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1241
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
September 25, 1969
MEMORANDUM FOR DR. KISSINGER
FROM:
C. Fred Bergsten
SUBJECT: Implementation of the President's Comment on
Balance of Payments Effects of U.S. Government
Transactions
At Tab I is an information memo which you sent to the President
on September 15. The President penned "no" in the margin next
to the penultimate paragraph.
I interpreted that as meaning "no" to the suggestion by
Arthur Burns which is the topic sentence of the paragraph, although
it could also be "no" to the purely analytical point in the second
sentence of the paragraph. I lean toward the former interpretation,
since the President would be in error analytically under the latter
interpretation.
I am sure that Burns did not feel very strongly about his sug-
gestion, which was made on August 11, and I see no reason to pursue
the matter any further, since no action is called for under either
interpretation. Inaction is particularly appropriate because of the
uncertainty over the "no" meaning and in view of Burns' sensitivity
over his memos going to the President through you.
RECOMMENDATION:
That you take no action on the "no" written in the margin. (If
you wish to convey the decision to Burns, there is at Tab A a memorandum
that would do so.)
APPROVE
DISAPPROVE
19-68-6
MEMO To BURNS NOT SENT.
Reproduced at the Richard Nixon Presidential Library and Museum
Reproduced at the Richard Nixon Presidential Library and Museum
1241
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
September 15, 1969
MEMORANDUM FOR THE PRESIDENT
FROM:
Henry A. Kissinger HK
SUBJECT: Payments Effects of U.S. Government Transactions,
FY 1968-70.
Attached at Tab A is Bob Mayo's report on the balance-of-payments
effects of recent and current U.S. Government international transactions.
Comments by Arthur Burns and Paul McCracken are at Tabs B and C.
The key elements of the report are:
1. The payments effects of all government transactions leveled
off during the past two years at about $2 billion net deficit.
2. This figure, however, includes window-dressing receipts of
about $1. 5 billion.
3. The deficit on regular transactions has thus been about $3. 5
billion, although it has shown steady improvement and is expected to
diminish by 12% to about $3 billion in FY 1970.
4. Because this Administration has decided to eschew window-
dressing statistical gimmickery, however, the total net payments effect
of government transactions will deteriorate this year.
5. The Defense Department accounts for over two-thirds of the
gross payments -- almost $5 billion annually - - and is responsible for
the total net deficit on regular transactions plus offsetting the effect of
the special transactions.
6. Non-defense agency transactions now produce a slight favorable
balance on their regular transactions, which should grow somewhat in
1970. Much of the inflow is return on previous loans.
7. AID, which is often labeled as a major source of the U.S.
payments deficit, has steadily reduced its foreign payments to the rela-
tively small figure of $145 million in 1970. This is a good bit less than
half its receipts and less than the combined payments of Interior, NASA
and the Panama Canal. The AID receipts are mainly repayments on
past loans.
Reproduced at the Richard Nixon Presidential Library and Museum
- 2 -
Analytically, this report is useful but cannot be simply compared
with our overall payments position -- as many people do to conclude that
"the deficit is caused by government spending. 11 This is because there
are large offsetting feedbacks to the government expenditures which show
up in the private accounts.
For example, Korea and Thailand would not buy as many U.S. exports
if they earned no dollars from DoD programs. Even Japan and major
countries in Europe adopt easier economic policies because of our military
expenditures there, of which some share comes back to us. This is not
to say that government expenditures are not a major factor in our payments
deficit -- but simply to flag the error in simplistic comparisons.
Paul McCracken comments that we should carefully consider the
domestic economic effects of the policies, which we inherited from the
previous Administration, to minimize foreign expenditures for govern-
ment programs. He is referring to such practices as the 50 percent prefer-
ence extended by DoD to domestic suppliers and AID's tying policies, which
create some balance of payments savings but are quite costly in budgetary
terms. (Reductions in the level of our overseas programs, as per your
recent directive on personnel and the Vietnam troop withdrawals, of course
help our balance of payments. McCracken is here referring to the foreign
exchange costs of a fixed level of government programs.)
Arthur Burns, on the other hand, suggests that you ask the Treasury
Department to make recommendations on steps to reduce further the balance
of payments costs of overseas government expenditures. Any such steps
would probably carry the increased budgetary costs mentioned by McCrachen
and have small payments effects, unless they represented major program
9-24-69
changes.
An interagency committee, chaired by Treasury, is in fact already
reviewing present policy and will be making recommendations soon on
possible changes. I therefore think that you do not need to take any action
now. One change - the elimination of the "additionality" requirements
under our AID programs -- has of course already been made.
Reproduced at the Richard Nixon Presidential Library and Museum
A
Reproduced at the Richard Nixon Presidential Library and Museum
THE WHITE HOUSE
WASHINGTON
September 25, 1969
MEMORANDUM FOR ARTHUR BURNS
FROM: Henry A. Kissinger
The President has asked me to inform
you that he would prefer not to pursue at this
time your suggestion of August 11 that the
Treasury Department be asked to provide
recommendations on further steps to reduce
the impact of U.S. government transactions
on our balance of payments.
Reproduced at the Richard Nixon Presidential Library and Museum
9-24
Secretariat Re 1241
I had to tube the original memo back
to Mr. Bergsten urgently. This is a
copy of the original memo with the
President's "no" on page 2. - for your
files.
nancy
Reproduced at the Richard Nixon Presidential Library and Museum
A
Reproduced at the Richard Nixon Presidential Library and Museum
THE WHITE HOUSE
1241
ACTION MEMORANDUM
WASHINGTON
LOG NO.: 997
A
Date:
Saturday, August 9, 1969
Time: 10:30 A.M.
FOR ACTION: Dr. H. Kissinger
CC (for information):
P. McCracken
Dir. Mayo
Dr. A. Burns
FROM THE STAFF SECRETARY
DUE: Date:
Tuesday, August 12, 1969
Time:
2:00 P.M.
SUBJECT:
Director Mayo memo to the President regarding transactions of the
Federal Government, Fiscal Years 1968-1970.
ACTION REQUESTED:
X
For Necessary Action
For Your Recommendations
Prepare Agenda and Brief
Draft Reply
For Your Comments
Draft Remarks
REMARKS:
Please review the attached and submit your comments by return
memorandum.
PLEASE ATTACH THIS COPY TO MATERIAL SUBMITTED.
If you have any questions or if you anticipate a
JRD
delay in submittRegroduced at the Richard Nixon Stary and MuseufrOLE, JR.
1241
A
EXECUTIVE OFFICE OF THE PRESIDENT
BUREAU OF THE BUDGET
WASHINGTON, D.C. 20503
AUG 8 1969
MEMORANDUM FOR THE PRESIDENT
Subject: International transactions of the
Federal government, fiscal years 1968-1970
Highlights
The most recent agency reports on the balance of payments
impact of their budgetary transactions (which do not reflect
your directives for reductions in overseas personnel) indicate:
The net dollar outflow abroad from the Federal
Government's regular activities amounted to an
estimated $3,413 million in fiscal year 1969,
or $55 million less than in fiscal 1968.
In fiscal 1970, the net outflow for regular
activities is expected to fall by another
$377 million.
In both 1969 and 1970, a small but increasing
surplus for non-Defense agencies is indicated.
This reverses the net outflow for these agencies
in all other recent years.
Attached is a more detailed summary of the impact of the Federal
Government's activities on the U.S. balance of payments during
fiscal years 1968-1970. (This report has in past years been
misleadingly nicknamed "The gold budget. ")
Robert Robert P. Mayo
Director
Attachment
Reproduced at the Richard Nixon Presidential Library and Museum
SUMMARY OF RESULTS
(May-June 1969 Agency Submissions)
The excess of payments over regular receipt transactions,
as now estimated, amounted to $3,413 million in fiscal 1969,
a decline of $55 million from 1968. Net payments by Defense
rose by $86 million, but all other agencies had a net improve-
ment of $140 million. In 1970, net payments are expected to
decline by $377 million; both Defense and other agencies show
improvement.
If special transactions are included, net payments are
estimated to have declined by $262 million in 1969.
Payments increased by an estimated $258 million in 1969,
almost entirely because of higher Defense outlays ($245 mil-
lion). For 1970, a further increase of $161 million is expected
in total payments, about half of which would come from Defense.
Regular receipts increased by an estimated $312 million
in 1969, and are forecast to rise even more ($538 million) in
1970. Both Defense and other agencies contribute substantially
to these increases.
Special transactions receipts were relatively higher in
both 1968 and 1969 ($1,321 million and $1,528 million, respec-
tively). These consist largely of sales of non-marketable
Treasury securities and of Export-Import Bank loans. As in
the past, special Treasury security sales for 1970 are not
forecast in advance; hence, the net credits of $183 million
shown in the table provide no indication of the special trans-
actions that will ultimately be made in 1970.
PAYMENTS
Both the current levels and the changes in overseas
expenditures continue to be dominated by Defense outlays.
The latter increased by $245 million in 1969 and will rise
by $88 million more in 1970.
Non-Defense outlays account for about 30% of total payments.
The revised 1969 total of $1,841 million represents an increase
of $13 million over 1968. The only major increases in specific
agency programs were a one-time reimbursement on completion of
a Canadian reservoir paid for by the Corps of Engineers ($40 mil-
lion) and an increase in Treasury interest payments on the public
debt held abroad ($15 million). The further rise of $73 million
Reproduced at the Richard Nixon Presidential Library and Museum
2
in non-Defense outlays now forecast for 1970 predominantly
reflects increased Treasury contributions to the capital of
international financial agencies ($61 million). AID payments
are scheduled to decline in both years.
RECEIPTS
Total receipts overseas rose by an estimated $521 million
in 1969. Substantially larger principal and interest receipts
by the Export-Import Bank, increased military sales by Defense,
and higher loan collections by AID were offset in part by
deferral of principal and interest payments on Treasury loans
to the United Kingdom,
In 1970, total receipts are currently estimated to be
$1, 175 million lower than in 1969, because of the absence of
any estimate for foreign sales of special Treasury securities.
Reproduced at the Richard Nixon Presidential Library and Museum
Table 1. SUMMARY OF INTERNATIONAL TRANSACTIONS
3
OF THE FEDERAL GOVERNMENT
(Fiscal years; in millions)
1968
1969
1970
actual
estimate
estimate
Governmentwide
Payments
$6,323
$6,581
$6,742
Regular receipts
2,856
3,168
3,706
Excess of payments
over regular receipts
3,468
3,413
3,C36
Less:
Special transactions, net
1,321
1,528
-183
Excess of payments
over total receipts
2,147
1,885
3,219
Defense:
Payments
4,495
4,740
4,828
Regular receipts
1,063
1,222
1,592
Excess of payments
over regular receipts
3,432
3,518
3,236
Less:
Special transactions, net
-13
27
-391
Excess of payments
over total receipts
3,445
3,491
3,627
All agencies excluding Defense:
Payments
1,828
1,841
1,914
Regular receipts
1,793
1,946
2,114
Excess of payments,
or regular receipts (-)
35
-105
-200
Less:
Special transactions, net
1,334
1,501
208
Excess of payments,
or total receipts (-)
-1,299
-1,606
-408
Notes:
(1) In instances where Defense and a civilian agency
both reported the receipts from certain trans-
actions, half of the total receipts were credited
to each agency.
(2) Details may not add to totals because of rounding.
Reproduced at the Richard Nixon Presidential Library and Museum
INTERN
PAYMENTS BY AGENCY
(Fiscal years; in millions)
1968
1969
1970
actual
estimate
estimate
1/
Defense-Military
$4,425
$4,705
$4,791
AID
178
159
145
Subtotal
4,603
4,864
4,936
Uncontrollable items:
Pensions and annuities
382
385
400
Treasury - Interest on public debt
620
635
635
Other financial transactions
207
156
213
Subtotal
1,208
1,176
1,249
Export promotion:
Agriculture
13
15
18
Commerce
4
6
8
Subtotal
17
20
25
Other agencies:
State 1/
155
154
146
USIA
56
56
58
Panama Canal 1/
46
53
58
Interior
50
56
59
NASA
30
36
37
Agriculture
28
24
25
Peace Corps
22
23
23
Post Office
17
18
18
Transportation
14
18
18
TVA
14
15
23
Corps of Engineers
12
53
*
AEC
7
6
5
GSA
6
12
14
Commerce 2/
6
7
7
HEW 1/
3
2
2
Treasury 3/
3
4
5
NSF
3
3
2
Justice 1/
2
2
2
ABMC
2
2
2
VA 1/
1
2
2
Subtotal
478
546
504
Total
6,307
6,606
6,715
Add: Net purchases of foreign
currencies for "unfunded"
reserved currency accounts
16
-25
27
Total payments
6,323
6,581
6,742
1/ Excludes payments of pensions and annuities.
