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

129. Memorandum of Conversation¹

Washington, June 19, 1967, 2:30 p.m.

PARTICIPANTS

• United States
  • Secretary Fowler
  • Honorable Francis Bator, White House
  • Honorable Arthur Okun, CEA
  • Assistant Secretary Knowlton
• Germany
  • Minister Karl Schiller
  • Mr. Ernst Jirka, First Secretary
  • Baron Herbert A. van Stackelberg
  • Mr. Johann Schoellhorn, State Secretary Ministry of Economics

SUBJECT

• International Liquidity

The Secretary opened the meeting by stating that the liquidity exercise was not related to the United States balance of payments deficit. He knew there had been talk in Europe to that effect. Nothing could be farther from the truth, as any simple analysis of the arithmetic proved. He gave Mr. Schiller charts showing the trend of the U.S. payments position in recent years.²

Mr. Schiller said he had a message from Debre, who was “angry”. Schiller considered it vital to review the “eight Munich points”. He said that the French had a much harder paper and that the Munich points did not represent a “second Munich with an umbrella.”

As Mr. Schiller began to go through the points, Secretary Fowler stated that he did not want to turn the meeting into a drafting exercise. Instead, he wanted to make several key issues clear. Mr. Schiller persisted in proceeding down the list.

On Point 1, Secretary Fowler said that recognition of an actual shortage of liquidity was neither a necessary nor desirable prerequisite to agreement on the need for additional liquidity. He said that reserves had grown in the post-war period and must continue to grow. He showed Mr. Schiller a table that summarized post-war reserve growth.³ He said there must be a regular accretion, determined in a orderly manner. If we waited for a visible shortage, the emergency would be upon us. There would not be much debate then about the need for additional liquidity. We would already have fallen into a pattern of restrictionism akin to that of the 30’s.

Dr. Schoellhorn said that Point 1 could be read as consistent with Secretary Fowler’s views. Secretary Fowler said that, in fact, Point 1 did not read that way and he took exception to it. Dr. Schoellhorn expressed agreement with Secretary Fowler’s view in substance on Point 1.

On Point 2 Mr. Schiller laid stress on the reference to “alternative solutions” (alternative to the creation of additional reserves) and said that the French had capitulated on the issue of an increase in the price of gold. The Secretary said his interpretation of the French position on gold was a bit different but that he could agree with the last sentence of Point 2, which was similar in substance to the Hague Communique.⁴

Secretary Fowler said he could live with Point 3. He did not believe that reserves should be created with “Milton Friedman automaticity” but that there should be secular growth.

There then ensued a lengthy discussion of Point 4 (voting procedures). Mr. Schiller said the EEC was strongly united on this matter and insisted on 85 percent approval to activate a plan.

Secretary Fowler said that he had a way out of this difficulty. It was his own personal view. He would prefer that the suggestion come from a country other than the U.S. before presenting his proposal, he said that he wanted to make it clear that the United States welcomed a larger role for individual countries in the EEC. It had favored larger quotas for Germany in the past and would do so again. It would welcome a larger role for France, Belgium, Italy—in fact for any country that wanted and was entitled to it. As he read the Treaty of Rome, however, the Secretary said that he saw no binding commitment for these countries to operate as a bloc, especially on a world problem and in a world organization like the International Monetary Fund. He pointed to the difference in EEC behavior in the case of NATO matters (in which an individual country had gone its own way) and international monetary matters (in which the bloc seemed compelled to work together). If the EEC acted as a bloc, it would inevitably end up with the lowest common denominator as a plan. The United States simply would not go along with this. And this was not really the sentiment of the United States alone but that of the Free World. In fact, within the EEC, he sensed that the Italians, Germans, and others found themselves reluctantly engaged in the painful process of dragging a single delinquent along.

Turning to his specific thoughts on voting procedures (which he made clear did not represent a formal United States position), the Secretary suggested that the contingency plan be activated initially for five years. A 75 percent weighted vote could activate an agreed minimum annual amount for this five year period. Any activation in excess of the minimum amount in any given year would require an 85 percent weighted vote. At the end of five years, future activations and amounts would be controlled by the normal IMF 80 percent weighted vote procedure. There would, of course, be a normal determination of quota levels during this period—or possibly a special re-determination of quotas. He foresaw that the EEC would have at least a 20 percent weighted vote during the second five-year period, which would give those countries their “proper influence.” This approach had the advantage of not frightening the world with an outcome at Rio that included an explicit EEC veto. To be perfectly frank about it, the world looked at the EEC as “hard-nosed central bankers preoccupied with gold.” While he did not personally share this view, it was widely held.

