133. Memorandum for the Files1
SUBJECT
- Meeting of U.S. Delegation to the G–10 Ministers’ Meeting—July 10, 1967 at 2:00 P.M.
PRESENT
- Under Secretary Deming
- Chairman Martin
- Gov. Daane
- Mr. R. Solomon
- Mr. Willis
- Secretary Fowler and Under Secretary Barr arrived later
Under Secretary Deming outlined the proposed schedule for Sunday, July 16, comprising luncheon for the Japanese, Swedish and Canadian Ministers, Governors and Deputies at our invitation, followed by bilateral discussions with other Ministers and Governors of the Ten from 3:00 P.M. to 7:00 P.M. on Sunday. The Secretary was to see Chancellor Callaghan in the morning and perhaps also for dinner. It was hoped that Chairman Martin would find time to see Governors Ansiaux, Blessing, Carli and Zijlstra sometime during the day.
Chairman Martin turned to substance, and said it was important to get clear what we are trying to do. He had become very much of a dove independently of Governor Daane and Mr. Solomon. It would be a disaster to have a collision now. We could have done so three months ago. Instead of coming out publicly for the IMF plan2 on August 1, which he had favored last week, he now felt it desirable to support the IMF plan as a compromise at London.
Under Secretary Deming said we were not really far away from the IMF plan. Secretary Fowler wants to concentrate on decision-making and reconstitution. He wants to take up some of the points in the 1965 guidelines of the Reuss Committee.3 He proposes a minimum amount of [Page 389] reserve creation during the first period that could be approved by a 75% vote, with 85% required to create reserves in the amount of more than a billion dollars a year. He might be prepared to go to an 80–85% version of this.
After the first activation, decisions would be on an 80% majority basis as in the present provision for enlarging Fund quotas. That is, the EEC should pay for a veto by increasing its quotas. Mr. Deming said the Fund Management would raise a number of arguments against this: (1) the statistics under the Bretton Woods formula do not raise the EEC to 20%, (2) the Fund could not hold back some other increases, and (3) the Canadians, Japanese and Indians would have to go up if the Italians went up. The idea of a minimum non-inflationary addition to reserves might be one billion a year or even less for 3 to 5 years.
Mr. Deming said the Secretary thought of his quota increase proposal as a counter proposal to the EEC suggestions for reform of the Fund.
On reconstitution, we would argue hard against reconstitution on our current lines, with any action to be taken on an ad hoc basis by the IMF after activation, but with no rules to define and clarify the general principle prior to experience under activation. A possible fallback was to defer negotiation of a protocol until after London or until after Rio.
If London failed to reach agreement in full, the alternatives were to leave some questions for later or have the U.S. introduce its own plan at Rio. He did not want to take the last course at this stage. The U.S. should hold a press conference after the meeting that would stress the U.S. position. Depending on the results of London, there might be more or less pointing of the finger at the EEC. If we were expecting to reach agreement on a plan, subject to further negotiation, the line would be softer. If it appeared we were not going to get anywhere, we might want to take a plan to the floor of a Rio session.
Chairman Martin objected to this latter course, and thought that the Secretary would be “clobbered” if he held such a press conference. Instead we should say that we are pleased with the recognition of the problem that has taken place and the progress made. Our position is vulnerable because the balance of payments is getting worse rather than improving and there are difficulties ahead in the gold market. We don’t want to have a market upheaval blamed on our statements. Our tone with the press should be one of encouragement rather than that we are demanding something that we can’t get. This is the line that the President is taking in general—to emphasize what is right rather than what is wrong. We should not be on the defensive but should try to take the view that the gold exchange standard can survive even with a shortage of gold.
[Page 390]Mr. Willis asked whether this approach would be expected to lead to continuing negotiation after Rio.
Chairman Martin said he would rather do this than precipitate a showdown. We have to meet our problems on an ad hoc basis with controls. Without peace in Vietnam, we may need these controls for a long time. We are not likely to have legislative restrictions on direct investment. We should do nothing to undermine the swap arrangements. He had been discouraged at the BIS meeting. He had gone down the line for a supplement to gold and found no disagreement. But there had been no support for our war in Vietnam. He feared that the breakdown in the negotiations would be what the French want. We should therefore come out with a hopeful attitude rather than forcing a collision. The French were winning the propaganda battle. Our line should be one of sweet reasonableness. He reiterated that he would propose to espouse the IMF plan now at the meeting instead of publicly on August 1. We should also make clear that we are not proposing reserve creation to solve our balance of payments problem and we are not trying to avoid drawing on the IMF or selling gold. We merely want a bona fide supplement to gold.
Under Secretary Deming pointed out that only on decision-making and reconstitution do we differ importantly with the IMF plan.
Secretary Fowler, who had arrived in time to hear Chairman Martin’s reiteration of his position, outlined his own views. He wanted to develop his point of view along the following lines in both bilateral meetings and the Ministerial meeting itself.
