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

125. Memorandum of Conversation¹

Washington, May 26, 1967, 4:15 p.m.

PARTICIPANTS

• IMF:
  • Mr. Schweitzer
  • Mr. Southard
  • Mr. Polak
• U.S.:
  • Secretary Fowler
  • Under Secretary Deming
  • Mr. Willis
  • Mr. Dale

SUBJECT

• International Monetary Negotiations

Secretary Fowler first raised the subject of recent developments in the gold market.

Mr. Schweitzer said that they did not know all the details as to what was happening in the gold market. His view was that, despite unusual demands, in the present circumstances we should continue to support the market. Mr. Schweitzer thought that the French would be prepared to participate in an additional rallonge to support the market.

Under Secretary Deming reported that one participant (a professor) at a recent meeting of academics and financial officials of the Ten at Bellagio suggested establishing a pool of $10 billion instead of continuing to provide bits and pieces. While $10 billion was excessive, what about establishing a pool of $500 million to $1 billion?

Mr. Schweitzer thought that would be wonderful. Would the U.S. be willing to provide 50% of the amount? He was not sure that the public, in general, knows much about the size of the gold pool and its possible supplementary resources.

Under Secretary Deming pointed out that over time the pool has acquired $1 billion in gold. It was pointed out that it is not strictly speaking a pure pool operation, because South Africa supplies gold to the pool, and on the other hand the contributors to the pool may replenish their gold reserves by converting dollars into gold.

Continuing, Mr. Schweitzer said that his personal guess was that we should proceed as if nothing had happened in the Middle East, and it would be dangerous to let the price move above $35.20. He was not sure it would be a good idea to make a startling announcement that a large amount was being set aside for the pool. This would have the disadvantage of appearing to fix a limit for support of the pool and would also be taken as official recognition that we expect a severe crisis. He preferred to avoid the impression of official panic.

Under Secretary Deming asked whether it would be useful to make some announcement by the pool or by the Group of Ten countries and Mr. Schweitzer repeated that he would rather play it down. He mentioned that Mr. Parsons² of the Bank of England had not appeared to be much concerned. He thought the Bank of France would be very unhappy to see the price of gold rise in London. Whatever Mr. DeGaulle wants to achieve, this should not be done through the London Gold Market.

Secretary Fowler then took up the subject of the negotiations on reserve creation. He mentioned that Minister Schiller will be in Washington on June 16 and that Minister Colombo will be here sometime between June 5 and June 15. The EEC Finance Ministers meet in Rome on June 5, in their capacity as Governors of the European Investment Bank. The Secretary wanted to discuss some of the technical elements in the U.S. proposals to determine whether they present problems to the IMF. He also wanted their evaluation of the “parliamentary” situation in Rio, and particularly whether it would be desirable to make a proposal on reserve creation even though there were some substantial objections from EEC countries.

Mr. Schweitzer found it very difficult to make an assessment of the current negotiating position. He was worried about two things. First, the EEC now appears to seek a common position. This could mean that the negotiations would drag out a long time because they have differences of opinion and they are in no hurry. Second, there is a danger that the EEC will take a common position at the lowest common denominator and the deGaulle press conference was rather forbidding. On the other hand, for the foreseeable future it is not likely that there will be a break in the EEC. Both Kiesinger and DeGaulle are afraid of a break. DeGaulle feared a break if he remained too negative, and Mr. Schweitzer does not think any pressure on Germany will produce a break. It is too late now for that during the next year or two. The other EEC countries do not want an open break with France.

Continuing, Mr. Schweitzer said there is room for dragging the French along under pressure from the Germans and Italians. The French will resist and it will be like dragging a mule, but deGaulle will be open to some limited pressure.

It would probably help if the U.S. would consider a drawing right plan. If we are to have agreement this year, it would probably have to be in the form of a drawing right that is somewhere beyond the French conception and somewhat less than the U.S. preference. The French have been surprisingly yielding on the issue of separation. Mr. Schweitzer interpreted Mr. Larre’s³ position in the IMF to mean that drawings on the new drawing right would not make use of regular Fund resources.

