Foreign Relations of the United States, 1969–1976, Volume III, Foreign Economic Policy; International Monetary Policy, 1969–1972

239. Paper Prepared in the Department of the Treasury¹

Washington, July 31, 1972.

MAJOR ELEMENTS OF PLAN X

A. Exchange Rate Regime

1. General rule: Countries will declare central values for their exchange rates expressed in SDR’s, with permissible margins of 3-4 percent on each side.

2. Floating rule: With permission a country can float:

a) transitionally to new central value

b) indefinitely if it declares willingness to avoid “balance of payments” controls on capital and trade and obeys more restrictive reserve management criteria—both subject to special surveillance.

3. Unit rule: A group of countries wishing to maintain narrower margins and declaring intention to move toward reserve pooling, can be declared “monetary and trading unit” and treated as single country.

4. Intervention: Countries with central values will be expected to intervene in their domestic markets to avoid depreciation beyond lower margin of currencies of leading trading partners with central values.

B. Reserve Regime

1. “Primary reserves” would consist of gold, SDR’s and IMF gold tranches.

2. Each country would have a “normal level” of primary reserves related to IMF quotas (e.g., 4 times each country’s quota).

3. Total world “normal” reserve must equal total world primary reserves. Dollars and other foreign exchange can be converted into SDR’s during a limited “open season.”SDR allocations will make up any shortfall of primary reserves below world “normal reserves.”

4. Countries acquiring foreign exchange can present it to the issuing country for primary reserves, so long as both countries are maintaining central rates.

5. Negotiated official credits permitted.

6. Foreign exchange holdings are neither encouraged nor prohibited. Countries would need to respect any limits established by the issuing country, and U.S. would negotiate limits on foreign official holdings of dollars. Foreign exchange holdings include all commitments and forward controls.

7. Adjustments would be called for at certain thresholds:

a) total reserves (primary plus forex of a country at 50 percent of “normal level”: devaluation required—3-4 percent per year without approval, more (subject to approval) if underlying conditions so justify.

b) primary reserves at 75 percent of “normal level”: devaluation permitted—3-4 percent per year without approval, more (subject to approval) if justified.

c) __reserves at (unspecified) level and after drawing of say 50 percent of IMF and capital controls in effect: surcharge permitted.

d) primary reserves at 150 percent of “normal level”: revaluation required—at least 3 percent per year.

e) primary reserves at 175 percent of “normal level”: no right to convertibility.

f) primary reserves (primary plus forex) at 200 percent of normal level and maintained for period (e.g., 6 months) would indicate persistent surplus country, which would be expected, e.g., to increase aid, liberalize imports and unless corrected, subject to discriminatory restrictions (e.g., surcharge).

8. Gold would be sold by official holders only at official price to IMF, which would be free to sell in private market with profits going to IDA.

9. SDR’s created for “open season” conversion of foreign exchange should be extinguished, up to a fixed amount per year, as the country with the currency liability obtains primary reserves above its “normal level.” Total SDR volume would be maintained by equivalent new allocation distributed by the usual formula.

10. Holding limits and restrictions on use of SDR’s by official institutions would be abolished.

11. An SDR-aid link could be grafted onto the system, but would not be proposed.

a) No country expected or compelled to maintain restrictions on outward flow of capital (though permitted to do so) except that countries applying surcharges (in addition to IMF borrowing) should be willing to apply internationally sanctioned capital controls.

b) Countries with below normal reserve holdings over a period should not be permitted restrictions on inward flow of capital imposed for balance-of-payments purposes. (Restrictions defined to include special interest incentives or penalties.)

c) In other circumstances, presumption (but not prohibition) against use of controls on inward flows. Presumption expressed by international review and surveillance when controls enforced for more than six months, and maintenance justified only by showing exchange rate not fundamentally undervalued. Sanctions, including elimination of right to hold foreign currencies before other countries could discriminate on trade, should be included.

d) Two-tier exchange markets would be treated as form of capital control and treated as above.

e) Nations should apply consistent set of regulatory standards on “foreign banks” to assure equitable treatment of Euro-currency markets.

C. Constitutional Regime

1. Completely new international monetary agreement needed covering monetary and related broad trade principles.

2. Parallel restructuring of GATT required.

3. Articles of two institutions should interact; joint meetings and working parties should be sought.

4. Monetary organization should be “politicized”

• —maintain Executive Directors at Deputy Minister level
• —Keep C-20 in being.

1. Source: Washington National Records Center, Department of the Treasury, Deputy to the Assistant Secretary for International Affairs: FRC 56 83 26, Contingency Planning, 1965-1973. Confidential. The paper bears no drafting information.