132. Current Economic Developments1

Issue No. 783

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An outline of a contingency plan for the creation of new liquidity based on automatic drawing rights in the International Monetary Fund was worked out in general terms, but with a number of major points still unresolved at the fourth joint meeting of the Deputies of the Group of Ten and the IMF Executive Directors in Paris June 20–21. The plan will be considered by the Ministers of the Group of Ten in July in London, and hopefully the outstanding issues can be resolved at this level. Before then, the Ministers of the six EEC countries will meet to discuss some of the issues involved.

Our objective remains to achieve agreement at the annual meeting of the IMF in September in Rio on the structure and major provisions of an acceptable plan which will convincingly demonstrate that the world’s need for reserves will be met by the timely creation of new reserves to supplement gold and US dollars. There remain, however, a number of issues to be resolved at the political level. The two most crucial are procedures for decision-making and reconstitution of the new asset.

Major Issues

The plan as it has evolved during the past year calls for creating new liquidity by means of special, automatic drawing rights linked to the [Page 387] IMF. The idea is to have a contingency plan that could be called into action to meet possible future needs.

No major progress was made on the outstanding issues at the fourth joint meeting of the IMF Executive Directors and the Group of Ten Deputies. The major issues are: a) whether and the extent to which the resources, accounting, and administration of reserve creation should be separated from the IMF in its normal operations; b) acceptable provisions on holding and use of the new asset; c) the manner in which holdings of the asset should be reconstituted, i.e., repaid following use; d) decision-making; and e) EEC proposals to “reform” some aspects of the operations of the IMF, especially giving the EEC strong control.

US Position

Fundamentally, the US objective is that the new asset have the basic characteristics of money rather than be another form of international credit added to the credit forms already available which fails to give convincing assurance that the world’s need for reserves will be met. The US position on the issues enumerated above is as follows: a) that reserve creation should preferably be undertaken by a separate affiliate of the IMF; b) that use of the asset should be permitted only when a country’s other reserves are falling and that surplus countries should accept and hold the assets up to triple the amount of their allocations; c) that reconstitution should be required only in extreme cases of prolonged use which threaten the liquidity of the scheme; d) that decision-making procedures should avoid an EEC veto of reserve creation; and e) that any consideration of proposals for changing the present operations of the IMF should take place on their merits and not be linked in timing or otherwise to reserve creation. The US had introduced two alternative draft plans which spell out the US position on all the essential aspects of reserve creation.

In general, the US, Canada, Britain, and Japan want the drawing rights to be as liberal as possible so that they come close to a new form of international money. France, with varying degrees of support from Belgium, Holland, Italy, and Germany, wants the privileges to be no more than another kind of credit.

The proposal advanced last year by the US for creation of a new reserve unit is “semi-dead,” Otmar Emminger of the German Bundesbank and Chairman of the Deputies of the Group of Ten, told a press conference after the Paris meeting. He also assessed the chance of reaching agreement among the major countries at “more than fifty percent.”

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  1. Source: Washington National Records Center, RG 59, E/CBA/REP Files: FRC 72 A 6248, Current Economic Developments. Limited Official Use. The source text comprises pages 18–19 of the issue.