126. Telegram From the Department of State to the Embassy in Italy1
205832. For Korp. From Treasury. Secretary Fowler requests that following letter be given to Minister Colombo:
Begin verbatim text
“Dear Mr. Minister:
“I appreciate the opportunity to respond to your message of May 232 and to comment on international monetary negotiations in the light of the recent meeting of Deputies of the Group of Ten, the forthcoming informal gathering of EEC Finance Ministers in Rome on June 5, and the Joint G–10–IMF meetings to be held in Paris June 19–21.
“I want you to know also that I deeply appreciate the fact that Italian representatives in intra-EEC discussions have consistently maintained the constructive position that new reserve assets should embody qualities of international money even if in the form of drawing rights and that the EEC common position should be one that is a reasonable basis for further negotiation with the rest of Group of Ten and other members of IMF. The United States representatives have felt that the Italian representatives in the Deputies meetings and the Joint meetings have made most valuable and constructive contributions. I believe the fact that the EEC position has been kept open on a number of important points with respect to the characteristics of the asset has been a crucial factor in keeping alive the possibility of achieving some satisfactory agreement in September, 1967. I am very glad to hear that the Italian delegation at the EEC Monetary Committee meeting on May 26 was instructed to maintain this position.
“Concerning your suggestion that the time is approaching when a common position of the EEC will have to be taken, I would like to share with you my conception as to the most desirable course of further negotiations. It now appears that five major issues require some solution in order to permit agreement in September on a satisfactory plan. These issues are: (a) segregation of accounts, resources and administration from IMF regular resources, (b) satisfactory provisions for use, transfer and holding, (c) provisions relative to reconstitution, (d) process for reaching decisions on creation of reserves and (e) treatment of EEC proposals [Page 369] to change voting procedures and certain administrative procedures in the IMF itself.
“It is possible that none of these issues can be resolved by the Deputies and that all of them will have to go to the Ministers for resolution in July. However, it is our hope that the Deputies and Executive Directors can make sufficient progress so that (a) and (b) can be resolved at the Joint meeting, permitting agreed versions to go to the Ministers.
“Our substantive views on these points have been set forth in two plans distributed at the last Deputies meeting. As you know, with respect to (a), we strongly prefer an IMF affiliate, which we think logic fully justifies, both on conceptual and operational grounds. I understand why you may prefer not to support such an affiliate. We believe it would be helpful if the EEC position at the least favors substantive separation of accounting and resources.
“With respect to (b), we consider it important that all use of the asset be subject to the basic rule that other reserves should not be increased when the asset is spent—a form of the balance of payments need test. We also believe that both voluntary and guided transfers should comply with this basic principle. The U.S. plan would not distinguish between allocated and acquired reserve assets. If we understand correctly, the EEC Monetary Committee document submitted at the last Deputies meeting would exempt some acquired reserve assets from this rule. The approach in this document seems to permit voluntary unguided transfers only for reconstitution by a debtor (in the system) when such transfers reduce creditor holdings.3 The U.S. plan envisages a wider scope for unguided transfers, generally at the initiative of the debtor, but not when this would reduce holdings of the new asset by a surplus country. That is, there would be no waiving of the reserve loss test for either debtors or creditors. One reason for our position is the desire to avoid massive and destabilizing shifts between holdings of dollars and new reserve assets which could result from unguided transfers in the absence of such a rule. Another reason is that we do not think it would be helpful if a new reserve creation scheme seemed to divide the world into a dollar bloc and a new reserve asset bloc. Furthermore, it would be unfortunate if acceptance or holding limits were used up in the course of financing shifts in reserve composition instead of payments imbalances. Over the longer term, more freedom could be permitted. We hope the EEC position would maintain this basic rule developed by the Ossola Working Group.4 The U.S. plan also gives members the right to convert balances of [Page 370] their own currency into the new asset, subject to both the basic reserve test and acceptance limits. I hope it will be possible to have no differences or minor differences on these provisions between two alternative plans to go to Ministers.
