Foreign Relations of the United States, 1964–1968, Volume VIII, International Monetary and Trade Policy

124. Memorandum From the Under Secretary of the Treasury for Monetary Affairs (Deming) to John J. McCloy¹

Washington, May 17, 1967.

SUBJECT

• Further Developments in International Monetary Negotiations

This memorandum summarizes major developments in international monetary negotiations since my memorandum of April 22, 1967,² with particular reference to the German role in these negotiations. It also indicates why we have not been satisfied with the German posture in these negotiations, and presents some arguments as to why we think it is in the German interest to take a more vigorous and constructive position, even to the extent of breaking with the French on this issue if the French remain too negative and dilatory in their tactics.

Prior to the meeting of the EEC Finance Ministers on April 17, Secretary Fowler wrote two letters to Economics Minister Schiller and on April 21 the Minister replied. (Copies of this correspondence attached at Tab A.)³ Walter Heller visited Schiller on April 11 and Vice President Humphrey discussed the liquidity question with Chancellor Kiesinger and Vice Chancellor Brandt during his visit to Bonn. As you know, President Johnson mentioned this topic in his letter to the Chancellor and subsequently discussed it with him personally.⁴ (Points made by the President summarized at Tab B.)⁵ Despite all of this the Germans moved much closer to the French and Belgians and away from the Italians and Dutch toward a “weak” form of new liquidity.

Following the meeting of the Finance Ministers of the EEC, the Group of Ten met with the Executive Directors of the IMF in a Joint Meeting on April 24 and 25, 1967, in Washington. The position taken in the EEC Communique (Tab C)⁶ was defended strongly by the French and Belgian spokesmen, and, under the “solidarity” principle, by the Dutch spokesman (although he was in fundamental disagreement with it). Chairman Emminger of Germany, who also disagreed with the EEC position, defended it but gave it a somewhat more flexible interpretation than the others. The Italian representative obviously chafed under the restraint imposed by the French attempt to stifle individual national positions and present only a common EEC position. Largely because of the aggressive suggestions for a much stronger control of EEC nations over the regular operations of the IMF, and the critical tone of the Monetary Committee’s Report on the operations of the IMF,⁷ the developing nations expressed a preference for a reserve unit as against the drawing right principle endorsed by the EEC. In the past the developing nations had not shown much interest in the form of the asset. They also strongly objected to some aspects of the voting procedure proposed by the EEC for activation of a reserve creation plan, which they considered discriminatory.

“That committee had proposed that there be opened in the Fund new automatic drawing rights, with both accounting and financing separated from other drawing rights in the Fund, which would be usable in accordance with well-defined rules drawn up in advance and directly transferable between the monetary authorities of the member countries. Furthermore, when the Fund’s Articles of Agreement were amended to include such new drawing rights, other amendments should be made. Many of these amendments were drawn along the lines of the earlier French suggestions. Conditions attached to drawing rights in the credit tranches should be tightened. The definition of par values and of the Fund’s unit of account should be simplified by retaining only the reference to a weight of fine gold. An 85 per cent voting majority should be required for various decisions in the Fund, particularly those for general changes in quotas and for the creation of additional reserves, and this majority ought to include at least half the major creditor countries.” (Margaret Garritsen de Vries, ed., The International Monetary Fund, 1966–1971: The System Under Stress, vol. I, pp. 132–133)

I made the U.S. position clear in the following terms:

“Perhaps some of the characteristics of money could be provided through a drawing right scheme, if its characteristics included unconditionality, ready convertibility, non-repayment, adequate provisions for acceptance, holding and use, transferability and segregation of accounts in an affiliate. With all these characteristics, a new reserve asset would constitute a credible, convincing and generally accepted supplement to gold and reserve currencies … a unit would be better, but I was willing to be convinced that a drawing right could have these characteristics, though I remained somewhat skeptical. For a scheme to be credible, the world must be convinced that there was a solid and substantial decision-making apparatus, which assured that decisions would be taken in a sober and conservative fashion. Also, however, one had to know that the decision-making apparatus was a viable one and that the decisions, however sober and conservative, could in fact be taken. One needed a very high, qualified vote and some sort of apparatus to prevent a veto by one country or a small group of countries.”

