, and it is being vigorously attacked on grounds of
inflation. It is desperately searching for remedies and
seems to be seizing on exchange rate action as the most feasible
course, having rejected new taxes, a stronger incomes policy,
and capital controls as practicable options. There is a
serious question, with speculative forces active, whether
this momentum can be turned.
CONFIDENTIAL-- LIMDIS
DECLASSIFIED
GERALD FORD LIBRARY
AUTHORITY Though Hp. 8/22/06
BY libs
NARA, DATE 9/29/09
CONFIDENTIAL- LIMDIS
- 2 -
This approach, on a coordinated basis with other EC
countries, was broached and rejected at a meeting of EC
finance ministers last week. The proposed German action
will be a serious divisive force in the EC (although it
could eventually force unity at a more rapid pace). Uni-
lateral German action will release extremely heavy pressures
on other currencies (e.g., the Dutch, Belgians, Swiss, and
Japanese). These currencies and others will probably be
forced to float. They will be in a position to -- but may
not -- force a confrontation with the United States on our
policy of converting dollars into gold.
In this situation, we have three options:
(1) To try to head off any exchange rate changes. This
will require an immediate direct appeal to the Germans
on the basis that it is in the best interests of the
international monetary system. We will have to be
prepared to provide:
1. Higher rate, longer term dollar denominated issues
in which to invest a portion of their reserves.
CONFIDENTIAL- LIMDIS
GERALD FORD LIBRARY
CONFIDENTIAL - LIMDIS
- 3 -
This presents no great problem.
2. Foreign currency denominated bonds, to protect
Germany against a dollar devaluation or float.
This presents larger problems, primarily because
it would be widely generalized and presents
financial risks.
3. Reassurance on monetary and fiscal policy (e.g.,
any further stimulation by fiscal rather than
monetary policy, resistance to any short-term
rate declines).
4. More U. S. borrowings, in dollars, in the Euro-
dollar market to sop up dollars flowing into
their reserves.
5. More generally, reassurance that our own balance
of payments is a matter of high policy attention.
Whether such an approach could be successful must
be considered doubtful at this stage. On the other hand,
CONFIDENTIAL - LIMDIS
TREALO FORD LIBRARY
CONFIDENTIAL - LIMDIS
- 4 -
it is not clear there is much to lose.
(2) A relatively passive position, limited to attempting
to guide responses away from the more destructive
alternatives toward the constructive.
(3) Suspension of U. S. dollar convertibility into gold,
followed by a general regime of floating exchange
rates. Negotiations could be promptly undertaken to
re-establish the rules of a new monetary order,
including the role of gold and limited flexibility of
exchange rates. .
⑈
FORD & LIBRARY 077835
CONFIDENTIAL- LIMDIS
GERALD R FORD LIBRARY
This form marks the file location of item number
2
as listed in the pink form (GSA Form 7122, Withdrawal Sheet)
at the front ot the folder.
STRICTLY CONFIDENTIAL (PR)
To: Chairman Burns
From: R, Bradshew and R.W. Smith
Subject: Foreign exchange markets--
noon conditions.
Conditions are essentially unchanged from those reported
earlier in the day.
No further official statements by German or other central
bank officials.
Mark and Svice franc somewhat firmer (1.4% and 2.7% above
upper limit, respectively). Dutch guilder somevhat easier.
Italian officials indicated that there will be consultations
among the EEC countries and Suitzerland; no time or place yet
determined.
FREMY officer said that the Bundesbank official he spoke
with expects the mark to be floated for the time being (e.g., beyond
this weekend).
(See attached for exchange rates.)
Attachment.
RB:nss
FORD is LIBRARY 076860
11:55 A.M.
FR S.A (Rev. 3/70)
WED.
STRICTLY CONFIDENTIAL (FR)
Notes from 9:30 Call
Date: 5/5/71
EURO DOLLAR BID RATES:
O/N
Call
1
3
6
12
GOLD:
London: 1st fixing
39,46
2nd fixing
40.10
interention
old upper limits
amounts RATES:
Europe (spot)
New York (sp)
New York (fwd) over old
upper lunets
750 Sterling
242.00
241.97
Can. $
—
99.25
+1040 DM
27.548
27.925
+1.4 %
+ 600 SF
23,283
23.90 hid
+2,7
+ 250 Guilder
27,836
27.95
+ 0,4
+ 120 FF
18.141
18,140
+ 2 Lira quict 14120
16098
+ 100 BF
2.0151
2,0200
+ 0 - 2
ARBITRAGE:
points in favor of
over
FORD if LIBRARY 976839
COMMENTS:
Gaman cabinet smeeting Pridays
from Italians - there will be consultation
smong EEC countries to
Switzerland
mor big meetings announced, however,
one B.B. official thought Germans would float
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date May 5, 1971
To Chairman Burns
Subject: 2:00-2:15 Report on Foreign
Exchange and Domestic Securities
From Ralph Smith & Paul Kelty
Markets
Foreign Exchange Markets
As of 2:00 P.M., there was no change in foreign exchange rates
from those given in the previous reports.
