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

142. Airgram From the Department of State to Treasury Representatives at the Embassies in the United Kingdom, France, Germany, Italy, and Japan¹

CA-6044

Washington, November 6, 1969, 17:17 p.m.

SUBJECT

• Meeting of Deputies of Group of Ten, Paris, Oct. 31, 1969, on Quota Increases in IMF

Chairman Ossola recalled the September agreement of the Deputies for a total increase in IMF quotas of about 30 percent plus or minus 3 percent.² It was implicit that new quotas should be the basis for the second annual allocation of Special Drawing Rights. It was also desirable not to modify substantially the relationship between Group of Ten countries and the developing countries in the IMF. In September figures had been mentioned by a number of countries, and a tabulation has been discussed which showed the U.S. at $6300 million. The United States, the Belgians, and some others did not accept the figures given for them in the September IMF table. Revised figures for these countries, plus the earlier objectives of France, Italy, Japan, and Canada would call for a larger global increase than the amount agreed upon in September.

Chairman Ossola suggested a possible avenue of agreement involving two principles:

(1) Accepting a two-tier approach that was more favorable to the developing countries than to the industrial countries, even though this discrimination was rejected by some developing countries as a bad precedent, and

(2) enlarging the total increase despite the adamant position of Germany against this, taking into account the political advantage of so doing to avoid resentment in other countries of G-10 dictation on Fund matters.

The Chairman said he had asked the Fund staff to prepare a table which provided:

(a) A general increase of 25 percent (for all countries except China);

(b) Distribution of $5 billion in selective increases proportionate to present shortfalls in quotas relative to BW calculations;

(c) A reduction of 8 percent of sum of (a) and (b) for G-10 countries. With some rounding, this produced figures satisfactory to most G-10 countries, and would result in an overall increase of about 35 percent. A table showing these results was distributed.³

Inamura (Japan) accepted the proposal. Nield (U.K.) said the U.K. would accept the two-tier principle in the Chairman’s ingenious variation. Handfield-Jones (Canada) called attention to the fact that the 8 percent reduction factor had not been applied to the middle group of industrial countries not included in the Group of Ten. If this were done, the total increase might be reduced to about 34 percent. Chairman Ossola favored this suggestion. Larre (Fr) would accept the table if all other members of G-10 accepted it.

Pieske (Ger) said the Group of Ten should abide by the agreement of last July. This agreement was part of an overall understanding on SDR allocations.⁴ We should not change this agreement after the SDR part of the understanding has been implemented. There is no need to go beyond 30 percent plus or minus 3 percent. Any G-10 ceiling appears like dictation to other IMF members, regardless of the amount. The Canadian proposal provides no guarantee that intermediate countries would really accept the 8 percent reduction. To the Germans, the proposal put forward some time ago by Mr. Roelandts of Belgium in the Fund calling for a 31 percent overall increase would be acceptable. The Germans would favor adopting a two-tier system openly rather than in the disguised form proposed by the Chairman. Countries which have raised their quota targets since last July bear heavy responsibility for breaking down the agreement of last July.

Chairman Ossola pointed out that Belgium, the Netherlands, Sweden and the U.S. did not accept the figures put forward last July for their countries. The July proposal was put forward under great pressure and we had not realized all of the implications. If necessary, we could force the non-G-10 members of the Fund to accept a reduction of 8 percent since we have a majority in the Executive Board.

Palumbo (Italy) accepted the Chairman’s proposal, noting that it provided for a $1 billion figure for the Italian quota, as requested in July. Joge (Sweden) said he would have preferred to limit selective increases to only a few countries. However, because the great majority want selective increases, he would accept the $325 million figure shown for Sweden. He thought the other Nordic countries would accept a reduction of 8 percent, and would be glad to have the two-tier system concealed as in this proposal.

De Strycker (Belg) continued to object to the two-tier system, but this proposal could be modified to avoid two classes of countries. 35 percent was a very high percentage increase. The world was not in a phase of general deflation. To reconcile differences, he suggested a two-stage quota increase, with a first stage covering only three years and the second stage the following two years. This would mean taking the proposal of the Chairman, but giving each country only 3/5ths of its total now. The Chairman thought the two-tranche idea of Belgium might be attractive.

Kessler (Neth) also was against going beyond the 33 percent limit. In the selective quota calculation, the $5 billion or 23 percent of the quotas was so divided that the developing countries got less than 23 percent and the Group of Ten got far more than 23 percent, amounting to about 30 percent. The scheme has the merit of making it possible for the U.K. to go down to 15 percent overall increase. He had no quarrel with the mechanism of the scheme, but the 8 percent reduction was too little. The Netherlands would go down to $675 million, or about a 30 percent increase. In response, Polak (IMF) argued that the selective calculation is not as arbitrary as Kessler suggested. The 25 percent general increase is important to non-members of the Ten.