I also suggested that to give the plan reality and precision for legislatures and for the general public, the agreement should specify the amount of reserves to be created each year for the initial 5-year activation period. The timing of the initial activation would be governed by the decision-making procedure. I mentioned a figure of $10 billion, or of $2 billion each year for five years, as had been suggested in one of the IMF plans.

At the close of the Joint Meeting, Mr. Schweitzer held a press conference (Tab D) in which he gave a cautiously optimistic forecast of the possibility of reaching an agreement to take some action at the September Annual Meeting of the IMF in Rio de Janeiro. However, there was one disturbing feature during the meetings. In order to expedite the negotiations, the United States suggested that the International Monetary Fund revise its two draft plans—one providing for a reserve unit and one providing for a drawing right⁸—in the light of the discussion at the meetings, so that these drafts would be available to the Deputies meeting in Paris on May 17 to 19, 1967. The EEC members took exception to this, and the Fund has now delayed this revision, so that there will not be available to the Deputies a “good” drawing right scheme as prepared by the Fund. In order to have an effective basis for discussion at the Deputies meeting May 18–19, the United States has therefore developed two schematic plans, so as to avoid being faced with a single alternative prepared by the EEC. These two plans represent the type of reserve unit or drawing right scheme that the United States would consider meaningful and constructive, and will probably be introduced informally by the United States at the meeting of the Deputies on May 18 and 19 (Tab E and Tab F).

The introduction of the U.S. plan to the Deputies meeting should enable us to determine whether the French approach is one of serious willingness to negotiate or pure delay. It should also make this clear to the Germans and other Europeans. If the French do not strongly object to the U.S. drawing right plan (Tab F), then the major negotiating problem will be the postponement of the controversial suggestions in the EEC Monetary Committee’s Report for tightening up the policies and voting procedures in the regular operations of the IMF—a very serious matter. In this event, we will need to seek the help of the Germans in separating this highly explosive issue from progress on a plan for reserve creation, in order to make any progress at the September meeting.

If, on the other hand, the French strongly object to the “good” characteristics of a drawing right scheme that have been introduced into the U.S. plan, then there will be intensive negotiation on these points. They may object to the non-repayment feature, although this plan adopts a suggestion thrown out by Dr. Emminger. They may also object to the clear segregation of the new reserve asset from the regular credit facilities of the Fund, through the establishment of an affiliate. They may find difficulty with the relatively easy system of transferring drawing rights from the using country to the recipient country. Or it may become clear that a basic objection is to the size of the obligation to accept the new asset.

In other words, this U.S. draft plan brings out rather clearly the issues that we had hoped the Germans would have brought home to the French and Belgians at the time of the April 17 meeting in Munich. (See Tab G) At that time the Germans went very far in accepting the French insistence on the principle of repayment, barely kept the door open for some vague form of segregation of the newly created assets, and did little more than hint at the possibility of some more liberal form of transfer that would distinguish the new asset from the older credit facilities. Up until the time of the April 22 meeting, the German Bundesbank representative and Chairman of the Deputies had been a strong and helpful advocate of a reserve unit plan, that was quite clearly a form of money rather than credit facilities, although it is true that the German Ministry of Economics had earlier expressed some interest in a drawing rights scheme.

Another major issue that concerns the United States is the question of a veto on the activation of the plan by the EEC countries, acting under a unit rule, and possibly against the convictions of some of the other countries. While it is true that the Europeans in general are more cautious regarding the need for new reserves than is the United States, the experts of Germany and Italy could be expected to be much quicker to recognize the need for activating the plan than the French, in future years. The French never agree to EEC solidarity in areas that, like the international monetary sphere, are not covered by the Treaty of Rome, unless it suits their interest. It would be tragic if we should establish a plan and then find that nothing came of it because the French were able to dictate an EEC veto.