The National Bank of Belgium has requested the System to draw
$65 million on the swap line. This will bring outstandings to $500
million -- the full amount of the facility.
Domestic Securities Markets
Short- and intermediate-term Treasury securities have weakened
further. Issues due within 10-years are now 1 to 13/32 lower. Long-term
bonds continue to show gains. The when-issued 15-month note is now
quoted at 99.31--100.02. The new 3-1/2-year note is quoted 99.18--.20.
In both cases the notes are bid 1/32 below issue price.
Treasury investment accounts have now purchased $230 million
of Government securities, including $20 million of bills.
Other Market Quotations
Federal funds
4-7/8 per cent trading
3-mo. Treasury bill
3.92--3.84 per cent
Stocks (DJ industrials)
down 2.39
FORD is LIBRARY GERALD
DRAFT 4 5/6/71
Secretary of the Treasury John B. Connally, after
meeting with the President, said that the Administration
was carefully following the speculative exchange market
crisis in Europe. No immediate action by the U. S. is
necessary or planned, but the United States remains
prepared to cooperate fully with others to assist in
stabilizing the situation. The Secretary emphasized
the United States contemplates no change in its own gold
and foreign exchange policies.
Secretary Connally again expressed the view of the
United States that maintenance of current parities would
provide a basis for reopening the markets in various
European centers. The Treasury is prepared to assist those
few central banks receiving large amounts of dollars in
FORD is LIBRARY 076830
- 2 -
recent weeks in the orderly investment of a portion of
these funds, through special Treasury securities.
The Secretary pointed out that consistent with orderly
economic expansion, the U. S. was now making visibly more
progress against inflation than its major trading partners
overseas. This is the fundamental basis for continued
confidence in the dollar at home and abroad.
Monetary authorities of other countries are aware of
these views in reaching their decisions with respect to
exchange rates and other policies.
FORD is 939410 LIBRARY
Conversation with Dr. Klasen - -- May 5, 1971
Germany had to close foreign exchanges. Inflow was so big
in the first 15 minutes; over a billion dollars came in during this
period.
The critical question is what to do. Schiller favors a "small
floating. 11 The majority in the government favor a line that would
not permit business to take up loans outside Germany.
Statement by Connally was clear and very significant to the Bank.
It was not so clear to other government officials. If we are worried
about the trend of events in Germany we should inform Schiller and
clarify our position or perhaps we should speak with the Chancellor.
Klasen is very much opposed to the floating rate. If we too are not
in favor of a floating rate, we should inform German officials promptly.
The government must decide the day after tomorrow.
In answer to my question as to what the German government
is most likely to do, Klasen replied: "Float the mark, keep the
premium from exceeding 5%. 11 As to the duration of the float, it might
be six months.
DECLASSIFIED
FORD is LIBRARY 9ERALD
E.O. 12958 Sec. 3.6
MR01-79, MR #10; st.ltr 10/2/01
By dal NARA, Date 10/25/01
Conversation with Sir Leslie O'Brien - - May 5, 1971
Bank took in 65 million dollars. Money market has been quiet.
Price of gold reached $40. 10.
The U.K. is not a candidate for a revaluation of its currency.
In view of the outflow of dollars, something had to be done.
The most likely outcome for the immediate future is a floating rate
of the mark and some other currencies. The French and Italians
will not go along and this will put great strain on the Common
Market.
DECLASSIFIED
E.O. 12958 Sec. 3.6
FORD is GENALD LIBRARY
MR 01-79, #11; stltr 10/2/01
By due NARA, Date 10/25/01
Conversation with President Wormser - May 6, 1971
The Bank of France did not intervene at all today in the exchange
market -- it neither bought nor sold dollars. There was only a slight
fluctuation in the value of the dollar. Yesterday the book took in
$120 million.
Interest rates not very well below the Euro-Dollar market;
this is deliberate, to avoid inflow of dollars.
Price of gold slightly lower than yesterday. This is unlike
the London market.
Talked to Germans yesterday at a memorial meeting for
Blessing. The Germans are very hesitant. Most of them seem
to feel that there is no economic or monetary reason to revalue
the mark, but they want to permit the mark to float temporarily
within margins. Some others feel that control of German firms
would be preferable.
At a meeting of experts at Brussels, controls were advised.
What are the prospects? If the Germans revalue, the Swiss
will follow. Maybe Belgium and the Netherlands as well. France
will definitely not float.
DECLASSIFIED
E.O. 12958 Sec. 3.6
FORD & LIBRARY GERALD
MR01-79, #9; ot. ltr 10/2/01
By dal NARA, Date 10/25/01
Conversation with Sir Leslie O'Brien - May 6, 1971
Markets had a quiet day. Bank took in no spot dollars.
Gold reached $40. 30 in a thin market. Dollar weakened until
lunch-time then strengthened. The 3 month Euro-Dollar rate
/
reached 8%, then moved back to 7 1/4%.
