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DOCUMENT WITHDRAWAL RECORD [NIXON PROJECT]
DOCUMENT
DOCUMENT
NUMBER
TYPE
SUBJECT/TITLE OR CORRESPONDENTS
DATE
RESTRICTION
I
memo
CIA to Moose
2/27/69
B
MANDATORY REVIEW REQUEST NLN -06/1 11pp
SANITIZED 3 per
sec. 4.2(C) E0 12958 Hr JUL 2 2007
report
Intelligence Memorandum
Feb. 1969
B
MANDATORY REVIEW REQUEST NLN 04-06/2
SANITIZED per sec. 3.3 (6)(1) E 012958 Hr. 7 7pp [JUL
22007
FILE GROUP TITLE
BOX NUMBER
NSC Files Subject Files
309
FOLDER TITLE
2
Balance of Payments [Jan '69 - Feb. 72]
RESTRICTION CODES
A. Release would violate a Federal statute gr Agency Policy,
E. Release would disclose trade secrets or confidential commercial or
B. National security classified Information.
finanoial Information.
C. Pending or approved claim that release would violate an individual's
F. Release would disclose investigatory Information compiled for law
rights.
enforcement purposes.
D. Release would constitute a clearly unwarranted Invasion of privacy
G. Withdrawn and return private and personal material.
or a libel of a living person.
H. Withdrawn and returned non-historical material.
Reproduced at the Richard Nixon Presidential Library and Museum
hard Nixon Presidential Library and Museum
Reproduced at the Richard Nixon Presidential Library and Museum
THE WHITE HOUSE
WASHINGTON
Treasury
Negotiations with Canada have not been brought to a
successful conclusion; the U.S. will seek appropriate
means of reducing imbalances in trade agreements with
Canada.
State
Negotiations with Canada are continuing.
Reproduced at the Richard Nixon Presidential Library and Museum
2/5/72
Droft Transmittal Ietter
Dear Mr. Speaker:
There is transmitted herewith a draft bill "To provide for a
modification in the par value of the dollar in the International
Monetary Fund, and for other purposes." There are also enclosed
background and statistical information on this proposed legislation
as well as a status report on progress in negotiations on short-term
trade problems with Canada, the Common Market, and Japan.
On August 15, 1971, President Nixon announced a "New Economic
Policy for the United States" to fight unemployment and inflation
at home and to strengthen our international economic position. The
program ves unique in its corprehensiveness, combining fiscal stimulus
to create jobs, and mandatory restraints on prices and wages as well
as cuts in spending to halt inflation. In the international field,
the President directed a suspension of convertibility of the dollar
into resorve assets, and a temporary 10 percent surcharge on dutiable
imports to assure that American products would not be at a disadvantage
because of unfair exchange rates.
The domestic program is proceeding well. It is now up to business,
labor and government to join together to assure continued noninflationary
growth.
The legislation being submitted today to authorize a change in
the par value of the dollar deals with one aspect of the international
program. The suspension of convertibility and the imposition of the
Reproduced at the Richard Nixon Presidential Library and Museum
- 2 -
10 percent surcharge were the beginning of a major effort to achieve
fair and equitable monetary and trading arrangements. Exchange rates
were out of line and trading practices had developed that are not in
the interest of fair trade. To remedy these defects, the United States
began a series of intensive multilateral and bilateral negotiations
aimed at achieving a better balance in international economic relation-
ships. In the international monetary field, & significant breakthrough
was achieved on a multilateral realignment of currencies agreed in the
Group of Ten at the Smithsonien Institution in Washington on December 18,
1971. The major industrial countries, after intensive nogotiations,
succeeded in reaching difficult decisions on the appropriate relation-
ship in the values of their currencies. The result of this joint
effort in on overall weighted average realignment of approximately
12 percent in the currencies of other industrial countries (excluding
Canada). Because 1t will take some time for the full impact of the
adjustment to be felt, the beneficial effects of the realignment
should begin to be realized during 1973 in terms of an improvement
in the United States balance of payments position. Since the import
surcharge Was linked to the exchange rate disadvantages suffered by
our trade, with the agreement on realignment the President terminated
it on December 19, 1971.
As part of this realignement and to facilitate agreement, the
United States agreed to propose legislation to Congress to devalue the
dollar by 8.57 percent as soon as the progress in negotiations on
short-term trade proposals was available for Congressional scrutiny.
Reproduced at the Richard Nixon Presidential Library and Museum
- 3 -
Agreements have now been reached with Japan which will result in a
significant increase in United States trade, particularly agricultural
trade, with that country. Some results have been achieved in discussions
with the Common Market and negotiations are continuing. Moreover, Japan
and the Common Market have joined with us in n. commitment, subject to
Congressional authorization, to negotiate the mutual reduction of
Rider Y
nontariff barriers in 1973 and the resolution of more inmediate
problems within the montext of the GATT during 1972. Although no
agreements have been reached with Canada, the United States is proposing
to take action to protect its trade interests in areas where an imbalance
exists,
The enclosed status report on these trade regotiations explains
in full the scope of the agreements reached.
Accordingly, legislation is now being submitted which would have
the effect of authorizing a modification in the United States dollar
par value in the International Monetary Fund. The Bretton Woods
Agreements Act prohibits a change in the par value of the dollar
without prior Congressional approval and the proposed legislation
would grant this approval.
The 8.57 percent change in the par value of the dollar will
increase by an equal percentage the value of the United States gold
stock and certain other assets. This par velue change will also have
the consequence of requiring the United States to add 8.57 percent to
its dollar subscriptions to the international financial and lending
Reproduced at the Richard Nixon Presidential Library and Museum
4P 4 -
institutions in order to maintain the value of these subscriptions
in terms of gold. The maintenance of value provision works equitably
on all members and assures that contributions from all countries
maintain their original worth despite changes in relationships among
currencies. It also assures that 1/0 do not lose out through devaluation
in our share of the assets and voting power of these institutions. In
addition, certain other gains and costs reflecting foreign exchange
obligations will result from the change in par value. The enclosed
background material contains full details on all aspects of the
increases in assets and liabilities resulting from the change in par
value.
The
Inglalation
will make
i,
contribution
to
better balanced international economic relationships and to international
monetary stability. I urge prompt and favorable consideration of this
proposed legislation by the Congress.
Reproduced at the Richard Nixon Presidential Library and Museum
DRAFT A
2/5/72
All ACT To provide for a modification in the par value of the dollar
in the International Monetary Fund, and for other purposes.
Be it enacted by the Connte and House of Representatives of the
Bited States of America in Contress assembled,
SECTION 1. This Act may be cited as "The Act to Modify the Par
Value of the Dollar in the International Monetary Fund."
SFC. 2. The Secretary of the Treasury is hereby authorized and
directed to take the steps necessary to establish a new par value of
the dollar in the International Monetary Fund of one dollar equals
0.818513 from of fine gold. Such par value when established as
provided in this section billed define one relationship 01 the dollar
to gold for the purpose of issuing gold certificates.
SEC. 3. The Secretary of the Treasury is authorized and directed
to maintain the value in terms of gold of the holdings of United
States dollars of the International Monetary Fund, the International
Bank for Reconstruction and Development, the Inter-American Development
Bank, the International Development Association and the Asian Develop-
ment Bank to the extent provided in the Articles of Agreement of such
institutions. There is hereby authorized to be appropriated, to rezain
available until expended, such amounts as may be necessary to provide
for such maintenance of value.
SEC. lie The $830 million increase in the value of the gold hold
by the United States (including the gold held as security for gold
Reproduced at the Richard Nixon Presidential Library and Museum
- 2 -
certificates) resulting from the change in the par value of the dollar
authorized by Section 2 hereof shall be covered into the Treasury as
a miscellaneous receipt.
Reproduced at the Richard Nixon Presidential Library and Museum
DRAFT B
2/5/72
AN ACT To provide for a modification in the par value of the dollar
in the International Monetary Fund, and for other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
!,
SECTION 1. This Act may be cited as "An Act to Modify the Par
Value of the Dollar in the International Monetary Fund."
SEC. 2. The Secretary of the Treasury is hereby authorized and
directed to take the steps necessary to establish a new par value of
the dollar in the International Monetary Fund of one dollar equals
0.818513 crem of fine gold. Such par value when established P.S
provided in this section shall define the relationship of the dollar
to gold for the purpose of issuing gold certificates.
SEC. 3. The Secretary of the Treasury is authorized to maintain
the value in terms of gold of the holdings of United States dollars
of the International Monetary Fund, the International Bank for
Reconstruction and Development, the Inter-American Development Bank,
the International Development Association and the Asian Development
Bank to the extent provided in the Articles of Agreement of such
institutions. To carry out these purposes the Secretary may (1) issue
letters of credit to the International Monetary Fund and deposit
drawings thereon in the International Monetary Fund as an exchange
of assets, and (2) use the resources of the fund established by
Section ao of the Gold Reserve Act of 1934 (31 U.S.C. 822a).
Reproduced at the Richard Nixon Presidential Library and Museum
- 2 -
SEC. 4. The increase in the value of the gold held by the
United States (including the gold held as security for gold
certificates), resulting from the change in the par value of the
dollar authorized by Section 2 hereof shall be covered inta, the
fund established by Section 10 of the Gold Reserve Act of 1934
(31 U.S.C. 822a).
Reproduced at the Richard Nixon Presidential Library and Museum
2/5/72
Analysis of Draft Gold Bill
Section 1. --- Short Title
This section provides that the bill may be cited as "An Act to
Modify the Par Value of the Dollar in the International Monetary Fund.
Section 2. -- Devaluation Authorization
Section 5(b) of the Bretton Woods Agreements Act requires that
Corcress must give prior approval to any change in the par value of
the dollar. Section 2 gives this approval by authorizing and
directing the Secretary to take the necessary steps to establish 8. new
par value for the dollar of one dollar equals 0.818513 gram of fine
gold. The Secretary can establish this new par value by communicating
it to the Fund. Under Article IV, Section 5, of the Fund Articles a
change in par value may be made only on the proposal of a member and
only after consultation with the Fund. While the Fund has a right to
object to in certain circumstanc to a proposed change, it may not
do so if the proposed change does not exceed 10 percent of the initial
par value. Since the proposed change in the U.S. par value is less
than 10 percent of the initial U.S. par, the Fund must accept the par
value change as provided in Section 2 of the bill.
Section 2 uses the par value of the dollar in the Fund to
establish the dollar's relationship to gold for international purposes.
It does not establish a gold dollar as defined in Section 15 of the
Gold Reserve Act of 1934 (31 U.S.C. 444). The old superseded gold
dollar which was relevant before par values were established in the
Fund was 15 and 5/21 grams of gold nine tenths fine.
Reproduced at the Richard Nixon Presidential Library and Museum
- 2 -
There is orie domestic purpose for which 1t is necessary to define
a fixed relationship between the dollar and gold. Section (c) of
the Gold Reserve Act of 1934 (31 U.S.C. 4056) provides that the
amount of gold certificates issued and outstanding shall at no time
exceed the value, at the legal standard, of the gold so held against
gold certificates. In order to provide a legal standard for the
issuance of gold certificates, Section 2 provides that the now par
value when established in the International Monetary Fund shall
define the relationship of the dollar to gold for the purpose of
Resuing gold certificates. Thus, gold certificates may be issued
onlthe basis of 138 per cance of cold instead of on the basis of the
old par value of the dollar of $35 per ource of gold.
Section 3 of the bill authorizes the Secretary of the Treasury
to maintain the value in terms of gold of the holdings of United
States dollars of the International Monetary Fund, the International
Bank for Reconstruction the Inter-American Development
Bank, the International Development Association and the Asian Development
Bank to the extent provided in the Articles of Agreement of such
institutions. Each of the Articles of Agreement establishing the
foregoing international financial institutions contains n provision
requiring members whose par value is reduced to maintain the value
in terms of gold of the institutions' holdings of dollars. The
Reproduced at the Richard Nixon Presidential Library and Museum
- 3 -
provisions do differ in detail but basically involve the obligation
to pay an amount equal to the reduction in par value on the
institutions' holdings of the members' currency. The details of
the emount that must be paid in with respect to each institution
is contained in Section III of this background paper.
Section 3 also authorizes the Secretary of the Treasury to
issue letters of credit to the I- termational Monetary Fund and
deposit dollars thereon in the Fund as an exchange of assets.
Since the United States receives on asset to in the Fund equal to any
drawings on the letters of credit no appropriation is required in
to issue those lettern of credit.
Section 3 also authorized the use of the resources of the
Exchange Stabilization Fund to make maintenance of value payments.
This authorization is similar to the authorization contained in
Section 18 of the Bretton Woods Agreeements
Act which authorised the Secretary of the Treasury to
utilize the resources of the Exchange Stabilization Fund for repayment
of drawings from the International Monetory Fund. It is proposed that
the Fund would use its resources to issue letters of credit end make
payments thereon in connection with its assumption of the maintenance
of value obligations on paid-in and callable subscription to the
International Nevelopment lending insitutions. The details of this
proposal are also contained in Section III of this paper.
Reproduced at the Richard Nixon Presidential Library and Museum
- 4 -
Section 4 of the bill provides that the increase in value of
gold held by the United States, including the gold held as security
for gold certificates, resulting from the change in par value
authorized by Section 2 of" this bill would be covered into the
Exchange Stabilization Fund. Section 7. of the Gold Reserve Act
of 1934 (31 U.S.C. 408b) provides that in the case of any decrease
in the weight of the gold dollar the resulting increase in value of
gold would be covered into the Treasury as miscellaneous receipts.
This statute is inspplicable for two reasons, one technical and one
substantive. One is that there has been no reduction in the
was git of the moid 867781 but instead, a creation ni A new DAY
value. The substantive reason is that the Exchange Stabilization
Fund which was established to deal with the consequences of exchange
rate fluctuations is the appropriate place for both handling the
increases in the value of assets and the increases in the value
of liabilities resulting from a change in the par value of the
dollar. In fact, the proceeds from the increase in the value of
gold were transferred to the Exchange Stabilization Fund in 1934.
As explained in Section III, the Exchange Stabilization Fund would
assume the liabilities resulting from maintenance of value in the
international development lending institutions and would need the
partially offsetting increase in assets in order to meet these
Reproduced at the Richard Nixon Presidential Library and Museum
- 5 -
liabilities. In fact, liabilities would exceed assets by #3 $239
million although it is anticipated that through earnings on
investments the Fund would accumulate the resources needed to meet
in full all of these liabilities when and if they fall due.
