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

214. Telegram From the Embassy in Germany to the White House¹

Bonn, November 21, 1968, 0255Z.

Following is a summary of the discussion at the first G–10 plenary session.

The meeting began about 4:30 this afternoon with a long statement from Schiller extolling the virtues of the German tax package² and nailing down the proposition that the Deutschemark should not be revalued.

Secretary Fowler followed with the statement already transmitted.³

Roy Jenkins said that a 4 percent change on the trade balance was not equivalent to a 4 percent tariff change. It wouldn’t cover the whole range of international transactions. It simply wasn’t enough. It only eliminated one-third of the massive German trade surplus. We must come up with something more convincing. Proposed German action equivalent to 7–1/2 percent revaluation. There was an abortive discussion about what the bankers had done at Basle and it was agreed that they had done nothing.

Ortoli⁴ then spoke. Said that the situation affects the whole monetary climate, which is very fragile. How can we effectively achieve a better system that in the long run, and he emphasized the long run, would be viable? First question to deal with is whether the technical measures of the Federal Republic will solve this problem. He agreed with Fowler and Jenkins that it wasn’t adequate. He agreed that the Federal Republic had made a real effort, but there would still be a problem. He didn’t want to set a rate for the Deutschemark in precise terms, but whatever rate it had should be realistic and credible (and by implication the present rate wasn’t). He said that technical measures (the border tax) have two major drawbacks. It didn’t cover the areas outside of trade and it was too short term. He thought it would invite speculation and that was a real risk. What needed to be done was readjustment in the whole level of international payments and we needed a durable solution with credible parities. This could apply to the Deutschemark and other currencies as well.

Colombo⁵ spoke at some considerable length. His net conclusion was that the present system had to stand on a fixed parity basis and that parities should not be changed. This would require other measures for both creditor and debtor countries. The Schiller program should make a positive contribution to adjustment. Speculators act on the belief that currency parities will be changed. This doctrine must be refuted. There should be no parity changes. He said that Italy indeed had a surplus, but for reasons different from those of the German surplus. He was confident that the measures Italy was taking to expand its economy would soon eliminate their surplus and bring their accounts into equilibrium.

Witteveen⁶ reacted to Colombo’s presentation very strongly. He said that in a system of fixed parities when countries are in disequilibrium it was important to determine whether it was fundamental. If it wasn’t fundamental, other measures could bring about proper adjustment, particularly demand management measures. If it was fundamental, such measures wouldn’t work and parity changes were designed to cover such situations. This is what was envisaged at Bretton Woods.

The very large German surplus seemed to him to be fundamental. He congratulated the Germans on running a successful economic program, but their very success required a fundamental adjustment. He doubted that the German tax measures would be adequate and he also doubted that they were really consistent with the idea of tax neutrality. He saw some danger for the Common Market in using this as an adjustment factor. The program in his judgment was insufficient; therefore it would not make the necessary impression on the financial world. He also was concerned about it being temporary rather than it being a durable change. He asked, isn’t something better possible? Finally, he asked about the Italian surplus. Would expansion of the domestic economy really cure that problem?

Schiller responded to the Dutch comment. He said he knew the TVA was meant to be neutral, but since it wasn’t to go into full effect until 1970, Germany was free to adjust it in 1969. Also he viewed the German actions as being not for protection or for subsidy, and consequently they should not be regarded as bad adjustment policies. To the contrary, the German approach is to lower the obstacles to imports and raise the burden for exports.

Snoy of Belgium⁷ was next. He said that if there is a fundamental disequilibrium, parity should be adjusted. He congratulated the Germans on the courage they were showing in the tax measure but he was somewhat frightened about it. First he found some conflict with the principles of the Rome treaty. More importantly he doubted its credibility. He agreed with Witteveen on this point.

Stopper of Switzerland⁸ followed. He said that he was only an observer; but because of Swiss financial role he felt he could speak. He thought it was wrong to change parity—apparently at any time—because it fed speculation. Germany had a surplus in 1961 and changed the parity then. Speculators automatically think it will change again. There is too much talk about this. We need to destroy speculative hopes of revaluation by stopping talk of revaluation. He argued that a DM revaluation would not stop speculation in other currencies.

Wickmann of Sweden⁹ said that he would prefer a revaluation but the Germans had decided not to do this. The tax approach was ingenious. What will come out of the meeting tonight should be a durable and concerted solution.

Benson of Canada¹⁰ closed this round by noting that speculation is out of hand. He thought it could not be resolved without parity changes (by Germany and France). He was impressed with the imagination of the German measures but he doubted they were sufficient to bring equilibrium. There must be changes in parities plus a credit package and adequate domestic measures to achieve long-term stability in both France and Germany.