Emminger (Ger) urged the necessity of insisting on pursuing the Canadian suggestion and reducing the middle group of industrial countries by 8 percent. However, 8 percent was still too small a reduction, and he suggested a reduction of 10 percent with some rounding up here and there, to be applied also to the middle group of countries. Ossola (Italy) thought that Italy and some others would not be satisfied with a 10 percent reduction, but asked for the table to be prepared and circulated.⁵

Volcker (U.S.) reminded the group that the U.S. had been reluctant to agree to the earlier ceiling because of a feeling that more leeway would be needed, but was equally reluctant to abandon the agreement on the 33 percent limit, related to the SDR allocation understanding. The U.S. had never agreed to the figure proposed for it in July. All objective calculations show the United States entitled to a substantial increase. The United States concluded that the earlier figure would erode our relative position in the Fund too much. Any solution along the lines of Roelandts’ proposal, mentioned by the Germans, would bring the U.S. down too low and was entirely unacceptable.

Volcker said the U.S. was willing to live within 33 percent, and this could be done by G-10 accepting small adjustments all around. While no one would obtain his target figure, the desired relative position of G-10 members could be attained. The U.S. might consider a small reduction in the U.S. figure to get within the 33 percent limit. Volcker saw problems with the Canadian suggestion. He thought the middle countries would not accept it without supplementary concessions by the Group of Ten.

Volcker said that we had never liked the two-tier system, but this was not a matter of life and death. We preferred the disguised two-tier system and had no difficulty with the proposed approach to calculating quotas. We would not stand in the way of a solution.

Volcker said the quota increases also raised the matter of gold mitigation.⁶ It was of some direct concern to the U.S., and any solution here was dependent on a satisfactory solution of the mitigation problem. He suggested a discussion of mitigation at this point before returning to the quota question.

Chairman Ossola accepted this suggestion, and said he was greatly encouraged by the first exchange of views. In view of the short time available before lunch, he suggested another meeting of the Deputies in the afternoon.

Emminger (Ger) said he was not sure there was any chance of getting any further this afternoon, but he and Ossola could talk to Schoellhorn, who was arriving about 2:45 p.m. We should not have a meeting unless we could make further progress.

Ossola argued the great importance of reaching agreement today.

Larre (Fr) complained that the G-10 discussion was on the verge of breakdown. This should not be allowed to happen because of the small difference between 33 percent and 34.8 percent under the scheme.

Chairman Ossola then brought up the subject of mitigation. Primary mitigation had been to some extent handled by installment payments and special drawings during the previous quota increase. There should be credit tranche drawings only if justified for other reasons. Installments might be permitted if requested, but he thought most countries would not so request because of their desire to have their quotas adjusted quickly in order to receive their full share of SDRs. Secondary mitigation had cost the reserve centers about $500 million last time, and this had been mitigated by special deposits of gold in the amount of $350 million and by special gold operations under which countries bought gold from a country having a super gold tranche claim on the Fund, and the Fund restored the positions of these countries by selling gold back to them in return for their currencies. The previous deposit scheme was unpalatable to some of the Group of Ten now, but perhaps the triangular arrangement could be agreed upon. The amount of secondary mitigation was somewhere around $600 million.

Polak (IMF) explained that the suggested mitigation gold sale procedure comprised three stages. For example, India might buy gold from Germany with dollars and pay the gold to the Fund. In the second stage the IMF would purchase DMs with gold. The third stage would be stretched out over time and would permit more DMs to be used in drawings than would otherwise be the case so that Germany could restore its IMF position and reduce its dollar holdings. The end result is that the IMF receives payment in usable currency rather than in gold, equivalent to 25 percent of the quota increase.

Volcker (U.S.) said the problem is not primary mitigation though this may arise for some countries. Our concern is to have a permanent form of secondary mitigation. The most natural solution would be to pay out Special Drawing Rights directly to the Fund instead of gold. Minister Colombo had regretted that this was not now possible. It would be feasible, if generally supported, to amend the Fund Articles to make this possible and to obtain legislative sanction simultaneously with legislative approval of quotas. This would tidy up the SDR agreement. He put this idea forward for consideration of the Group.

Volcker also recognized that the recent Fund Staff proposal would be adequate. The drawings in the third step cited by Polak could in fact begin in advance of the gold payments to the Fund. A number of countries could be used as intermediaries. The United States might or might not play such a role dependent upon the wish of others. What we need is agreement in principle that the Executive Board will work out a mitigation plan on this basis.

Emminger (Ger) thought it might be better that the Fund take in SDRs instead of useable currency, but it would be odd to amend the new SDR plan so quickly to permit this. He was not sure this was a practicable procedure. We should, however, explore the method suggested by the IMF Staff. Germany has participated in these mitigation gold transactions before and would have no difficulty in permitting the DM to be used as an intermediary. Volcker (U.S.) intervened briefly to clarify the point that we could obtain much the same result as an amendment by encouraging countries to repay the Fund in SDRs. Then the Fund would end up with SDRs instead of gold, and this provided a certain degree of logic to the whole procedure.

Morse (U.K.) thought it would be logical for the present gold payment to the Fund to be made in SDRs, but this had been specifically eliminated during the negotiations. He would now be content with the procedure outlined by Mr. Polak.