Reproduced at the Richard Nixon Presidential Library and Museum
2/5/72
Modification of Par Value of the Dollar -- Increase
in Value of Assets and Liabilities
The currency realignment will increase the value of certain
United States international reserve and other assets. Our gold
assets and those with & fixed relationship to gold such as the gold
tranche in the International Monetary Fund end Special Drawing Rights
will increase in value by 8.75 percent -- the amount of the reduction
in the par value of the dollar. Foreign exchange assets will increase
by the amount of dollar devaluation plus any revaluations of the
currency held.
The par value change will also result.in on increase OI 0.57 percent
in the value of our dollar subscriptions to international financial
institutions. This increase in the value of dollar subscriptions
stem from a requirement that subscriptions be maintained in value in
terms of gold. The purpose of this requirement is to assure that
the contributions of all members do not lose value in relation to
each other despite changes in values of currencies. It also assures
that our share in the assets and voting rights in these institutions
is not impaired by devaluation of our currency.
Currency realignment will also mean increased dollar costs on
repayment of certain foreign currency borrowings.
Reproduced at the Richard Nixon Presidential Library and Museum
@
- 2 -
The increases in value of assets in some cases exceed the
increases in related liabilities and in others assets and liabilities
almost offset each other. In most cases the increases in value of
assets end liabilities are the direct result of the privileges and
obligations of membership in international financial institutions.
[No appropriations will be required as a consequence of currency
realignment.]
With respect to liquid assets, there is en increase of
$828 million in the value of United States gold holdings, an increase
of $155 million in United States holdings of Special Drawing Rights;
en increase of $244 million in the United States cold bennaher in the
Internation 1 Monetary Fund; and, finally, an increase of $27 million
in the value of United States foreign exchange holdings. These
increments in value total $1.1 billion.
The calculated increment on the U.S. gold stock of $828 million
is based on the assumption that the IMF will, prior to the change of
the dollar parity, repurchase or withdraw from the Treasury amounts
of gold on which it has a claim on the U.S. These claims amount to
$544 million. We have proposed that the IMF do so. There are no
financial benefits to either party whether these reversals take place
prior to or following the U.S. parity change. The Treasury believes,
however, that a clearer presentation of the effects of the parity
change on the U.S. gold stock may be made if these transactions are
now reversed and, in any event, there no longer appears to be any
useful purpose served by their continuation.
Reproduced at the Richard Nixon Presidential Library and Museum
- 3 -
The increments in value of assets must be viewed against increases
in value of three classes of liabilities; those resulting from (1)
participation in the International Monetary Fund, (2) participation in
the international development lending institutions, and (3) increased
costs of repaying certain foreign currency borrowing.
International Monetory Fund
A. Additionalletters of credit will be issued
in the following amounts representing the
8.57% increase in:
(1) amount of U.S. dollar sub-
scription (3/4 of quota)
431
(ii) outstanding drawings by U.S.
94
525
B. The value of our subscription will
increase by:
575
(The net increase of $50 million over
the additional letters of credit issued
represents the portion of our quota
paid in gold and undrawn.)
The consequences of our relationships with the International
Monetary Fund will result in a $50 million increase in our assets.
First, because the dollar portion of $5025 million of our Fund
subscription is denominated in dollars of a fixed weight and fineness
of gold, this subscription will increase in current dollar value by
8.57 percent or $431 million. Against the increased value of this
asset, the United States will incur an equal liability derived from
the requirement of maintenance of value of the dollar portion of our
subscription in terms of gold. In order to effect this exchange of
assets, the Treasury will issue a letter of credit to the Fund in
the amount of $431 million.
Reproduced at the Richard Nixon Presidential Library and Museum
- 4 of
There yill hlso be an 8.57 percent increase equal to $144 million
in the United States gold tranche of $1675 million in the International
Monetary Fund. Because this asset represents gold paid to the Fund
in partial fulfillment of U.S. subscription obligations, there is no
offsetting maintenance of value obligation. However, the increase
in value of this asset will be partially offset by the requirement
of maintaining the value in terms of gold of a United States drawing
from the Fund of $1,105 million, resulting in an increased obligation
of $94 million. A letter of credit would be issued to the Fund in
this amount as part of the normal process of issuing such letters
of credit in connection with U.S. drawings.
Thus, in the Fund, C.S. a result of a change in the par value of
the dollar the total increase in assets equals $575 million and the
increase in liabilities amounts to $525 million. The $525 million
in letters of credit that are to be issued to the Fund will not
result in budgetary expenditures even when drawn upon since trans-
actions with the Fund represent exchanges of assets that are outside
the budget. [Morcover, since only exchanges of assets are involved
no appropriation is required.] [However, in order to issue these
letters of credit an appropriation of approximately $525 million
will be requested. The amount of appropriation to be requested can
only be approximate since the exact amount of the Fund's holdings of
dollars will vary by small amounts from day to day and the exact amount
of the letters of credit to be issued to the Fund can only be determined
0.8 the day when the United States par value is formally modified.]
Reproduced at the Richard Nixon Presidential Library and Museum
- 5. -
International Development Lending Institutions
The maintenance of value obligations incurred for the
multilateral development lending institutions are as
follows and total approximately:
1,069
Callable
To be paid in
IBRD
509
51
IDA
1
122
IDB
OC
146
25
FSO
:
199
ADB
9
9
663
406
A.
Callable Capital
In the World Bank, the Inter-American Development Bank (IDB) and
the Asian Development Bank (ADB) -- our subscription of callable or
"miarantee"
capital
in
fixed
:ht and
fineness and the change in the par value of the dollar will mean an
increase of 8.57 percent in our callable capital obligation. The U.S.
callable capital in the World Bank is $5,715 million, in the IDB it is
$1700 million, and in the ADB it is $100 million. The total increase
in the current dollar amount of these callable capital subscriptions,
plus those authorized by Congress but not yet subscribed, amounts to
$663 million.
This callable capital is a highly contingent liability. It has
never been called in the past and it is highly unlikely that these
subscriptions vill be called in the future considering the size of
already existing callable capital and the reserves which the inter-
national banks have built up. [Nevertheless, funds must be available
Reproduced at the Richard Nixon Presidential Library and Museum
- 6 -
to meet these obligations if they are ever called and an appropriation
will be requested. This appropriation will back up borrowing in
private capital markets but will not result in budgetary expenditures
unless it is called.]
B. Paid-in Subscriptions
There is a substantial maintenance of value obligation with
respect to the paid-in subscriptions to the development lending
institutions -- the multilateral banks mentioned above plus the
International Development Association. As a maximum this will total
$343 million on both subscriptions previously authorized and those
now in the authorization process. The total obligation can only be
definitively determined on the basis of dollar holding S as of the
day on which the par value is changed. In addition, the IDB is studying
the question of maintenance of value and particularly its application
to the pending $1 billion Fund for Special Operations subscription.
The maintenance of value obligation would be paid in letters of
credit that would be drawn down only after a period of several years
as the development lending institutions need the funds for disburse-
ments. No disbursements on these funds is anticipated in fiscal years
1972 or 1973 and it is expected that draw. downs would be fairly evenly
spread over fiscal years 1974-1976. In addition, in the World Bank
and in the Fund for Special Operations of the Inter-American Development
Bank there are loans outstanding which, when repaid over the next 5 to
10 years, would result in a maintenance of value obligation of $63 million
Reproduced at the Richard Nixon Presidential Library and Museum
- 8 -
Foreign Currency Bonds and SDRs
Exchange guarantees on foreign currency-
denominated securities estimated at:
$172
Offset from gains on foreign exchange of
27
$145
Also the value of both SDR held by and
allocated to the ESF will be written up.
Since the U.S. is a net user of SDR there
will be D. net book loss, realizable only
on dissolution of the SDR system, of:
42
The United States will incur a liability of $172 million on its
foreign currency denominated securities. In other words, the cost of
buying foreign currencies to repay these securities will increase by
$172 million over wh t it would have been prior to the realignment.
The Exchange Stabilization Fund, as the organ of the Treasury which
has responsibility for exchange stabilization operations, assumes
the foreign exchange risk of United States borrowing in foreign
currencies. Thus, the Fund would assume the liability of purchasing
the additional foreign currencies to pay these obligations. This
obligation will be partially offset by the increase of $27 million
in the value of the foreign exchange holdings of the Fund. In addition,
the Fund would incur an increased contingent liability of $194 million
on allocations to date of Special Drawing Rights to the United States
but only in the remote event of liquidation of the 'SDR account in the
IMF. This liability is offset by an increase, noted above, of $155
million in the value of current United States holding of SDRs. No
appropriations are necessary with respect to these transactions and
no budgetary expenditures will result.
Reproduced at the Richard Nixon Presidential Library and Museum
Revaluation of Assets and Obligations
Arising from Devaluation of Dollar
With Respect to Gold
(In millions of $)
Gold revaluation results in increment of 8.57% of U.S. gold stock
$828
Maintenance of Value Obligations (MOVs) in International
Financial Institutions
The value of our subscriptions and capital stock, in
accordance with the Articles of Agreement to which we have
subscribed, must be revalued in terms of dollars to maintain
their initial gold value. This entails the acceptance of
liabilities with varying degrees of contingency. These are:
International Monetary Fund
A. Additional letters of credit will be issued in the
following amounts representing the 8.57% increase in:
(i) amount of U.S. dollar subscription (3/4 of quota) 431
(ii) outstanding drawings by U. S.
94
525
B. The value of our subscription will increase by:
575
The million over the additional
letters of credit issued represents the portion of
our quota paid in gold and undrawn.)
The IMF transaction represents an exchange of assets
and is not a budgetary expense.
International Banks
The maintenance of value obligations incurred for the
development institutions may be broken down as follows and total
approximately:
1,069
To be paid in
Callable
IBRD
51
509
IDA
122
-
1.
IDB
OC
25
146
FSO
199
-
ADB
9
9
406
663
The paid in amount reflects that portion of our subscrip-
tion already paid in or for which letters of credit are out-
standing, plus amounts to be paid in under subscriptions to
which we are committed and are now in the authorization
process. Budgetary expenditures will take place only as
payments are made under letters of credit and will be spread
over a number of years (see below).
Reproduced at the Richard Nixon-Presidential Library and Museum
- 2 -
The callable capital represents a highly contingent
liability. The likelihood of it being. called and becoming
an expenditure at any time is remote.
The dollar value of our subscription and capital stock
in these institutions will increase commensurately with our
MOV obligations.
Estimated Budgetary Impact
IMF: None
I,
International Banks:
Paid in Capital
TY1972 and 1973 - None
FY1974 through FY 1976 - representing MOV on
capital now paid in and held by institutions,
or to be paid in under authorizationsin process
$343
FY1977 to FY1986 - representing MOV on paid in
capital now out on loan by institutions for
which letters of credit will be issued and pay-
ment made as loans are repaid and new disburse-
ments made:
63
Callable Capital: None expected.
Note: The precise amount of maintenance of value obligations
will have to be determined on the date the parity
change becomes effective. The above figures are there-
fore subject to moderate change. Also, the IDB has
under consideration the relationship of MOV to
pending subscriptions to the FSO.
2/5/72
Reproduced at the Richard Nixon Presidential Library and Museum
- 3 -
Exchange Stabilization Fund (ESF)
In addition to MOVs in the international financial
institutions certain liabilities will be incurred
by the ESF.
These arise from exchange guarantees on foreign
currency denominated securities estimated at: $172
Against which there is an offset from gains
on foreign exchange of
27
$145
Also the value of both SDR held by and allocated
to the ESF will be written up. Since the U. S.
is a net user of SDR there will be a net book
loss, realizable only on dissolution of the
SDF. system, of:
42
The exchange transactions of the ESF are not
budgetary expenditures.
2/5/72
Reproduced at the Richard Nixon Presidential Library and Museum
B
Reproduced at the Richard Nixon Presidential Library and Museum
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
the are balance untury
Although no agreements have been reached with Canada, / we will continue
our negotiations with that country with a view toward prompt settlement
of outstanding trade issues,
Reproduced at the Richard Nixon Presidential Library and Museum
C
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Propose Modification of Par Value f Dollar
Background Material
U.S. Treasury Department
February 1972
Contents
Page
I.
Introduction
II. The Smithsonian Agreement and Related
Negotiations on Trade and Defense
A. Exchange Rate Realignment
B. Related Trade Negotiations
C. Defense Financing Arrangements
III. Modification of Par Value of Dollar
A. Need for Change in the United States
Official Gold Price as Part of Exchange Rate
Realignment
B. Increases in Value of Assets and Liabilities
IV. Background on the Monetary Crisis of 1971
A. International Payments Developments
B. U.S. Assessment at Mid-Year
C. New Economic Program
V. Long-Term Monetary Arrangements
Annexes
1. Proposed Legislation
2. Technical Description of Proposed- Legislation
3. Group of Ten Communique, December 18, 1971
4. Average Appreciation Against the Dollar
5. Listing of Exchange Rate Changes Since December 18, 1971
6. IMF Resolution on International Monetary System
7. Statistical Material
Reproduced at the Richard Nixon Presidential Library and Museum
Proposed Modification of Par Value of Dollar
Background Material
I. Introduction
The Administration has proposed legislation authorizing
and directing the Secretary of the Treasury to take the steps
necessary to modify the par value of the dollar in the Inter-
national Monetary Fund by 8.57 percent to $38.00 per fine
Troy ounce as agreed provisonally in the Smithsonian Agree-
ment of the Group of Ten on December 18, 1971. (This
modification is equivalent to a change of approximately
7.89 percent in the par value of the dollar in terms of
grams of gold per dollar, from .888671 grams to 818513 grams. )
Legislation has also been proposed to authorize the United
States Government to fulfill maintenance of value obligations
to international financial institutions, and to effect
increases in the dollar value of the U.S. Government's sub-
scriptions in those institutions and otherwise. These changes
are a necessary consequence of the proposed modification
in the par value of the dollar. The text and a technical
explanation of the proposed legislation appear in Annexes 1
and 2.
This report describes the Smithsonian Agreement and the
status of negotiations on related issues, and the increases
in U.S. assets and liabilities which will result from the
change in the dollar's par value. It. also discusses briefly
international monetary developments in 1971 and points out
several issues for discussion in the area of monetary reform
over the longer-term.
