Friday, October 14, 2016

The French Factor in U.S. Foreign Policy during the Nixon-Pompidou Period, 1969–1974

by Marc Trachtenberg

"...The crisis, though long expected, came to a head in mid-1971. The new secretary of the treasury, John Connally, laid out the policy in May. The crisis would be allowed to develop “without action or strong intervention by the U.S.” At an appropriate time, the gold window would be closed, and trade restrictions would be imposed. This would lead, at least for the time being, to a system of floating rates. The main goal was to get the surplus countries to revalue their currencies, but the United States would make clear—both for bargaining purposes and as a fallback position if revaluation negotiations failed—that it could live indefinitely with the floating rate system.35 Nixon approved this course of action and wanted to “move on the problem,” not “just wait for it to hit us again.”36 The new measures were announced on 15 August. The gold window was closed, a border tax was imposed. Nixon had gone on the offensive. The tone of U.S. policy in this area was nationalistic. The emphasis was still on getting the Europeans and the Japanese to accept a substantial realignment of exchange rates, but the goal of systemic change had not disappeared entirely. According to Shultz, who was in a position to know, the 15 August package “was designed to be a signal that the United States was seeking a fundamental change not only in existing exchange rates but also in the monetary system itself.”37 Shultz’s influence at this time was on the rise. By late 1971, Nixon had evidently come to share the Shultz view that a major structural reform was needed and that it would be a mistake to go back to the “old system of parities, but with different exchange rates.”38 This was probably why the question of a devaluation of the dollar in terms of its gold price was now so important. If the price of the dollar could be set in terms of gold, then why should all the exchange rates not be set by international agreement? That was the old system, and the basic goal now for Shultz and, increasingly, for Nixon, was to move on to something better. But Connally, who was being criticized for his rough tactics, was under pressure to settle, and he in effect offered to devalue the dollar as part of a rate realignment package.39 Nixon, who had made clear he did not favor devaluation, was angry.40 But the Connally offer could not be rescinded. A series of negotiations between the West Germans and the French; then between Nixon, Kissinger, and Pompidou in the Azores; and, ªnally, in late December 1971 between all the major trading nations at the Smithsonian Institution in Washington—followed in rapid order, leading to an agreement that set new parities but did not restore convertibility. The United States, however, did little to “defend” the new rates.41 Shultz had taken over from Connally as secretary of the treasury in early 1972, and the choice not to defend the rates was in line with Shultz’s basic approach to the problem. His goals were more ambitious than Connally’s had been. He wanted a fundamentally new system in which the market would play the central role in setting exchange rates. But he was no Texas cowboy. His methods were subtle and indirect. He thought of himself as a strategist who sought to “understand the constellation of forces present in a situation” and tried to arrange them so that they pointed “toward a desirable result.” The aim was not to dictate the terms of a settlement but “to get the right process going” and allow things to take their course.42 Shultz’s style was thus not to force his views directly on other people. He was a “conciliator and consensus builder” and could “work with almost inhuman patience to bring a group into agreement upon a decision that all could support, at times submerging his own preferences.”43 The most striking example of this was his willingness in mid-1972 to accept a “par value system supported by official convertibility of dollar balances,” provided the burden of adjustment was shared equally by both surplus and deficit countries.44 A plan of that sort (which, however, would also allow countries to “float their currencies”) was announced in September 1972.45 The plan was well received because it showed that the U.S. government was serious about reform. For Shultz, however, a negotiation based on this kind of plan was not the only way to bring a new system into being. For him, the road to reform had two lanes, “one of negotiations and the other of reality. A conclusion would be reached only when these two lanes merged and the formal system and the system in actual practice came together.”46 A system of floating exchange rates came into being de facto with the collapse of the Smithsonian agreement in early 1973. The two lanes converged when the reality of the floating rate system was recognized by the Jamaica agreement of January 1976..."

35. Treasury Paper, 8 May 1971, in FRUS, 1969–1976, Vol. 3, pp. 423–427, esp. 425. 36. Huntsman to Connally, 8 June 1971, in FRUS, 1969–1976, Vol. 3, p. 443. The Nixon tapes provide some extraordinary insights into U.S. policymaking at this point. Some key passages were transcribed and presented in Luke Nichter, “Richard Nixon and Europe: Confrontation and Cooperation, 1969–1974,” Ph.D. Diss., Bowling Green State University, 2008, ch. 3. 37. Shultz and Dam, Economic Policy, p. 115. 38. Editorial Note, in FRUS, 1969–1976, Vol. 3, pp. 521–522. See also a letter of 8 September 1971 to Under Secretary of the Treasury for Monetary Affairs Paul Volcker from Shultz’s assistant director, Kenneth Dam (he and Shultz later wrote a book together), cited in FRUS, 1969–1976, Vol. 3, 179 n. 1, and warning (in the editor’s paraphrase) that “focusing on quantitative goals before agreeing on the type of international monetary system the administration wanted might constrain long-term options.” See also Nixon-Kissinger Telephone Conversation, 28 October 1971, in Kissinger Telephone Conversations Collection, DNSA/KA06727.

"So the whole point of an interventionist policy in this area was not to help the Europeans with their monetary problems, but to keep the Europeans from coming together as a bloc. The idea was that the United States might be able to achieve that goal by selectively intervening on a country-by-country basis. U.S. officials took for granted that they could not oppose the Europeans head on: “We couldn’t bust the common float without getting into a hell of a political fight,” Kissinger said. The United States had to do what it could “to prevent a united European position without showing our hand.” He emphasized that this policy was not based on an assessment of U.S. economic interests: his objection to what the Europeans wanted to do “was entirely political.” He had learned from intelligence reports that all of the administration’s enemies in the West German cabinet “were for the European solution,” a disclosure that pretty much decided the issue for him.76 A year later, at a time when U.S. problems with Europe were coming to a head, he laid out his thinking on the issue in somewhat greater detail. “We are not,” he said, “opposed to a French attempt to strengthen the unity of Europe if the context of that unity is not organically directed against us. So I am not offended by the ºoat idea as such, or by common institutions. If, however, it is linked to the sort of thing that is inherent in the Arab initiative [i.e., the Europeans’ plan at that point for a “dialogue” with the Arabs, which Kissinger viewed as a hostile move], as it seems to be, then we have a massive problem. Then we have the problem that we have got to break it up now.”77"

74. Nixon-Kissinger-Shultz Meeting, 3 March 1973, Tape Transcript, in FRUS, 1969–1976, Vol. 31, p. 79. 75. Brandt to Nixon, 2 March 1973, in FRUS, 1969–1976, Vol. 31, p. 49; and Nixon to Brandt, 3 March 1973, in FRUS, 1969–1976, Vol. 31, p. 92. 76. Kissinger-Simon Telephone Conversation, 14 March 1973, in DNSA/KA09752; and KissingerSimon Telephone Conversation, 15 March 1973, in DNSA/KA09779. Extracts were also published in FRUS, 1969–1976, Vol. 31, pp. 123, 126. The following month another intelligence report about Brandt was circulated to top U.S. ofªcials. “Apparently,” Federal Reserve chief Arthur Burns wrote in his diary on 3 April 1973 that “we know everything that goes on at German cabinet meetings.” Arthur Burns Journal II, p. 60, in FDPL. 77. Secretary’s Staff Meeting, 22 March 1974 (dated 26 March), p. 50, in DNSA/KT01079. Note also a comment Kissinger made in a 6 March 1974 meeting with Secretary of Defense James Schlesinger: “I am convinced we must break up the EC. The French are determined to unify them all against the United States.” See DMPC:Nixon/FDPL.