In the ensuing conversation, Mr. Schiller stressed again that the EEC was united on this issue. Dr. Schoellhorn said that in fact there had been an amendment to the Mandate of the Monetary Committee calling for the group to act together on international monetary matters. Secretary Fowler said this confirmed his fears on the matter. Dr. Schoellhorn disputed the lowest common denominator theory and said that in fact the French had been brought quite far along.

Mr. Bator said that we should not worry too much too soon about accommodating the French. The critical point was to persuade France that the rest of the EEC would join the rest of the world even if France would not go along. Once this became credible to the French, they would join. That was the historical pattern.

Mr. Schiller said that the French had been extremely irked by the formal German policy statement on dollars and gold. The Secretary asked why France would be critical of a country that was clearly attempting to support the international monetary system in a constructive way. Dr. Schoellhorn said they were irked because it was a bilateral agreement without consultation.

Mr. Schiller then said that while Chancellor Erhard had often been willing to agree with conflicting propositions made by the United States and France, thus putting himself in an awkward and helpless position, Chancellor Kiesinger wanted to “win the French to a common solution with you (the United States).” The present German regime did in fact want to revive the Franco-German Treaty.⁵ He said that Germany was taking a “loyal Triangular position.” There might be another way—to let the French go to Rio alone in splendid isolation but the German people would not understand this. They would view it as a failure of government policy.

The Secretary asked if there were any alternatives. Messrs. Schiller and Schoellhorn stated “the common way,” in which (presumably) Germany acted as an honest broker narrowing differences between France and the United States.

The Secretary said that the United States would be willing to give up its veto. It was not taking a parochial position. As for the “common way,” he said that he had tried that approach—his first port-of-call in the summer of 1965 had been France.

The Secretary then read excerpts from his Granada speech,⁶ emphasizing that unanimity was not necessary in international cooperation but that “the preponderant majority must not be immobilized.” He could deal with Point 4 in that spirit. He could meet the German concern with inflation but he could not in international financial matters give credibility to a world of blocs.

Mr. Schiller said that the EEC had been a U.S. “baby”, with George Ball one of the fathers. Secretary Fowler said it had been designed as an “outward looking” baby.

Dr. Schoellhorn said that Point 4 made reference to EEC voting rights not only in connection with new liquidity but regular IMF operations. The Secretary said he “understood this perfectly and rejected it completely.” Mr. Bator pointed out that this provision immeasurably complicated the negotiating job between now and September.

Mr. Schiller reiterated that the minority must be protected; otherwise, there would be a wave of public protest. The Secretary said that the Bretton-Woods negotiators thought that an 80 percent weighted vote provided that protection. At the time of Bretton-Woods, western Europe was a “wrecked battle ground.” United States blood and treasure had helped revitalize it. Was it asking too much of western European nations now to play by the rules of the game?

Mr. Schiller said “we will reach a solution.”

Mr. Bator said the wrong kind of compromise would do the world no good. Many French officials don’t want the price of gold to go up in any event. The others must be made to realize that gold won’t go up. “The game won’t be played that way.”

Secretary Fowler said that if the world divided into two blocs—a gold bloc and a dollar bloc—Germany would be isolated with the French in the former.

Dr. Schoellhorn said it was wrong to say the EEC wasn’t expansionary; even France was basically expansionary.

Secretary Fowler asked whether politics or economics was more important to de Gaulle. Mr. Jirka replied that “economics are the basis of de Gaulle’s politics.” Mr. Schiller said de Gaulle had learned something from the election. Debre was basically an expansionist. Secretary Fowler agreed. He said he believed he was fundamentally more expansionist than Giscard d’Estaing. He said nevertheless he did not want political solutions superimposed on the international financial system.

Mr. Schiller made a long speech on German loyalty to the U.S.A.

Secretary Fowler said he had no doubts on this score but what we must focus on is making the first step—and it must be on the right path and a big enough step to convince the world that the price of gold would not go up. Otherwise, we would have crisis after crisis. The French may have abandoned the direct approach in the increase of the price of gold but could be seeking the same result by their efforts to abort the liquidity exercise.

The conversation then turned to Points 7 and 8 of the Munich Communique. Mr. Okun said that we were not seeking a simple quota increase or conventional drawing rights but something new: a first-class asset. It must be as good as gold. If people couldn’t transfer it, how highly would it be held in their esteem? Why do we work so hard to restrict the asset? Why not lean over backwards to make it attractive?

Mr. Schiller dismissed this as “semantics.”

Mr. Bator said there was one clear test: would central bankers count the new asset in their reserves freely and willingly? If not, we would have “the Gresham problem.” Would people consider that they owned the asset or they owed it?