Responding to the criticism, Schiller made these points. First, we must have a collective action abut all speakers mentioned only unilateral action by Germany. Second, he saw no reason in economic theory for the preference expressed for revaluation as against devaluation. Third, the German measures go to the bottom of correcting the German position since there is no surplus in the German basic balance but only in the trade accounts. Other items in the balance of payments are in equilibrium or deficit except for a short-term speculative capital inflow. He repeated his earlier points regarding the sacrifice to German traders resulting from cutting the trade surplus by one-third.

The German measure should be supplemented by measures in other countries that would directly affect the balance of payments; internal policies were not enough.

He invited Ortoli to call on other countries in a smaller meeting of the six with the Economic Commission representative (Barre) present.

On the credit package, he mentioned the German willingness to increase swap lines to $500 million or more and to extend the period of time of these credits for six months. Finally, he complained that the action proposed by the meeting would appear to be a punishment for a sound German policy.

Chancellor Jenkins intervened at this point and urged a decision closing all the markets on Thursday. After much discussion and differences of views among the Central Bank Governors, it was agreed that the Governors would meet separately to resolve this question.

Secretary Fowler and Chairman Martin agreed to handle the US market on Thursday and, if necessary, on Friday in the same way as it had been handled today.

Following the discussion of markets, Ortoli suggested a suspension of the plenary session, to resume later.

Secretary Fowler asked permission to make some further observations and break new ground. He wanted to clarify some misunderstanding. He said that we had not said or implied that the Federal Republic was bad or unwise and we welcome it as a step in the right direction. Our judgment is that it is not adequate to meet the situation. We have not said that action should be confined to Germany. The measures should be broader in scope. They would carry more conviction if accompanied by a change in the DM currency parity. We have not argued for other parity changes but would welcome them if they contribute to stability. We are not advocating solely unilateral action by Germany.

We believe there should be an adequate credit package and we are prepared to participate as we always have.

In response to Schiller’s point on appreciation vs depreciation we have no theoretical doctrine of preference but are merely looking at the present situation in a practical manner and try to deal with it as it exists now. There is evidence of a fundamental German payments imbalance.

The German surplus has existed over a number of years in a sizable amount, and existed during a business cycle covering the years 1963 to 1967. The trade surplus is at the core of the problem. Germany has had trade surpluses in the years since 1961. The persistence of a small trade surplus in the year of peak demand such as 1965 shows that it is a structural surplus rather than cyclical.

The reason there is so much discussion of the role of Germany is because Germany is a strong country and is attracting large amounts of money. There is no desire to punish Germany. The Secretary indicated that we had been in the role of the strong country for many years and Germany is now also in that position.

The Germans are responding. We do not insist exclusively on a parity change but we point out that the Bretton Woods Agreements provide a standard procedure for a change in parity that is intended to be used when there is a structural imbalance. That is the question we confront.

Schiller did not undertake to reply and the meeting adjourned for supper. Schiller did indicate that he felt there was no proof that the structural disequilibrium of deficit countries can be solved by a single parity change.

The meeting as such never reconvened. Following supper the Common Market Ministers met among themselves for almost 2–1/2 hours and then there was a meeting solely of the Ministers of the 10, which lasted some one-half or three-quarters of an hour. In the intervening period, two or three interesting side conversations were held.

At supper Deming talked to Van Lennep, who said the Germans should revalue and that if another country, Italy, would revalue in a small amount, the Netherlands would follow. Van Lennep’s figures were 10 for Germany and 5 each for Italy and the Netherlands. He suggested we talk to the Italians.

We had a long conversation with the Italians which began with Colombo, Carli and Ossola.¹¹ Colombo had to leave relatively soon for the Common Market Ministers meeting, but the conversation continued with Carli and Ossola. The Italians said that they simply could not revalue the lira on political grounds. Colombo himself said that it would be impossible to form a new Italian cabinet with a lira revaluation. He and Carli both said any new government would be inflationary and that the Italian surplus would disappear pretty fast. In addition, Carli repeated the arguments Colombo had used in the plenary session, that is that there should be no parity change, that other measures should be used for adjustment. We finally convinced Carli that there were conditions of fundamental disequilibrium that logically required parity changes, but that did not convince him that Italy should move. Carli did suggest that Italy would be glad to participate in a credit package, and noted that it should be in two parts. One would involve a rechanneling of reserve losses from capital flight back to the central banks of the countries losing reserves. This would be completely separate from a conventional swap package for France, which he thought should be enlarged from the present $1.3 billion to at least $1–1/2 billion to $3 billion. He thought that we should take a bold approach to the granting of credits and convince speculators that capital flows between countries were no more destabilizing than capital flows within countries.