2/ Excludes payments for export promotion.
3/ Excludes uncontrollable transactions and $16.5 million
payments to Interhandel in 1968 and 1969.
* Less than $500,000.
Note: Detail may not add to totals because of rounding.
Reproduced at the Richard Nixon Presidential Library and Museum
5
Table 3.
INTERNATIONAL RECEIPTS, BY AGENCY.
(Fiscal years; in millions)
1968
1969
1970
Total receipts:
actual
estimate
estimate
Defense
$1,249
$1,439
$1,397
Treasury
1,429
1,293
177
Export-Import Bank
952
1,314
1,325
Agriculture
473
404
425
AID
259
367
342
91
95
Panama Canal
90
AEC
44
77
76
26
24
23
State
Post Office
24
24
24
14
10
10
Transportation
4
13
6
Interior
2
11
7
NASA
All other
10
9
8
Less: Duplication in agency
380
392
reporting
399
Total receipts
4,176
4,697
3,522
Special transactions, net:
(included in totals above)
Defense, advance payments for
military sales, drawdowns,
and related adjustments, net
-90
23
-398
Treasury, sales of medium term,
non-marketable securities
1,185
1,154
-48
Special deposit item
52
Loan prepayments:
7
--
Ex-Im Bank
DOD
38
4
-
66
- -
AID
Export-Import Bank sales of loans
and certificates
103
230
255
Other:
Agriculture/DOD
78
--
Total, special transactions
1,321
1,528
-183
of which Defense is
-13
27
-391
Regular receipts:
Governmentwide
2,856
3,168
3,706
Defense
1,063
1,222
1,592
All agencies, excluding Defense
1,793
1,946
2,114
Note: Detail may not add to totals because of rounding.
1/ See note 1/ on Table 1.
Reproduced at the Richard Nixon Presidential Library and Museum
B
Reproduced at the Richard Nixon Presidential Library and Museum
THE WHITE house
WASHINGTON
August 11, 1969
MEMORANDUM FOR THE STAFF SECRETARY
FROM:
Arthur F. Burns AM3
SUBJECT:
Director Mayo's Memo to the President re:
Transactions of the Federal Government FY 1968-1970
Director Mayo's memorandum is informational in character. It
presents no recommendations for Presidential action.
The report demonstrates that the contribution of Federal Govern-
ment activities to the deficit in our balance of payments has lately
diminished somewhat; but that neither the actual diminution, nor
that in prospect, is at all substantial.
I suggest that the President seek the recommendations of the
Treasury Department on what steps can be reasonably taken to
reduce further the impact of governmental transactions on the
balance of payments.
Reproduced at the Richard Nixon Presidential Library and Museum
C
Reproduced at the Richard Nixon Presidential Library and Museum
THE CHAIRMAN OF THE
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON
August 15, 1969
MEMORANDUM FOR KEN COLE
Subject: Memo of Director Mayo to the President regarding
International Transactions of the Federal Government,
Fiscal Years 1968-1970
The memo of Director Mayo to the President provides
information on the balance of payments impact of the inter-
national transactions of the Federal Government -- i.e., on
the balance of payments budget, which in preceding years had
carried the misleading title of "The Gold Budget. 11
It would, however, be desirable to place discussion of
these transactions within a broader context. Apart from the
political question of reducing the obtrusiveness of the American
presence abroad, which is associated primarily with the number
of personnel abroad and is being dealt with by Secretary Richard-
son's Committee, the domestic economic effects of government
international transactions should also be considered. For
instance, increased preferential use of domestic suppliers to
service installations abroad would reduce the balance of pay-
ments cost of such installations, but resources would be
allocated less efficiently and the budgetary cost to the govern-
ment would be increased. These are considerations which should
be examined explicitly. Studies underway at the Defense Depart-
ment, regarding the budgetary implications of the preference for
U.S. suppliers, should throw light on these problems.
Paul W. McCracken
Reproduced at the Richard Nixon Presidential Library and Museum
1241
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
ACTION
August 26, 1969
MEMORANDUM FOR DR. KISSINGER
FROM:
C. Fred M Bergsten
SUBJECT: Payments Effects of U.S. Government
Transactions, FY 1968-70
Attached is a revised memorandum for the President on
overseas expenditures under Government programs. It
incorporates the changes which you directed and the comments
made by Paul McCracken and Arthur Burns, which Ken Cole
asked us to incorporate in our memo. Because of their com-
ments, I have also added a note as to where the policy review
of this issue stands.
RECOMMENDATION:
That you sign the attached memorandum to the President
(Tab I).
Reproduced at the Richard Nixon Presidential Library and Museum
- 2 -
Analytically, this report is useful but cannot be simply compared
with our overall payments position -- as many people do to conclude that
"the deficit is caused by Government spending. " This is because there
are large offsetting feedbacks to the Government expenditures which show
up in the private accounts.
For example, Korea and Thailand would not buy as many U.S.
exports if they earned no dollars from DOD programs. Even Japan
and major countries in Europe adopt easier economic policies because
of our military expenditures there, of which some share comes back
to us. This is not to say that Government expenditures are not a major
factor in our payments deficit -- but simply to flag the error in simplistic
comparisons.
Reproduced at the Richard Nixon Presidential Library and Museum
I
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
August 25, 1969
MEMORANDUM FOR FRED BERGSTEN
FROM: Jon Howe IH
Attached are memoranda from Paul McCracken and Arthur
Burns commenting on Mayo's memorandum to the President
concerning international transactions of the Federal Govern-
ment fiscal years 1968 through 1970. Ken Cole's office has
requested that we incorproate these memoranda into ours for
the President SO that he will have one concise package. They
would like to have this in Tuesday's pouch. OK?
Attachments
a/s
Pnc Flys well to and du en effect Es
By
and and h/p what +
AB I gress Mrs and my &
pich, to when 456
not -hlp
Reproduced at the Richard Nixon Presidential Library and Museum
Rent to Preo 8-21-69
1241
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
send to Pres.
dating
MEMORANDUM FOR HENRY A. KISSINGER
AUGUST 13, 00 1969
FROM:
Fred Bergsten
SUBJECT:
Payments Effects of U.S. Government
Transactions FY 1968-70
The memorandum at Tab I summarizes and comments
on a report from Bob Mayo on the balance-of-payments
effects of U.S. Government transactions in the fiscal
years 1968-70. This is the report which was formerly
labled the "gold budget." It is an effort to see how
much defense, aid and other government activities con-
tribute to the U.S. payments deficit.
Analytically, these reports are useful but can-
not be simply compared with our overall payments
position - as many people do to conclude that "the
deficit is caused by Government spending." This is
because there are large offsetting feedbacks to the
Government expenditures which show up in the private
accounts. For example, Korea and Thailand would not
buy as many U.S. exports if they earned no dollars from
DOD programs. Even Japan and major countries in Europe
adopt easier economic policies because of our military
expenditures there, of which some share comes back to us.
This is not to say that Government expenditures are not
a major factor in our payments deficit - but simply to
flag the error in simplistic comparisons.
K
winoto www Pres.
Reproduced at the Richard Nixon Presidential Library and Museum
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
August 12, 1969
MEMORANDUM FOR DR. KISSINGER
FROM:
C. Fred Bergsten
SUBJECT: Payments Effects of U.S. Government Transactions
FY 1968-70
The memorandum at Tab I summarizes and comments on a
report from Bob Mayo on the balance of payments effects of U.S.
Government transactions in the fiscal years 1968-70. This is the
see
report which was formerly labled the "gold budget. 11 It is an effort
to get at just how much defense, aid and other government activities
cont ribute to the U.S. deficit.
payments
The recent wide discrepancy between the official settlements
and liquidity payments accounts and their wide swings over the past
year show that the rather steady, though considerable, government
deficit is easily swamped by private capital movements, particularly
from the Eurodollar market. Nevertheless, their report on the
government sector, apart from the special or window dressing trans-
actions and the repayment and extension of loans, does give a fairly
good picture of the net foreign resources the U.S. Government is
consuming. This particular summary, however, does not sufficiently
separate the long-term or "capital" transactions from current expenses
and receipts and will need to be reviewed by the group working to
improve U.S. balance of payments definitions.
Chmes back to us. This is not to
RECOMMENDATION:
can that Guernnet expendines are mutaniju
factor uur rayments deficit but simplato
That you sign the attached memorandum to the President. (Tab I)
flag the arror in singlistic
Andytically, there reputs are wieful but cannot
be Simply compared with our overall payments position as many
people do to conclude that - the definit is caused by
Guernmant transactions apending." This is because targe there
are large afrecting feedbacks to the Guernnat expenditures which
show up in the private recounts. For example, Kirea ad Thailad
wold not buy as meny u.s. expents if they - earned
Joran and
no dollars from DOD programs. Even, myr cuarties adjust easier of
ecmmie policies because of writing expenditing there of which sme ILave,
Reproduced at the Richard Nixon Presidential Library and Museum
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
MEMORANDUM FOR THE PRESIDENT
FROM:
Henry A. Kissinger
SUBJECT:
Payments Effects of U.S. Government Transactions,
FY 1968-70
Attached at Tab A is Bob Mayo's report on the balance of pay-
ments effects of recent and current U.S. Government international
transactions.
leveled off during
The key elements of the report are:
2.This
frigure,
1. The payments effects of all government official transactions
have been on a slightly descending plateau for the past two years at about
however,
level of almost $2 billion net deficit.
includes
has this bear about billiam,
althingh it hershmen
window-
8.3. The deficit on regular transactions shows steady improvement
dressing
over the three years, diminishing by some 12% to about $3 billion in FY 1970.
recepts
Land is expected to
about $1.5
3. Favorable special transactions (mainly Treasury sale of
billion.
non-marketable securities) increased between 1968 and 1969 (though
traditionally no estimate is given for the future year's estimate) rein-
forcing the improvement in the net for all transactions. Special trans-
actions, however, are mainly window-dressing and do not really represent
payments for consumption of resources.
100 Non-defense agency transactions now produce a slight favorable
balance on their regular transactions, which should grow somewhat in
1970. Much of the inflow, however, is return on previous loans and is
thus a draw down on our government "capital' abroad.
A
anmedly--
B5.5 The Defense Department accounts for over two-thirds of the
gross payments and is responsible for the total net deficit on regular
transactions plus offsetting the effect of the special transactions.
has
of
8.7. AID, which is often labled as a major source for the U.S.
payments deficit, is steadily reducing its foreign payments to the rela-
tively small figure of $145 million in 1970, which is a good bit less than
half its receipts and less than the combined payments of Interior, NASA
and the Panama Canal. However, the AID receipts are also mainly
repayments on past loans.
4. Becomic this Administration has decided to eschen under dressing
statistical transactions simmiching, will however, the total wet inaguats effect of Covernment
Reproduced at the Richard Nixon Presidential Library and Museum
Irom to
Boyten
SCB021
00 WTE
1969 AUG 19 05 04
DE WTE15 B0021
FROM: AL HAIG
TO : COMMANDER HOWE (WHSR) FOR FRED BERGSTEN
CITE: SCWH90021
UNCLAS
AUGUST 18, 1969
REQUEST TRANSMITTAL MEMORANDUM TO THE PRESIDENT FOR HENRY'S
SIGNATURE BY NOON SAN CLEMENTE TIME, AUGUST 19.
AUGUST 14, 1969
MEMORANDUM FOR THE PRESIDENT
SUBJECT: BALANCE OF PAYMENTS, SECOND QUARTER 1969
MORE DEFINITE FIGURES FOR THE MAIN COMPONENTS OF THE BALANCE
OF PAYMENTS HAVE JUST BECOME AVAILABLE FOR THE SECOND QUARTER.
THE DIVERGENCE BETWEEN THE "OFFICIAL SETTLEMENTS" AND "LIQUIDITY"
MEASURES CONTINUED AND WIDENED. THE LIQUIDITY DEFICIT, WHICH IS
SUPPOSED TO MEASURE OUR POSITION WITH RESPECT TO ALL FOREIGNERS
COFFICIAL AND PRIVATE), SOARED TO $15.2 BILLION (SEASONALLY ADJUSTED
AT ANNUAL RATES). THIS IS A LITTLE MORE THAN DOUBLE THE FIRST
QUARTER DEFICIT ITSELF A RECORD. HOWEVER, THE OFFICIAL SETTLEMENTS
SURPLUS REFLECTING ONLY CHANGES IN OUR RESERVE AND IN THE CLAIMS OF
FOREIGN CENTRAL BANKS ON US, INCREASED SOMEWHAT FROM THE FIRST QUARTER
UP FROM AN ANNUAL RATE OF $4.5 TO $5.0 BILLION. THE DIFFERENCE
BETWEEN THE TWO MEASURES WAS DIE TO CONTINUED HEAVY SHORT-TERM
BORROWINGS ABROAD BY AMERICAN BANKS AND BUSINESSES, PARTICULARLY
IN THE EURODOLLAR MARKET. A SUBSTANTIAL AMOUNT OF THE MONEY
BORROWED FROM THE EURODOLLAR MARKET APPEARS TO HAVE COME FROM
U.S. RESIDENTS, HOWEVER, AND SHOULD NOT THEREFORE BE COUNTED AS A
REAL OUTFLOW FROM THE UNITED STATES. THE LIQUIDITY DEFICIT IS
THEREFORE QUITE MISLEADING.