LIBRARY GERALD ? FORD
Conversation with Dr. Zijlstra - May 6, 1971
At this moment markets are closed. Important question is
what will happen on Monday. We must wait until the Ministerial
Council on the European Community meets on Saturday morning.
The Germans have agreed to postpone their decision until after
this meeting.
Thinks that the Germans will float the mark. Does not know
whether there will be any restriction onthe degree of the float.
European Community is opposed to floating. At least two
countries, France and Italy, will not follow Germany. Disruption
of theCommunity may be the result.
Does not know what the Netherlands or Belgium will do.
But if the Germans and the Swiss revalue, Netherlands
will
probably be forced to do the same. Belgium is likely to follow
the Netherlands.
-
DECLASSIFIED
FORD & LIBRARY 076839 39
E.O. 12958 Sec. 3.6
MR01-79, 79, #12; st.ltr 10/2/01
By dal NARA, Date 10/25/01
Mr. Gill, Bank of England - May 6, 1971
He called in response to my inquiry of O'Brien as to
whether Wormser and Klasen would go to Basle. Both intend
to go but they may be subject to call by their Finance Ministers.
They would certainly hope to be there Sunday anyhow. But there
could be no absolute assurance.
LIBRARY GERALD R. FORD
Telephone Call from Dr. Karl Klasen, President, Bundesbank - 5/10/71
I wanted to inform you of my personal feelings. We have
accepted on the Common Market Community that we have only the
permission to float for a short certain time. We are obliged to
return back to the old parity that that is very much
.
That is a definite understanding and our government has taken the
responsibility to fulfill this obligation and all the other members
are very much interested. It is quite natural that this way will not
be very easy because in the meantime the Swiss and the Austrians
have re-valued. But I think these countries are not so important
that they can prevent us.
Today I had a visit from the Governor of the Bank of Japan.
He said that Japan has not the slightest intention of changing its
rate. Therefore, I think it is no reason for us to change our parity.
I think we will have a floating rate during 3 months, 4 or 5 months
and during this time we have to work with the United States to find
all the arrangements to stop the money inflow to us as you proposed it.
In the meantime, the Governors of the Central Banks of the
Common Market have to organize the new system to prevent a big
inflow of speculative money. Ithink it was good for you to be informed
because in the public it is not só clear that we are obliged to go back
to our parity.
DECLASSIFIED
E.O. 12958 Sec. 3.6
MR01-79 #13; st.ets 10/2/01
FORD & LIBRARY 9ERALD
By dal NARA, Date 10/25/01
-2-
It is not very easy to do this but we are obligated -- we
are partners and cannot get a new parity without consent.
Dr. Burns asked if they were placing any limit?
Dr. Klasen said it would not go more than 5% -- this is
not being made public. Then be said something about 3. 525.
less than the normal rate -- would amount to a little
more than a revaluation of 4%. It is not so much we cannot go back.
We have not the intention in the next days to set our dollars to a
lower rate than 3.63 because we think all the people who have
speculative engagements will be in need of dollars -- therefore
we have intention of not to sell. It would be very good if at this
time you could also keep as much dollars back as possible. It
would be good that speculators get nervous.
FORD is LIBRARY CERALD 07V83
DOCUMENT OF TERNATIONAL MONETARY FUND ID NOT FOR PUBLIC USE
May 6, 1971 - 71/54
NOTE:
The following aide memoire by the Managing Director will be dis-
cussed at an Informal Session to be held at 11.00 a.m., Friday, May 7.
Aide Memoire
In my statement to the Board yesterday I tried to outline some general
principles to guide us in finding a way out of the present grave diffi-
culties of the world exchange rate system. The principles I mentioned in
that connection were:
(1) Primary emphasis on the preservation of the par value system;
(2) Recognition of the possibility that some additional flexibility
may be required with respect to margins, at least until the present
uncertainties have been dissipated.
Concrete solutions for these difficulties are, of course, being
discussed in many places at this moment, both within governments and inter-
nationally. The Fund will contribute all it can towards a solution that
should at least be tolerable for the short-run, as well as being construc-
tive for the longer-run.
Any solution that will at the same time preserve the essential features
of the par value system and provide sufficient flexibility for the diffi-
culties and uncertainties of the moment, will obviously have to be a com-
promise solution. It will have to be made in the light of all available
evidence. The specific suggestions that I am putting forward now should,
therefore, clearly be understood as tentative. They represent my best
estimate at this moment of what would both meet the needs of the situation
and preserve the essential features of the system.
I would judge that the chance of any new parities being introduced
between now and Monday is not high, although as I said yesterday I would
in no way be against this. If my guess on this is right this would mean
that markets would be reopened, at least nominally, on the basis of exist-
ing parities. It would probably be unrealistic to expect that this could
be done within the 1 per cent margins. Many people have drawn the conclu-
sion from this that the alternative would be for a large number of curren-
cies to float. To my mind a preferable solution--from the point of view
of the preservation of the system--would be the avoidance of floating
rates, finding the flexibility needed by widening the margins even if this
widening might have to be rather substantial for a short period. I would
not, in present circumstances, preclude upward margins of 5 per cent or
6 per cent from par in relation to the dollar. Perhaps the downward margin
of 1 per cent could be maintained as a useful reminder of the permanent
margins in the system, given the fact that flexibility in that direction
does not seem to required now.