Mr. Schweitzer thought that a completely negative result in Rio would be a very unhappy result. The blame could easily fall on the most innocent country. The attitude of the countries outside of the Group of Ten was a bit complex and their views differ. They don’t care much about the distinction between the drawing right and the reserve unit. They are jockeying for position, and since Munich they have preferred reserve units, but they won’t make a basic issue on this. On decision-making, they feel strongly on the “diplomatic” issue of a special unit vote for creditors, but they could accept an 85% majority, including plus votes for creditors. What they oppose is a self-appointed inner group like the U.N. Security Council.

Concerning changes in the IMF itself, anything that would change the present voting rights in the IMF is wholly unacceptable. This is like playing with fire with one qualification. Thinking in terms of legal provisions as the French do, it is now possible by a simple majority to make access to the credit tranches automatic. We will probably have to find some language to prevent that, as the Europeans have a good case there. Mr. Schweitzer would strongly oppose any other change in existing voting procedure, as a political disaster and not needed. He would try to convince the Six that this was against their interest.

Mr. Schweitzer said that if he were a member of the Deputies Group, he would be concerned because the Group appeared to prefer long discussions to getting down to the business of agreeing on specific language. He had hoped that we had left that point, since general discussions could go on for years. His suggestion of IMF outlines had been designed to bring the joint meeting to bear on specific language. The U.S. illustrative plans were useful, and the IMF would try to come up with specific language.

Mr. Schweitzer felt that the Ministers would not be able to deal with the complex questions of holding, use and transfer, and this probably meant that a wide discretion for guidance would have to be left to the agent in the future unless the Deputies could reach agreement on some specific principles.

Mr. Polak⁴ hoped that it would not be necessary to explain to Ministers more than the issues of repayment and decision-making.

Mr. Willis pointed out that it is now realized by the Deputies that the provisions on holding and use are really at the heart of the whole scheme, are tied up with the other issues, and there is some reluctance to delegate full discretion to the agent.

Mr. Polak noted that it might be possible to agree on roughly three quarters of the U.S. principles on transfer and use.

Summing up his remarks, Mr. Schweitzer said: (1) do all we can to drag the French along, (2) don’t expect a split in the EEC, and (3) try to agree on specific language. The Fund would try to present some specific language that would not be the same as the U.S. scheme. Although the French had opposed the Fund initiative in providing language, it was essential that the Ministers have specific language before them.

Secretary Fowler stressed that at least one element, paragraph 11 of the Monetary Committee Report, applying high qualified majorities to basic policy decisions, would have to be given up and brushed out of the way. Mr. Southard agreed that the paragraph is anathema to the non-Ten countries, and that the unit vote of creditors is also unacceptable.

Under Secretary Deming thought that the EEC would give up the unit vote for creditors.

Concerning the 85% weighted vote, Mr. Schweitzer said that the non-Ten countries realize they could not have activation if there is no EEC participation, and they do not oppose 85%, including bonus votes for creditors.

Secretary Fowler thought it made an important difference whether the qualified majority was 75% or 85%. An 85% majority is a very attractive incentive for the EEC to stick together. Mr. Dale reported that Mr. Kafka⁵ thought the Europeans might stick together on constitutional provisions, but might be easier on actual operations.

Secretary Fowler was worried whether the plane would ever be able to fly with an 85% majority. Mr. Southard suggested that the non-Ten do not believe the EEC will really resist the pressure to create reserves when a plan is in effect.

Secretary Fowler made clear that he was fearful that 85% would permit an effective veto by one country, and stated that he would not want to be a party to it. He read a copy of his statement at The Hague⁶ on this point. He mentioned that the Dillon Advisory Committee did not agree with Mr. Schweitzer and thought there was a possibility of splitting the EEC this year.

Mr. Schweitzer said that he had welcomed the Secretary’s statement at The Hague which had killed the earlier European idea of a two-tier vote. However, it would be futile to try to prevent, through a voting arrangement, a common position on the part of a few countries. If we were to proceed by amending the IMF Articles, this required 80% of the weighted votes and 60% of the individual member votes.

The Secretary raised the possibility that the French might require a private understanding with the Germans and Italians that if any one of them was opposed to activation, the others, regardless of their views on the merits, would not vote for it. Was this a danger and should we worry about it? Mr. Schweitzer agreed this was a danger but there was not much that could be done about it.

Mr. Willis referred to Mr. Larre’s position that a precondition for activation was a change in IMF voting procedures. Mr. Southard reported that the alternates of the EEC Monetary Committee were to meet on reform of the IMF on June 5–6.