Dr. Schoellhorn said that asset must be under some kind of control; there could be too large a volume created. Secretary Fowler said that Dr. Schoellhorn had confused the problem of the amount of the asset with the quality of the asset. Mr. Okun said that the present “basket” approach to an IMF drawing would not be satisfactory in the case of the new asset.

Mr. Bator pointed out that there was a strong bias in the international financial system toward the running of surpluses. This was a question of political reality and conservative bookkeeping. It was all very well to talk about letting the new asset “evolve” but there was a short-term problem too: the gold pool. The President was acutely conscious of this problem.

Secretary Fowler expressed displeasure at the recent French failure to replenish the gold pool.

Secretary Fowler said that Germany has the primary responsibility for the outcome of the liquidity negotiations—both success or failure; the world sees it that way. Dr. Schoellhorn said he accepted this but liquidity alone was not enough. Countries must pursue the right economic policies as well.

Secretary Fowler said the U.S. understood this perfectly. It was fully behind the adjustment process report. We must protect existing liquidity. With the formation of blocs, the value of gold as a reserve asset would be endangered. The international financial system must stand on a tripod: (1) present holdings of gold and foreign exchange must be preserved as reserves; (2) the dollar must be kept as good as gold and the United States must thus solve its balance of payments problem; (3) new forms of liquidity must be devised.

Mr. Bator said that we could not labor for three years and produce a “mouse.” Dr. Schoellhorn asked whether the drawing rights described in the communique were a “mouse.” Mr. Bator asked whether Germany would treat them as owned assets. Mr. Schiller did not respond to the question but instead disputed Mr. Bator’s earlier point on the bias in the system toward surpluses. He said that Germany was attempting to reduce its surplus. Dr. Schoellhorn said that Germany had a current account surplus and an overall balance as its objective. Mr. Bator said this proved his point; if Germany were willing to run down its reserves $2 to $3 billion, and if other countries would do the same from time to time, gold would be enough. But they would not do this.

Mr. Schiller asked whether a second Chequers meeting either in Paris or Bonn would be helpful. Secretary Fowler said he would go anywhere anytime to expedite progress, but he would leave to Mr. Schiller the question of who would be invited and where and when. There was a brief discussion on whether Debre could operate more flexibly in or out of Paris. There was an inconclusive discussion of the timing of the ministerial meeting. There was some feeling that another Chequers meeting would be better after the next ministerial meeting than before.

Mr. Schiller and Secretary Fowler outlined the public and Congressional pressures that confronted them as the negotiations proceeded. Mr. Bator and Secretary Fowler emphasized the increasing “linkage” between the liquidity negotiations, the balance of payments problem, and United States military expenditures abroad including western Germany.

Schiller said that if liquidity and the offset arrangements got “mixed up,” great damage would be done. He took credit for proposing the purchase of long-term bonds by the Bundesbank.

The Secretary said that modern military and political alliances must have a financial wall. We have bought time in the case of the German offset—thanks to Schiller. We want to go as far as we can in the liquidity negotiations not to disrupt relationships with France, but France was really not the first order of priority. The problem transcended France. We have expressed willingness to talk of drawing rights instead of units. We wanted a plan to evolve with many nations responsible for its creation.

Mr. Schiller said the plan would have “many fathers.”

In closing, Mr. Schiller said that the German Government was taking a very quiet line on U.S.-Vietnam policy despite growing public feeling in Germany that the U.S. was increasingly immobilized by this difficult situation.

In closing, Secretary Fowler and Mr. Bator stressed the constant attention being paid to the liquidity negotiations by the President, Vice President, the Secretary of State, and the Under Secretaries of State, Mr. Deming, Mr. Okun, and Mr. Bator. In the aftermath of the Kennedy Round, it was clearly the “big item on the agenda.”

Winthrop Knowlton

1. Source: Johnson Library, Bator Papers, Liquidity Negotiations, Box 9. Limited Official Use. Drafted by Knowlton and approved by Fowler. Another copy with a few handwritten changes and additions is ibid., Letters and Memoranda of Conversation, Box 9. The meeting was held in Secretary Fowler’s Conference Room.
2. These charts have not been found.
3. This table has not been found.
4. Reference apparently is to the communique issued at The Hague by the Ministers and Governors of the Group of Ten on July 26, 1966; for text, see American Foreign Policy: Current Documents, 1966, pp. 185–186.
5. For text of the Franco-German Treaty on Organization and Principles of Cooperation, signed at Paris on January 22, 1963, see Documents on Germany, 1944–1985, pp. 834–838.
6. Reference is to Fowler’s speech to the Thirteenth Annual Monetary Conference of the American Bankers Association at Granada, Spain, on May 27, 1966; for text, see Annual Report of the Secretary of the Treasury on the State of the Finances for the Fiscal Year Ended June 30, 1966 (Washington, 1967), pp. 438–447.