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

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

Bonn, November 21, 1968.

Continuation of restricted meeting of Ministers of Group of 10. Summary of credit package.²

Zijlstra was called on to report on the credit arrangements. He stated that the new credit line is conditional and depends on a satisfactory solution to the main problems under discussion.

Schiller intervened to say that in substance the Governors worked out a standby credit of $2 billion in addition to the possibility of borrowing from the IMF. (Secretary Fowler had proposed $2 billion, including $750 million from the IMF.)

Zijlstra gave the following breakdown:

	$ (million)
Germany	625
United States	525
Scandinavia	100
Belgium	100
The Netherlands	100
Switzerland	100
Canada	100
Japan	50
Italy	200
BIS	100
United Kingdom	100
Total	2100

Zijlstra qualified the list, pointing out that everyone is not absolutely certain and it requires some clearance. But it is fairly sure there may be some reallocation among Germany, the United States and the BIS, as the United Kingdom wants to participate for $100 million, but the total would not be changed. In response to a question from Schiller as to the criteria for allocating the amounts, Zijlstra said this was a matter of judgment, taking into account recent developments as well as basic factors.

Rasminsky (Canada) pointed out that these commitments are dependent upon a satisfactory resolution of other questions. Unless the meeting is successful on these questions, he was doubtful that the communique should mention the credit line. The credit package was not firm until we have assured a successful outcome for the meeting as a whole. In response to Minister Schiller’s inquiry, it was noted that these credit lines are in addition to those previously created but not used to date.

Minister Ortoli said this package makes it possible to make a more credible arrangement.

Franc Adjustment

Schiller said he had discussed the 15 percent devaluation figure with some members of his government, and they thought 15 percent was too much. Could that figure not be reduced?

Snoy (Belgium) said we risked too great a disparity in the parities of the Common Market.

Schiller thought this was a very important question that Ortoli must think about.

Witteveen agreed with Snoy and Schiller. He thought that 8 percent, or at the maximum 10 percent, would be compatible with a credit package of the size contemplated. The Swedish Minister joined in this view.

Schiller called on Mr. Schweitzer.

Schweitzer said that France would have to make a proposal which the IMF Board would consider. Personally, his feeling was that 15 percent was too much. The maximum should be 10 percent. But this is a decision for the Executive Board. Preliminary studies indicate that 10 percent is about right.

Schiller argued that the large credit package should be taken into account.

Schweitzer questioned whether there was a direct relationship between the credit package and the adjustment figure. The Fund looks at costs and prices and fundamental imbalance. They hope that credits will not be used except for psychological purposes. They think in more fundamental terms. The Fund would have the same view whether the credit package was $1 billion or $3 billion.

Emminger argued there is an important relationship between the credit package and the adjustment percentage. He understood that fundamental factors would not justify anything like 15 percent. That figure would have an element of safeguard against speculative pressures. But the credit facilities should deal with such pressures. Thus we should deal only with fundamental factors. Also the German trade measures should help and should be taken into account.

Fowler called attention also to the German banking measures.

Emminger said the German Central Bank Council would introduce a 100 percent reserve requirement on new foreign deposits as of November 15. That is, such deposits would have to be redeposited with the Bundesbank and would earn no interest. They were also preparing a measure to restrict certain short-term transactions of German residents or subject them to license.

Rasminsky asked whether the 2–1/2 percent penalty charge is impractical; and Emminger said the reserve requirement is a substitute for this proposal.

Schiller, however, said the negative interest rate was still under study in the government and might be preferable to licensing transactions. In response to further questions, Emminger said the 100 percent reserve requirement applies to the gross increase in foreign liabilities since November 15—not to the net increase. According to Emminger, this applies to any net increase over November 15 in the gross foreign liabilities of German banks.

Rasminsky suggested that it should apply to renewal of term deposits as well.

Gabriel G. Ferras, General Manager of the Bank for International Settlements.3

Returning to the 15 percent adjustment, Ferras (BIS)3 argued that the important relationship was between German action and French action—not between the credit factors and the size of the adjustment.

Minister Schiller, however, persisted that it would be a major mistake to undertake a devaluation because of short-term capital flows when these could be covered by credit facilities. Such facilities should be allowed for in fixing the parity change.

Jenkins thought it was optimistic to expect that speculative forces would be swept away by a credit package. We have to stop the speculative forces and thus we need to do other things than the credit package. But Schiller insisted that the credits play a part.

Benson (Canada) stressed the need for a credible package in three parts:

1. The German part is too small and too temporary.

2. The French action is positive and credible, but 15 percent is too high. It should be less and is linked to the German action.

3. Credit is for the future and will be needed only if the German action is not credible.

Witteveen (Netherlands) said we need to see all parts of the package together. Probably the weakest part on the German side is the explicit temporary character of the action. He was glad to hear in the EC meeting that it could be prolonged. Thus, he appealed for a longer period, perhaps indeterminate in length.

Schiller argued that we don’t know what conditions will exist in Europe a year from now.

Witteveen responded that he does not expect the German measures to be permanent, but they should not be made explicitly for 15 months. Keep them indefinite.

Schiller said the original plan was for 18 months, and this had been shortened to 15 months because of Parliamentary objections.

Ortoli said a parity is one thing and credits to defend it are something else. You cannot defend a parity which is wrong with short-term credits.

The meeting was suspended at 7PM at Ortoli’s request. It reconvened at 9PM.

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 25,” bears no additional information on the place, date, or time of transmission, but the telegram was received at the White House on November 21, 4:55 p.m., as identified in the Washington-Bonn Telecon Chronology of Events for November 21. (Ibid.)
2. For the record of the first parts of this restricted meeting, see Documents 216 and 217.