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II. The Smithsonian Agreement and Related Ne, tiations on Trade
and Defense
The Smithsonian Agreement of the Group of Ten followed a
period of international monetary adjustment, involving a
generalized system of floating (but not freely floating) exchange
rates, during 1971. It consisted of an interrelated series of
measures designed to help resolve balance of payments problems to
restore more settled conditions to the exchange markets, and
to provide a framework from which longer term reform could evolve.
It was also agreed that discussions should be promptly undertaken
measures for reform of the monetary system over the longer
term, and several areas of reform to which attention should
be directed were identified. /
The agreement on "near-term" issues comprised:
--a new pattern of basic exchange rate relationships among
the countries concerned;
provisional arrangements to permit up to 2-1/4 percent
margins of exchange rate fluctuation above and below
the new exchange rates;
--recognition that trade arrangements are a relevant
factor in assuring lasting equilibrium in the inter-
national economy;
.-agreement by the United States to propose to the Congress
a suitable means for devaluing the dollar in terms
of gold as soon as a related set of short-term trade
expansion measures is available for Congressional
scrutiny; and
--agreement by the United States to immediately suppress
the 10 percent import surcharge and related provisions
of the Job Development Credit.
The text of the Communique issued at the conclusion of the
Smithsonian Agreement appears at Annex 3.
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A. Exchange Rate Real nment
During the week following the Agreement, the Group of Ten
participants individually announced the exchange rates and
exchange rate policies to which they had agreed. The Government
of Canada announced that it would not immediately set a new
fixed rate for the Canadian dollar, but instead would maintain
temporarily a floating exchange rate and would permit
fundamental market forces to establish the exchange rate without
intervention except as required to maintain orderly conditions.
The changes and the new pattern of exchange rates for the U.S.
dóllar, are summarized in the table below. Annex 4 provides
several alternative calculations of the average appreciation
of foreign currencies vis a vis the dollar.
Table 1
Percent
Change
Percent
Currency
Type
from IMF
Appreciation
Unit
of
Wider
Parity of.
Against U.S.
Per Dollar
Rate
Margins
May 1, 1971
3,6,
untry
Dollar:
Old
New
lgium
Central
1/
Yes
+2.76
+11.57
50.00BF
44.8BI
nada
Float
*
*
*
*
ance
Par
Yes-
0.0
+8.57
5.55FF
5.12F
rmany
Central
Yes
+4.61
+13.57
3.66DM
3.22D
:aly
Central
Yes
-1.00
+7.48
625L
581.5
&
apan
Central
Yes
+7.66
+16.88
360¥
308¥
therlands
Central
Yes
+2.76
+11.57
3.62G
3.24G
veden
Central
Yes
-1.00
+7.48
5.17K
4.81K
vitzerland
Par2
Yes
+4.89
+13.88
4.37SF
3.84S
ited Kingdom
Par
Yes
0.00
+8.57
.42E
.38E
ited States
Par
*
-7.89±
0.00
*
* Not applicable.
"Central rates" have been established in some cases, in lieu of new
par values as the effective rates about which currency values will be
maintained sending formal par value changes.
2/
Switzerland is not a member of the IMF.
3/
Expressed as percent change in grams of gold per currency unit.
41
If approved by the Congress.
5/
Expressed as percent change in U.S. cents per foreign currency unit.
All changes are computed on basis of par values of April 30, 1971.
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The Group of Ten participants recognized that their
agreement would trigger decisions on exchange rates by most
other countries and indicated their view that it was particularly
important that no country seek improper competitive adyantage
through its exchange rate policies. Changes in parities could
be justified only on the basis of an objective appraisaI
which established a position of disequilibrium. As of January 20,
the IMF had received indications from all but five of its
members of their decisions on their exchange rate systems.
All proposed exchange rate changes have been examined by
the IMF in accordance with the principle outlined above and
in accordance with the Fund's own Articles of Agreement,
and the Fund has taken such formal action as was appropriate
in each case to enable the rates concerned to be implemented.
1/ Changes and new rate patterns for each member country are
listed in Annex 5.
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B.
Negotia ons on Trade Expansion M sures
The Smithsonian Agreement noted that urgent negotiations
were under way between the United States and the Commission of
the European Community, Japan and Canada "to resolve pending
short-term issues at the earliest possible date"
and
"to establish an appropriate agenda for considering more basic
issues in a framework of mutual cooperation in the course of
1972 and beyond. " The result of these talks has been a series
of practical steps to remove trade obstacles and an agreement
to work toward improvement in the framework for the conduct of
international trade.
These negotiations have addressed themselves both to
major trade issues, including issues which the United States
considers of critical importance, and to a series of intrin-
sically less important issues that have become an irritant in
trade relationships. These issues have by no means been fully
resolved, but a beginning has been made. The Japanese
Government has announced a series of trade liberalization
steps of immediate value to the United States. The European
Communities have also agreed to some limited measures. Both
trading partners have agreed to join with the United States
in efforts during 1972 within GATT toward the removal of
some trade barriers leading to comprehensive: trade negotiations
in 1973. In short, a broad understanding has been reached
for future negotiations in a time frame that takes into account
the fact that international trade is undergoing an adjustment
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2 -
process initiated by recent comprehensive and substantial
currency realignments. In the case of Canada, the parallel
short-term negotiations, dealing mainly with certain bilateral
agreements and understandings that no longer fit the facts of
our economic relationship, have not been brought to a success-
ful conclusion. A continuing absence of such agreement will
necessarily require a review of other approaches toward
achieving the necessary balance and equity in our trading
relationship.
The United States for its part intends to focus these
future negotiations on issues such as: non-tariff barriers;
barriers to trade in agricultural products; the erosion of the
"most-favored-nation" principle through the proliferation of
preferential trading arrangements; the trade effects of the
enlargement of the European Communities; the continued main-
tenance by some developed countries of quantitative restric-
tions
not sanctioned by the GATT; and the need for new or
modified institutions for the conduct of trade.
The immediate reduction of some tariff and non tariff
barriers demonstrates the commitment of these countries to
minimize economic friction and expand trade. These unilateral
commitments do not completely fulfill U.S. desirés, but
together with the commitment to negotiate reductions in trade
barriers over the longer term they do constitute recognition
that changes must be made in the trading system.
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3 -
Short-Term Measures
The greatest progress toward liberalization in the
immediate future with tangible benefits for the United States
will be made by Japan. For several years there has been a
large and growing deficit in our trade with Japan, partially
as a result of the now inappropriate trade barriers the
Japanese continue to maintain. While many important reştric-
tions remain, the actions; supplementing the yen appreciation
of 16.8 percent, represent a useful contribution towards
bringing the United States-Japan trade imbalance into rea-
sonable adjustment. They are also a welcome sign that Japan
wishes to participate more fully in international efforts to
reduce barriers. Japan will [unilaterally] alter a number of
tariff and non-tariff barriers over a broad spectrum of trade.
With respect to agricultural products, Japan will
increase the quantity of imports permitted under quota of
fresh oranges, orange and grapefruit juice, quality beef, and
several other products. The duty on soybeans will be elimi-
nated and the duties on Turkey meat, tallow, soybean meal,
vegetable oils and some 10 other products will be reduced.
A duty-free tariff quota will be established for feeder
cattle. The effective date for these changes will be April 1,
1972, the beginning of the Japanese fiscal year.
On industrial products, Japan will reduce tariffs on
April 1, 1972 on automobiles, computers, computer peripheral
equipment, machine tools, color film, X-ray film and some 30
other industrial products. The internal excise tax on large
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4
and medium sized automobiles will be significantly reduced.
As of February 1, Japan is removing import quota restrictions
on light aircraft and light aircraft parts, computer peripheral
equipment (not including memory or terminal devices), light
and heavy oil, and sulfur. Technical consultations will be
held later this year when a U.S. team is to visit Japan to
discuss liberalization of restrictions on imports of computers
and computer equipment Japan will in addition grant more
liberal treatment to the establishment by U.S. firms of
wholly-owned subsidiary sales and service outlets in Japan.
Some actions are also being taken to reduce other Japanese
non-tariff barriers.
Part of Japan's hesitance to further liberalize its inter-
national trading practices in response to U.S. desires is the
result of the continuing restrictions on Japanese goods enter-
ing the European Common Market. Therefore, the agreement by
both Japan and the Common Market countries to multilateral
negotiations is of key importance to reaching the President's
objective of a reduction in trade barriers.
The European Communities have agreed to add 1.5 million
metric tons to their normal carry-over stocks of wheat as
part of an effort with the U.S. to prevent a depression in
world markets due to surplus production in '71-'72. The EC
will also make an effort to stock grains in the next crop year
and will endeavor to operate its export payments system for
grains for this year so as not to cause trade diversions in
favor of: the EC. The EC has further declared that the
UCE
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- 5 -
harmonization of its manufactured tobacco tax system will be
neutral in its effects on trade, and has agreed to consult
with the United States at the appropriate time. The Commu-
nities have announced that for the coming two years the 15
percent common external tariff (CXT) on oranges from non-
preferential suppliers will be reduced to 5 percent during
part of the U.S. export season (June 1 - September 30) The
CXT on non-preferential imports of grapefruit will be reduced
from 6 percent to 4 percent for the coming two years. The EC
has agreed to immediate discussions in the GATT of the accession
treaty between the EC and the four applicant states. Formal
tariff renegotiations under the relevant procedures of the
GATT will begin im ediately after ratification by the parties
concerned, which is envisaged for December 31, 1972, at the
latest.
The nominal short-term effects of the agreements with
the European Communities reflect the reluctance of the
Community, despite its strong external position, to accept
fully the responsibilities for leadership in external liberali-
zation, at least during a period when it is preoccupied with
internal expansion. The cumbersome decision-making machinery
within the EC is itself a handicap. Further négotiations on
the key issues for the longer term, such as appropriate means
of reducing the impact on third countries of the highly pro-
tectionist Common Agricultural Policy, will be long and diffi-
cult. Nevertheless, we believe the EC has shown a new politi-
cal will to join with us in an attempt to find mutually
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- 6 -
satisfactory solutions both bilaterally and within the GATT
to outstanding problems. As part of this agreement the U.S.
and the EC have both accepted the principle of reciprocity
and mutual advantage as the basis for solving pending issues.
For its part, the United States has announced the U.S.
domestic farm program will be administered so as to carry
over 10 percent of the production of wheat and feed grains
from '71-'72. For the coming year, 20 million acres will be
removed from corn production and 6 million from wheat produc-
tion. The U.S. has agreed to participate in bilateral anti-
dumping discussions with the Japanese at the technical level.
The United States has agreed to consider steps necessary for
the elimination of the "Final List' (Section 402 (a) of the
Tariff Act) and "American Selling Price" methods of customs
valuation, both of these actions to be contingent upon fulfill-
ment of reciprocal commitments previously made by other coun-
tries. The United States may moderate its inspection measures
of Japanese canned tuna as determined by the effectiveness of
Japanese measures in meeting U.S. laws and regulations con-
cerning decomposed canned tuna.
Discussions were held with Canada on the issues of the
Automotive Agreement, defense production sharing, and tourist
allowances, as current arrangements in these areas are no
longer justified by the economic relations which exist between
our two countries. While it was not possible to reach agree-
ment in these areas, the U.S. will continue efforts to achieve
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- 7
balanced and equitable arrangements with Canada. It is
possible that such new arrangements will prove unobtainable.
Thus, the U.S. is reviewing other approaches which would
achieve a U.S.-Canadian trade relationship more in keeping
with the current payments balances of both countries.
Conclusion
These negotiations have by no means settled the major
issues outstanding in the field of international trade.
Nevertheless a good beginning has been made. Japan in par-
ticular has, by its actions in the trade field, supplemented
the effects of the monetary realignment in contributing to an
improvement in the United States balance of payments. Cer-
tainly, there is greater recognition today of both the need
for further progress and the dangers implicit in failure to
achieve that progress. We are encouraged that major trading
nations have agreed to join with US in seeking future steps
to revitalize the world trading system.
Rider
X
The United States has been concerned that certain trading
arrangements with Canada no longer fairly reflect the
economic circumstances surrounding economic relationships
between our two countries. While it has not yet been
possible to achieve appropriate balance in these arrange-
ments, the United States will seek appropriate means of
reducing imbalances in trade agreements with that country.
Reproduced at the Richard Nixon Presidential Library and Museum
C. Defense Financing Arrangements
The President's announcement of August 15, 1971, included
the statement:
"Now that other nations are economically
strong, the time has come for them to bear their
fair share of the burden of defending freedom
around the world.
The implication was that the persistent U.S. payments
problems were caused partly by the high level of U.S. defense
expenditures abroad. If some of those defense burdens could
be borne by other countries, the shift required in other
U.S. accounts, including trade, would be smaller.
Some reduction of defense expenditures overseas could
be expected as we withdrew from Vietnam. However, these
savings could be dissipated by rising prices and the increased
cost of foreign currencies. It seemed desirable that Europe
and Japan be asked to carry a larger share of the defense
burden, which would mean some increase in their defense
responsibilities, greater contributions to the cost of
maintaining U.S. forces in their areas, or a combination of
both.
The U.S. wants to maintain fully the strength of the
alliance. Unilateral reductions in U.S. forces might be
followed by reductions in the forces of our allies rather
Reproduced at the Richard Nixon Presidential Library and Museum
than a compensating increase. Reductions should be the
subject of negotiation with Warsaw Pact powers, not the
result of unilateral action. The U.S. view was that forces
of our European allies needed to be strengthened. Thus, a
number of conflicting objectives had to be reconciled.
The result so far has been the signing of a new agreement
for partially offsetting the cost of U.S. forces in Germany
and announcement by our European allies that they intend to
increase expenditures on their own defense forces by more
than $1 billion in 1972. These agreements are steps toward
maintaining the strength of our common defense with a less
proportionate burden on the U.S. However, the increased
expenditure by our European allies on their own defense
forces, except as it may involve procurement from the U.S.,
will not directly reduce our payments deficit. Nor will
the share of European gross national products spent on
defense be larger than in previous years.
Consequently, this area will need further examination
and action in the year ahead when the adjustment needed in
the international payments balance will have to be achieved
almost entirely in the trade sector of the balance of payments.
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III. Modification of Par Value of Dollar
This section reviews the considerations that led the
United States negotiators to agree to propose legislation
to the Congress to change the par value of the dollar. It
also sets forth information on the changes in the dollar
value of certain assets and obligations that result, under
existing international agreements, when the par value of
the dollar is increased in terms of gold.