We raised the possibility of a border tax adjustment by Italy with Carli; Colombo had already left. Carli thought the present Italian Parliamentary situation precluded any such action for some time to come. Carli did think the German tax package was inadequate and thought it ought to be at least twice as big.

In a separate conversation with Emminger some time later, Emminger told Deming that he thought the German tax package could be enlarged to 5 percent, but that he saw no hope for a revaluation of the mark. Deming’s impression is that Emminger favors revaluation, but regards it as politically impossible. Emminger’s judgment is that a bigger border tax adjustment on the part of the Germans, a small, say 7 percent, devaluation of the franc, and an adequate credit package would restore confidence.

Van Lennep joined the conversation and stated again that the Netherlands was willing to revalue by a small amount if Germany and one other country would move. Emminger said that the German representatives at Basle had tried to get some other movements for support of their own feeling that the Deutschemark should be revalued, but had failed to get any support whatsoever.

Larre told Deming that he thought Fowler had made a very strong case in his presentation and that if the Germans would move some, plus the border tax adjustment, and perhaps there could be something done by Italy and Holland, that France would be in a reasonably comfortable position. He thought now, however, that the situation had gone so far that there would be some kind of devaluation in France, but that there was no reason for it to be more than 5 percent, if there were an adequate movement on the part of other countries.

In a conversation before dinner, Strauss told Fried and Deming that the British had called in the German Ambassador in London at 2 a.m. and had read him the Riot Act on the necessity for a German parity change. [6 lines of source text not declassified]

Late in the evening after the meeting of the Ministers of the 6 had ended, the Ministers of the 10, meeting by themselves, were in session for a half-hour or forty-five minutes. Colombo, President of the Common Market Ministers, made a formal report to the rest that there had been a meeting and the problem had been discussed at great length.

Schiller stated that it was a Common Market rule that any government contemplating a parity change should consult its Common Market partners before taking any action. Since Germany had no intention of changing its parity, it had seen no reason to consult its partners.

Schiller then asked pointedly whether any other Common Market countries needed to consult? There was no response. Schiller then said, what do we do now? Go home?

Jenkins said we needed to come to a convincing conclusion.

Fowler made a strong plea for continuation of the meeting, said there was nothing on the table so far but the German measures. Seven countries had said they were inadequate; two countries, Italy and Switzerland, opposed any parity change but had not commented on the adequacy of the parity measures. One country, Japan, had not spoken. He thought that the meeting needed to explore one aspect that hadn’t been discussed in any explicit terms. That was credit arrangements. He intended to present in the morning some proposals for a wholly new type of arrangement, the rechanneling of reserve losses, and propose in addition to that, a new swap package for France. Finally, he thought there should be discussed tomorrow other substantive measures to deal with both structural and cyclical problems.

Schiller responded that the German measures had been announced. He had some doubts about credit measures as reflecting on the adequacy of the German measures and he wanted to know what deficit countries would do.

Jenkins stated that the United Kingdom had done a lot and Ortoli pointed to the French actions.

Schiller asked pointedly, twice, what would France do about its parity?

Ortoli responded that he could not give any answer until he knew what more the Germans would do, what other countries would do and what the credit package was. He had to judge the credibility of the total package.

Jenkins closed the meeting by strongly stating that the United Kingdom had no intention to change its parity. It was then decided that the meeting would reconvene at 10 in the morning in restricted session, three from each country, and reconvene in plenary session at 11 a.m.

1. Source: Johnson Library, National Security File, Subject File, Monetary Crisis, November 1968, Cables and Memos, Vol. 1 [1 of 2], Box 22. Secret. The source text, identified as “Bonn Telecon Nbr 20,” bears no additional information on the place of transmission, but the telegram was received in parts at the White House on November 20 beginning at 8:25 p.m. (Washington-Bonn Telecon Chronology of Events for November 20; ibid.)
2. The Embassy’s translation of the German Government’s press release announcing the border tax measures and declaring that it would not revalue the mark is in telegram 19490 from Bonn, November 19. (Department of State, Central Files, FN 16 GER W)
3. Text of Fowler’s opening statement, November 20, was transmitted in Bonn Telecon No. 19, November 21. (Johnson Library, National Security File, Subject File, Monetary Crisis, November 1968, Cables and Memos, Vol. 1 [2 of 2], Box 22)
4. Francois-Xavier Ortoli, French Governor of the IBRD.
5. Emilio Colombo, Italian Governor of the International Monetary Fund.
6. Hendrikus Witteveen, Netherlands Finance Minister.
7. Baron Jean Snoy et d’Oppuers, Belgian Finance Minister.
8. Edwin Stopper, President of the Swiss National Bank.
9. Krister Wickmann, Swedish Finance Minister.
10. Edgar J. Benson, Canadian Finance Minister.
11. Rinaldo Ossola, Chairman of the Deputies of the Group of Ten.