- over -
GERALD FORD LIBRARY
- 2 -
Any arrangements of this nature should have a clear time limit of a
few months at most. This should give enough time to test what, if any,
parity changes were needed. At the end of the short period one might
either envisage returning to the 1 per cent margins (on existing or new
parities) or maintaining for a substantially longer period margins of say
2 per cent or 3 per cent, and then presumably on both sides of par.
If this were approximately the regime one aimed for--and it might of
course be further refined--there are, as I mentioned yesterday, two ways
in which it could be approached under the Articles.
First, under Article XVI the Fund can suspend the margin provisions
and at the same time set as a condition that members that do not observe
the 1 per cent margins would be required to observe specified wider margins.
This regime, which takes unanimity on the part of Directors for its intro-
duction, can be continued for a period of up to 1 year.
Alternatively, the Fund could call on members to collaborate, under
the provisions of Article IV, Section 4(a), to observe the same specified
wider margins in those cases where they felt unable to observe the 1 per
cent margins.
Whatever arrangements might be adopted should include provision for
close consultation with the Fund on all their aspects, including inter-
vention policies.
I have limited my observations in this memorandum to the exchange rate
aspects of the present situation, and have not dealt again with the broader
issues mentioned in paragraphs 3 and 4 of my statement of yesterday.
GERALD FORD LIBRARY
FOR IMMEDIATE RELEASE
MAY 6, 1971
OFFICE OF THE WHITE HOUGH PRESS SECRETARY
THE WHITE HOUSE
Mn
PRESS CONFERENCE
International
OF
HON. JOHN B. CONNALLY, JR.
SECRETARY OF THE TREASURY
12:30 P.M. EDT
MR. ZIEGLER: President Nixon has just completed
a meeting with Secretary Connally. The Secretary is here
this morning to make an announcement and also to take your
questions on the subject, if you would like.
Mr. Secretary.
GERALD FORD LIBRARY
SECRETARY CONNALLY: Thank you, Ron.
With the President's obvious priority and explicit
approval, I am here today to announce that the President
is going to send to Congress a request for legislation to
enable the Government to provide $250 million in loan
guarantees for the Lockheed Aircraft Corporation.
This is a matter that we have had under review, as you
know, for some time, since Rolls Royce went into receivership.
We have looked at it very carefully and looked at it in
terms of the impact on this economy, the number of people
that are employed. We have considered the ripple effect
that, frankly, the bankruptcy of Lockheed would have. And
in my judgment, after studying this situation, that is
precisely what would happen if the Government does not
provide a guarantee.
I think there are certain essential facts that
I should make to you. The first is that the L-1011
with a Rolls Royce engine is going to be a very excellent
airplane; that the RB-211 by Rolls Royce will probably
be the most advanced engine of its type produced in the world.
Secondly, I feel it is important to point out
that far from bailing out Rolls Royce or the British Government,
so to speak, the British are going DO put in approximately
$288 million of additional monies in order to provide the
necessary funds for the research and development that still
needs to be done on the engine.
In addition to that, they anticipate that they
will suffer some losses in the full production of the engines
themselves when they get. into the production runs.
From strictly the domestic standpoint we should
point out that there is presently invested by different parties
in this country approximately $1. billion in the L-1011 pro-
gram; $400 million of that by various banks throughout the
country; about $350 million of that by Lockhood suppliers
E. lot of it, obviously, by the shareholders or Lockheed
itself. There is $240 million of that figure that has
been advanced in progress payments by the airlines themselve
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- 2 -
I think there are other significant factors that
lead to the conclusion that the President has reached to
seek this type of authorization from the Congress, and that
is simply that Lockheed is not only a very important
airframe manufacturer in this country, it is the nation's
largest defense contractor. It has, overall in its
corporation work, 35,000 subcontracting companies -- not
people, but companies -- throughout the country. Seventy
percent of those, or 25,000 of them, fall in the category of
small businesses with less than 500 employees each.
The impact on this economy in the event of
the bankruptcy of Lockheed would be enormous in my judgment.
In February when the L-1011 program was still
going, there were over 17,000 people employed by Lockheed
in this one program alone, the L-1011 program; approximately
7,000 of them have already been released. There are
over 10,000 presently employed by Lockheed. There is
an additional 14,000 employed by their principal suppliers
solely dedicated to this particular project, the L-1011
So that the economic impact in terms of jobs, of
employment, would be enormous and is enormous.
There is, of course, the additional factor that
in the event Lockheed should not survive, the Treasury,
frankly, would be affected. This $1.4 billion will be
written off as best it can be by the various entities
involved. I would not now today want to put a dollar
figure on the losses to the Treasury in terms of revenues,
but it would be very, very substantial, beyond any question,
when you consider not only the write off of the $1.4
billion invested but also the loss of salaries and revenues.