A. Need for Change in the United States Official Gold
Price as Part of Exchange Rate Realignment
The United States entered the negotiations that followed
the August 15 announcement of the New Economic Policy with a
strong view that it would be preferable to achieve a realignment
of exchange rates without changing the official price of gold
in terms of dollars.
This view was based upon several considerations:
(a) A change in the official monetary price of gold
did not have any economic significance in itself.
The exchange rate of the dollar in terms of other
currencies was the substantive economic question,
and the official dollar price of gold was relevant
only if it affected those exchange rate relationships.
(b) If other countries also raised their official gold
prices along with the United States, then no
realignment of exchange rates would occur. Such a
uniform change in par values would therefore
Reproduced at the Richard Nixon Presidential Library and Museum
accomplish nothing useful and might stimulate
a rise in prices in the private market for gold.
This would attract more funds into gold hoarding
and speculation in anticipation of still further
changes in the official prices for gold sometime
in the future. Such speculative gold hoarding
could draw funds from any country, weakening all
currencies in comparison to gold. In order to
avoid a general rise in official gold prices,
therefore, it was necessary to obtain prior
agreement on a pattern of exchange rates for
major currencies. This was instrumental in getting
the agreement.
(c) Furthermore, the Executive Branch, of the United
States believes that the monetary role of gold
should continue to diminish. With the advent of
Special Drawing Rights in the Fund, the world now
has a basic reserve-asset which is not held in
private hands and hence is free from the private
hoarding and speculation which has arisen in
connection with gold. Moreover; in contrast to
gold, the volume of Special, Drawing Rights can be
expanded when needed without changing the official
price of SDRs, and theré is no need to raise the
Reproduced at the Richard Nixon Presidential Library and Museum
official gold price merely to increase world
reserves. Hence it is sensible to de-emphasize
gold. and gradually replace its monetary functions
with Special Drawing Rights
On the other hand, there was a political issue involved
in the gold price question. In some quarters in Europe it was
strongly held that the United States must "participate" in the
reâlignment by changing its official gold price. Without such
participation, the exchange adjustment that appeared negotiable
was unsatisfactory. With it, a substantial realignment appeared
possible.
There was one other aspect of realignment that gave rise
to resistance to an adjustment in exchange rates solely by
appreciation of foreign currencies. This was the fact that a
country which appreciates its currency has to reduce the value
of its reserves and other foreign assets measured in terms of
its own currency.
In September, at the Annual Meeting of the Fund in Washington,
the United States proposed elimination of the temporary import
surcharge if tangible progress could be made on trade liberalization
and if foreign governments would allow fundamental market forces
freely to determine the exchange rates of their currencies for
a transitional period. This suggestion was.not accepted --
underlining the strength of foreign views that the U.S. should
Reproduced at the Richard Nixon Presidential Library and Museum
"participate" and indicating more strongly than ever the deep-
seated resistance of many governments to truly floating rates
themselves.
As time passed after August 15, business pressures for a
return to stable rates strengthened both here and abroad. In
addition, European economic growth was widely expected to slow
somewhat, for cyclical reasons unrelated to the international
monetary situation. If this expectation were correct, further
appreciations would become even more difficult as foreign
business conditions slackened. There was even some danger that
the quite significant appreciations already produced by the
period of temporary floating would be eroded.
Thus an early settlement of the realignment question
appeared in late November and early December to be advantageous,
if the realignment offered reasonable prospects for a substantial
improvement in the U.S. position, and if it were accompanied by
such short-term trade expansion measures and agreement to
negotiate over the longer term on trade liberalization -- as
could reasonably be negotiated to help ensure the success of
the realignment.
Because of these factors and the firm foreign attitude
with respect to "participation" by the United States, the
United States negotiators agreed in December to a change in the
official gold price, to facilitate and expedite an agreed realign-
Reproduced at the Richard Nixon Presidential Library and Museum
ment of exchange rates. However, it became clear that foreign
countries were even more basically concerned with their exchange
rates than with their demand that the United States participate.
In effect, they did not wish the dollar to be devalued too much,
because this would affect their export and other internationally
competitive industries. This placed a limit to the extent to
which they would agree to a change in our gold price without
themselves matching and hence neutralizing such a change.
In terms of dollars, the proposed rise in the United States
official gold price amounts to 8.57 percent. In terms of some
other major currencies, the official price of gold will be lower
than before, because of an appreciation of these currencies in
terms of gold. On a weighted average calculation, the price of
gold in terms of the currencies of the Group of Ten (excluding
Canada) will rise only by about 1-1/2 percent.
It is the view of the Executive Branch that this agreed
change in the official gold price should not be allowed to
disturb the trend toward de-emphasis of gold in the international
monetary system. It will be one major task of those examining
the long-term improvement in the international monetary system
to counter any tendency toward a relapse. Gold is becoming more
1/ Weighted by official gold holdings on November 30, 1971.
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useful as a non-monetary commodity and less satisfactory as
a monetary reserve. All nations should recognize this fact,
and adapt the monetary system accordingly.
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D
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THRUS
1234
MEMORANDUM
NATIONAL SECURITY COUNCIL
URGENT ACTION
February 4, 1972
MEMORANDUM FOR:
DR. KISSINGER
FROM:
HELMUT SONNENFELDT
it
ROBERT HORMATS
SUBJECT:
Tough Treasury Pasition on Canada --
A Pointless Crisis
Treasury has rejected the latest Canadian offer on trade. It feels
that the "trade package" is inadequate and has threatened to take a
public hard line against Canada when we submit the "gold bill!' to the
Congress in the middle of next week. And, Treasury has raised the
possibility of suspending the U.S. - Canadian Auto Agreement and the
Defense Production Sharing Arrangement with Canada. Canada, how-
ever, believes that it has gone as far as it can go and that to give any
more would lead the Government to fall in the next election. The
Canadians feel that they are being asked to commit political suicide
by Treasury for the sake of concessions that could scarcely make that
much difference to the U.S. This memo is to alert you to the problem
and to the urgent need to moderate Connally before an unnecessary
foreign policy crisis with adverse domestic implications arises.
The major issues are:
Canada wants to declare "inoperative" the first two safeguards of
the Canadian-American Auto Agreement by legally eliminating them
widea
through an order-in-council (which the Ministers feel would involve
unaccentable domestic political consequences). Treasury wants formal
elimination. The issue here is more political than economic, since
these two safeguards have not actually been adhered to or affected our
trade in the last several years.
--
With regard to the third safeguard, which limits the duty free
import of autos into Canada to manufacturers alone, i.e., no private
Canadian citizens can import duty free automobiles from the U.S.
Canada has indicated that for both political and economic reasons it
cannot give any concessions on this, although it has proposed the estal
lishment of a committee to examine this problem. Treasury's position
is that individual Canadians should be able to import automobiles duty
free since Americans can now import automobiles duty free from Canada
(although because Canadian prices are higher no Americans have done so).
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2
In addition, Canada will remove the ten percent ("buy Canadian")
verential on defense purchases under the Defense Production Sharing
.4rrangement, and will allow duty free entry for prime contracts valued
at $150, 000 or more as opposed to the current $250, 000. Treasury's
position is that because most contracts are not "prime", but "subcon-
tracts", this is of little help to us. <(Treasury is probably right.)
--
Canada has also offered to increase tourist allowances, which is
calculated to increase U.S. earnings by about $40 million per year.
And Canada has indicated that it would eliminate its present five percent
duty on citrus juices, although it admits this is unlikely to affect the
level of U.S. exports to Canada.
--
Canada also points out that the U.S. has done nothing which has the
appearance of a reciprocal concession.
Although admittedly Canada has made limited concessions to the U.S.
it would serve little good at this time to publicly denounce Canada or to
threaten to revoke the Auto Agreement or the Defense Production Sharing
Arrangement. Indeed, it might encourage members of the Congress to
tack on punitive amendments to the gold bill, and strengthen protectionist
pressures.
The foreign policy consequences would be that anti Americanism will
become the major Canadian election issue with the parties outbidding each
other. In addition, the Canadians are not incapable of economic retalia-
tion with adverse effects on interests and communities in this country
which should be of some concern to the President. Needless to say, any
notion of a Presidential trip in these circumstances would be absurd and,
as has beer previously pointed out to you, the cancellation of the trip
will merely add to the momentum of deteriorating relations. (Inciden-
tally, there is evidence that Treasury, either on its own or with White
House blessing, has already threatened the Canadians with cancellation
of the trip as part of the economic bargaining. ) Instead, the trip ought
to be used as a means to keep the negótiations open until the Canadian
election, after which Trudeau will be able to make concessions which now
would kill him politically.
RECOMMENDATION:
It is essential that you talk to Secretary Connally on this matter before
Treasury freezes the position and goes public.
Reproduced at the Richard Nixon Presidential Library and Museum
28228
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
INFORMATION
CONFIDENTIAL
May 5, 1971
THE PRESIDENT HAS SEEN
MEMORANDUM FOR: THE PRESIDENT
FROM:
HENRY A. KISSINGER Naigh
SUBJECT:
International Monetary Developments
Germany, Switzerland, The Netherlands, Belgium and Austria today
suspended the dollar operations of their central banks. They did so
because of a tremendous inflow of dollars which reached $1 billion in
Germany yesterday. It now appears that the dollar operation will con-
tinue suspended at least through this weekend.
The huge capital flows are due mainly to speculation that the German
mark, and perhaps other European currencies, will be raised in value
against the dollar. The German Economic Minister and five influential
German research institutes have advocated such a move to help fight
inflation in Germany. Their public comments are in fact the dominant
cause of the immediate problem.
The German Cabinet will meet on Friday to decide the course of action.
Their most likely decision is to let the mark float freely for a temporary
period, perhaps via the technical step of widening the margins around
the present exchange rate within which the currency can fluctuate. This
is the preferred course of most German economic officials, but it faces
strong opposition from France which wants no exchange rate movements
within the Common Market. The theoretical possible alternative of a
joint move by the Common Market countries is also firmly opposed by
France.
The Germanscould try to block dollar inflows directly rather than let
the exchange rate move, as they have done in earlier speculative situa-
tions. They could also simply make a firm declaration that no exchange
rate change was planned, a move which has succeeded at least temporarily
in past crises.
The smaller countries will undoubtedly await a German decision and take
their cue from it. Most of them would, however, probably have to emulate
a German float or else they would then be swamped with capital themselves.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
The situation could develop important political overtones in Europe.
Germany and France take opposite views on how European monetary
integration should proceed, on whether individual EC countries should
be permitted to change their exchange rates, and perhaps even on whether
we should be pressured to at least contribute to whatever action is needed
to resolve the crisis. The French might even seek to use their veto over
British entry to get German acquiescence on French monetary views.
However, no policy decisions are required on our part at this time.
The sharp disparity between U.S. and European interest rates has been
a major cause of the large short term capital flows from the U.S. to
Europe, but are obviously essential to pursue our domestic economic
objectives. There is also concern that we do not attach much importance
to our balance of payments situation and that, since a dollar devaluation
is technically impossible, other currencies are bound to move up in value
at some point in the future. However, the immediate situation has been
stirred up by German rhetoric and there is nothing much we could do
about it anyway short of fundamental changes in our international financial
policy.
Treasury issued a statement last night indicating that we see no need for
any exchange rate changes, and indicating our continued willingness to
cooperate in dealing with the situation. At present, we need only watch
the situation carefully and await word on what the Europeans plan to do.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
28228
May 5, 1971
MEMO FOR GENERAL HAIG
Attached is the memorandum
for the President on the inter-
national monetary developments
which we just discussed.
C. Fred Bergsten
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
DOC
RECD
LOG NBR
INITIAL ACTION OFF
MO DA
MO DA HR
NSC CORRESPONDENCE PROFILE
250513
28228
LOG IN/OUT ONLY
TO: PRES
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DOC SOURCE/CLASS/DESCRIPTION
HAIG X
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LIMDIS
S
CODE
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SUBJECT: Situation Repar Ton International TS SENSITIVE
Monstay Development
REFERENCE: S/S
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NOT XEROXED
APP'TS: PRES
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(
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* GPO: 1971-412-412
Reproduced at the Richard Nixon Presidential Library and Museum
24076
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
nice Hairy
INFORMATION
SECRET
December 3, 1970
MEMORANDUM FOR DR. KISSINGER
Amen
FROM:
C. Fred Bergsten
The Absurdity of Possible Reductions I afree in U.S. Forces
HK
SUBJECT:
Overseas for Balance of Payments Reasons
I was shocked to learn that Paul McCracken and Peter Flanigan
had seriously raised with you the possibility of U.S. troop cuts abroad for
balance of payments reasons.
I take no stand on whether our overseas troop levels are correct.
I do take the firmest possible stand that we should never reduce them for
balance of payments reasons.
The last Administration had a major hangup over the balance of
payments. It did everything from implementing mandatory capital controls,
to proposing a tax on foreign travel by American citizens, to requiring the
Defense Department to pay 50% higher prices to purchase U.S. commodities,
to bringing down Erhard over the offset issue, to the additionality require-
ments on foreign aid. Even it, however, never reduced U.S. troops abroad
for balance of payments reasons -- though it considered the possibility
repeatedly throughout its eight-year life.
The arithmetic demonstrates why. It is true that our foreign
expenditures for military purposes are high. However, drastic reductions
in our military capabilities would be required to produce small net gains
for our balance of payments. When our deficit is running in the $3-$5 billion
range, as it has for twelve years with temporary abberrations on either
side of the range, the saving of a few hundred million dollars gets lost in
the shuffle -- and even a saving of that relatively small magnitude would
require major shifts in troop deployments.
In view of the difficult decisions already made to maintain our
troop levels in Europe, Vietnamize as rapidly as possible, and pull out of
Korea at a pace which already causes major foreign policy problems, I do
not see how we could seriously consider additional withdrawals for balance
of payments reasons.
SECRET
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
2
What would be the signal to the Soviets if we were to do so? It
could only be that the U.S. had become SO pitifully weak on the economic
and financial front that we could no longer make any pretense of maintaining
our defense posture around the world.
It is bad enough to make overseas troop decisions on budgetary
grounds, but this at least involves real resources and alternative uses of
money. To do so for balance of payments reasons, in order to juggle the
statistics marginally and enable us to tell the European financial officials
"that we are doing something about our problem", would be criminal.