Reserve creation is not an answer to our balance of payments problem and he would like to drive this home with arithmetic and charts. We thought the gold exchange standard served our purpose well, but a supplement will be needed. He would cite the guidelines in the Joint Economic Committee Report. The technicians have made very substantial progress. We have narrowed the issues down to one technical problem, that of reconstitution, and one political problem, that of decision-making. There is a third important element in the extraneous matter of reform of the IMF.
The United States wanted to put forward constructive proposals on the first two issues, hoping that some time between now and Rio agreement could be reached. The Secretary indicated that he would personally deal with the question of decision-making, and that Mr. Deming would handle reconstitution.
Concerning decision-making, we recognize that there may be concern as to the excessive amount of reserves, and that some kind of maximum is needed for Parliaments. The U.S. band proposal does not appear to attract support. At this point the Secretary would hope that Minister Schiller would have put forward a compromise proposal. If not, the United States would put it forward. This would call for a minimum of $1 [Page 391] to $1–1/2 billion a year of reserves to be created, with a case to support it. Such an amount would be non-inflationary and modest and would be authorized by a weighted vote of 75%. Amounts in excess of this would require an 85% vote during the first 5 years.
As a related part of this proposal, and an added starter in the discussion of reform of the Fund, there would be a proposal to change the structure of the IMF quotas to reflect the stronger position of the EEC. This would go far in dealing with the EEC concern with voting procedures in the Fund. This should be tabled along with the EEC proposals. We would hope that the first 5-year plan agreement would be announced simultaneously with the announcement that there was going to be consideration of the general working of the Fund.
The United States would then put forward the second part of its proposal relating to reconstitution. The general slant would be that we were really trying to move in their direction on these matters.
The purpose of the press conference would not be to declare war or to express defeat. It would be a sanitized statement of what we would say at the meeting so as not to be misrepresented in the press.
Chairman Martin thought this was all right. It should have a tone of commendation and approval, with perhaps a hint of disappointment. It should not be a demand or an ultimatum.
Mr. Willis suggested that both the Secretary’s approach and Chairman Martin’s suggested approach seemed likely to lead to further negotiations after Rio. He noted that the Kennedy Round reached a decision only because of a firm deadline.
Secretary Fowler said it was not time for an ultimatum now and there is room for further negotiations. He did not propose to burn any bridges on his right to take it to Rio but likewise did not wish to commit himself now to sponsor a proposal at Rio. He thought the meetings in London and Rio would be fairly decisive and we would either get results or not on a contingency plan. He did not want to let up on the pressure to get agreement at Rio. The only question was whether the tone was one of an ultimatum or hopeful expectation.
Mr. Willis expressed doubt that it would be possible to get agreement at Rio on a contingency plan on either of these two approaches.
Governor Daane recommended that we accept an 85% majority for decision-making and in return seek a favorable compromise on reconstitution. Secretary Fowler was not prepared to go so far as 85%.
Mr. Willis pointed out that the Europeans are also interested in the third question, the reform of the Fund, and questioned Governor Daane’s hopes for a successful deal on the basis of 85% plus reconstitution.
[Page 392]Mr. Solomon saw dangers in the approach of a minimum amount, pointing out that Minister Debre would strongly resist the minimum and would say that this is not consistent with the idea of a contingency plan.
Governor Daane thought that the Six would probably not have any flexibility on anything except reconstitution. Mr. Willis pointed out that there were three stages in the operation—the Rio resolution, ratification, and activation. The Europeans might hold up the ratification stage if they were not satisfied on any of the three issues.
Under Secretary Deming said that the ratification problems might be a postponable issue. Under Secretary Barr thought it was best to proceed stage-by-stage, and to get agreement on a contingency plan even if it was not clear what further concessions might be necessary to get ratification. He did not want to see the Group of Ten let off the hook by a breakdown of negotiations.
Secretary Fowler said his objective was to put them in a position of having to turn down a reasonable proposal covering reconstitution and decision-making. He would not agree to 85% as a permanent majority procedure. He was not wedded to the initial 75% figure and would take 80% for the minimum vote in the first round.
- Source: Johnson Library, Bator Papers, Letters and Memoranda of Conversation, Box 9. Limited Official Use. Drafted by Willis on July 11 and approved by Deming. The signed original of this memorandum is Deming Group paper DG/67/211. (Washington National Records Center, RG 56, OASIA Files:FRC 75 A 101, Deming Group)↩
- Reference apparently is to the IMF plan, “An Outline of a Reserve Facility Based on Drawing Rights in the Fund,” dated June 8, which was a revision of the IMF’s May 29 proposals; for text of the two plans, see The International Monetary Fund, 1966–1967, vol. II, pp. 30–34 and 40–44.↩
- Apparent reference to Henry S. Reuss, Chairman of the Subcommittee on International Finance of the House Committee on Banking and Currency. The 1965 guidelines were contained in the subcommittee’s report, Guidelines for Improving the International Monetary System: Report of the Subcommittee on International Exchange and Payments of the International Exchange and Payments of the Joint Economic Committee, Congress of the United States (Joint Committee Print of the Joint Economic Committee, Eighty-ninth Congress, First Session, transmitted August 30, 1965).↩