FOR THE FIRST TWO QUARTERS COMBINED THE OFFICIAL SETTLEMENTS
AND LIQUIDITY FIGURES WERE AT ANNUAL RATES OF $4.8 BILLION SURPLUS
AND $11.0 BILLION DEFICIT, RESPECTIVELY. THESE COMPARE WITH ANNUAL
RATES OF $2.3 BILLION SURPLUS AND $1.2 BILLION DEFICIT FOR THE
FIRST HALF OF LAST YEAR AND $1.6 BILLION SURPLUS AND $0.1 BILLION
SURPLUS FOR THE WHOLE YEAR 1968.
Reproduced at the Richard Nixon Presidential Library and Museum
NET FOREIGN PURCHASES OF OUR STOCKS AND BONDS FELL SUB-
STANTIALLY IN THE SECOND QUARTER FROM THEIR PREVIOUS HIGH LEVELS.
MERCHANDISE EXPORTS AND IMPORTS BOTH ROSE SHARPLY AFTER THE DOCK
STRIKE WAS SETTLED, WITH THE MERCHANDISE BALANCE RETAINING A SMALL
DEFICIT. U.S. OFFICIAL RESERVE ASSETS CONTINUED TO RISE (BY
$229 MILLION) AND THE GOLD STOCK INCREASED BY $317 MILLION.
ALTHOUGH THE LIQUIDITY DEFICIT, AS REPORTED, IS HUGE, IT WILL
NOT COME AS A SURPRISE TO THE MARKET AND THEREFORE SHOULD NOT
WEAKEN THE DOLLAR. IN FACT IT IS THE LARGE OFFICIAL SETTLEMENTS
SURPLUS THAT KEEPS THE DOLLAR TECHNICALLY STRONG. IT IS CLEAR,
HOWEVER, THAT WE NEED BETTER CONCEPTS TO REPRESENT OUR TRUE
BALANCE OF PAYMENTS POSITION.
/S/ PAUL W. MCCRACKEN
DTG: 190340Z AUG 69
GPS: 63ø
Reproduced at the Richard Nixon Presidential Library and Museum
787
MEMORANDUM
THE PRESIDENT HAS SEEN
THE WHITE HOUSE
A
WASHINGTON
14
6/11
ACTION
SECRET
June 6, 1969
MEMORANDUM FOR THE PRESIDENT
FROM: Henry A. Kissinger HK
SUBJECT: The International Monetary Situation
Memoranda from Paul McCracken
Attached at Tabs A and B are information memoranda from Paul
McCracken on the international monetary situation. Their major
points are:
1. The U.S. balance of payments was in deficit by the incredible
amount of $2. 1 billion in the two weeks ending May 14. (The deficit
has never been more than $4 billion in any previous year.) The U.S.
was thus the source of about one-half the money which flowed into
Germany during that period. For the year to date, we are now in
small surplus on one of our payments definitions and in deficit by
about $4 billion on the other.
2. Germany has lost about $1.2 billion of the $5 billion inflow of
those two weeks. The market is not convinced that the DM will not be
revalued and most of the speculative money is sitting tight to await
further developments.
3. The UK has regained about $400 million of its $600 million loss.
France has regained about $100 million of its $500 million loss.
Memorandum from Secretary Kennedy
Attached at Tab C is an earlier information memorandum from
Secretary situation. Kennedy which gives his views on the international monetary
The Secretary concludes that our short-term interests lie in pro-
moting capital reflows out of Germany and into the UK. He thus:
1. Sees no alternative to accepting the German decision against
revaluation, privately as well as publicly.
2. Notes that the issue of additional credits to the UK is bound to
arise; their "new" $1 billion credit from the IMF contains at best
$300 million of really new money.
SECRET
Historical File
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
- 2 -
3. Feels that the German decision will change only if an even more
severe crisis develops or if other countries decide to change their
exchange rates as well.
4. Suggests that an orderly exchange rate realignment may be possible
this summer, implying (per 3) either that a severe crisis lies ahead or
that countries other than Germany will decide to change their rates.
5. Judges that we will continue to face formidable uncertainties until
the exchange rate situation is resolved.
Further developments
Developments since the German decision give little hope that the
immediate problem of exchange rate disequilibrium has been solved.
First, the "recycling" of speculative funds agreed upon by the central
bankers at Basel on May 11 is very meager. The Bundesbank has agreed
only to recycle $500 million to countries other than the UK and $120 mil-
lion to the UK. They will not agree to any recycling for the UK unless
the German government guarantees the credit against UK default. Coming
against the total inflow of $5 billion since the French referendum, the
amount is thus grossly inadequate and, unless Britain is better provided
for, may not be adequately distributed.
Second, as noted by Dr. McCracken, the market is clearly skeptical
that exchange rates changes will be avoided. Only about 25 percent of
the inflows have moved back out through the market. Most of the specu-
lative money, at least for the moment, is awaiting further developments.
Third, there are additional uncertainties:
-- Dr. McCracken relayed the bad U.S. balance of payments figures.
-- The British trade figures are bad for the third month in a row
and will heighten doubts that Britain has solved its balance-
of-payments problem.
-- The French trade figures for April are also bad and have
intensified the view that devaluation of the franc must occur
fairly soon.
The additional German economic measures, adopted "in lieu
of revaluation", are aimed mainly at their domestic inflationary
pressures and hence will further increase their external surplus;
their measures to deal directly with the external position are puny.
SECRET
Historical File
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
- 3 -
Outlook
The one ray of hope is that Germany, despite its public avowals that
its decision not to revalue is "eternal", has already indicated privately
that it will still consider revaluation if it can get company from other
countries. But no "company" seems interested and the Germans have
also indicated that "eternal" means "until after its election in September."
There is virtually unanimous agreement that a DM revaluation is inevit-
able; hence a new speculative crisis is certain to develop as the election
approaches.
What France will do regarding devaluation, after the runoff election,
is unclear. Some experts think that Pompidou would devalue quickly and
pin the blame on de Gaulle. And Poher has begun to echo the Strauss call
for a "multilateral realignment".
Any new French government, however, would probably wish to deal
with the pending wage negotiations before devaluing and would also need
time to prepare a plan for supplementary domestic measures to make any
devaluation work. (S uch a position is quite defensible.) By the time these
two problems are met, the Bonn elections may be close at hand and Germany
will probably not wish to move even in concert with others. In short, there
is no certainty that France will provide Germany with its desired "company"
very soon.
The UK will also remain on the margin, with liquid debts swamping
its meager reserves, especially if the Wilson Government continues to
face major political problems. There is little chance of a discreet UK
devaluation, however, which would provide "company" for Germany. The
British would be more likely to impose additional import controls or let
the pound float freely. A French devaluation without a German revaluation
could force such action on the UK.
General uneasiness about exchange rates, especially if coupled with
large U.S. deficits, could also jeopardize European agreement to early
and sufficient activation of Special Drawing Rights and thereby exacerbate
the jitters surrounding the system.
The United States has two tactical options in the present situation:
(1) We can attempt to apply pressure soon, during a period of relative
calm, to try to pre-empt future crises. The pressure would be mainly on
the Germans to revalue or take decisive alternative steps to reduce their
payments surplus, but might have to extend to other countries to provide
"company" for them.
SECRET
Historical File
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
- 4 -
(2) We can simply await the next crisis, which is virtually certain
to occur by September and could come much earlier, and seek the
desired changes then.
Experience shows that intervention in a period of relative calm --
unless handled extremely deftly and with extremely good luck -- can
create the very crisis it seeks to pre-empt. Intervention during a
crisis, however, could plunge us even more deeply into the midst of
a major domestic political struggle in Germany.
Embassy Bonn has recommended against any U.S. intevention due
to the possibility of fanning "nationalistic sentiments" in Germany and
strengthening the right wing there. Our approach prior to the decision
not to revalue was, of course, unsuccessful. We are thus threatened
with policy paralysis in dealing with the immediate situation.
However, inaction carries serious risks. The certainty of renewed
crises and the nearness of the UK to bankruptcy means that the system
could suffer severe disruption. This could lead to renewed pressures
on the U.S. gold stock, especially if our balance of payments were to
deteriorate sharply, and force us to make some difficult decisions on
our own international monetary policy.
And even if the system does not face fundamental disruption, there
is likely to be a further escalation of restrictions on international trade
and payments by other countries unless the necessary exchange rate
realignment occurs and there is reform of the overall system.
Conclusion
The short-term threat of renewed crises highlights the more funda-
mental problems of the international monetary system. In fact, the
short-term problem of exchange rate realignment probably must be
solved before we can get the type of long-range reform favored by most
of our officials -- greater flexibility of exchange rates -- or even
before this kind of reform can be openly discussed internationally,
because of the probability of kindling speculation if rates are out of line
when such reform is discussed.
SECRET
Historical File
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
- 5 -
The time has thus come when the United States needs to define
clearly its strategy on both the short-term and longer-term aspects of
the monetary problem and pull the two together.
There are a number of important international monetary meetings in
June. In addition, Secretary Kennedy's speech to the American Bankers
Association on June 20 provides an excellent opportunity for a major
statement of the Administration's international monetary policy. If we
do not begin to move now, it will be difficult to do so before September.
At a minimum, we should be ready to take major initiatives in the fall
after the key European elections are over. We should thus try to make
our decisions fairly quickly.
In early April, you asked the Secretary of Treasury to coordinate for
you an interagency options paper on monetary reform. Two weeks ago
you agreed to my recommendation to convene an early meeting to discuss
overall international monetary policy, to be attended by the Secretaries
of Treasury and State, Chairman Martin, Paul McCracken and myself.
RECOMMENDATION:
I now recommend that you authorize me to:
1. Set up a meeting in about ten days to consider U.S. international
monetary policy, both short-term and toward longer run reform of the
system. (If our meeting slides beyond that point, it will be difficult to
take any initiatives you might decide before summer.)
Approve/ Rn
Disapprove
2. Ask Treasury to submit, as the basis of discussion for that meeting
and sufficiently prior to it, the interagency paper you asked for earlier.
Approve Par
Disapprove
See me
SECRET
Historical File
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
THE CHAIRMAN OF THE
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON
May 16, 1969
MEMORANDUM FOR THE PRESIDENT
Subject: International Financial Report for the Current Week
This was a relatively quiet week on the international financial
markets, after the hectic rush of last week. The slower pace was,
of course, encouraging, as was the direction of international reserve
movements. The British, who had lost over $600 million on the
markets in the previous two weeks, regained $310 million this week.
The French were also gainers, although to a lesser degree (over
$100 million, although a complete figure for the week is not yet
available). There was an outflow from Germany of about $840
million less than a fifth of the $4. 6 billion inflow (gross of swaps)
during the previous two weeks
(Note: These data are confidential data involving the accounts of
other countries, and cannot be used publicly.)
Grounds for concern, however, remain. The return flow was
heavily concentrated at the beginning of the week, and dropped off
sharply as the week wore on. This in itself was not surprising,
as there was pressure at the beginning of the week on some of those,
who "took positions" in the speculative rush, to revèrse themselves.
But the signs that the flow might be drying up suggested that the
greater part of the money which moved into Germany is sitting tight
to see what develops. Thus, while the market does not have the
immediate expectations of a German revaluation which were evident
last week, some skepticism remains over the continuing viability of
the present exchange rate structure.
For the week ending Wednesday, May 14, (which includes the rush
of Thursday and Friday a week ago), the U. S. had a deficit of $1, 340
million on the liquidity basis, and $1, 755 million on the official
settlements basis. For the two week period ending May 14, the two
deficits were almost identical, at $2. 1 billion. This suggests that
about half of the inflow into Germany originated in the U. S.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
-2-
The cumulative 1969 liquidity deficit through May 14 has been
just over $4 billion, compared with just under $1 billion in the
corresponding periods of 1967 and 1968.
The cumulative 1969 official settlements deficit through May 14
was about the same as a year ago, though the pattern was sharply dif-
ferent.