The underlying problem, as always, is the failure to properly
perceive our balance of payments situation -- and I deliberately do not say
"balance of payments problem". An effort to clarify perceptions on this
issue will be the first task of the new International Economic Policy
Committee, as worked out yesterday at George Shultz's meeting on the
subject in which I participated. Hopefully, that exercise will dash any
notions of troop cuts or other changes in serious policies for balance of
payments purposes.
In addition, however, I urge you to stand firm against any such
nonsense. I assume you will need little urging in this direction, but wanted
to restate the case to you because of the absurdity of the proposal.
SECRET
Reproduced at the Richard Nixon Presidential Library and Museum
NUMBER
MO
DA
HR
NATIONAL SECURITY COUNCIL
RESPONDENCE ROUTING AND CONTROL
JFILE
24076
12
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TO: PRES
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DOC DATE:
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Beyery
TS
CODEWORD
sensitive
PARIS MTG
NO FORN
SUBJECT: Possible Reductions is US Locie Overves For Balence 7
Payments reasons
ENCLOSURES: (
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APPROPRIATE ACTION
(
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LATIN AMERICA
ANY ACTION NECESSARY
(
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UNITED NATIONS
CONCURRENCE
(
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ECONOMIC
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DUE DATE:
SCIENTIFIC
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COMMENTS: (Including Special Instructions)
PROGRAM ANALYSIS
date
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12/03
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INTERNAL ROUTING
THE
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UNIT
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SUBF
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TO
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DEC 1 1970
WH
* GPO: 1970-385-803
Reproduced at the Richard Nixon Presidential Library and Museum
SANITIZED COPY
MEMORANDUM FOR:
National Mr. Lite Michard Security Moose 619
Council Staff
The attached paper fulfills a phoned
request from Mr. Richard Cooper to Ed
Allen, the Director of our Office of Economic
Research.
Because of the potential sensitivity of
this paper, there is but one file copy. /
SANITIZED
6.2(c) 6.2 (c)
27 February 1969
Attachment
(DATE)
FORM NO.
1 1 AUG 54
101
REPLACES FORM 10.101
WHICH MAY BE USED.
(47)
DECLASSIFIED
E.O. 12958, as amended. Sect 3.5
NLN 04-06/1 persec.6.2(c) Hr. JUL 2 2007
By Be NARA, Date 16 oct 07
[e. 1 of 11]
SANITIZED COPY
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
OCI- 1111 -69
WESTERN EUROPEAN ATTITUDES TOWARD A CHANGE
IN THE OFFICIAL PRICE OF GOLD
I. Introduction
1. If there is a European gold lobby favoring an increase in
the price of monetary gold, it is heterogeneous and scattered among
various groups of officials and private persons. Motivations among
its members vary from ideology to profit. A few academic and
governmental monetary authorities have been the most outspoken and
influential supporters of a price increase outspoken because their
claims can be tinted with the respectability of participating in the
debate over improving the international monetary system, influential
because they have been close to or involved in the policy-making
machinery of Europe.
II. Official Attitudes to Proposals for a Gold Price Increase
France
2. France is the only country to take a stand officially and
publicly in support of gold revaluation. President DeGaulle has
been the leading official champion in Europe, indeed in the world,
for the case of returning to the gold standard. He and his supporters
reason that the additional gold reserves gained through a rise in
the official price of gold could be used by the United States and
United Kingdom to pay off existing dollar and sterling liabilities,
thus terminating the gold-exchange standard and permitting a return
to the pure gold standard of pre-World War I vintage. DeGaulle has
found this view well suited to his underlying political goal of
[NLN 04-06/1:2]
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
reducing the worldwide monetary influence exercised by the US.
3. There is considerable difference of opinion on the gold
price issue between the French government and the French central
bank. M. Brunet, Governor of the Banque de France, is known to be
opposed to Gaullist views on gold. However, the opposition of the
Bank is of little consequence in French politics; in matters of
monetary policy, the French central bank is completely captive to
the Ministry of the Economy and Finance and hence to General DeGaulle.
The United Kingdom
4. Hardly in a position to do otherwise because of its
enormous political and financial debt to the US, the British govern-
ment's policy on international monetary questions mirrors that of
the US. The situation is somewhat different in the Bank of England,
however. Its governor, Sir Leslie O'Brien, is an outspoken proponent
of a gold price increase, on the grounds that it would benefit the
international monetary system as a whole and the UK in particular.
Sir Leslie feels that such a price increase would permit accelerated
growth (and attendant inflation) in the UK without immediately
calling forth the balance of payments constraint.
West Germany
5. Both government and central bank in West Germany are solidly
opposed to any suggestion of a gold price increase. The German view
on this issue is expounded with nearly one voice by Karl Schiller
-2-
[NLN 04 - 06/1:3]
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
funds that might accompany a worldwide gold price increase. Moreover,
they reason that the net effect of a price increase would be the
destabilization of the international monetary system as a whole.
Belgium
8. The Belgian central bank is opposed to a price increase,
but for a rather curious reason. With nearly 70% of its reserves
in gold (see Table 1), the National Bank of Belgium would reap a
substantial profit from a price increase but the officials of the
bank are morally certain that their government will find a way to
use this windfall to finance an inflationary fiscal policy. This
fear outweighs the profit motive. The central bank position has a
counterpart in a considerably more lukewarm attitude on the part of
the Belgian government, which nevertheless does not publicly support
a price increase.
The Netherlands
9. The Dutch government is opposed, for the same reasons as
are the German and Italian governments. In the central bank, however,
some ambivalence is developing. The Bank's head, Dr. Zjilstra,
has had a long association with the Bank for International Settlements
(BIS) in Basle. As Chairman of its Board of Directors, he has been
heavily influenced by the long-standing BIS policy of favoring a
gold price rise. He is regarded by other Western central bankers
-4-
[NLN 04 - 06/ 1:5]
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
as a man who tends toward maverick behavior in any case and who is
especially to be watched on the gold price issue.
Other
10. All of the Scandinavian central banks and governments are
solidly opposed to a gold price increase. Most of the other European
governments and central banks also are unsympathetic to plans for
revaluing gold. However, Spain and Portugal may favor a price increase
for monetary gold because of a considerable share of gold within
their reserve holdings.
The Bank for International Settlements
11. Based in Basle, this quasi-official international insti-
tution is well known as supporting a gold price increase. The chief
intellectual force behind this support is Dr. Milton Gilbert, who
is the BIS staff economist and is highly regarded throughout the
West for his wide ranging work. The chief protagonist -- indeed,
propagandist on the BIS staff for a gold price increase is a
bank officer named MacDonald (a British citizen), who is ardently
anti-US. He lobbies extensively, both in the US and in Europe, and
wields considerable influence within the US-European financial
community. On evidence gained from other intelligence sources, we
believe him to be an active and strong opponent of the present US
policy on gold.
-5-
[NLN W 04 - 06/ 1:6] 04
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
Summary of Official Attitudes
12. Despite the prevailing feeling among European monetary
officials that gold must continue to serve a vital function in the
international monetary system for some years to come, most --
excepting the French government, the Bank of England, possibly the
Netherlands Bank, and the BIS agree that an increase in the price
of gold would be undesirable and should be avoided. Fear of inflation
is prevalent among them, and the thoughts that an increase in the
price of gold could lend greater instability to the international
monetary system in the future also lurks in the backs of their minds.
Most officials prefer to maintain the existing international monetary
machinery with necessary increments to world liquidity to be furnished
by the new SDR's and perhaps -- by official purchases of South
Africa's newly mined gold at $35 an ounce. They see the principal
hope for the future of the international monetary system in closer
international cooperation under the old rules. They also generally
believe that a basic weakness in the system now is the chronic US
balance-of-payments deficit.
III. Attitudes in the Private Sector
13. The great majority of Europe's scholars, journalists,
bankers, and businessmen view with disapproval any potential shift
toward gold revaluation. Nevertheless, a few eminent economists
have been outspoken in support of a gold price increase. They include
-6-
[NLN 04 - 06/1:7]
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
such well-known names as professors Roy Harrod of the UK, Michael
Heilperin of Switzerland (actually a naturalized US citizen residing
in Switzerland), and Jacques Rueff of Frence. Rueff is considered
the high priest of the gold school. Perhaps the most active proponent
today outside France for a rise in the official gold price is
Dr. Franz Aschinger, former editor of the Neue Zurcher Zeitung and
presently economic advisor to the Swiss Bank Corporation in Zurich.
He has been a prominent figure among an informal group of economists
and private bankers which meets periodically in Geneva to massage
common views on gold.
14. Few important European financial journals are consistently
outspoken in favor of 8. gold price increase. British journalist
C. Gordon Tether, who writes for the Financial Times, is perhaps the
UK's most prolific protagonist for an increase. It cannot be said,
however, that a gold price increase forms an element of editorial
policy for this publication. The influential London Economist has
made some comment favorable to price revision but has focused its
discussion of international monetary problems on the need for floating
exchange rates. Der Volkswirt in West Germany echoes the views of
the German government in firm opposition to a gold price increase.
Most major European newspapers have not taken a stand regarding gold
revaluation, although the French Le Monde and Figaro have reflected
a favorable attitude.
-7-
[NLN 04-06/1:8 -06/
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
15. The views of private European banks, firms, and citizens
on the question of gold revaluation are mixed. Some private com-
panies and banks in Switzerland and France have invested heavily in
gold. The three large Swiss commercial banks comprising the Zurich
gold market the Union Bank of Switzerland, the Swiss Banking
Corporation, and the Swiss Credit Bank -- are (not remarkably) known
to favor a revaluation of gold. These banks also have been maneuver-
ing successfully into position as South Africa's principal gold
marketing agents. The majority of private banks and companies
throughout the remainder of Europe do not wish a price increase for
gold. Both Dr. Othmar Emminger of the Bundesbank and Dr. Kurt
Richebacher, deputy manager of the Dresdner Bank explain that most
private bankers oppose an increase in the official price of gold
because it would be inflationary and would allow the Americans to
postpone the day when they will reduce their deficit and strengthen
international confidence in the dollar.
16. Popular sentiment favoring an increase in the price of
official gold appears to be strong only in France. French citizens,
who cannot easily forget the many Franc devaluations of the past,
are believed to be hoarding about $4 billion of gold. The middle
class, which represents both the main group of gold hoarders and the
biggest backers of Gaullism, has been a major source of political
pressure to raise the price of gold.
-8-
[NLN 04-06/1:9]
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
17. With the exception of a few ideologues, a large portion
of the French bourgeoisie, and the few banks and businesses that
have gambled heavily on a gold price increase, European private-
sector opinion roughly parallels official opinion in viewing the
idea of a gold price increase as on balance a poor one. The larger
international banks and business firms of Western Europe hold
highly sophisticated economic views. Like the majority of their
counterparts in the US, they tend to form "internationalist" opinions
on international monetary questions. In general, they eschew any
precipitous alterations in the present system. At the same time,
they favor expanding and developing the techniques of international
cooperation to correct faults in the system in unspectacular steps.
Nevertheless, some have swung towards less conservative proposals.
While opinion is almost unanimous against a change to fully flexible
exchange rates, for example, some important European bankers have
publicly supported the proposal for widening the bands within which
exchange rates would be allowed to fluctuate around parity. Others
place great faith in SDR's. The entire group's generally skeptical
attitude towards the notion of a gold price increase is, like the
attitude of Karl Blessing, based primarily on a deep-seated fear
of its possible inflationary consequences.
OER/CIA
26 February 1969
-9-
[NIN 04-06/1:10]
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
SECRET
Table 1
INTERNATIONAL RESERVE HOLDINGS
AT THE END OF 1968
Total
(Billions of US$ and Percentage)
Reserves
Gold
Percent
France
4.20
3.88
92
Spain
1.06
.79
75
Netherlands
2.46
1.70
69
Belgium
2.19
1.52
69
Switzerland
3.93
2.62
67
Portugal
1.36
.86
63
United Kingdom
2.42
1.49
62
Italy
5.34
2.92
55
Austria
1.51
.71
47
West Germany
9.93
4.54
46
Sweden
.82
.23
28
Denmark
.45
.11
24
Norway
.61
.02
3
SECRET
(NLN 04-06/1:11]
Reproduced at the Richard Nixon Presidential Library and Museum
bitin
5320
MEMORANDUM
THE WHITE HOUSE
ACTION
WASHINGTON
December 9, 1969
MEMORANDUM FOR DR. KISSINGER
OK Let's take
FROM:
C. Fred Bergsten
Bruns aphin
SUBJECT: Urgent Need for Presidential Decision on Balance of Payments
Program for 1970
DEC 11 1969
Issue
The President approved two contradictory options for the 1970
investment control program (Tab A). The issue is now quite urgent
because the hundreds of companies covered by the program are already
making their plans for next year; Commerce and Treasury are both
agitating daily for a decision. I urge you to take up the matter orally
with the President as soon as possible to reconcile the inconsistencies.
Option 1 (your recommendation in Tab A)
1. Increase level of foreign investment exempted from control for
each firm from $1 million to $3 million.
2. Exempt from control up to an additional $2 million per firm
for investment in LDCs, on a case-by-case basis. (This would meet
the President's pledge to modify the controls to facilitate private invest-
ment in the LDCs, which he made in the Latin America speech.)
3. Recommended by Secretary Kennedy, with the concurrence or
acquiescence of all relevant parties. The Secretary worked this out as
a compromise between Secretary Stans' desire for greater liberalization
and Arthur Burns' desire for no liberalization at this time.
Option 2 (cited as "fully acceptable" to you in Tab A).
1. Increase level of foreign investment exempted from control
from $1 million to $5 million for investment in LDCs only, as a general
rule (not case-by-case).
2. Pros:
-- Would redeem President's pledge to promote investment in
LDCs more than Option 1.
-- Would hurt U.S. balance of payments less.
Reproduced at the Richard Nixon Presidential Library and Museum
- 2 -
3. Con: less popular with U.S. business community, which expects
liberalization of investment to all areas.
4. Strongly supported by Arthur Burns and Peter Flanigan. (Tab B)
Evaluation
Either approach is fully acceptable from a foreign policy standpoint.
Option 2 is more clearly directed toward the LDCs. It also runs less
risk of later problems with the Europeans, if our balance of payments
turns sour and requires drastic U.S. action, because it will hurt our
balance of payments less; we would then be less susceptible to charges
of having induced a crisis ourselves.
The main virtue of Option 1 is bureaucratic: Secretary Kennedy
worked it out in a series of lengthy sessions with Stans and Burns.
You favored it in your earlier memo. And Stans will be even more
unhappy if Option 2 is chosen.
