Pursuant to the President’s memorandum of October 14, I am sending you
the attached draft memorandum which Mr. Roosa proposes to submit to the Deputies of the Group of
Ten. Each of the ten Deputies has agreed to prepare a brief statement
indicating the questions which his government considers relevant to the
scope of studies being undertaken by the Deputies. While this initial
indication of questions of interest to the United States does not, in
any way, bind the United States to any position with respect to the
questions, I thought you would like to review this—as the first document
to come under our purview as the committee designated by the President
to oversee the participation of this Government’s representative in the
work being carried out by the Deputies of the Group of Ten.
This memorandum, and the accompanying summary in abbreviated question
form, represents the combined efforts of the Long-Range International Payments Committee. I hope you
can send an indication of your approval, with any additional suggestions
or questions, to Mr. Roosa no
later than Monday morning, October 21. Mr. Roosa will then, under my direction, put this material
in final form for immediate distribution to the other Deputies.
Attachment
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MAJOR QUESTIONS TO BE DEALT WITH BY
THE DEPUTIES
IN THE STUDY OF THE GROUP OF TEN
(Submitted by the United
States Representative)
GENERAL QUESTIONS
The Deputies are, in effect, undertaking a study of the international
payments system. What are the major objectives of the system? How
does it relate to domestic economic policies and to the commercial
policies of industrial nations? What are the necessary conditions
for its effective operation? And what may be needed to assure those
conditions over the years ahead? How can the system contribute to
financial,
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economic and political progress? Interest among the Ten
necessarily centers on the functioning of the system in relation to
the industrial countries—particularly with respect to the variations
in their individual balance of payments positions, and to the
interaction of economic forces among them. The implications of the
system for the less developed countries are obviously of great
importance, but need not at this stage be studied separately by the
Deputies.
As presently constituted, the system presumes fixed (though perhaps
infrequently adjustable) exchange rates, a
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fixed and continuing $35
price of gold, and at least one currency freely exchangeable into
gold at that price. It is also necessary, in order to economize
gold, that most countries hold something in addition to gold in
their international reserves—mainly key currencies widely usable in
settling foreign accounts. Gold reserves may also be supplemented by
quick drawing rights (gold tranche) on the International Monetary
Fund. The reserve position may be bolstered by credits arranged with
the IMF, or obtained from other
countries.
These are the major elements of the system. The Deputies should
attempt, however, to describe this system more precisely, noting
current practice, but especially those features which appear to be
essential conditions for the most effective performance of the
system. This effort to formulate an agreed description of the
present system, in its most efficient form, will lead to four sets
of questions: (1) what are the essential parts of the mechanism for
balance of payments adjustment among convertible-currency countries
and how is the function of this adjustment mechanism interrelated
with the use of reserves, and (2) what is the appropriate role of a
reserve currency, including the duties of
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the country supplying it and
the obligations of countries making use of it, bearing in mind the
advantages and disadvantages of reserve currencies to the respective
participants; (3) what determines the adequacy of foreign reserves
for any country, in amount and in composition; and (4) what is the
acceptable scope for credit arrangements to supplement existing
reserves, either through the IMF or
between and among countries, and when are short, medium, or long
maturities appropriate?
Once so described, in terms mutually agreed by the Ten, the system
must meet even sterner tests: (1) where does present practice fall
short of model conditions? and (2) where does this prescribed model
itself fall short of the needs and potentialities that a fully
satisfactory international monetary system should fulfill? Or put
differently, what is not now being done the way it should be, under
existing arrangements; and what should be introduced to strengthen
and expand the structure for the future?
In this appraisal, we suggest that projections and suggestions relate
to roughly the decade extending from 1965 to 1975. Secondly, it
might
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be
assumed for at least part of the analysis that the United States
would not on average
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over this period run a balance of payments
deficit; thus it could only provide an increase in the reserves of
the rest of the world through deliberate action, such as adding to
the level of gross reserves of other countries by acquiring their
currencies for dollars.
The two following sections and the attached outline suggest further
points that may arise in considering the process of adjustment, and
the financing of imbalances.