Paul W. McCracken
Reproduced at the Richard Nixon Presidential Library and Museum
Chart I
U.S. BALANCE OF PAYMENTS BASED ON WEEKLY DATA
(LIQUIDITY BASIS)
Deficit (+),surplus (-)
Millions of dollars
5/14/69
Millions of dollars
4000
4000
3500
3500
DEFICIT
IT
3000
3000
1967
2500
2500
2000
2000
1500
1500
1000
1000
500
500
1968
0
0
SURPLUS
-500
-500
Cumulated
-1000,
-1000
1
F
M
A
M
I
I
A.
S
0
N
D
The $823 nillion net surplus for the week ended January 4, 1967 is shown as a $1,145 million surplus
for December 28-30, 1966 and a $322 million deficit for January 1-4, 1967. Likewise, the $276 million
net surplus for the week ended January 3, 1968 is shown as a $458million surplus for December 28-29,
1967 and a $182 million deficit for January 1-3, 1968.
Reserve R Bank of Now York
Reproduced at the Richard Nixon Presidential Library and Museum
Chart II
U.S. BALANCE OF PAYMENTS BASED ON WEEKLY DATA
(OFFICIAL RESERVE TRANSACTIONS BASIS)
Deficit (+), surplus (-)
Millions of dollars
Millions of dollars
4000
4000
DE F/C IT
3000
3000
2000
2000
1967
1000
1000
5/14/69
0
-1000
-1000
1968
-2000
2000
-3000
-3000
SURPLUS
Cumulated
-4000-
-4000
I
F
M
A
M
I
I
A
S
O
N
D
The $474 million net surplus for the week ended January 4, 1967 is shown as a $499 million surplus
for December 29-30, 1966 and a $25 million deficit for January 1-4, 1967. Likewise, the $341 million
net surplus for the week ended January 3, 1968 is shown as a $70 million surplus for December 28-29,
1967 and a $271 million surplus for the Richary 1-3 1968
Reproduced at Nixon Presidential Library and Museum
1357
CONFIDENTIAL
THE CHAIRMAN OF THE
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON
May 24, 1969
MEMORANDUM FOR THE PRESIDENT
Subject: Weekly Report on International Finance
The Germans continued to work off some of the dollars that they
had acquired during the recent speculative wave. During the current
week, they sold $405 million in U. S. dollars on the spot market.
On Wednesday, they began swapping out dollars again and worked
off another $262. 5 million from their official holdings in this manner.
(Swaps involve a sale of dollars by the German Central Bank to
German Commercial Banks under a repurchase agreement. By
this procedure, the Central Bank is able to reduce temporarily its
holdings of unwanted dollars. The Commercial Banks find it ad-
vantageous to engage in the transaction because of the interest in-
centive, and because the repurchase agreement protects them from
a capital loss on their acquired dollar assets in the event of a re-
valuation of the D. M.)
The swapping procedure had been suspended during the specula-
tive wave because the dollars swapped out by the Bundesbank were
finding their way into the hands of speculators, who sold them back
to the Bundesbank for D.M. Thus, in effect, the Bundesbank
found itself buying the same dollars more than once.
The Germans raised their required reserves on bank deposits,
effective June 1. While this and other anti-inflationary steps will
act as partial domestic substitutes for revaluation, in that they
will reduce pressures on prices, they will tend to make the inter-
national imbalance worse. The reduction in the rate of increase
of German prices will tend to make German goods even more
competitive on world markets, and German demand for imports
will also moderate.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
-2-
During the past week, the British took in $95 million on the
market, bringing their total recovery in the past two weeks to
over $400 million, or about two thirds of their losses during the
preceding two weeks of speculative activity.
The net change in the franc position was small, with modest
gains at the beginning of the week offset by a loss on Thursday.
The price of gold on the London market remained steady in the
$43.425 - $43.50 range.
During the week ending May 21, the U.S. had surpluses of $94
million on the liquidity basis, and of $570 million on official
settlements. This leaves the cumulated liquidity deficit for 1969
at around $4 billion, but puts us back into a small official surplus.
Paul W. McCracken
Reproduced at the Richard Nixon Presidential Library and Museum
HOLDBAC"-
787
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
ACTION
SECRET
June 2, 1969
MEMORANDUM FOR DR. KISSINGER
FROM: C. Fred MY Bergsten
SUBJECT: International Monetary Situation
Attached per your instructions via Al Haig is a revision of the
memorandum to the President on the international monetary situa-
tion, which recommends that we move quickly toward setting U.S.
policy on both the short-run crisis possibilities and longer-run
reform of the system.
I have two points on your comments as relayed by Al. You
indicated a belief that it is the close balance between the COU and
SPD which makeslikely a new DM crisis as the German election
approaches. The fact is that such a crisis will result whatever the
German political alignment, since almost everybody in the world is
convinced that revaluation is inevitable and will be carried out by
any new FRG government -- even one in which Kiesinger and/or
Strauss remain dominant.
Second, you note that application of pressure during a period of
relative calm can create the very crisis which the intervention seeks
to pre-empt. I make the point in the memo to the President but
have qualified it partially: if applied skillfully and with luck in avoid-
ing publicity, such intervention could work without generating enough
speculation to produce a crisis.
I have also sent to you a memorandum for the President reporting
on the offset negotiations with Germany, which are not going too
smoothly at the moment. If timing permits, you might wish to read
them together yourself and send them together to the President.
RECOMMENDATION:
That you sign the attached memorandum to the President.
SECRET
Reproduced at the Richard Nixon Presidential Library and Museum
787
THE secretary OF THE TREASURY
washington
CONFIDENTIAL
MAY 10 1969
MEMORANDUM FOR THE PRESIDENT
The decision of the German Cabinet not to revalue
the mark will leave an air of uncertainty over inter-
national financial developments for some time. The immedi-
ate outlook for the exchange markets is highly uncertain,
and turns on the credibility of the German position. This
will depend, in large part, on what other tax and financial
measures the Germans are prepared to take. The Germans
have been extremely vague on this, and no decisions are
expected until the middle of next week, at the earliest.
While the German position on the mark parity is
unsatisfactory, I see no alternative but to accept it as
an accomplished fact for the time being, and to work
as best we can within that framework in the days ahead.
Revaluation has become a straight party issue, with
Strauss leading the CDU opposition. While some reports
indicate the Chancellor himself has some sympathy for re-
valuation, in the last analysis there seems little chance
that he would reverse the decision, unless or until
external conditions and pressures change. In practice,
this would require an even more severe crisis in the
exchange markets or changes in parity by other countries
so the Germans have "company."
Our interest for the short run lies in (1) promoting
a reversal of the recent speculation into marks, and (2)
building protection against the possibility that new
speculative pressures will converge on sterling. To help
achieve the former, in press statements and contacts we
will cast no doubt on the ability of the Germans to
sustain their position, accept it as a fact, and make plain
the necessity for supporting measures to repel speculation.
The second objective is supported by the agreement
now reached under pressure from events and the U. S., between
the U. K. and the IMF in negotiations on a $1 billion
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
- 2 -
credit package. This will be leaked to the press in
London in time for the Monday papers.
The question of additional credit facilities for the
British, by the U. S. and other countries, will also
arise, especially if speculative pressures on sterling
are not reversed. The Federal Reserve, in contacts this
weekend at the regular Basle meeting of central bankers,
will test sentiment on this difficult issue. With respect
to "recycling" recent German gains, the question of a
German government guarantee may arise.
If a calmer market atmosphere prevails in the days
and weeks ahead, some orderly realignment of exchange
rate parities still may be possible this summer. This
would be a prelude to our efforts to achieve more funda-
mental reforms. But it is clear we will continue to face
formidable uncertainties until the politically-charged
impasse on exchange rates is resolved.
David We Kennedy
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
Hichos BP
May 31, 1969
MEMORANDUM FOR THE PRESIDENT
which is
FROM:
Arthur F. Burns
The attached memorandum was written by Professor Aschheim
at my request. It is a summary of a competent paper that he
prepared for the Joint Economic Committee.
Professor Aschheim is critical of the way in which the Germans
have been off-setting the drain on our balance of payments caused
by our military expenditures in Germany. I have long felt as he
does about this problem.
Attachment
cc: Honorable William P. Rogers
Honorable David M. Kennedy
Honorable Henry A. Kissinger
Reproduced at the Richard Nixon Presidential Library and Museum
Summary of
: Dollar Deficit and Germ. Offsetting
by Joseph Aschheim
In recognition of the impact upon the U.S. balance of payments
of the U.S. Defense Establishment in the Federal Republic of
Germany, a series of economic agreements was concluded between
the U.S. and German Governments. The agreements have as their
objective the offsetting by the German Government of this U.S.
balance-of-payments impact.
For the years 1961-1966, the agreements called for the
offsetting of U.S. military expenditures in Germany by German
expenditures in the U.S. for military procurement by the German
Bundeswehr. The average annual offset amounted to $680 million.
A new type of offset agreement went into effect in mid-1967.
This agreement committed Germany's Bundesbank to purchase $500
million dollars of U.S. Treasury notes maturing in 4½ years.
Quantitatively, the second type of offset agreement is a retreat
from the first type. In the first type there was an attempt by the
parties to approximate a full offset of the foreign-exchange cost
to the U.S. of the American defense presence in Germany. By
contrast, in the second type the U.S. Government openly conceded
that the offset would only be partial.
Qualitatively, as well, the second type of agreement was a
retrogression by the U.S. in several respects. Firstly, under the
second type, the Germans receive interest income, not provided for
in the first type. Secondly, instead of buying American merchandise
outright, the Germans are merely extending a loan to the U.S.
Government, and will accordingly expect re-payment of principal
in the future. Thirdly, if prior to the expiration of the loan
additional amounts were lent in subsequent years, there would
cumulatively be generated German pressure against an indefinite
pileup of such loans in the insistence that sooner or later they
ought to be re-paid.
Accordingly, the second type of agreement is a substantial
surrender of principle from the U.S. standpoint not only because
$500 million is less than $680 million. The U.S. Government has
acceded to the position of debtor to the German Bundesbank, thereby
not solving, but only deferring the solution of, the problem posed
Reproduced at the Richard Nixon Presidential Library and Museum
-2-
for the U.S. by its defense expenditures in Germany.
Conceptually, there are four kinds of foreign-exchange
offsetting: (1) offsetting by buying; (2) offsetting by lending;
(3) offsetting by remitting; and (4) offsetting by compensating.
The first type of agreement was offsetting by buying; the second
is offsetting by lending.
It turns out that there is inherent in both the first and
second kinds of offsetting, a misallocation of resources. The U.S.
would be both unwise and unfair to inflict economic waste upon its
allies. Fortunately, such misallocation has not occurred thus far,
because the offset agreements were essentially window-dressing by
Germany. In other words, thanks to German shrewdness, the several
offset agreements have been economically ineffective.
To avoid both the practice of window-dressing (which implies
hoodwinking the American public) and the saddling of an ally with
uneconomical purchases or loans, offsetting must be at the least
by remitting. Offsetting by remitting would mean the rendering
of annual (or other periodic) payments by the West German Government
to the U.S. Government in the amount of the U.S. balance-of-payments
drain due to the American defense presence in Germany, in excess of
$800 million annually.
Though vastly superior in both economic and ethical soundness
to offsetting by buying as well as by lending, offsetting by
remitting still falls short of constituting an entirely rational
and fully equitable sharing of the economic burden of the U.S.-
German defense alliance. For offsetting by remitting confines the
offset to the foreign-exchange cost alone. The full cost borne by
the American taxpayers, however, is the budgetary cost of the
U.S. Defense Establishment in Germany. This cost is conservatively
estimated by this writer at $4 billion per annum. Its equitable
sharing would, then, imply a $2 billion annual payment by Germany
to the U.S. as the offset by compensation.
The Germans have been calling on the U.S. for several years
now both to restore equilibrium to the U.S. balance of payments
and to put the U.S. fiscal house in order. It is indeed high time
that the U.S. rose to the opportunity of taking up its German ally
on this wise counsel.
Reproduced at the Richard Nixon Presidential Library and Museum
TRANSLATION FROM DER VOLKSWIRT
( "The Economist") of Germany, Nr. 41, October 11, 1968,
p. 21, of item entitled in the German text, Window-
Dressing.
Window-Dressing
The Americans have subjected the foreign-exchange offsetting
arrangements thus far in effect, to a critical analysis.
Joseph Aschheim, professor of economics in the George Washington
University, contributed a 35-page memorandum commissioned by the
U.S. Congress whose quintescence is:
(a) Foreign-exchange offsetting by arms-buying
leads to economic nonsense.