The salaries that Lockheed pays to its present employees
or to the 17,000 employees under L-1011 program alone
was $5 million a week -- just that one payroll for
their own employees not counting their subcontractors.
So all things considered -- and we have,
as I said, looked at it over a period of weeks in as great
a depth as we possibly could, after talking with all
of the parties involved, the airlines, banks, Lockheed
and others, every agency of the Government, almost, who
has some expertise in this field I did recommend to
the President that this course be followed. He has
made that decision and we are now announcing it today.
Q
What Committees are you going to ask
to act on this, and what chances do you think you are
going to have up there?
SECRETARY CONNALLY: I think the chances are
quite good. I would anticipate in the given nature of
the bill and the legislation that it will undoubtedly go
to the Banking and Currency Committees in the House and
GERALD FORD LIBRARY
Senate.
?
Have you taken soundings in Congress, and
what have you found?
SECRETARY CONNALLY: To some extent we have taken
soundings, yes, and I might say I have been very encouraged.
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- 3 -
?
About the $288 million British contribution
to the Rolls Royce engine, is that contingent on the
$250 million legislation being passed?
SECRETARY CONNALLY: I would say it is contingent
upon their belief in the survivability of Lockheed.
Ω
No more directly than that?
SECRETARY CONNALLY: Well, I am not sure I- can
answer for them, but I think their position is that they
don't believe Lockheed can survive without the $250 million
loan guarantee. That is my position. I don't believe
they can survive and = will belperfectly candid about it.
Q
What terms are you putting on the loan,
repayment, et cetera?
SECRETARY CONNALLY: The bill is not finally
drafted. Hopefully it will go forward about Tuesday
of next week, I hope.
a
Would you object to Congress broadening
this to include any aerospace company?
SECRETARY CONNALLY: That will be a matter for
Congress to decide. At this moment we are limiting the
request to an amount that would only be sufficient to
cover Lockheed.
Q
Mr. Secretary, some people in Congress
have expressed concern that by helping Lockheed now you
are setting a precedent for helping every big company
that might get into trouble.
SECRETARY CONNALLY: I think that will be raised.
I don't assume that this will be a precedent. I don't
think it should be viewed as a precedent. I think perhaps
in more normal times the answer might have been even
different in this particular case, but at a time when we
are coming out of a slack economy period, at a time when
we have a rate of six percent unemployment in this country,
and at a time we are seeking economic expansion and vitality,
we feel that the impact that the demise of this company
would have would be of such proportions that it ought
not to be permitted in the interest of the economic
revival of this nation.
2
Mr. Secretary, whether or not it should be
viewed as a precedent, is it in fact a precedent? Has
the Government done this before?
SECRETARY CONNALLY: Sure the Government has done
it before. They do it almost every day. They did it in
the days of RFC, in defense contracts now, in 1967 a
$75 million V loan was made available to Douglas Aircraft
prior to its merger with McDonnell. We do it through
export-import loans, through the FDIC, we guarantee bank
deposits and savings and loan deposits. We are now
guaranteeing investment in the market. We guarantee
a lot of things.
MORE
LIBRARY GERALD FORD
- 4 -
C
Mr. Secretary, why is this loan necessary?
What is wrong with Government policy that lead to Lockheeds
trouble?
SECRETARY CONNALLY: I didn't understand your
question.
a Why do they need the money?
SECRETARY CONNALLY: To keep from going
broke. (Laughter.)
0 Why are they in danger of going broke?
Is it the C5A?
SECRETARY CONNALLY: Part of it stems from two things:
First, there is not any question but as a result of the
C5A, the Cheyenne, SRAM,, and the shipbuilding program
which they took on here several years ago, the Defense
Department, obviously has as late as I believe January
of this year in effect made the Lockheed Corporation
eat about $500 million in losses. Even though there
is no question about that they had the costs and there
is no question but what under prior times perhaps through
change orders or one thing or another they might have not
had to suffer this much of a corporate loss. Nevertheless
they did agree to these losses.
They did so because they were under pressure
to get on with their business and they were totally
unaware that anything such as the Rolls Royce debacle
would occur and within 48 hours after they made their
agreements with the Defense Department to absorb approximately
$500 million in losses on these various programs, Rolls
Royce collapsed. They had no knowledge of it, they had
no control of it, and it put them in suchia bind that,
frankly, they cannot now extricate themselves without
some help.
O Has the British Government, in your view,
done all it can in this situation? Would you welcome
a BEA order for this plane?
SECRETARY CONNALLY: I would certainly hope that
Lockheed might get a BEA order. To answer your question,
I would not say that I would want to issue a proclamation
that Rolls Royce and the British Government were Simon
pure with respect to this but, nevertheless, I think
they have performed admirably under the circumstances.