Larre (Fr) saw a contrast between the rigidity of quota positions and the laxity with which people contemplated amendments to the SDR plan. The ink on the SDR amendment was barely dry and we were talking about amending the earlier understanding. Such an amendment is premature. After three years, we can tell whether the SDR has replaced gold in central banks. The only feasible proposal is the Polak procedure which (a) conforms to the IMF rules, (b) has been used in the past, and (c) avoids disruption for gold holders. However, every member of the IMF that holds gold should be eligible as an intermediary.

Chairman Ossola noted that at least two countries have spoken favorably of the amendment to permit payment in SDRs.

Larre (Fr) suggested that countries must give up something of value when they receive a quota increase. Kessler (Neth) suggested that countries be permitted to purchase gold from the intermediary only when they have no gold or have a rather small percentage of gold in their reserves. He added that we might provide for some gold transactions with gold producers in connection with mitigation. In this way, the IMF could recover gold.

De Strycker (Belg) saw prima facie logic to permitting quota payments in SDRs, but there are two major drawbacks. This could mean that $1.7 to $2 billion of SDRs would be paid into the Fund and thus a very large amount of SDRs would move rather quickly from the Fund to be absorbed by surplus countries. Secondly, the IMF would be deprived of gold, which gives a guarantee that the IMF can get the currency it requires.

Joge (Sweden) had no objection to the IMF Staff method. Permission for direct payment in SDRs would be a more direct method. The world’s attitude toward SDRs will be largely determined by the attitudes of the Group of Ten authorities. If such payment were permissible, however, he was not sure he would recommend payment in SDRs instead of gold.

Emminger (Ger) strongly supported the Swedish view that the status of SDRs depends on the attitude of the G-10 countries. He was not absolutely certain that Germany would choose SDRs instead of gold if permitted to do so since the SDR is a gold certificate bearing 1-1/2 percent interest. The Fund could procure usable currencies with SDRs just as well as with gold. There is no real danger that SDRs will become illiquid because of reaching the acceptance limits. However, it is not necessary to push the amendment now. It is satisfactory to obtain pragmatic results.

Volcker (U.S.) said the inclination of the U.S. might well be to pay gold rather than Special Drawing Rights even if the latter were permissible. The mitigation problem was not essentially a matter of gold as such but resulted from the circumstance that quota payments to the Fund would produce pressure on U.S. reserves, however composed. Concerning arrangements with gold-producing countries, Volcker referred to having spent some time during the year exploring the problems of the gold producers with them. This had made it plain to him that we cannot link that problem with mitigation at this stage. He saw no practical way to do so at this time.

Chairman Ossola summarized the results of the meeting as follows:

(1) Primary mitigation is not a problem with which the countries around the table are concerned;

(2) There was a rather widespread desire that Special Drawing Rights be usable instead of gold, but a recognition that it is impracticable to insert such an amendment into the ratification of quota increases. It was not clear that countries would in fact use Special Drawing Rights instead of gold if permitted to do so. We should use the IMF Staff technique of mitigation gold transactions without restricting its use to a particular country. The Fund should be left to determine which countries were entitled to use this procedure and which currencies could serve as intermediaries;

(3) There should be no connection between mitigation and arrangements with gold-producing countries, which is a separate problem.

Chairman Ossola then pressed again for an afternoon meeting but Emminger (Ger) again suggested that this matter be left open until it could be ascertained whether it would be useful to have the meeting. The Chairman suggested that the matter might be taken up again at the time of the EPC meeting. Polak (IMF) said this would be very difficult. The IMF could make a proposal along these lines, but it would take a few weeks to clarify the reaction of the other developed countries. There was little time left to reach agreement by December 31. Chairman Ossola was very reluctant to leave the decision to be worked out in other bodies without reaching unanimous agreement in the Deputies. Polak (IMF) said that if the group wanted to agree they should do so today. He did not think the Executive Directors could be asked to delay further consideration of the matter until after the EPC meeting.

Volcker (U.S.) noted that he recognized the procedural and psychological difficulties of presently introducing an SDR amendment. However, he did not want to associate himself at this point with the Chairman’s use of the term “impracticable.” The Chairman agreed that “difficulty” could be a better description.

Rogers

1. Source: National Archives, RG 59, Central Files 1967-69, FN 10 IMF. Confidential. Drafted in Treasury by Willis on November 5 and cleared by Volcker; approved in State by Weintraub. Repeated to USOECD and USEC and the Embassies in Brussels, The Hague, Bern, Stockholm, and Ottawa.
2. For information on the discussion of IMF quota increases at the G-10 Deputies meeting, see Margaret G. de Vries, The International Monetary Fund 1966-1971: The System Under Stress, Volume I: Narrative (Washington, D.C.: The International Monetary Fund, 1976), pp. 287-305.
3. Not printed.
4. See Document 135.
5. Not printed.
6. IMF members were expected to subscribe 25 percent of any quota increase to the Fund in gold, sometimes a problem for members that did not hold significant gold reserves. IMF quota increases sometimes led countries to exchange currency holdings for U.S. monetary gold, creating a drain on the U.S. gold reserves. Mitigation concerned strategies and procedures for dealing with meeting the gold subscription of any quota increase. See de Vries, The International Monetary Fund 1966-1971: The System Under Stress, Volume I: Narrative, pp. 297-298.