(b) Offsetting by German lending is virtually
window-dressing.
Therefore, while the German Central Bank has not contravened
the letter, it has contravened the spirit of these agreements,
in that it simply exchanged maturing U.S. Treasury bonds (Roosa
bonds) for newly issued balance-of-payments-offsetting bonds.
In his contribution, the American professor reduces the foreign-
exchange-offsetting problem to the formula of "offsetting by
remitting". According to Aschheim, there exists for the U.S.
only one real solution, "namely, genuine transfer of German
budgetary appropriations to the U.S. Government in the amount
of the U.S. defense expenditures in Germany."
In the American Congress, as well, there is growing unrest about
the annual haggling over German foreign-exchange credits. Thus
Senator Mansfield has pointed out that for the stationing of
American troops in Germany the U.S. is paying interest.
Reproduced at the Richard Nixon Presidential Library and Museum
TRANSLATION FROM DER VOLKSWIRT
("The Economist") of Germany, Nr. 41, October 11, 1968,
p. 21, of item entitled in the German text, Window-
Dressing.
Window-Dressing
The Americans have subjected the foreign-exchange offsetting
arrangements thus far in effect, to a critical analysis.
Joseph Aschheim, professor of economics in the George Washington
University, contributed a 35-page memorandum commissioned by the
U.S. Congress whose quintescence is:
(a) Foreign-exchange offsetting by arms-buying
leads to economic nonsense.
(b) Offsetting by German lending is virtually
window-dressing.
Therefore, while the German Central Bank has not contravened
the letter, it has contravened the spirit of these agreements,
in that it simply exchanged maturing U.S. Treasury bonds (Roosa
bonds) for newly issued balance-of-payments-offsetting bonds.
In his contribution, the American professor reduces the foreign-
exchange-offsetting problem to the formula of "offsetting by
remitting". According to Aschheim, there exists for the U.S.
only one real solution, "namely, genuine transfer of German
budgetary appropriations to the U.S. Government in the amount
of the U.S. defense expenditures in Germany."
In the American Congress, as well, there is growing unrest about
the annual haggling over German foreign-exchange credits. Thus
Senator Mansfield has pointed out that for the stationing of
American troops in Germany the U.S. is paying interest.
Reproduced at the Richard Nixon Presidential Library and Museum
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
SECRET
May 10, 1969
MEMORANDUM FOR DR. HENRY A. KISSINGER
FROM : C. Fred Bergsten
SUBJECT: The Monetary Crisis
Following is the memorandum which you requested, which Dick
Cooper (who flew down for the day) and I wrote today. Volcker
would not commit himself to prepare an Options paper so we pro-
ceeded fully on our own. The Volcker group will meet tomorrow
night.
SECRET
Reproduced at the Richard Nixon Presidential Library and Museum
429
SECRET
May 2, 1969
MEMORANDUM FOR DR. KISSINGER
FROM:
Richard N. Cooper
SUBJECT:. Implications of Gold Suspension and a Floating Pound
At present, the United States is technically running a large
balance-of-payments surplus, due largely to our extremely tight
monetary conditions.
In the event of a real monetary crisis, however, funds might
leave the United States in large amounts. Until the German mark is
revalued, Germany would be the logical destination for such funds,
and Switzerland to a lesser extent. Some Americans might attempt to
purchase gold, although the major gold market has been quiet during
the past week, perhaps reflecting some uncertainty about what the U.S.
would do in the face of a crisis.
Under an existing agreement, Germany would not convert dollar
inflows into gold. But Switzerland would. Furthermore, large out-
flows of funds to Germany and Switzerland might induce other Central
Banks to convert their dollar holdings into gold. Thus, there is some
risk of a large drain on the U.S. gold stock, but it is by no means a
certain risk.
If such a drain showed signs of materializing, the U.S. should
cease to pay out gold in exchange for dollars. (We should consider the
possibility of taking such an occasion to launch discussions for basic
reforms of the monetary system, but that topic is not dealt with here.
On its merits, this action has much to be said for it. It would go further
toward eliminating an increasingly anachronistic feature of the inter-
national monetary system. But it would be a great psychological shock
to many, and especially in Europe, where gold is still accorded an
important place in monetary affairs. The United States would be charged
with violating a commitment, and President Nixon would be accused of
failing to live up to his promise to consult with his major allies on im-
portant decisions. Bitterness in certain financial circles would be great.
SECRET
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
-2-
Attitudes must be distinguished from behavior. While the United
States would get a bad financial press, there is not much Europeans
or others could do about it. Their broad options would be three. They
could:
pechaps
(1) Cease to peg their currencies to the dollar, as they do now,
and allow their exchange rates to float -- upward in the case of the
mark, the Swiss franc and the Italian lira, and downward in the case
of the French frane and the pound;
(2) Impose controls on the inflows of dollars, especially on
American investment in Europe;
any
(3) Maintain existing exchange rates as they do now, adding surplus
dollars to their international reserves.
The first outcome would not be undesirable under present circum-
stances, though it would, no doubt, be temporary because of European
aversion to exchange flexibility. But a temporary period of floating rates
would leave the world with a better structure of exchange rates than now
exists.
The second option would be far worse. It would very likely lead
to a revival of protectionism by immobilizing those domestic political
forces within foreign countries who favor a liberal trading world, and
it would certainly inject economic questions into foreign affairs in a major
way.
The third option is the most likely, provided the outflow of dollars
from the United States is not too great. Otherwise, the first or second
option would eventuate.
To sum up, on substantive merits Secretary Kennedy's inclination
is correct, but it would create a bad press and resentment within foreign
governments, thus souring the general diplomatic atmosphere. There
is little the Europeans could do about it, however, that would not also
be of serious damage to themselves.
On the narrower question of the British pound: any major currency
movements could force the British to act, because their financial margin
is at present so narrow. They could devalue the pound by a fixed amount,
as they did in November 1967; they could allow the pound to float freely;
in which case it would certainly depreciate in the first instance; or
they could impose restrictions on imports. Devaluation of the pound
SECRET
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
-3-
would not, in the short run, have very wide repercussions, although
it might stimulate other countries to devalue their currencies too,
either at once or in the near future. Devaluation is probably not
necessary for Britain in thellong run, but it could quell short-run
speculation against the pound.
Allowing the pound to float freely would be far more unsettling.
Countries with close trading or financial ties to Britain would either
allow their currencies to float with the pound or impose countervailing
import duties on British goods to limit the impact of a sharp depreciation
of the pound on their own economies. The only merit of this course of
action, in my view, is that it might provide a sufficiently great shock
to stimulate European officials to a serious reconsideration and reform
of the present payment system.
The third course of action, imposition of controls on imports, while
offensive to liberal traders, might serve best the immediate require-
ment of halting speculation against the pound without representing major
shocks and requiring major long-run adjustments, as the other two options
would do. On these grounds -- its temporary and limited purposes -- I
am less opposed to this third solution than is CEA.
SECRET
RCN:mst
Reproduced at the Richard Nixon Presidential Library and Museum
MEMORANDUM
599
THE WHITE HOUSE
WASHINGTON
ACTION
SECRET
May 6, 1969
MEMORANDUM FOR DR. KISSINGER
FROM: C. Fred Myster Bergsten
SUBJECT: The Present International Monetary Situation
Attached at Tab I is a memorandum from you to the President
on the present international monetary situation. It summarizes and
analyzes a memorandum from Paul McCracken on the subject.
I know that you are reluctant to make judgments on the economics
of this issue, but some of McCracken's analysis is inadequate and
some of his recommendations are extremely dangerous politically.
McCracken's recommendations:
1. Call for us to intervene quite deeply in Britain's decision-making
process, by indicating that we oppose additional import restrictions
but would support them if they decided to float the pound.
2. Would commit us to underwrite future British policy to an almost
unlimited extent with US money, because support for a floating pound
means in practice that we might have to give Britain huge amounts even
if their domestic economic policies were profligate.
3. By talking openly about US support for greater flexibility of
exchange rates (the "crawling peg") and by trying to get Britain to float,
could contribute to bringing on the very financial panic we seek to avoid
and the politically disruptive action which the US might be forced to
take under such circumstances.
RECOMMENDATION:
I therefore urge that you sign the attached memorandum to the
President.
SECRET
Eeproduced to Bergsten 5/20/69
at the Richard Nixon Presidential Library and Museum
Reproduced at the Richard Nixon Presidential Library and Museum
599
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
ACTION
SECRET
May 7, 1969
MEMORANDUM FOR THE PRESIDENT
FROM: Henry A. Kissinger
HK
SUBJECT: The Present International Monetary Situation
Issue
Attached at Tab A is a memorandum from Paul McCracken which
reviews the present status of the international currency difficulties
and makes three recommendations:
1. That we inform the United Kingdom, which is the main potential
crisis point, that:
(a) We hope they will continue to defend their present
exchange rate.
(b) We are opposed to their adopting any new import
restrictions,
(c) We are willing to help them manage a floating exchange
rate for the paind, if they are forced to abandon their present
parity, presumably by making available to them enough money
to moderate any decline in its value.
2. That we make no statements supporting the present structure of
exchange rates (except for the gold-dollar price) or minimizing the
seriousness of the situation.
3. That we come out more openly for the "crawling peg", a basic
reform of the international monetary system which would permit
gradual adjustment of exchange rates and hence help avoid future crises.
Present Situation and Analysis
Dr. McCracken's memorandum is contradictory on one of the crucial
elements of the situation. It states at one point that "there are no
indications" that Germany will revalue unilaterally, and at another that
they "will probably change their view if more money flows in". I share
the former judgment; the present monetary system puts very little real
pressure on surplus countries to act short of intense political pressure
SECRET
Historical File
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
- 2
from the rest of the world. In the case of Germany, this means in
practice that the US would have to involve itself deeply -- probably
including your personal intervention -- to change thei: minds.
Second, the memorandum indicates only by omission that the US is
well shielded from any direct effects of the present European currency
problems. Our exceedingly tight monetary policy is keeping the dollar
extremely strong in the exchange markets. Thus our only purely
national worry is the possibility that a real financial panic will ensue
and lead foreign monetary authorities to lose their nerve and seek to
convert their dollars into US gold. We might then be forced to suspend
the convertibility of the dollar into gold, which would risk major foreign
policy problems as outlined in my memo last Friday.
Third, I fully endorse Dr. McCracken's conclusion that the UK is
the major potential crisis point in the system and therefore agree with
his recommendation that we express our hope that the UK will hold its
present exchange rate.
However, I do not agree with his recommendation that we tell the
UK that we would prefer a floating exchange rate for the pound to new
import restrictions, if they are forced to do something. Even on purely
economic grounds, it is not clear that our balance of payments would be
hurt more by restrictions than by a change in the exchange rate of
sterling. More important, however, a UK decision to float would repre-
sent a major break with the present monetary system and is much more
likely than new restrictions to induce other countries to follow. Thus,
a decision to float is much more likely to touch off a panic. It is true
that import restrictions would only buy time for the UK, but there is
good economic reason to believe that they are finally on the right track
and that a bit more time will permit them to hold their present exchange
rate.
Finally, I agree that we need to move specifically toward reforming
the monetary system so that such crises will not recur continuously and
that the "crawling peg" is a desirable element in such reform. There
are two problems with his recommendation that we come out more openly
for such an approach, however.
One problem is that we should be very cautious about openly advocat-
ing the "crawling peg" at the present time. Any US statement on exchange
rates would increase market nervousness and run counter to Dr. McCracken's
other recommendation that we avoid making any statements on the present
situation. (We should, however, be alert to opportunities afforded by the
present situation to increase support for our reform ideas.)
SECRET
Historical File
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
- 3
The other problem is that you have not yet received the options
paper on monetary issues which you asked the Treasury to provide a
month ago. As a result, you have not had an opportunity to consider
the subject systematically and we have no agreed policy. We need to
move on this quickly before a real crisis overtakes us.
RECOMMENDATIONS:
1. That we inform the UK, in low key, of our hope that they can
maintain their present exchange rate.
Approve
Disapprove
2. That we go no further in our policy recommendations to the UK.
Approve
Disapprove
3. That we make no statements at all concerning the present
European currency situation, or, for the moment, our specific proposals
for international monetary reform.
Approve
Disapprove
4. That you convene an early meeting to consider overall US inter-
national monetary policy. I recommend that such a meeting include
the Secretary of Treasury, the Secretary of State, the Chairman of the
Federal Reserve Board, the Chairman of the Council of Economic
Advisers, and myself.