They have recognized a liability. There was not a
Government liability. Rolls Royce was not a Government-
owned company. The Government, to their credit, has
undertaken to fulfill the commitment to produce these
engines and has agreed to put up, as I have already
said, hundreds of millions of dollars to assure the
production of these engines.
MORE
GERALO FORD LIBRARY
- 5 -
Now in the process they have insisted that the
price of the engines be increased and they have insisted
on some other things which differ from the original
contract that Rolls Royce made with Lockheed. So in the
re-negotiation they have put greater pressure on Lockheed
and on Lockheed's purchasers and customers than was true
under the old deal. But I think in balance you would
have to say the British Government has performed
admirably well under the circumstances.
Ω
Why do the banks require a Federal
guarantee before putting up $250 million?
SECRETARY CONNALLY: Simply because the banks
now have $400 million in it. They had $350 million.
They were told by me, in addition to others, that they
were going to have to put additional money into the project
to be sure that Lockheed did survive during the time
that these decisions were being made and during the time
that Congress had to act. So they have $400 million in it.
This is not going to be guaranteed in any sense. The
guarantee applies only to the additional $250 million which
will be advanced and has no relationship and no bearing
to the existing indebtedness.
0
How much of a collateral do they get
for that additional $50 million, sir?
SECRETARY CONNALLY: I don't know. You will
have to ask either the banks or Lockheed. I can't answer
that.
& What collateral does the Government get?
SECRETARY CONNALLY: We will have the collateral
first in many forms. I believe we are going to be able
to save one of the large contractors in this country.
We are going to be able to ensure the continuity of jobs
and a rehiring of a great many people to carry
forward this project. We will have the collateral of
the continuity of an additional airframe manufacturer
in this country and the competition that that provides.
We are going to have the collateral of the conservation-
and utilization of the technological talent that is
a part of Lockheed's operation. We are going to have
the additional collateral of getting our money out first
before anybody else does, and in my judgment we don't
run any risk in connection with this. I think we will
have all of our money back before anybody else gets anything.
?
Do you think the $250 million loan will be
paid before?
SECRETARY CONNALLY: That is part of the bill.
Our money will be out first.
Q
The President indicated in San Clemente
that if we go along with this program that it might be
necessary to change management at Lockheed. Mismanagement
at Lockheed, of course, has been a big problem here.
Do you have any plans for this?
GERALD FORD LIBRARY
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- 6 --
SECRETARY CONNALLY: I don't want to pass
judgment on the management of Lockheed at this point, other
than to say that the management of Lockheed, so far as
I know, is infinitely more interested in Lockheed
and its performance than it is in the preservation of
their own jobs. If that is a factor, I don't think
it will be a problem.
0
Have you rejected an American solution to
the problem?
SECRETARY CONNALLY: I don't think there is
an American solution to the problem, if I understand
what you are getting at. I don't know that there is
an American solution. Specifically, what do you refer to?
?
The General Electric proposals that have
been reported in the press.
SECRETARY CONNALLY: Well, I don't think it is
a solution for a number of reasons. First, and I am
not an aeronautical engineer but everybody knows that
every successful airplane that was ever built has been
designed around the specific engine, and the L-1011 has
been no exception; it has been designed around the
Rolls Royce engine. To use the GE engine would require a
redesign of the airframe itself that would add on
enormous cost. So far as we have been able to tell, the
engines to the customer would be much more expensive
than is true of the RB-211 engines, even under the re-
negotiated price.
FORD
In addition to that, you have the time factor.
In addition to that, you have a question to whether or
GERALD
LIBRARY
not the L-1011, as altered and changed with all of the
attendant difficulties that occur, whether or not it
can compete with the DC-10 in the time-frame that
we are talking about.
In addition to that, the customers would be
unimpressed, I think, by a completely new airplane and
a completely new engine and a completely new design,
as opposed to the existing situation, because, very frankly,
they have some favorable financing arrangements with
respect to the RB-211 engines with the British. And,
more than that, they have an investment tax credit with
respect to this particular airplane built around this
particular engine.
O
There are reports that a number of
airlines are still unhappy with this program, even given
the fact that you are now attempting to get a Government
guarantee on this program. Are you confident that the
airlines will now go along with this package, particularly
Delta and Air Canada?
SECRETARY CONNALLY: The airlines will have to
speak for themselves. If they are unhappy, I don't
know why they should be. If this program proceeds as
I think it will they are going to have the assurances
of the British Government that the engines will be produced
and they are going to have the assurances of the Congress
of the United States that $250 million additional money
will be made available to Lockheed so they can survive
and produce the planes. And very few outfits that I know
MORE
- 7 -
of in this country, regardless of what you huy, has the
assurances of two Governments that they are going to
get a product.
Ω
Aren't you putting yourself in a position
of supporting Lockheed over the Douglas plane?
SECRETARY CONNALLY: No, that has nothing to
do with it.
2
They are in very bitter competition in this.
SECRETARY CONNALLY: It has nothing to do with
it. If it was purely a matter of a toss of the coin as to
whether or not it was the Douglas DC-10 --- they make
a great product. I am sure it is a great airplane. It is
a well run company. Jim McDonnell, I think, is one of
the outstanding industrial leaders of this nation.
