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

140. Telegram From the Department of State to the Embassy in the United Kingdom¹

Washington, August 24, 1967, 0345Z.

26200. For Griffin from Treasury. Following text of confidential letter from Secretary Fowler to Chancellor Callaghan. Request you arrange delivery soonest. Signed original being pouched.²

Begin text

Dear Jim:

I hope it will be possible for the two of us to meet before the Ministerial meeting at 10:00 a.m. on August 26, possibly at 8:30 or 9:00 in the morning. As you know, I will not be arriving in London until about 11:00 p.m. on the evening of the 25th. It would be helpful to exchange views on the Ministerial meeting beforehand. However, there would probably not be time to go into any other matters on Saturday morning,³ and I would be happy to have a further session with you at some time on Sunday on other subjects, if this would be convenient to you. In the meantime, you might be interested in the present state of our consideration of some of the major questions.

The Deputies have done yeoman work in trying to implement the package which you assigned them at our last meeting in London.⁴ In addition to resolving a good number of the brackets in the Outline,⁵ they made considerable progress in narrowing differences on the big issues. I understand that if the French representative had had more flexible instructions, it might have been possible to reach almost complete agreement on the Outline—with acceptance of the average net use formula as the centerpiece.

As it turned out in London, the major issues were left unresolved. Voting provisions, reconstitution, the right to purchase a country’s own currency, the name of the asset, the magnitude of acceptance limits, and a satisfactory resolution for adoption by the Governors at Rio must all be considered by the Ministers this weekend.

One of the important accomplishments of the Deputies at the Paris meeting in July was to narrow and clarify the alternatives on reconstitution. Although there are five alternatives in the Emminger redraft of Chapter V, 4, the results of the Paris meeting—where agreement was almost achieved on the basis of Alternative A—would seem to justify concentration on Alternative A in our forthcoming discussions on reconstitution. In Paris Ossola indicated that the Italians would not want their harmonization proposal to stand in the way of the agreement on Alternative A. In large part this attitude seemed to reflect the fact that the harmonization principle was very difficult to define and apply practically. Whether or not this is the official Italian position, I cannot say. Governor Carli seems to be very closely attached to the harmonization principle.

You will recall that the first paragraph of Alternative A is really based on a French suggestion. In brackets, it contains also the elements of Minister Schiller’s proposal of 75% over six years. At the same time, our version of Alternative A sub-paragraph (ii) would maintain the principle of harmonization as a general guide. (The Emminger formulation in paragraph (ii) A seems to us much too rigid. By emphasizing disproportionate use, without any qualification with respect to “over time”, it would undesirably constrain the asset as a freely usable reserve.)

I would like you to know that, for our part, we could under no circumstances consider any operative combination of harmonization and average use such as is represented by the Emminger variant of Alternative A, paragraph (ii), or by Alternative C. Needless to say, the new French Alternative D is also outside the range of what is negotiable, since it combines the most stringent form of harmonization with average use.

All in all, our general view is that we could support Schiller’s average use proposal of 75% over six years, supplemented by Fred Deming’s language in paragraph (ii) of Alternative A. This seems to be the most reasonable of the formulae on the table. Of course, the 75% figure is an essential feature of the proposal.

On a different point, I would like to draw your attention to the fact that the right of a member to purchase balances of its own currency has been bracketed by the French. You will recall that the substance of this provision has been changed in an important respect since it was discussed at our July meeting. Previously it was provided that a country meeting the needs test could obtain balances of its currency held by another country if the latter country was eligible to receive the new drawing rights and was within its acceptance limits. Provided these conditions were met, a country could exercise this right without the consent of the country receiving the drawing rights. The provision has now been modified so that the right to obtain one’s own currency from another country can be used only if the other country consents. Thus, for example, the U.S., if it meets the needs test, can obtain dollars held by another country if that country is eligible to receive special drawing rights, is within its acceptance limits, and agrees to take special drawing rights in return for dollars. We are fully in accord with this modification of the provision since it removes any possibility that it might be misconstrued to indicate that the U.S. was modifying its commitments to convert dollars into gold. Although this construction was completely unfounded even under the previous provision, the requirement of consent of the other country eliminates any possibility of misinterpretation.

Even as modified, this provision is of vital importance to the U.S. Under the regular rules of holding and use, in order to use 100 drawing rights we would have to obtain a basket of foreign currencies including, for example, 25 SDR in Deutsche Marks, 25 in Guilders, 25 in Lire and 25 in Sterling. However, all but one country contributing to this basket might be perfectly happy to be holding dollars. Thus, drawing down dollars from the other countries would be of no particular use to us. What we would like to be able to do is to use all 100 drawing rights with countries that want to exchange dollars provided they consent to accept drawing rights. Without this provision the drawing right scheme has a limited utility to us. Therefore, acceptance of this provision is a sine qua non to our agreement to new package proposals. I believe you share our interest in this provision, as your own needs might not always be covered efficiently by a straight package drawing.

Another important point that may come up is the resolution for Rio. A question may be raised as to whether it is advisable for the Ministers to take up the resolution which has not been discussed in advance by the Deputies, and on which discussion has begun in the Executive Board. As you know, I consider it essential that instructions be given at the Annual Meeting to authorize the task of drafting an amendment to the Articles to implement the provisions of the Outline. At the same time, I do not want to be placed in the position where agreement to the EEC proposals for changes in the present operations of the Fund, particularly in the voting majorities, becomes a condition to a report by the Executive Directors and an agreement by the Governors on an amendment implementing the Outline. As the French have indicated an interest in linking the two as part of the package, and the EEC have been meeting on their substantive proposals, the question may have to be faced in some way at London. There is no logical connection between these EEC proposals and the Outline. A linking of the two seems to me to be simply a case of placing a precondition on final action by the Board of Governors on the Outline.

From this point of view, the Fund Staff draft of the Rio resolution seems deficient. The implementation of the Outline and formulation of amendments to the Articles to allow the Fund to hold and use the new asset should be treated in one resolution and a second resolution, if desired by the EEC, should treat their proposals for changes in present operations of the Fund.

Since implementation of the Outline should be given priority, we should ask for proposed amendments establishing the plan and making other changes in the Articles in connection with the plan to be submitted to the Board of Governors not later than the end of February 1968. A separate report containing any agreed proposals on changes in the other operations of the Fund, such as those proposed by the EEC, could also be submitted in February or as soon as possible thereafter.

I hope that on Saturday morning we can have a quick review of reconstitution, the acceptance limits, the conversion right, and the resolution question, as well as other elements of the package. As you know, I feel very strongly that we cannot move on voting majorities unless we have a satisfactory solution of all the other problems that still remain open.

With best regards.

Sincerely, Henry H. Fowler

End Text.

Rusk

1. Source: Department of State, Central Files, FN 10. Confidential; Priority; Limdis. Drafted by Willis on August 22 and approved by John F. L. Ghiardi (E/IMA).
2. Not found. A similar message from Deming to Schoellhorn was transmitted in telegram 26201 to Bonn, August 24. (Ibid.)
3. August 26.
4. Reference is to the London meeting July 17–18; see Document 134.
5. Following a meeting in Paris July 27–28, the Deputies of the Group of Ten agreed on a version of an Outline, which has not been found, but is summarized in De Vries, The International Monetary Fund, 1966–1971, vol. I, pp. 157–158.