Mr. Schweitzer said he had no reason to believe that the Monetary Committee proposal of a highly qualified vote to establish major Fund policies was important to the French with the one exception that he had mentioned earlier concerning a vote to liberalize credit tranches.

Under Secretary Deming thought that if the non-Ten countries did take a strong position, the voting majority could be negotiated at 80%. The EEC could reach this level by increasing its quotas, thus accepting responsibilities commensurate with its growing importance.

Secretary Fowler said he would accept Mr. Schweitzer’s technical judgment that it is not worth proceeding if the EEC won’t play, but it troubled him to give up in advance the right to try. If the rest of the world had the power to proceed without the EEC, this would mean that there was a better chance to obtain EEC participation. The Secretary would hate to give the EEC a legal blocking power in addition to its practical veto.

Mr. Schweitzer said the French were worried that it would be difficult to resist activation once the scheme was established, and he thought they had a point if a slowdown develops in world trade. He did not think $2 billion a year would be created but something like $1 billion a year.

Secretary Fowler inquired as to why, if 75 percent of the votes wanted to go ahead and 15 percent could opt out, the 15 percent should exercise a veto on the power of the 75 percent to proceed.

Mr. Schweitzer was not sure that 75 percent participation would mean anything more than the Anglo-Saxon countries extending credit to the developing countries, and there would be no real reciprocation in such a system.

Turning to reconstitution, Under Secretary Deming said that France will apparently insist on very specific terms so as to make the asset both ostensibly and really a credit facility. Was it better to have this or nothing?

Mr. Schweitzer thought that the French wanted to have it ostensibly credit but perhaps not really credit. Mr. Polak said that the IMF proposal on reconstitution would not do for the French. They must have a precise repayment obligation. Mr. Schweitzer suggested the gold tranche provisions on repayment, and Mr. Polak said the French want something tougher than the present gold tranche repayment arrangements.

Mr. Schweitzer thought we should resist compulsory provisions in the charter, and rely on representations by the Agent. We would be over the hump if we could sell this to the French. Mr. Polak said that Minister Debre will not buy this. Mr. Southard thought this was the toughest issue.

Under Secretary Deming thought that if the French are not honest and are merely delaying, the EEC might split. Mr. Willis reported an Italian comment to the effect that the French regard reform of the IMF as a prerequisite for activation of the reserve creation plan. They also wanted an advance definition of an excessive drawing and a numerical statement of a repayment obligation.

Returning to the question of voting, Secretary Fowler suggested tying the opting out provision to the initial vote in the U.S. band proposal, with a provision that those opting out would not block a second vote. Mr. Schweitzer said there was nothing to prevent any group of countries from setting up a glorified multilateral swap. Without the EEC countries, the burden would fall on the U.S. and it would not be a truly reciprocal arrangement.

Secretary Fowler said he would be prepared to argue with Congress that the U.S. should not retain a veto if the rest of the world wanted to go ahead but should merely opt out. The Secretary was not sure that he could make the case and win it at the Ministers’ meeting. Perhaps he would try to do so at Rio.

Mr. Schweitzer called attention to the problem of the Belgian Congo, and urged that the U.S. consider giving help to the Congo. They have worked out an arrangement with the copper company. The amount is small but it has an important political aspect. Mr. Southard said that he had been told that the Treasury was lukewarm on this.

George H. Willis

1. Source: Johnson Library, Bator Papers, Letters and Memoranda of Conversation, Box 9. Limited Official Use. Drafted by George H. Willis on June 2 and approved by Deming. The meeting was held in Secretary Fowler’s Conference Room.
2. Sir Maurice Parsons, Deputy Governor of the Bank of England.
3. Rene Larre, French representative on the Board of Executive Directors of the International Monetary Fund.
4. J.J. Polak, Economic Counselor, International Monetary Fund.
5. Alexandre Kafka, Brazilian representative on the Board of Executive Directors of the International Monetary Fund.
6. Reference is to Fowler’s statement to the meeting of the Finance Ministers and Central Bank Governors of the Group of Ten at The Hague on July 26, 1966. A copy of this statement is Attachment B to the Summary of Meetings of the Ministers and Deputies of the Group of Ten at The Hague, Netherlands, July 25–26, 1966, dated August 15, 1966. (Department of State, Ball Papers: Lot 74 D 272, Balance of Payments)