I have no argument about the DC-10. I am trying to point
out some of the things that are affected.
But primarily the President's decision was
based on the impact that this is going to have on the
economic recovery of this country and the maintenance
of jobs. We are spending billions of dollars to try
to provide training and re-training, manpower training,
in this country. We are trying to build jobs. You
have bill after bill being introduced in Congress almost
daily with respect to creation of public service jobs.
Here we have jobs. We have jobs of a highly
technical nature. And, all things considered, which
GERALD FORD LIBRARY
I don't want to repeat, the President felt that it was
in the best interest of this nation and it was on that
basis and that basis alone that he made this decision.
O
When Penn Central went bust a year ago
they didn't lay off everybody in sight and most people
think that if Lockheed went through a Chapter 10, why
you would maintain the SAMS works, the "Spook" works, and
Marietta and everything else.
CRETARY CONNALLY: Beyond any question, the
military projects would be carried on. Anyone who assumes
that a company of this character can go through bankruptcy
and maintain the degree of efficiency and economy and
that you will come out with the same costs, frankly,
has not had any familiarity with bankrupt companies.
Q May I change the subject to the dollar in
European markets? How deeply concerned are you about
that?
SECRETARY CONNALLY: We are concerned about it,
obviously. I have issued a statement which you have seen.
I have nothing basically new to add to that.
Any time you have a closing of the central
banks in Europe, as we have had the last few days,
of course, we are concerned. We are studying it. We are
watching it every hour of the day. We regret that the
circumstances have occurred. We think much of it
certainly cannot be attributed to any actions of the
United States, nor to even the weakness of the dollar.
I think it would be a mistake to assume that.
MODE
- 8 -
We have problems. We obviously have problems
in the balance of payments. Our basic balances have been
off approximately $2-1/2 to $3 billion a year for
several years. This concerns our friends around the
world. Germany, however, has very, very difficult
problems of their own. They are trying to fight a high
rate of inflation at home and at the same time conduct
their affairs to where they can protect their overseas
markets and their exports, and this is a difficult thing
to do.
So this all started with a short-term outflow
of capital into Germany because of the disparity of
rates that existed here and what prevailed there. But
this Administration, rightfully, was not willing to
in any sense completely sacrifice the stability and
the recovery of our own economy in order to just
try to narrow the gap between the rates prevailing
here and prevailing over there; just as they are making
decisions, I think, that tends to solve their problems
without sole regard to other people.
I don't think there is any question but what these
kind of problems are going to continue. We have tried
to make clear to everyone and will continue to do so, that
we are going to be as cooperative as we know how to be.
We don't like to see speculators in the market and
that is what it has been in the last few days. There
is no question about it, speculators were in the market.
O Mr. Secretary, would you be distressed
if a number of European currencies were to rise against
the dollar as has been discussed?
SECRETARY CONNALLY: That is a matter for
them to decide as to weather or not they want to revolue.
We are going to try to make it almundantly clear in every
way that we can that we recognize what we do have has: an
impact on countries around the world. We are going to
try to make it clear that we are going to be cooperative
and as helpful in every way that we possibly can. This
includes issuing special issues in order to sop up
Euro-dollars, if necessary.
We are going to make it abundantly clear that
we are going to try to conduct our affairs here in such
a way that the stability of the international currency
will be obtained.
The problem always comes in this sense: We
think we are making more progress against inflation in
this country than they are making over there. But the
cycles don't always occur at the same time and in the
same way.
o
On the question of inflation, you had the
Wholesale Price Index go up. There has been an increase
in the price of steel. How do you assess those in your
fight on inflation?
MORE
GERALD FORD LIBRARY
- 9 --
SECRETARY CONNALLY: I assess them in two
entirely different ways, of course. I hated to see
the Wholesale Price Index go up, but I don't think we
ought to pay too much attention to it. It is one of
the things that you see. There are going to be other
things, I think, that reflect even more favorable news
than that. If you will look at the average, though,
the Wholesale Price Index is about the average of the
first quarter of this year. It is above what it was
in March, yes. I wish it had not been, but it was and we
are going to see some other things probably jump up
and down because you don't have that type of a managed
economy.
But on the whole I am very pleased. Retail
sales are up, housing starts in March were up, as you well
know. The Consumer Price Index has held extremely
well. The rate of inflation has decreased, I think, to
a very significant degree. So I just don't think we
ought to pay that much attention to that one single
factor.
MORE
LIBRARY GERALD FORD
-10-
Q
Now, the steel thing.
SECRETARY CONNALLY: I have a different reaction to
it. I am disappointed that U. S. Steel found it necessary to
raise the price on some of their products. This was, I must
say. in fairness to them, in keeping with a previously
announced policy that on the anniversary date of last year
that they were going to have to raise prices on some of their
commodities.