Approve
Disapprove
SECRET
Historical File
Reproduced at the Richard Nixon Presidential Library and Museum
Reproduced at the Richard Nixon Presidential Library and Museum
THE CHAIRMAN OF THE
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON
May 5, 1969
MEMORANDUM FOR THE PRESIDENT
Subject: The International Monetary Situation
Friday's meeting at Treasury brought out the political difficulties
in getting France to devalue, a solution about which we had economic
doubts in any case. The action proposed in Secretary Kennedy's memo
of May 1 is therefore ruled out for the time being. But the monetary
situation continues to give concern.
After a week in which close to $1 billion (net) flowed into
Germany, and in which the British lost some $200 million, today
(Monday) was fairly quiet. Some speculators, who had counted on
weekend devaluations or revaluations, revised their positions, but
it is expected that pressure will pick up again during the week. Con-
fidence in the dollar has so far held fairly firm, and the London gold
price remains slightly below its 1969 peak reached several weeks ago.
However, the interest rate on Eurodollars has risen significantly in
the last few days.
It would be nice if the Germans, without waiting for "company,"
revalued the mark unilaterally, but there are no indications they will
do so. Strauss made another statement on Sunday which gave additional
encouragement to speculators. Further complicating factors are a
central bankers' meeting in Basle, scheduled for next weekend
(traditionally an object of speculative interest) and the publication of
our first-quarter balance of payments figures by the middle of May.
So far the press has generally put our liquidity deficit at around $1
billion for the first quarter, while it was actually nearer $2 billion, an
unusually large amount.
Reproduced at the Richard Nixon Presidential Library and Museum
2
Evidently we are faced with a very hazardous situation. If
the British lose too many reserves they are likely to do one of three
things: (a) introduce tight import restrictions; (b) devalue to a new
fixed rate; or (c) let the pound float. The first course would be directly
contrary to our interests, not only because the U. K. is still one of our
best customers, but also because our policy is to eliminate barriers to
trade. In any case import quotas are not likely to give any durable
relief.
The second course seems less probable. Their 1967 experience
was not encouraging, and it would be difficult to pick a new fixed rate.
A decision to float also has its dangers since the pound may drop
sharply and drag several other currencies (such as the Scandinavian
and the Australian currencies) with it. But it would be quite possible
to prevent extreme movements by suitable management and international
cooperation. Basically the pound is not really over-valued at the
present parity, but confidence in the British government is low. Therefore
our efforts should be directed at keeping any downward movement in
sterling within bounds. We suggest that the British government be
informed of our opposition to import restrictions and our readiness,
if necessary, to help in managing a floating rate. For the time being,
however, we would prefer that the British continue to defend the existing
exchange rate.
Apart from this there appears to be little we can do at the moment.
A French devaluation would weaken both sterling and the dollar and is
therefore undesirable, quite apart from political feasibility. The
Germans are still insistent that they will not revalue alone, but they
will probably change their view if more money flows in. In the meantime
it would be good to avoid any statements minimizing the seriousness
of the situation or implying support for existing parities (other than the
dollar price of gold).
For the somewhat longer run it is clear that we have to take the
leadership in improving the international monetary system. In
particular we should come out more openly for the "crawling peg, 11 a
device that permits gradual adaptation of parities to changing economic
conditions and thus forestalls crises. We have now had technical
discussions with several countries on the crawling peg. Although
Reproduced at the Richard Nixon Presidential Library and Museum
3
these have not uncovered much enthusiasm abroad they have not uncovered
any insuperable technical difficulties either, and there is considerable
interest in Germany. Unless we act to improve the present System we
will be forced to defend it by allowing controls to proliferate, whic h
is essentially what the previous Administration did (with indifferent
success). The crisis now in progress should lead to a realignment
of par values and thereby provide the foundation for a more satisfactory
framework.
Paul W. McCracken
Reproduced at the Richard Nixon Presidential Library and Museum
429
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
SECRET
May 2, 1969
- HAK
MEMORANDUM FOR DR. KISSINGER
FROM:
Richard N. Cooper percary
SUBJECT: Implications of Gold Suspension and a Floating Pound
At present, the United States is technically running a large
balance-of-payments surplus, due largely to our extremely tight
monetary conditions.
In the event of a real monetary crisis, however, funds might
leave the United States in large amounts. Until the German mark is
revalued, Germany would be the logical destination for such funds,
and Switzerland to a lesser extent. Some Americans might attempt to
purchase gold, although the major gold market has been quiet during
the past week, perhaps reflecting some uncertainty about what the U.S.
would do in the face of a crisis.
Under an existing agreement, Germany would not convert dollar
inflows into gold. But Switzerland would. Furthermore, large out-
flows of funds to Germany and Switzerland might induce other Central
Banks to convert their dollar holdings into gold. Thus, there is some
risk of a large drain on the U.S. gold stock, but it is by no means a
certain risk.
If such a drain showed signs of materializing, the U.S. should
cease to pay out gold in exchange for dollars. (We should consider the
possibility of taking such an occasion to launch discussions for basic
reforms of the monetary system, but that topic is not dealt with here.)
On its merits, this action has much to be said for it. It would go further
toward eliminating an increasingly anachronistic feature of the inter-
national monetary system. But it would be a great psychological shock
to many, and especially in Europe, where gold is still accorded an
important place in monetary affairs. The United States would be charged
with violating a commitment, and President Nixon would be accused of
failing to live up to his promise to consult with his major allies on im-
portant decisions. Bitterness in certain financial circles would be great.
SECRET
Cy pent Cooper 5/7/69 Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
-2-
Attitudes must be distinguished from behavior. While the United
States would get a bad financial press, there is not much Europeans
or others could do about it. Their broad options would be three. They
could:
perhaps
(1) Cease to peg their currencies to the dollar, as they do now,
and allow their exchange rates to float -- upward in the case of the
mark, the Swiss franc and the Italian lira, and downward in the case
of the French franc and the pound;
(2) Impose controls on the inflows of dollars, especially on
American investment in Europe;
any
(3) Maintain existing exchange rates as they do now, adding surplus
dollars to their international reserves.
The first outcome would not be undesirable under present circum-
stances, though it would, no doubt, be temporary because of European
aversion to exchange flexibility. But a temporary period of floating rates
would leave the world with a better structure of exchange rates than now
exists.
The second option would be far worse. It would very likely lead
to a revival of protectionism by immobilizing those domestic political
forces within foreign countries who favor a liberal trading world, and
it would certainly inject economic questions into foreign affairs in a major
way.
The third option is the most likely, provided the outflow of dollars
from the United States is not too great. Otherwise, the first or second
option would eventuate.
To sum up, on substantive merits Secretary Kennedy's inclination
is correct, but it would create a bad press and resentment within foreign
governments, thus souring the general diplomatic atmosphere. There
is little the Europeans could do about it, however, that would not also
be of serious damage to themselves.
On the narrower question of the British pound: any major currency
movements could force the British to act, because their financial margin
is at present so narrow. They could devalue the pound by a fixed amount,
as they did in November 1967; they could allow the pound to float freely;
in which case it would certainly depreciate in the first instance; or
they could impose restrictions on imports. Devaluation of the pound
SECRET
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
-3-
would not, in the short run, have very wide repercussions, although
it might stimulate other countries to devalue their currencies too,
either at once or in the near future. Devaluation is probably not
necessary for Britain in the long run, but it could quell short-run
speculation against the pound.
Allowing the pound to float freely would be far more unsettling.
Countries with close trading or financial ties to Britain would either
allow their currencies to float with the pound or impose countervailing
import duties on British goods to limit the impact of a sharp depreciation
of the pound on their own economies. The only merit of this course of
action, in my view, is that it might provide a sufficiently great shock
to stimulate European officials to a serious reconsideration and reform
of the present payment system.
The third course of action, imposition of controls on imports, while
offensive to liberal traders, might serve best the immediate require-
ment of halting speculation against the pound without representing major
shocks and requiring major long-run adjustments, as the other two options
would do. On these grounds -- its temporary and limited purposes -- I
am less opposed to this third solution than is CEA.
SECRET
Reproduced at the Richard Nixon Presidential Library and Museum
MEMORANDUM
BP &- File
ACTION
THE WHITE HOUSE
WASHINGTON
CONFIDENTIAL
April 11, 1969
MEMORANDUM FOR THE PRESIDENT
FROM:
Henry A. Kissinger K
SUBJECT: Relaxation of Balance of Payments Controls
The relaxation of our controls on capital outflow which you announced
on April 4 carries certain foreign policy risks but, as you know,
I consider them acceptable in the context of this limited action.
I recommend that you proceed. However, due to Secretary Kennedy's
reluctance to have this matter referred to the National Security
Council, you were in effect asked to make a statement of your over-
all balance of payments strategy without an opportunity to address
the subject systematically and in context.
I therefore recommend that you ask Secretary Kennedy to prepare,
for your early consideration, a memorandum outlining your options
in the balance of payments and international financial area. A
memorandum for your signature instructing Secretary Kennedy to do
so is attached.
RECOMMENDATION:
That you sign the memorandum at Tab A.
Attachment
CONFIDENTIAL
vaea VbB 14 VIV a 55
УЯАТЗЯОЗ2
HONSE BECEINED OELICE OL
Reproduced at the Richard Nixon Presidential Library and Museum
File
april 15, 1969
MEMORANDUM FOR
THE SECRETARY OF THE TREASURY
On April 3, I approved the action proposed in your mem-
orandum concerning relaxation of balance of payments
controls, and authorized the release of the draft statement
prepared for this purpose.
While I thought it desirable to approve your recommendations
now, I would like to know what my choices are with respect
to our international monetary policy. Please prepare, in
coordination with interested agencies, a paper which will
permit me systematically to look at the available options,
including full consideration of the implications of each.
(initialed "RN")
(rewritten)
RN:HAK:CFB:mz
Reproduced at the Richard Nixon Presidential Library and Museum
THE WHITE house
WASHINGTON
April 15, 1969
MEMORANDUM FOR
THE SECRETARY OF THE TREASURY
On April 3, I approved the action proposed in your mem-
orandum concerning relaxation of balance of payments
controls, and authorized the release of the draft statement
prepared for this purpose.
While I thought it desirable to approve your recommendations
now, I would like to know what my choices are with respect
to our international monetary policy. Please prepare, in
coordination with interested agencies, a paper which will
permit me systematically to look at the available options,
including full consideration of the implications of each.
m
Reproduced at the Richard Nixon Presidential Library and Museum
NATIONAL SECURITY COUNCIL
WASHINGTON, D.C. 20506
CONFIDENTIAL
April 1, 1969
ACTION
MEMORANDUM FOR DR. KISSINGER
FROM: C. Fred M Bergsten
SUBJECT: Relaxation of Balance of Payments Controls
The attached memorandum from Secretary Kennedy recommends
that the President announce shortly the modest relaxation of all three
aspects of our controls over private capital outflows already decided.
The recommendation is agreed to by Secretaries Rogers and Stans,
Chairman Martin, Paul McCracken, and Bob Mayo.
I recommend that you support the recommendation, although it
carries significant foreign policy (and domestic economic) risks as
outlined in the memo itself and conveyed to you in my earlier memos.
There are, however, two specific problems of concern to us, one
relating specifically to our new emphasis on consultations and one
relating to the decision-making process.
This recommendation was delayed for two weeks to permit
Treasury Under Secretary Volcker to consult with the Europeans on
it. None of the Europeans oppose the move outright, but virtually all
of them were highly cautionary. They indicated that any resultant
increase in the U.S. payments deficit would weaken our over-all bar-
gaining position, particularly with regard to early and sizeable
activation of Special Drawing Rights. The major implication of this
conclusion is that our preferred multilateral approach to monetary
reform is now less likely to succeed, and we may be forced to take
unilateral steps which could be seriously disruptive to the entire Atlantic
Alliance.
Since we do not plan to reduce the pressure on the Europeans to
move ahead on SDRs and on much more "radical" reforms -- the
question of our sincerity in undertaking consultations will arise at
some point in the near future. We gave them a chance to record their
views and they did so. Our future action may well imply that we have
ignored those views. I flag this as an early case of the obvious prob-
lem that the new emphasis on consultation will create.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
-2-
On decision making, this is a prototype case of unsatisfactory ad
hoccery. The President is being asked to enunciate his over-all
international monetary policy without ever considering that policy. He
has been given no choices, nor even a paper on the over-all subject. In
retrospect, the decision to lift the subject from the NSC agenda was a
mistake -- since the Secretary of Treasury has not exercised the re-
sponsibility which he sought and received.
This factor does not lead me to recommend your opposing the pro-
posed action, since the President has made known his strong desire to
begin relaxing the controls as soon as possible. But I suggest that you
remind the President that he is being asked to do something without
consideration of its context and without systematic exploration of its full
implications, and recommend that he instruct the Secretary of Treasury
to present an options paper for his consideration in the near future.