RECOMMENDATION:
That you recommend to the President that he choose Option 2 -- the
Burns proposal, strongly supported by Flanigan, that we liberalize for
investment in LDCs only.
Reproduced at the Richard Nixon Presidential Library and Museum
A
Reproduced at the Richard Nixon Presidential Library and Museum
#4524 personcy
DUM
A
THE WHITE HOUSE
ACTION
WASHINGTON
November 28, 1969
.FIDENTIAL
MEMORANDUM FOR THE PRESIDENT
FROM:
Henry A. Kissinger
HK
SUBJECT: Balance of Payments Program for 1970
At Tab A are recommendations from Secretary Kennedy for next year's
balance of payments control programs on foreign investment by U.S.
companies and banks. An early announcement is needed to permit the
companies and banks to develop their own plans in light of the new
program. I have checked this memorandum with Arthur Burns.
Level of Restraint
Secretary Kennedy, with the concurrence or acquiescence of all relevant
parties, recommends a modest liberalization of the present controls on
foreign investment by U.S. firms:
1.
An increase in the level of foreign investment for each firm exempted
from the controls, from $1 million to $3 million.
2.
Exemption from control of an additional $2 million per firm for
investment in LDCs.
These steps represent a compromise between the preferences of some for
more liberalization and the preferences of others for less. They would:
⑉⑉ Be a next move toward implementing your April 4 call for
"ultimate dismantling of the network of direct controls. "
-- Eliminate about 350 companies from coverage by the Commerce
program, which would be popular politically.
⑉⑉ Risk an increase in capital outflows of up to $600 million. (The
net effect on our balance of payments would be decidedly smaller
because any additional capital outflows would generate additional
U.S. exports.)
N- Risk foreign policy problems, if our balance of payments turns sour
enough next year to require us to take tough unilateral actions such
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
TIAL
- 2 -
suspension of the gold convertibility of the dollar ⑉⑈ since we
ght be blamed for creating the problem ourselves by relaxing our
fensive measures.
ther options were considered:
Tightening of the cohtrols (This would signal a new policy direction
the Administration, contrary to our basic philosophy of freer trade
payments. )
No change from 1969. [This would disappoint some businessmen but
would reduce the risks cited above. It was initially preferred by the Budget
Bureau and the Federal Reserve. It is strongly opposed by CEA (Tab B). ]
3.
Liberalization on investment in LDCs only. (This is strongly supported
by Arthur Burns, who would increase the level of investment exempt from
control to $5 million for LDCs only.)
4.
Slightly greater liberalization than finally proposed by Secretary
Kennedy, by eliminating the present program's preferential treatment
from LDCs in addition to the two steps proposed by Secretary Kennedy.
(Its gross payments effect of up to $900 million would run greater real and
psychological risks but would be better received by some businessmen. It
is preferred by Secretary Stans.)
5.
A large reduction or complete elimination of the controls. (This was
deemed by all as too risky in view of next year's unfavorable balance of
payments outlook.)
Treatment of LDCs, including Latin America
In your speech on Latin America, you said that, "We are examining ways to
modify our direct investment controls in order to help meet the investment
requirements of developing nations in Latin America and elsewhere."
Secretary Kennedy's proposal would redeem that pledge by the increase in
the overall restraint level and the preferential "minimum allowable" for
investment in LDCs. Arthur Burns' proposal would do so to an even greater
extent, by providing a greater degree of LDC preference and less cumbersome
rules to implement it.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
- 3 -
Tightening of the controls or the "no change" option would clearly not
redeem your pledge. Neither would Commerce's proposal, which would
eliminate the favored treatment for LDCs under the present program.
RECOMMENDATION:
That you approve the proposal of Secretary Kennedy, 'agreed or acquiesced
in by Arthur Burns, Secretary Stans, and all other relevant parties, for
modest liberalization in 1970 of our controls on capital outflows by U.S.
corporations and banks.
Approve an
by Arthur Burns. (I would find this fully acceptable.)
Prefer liberalization for investment in LDCs only, as preferred PA
Prefer no liberalization, as initially proposed by the Federal
Reserve and the Budget Bureau.
DEC I 1969
Prefer slightly greater liberalization as initially proposed by
Commerce.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
December 3, 1969
CONFIDENTIAL
TO:
THE STAFF SECRETARY
FROM:
PETER FLANIGAN
RE:
Log 2310
Our balance of payments has been in deficit for a decade.
During the recent election campaign the President strongly
criticized the Democratic administrations for not having
taken steps to cure this serious problem. Since we have
been in office we have already had a modest relaxation of
foreign investment control. In the first year of this
Administration the balance of payments deficit has risen
dramatically to a $10 billion deficit on a liquidity
basis, two and one-half times the previous peak figure.
The outlook for 1970 is not encouraging.
Our apparent unwillingness to take strong action in this
area as opposed to the strong action taken in other areas,
such as monetary and fiscal policy, raises questions in
the US and abroad as to the seriousness with which we
regard this problem.
Based on the above, I strongly recommend liberalization
for investment in LDC only (set forth as No. 3 on page 2
of Dr. Kissinger's memo).
Attachment
Reproduced at the Richard Nixon Presidential Library and Museum
B
Reproduced at the Richard Nixon Presidential Library and Museum
Bergaten
B
THE WHITE house
5320
WASHINGTON
December 4, 1969
MEMORANDUM FOR DR. KISSINGER
PETER FLANIGAN and N
FROM:
RE:
Proposal for Relaxation of Foreign Investment
Controls
The President approved both the Kennedy proposal
and the Burns proposal regarding relaxation. Based on a
memorandum submitted that to the President with a copy to you,
I strongly urge. when you ask the President for clarifica-
tion you guide him towards the Burns proposal.
Beyden please - efool
my verolating in
brief memo- due
morning Due 9
Reproduced at the Richard Nixon Presidential Library and Museum
THE WHITE Hous
WASHINGTON
FICE
TO: AL Haig
FROM:
JOHN BROWN
FYI
12 1969
COMMENT The Flanigan DEC
Came in after the TT had taken
action on HAK's recommendations.
However since the TI approved
two different counses of action
this issue may still be alive.
Flanigan wants you to . know
that he feels strongly on his
Reproduced at the Richard Nixon Presidential son, Library and Museum
NATIONAL SECURITY COUNCIL
December 12, 1969
MR. BERGSTEN:
This folder is being returned to you
for you to note Brown's note to HAIG,
and Flanigan memo to Staff Secretary.
Thank you,
NSC SECRETARIAT
care
Reproduced at the Richard Nixon Presidential Library and Museum
4524
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
December 3, 1969
CONFIDENTIAL
TO:
THE STAFF SECRETARY
FROM:
PETER FLANIGAN
RE:
Log 2310
Our balance of payments has been in deficit for a decade.
During the recent election campaign the President strongly
criticized the Democratic administrations for not having
taken steps to cure this serious problem. Since we have
been in office we have already had a modest relaxation of
foreign investment control. In the first year of this
Administration the balance of payments deficit has risen
dramatically to a $10 billion deficit on a liquidity
basis, two and one-half times the previous peak figure.
The outlook for 1970 is not encouraging.
Our apparent unwillingness to take strong action in this
area as opposed to the strong action taken in other areas,
such as monetary and fiscal policy, raises questions in
the US and abroad as to the seriousness with which we
regard this problem.
Based on the above, I strongly recommend liberalization
for investment in LDC only (set forth as No. 3 on page 2
of Dr. Kissinger's memo).
Attachment
Reproduced at the Richard Nixon Presidential Library and Museum
4127
MEMORANDUM
relidy
THE WHITE HOUSE
ACTION
WASHINGTON
November 28, 1969
CONFIDENTIAL
MEMORANDUM FOR THE PRESIDENT
FROM:
Henry A. Kissinger
K
SUBJECT: Balance of Payments Program for 1970
At Tab A are recommendations from Secretary Kennedy for next year's
balance of payments control programs on foreign investment by U.S.
companies and banks. An early announcement is needed to permit the
companies and banks to develop their own plans in light of the new
program. I have checked this memorandum with Arthur Burns.
Level of Restraint
Secretary Kennedy, with the concurrence or acquiescence of all relevant
parties, recommends a modest liberalization of the present controls on
foreign investment by U.S. firms:
1.
An increase in the level of foreign investment for each firm exempted
from the controls, from $1 million to $3 million.
2.
Exemption from control of an additional $2 million per firm for
investment in LDCs.
These steps represent a compromise between the preferences of some for
more liberalization and the preferences of others for less. They would:
-- Be a next move toward implementing your April 4 call for
"ultimate dismantling of the network of direct controls. 11
-- Eliminate about 350 companies from coverage by the Commerce
program, which would be popular politically.
-- Risk an increase in capital outflows of up to $600 million. (The
net effect on our balance of payments would be decidedly smaller
because any additional capital outflows would generate additional
U.S. exports.)
-- Risk foreign policy problems, if our balance of payments turns sour
enough next year to require us to take tough unilateral actions -- such
CONFIDENTIAL
Historical File
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
- 2 -
as suspension of the gold convertibility of the dollar -- since we
might be blamed for creating the problem ourselves by relaxing our
defensive measures.
Five other options were considered:
1.
Tightening of the controls (This would signal a new policy direction
for the Administration, contrary to our basic philosophy of freer trade
and payments.)
2.
No change from 1969. [This would disappoint some businessmen but
would reduce the risks cited-above. It was initially preferred by the Budget
Bureau and the Federal Reserve. It is strongly opposed by CEA (Tab B).
3.
Liberalization on investment in LDCs only. (This is strongly supported
by Arthur Burns, who would increase the level of investment exempt from
control to $5 million for LDCs only.)
4.
Slightly greater liberalization than finally proposed by Secretary
Kennedy, by eliminating the present program's preferential treatment
from LDCs in addition to the two steps proposed by Secretary Kennedy.
(Its gross payments effect of up to $900 million would run greater real and
psychological risks but would be better received by some businessmen. It
is preferred by Secretary Stans.)
5.
A large reduction or complete elimination of the controls. (This was
deemed by all as too risky in view of next year's unfavorable balance of
payments outlook.)
Treatment of LDCs, including Latin America
In your speech on Latin America, you said that, "We are examining ways to
modify our direct investment controls in order to help meet the investment
requirements of developing nations in Latin America and elsewhere. "
Secretary Kennedy's proposal would redeem that pledge by the increase in
the overall restraint level and the preferential "minimum allowable" for
investment in LDCs. Arthur Burns' proposal would do so to an even greater
extent, by providing a greater degree of LDC preference and less cumbersome
rules to implement it.
CONFIDENTIAL
Historical File
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
- 3 -
Tightening of the controls or the "no change" option would clearly not
redeem your pledge. Neither would Commerce's proposal, which would
eliminate the favored treatment for LDCs under the present program.
RECOMMENDATION
That you approve the proposal of Secretary Kennedy, agreed or acquiesced
in by Arthur Burns, Secretary Stans, and all other relevant parties, for
modest liberalization in 1970 of our controls on capital outflows by U.S.
corporations and banks.
Approve hr
Prefer liberalization for investment in LDCs only, as preferred
by Arthur Burns. (I would find this fully acceptable.)
Pm
Prefer no liberalization, as initially proposed by the Federal
Reserve and the Budget Bureau.
Prefer slightly greater liberalization as initially proposed by
Commerce.
Gar # action 5320
CONFIDENTIAL
Historical File
Reproduced at the Richard Nixon Presidential Library and Museum
NATIONAL SECURITY COUNCIL
November 26, 1969
MEMORANDUM FOR DR. KISSINGER
confussing
FROM:
C. Fred Bergsten
At Tab I per your instruction is a revised
memorandum for the President on the control
programs which incorporates your earlier
sing lifed. He paid
instructions to simplify it and to include the
specific steps proposed by Secretary Kennedy.
hh they memo to the it Pres
Fud: HAK would
Return to Berysten:
T2
Tab
A
Reproduced at the Richard Nixon Presidential Library and Museum
4524
CONFIDENTIAL
November 24, 1969
MEMORANDUM FOR DR. KISSINGER
FROM:
C. Fred Bergsten
SUBJECT: Balance of Payments
Program for 1970
At Tab I, per your instruction, is a
revised memorandum for the President
on the control programs.
RECOMMENDATION:
That you sign the memorandum for the
President.
CFB:mm
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
THE WHITE HOUSE
WASHINGTON
this Churld so
08 Benotin
fn prompt
Cutum
S
W
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
THE SECRETARY OF THE TREASURY
washington
NOV 19 1969
MEMORANDUM FOR THE PRESIDENT
Subject: Recommendations Concerning 1970 Balance of
Payments Programs -- Controls on Capital Outflows
To permit time for orderly business planning for next
year, our intentions with respect to the restraints on
foreign direct investment and bank loans, administered
by the Department of Commerce and the Federal Reserve,
respectively, should be announced shortly. Following your
approval, a coordinated Treasury-Commerce-Federal Reserve
announcement will be prepared. An attachment to this memo-
randum outlines the details of the proposed moves.
The proposed changes in the Federal Reserve program
have the concurrence of all interested agencies. However,
some differences in approach toward the controls on direct
investment, administered by the Commerce Department, have
not been fully reconciled. The main alternatives are set
forth in this memorandum, with a proposed compromise that
seems to me to best reconcile the conflicting considerations.
This would be supported as "second best" by other agencies.
Essentially, the proposed moves represent limited steps
toward simplification of the existing programs and some very
modest liberalization to achieve specific purposes. There
is broad agreement that our balance of payments situation
rules out more dramatic action at this time. Indeed, except
for the desirability of announcing now our intentions for
next year, the question of liberalization would not arise at
this time.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
- 2 -
We hope to follow this announcement with some early
indication of our longer-term programs for improving our
trade performance, emphasizing improved export credit
facilities and some possible changes in tax arrangements.
These are under intensive study now, and we will be report-
ing to you shortly on these programs in the light of the
entire balance of payments outlook.
Balance of Payments Background
Decisions on the direct investment and bank loan
restraint programs must be made against the background of
a seriously unfavorable balance of payment performance
and outlook. Third quarter figures, just published, show
a deficit on the conventional "liquidity balance" of $2.5
billion. This brings the cumulative deficit for the first
nine months to $8.1 billion. Despite some anticipated
improvement in the fourth quarter, our "liquidity" deficit
for the year as a whole could total as much as $10 billion,
two and one-half times the previous peak in 1959 and 1960.