It is increasingly clear that the German posture during the next three months will be of the greatest significance in determining the outcome of the negotiations. Despite our desire for an agreement in September, it would not be in the interest of the world to bind ourselves to a weak and unpromising plan of reserve creation, which would make it more difficult to proceed to develop bilateral monetary defenses of the dollar and the gold exchange standard. We might thus have the worst of both worlds—an ineffective multilateral system and a general resistance on the part of European countries to constructive bilateral arrangements to economize gold and avoid strain on gold and exchange markets. Thus the Germans should not assume that we will be prepared to agree to a feeble and weak plan of the type the French might most easily be persuaded to join.

Nevertheless, we recognize that there are serious risks in a breakdown of these negotiations, both of a short-term and longer-term character. These risks should be brought home to the Germans. Tab H suggests some of these risks.

One other point deserves comment. General DeGaulle in his press conference and the French on numerous occasions have charged that the United States interest in reserve creation results from a desire to continue financing our balance of payments deficit. This is not the case. We are genuinely interested in providing what we consider an essential prerequisite for the continued development of the world’s monetary and trading system without lapsing into cumulative restrictions on capital movements and on trade itself. (See Tab I) In a world in which all economic indices have a clear secular uptrend, we simply cannot expect the level of world reserves to remain stagnant without constraining international transactions. No country maintains a constant level of domestic money but in all countries the trend is steadily upward in the domestic money supply.

At the same time, our ideas as to the magnitude of new reserve creation are quite conservative. We would not expect reserve growth to exceed 2 or 3% per annum, whereas much higher figures are steadily recorded for the growth of domestic money supplies. In terms of our balance of payments deficit, the amount of new reserves that would become available to the United States would hardly be as much as $500 million a year at the most. Most Europeans would not regard this sum, even if it were used to finance a U.S. deficit, as in any way significantly affecting the U.S. desire to reach equilibrium as soon as the Vietnam situation permits.

Frederick L. Deming ⁹

1. Source: Johnson Library, Bator Papers, McCloy Trip, June 1967, Box 8. Confidential. McCloy was the U.S. representative to the trilateral offset negotiations.
2. Deming’s memorandum has not been found.
3. Only Fowler’s first letter to Schiller is attached; it is printed as Document 119. Regarding his second letter, see footnote 6, Document 120. The purported text of Schiller’s April 21 response was distributed to members of the Deming Group as DG/67/129 on May 10. The memorandum from George H. Willis reads “Attached as DG/67/129 is Minister Schiller’s reply to Secretary Fowler,” but the attached document, in English, is not on a letterhead and presumably is a U.S. Government translation of a letter in German. In the English text, Schiller mistakenly thanks Fowler for his letters of April 6 and 13 (not 14). Secretary Fowler’s reply to Schiller’s April 21 letter had an extended gestation period with drafts on May 10 (DG/67/126) and May 29 (DG/67/145) before actually going out on June 1 (DG/67/150). Fowler also wrote Italian Treasury Minister Colombo on June 1. (DG/67/149; Washington National Records Center, RG 56, OASIA Files: FRC 75 A 101, Deming Group) For text of the letter, see Document 126.
4. See footnote 4, Document 119, and Attachment B to Document 120.
5. Neither this summary nor any of the other tabs has been found.
6. See footnote 7 below.
7. This report of the Monetary Committee of the EEC has not been found, but according to the official IMF history, the EEC Finance Ministers at Munich on April 17 approved that committee’s recommendations:
8. Reference is to the IMF’s “Outline of an Illustrative Reserve Unit Scheme,” February 23, and “Outline of an Illustrative Scheme for a Special Reserve Facility Based on Drawing Rights in the Fund,” February 28, which are reproduced ibid., vol. II, pp. 15–23 and 24–29, respectively.
9. Printed from a copy that bears this typed signature.