RECOMMENDATION:
That you sign the attached memorandum to the President, recom-
mending that he:
(1) Approve the proposed relaxation of controls.
(2) Do so between 2 P. M. Thursday and 11 A. M. Saturday for
market reasons.
(3) Instruct Secretary Kennedy to prepare an options paper on
our international monetary policy with a meeting to take place
on it at an early date.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
Col Haig:
3.
I don't think you want this to go to the President
now -- it was being provided for his meeting
with the Quadriad on 3/18. If the information
is still valid for the President, perhaps the
reference to the Quadriad meeting should be
deleted.
Lora OBE
Tile
Reproduced at the Richard Nixon Presidential Library and Museum
MEMORANDUM
THE WHITE HOUSE
WASHINGTON
CONFIDENTIAL
March 17, 1969
MEMORANDUM FOR THE PRESIDENT
FROM: Henry A. Kissinger
tk
SUBJECT: Reductions of Controls on U.S. Capital Outflows:
Foreign Implications and a Note of Caution
Issue
I understand that you will discuss the reductions of our present capital
controls with your economic Quadriad tomorrow afternoon. There are
major foreign policy implications of our moving in this direction. As a
result of the considerations outlined below I recommend that you not com-
mit the Administration irrevocably to the abolition or large scale reduction
of the controls until an alternative solution to our international monetary
problems is in sight. I have no objection to the limited reduction which is
proposed for the near future although I agree fully with Secretary Rogers
that it should not be undertaken until after full consultation with our European
allies.
Foreign Policy Aspects
Eliminating restraints on private investment abroad has three foreign
policy aspects. The first is that the initial effect of easier monetary con-
ditions in the U.S. in the absence of controls would be an enlarged payments
deficit, to which most of the countries of continental Europe would object
strongly. Foreign disapproval would be expressed relatively quickly, even
before the emergence of a large deficit, since foreign officials can look
ahead. The move would be interpreted as a disavowal of our earnest inten-
tions to maintain a strong payments position.
Such officials, incidentally, do not share U.S. antipathy to controls over
capital movements. Nor does the foreign business community. Except for
Germany, all the European countries maintain some form of restraints on
international capital movements. Even Switzerland, the citadel of free enter-
prise, controls the access of foreigners to the Swiss capital market.
The main effect of this reaction would be a setback to our efforts to
improve the monetary system through cooperative steps with the Europeans.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
-2-
Thinking that the U.S. no longer cares about its payments position, their
propensity to cooperate even in the activation of Special Drawing Ri ghts,
let alone more far-reaching reforms such as adoption (or even serious
study) of greater exchange rate flexibility, will be sharply reduced. In
short, we may be circumscribing our option of a cooperative solution
forcing us inevitably toward the kind of unilateral action described below.
(The counter-argument is that a cooperative approach will not work anyway
and that unilateral U.S. moves are inevitable. I do not share this pessimism. )
Second, many -- probably most Europeans welcome U.S. controls
on direct investment (i.e., investment involving U.S. management control)
as providing some slowdown to the takeover of European industry by American
firms. This potentially explosive anxiety is by no means confined to govern-
ment officials. To be sure, Europeans are ambivalent about American
investment. Except for those firms feeling the direct competition, they
generally welcome the infusion of technology and even new management tech-
niques. But, because of the central position of the U.S. dollar in the
international monetary system, we are open to charges of dollar imperialism
if American capital is permitted to move to Europe without restraint at
least as long as our balance of payments is in sizable deficit. Some kind of
restraint on direct investment even the pre-1968 voluntary restraints were
helpful in this regard provides the necessary ambiguity on our side, com-
bined with their own ambivalence, to diffuse the issue.
Finally, and most important, the alternative policies which we might
be forced to adopt in lieu of capital controls could be much more damaging
to U.S. foreign policy. Troop withdrawals, additional pressure on Germany
and others for "better" offset arrangements, and further restrictions on the
aid program are only the most obvious possibilities -- and ones which we
should reject for obvious foreign policy reasons. Unilateral U.S. suspension
of gold convertibility -- essentially adoption of a floating exchange rate of
the dollar -- would represent a massive display of U.S. power and rupture
all our efforts to forge a new partnership with Europe on the basis of greater
equality. An increase in the official price of gold -- which would represent
only a temporary solution anyway -- would also be a unilateral act rejected
by most official Europeans and would betray $15 billion worth of dollar holders
from Germany to Thailand. Adoption of trade controls, such as export sub-
sidies and import surcharges, would be no economic improvement over capital
controls and would be much more damaging to our foreign policy, because of
the network of international rules which govern trade and which would be
broken in the process.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
- 3
As I understand it, the present proposal of the Secretary of Treasury
is for some relaxation in all three of the present control programs but
mainly affecting direct investment. The estimated gross cost to the balance
of payments is about $400 million. The relaxation would come against an
agreed projection of significant deterioration -- at least $1 billion and
possibly more -- in our payments position in 1969. This first step will
raise the problems outlined above to only a minor extent, but I recommend
that you not commit yourself irrevocably to the abolition of investment
restraints until a clear alternative is in sight.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
ACTION
CONFIDENTIAL
March 17, 1969
MEMORANDUM FOR DR. KISSINGER
FROM: C. Fred Bergsten
The issue of relaxing the capital controls is on the
agenda of tomorrow's meeting of the President with his
"Quadriad" of domestic economic advisers -- Secretary
Kennedy, Chairman Martin, Budget Director Mayo,
and Paul McCracken. Pursuant to your instruction,
attached is a memo to the President informing him of
the major foreign policy implications of the proposed
line of action and advising him to adopt a "go slow
approach" in implementing it.
CFB:mst
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENEIAL
March 17, 1969
MEMORANDUM FOR THE PRESIDENT
FROM: Henry A. Kissinger
SUBJECT: Reductions of Controls on U.S. Capital Outflows:
Foreign Implications and a Note of Caution
Issue
I understand that you will discuss the reductions of our present capital
controls with your economic Quadriad tomorrow afternoon. There are
major foreign policy implications of our moving in this direction. As a
result of the considerations outlined below I recommend that you not com-
mit the Administration irrevocably to the abolition or large scale reduction
of the controls until an alternative solution to our international monetary
problems is in sight. I have no objection to the limited reduction which is
proposed for the near future although I agree fully with Secretary Rogers
that it should not be undertaken until after full consultation with our European
allies.
Foreign Policy Aspects
Eliminating restraints on private investment abroad has three foreign
policy aspects. The first is that the initial effect of easier monetary con-
ditions in the U.S. in the absence of controls would be an enlarged payments
deficit, to which most of the countries of continental Europe would object
strongly. Foreign disapproval would be expressed relatively quickly, even
before the emergence of a large deficit, since foreign officials can look
ahead. The move would be interpreted as a disavowal of our earnest inten-
tions to maintain a strong payments position.
Such officials, incidentally, do not share U.S. antipathy to controls over
capital movements. Nor does the foreign business community. Except for
Germany, all the European countries maintain some form of restraints on
international capital movements. Even Switzerland, the citadel of free enter-
prise, controls the access of foreigners to the Swiss capital market.
The main effect of this reaction would be a setback to our efforts to
improve the monetary system through cooperative steps with the Europeans.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
-2-
Thinking that the U.S. no longer cares about its payments position, their
propensity to cooperate even in the activation of Special Drawing Ri ghts,
let alone more far-reaching reforms such as adoption (or even serious
study) of greater exchange rate flexibility, will be sharply reduced. In
short, we may be circumscribing our option of a cooperative solution --
forcing us inevitably toward the kind of unilateral action described below.
(The counter-argument is that a cooperative approach will not work anyway
and that unilateral U.S. moves are inevitable. I do not share this pessimism.)
Second, many probably most Europeans welcome U.S. controls
on direct investment (i.e., investment involving U.S. management control)
as providing some slowdown to the takeover of European industry by American
firms. This potentially explosive anxiety is by no means confined to govern-
ment officials. To be sure, Europeans are ambivalent about American
investment. Except for those firms feeling the direct competition, they
generally welcome the infusion of technology and even new management tech-
niques. But, because of the central position of the U.S. dollar in the
international monetary system, we are open to charges of dollar imperialism
if American capital is permitted to move to Europe without restraint -- at
least as long as our balance of payments is in sizable deficit. Some kind of
restraint on direct investment -- even the pre-1968 voluntary restraints were
helpful in this regard -- provides the necessary ambiguity on our side, com-
bined with their own ambivalence, to diffuse the issue.
Finally, and most important, the alternative policies which we might
be forced to adopt in lieu of capital controls could be much more damaging
to U.S. foreign policy. Troop withdrawals, additional pressure on Germany
and others for "better" offset arrangements, and further restrictions on the
aid program are only the most obvious possibilities -- and ones which we
should reject for obvious foreign policy reasons. Unilateral U.S. suspension
of gold convertibility -- essentially adoption of a floating exchange rate of
the dollar would represent a massive display of U.S. power and rupture
all our efforts to forge a new partnership with Europe on the basis of greater
equality. An increase in the official price of gold which would represent
only a temporary solution anyway -- would also be a unilateral act rejected
by most official Europeans and would betray $15 billion worth of dollar holders
from Germany to Thailand. Adoption of trade controls, such as export sub-
sidies and import surcharges, would be no economic improvement over capital
controls and would be much more damaging to our foreign policy, because of
the network of international rules which govern trade and which would be
broken in the process.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
-3-
As I understand it, the present proposal of the Secretary of Treasury
is for some relaxation in all three of the present control programs but
mainly affecting direct investment. The estimated gross cost to the balance
of payments is about $400 million. The relaxation would come againstan
agreed projection of significant deterioration -- at least $1 billion and
possibly more -- in our payments position in 1969. This first step will
raise the problems outlined above to only a minor extent, but I recommend
that you not commit yourself irrevocably to the abolition of investment
restraints until a clear alternative is in sight.
HAK: CFB:mst
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
MEMORANDUM
BP
THE WHITE HOUSE
WASHINGTON
LIMITED OFFICIAL USE
INFORMATION
March 12, 1969
MEMORANDUM FOR DR. KISSINGER
FROM: C. Fred VM Bergsten
SUBJECT: Relaxation of U.S. Controls on Capital Outflows
Any decision to relax the present controls has been post-
poned. At a Cabinet-level meeting yesterday, Secretary
Rogers insisted that we were obligated by the President's
trip to consult with the Europeans before taking a step with
such far-reaching implications. (See my memo of March 4
on this subject.) Arthur Burns and Secretary Stans, to a
lesser extent, resisted this decision but their views were
finally rejected by Secretary Kennedy.
Treasury Under Secretary Volcker will thus raise the issue
on his upcoming European trip. He will inform them that we
plan to reduce our reliance on controls but will seek their views
on timing and complementary steps. This approach will stand
in marked contrast to that of the previous Administration,
which enacted the entire control program -- a much more
drastic step than the marginal relaxation now envisaged and
then sent teams to Europe and the Far East to inform them of
the action. In fact, it could be argued that it is stretching the
President's commitment quite far to consult on an issue of
this magnitude. However, I supported Secretary Rogers on
the grounds that any unilateral action should be avoided so
shortly after the trip.
LIMITED OFFICIAL USE
Reproduced at the Richard Nixon Presidential Library and Museum
MEMORANDUM
THE WHITE HOUSE
file
WASHINGTON
CONFIDENTIAL
January 28, 1969
ACTION MEMORANDUM FOR DR. KISSINGER - URGENT
FROM:
Richard Cooper
C. Fred Bergsten OM
SUBJECT: Proposed Precipitate Action on the Balance of
Payments
The President met last Friday with his new Cabinet Committee
on Economic Policy. It comprises his domestic economic advisers:
Secretary Kennedy, Secretary Stans, Budget Director Mayo, CEA
Chairman McCracken, etc. They discussed the removal of present
controls over the export of funds by American banks and businesses.
The sentiment was very strong for immediate removal of these con-
trols, with little consideration of the consequences of SO doing or of
not
the actions to be taken in response to those consequences. It now
appears possible that Secretary Stans will announce a change in his
done
part of the program as early as tomorrow (Wednesday).
This question has a high foreign policy content. No action should
be taken before a thorough review of both the effects on the balance
of payments and foreign, especially European, reaction to removal
of the controls. Removal of the controls might well result in a sub-
stantial increase in the payments deficit, or at least widespread
expectations thereof, confronting the Administration with an inter-
national monetary crisis. It would evoke a strong negative reaction
from high officials in Germany, France, the Netherlands, Switzerland,
and possibly other countries a reaction that would, among many
other things, undercut our efforts to work out more satisfactory
arrangements for sharing the financial burden of NATO.