For technical reasons, these figures somewhat overstate --
by perhaps $2 - $3 billion -- the magnitude of the underlying
deficit. More importantly, the extreme tightness of money
in the U. s., by inducing unprecedented amounts of bank
borrowing abroad, has tended to keep the dollar relatively
scarce in foreign markets despite the underlying deficit.
This short-term borrowing does not enter into the calcula-
tion of the commonly-used liquidity deficit, but it is
reflected in the alternate "official settlements" balance.
This latter balance shows a cumulative surplus of $1.4 billion
over the first nine months. In effect, tight money has
protected our payments position and the international strength
of the dollar through this period.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
- 3 -
This situation may now be changing. In fact, we are
currently showing some deficit on the official settlements
basis as well as a continuing large deficit on the liquidity
basis. Our staff projections suggest that, despite limited
improvements on the trade account, the liquidity deficit
may total $4 - $5 billion in 1970. There is a substantial
danger that repayment of some of our bank borrowings from
abroad may produce a considerably larger official settlements
deficit. Such repayments will depend to a considerable extent
on whether credit eases in the U. S. relative to abroad.
At present, international financial markets are excep-
tionally calm, reflecting the successful resolution of the
mark crisis, the indications of renewed strength in sterling,
and the glow of the SDR agreement. But, in the light of our
balance of payments outlook, we must anticipate that the
dollar -- in contrast to the past two years -- will be under
strong pressure in the exchange markets. Already, our major
financial partners in Europe are aware of this prospect and
have begun to raise questions about our ability and willingness
to finance our prospective deficit.
Role of Capital Restraint Programs
The liberalization of the Commerce and Federal Reserve
restraint programs you approved last Spring has not been an
important factor in our poor balance of payments performance.
As expected, with money tight, many banks and corporations
are not utilizing their full "allowables." As money eases,
this situation will change, and we must anticipate that com-
panies will operate closer to their ceilings in 1970. Thus,
even with no further liberalization, additional direct invest-
ment and bank loan outflows can be anticipated in 1970 in a
general magnitude of, perhaps, $3/4 billion, with somewhat
more than half accounted for by direct investment. Further
liberalization will tend to raise the projected deficit above
the range cited above.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
- 4 -
The psychological and foreign policy aspects of liberali-
zation must also be considered. Financial officials of
European creditor countries, some of which resent heavy U. S.
investment in their economies in any event, will tend to
consider liberalization unwarranted in the light of our balance
of payments outlook. Carried far enough, they might read it
as an aggressive act -- a precursor of a de jure suspension
of gold payments or even devaluation. Monetary and balance of
payments cooperation on other fronts would thus be made much
more difficult. On the other hand, some capital-short countries
(particularly some LDC's) would welcome liberalization, at least
to the extent it is directed toward their countries.
Of course, both banks and corporations would also welcome
some liberalization and simplification. However, radical
liberalization or abandonment of the existing programs has not
been pressed in recognition of the serious balance of payments
situation.
Major Options
1. Tightening Controls by Reducing Ceilings
As a practical matter, only limited tightening
would be possible without jeopardizing our ability to
maintain the minimum of business cooperation needed
to administer the programs effectively. Thus, sizable
reduction of the projected deficit (say, more than
about $500 million) through this means is not practi-
cable. Within that limitation, tightening could be a
gesture toward indicating our concern over the balance
of payments. On the other hand, this would be a back-
ward step in terms of our basic objective of maximizing
freedom of trade and payments and would signal a new
policy direction for the Administration. Given this
disadvantage and the limited substantive benefits,
this course has no support among interested agencies.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
- 5 -
2. "Hold the Line" -- No Important Changes
This course would not raise the serious adminis-
trative and political problems inherent in tightening.
It would be readily defensible in terms of the balance
of payments outlook and facilitate our financial
relationship with other leading countries. The dis-
advantages are that it might raise some questions as
to the degree of your commitment to liberalization,
would forego any significant simplification, and would
be inconsistent with the objectives of providing some
help for export credits or LDC's.
This is a practicable course of action, initially
preferred by the Federal Reserve and the Bureau of the
Budget, and strongly supported by Arthur Burns.
3. Moderate Liberalization
Within the basic framework of the present program,
further liberalization could be undertaken to achieve
substantial simplification, some benefits for less
developed countries, and fresh incentives to export
credits. The estimated balance of payments cost would
be roughly $700 - $900 million (on top of the added
outflows anticipated without any program liberalization),
assuming only moderate easing of domestic credit condi-
tions next year. This cost would be about evenly divided
between additional bank loans and direct investment.
This course would underscore your commitment to
liberalization. There will be clear gains in adminis-
trative simplicity; e.g., the number of companies
involved in detailed reporting could be reduced by
40 percent to less than 350. To some extent, the added
capital outflows will be employed to assist our export
effort, tending to offset a portion of the cost.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
- 6 -
The major disadvantage is that it will aggravate
our already serious balance of payments problem. The
psychological repercussions in Europe will be adverse.
(More critical factors affecting the balance of pay-
ments situation and confidence in the dollar will be
the extent to which the domestic credit situation
eases and our progress against inflation.)
The attached memorandum by Secretary Stans suggests
this course, which would also be supported by the CEA.
4. Large Relaxation or Elimination
This option would move directly toward the objec-
tive of freedom from controls, but there is substantial
danger that it would be counter-productive. It would
release so large a volume of funds abroad as to signi-
ficantly jeopardize efforts to maintain international
financial stability. Foreign reaction would be adverse,
substantially limiting our influence and ability to
exert leadership in the direction of needed reforms.
This course has no substantial support within the
Administration.
A Desirable Compromise Proposal
In my opinion, the conflicting considerations surround-
ing this matter can best be resolved by limited steps to
combine some simplification with two specific purposes:
(1) greater freedom for investment in LDC's and (2) greater
priority for export credits. This could be achieved by
accepting certain Federal Reserve proposals concerning export
credits for banks (described in detail in the attachment) and
increasing from the present $1 million to $3 million the mini-
mum amounts a nonfinancial corporation may invest abroad, with
a special $2 million bonus when funds are directed to LDC's.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
- 7 -
This falls short of Secretary Stans' desire to eliminate
the three schedules now controlling investment by area.
Elimination of these schedules would cost as much as $300
million and appear to work at cross-purposes with the desire
to provide special priorities for investment in LDC's.
The compromise proposal might entail a gross balance of
payments cost of $500 - $600 million. About $300 million of
this estimated cost would be incurred to facilitate export
credits and thus should help our export effort. Some $250
million of the cost would be in the direct investment program
and would tend to be directed to the LDC's. I believe the
compromise fairly balances the competing considerations,
foreign and domestic. While it is not the preferred course
of action of other agencies, it is a practical course that
can be supported by all.
RECOMMENDATION: That you approve the "compromise proposal,"
for prompt release at or before the session
with businessmen this Friday.
Approve:
Disapprove:
Damidmicemedy
Attachments
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
ATTACHMENT
THE DIRECT INVESTMENT PROGRAM FOR 1970
Secretary Stans' proposal raises the ceiling for 1970 by
$550 million to $3.90 billion and involves the following changes:
(A) Raise the minimum investment allowable for each
company from $1 million to $3 million.
-- reduces the number of companies involved in
quarterly reporting by almost 40 percent to
less than 350;
-- assists small to medium companies or those
without historical experience.
(B) Eliminate the arbitrary division of the world into
three schedules by going to a worldwide program
for companies using historical and earnings allowables.
These historical and earnings allowables would be
calculated as done at present but would be applied
on a worldwide basis. Carry-forwards of unused
schedular allowables into 1970 could also be applied
on a worldwide basis.
-- represents a major simplification of the complex
program;
-- appropriate step for the ultimate elimination of
the program.
(C) Offer up to $2.0 million additional allowables on a
matching basis to companies using the minimum allowable
and investing in the LDC's (Schedule A).
-- gives real benefit to LDC's who may feel elimination
of the schedules was a removal of preferential
treatment;
-- to be administered through the specific authorization
process to avoid complication of the Regulations and
to maintain control of the amount of the relief.
The alternative proposal simply foregoes step (B), thus saving
more than $200 million, leaving the new target at $3.7 billion.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
ATTACHMENT
THE FEDERAL RESERVE PROGRAM FOR 1970
The Board of Governors proposes that the 1970 Federal
Reserve guidelines for restraints on credits by U. S.
financial institutions to foreigners be revised principally
to insure that more emphasis is given to credits for
financing U. S. exports than to credits for other purposes.
As compared with the present ceiling of $10.1 billion
for commercial banks, of which $9.1 billion is currently
utilized, there would be two ceilings for each bank. A new
Export Term Loan Ceiling will be applicable to all export
term loans financing goods exported from the U. S. after
October 31, 1969. The amount of this ceiling for partici-
pating banks, as a group, will be $1.3 billion. A General
Ceiling, unchanged from the present ceiling of $10.1 billion,
will be applicable to all other bank loans to foreigners.
However, as outstanding export term loans under the General
Ceiling are repaid, the level of this ceiling will be reduced
accordingly but the Export Term Loan Ceiling will be increased
by the same amount.
Export credits guaranteed or participated in by the
Export-Import Bank, guaranteed by the Department of Defense
or insured by the Foreign Credit Insurance Corporation will
continue to be exempt from the ceiling.
Minor changes will be made in the guidelines applying to
nonbank financial institutions, such as insurance companies
and pension funds. These changes will also provide some new
leeway for export term loans.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
DEPARTMENT OF COMMERCE
IE SECRETARY OF COMMERCE
UNITED STATES OF AMERICA
Washington, D.C. 20230
CONFIDENTIAL
MEMORANDUM FOR THE PRESIDENT
Subject: Proposed 1970 Program on Foreign Direct Investments
I propose that we adopt the moderate liberalization and substantial
simplification of the Foreign Direct Investment Program as described
in Secretary Kennedy's memorandum. This proposal raises the target
ceiling by $550 million from $3.35 billion to $3.90 billion, and
involves the following changes:
A. Raise the minimum investment allowable for each company
from $1 million to $3 million. This will reduce from
650 to 350 the number of companies required to report
quarterly.
B. Eliminate the arbitrary division of the world into three
schedules by going to a worldwide program. The historical
and earnings allowables would be calculated as done at
present to continue to reward companies that have historically
invested in the LDCs, but would be applied on a worldwide
basis. Carryforwards of unused schedular allowables into
1970 could also be applied on a worldwide basis.
C. Offer up to $2.0 million additional allowables on a matching
basis to companies using the minimum allowable and invest-
ing in the LDCs (Schedule A).
The major reasons for this modest liberalization and simplification
of the program are as follows:
1. There is general agreement that restrictions on capital are
counter-productive in the long-run. If the FDIP is not to become a
permanent program, there must be steady progress toward the goal of
ultimate elimination.
2. You have announced that some liberalization will be forthcoming
with regard to investment in the LDCs.
3. In Commerce we have continued to say that we are opposed to
controls of this nature and, in reliance upon the prevailing attitude
in the Administration, have given the impression that the program
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
-2-
would be relaxed for 1970. As a result, business and financial
circles are expecting some liberalization of the program to be announced
shortly.
4. In view of the growth of foreign earnings, making no change
for 1970 is effectively a tightening of the program for those companies
electing the historical allowable.
5. The relatively small dollar differential between the proposed
program and the present program will not have any significant impact
on the balance of payments next year.
6. To announce no change when some liberalization was expected
here and overseas could telegraph uncertainty as to the strength of the
dollar on the part of the Administration itself.
7. A modest change in this program should help reduce some of
the unhappiness among our business friends which results from the tax
bill, antitrust actions, etc.
8. There is no real evidence that foreign bankers would look with
disfavor on a liberalization as mild as that proposed. Foreign govern-
ments and foreign businessmen have expressed to us greater interest in
more investments by U.S. companies.
9. The changes proposed are mostly for simplification. The require-
ment for repatriation of foreign earnings is unchanged.
To help insure that companies react as desired in the fourth quarter
and do not make needless outflows due to the uncertainty of the 1970
program, a timely decision is important. Announcement of the program
prior to our meeting with business leaders on November 21 would be
highly desirable.
Manrice H. Stans
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
THE WHITE HOUSE
ACTION MEMORANDUM
WASHINGTON
LOG NO.: 2066
4524
Date: Tues. November 11, 1969
Time:
4:30 p.m.
FOR ACTION:
Dr. Kissinger
CC (for information):
FROM THE STAFF SECRETARY
DUE: Date:
Fri. November 14, 1969
Time:
2:00 P. M.
SUBJECT:
Dr. McCracken's memorandum recommending a further liberalization
of exchange controls over foreign investment.
ACTION REQUESTED:
For Necessary Action
X For Your Recommendations
Prepare Agenda and Brief
Draft Reply
For Your Comments
Draft Remarks
REMARKS:
Please review the attached memorandum and submit your
recommendations in coordination with the appropriate
involved agencies.
PLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.
If you have any questions or if you anticipate a
BDG
delay in submitting the required material, please
K. R. COLE, JR.
telephone the Staff Secretary immediately.
For the President
Reproduced at the Richard Nixon Presidential Library and Museum
Tab
B
Reproduced at the Richard Nixon Presidential Library and Museum
THE CHAIRMAN OF THE
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON
November 11, 1969
MEMORANDUM FOR THE PRESIDENT
Subject: Further Liberalization of Exchange Controls over
Foreign Investment
Within the next few days the shape of our two principal
exchange control programs for 1970 has to be determined.
These are the Foreign Direct Investment Program, operated
by Commerce, and the Voluntary Credit Restraint Program
(for banks) operated by the Federal Reserve System. A
small relaxation of the Direct Investment Program in April
was among the first actions of this Administration in the
international monetary field.
Maintaining the momentum towards our goal of a more
free and open economy, both domestically and internationally,
should itself be a primary objective of economic policy for us.
While we must be cognizant of the effects of these actions
on our external payments, and must not take disruptive
actions, we must also keep making some progress toward a
more liberal international economy. The outlook for our
balance of payments is not rosy enough to permit complete
abandonment of these programs, but neither is it SO bad
that we cannot do anything at all. We want to keep the dollar
strong, but our objectives are more fundamental than to
preserve the appearance of strength through direct controls.
Our leadership in international financial matters requires us
to set an example of the liberal policies which we are urging
upon other countries (in our interest as well as theirs).