But the thing that we have to keep in mind, the thing
that management and labor, steel and the labor unions that
work in those steel mills have to keep in mind, is whether
or not by pricing and by labor demands and by wages they
are pricing themselves out of the world markets.
This Nation is a free-trading nation and we want to
remain so; and we are going to remain SO. But it is signifi-
cant to me, as the President said to you in San Clemente last
weekend, that 20 years ago the United States had precisely
47 percent of the steel production of the world and today we
have 20 percent, and it is estimated that Japan is going to pass
us in the next two years.
It is fine to talk about increased prices and increased
wages, but the thing that everybody in this country has to
understand -- it doesn't only apply to steel -- but management
and labor is going to have to understand that what they are
dealing with is not their own personal problems of the moment,
but they are dealing with the standard of living in this Nation
and the basic security of this Nation from the standpoint of
being able to compete in world markets.
One of the biggest users of steel, as you well know, is
automobiles. It is significant to me that 18 percent of all the
automobiles sold in America last month were imported. I think
there is going to be greater pressure from imported automobiles.
We are going to have to be competitive.
It is not just steel. I am not singling out steel at all.
But it is a very basic and vital industry and this Nation, at
almost any cost, has to maintain a very strong and viable steel
industry. It applies to a great many commodities in this country
as well.
Q
What can you do beyond public statements such as this
one to try and get industries such as steel not to raise prices
and come forth with wage settlements you would consider reason-
able?
SECRETARY CONNALLY: Basically, as you well know, I don't
know of but two ways to do it. One is to try to continue to be
as responsive as we can so far as the Government is concerned.
I think the Government has done that. The Government has tried
to keep its expenditures within full employment revenue levels
and we have tried to maintain that type of stability. We are
trying to ask management and labor throughout the country to do
the same in their own self interest.
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The only other thing, other than a continuing program of
asking, of seeking, of educating, is to impose mandatory wage
and price controls, which, in my judgment, are not justified
and in my judgment the President will not do at the present
time.
Q
Getting back for a second to the international thing,
you seemed to be saying a minute ago that the Government does not
plan to apply any further brakes to the economy, either to
straighten out this interest rate disparity with Europe or to
cool inflation.
SECRETARY CONNALLY: Don't put words in my mouth. I didn't
say that. I said that this Nation was continuing its fight
against inflation and we are making more progress than almost
any industrialized country in the world that I know anything about.
And we are going to continue to do it.
I said that we are going to have an expansion in this
country that is going to, in my judgment, improve our balance
of payments, our trade balances in particular. We are going to
have an expansion that will permit us to reduce unemployment to
a significant degree the latter part of this year and next year.
We are going to do it at the name time that we continue the
unrelenting pressure on the rate of inflation in this Nation
We already have a rate of inflation that is less than most of
the countries involved.
Q Mr. Secretary, are you saying that you and the
Treasury and Government would not adamantly resist the upward
valuation of the mark and other European currencies?
SECRETARY CONNALLY: I am saying that a large part of
this is not our decision. This is a matter for other sovereign
nations to decide. We are not dictators of the international
monetary system. We are saying to all of them that we think
that it is in the interest of everyone that the parities be
maintained. We are saying that we want to cooperate and we want
to help in every way that we can to relieve the pressure that
exists at this time which we know results largely from the
short-term flow of capital. We are saying that we are going to
continue to work to bring about these ends.
Now, so far as us trying to dictate to other nations what
they are going to do, we are not going to do it.
Q Mr. Secretary, do you plan any specific action to
deal with the current crisis of the dollar?
SECRETARY CONNALLY: Well, that is a difficult question
to answer. I don't have any plan at the moment that I went to
talk about. I simply want to say to you that we are watching th
situation. We think it will stabilize. We hope it will. We
hope that the parity will be maintained. But we plan to do what-
ever is necessary, I think, to try to quiet the situation, to
try to insure the stability that we think is so necessary in the
international monetary field.
d
Can you tell us what things might be necessary?
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SECRETARY CONNALLY: No, because I don't want to anticipate
now that things are in such a : we condition that any action is
required at the moment.
Q
You mentioned something about international
securities. Is that what you had in mind?
SECRETARY CONNALLY: Yes, that was procisely what I had
in mind, plus, we can borrow directly or we can issue special
securities and so forth. It could be a number of things that
are traditional in the monetary field.
& On Lockheed, aren't you tampering with sort of a basic
part of the free enterprise system; if you can't cut it you go
broke?
SECRETARY CONNALLY: Yes, you sure are. I don't like to
do it. The President doesn't like to do it. I don't think we
are tampering with it. I think we are injecting a Government
guarantee into what has been in this particular company a free
enterprise operation, but we do that. It is not without precedent.
It is not a course of action that we just relish, that we want
to take. We don't want to get involved in their business. We
have tried to stay out of it as much as we can, but we think that
the price that would be paid by this nation for the failure of this
company would be of such proportions that we are entirely justified
in taking the action which the President has decided on.
THE PRESS: Thank you, Mr. Secretary.
END
(AT 1:00 P.M. EDT)
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