The NSC is the natural place to consider the foreign policy
implications of our balance of payments program and a meeting is
scheduled for February 26 on international monetary arrangements.
You should urge the President to avoid making any decision or public
commitments on this question until after the NSC review and to
instruct his Cabinet Members (especially Secretary Stans) not to do
SO either. Attached is a draft memorandum to him on the subject.
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
MEMORANDUM
fib
DI
THE WHITE HOUSE
WASHINGTON
copy copy glusn glush
CONFIDENTIAL
January 28, 1969
to Bangsten
2/4/69
MEMORANDUM FOR THE PRESIDENT
FROM:
Henry A. Kissinger IK
SUBJECT: Foreign Policy and U.S. Controls
on Foreign Investment
I understand that you have discussed with your domestic
economic advisers the removal of our present controls on
American investment abroad. I heartily agree with the
desirability of removing the controls. However, such a move
has vitally important foreign policy implications, especially
with respect to our relations with Europe.
Removal of the controls must be planned carefully and, to
avoid risking an international monetary crisis, probably must
be coupled with new and positive U.S. policy initiatives. I
/
therefore urge you to defer any final decision on this matter
until you can review the foreign policy aspects with the NSC,
and to instruct your Cabinet officers likewise to defer any de-
cision. An NSC meeting on international financial matters is
now scheduled for late February.
2
/
2 agree
2
2 believe etal
think we should antsomer 1
PRESERVATION COPY
Check with my Croolean-
(who is the CONFIDENTIAL w. H. man in change of this area)
t set an earlier date for
M.S. C. meety if his check with
the principids involved below
it is advisable
Reproduced at the Richard Nixon Presidential Library and Museum
6307 1/19
Secretariat
Please send this covering memo back to
Mr. Bergsten for further action. Memo
was signed and sent to the Pres. I will
hold the file - filed with the Pres. Please
have Mr. Bergsten's answered kept under
this number - 6307.
nancy
Reproduced at the Richard Nixon Presidential Library and Museum
THE WHITE HOUSE
6307
WASHINGTON
ACTION 1970
January 13, 1969
MEMORANDUM FOR DR. KISSINGER
FROM: Fred Bergsten HA
Attached for your signature is a memorandum
to the President covering Paul McCracken's
Weekly Report during the first week of January.
Fied-mlat is upingiure
J. lower
Alre please explain
different from if
anounting if
freeign
JAN 19 1970
Reproduced at the Richard Nixon Presidential Library and Museum
File Copy
INFORMATION
6307
MEMORANDUM FOR THE PRESIDENT
FROM:
Henry A. Kissinger
SUBJECT: International Monetary Situation
Paul McCracken's weekly report (Tab A) indicates that
the U.S. balance of payments moved back into sizeable deficit
during the first week of January. You will recall that it showed
a huge surplus in late December as U.S. firms repatriated
capital to meet the requirements of our control program. A
large portion of these funds was apparently re-exported immed-
iately, so we showed a liquidity deficit of about $1 billion and
an official settlements deficit of over $400 million last week.
On January 1, however, we received our 1970 allocation
of Special Drawing Rights which amounted to $867 million. This
windfall receipt thus reduced our liquidity deficit to about
$100 million and moved our official settlements position into a
surplus of over $400 million.
Foreign exchange markets were quiet with the Germans
continuing to lose reserves and the French continuing to gain.
The price of gold has now stayed below the official $35 price for
several days, and the South Africans may take advantage of our
new agreement with them to sell some gold to the International
Monetary Fund.
CFBergsten:1w
1/13/70
Reproduced at the Richard Nixon Presidential Library and Museum
CONFIDENTIAL
6307
THE CHAIRMAN OF THE
COUNCIL OF ECONOMIC ADVISERS
WASHINGTON
January 10, 1970
MEMORANDUM FOR THE PRESIDENT
Subject: Weekly Report on International Finance
During the first week in January, there was a sizable reversal
of the late December inflow of funds into the United States, and the
U.S. balance of payments swung back to the negative side. On a
basis comparable to earlier figures the liquidity balance was in
deficit by about $1, 000 million during the first week of January, but
the $867 million allocation of SDR's to the U.S. at the beginning of
January, which is counted as an inflow, reduced the liquidity deficit
to $131 million. The SDR allocation, which comes only once a year,
resulted in an official settlements surplus of $428 million instead of
the $439 million deficit which would otherwise have been recorded.
The foreign exchange markets were quiet during the past week.
The British did not intervene in the market, and the pound stayed around
par for most of the week. The Germans engaged in no intervention until
Friday, when they lost $127 million. The French gained $70 million
during the first three days.
On Wednesday, the price of gold in London fell to $35.00, and
on Thursday and Friday it was quoted slightly below $35.00. Thus, for
three days this week, the conditions were fulfilled for a South African
gold sale to the IMF. South African sources suggested that a gold sale
would indeed be made to the Fund, although South Africa would probably
hold off for a week or so in order to allow the volume of salable gold
to accumulate, and thus avoid transactions of trivial size.
Paul W. McCracken
CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library and Museum
Chart I
U. S. BALANCE OF PAYMENTS BASED ON WEEKLY DATA
(LIQUIDITY BASIS)
Deficit (+), surplus (-)
Millions of dollars
Millions of dollars
10000
10000
9000
9000
1969
8000
8000
7000
7000
Dec. 31
6000
6000
DEF IC C / T
5000
5000
4000
4000
3000
3000
2000
2000
1967
DEFICIT IT
1000
1000
JAN. 7,
1968
1970
0
0
SURPLUS
Cumulated
-1000
-1000
I
F
M
A
M
J
I
A
S
0
N
D
Reproduced at the Richard Nixon Presidential Library and Museum
Chart II
U.S. BALANCE OF PAYMENTS BASED ON WEEKLY DATA
(OFFICIAL RESERVE TRANSACTIONS BASIS)
Deficit (+),surplus (-)
Millions of dollars
Millions of dollars
4000
4000
3000
3000
2000
2000
1967
1000
1000
DEFICIT
0
0
JAN. 7,
1070
-1000
-1000
-2000
-2000
SURPLUS
Dec. 31
1968
-3000
-3000
1969
SURP LUS
-4000
-4000
Cumulated
-5000
-5000
I
F
M
A
M
I
I
A
S
0
N
D
Reproduced at the Richard Nixon Presidential Library and Museum
CIA
Reproduced at the Richard Nixon Presidential Library and Museum
SANITIZED COPY
Secret
3.3(b)(i)
SANITIZED
CENTRAL INTELLIGENCE AGENCY
RUNITED STATES OF AMERICA
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
International Finance Series No. 11
Gold and Monetary Reform: A Brief Interim Report
Secret
ER IM 69-23
February 1969
DECLASSIFIED
Copy No. 18
NLN E.O. 12958. 04-06/2 as amended Sect 3.5 per xxx.3.3(6)(1) Hv.
By 3R NARA, Date 16 160ct 07
[p. of 7]
CANITIZED COPV
Reproduced at the Richard Nixon Presidential Library and Museum
WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP 1
EXCLUDED-FROM AUTOMATIC
now GRADING AND
DECLASSIFICATION
[NLN 04 - 06/ 2 : 2]
Reproduced at the Richard Nixon Presidential Library and Museum
SANITIZED COPY
SECRET
SECRET
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
February 1969
INTELLIGENCE MEMORANDUM
International Finance Series No. 11
Gold and Monetary Reform: A Brief Interim Report
SANITIZED
1. Press
suggests
3.3(b)(1)
that the French may be mounting an elaborate effort
to set the Parisian monetary stage for the forth-
coming Presidential visit -- the objective being to
create conditions favorable for discussion of inter-
national monetary questions within terms of reference
satisfactory to General de Gaulle. There has de-
veloped in Paris a school of thought -- encouraged
if not inspired by French officials -- that the new
US administration is basically in sympathy with de
Gaulle's international monetary views. This school
has few adherents in other major Western money
centers. In Paris it is led by a phalanx of financial
writers, the most influential of whom has allied
himself closely with French official views in the
past.
2. Adherents to the school claim to see US
officials progressively excluding from consideration
all monetary reform proposals except for the well-
known French ones -- an increase in the official
price of gold and a movement toward an international
monetary system based on a pure gold standard. This
school of thought is becoming a "line" with the
corollary that the United States and France share
the same leaky boat, the repair of which involves
joint devaluation through an increase in the price
of gold.
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research.
SECRET
SANITIZED COPY
[NLN 04-06/2:3]
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
3. Adherents to this school claim that the
objective circumstances, that is, developments on
the foreign exchanges and in world gold markets,
point to the increasing relevance of reforms of the
Gaullist type. Although the principal gold and
foreign exchange markets continue to behave er-
ratically and to reflect the persistent instability
of the international monetary system,* recent develop-
ments do not support the view that increased gold
prices can furnish the only acceptable solution.
These developments are reviewed below.
Performance of the Two-Tier Gold Market System
The Official Sector
4. Since the establishment of present gold
trading arrangements in March 1968, nearly all
nations of the West have adhered to the principle
laid down in the Washington Agreement that govern-
ments not engage in gold trading with any element
of the private sector. The minor exceptions - in-
deed the only violations of the principle - - have
been purchases of gold by Portugal and the Congo
(Kinshasa) directly from the South African Reserve
Bank, which markets South Africa's production.
The Private Sector
5. Gold trading in London and Zurich furnishes
the bellwether for performance of the unofficial
segment of the world gold market. Since March
1968, free gold market trading volumes have generally
been low, and prices have shown considerable variation
with no clear trend, although current prices are at a
near all-time high. In April-May 1968, weekly average
prices climbed to a peak of about $42.00 per ounce, then
fell to a low of about $38.50 in July. Subsequently,
they fluctuated between a low of $38.70 and a high
of about $40.40 until the end of November, with no
*This Memorandum is concerned only with very recent
market developments. An extensive analysis of the
fundamental problems of the international monetary
system will be published at a later date.
- 2 -
SECRET
[NW N CH-06/2:4]
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
trends in evidence. In December 1968 and January
1969, prices rose steadily until they reached the
$42.50 - $42.70 range, within which they have re-
mained during the last three to four weeks.
6. The December-January price rise reflects
speculation that the new US administration would
opt for an increase in the official price of gold
and abandonment of the two-tier arrangement. This
speculative movement lost momentum except in Paris
following the Inauguration. Recent London market
performance indicates that the modestly higher
price of roughly $42.50 is the limit to which
speculators are willing to gamble.
7. Compared with London and Zurich, the Paris
gold market is unimportant and influenced primarily
by domestic factors. Prices have fluctuated more
widely while generally following the lead of London
and Zurich. During the summer of 1969 and since
November 1968 - the periods in which French ex-
change controls have been in force -- Paris gold
prices have, as expected, risen to substantial
premiums above those prevailing in other gold
markets. The present premium is between $2.00 and
$3.00 per ounce.
8. On 17 February, the Paris price of the
French hoarder's favorite bar - the one-kilo
ingot - - rose to a historic high, equivalent to
$46.32 per ounce, after a weekend in which Parisian
financial writers had filled the press with con-
clusions that the United States was clearly com-
prehending the correctness of the French official
position on the role and price of gold. However,
the high Paris gold price -- which has fallen
slightly from the $46.32 level -- also reflects
the continuing weakness of the franc on the foreign
exchanges and the persistent problems of the French
economy. French nationals continue to move out of
francs and into real estate, securities, objets d'
art, and gold as a hedge against possible franc de-
valuation.
- 3 -
SECRET
[NLN 04-06/2:5]
Reproduced at the Richard Nixon Presidential Library and Museum
SECRET
The Foreign Exchanges
9. In marked contrast to the crisis period which
led to the establishment of the two-tier gold price
system, market response to the instability of the
international monetary system has resulted in ex-
change rate fluctuations rather than speculative
gold buying. Moreover, pressure against the US
dollar has eased. At the moment, the dollar is
strong, Eurodollar rates are firm or rising, and
there is every indication of a strong demand for
dollars in the world's principal money and capital
markets. If it were the collective judgment of
the international financial community that the
dollar is - - or ought to be - headed for devalua-
tion in the short term, this judgment would be
reflected in a combination of dollar weakness on
the foreign exchanges, liquidation of dollar debt
in favor of debts denominated in other currencies,
and rising prices and trading volumes in the princi-
pal world gold markets. None of these factors is
in evidence.
- 4 -
SECRET
[NLN 04- 04 - 06 / 2167
Reproduced at the Richard Nixon Presidential Library and Museum
0309/02/003
Secret
SANITIZED
SANITIZED COPY
3.3(b)(1)
3.3
Secret
SANITIZED COPY
[NLN 04-06/2:7]
Reproduced at the Richard Nixon Presidential Library and Museum