The Direct Investment Program has also been unpopular
with our own business community, whose increasingly inter-
national orientation has become a powerful factor in preventing
Reproduced at the Richard Nixon Presidential Library and Museum
2
a new isolationism from emerging. In my opinion further
progress toward liberalization is desirable in itself, and
worth the risk of a small loss on the balance of payments.
I urge, therefore, that a further modest step be taken
soon. This could be either the elimination of the present
differentiation according to which schedule the foreign nation
is in, or it could take the form of raising the minimum not
subject to control. Since the Secretary of Commerce must
administer these, I would be strongly influenced by his
preference here.
Paul W. McCracken
ЫМ
C/I
00
Reproduced at the Richard Nixon Presidential Library and Museum
Revised copy submitted to Kissinger
on November 26 (last revision) under
Log No. 4524. Also attached is
Treasury's revised memo dated 11/19/69
Ruth:
Think this should go
The files with notation,
THE SECRETARY OF THE TREASURY
WASHINGTON
NOV 5
1969
CONFIDENTIAL
MEMORANDUM FOR THE PRESIDENT
Subject: Recommendations Concerning 1970 Balance-of-
Payments Programs--Controls on Capital Outflows
To permit time for orderly business planning for next
year, our intentions with respect to the restraints on
foreign direct investment and bank loans, administered
by the Department of Commerce and the Federal Reserve,
respectively, should be announced shortly. With your
approval, a coordinated Treasury-Commerce-Federal Reserve
announcement is planned for Monday, November 10. An
attachment to this memorandum outlines the substance of
the recommended further liberalization and simplification.
These recommendations have been shaped in detail by
Secretary Stans and the Federal Reserve Board, and have
been discussed and concurred in by other interested agencies
including State, the Council of Economic Advisers, Budget,
and the Export-Import Bank.
Essentially, the proposed moves represent a limited
but useful step toward the dismantling of these controls.
Our balance-of-payments situation appears to rule out more
dramatic action at this time. Indeed, except for the
desirability of announcing now our intentions for next
year, the question of liberalization would not arise at
this time.
We hope to follow this announcement with some early
indication of our longer-term programs for improving our
trade performance, emphasizing improved export credit
facilities and some possible changes in tax arrangements.
These are under intensive study now.
Balance-of-Payments Background
Decisions on the direct investment and bank loan
restraint programs must be made against the background
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of a seriously unfavorable balance-of-payments performance
and outlook. Third quarter figures, to be published in
the middle of this month, show a deficit on the conventional
"liquidity balance" of $2.5 billion. This brings the
cumulative deficit for the first nine months to $8.1
billion. Despite some anticipated improvement in the
fourth quarter, our "liquidity" deficit for the year as
a whole could well total $10 billion, two and one-half
times the previous peak in 1959 and 1960.
For technical reasons, these figures somewhat over-
state--by perhaps $2-$3 billion--the magnitude of the
underlying deficit. More importantly, the extreme tight-
ness of money in the U. S., by inducing unprecedented
amounts of bank borrowing abroad, has tended to keep the
dollar relatively scarce in foreign markets despite the
underlying deficit. This short-term borrowing does not
enter into the calculation of the commonly-used liquidity
deficit, but it is reflected in the alternate "official
settlements" balance. This latter balance shows a cumu-
lative surplus of $1.4 billion over the first nine months.
In effect, tight money has protected our payments position
and the international strength of the dollar through this
period.
This situation may now be changing. In fact, we are
currently showing some deficit on the official settlements
basis as well as a continuing large deficit on the liquidity
basis. Our staff projections suggest that, despite limited
improvements on the trade account, the liquidity deficit
may total $4-$5 billion in 1970. There is a substantial
danger that repayment of some of our bank borrowings from
abroad may produce an even larger official settlements
deficit. Such repayments will depend to a considerable
extent on whether credit eases in the U. S. relative to
abroad.
In the light of this outlook, we must anticipate that
the dollar--in contrast to the past two years--will be
under strong pressure in the exchange markets. Already,
our major financial partners in Europe are aware of this
prospect, and have begun to raise questions about our
ability and willingness to finance our prospective deficit.
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Role of Capital Restraint Programs
The liberalization of the Commerce and Federal Reserve
restraint programs you approved last spring has not been
an important factor in our poor balance-of-payments per-
formance. As expected, with money tight, many banks and
corporations are not utilizing their full "allowables."
As money eases, this situation will change, and we must
anticipate that companies will operate closer to their
ceilings in 1970. Thus, even with no further liberalization,
additional direct investment and bank loan outflows can be
anticipated in 1970 in a general magnitude of, perhaps,
$3/4 billion. Further liberalization will tend to raise
the projected deficit above the range cited above.
The psychological and foreign policy aspects of
liberalization must also be considered. European creditor
countries, some of which resent heavy U.S. investment in
their economies in any event, will tend to consider liber-
alization unwarranted in the light of our balance-of-payments
outlook. Carried far enough, they might read it as an
aggressive act--a precursor of a de jure suspension of gold
payments or even devaluation. Monetary and balance-of-
payments cooperation on other fronts would thus be made
much more difficult. On the other hand, some capital-
short countries might welcome liberalization, particularly
if it is directed toward their countries.
Of course, both banks and corporations would welcome
some liberalization and simplification. However, radical
liberalization or abandonment of the existing programs
has not been pressed in recognition of the serious balance-
of-payments situation.
Major Options
1. Tightening Controls by Reducing Ceilings
As a practical matter, only limited tightening
would be possible without jeopardizing our ability
to maintain the minimum of business cooperation needed
to administer the programs effectively. Thus, sub-
stantial reduction of the projected deficit (more
than about $500 million) through this means is not
practicable. Within that limitation, tightening
could be a gesture toward indicating our concern
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over the balance of payments. On the other hand,
this would be a backward step in terms of our basic
objective of maximizing freedom of trade and payments,
and would signal a new policy direction for the
Administration. Given this disadvantage and the
limited substantive benefits, this course has no
support among interested agencies.
2. "Hold the Line"
Limited changes to simplify the administration
or to facilitate export credits could be undertaken
within the framework of essentially unchanged ceilings.
This course would not raise the serious adminis-
trative and political problems inherent in tightening.
It would be readily defensible in terms of the balance-
of-payments outlook, and facilitate our financial
relationships with other leading countries. The dis-
advantages are that it would raise some questions as
to the degree of your commitment to liberalization,
and prevent any meaningful gesture towards the desires
of less developed countries for liberalization.
This is a practicable course of action, preferred
by the Federal Reserve and the Bureau of the Budget.
3. Moderate Liberalization
Within the basic framework of the present program,
further liberalization could be undertaken to achieve
substantial simplification, some benefits for less
developed countries, and fresh incentives to export
credits. The estimated balance-of-payments cost would
be roughly $700-$900 million (on top of the added
outflows anticipated without any program liberalization),
assuming only moderate easing of domestic credit con-
ditions next year. This is the preferred course of
Commerce. The Federal Reserve and the Bureau of the
Budget would acquiesce. Treasury and other interested
agencies would support this approach. (An outline
of the specific proposals is attached.)
This course has the advantage of reiterating your
commitment to liberalization. There will be clear
gains in administrative simplicity; e.g., the number
of companies involved in detailed reporting would be
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reduced by 40% to less than 350. To some extent,
the added capital outflows will be employed to
assist our export effort, tending to offset a
portion of the cost.
The major disadvantage is that any liberali-
zation will aggravate our already serious balance-
of-payments problem. The psychological repercussions
in Europe will be adverse. However, liberalization
of the proposed magnitude will not, in itself, be
the controlling factor bearing on our over-all
balance-of-payments performance. More critical
factors affecting the balance-of-payments situation
and confidence in the dollar will be the extent to
which the domestic credit situation eases and our
progress against inflation.
One issue of substance arises in shaping a
moderate liberalization of the Commerce program.
Less developed countries are given preference at
the present time through inclusion in a separate
area schedule with a relatively generous allowable.
With the proposed elimination of area schedules in
the 1970 program, there might be some concern on the
part of less developed countries. The Commerce
proposal deals with this problem by establishing
a preferential minimum allowable for direct invest-
ment in the less developed countries.
4. Large Relaxation or Elimination
This option would move directly toward our basic
objective, but there is substantial danger that it
would be counter-productive. It would release so
large a volume of funds abroad as to significantly
jeopardize efforts to maintain international financial
stability. Foreign reaction would be adverse, sub-
stantially limiting our influence and ability to
exert leadership in the direction of needed reforms.
This course has no substantial support within the
Administration.
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RECOMMENDATIONS: That you approve announcement of
a liberalization of the 1970
programs in the magnitude sug-
gested in option 3.
Approve:
Disapprove:
That, within the liberalization
amount recommended above, you
approve simplifying the Commerce
program by eliminating the area
schedules and extending special
less developed countries' allow-
ables to companies seeking them.
Approve:
Disapprove:
(Summaries of the substance of the proposed programs
are attached.)
Danian Kennedy
Attachments
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Attachment
The Direct Investment Program for 1970
Secretary Stans' proposal raises the ceiling for 1970
by $550 million to $3.90 billion and involves the following
changes:
A) Raise the minimum investment allowable for each
company from $1 million to $3 million.
-- reduces the number of companies involved in
quarterly reporting by almost 40 percent to
less than 350;
-- assists small to medium companies or those
without historical experience.
B) Eliminate the arbitrary division of the world
into three schedules by going to a worldwide
program for companies using historical and
earnings allowables. These historical and earnings
allowables would be calculated as done at
present, but would be applied on a worldwide basis.
Carry-forwards of unused schedular allowables
into 1970 could also be applied on a worldwide
basis.
-- represents a major simplification of the
complex program;
-- appropriate step for the ultimate elimination
of the program.
C) Offer up to $2.0 million additional allowables
on a matching basis to companies using the minimum
allowable and investing in the LDC's (Schedule A).
-- gives real benefit to LDC's who may feel elim-
ination of the schedules was a removal of
preferential treatment;
-- to be administered through the specific
authorization process to avoid complication
of the Regulations and to maintain control of
the amount of the relief.
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The estimated balance-of-payments burden of the
liberalized program rests heavily on two conditions:
that U.S. direct investors will continue to rely heavily--
although not as heavily as this year--on the use of foreign
funds to finance their direct investment; and that they
will use in 1970 a relatively small portion of unused 1969
allowables carried forward into 1970. These conditions
seem likely to be met on the basis of an analysis of
currently available company reports and plans.
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Attachment
The Federal Reserve Program for 1970
The Board of Governors proposes that the 1970 Federal
Reserve guidelines for restraints on credits by U.S.
financial institutions to foreigners be revised principally
to insure that more emphasis is given to credits for financ-
ing U.S. exports than to credits for other purposes.
As compared with the present ceiling of $10.1 billion
for commercial banks, of which $9.1 billion is currently
utilized, there would be two ceilings for each bank. A
new Export Term Loan Ceiling will be applicable to all
export term loans financing goods exported from the U.S.
after October 31, 1969. The amount of this ceiling for
participating banks, as a group, will be $1.3 billion.
A General Ceiling, unchanged from the present ceiling of
$10.1 billion, will be applicable to all other bank loans
to foreigners. However, as outstanding export term loans
under the General Ceiling are repaid, the level of this
ceiling will be reduced accordingly but the Export Term
Loan Ceiling will be increased by the same amount.
Export credits guaranteed or participated in by the
Export-Import Bank, guaranteed by the Department of Defense
or insured by the Foreign Credit Insurance Corporation
will continue to be exempt from the ceiling.
Minor changes will be made in the guidelines applying
to non-bank financial institutions, such as insurance
companies and pension funds. These changes will also provide
some new leeway for export term loans.
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4524
MEMORANDUM
THE WHITE HOUSE
ACTION
WASHINGTON
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November 20, 1969
I done
MEMORANDUM FOR DR. KISSINGER
FROM:
C. Fred cm Bergsten
I eat are the atepse
SUBJECT:
Balance of Payments Program for 1970
Please personle
At Tab I is a memorandum for the President on the 1970
ment balance
of payments program, triggered by a memorandum from Secretary
Kennedy. I have discussed the issue at length with Arthur Burns and
24
have cleared your memorandum with him.
Early decisions are needed so that U.S. companies and banks can
take the new rules into account in developing their 1970 investment plans.
In fact, the agencies are anxious to announce the decisions before the
big meeting of businessmen here on Friday, in which the President will
participate, but this is not necessary.
Secretary Kennedy's recommendation is the result of a compromise
which he worked out between Secretary Stans, who wants more liberaliza-
tion of the controls on corporations, and Arthur Burns and the present
Federal Reserve, who want little or no liberalization in view of the dismal
outlook for our balance of payments.
Any liberalization runs some foreign policy risk vis-a-vis the Europeans
because of our dismal payments outlook, and it is conceivable -- though
highly doubtful in my judgment -- that we could be forced sometime next
year to take drastic unilateral action such as suspending gold convertibility
of the dollar. The foreign policy problem would arise because we might
then be blamed for precipitating the crisis by relaxing our own defensive
measures. The answer is that our liberalization is quite moderate and
any crisis of the magnitude described would result overwhelmingly from
other factors.
In any event, some liberalization -- at least toward the LDCs --
is virtually dictated by the President's commitment, in the Latin America
speech, to seek ways to modify the controls to promote U.S. investment
in Latin America and other LDCs. Commerce originally proposed a
course of action which moved in the opposite direction: elimination of the
present distinctions made among three groups of countries, under which
allowable investment in the LDCs is much higher than elsewhere.
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Commerce proposed a substitute preference for investment in the
LDCs, but it is highly technical and would only be applied on a case-by-
case basis in any event. It would be lost in the shuffle of the overall
changes in the program, and we would appear to have tightened our
treatment of investment in Latin America as a result.
The Kennedy compromise would adopt the Commerce proposal in
addition to the present preference for investment in LDCs and would
therefore fully meet the President's commitment. I therefore recommend
that you support it.
Arthur Burns has proposed a different compromise, however,
which would amount to less overall liberalization but a greater degree
of preference for the LDCs. It would amount to a liberalized version of
the Commerce preference scheme, maintenance of the present prefer-
ence for investment in LDCs, and no change at all in the controls over
investment in industrialized countries. I am therefore tempted to sup-
port it and refrain from doing so only because of Secretary Kennedy's
tortuous bureaucratic effort to achieve his compromise. I would find
it fully acceptable and recommend that you so state in your memorandum
for the President.
RECOMMENDATION:
That you sign the memorandum for the President at Tab I.
Concurrence: ANachmanoff an
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