The European Response

Nixon’s speech shocked the European governments, which were taken by surprise, not even being able to coordinate a diplomatic reaction while their currencies started to float in a disorderly fashion� The first reaction was strong resentment and a sense of frustration over the unilateral character of the decision, taken without any consultation with European allies� Probably a better formula to express the feeling of frustration shared by the Europeans was that used by the Japanese press, which called the American decision to close the gold window “the Nixon Shock”�

European governments had two unpleseant choices to make: they could hold unconvertible dollar reserves, or sell them in the currency markets, with a forced revaluation of their currencies� A devalued dollar helped American exports, and the balance of payments problems would be helped by the temporary 10% border tax, a measure which proved to be particularly irritating for the European governments�

The floating of the dollar created wild fluctuations among the European currencies, wiping out the Werner Plan and the planned monetary union, with severe consequences also for the European integration process� The Brandt government tried to propose a joint float against the dollar, with

20 Becker, W�, “The US and the search for a new monetary system”, in Haftendorn, H�, Soutou, G�-H�, Szabo, F� & Wells, S� (eds�), The Strategic Triangle, p� 199-201�

21 Basosi, D�, Il governo del dollaro, p� 162-5�

22 Becker, W�, “The US and the search for a new monetary system”, p� 199-201�

the aim of creating a European bloc against the US, but France insisted on a return to fixed exchange rates and tried with all means possible to avoid a revaluation of the franc� Italy found itself in the difficult position of chairing the EC Council of Ministers and developed a strategy aimed at finding a compromise between the US and the Europeans, with the goal of promoting an international monetary negotiation covering trade issues also�

Only on September 13, following strenous debate, did the Council of Ministers publish a communiqué very critical of the US, which requested, as a condition prior to starting negotiations inside the International Monetary Fund and the Group of Ten leading industrialist countries, dollar devaluation, the lifting of the surcharge on imports, a renewed role for gold, the alignment of currencies, and, last but not least, a return to a fixed exchange rate�

At the same time, the Europeans opened a channel for negotiations:

a European delegation visited Washington, headed by Renato Ruggiero, Sicco Mansholt and Ralph Dahrendorf� In the debate that developed inside the Commission on October 6, which focused on the results of the visit, Sicco Mansholt, at that time European Commissioner for Agriculture, stressed the need for stronger coordination among the European countries, a suggestion which was encouraged also by Raymond Barre, in charge of Economic and Monetary Affairs, who pointed out the American strategy of negotiating bilaterally with each Government with the aim of pitting one against the other without making concessions�²³

In spite of the European efforts, the US government did not propose any solution, apart from stating the need for a massive improvement in its trade account� As Henry Kissinger noticed, “Connally’s strategy was to put forward no specific American proposal to resolve the crisis”�²⁴ The government stopped supporting the exchange rate of the dollar, which started to float against the other major currencies�

In the debate which developed inside the Nixon administration on the best strategy to pursue in the following months, the US decided “to bring maximum pressures on the more instransigent negotiating partners, including the French (with regard to monetary issues) and the Common Market (on trade issues)� This would be achieved by presenting the possibility of a package that might provide the basis for a modus vivendi

23 Historical Archives of the European Union, Emile Noël Papers, Folder 1050, Compte rendu sommaire de la discussion de la Commission, October 6, 1971�

24 Kissinger, H�, The White House Years, New York, Simon & Schuster, 1979, p� 753�

by Christmas�”²⁵ The absence of convertibility was considered “central to the US position”, not only for the financial risks, but for the desire to maintain a strong hand in future negotiations about the monetary system�

However, maintaining such an assertive position for a long time could be dangerous� A memorandum worked out by Robert Hormats for Henry Kissinger warned of the risks of playing France off against Germany and stressed the fact that Secretary Connally could not fully appreciate the political implications of attempting to divide Common Market nations on economic and monetary issues�²⁶

In his memoirs, Henry Kissinger awarded himself kudos for having understood the limit beyond which this disagreement would generate a dangerous rift in transatlantic relations, which could be exploited by the Soviet Union, and for having convinced John Connally not to cross it�

“We would”, wrote Kissinger,

have to tread a narrow path between maintaining enough pressure to provide an incentive for the adjustments we were seeking, and evoking a trade war as well as jeopardizing political relationships built up over decades� I sought to make my contribution in finding that balance�²⁷

Despite Kissinger’s words, the wish to repair such a dangerous cleavage was also European� Georges Pompidou did not want to start a monetary battle against the dollar and, thanks to the friendship which tied Michel Jobert, at that time General Secretary at the Élysée, to the American Ambassador in Paris, Dick Watson, decided to engage a deal with the Nixon administration�²⁸

A compromise was found at the meeting in the Azores between Nixon and Pompiduou, which took place on December 13 and 14, 1971� Before the meeting, the French President had met the German Chancelor, Willy Brandt, in Paris at the beginning of December, and had agreed on a common scheme of a concerted floating of European currencies vis-à-vis the dollar, which represented the basis of the deal� The new monetary order agreed in the Azores established that most of the major currencies

25 National Archives, College Park, USA, Nixon Presidential Material Staff, National Security Council (NSC) Files, Box 356 Monetary Matters, Memorandum for Henry Kissinger, Lunch with President, Connally, Shultz, November 24, 1971� Secret�

26 National Archives, College Park, USA, Nixon Presidential Material Staff, National Security Council (NSC) Files, Box 356 Monetary Matters, Memorandum for Henry Kissinger from Robert Hormats, Economic Policy at the Summit, December 9, 1971� Secret�

27 Kissinger, Henry, White House Years, p� 755�

28 Roussel, E�, Georges Pompidou, Paris, Lattes, 1994, p� 462�

would appreciate against the dollar, while the US would lift the 10%

surtax on imports and would adopt more flexible margins for exchange rates�

In spite of the triumphalistic press communiqué released at the end of the summit, Pompidou was not able to obtain from the Nixon administration a return to dollar convertibility into gold, and was perfectly aware that the deal was particularly favorable to the US�²⁹ Richard Nixon, during a Cabinet meeting held on December 15, declared that the Azores meeting could be considered “a good deal”�³⁰ And really it was a good deal for the US, which had unleashed the dollar from the Bretton Woods constraints, maintaining at the same time its centrality in the international monetary system�

On December 18, the US, Western European governments, and Japan came to an understanding via the so-called Smithsonian agreement, which adopted the Azores deal� To salvage a semblance of fixed exchange rates, the participants agreed to widen the band within which the currencies could fluctuate: the range was extended to 2�5% from the 1% allowed by Bretton Woods