“Issues (c) and (d) seem highly likely to go to the Ministers for resolution. With respect to (c), virtually everyone in the Deputies group and among the Executive Directors is in agreement that the new asset should be money-like in character and hence should have no reconstitution provisions beyond those necessary to assure the liquidity of the plan and the natural desire of any nation to restore its reserve position. Nevertheless, the problem of reconstitution seems difficult in view of French insistence on a numerical formula for forced reconstitution and pressure for advance description of ‘persistent users.’ Since this view is particularly difficult to reconcile with the concept of money, rather than credit, and we sense considerable nuances among the EEC, I hope this matter can be kept open, even within the EEC, with at least some alternatives put forward as unresolved EEC views for further discussion at the Joint meeting and the G–10 Ministerial meeting. The U.S. is not disposed to go beyond the position outlined in the U.S. draft plans. It seems to us that an asset which central banks might not count as part of their reserves, would simply not provide the kind of stability we need for the international monetary system.
“With respect to (d), we assume that the issue is clearly one for the Ministers, even should there be close agreement among the Deputies and Executive Directors. Three basic formulae have been set forth: (1) one based on the present IMF procedure for quota increases—80 percent of the weighted votes (plus possible additional weight for creditors in the system); (2) the tentative EEC proposal of an 85 percent weighted vote (plus possible additional weight for creditors) and plus a unit voting supplement; and (3) the U.S. band proposal developed fully in the two plans referred to above.
“All three proposals recognize the principle that a successful plan must include most, if not all, of the countries of the Free World and particularly the major industrial, trading and financial nations. All recognize the principle that a successful plan must have at its base a wide consensus and, therefore, widespread support. It is our judgment that no unit vote proposal can be negotiated. It has been strongly opposed by the Executive Directors of all countries except the EEC. We feel further that an abnormally high weighted vote, which permits a veto by a very small number of countries, cannot really be justified.
“With respect to (e), we very much hope that this issue will not be made a part of the liquidity exercise and, consequently, will not need resolution either by the Deputies, the IMF, or G–10 Ministers at the July meeting.
[Page 371]“We are disturbed at the possibility implied, but not clearly expressed, that the French government will ask for some indeterminate degree of parallel action in changing voting procedures in regular IMF operations before approving a reserve creation plan in September. We would be bound strongly to resist this. Such a controversial proposal should be treated separately from reserve creation and examined on its merits. There simply is not enough time to do both jobs this summer. I hope and believe that other members of EEC will not wish to see agreement on reserve creation founder on this new and a separate idea that has just been brought forward in recent weeks.
“In conclusion, I want to reiterate my strong conviction that the basic need is creation of a new international reserve asset that will have unquestioned characteristics of money rather than merely credit. I gain great reassurance in knowing that you share this conviction.
“Recent events in the exchange and gold markets have again demonstrated the importance of proceeding rapidly to establish a plan for reserve creation. They also underline our and your basic view that the new asset should have characteristics that will make it convincing as a supplement to gold and reserve currencies and, thus, be helpful in meeting any renewed agitation concerning a gold shortage. I strongly concur in your point that it is quite important to avoid disaccord in international monetary negotiations, provided agreement can be reached on a good, meaningful plan for deliberate reserve creation. We cannot, however, afford to produce a plan which will not do the job.
“I look forward with pleasure to your visit to Washington and to discussing with you these matters in greater detail, either during the periods June 7 to 9 or June 13–14. Would it be possible for you to take time out from your busy schedule? These dates would work very well in terms of the negotiating calendar.
Sincerely yours, Henry H. Fowler”
End verbatim text.
Please deliver above verbatim text to Minister Colombo.
- Source: Department of State, Central Files, FN 10. Confidential; Immediate; Limdis. Drafted by Willis; cleared by Bator, Deming and Fowler (Treasury), and John C. Colman (E/OMA); and approved by Colman. A similar letter from Fowler to Schiller on negotiations regarding international reserves was transmitted in telegram 206501 to Bonn, June 1. (Ibid.) See footnote 3, Document 124.↩
- Not found.↩
- Regarding this EEC Monetary Committee document, see footnote 7, Document 124.↩
- Reference is to the Working Party on Provisions to Ensure Acceptability of a New Reserve Asset created by the Group of Ten in late November 1966. It was commonly referred to as the Ossola Working Group after its chairman, Rinaldo Ossola of the Bank of Italy. (The International Monetary Fund, 1966–1971, vol. I, p. 115)↩