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

216. Telegram From the Embassy in Germany to the White House ¹

Bonn, November 21, 1968.

Following is summary of restricted meeting of Ministers and Governors of the Group of Ten, 10 a.m.–1:30 p.m., Nov 21, 1968.

Minister Schiller summarized the German position:

(1) German measures

A. Germany had proposed to reduce the border tax 4 percent on exports and imports. There was no chance that this figure would be changed.

B. A German regulation will pass the Cabinet this p.m. Short-term liquidity coming into German banks will be subject to a negative interest charge of 2–1/2–3 percent. This is an extraordinary measure under a 1961 German law. Minister Schiller said it was a dangerous law since it permits positive exchange controls but also negative controls.

(2) There should be an international credit arrangement of a special quality and quantity in addition to regular swap lines.

(3) Credibility of the package requires additional balance of payments measures by deficit countries.

The package is only good if all three points are covered with appropriate numbers. More progress will be made by discussing points 2 and 3. There is no point in saying the German measures under point 1 are not sufficient. The three elements are interdependent.

Secretary Fowler said he was attempting to find a pattern that would be both realistic and achievable. He proceeded with the talking points set forth in attachment A.²

Minister Schiller insisted that he was not empowered to do more than 4 percent for 15 months. Until March 1970 the parity was fixed and would be supported. He hoped that activation of SDRs, which he would support, would take place during this period and resolve the problem.

Minister Schiller continued that an overall alignment of all important parities is needed, but this cannot be done now even if the dollar is over valued in some U.S. opinion. Such a general alignment is not possible politically and is dangerous. This is not a proposal now and may not be made in the future. The border tax adjustment cannot be extended beyond 15 months according to Common Market rules.

Minister Ortoli said he would comment on Secretary Fowler’s statement and particularly point 3. To reach a solution we have to look at the whole thing. He shares Secretary Fowler’s view that the German Government should do much more.

As to point 3, Secretary Fowler proposed a system of automatic compensation and this should be explored.

Minister Schiller and Secretary Fowler have raised the question of other currencies against which there is speculation. Secretary Fowler envisaged complementary measures if the franc were devalued. Such complementary measures would be important, but Ortoli said he would deal here only with French devaluation itself.

Minister Ortoli said he could propose a parity move to the French Government, but the French must know the whole package. The package must stop the speculation. With the German proposal as it stands, France would have to move on the order of 15 percent. If the Germans could extend their measures he could envisage a move slightly less than the one mentioned.

Minister Schiller called on Mr. Schweitzer for the expert opinion of the Fund on the French figure.

Mr. Schweitzer, before commenting on the French [figure] specifically, said he was frightened at the Schiller proposal for an overall parity review. This would be very destabilizing. At present only two currencies need to be changed—the D-mark and the French franc. He had nothing more to say about the D-mark. He could not say anything about the franc without further study. Speculative movements would continue. It seemed difficult to justify devaluation of 15 percent. As regards an IMF standby, such an agreement could be negotiated in traditional and conventional terms.

Minister Schiller interpreted Mr. Schweitzer’s remarks as indicating that other parities were not out of line but Schweitzer refused to make a judgment on the 15 percent franc adjustment. Mr. Schweitzer said that we should have waited for the franc adjustment but cannot do so now. There is a necessity to do something but 15 percent was on the high side. Mr. Schweitzer said he had not commented on the D-mark because the Minister had said it was useless to do so. But he thought it was on the low side.

Chancellor Jenkins made these points: first, it would be unwise to move on general parity charges; this would cause speculation in every currency. Second, he supported Secretary Fowler’s position on the inadequacy of the German measures, stating that the great weight of opinion is that it is not enough. He also endorsed Mr. Fowler’s proposal on the package. Third, the French devaluation should be lower than 15 percent which would place a heavy burden on the U.K. He would prefer a substantially greater German move and a substantially smaller French move.

In the strictest confidence Chancellor Jenkins said he hoped to present some further measures to help the United Kingdom’s balance of payments. Just what these would be would depend upon the French action, and the United Kingdom improvement would move more slowly if the French move is as strong as 15 percent.

His comment on the credit package was that it will not work if we leave the meeting with the idea that it will need to be used. We cannot leave this meeting with instability. The only rechanneling of funds acceptable to the United Kingdom would be one that would not add to the already excessive short-term debt, but the United Kingdom would participate in technical discussions. He gave complete support to Secretary Fowler and Minister Ortoli.

Minister Schiller said the United Kingdom had explored a long-term loan in Germany to consolidate short-term credits. The government could not make such a loan, but was ready to mobilize commercial banks to do so. The United Kingdom rejected this. A long-term Canadian loan had been arranged this year at German initiative.

Minister Strauss made a long and very hard statement indicating German inflexibility on the rate. He denied that the Deutschemark rather than the French events of May was responsible for the present crisis. Rumors of revaluation have been fostered by interested persons. Germany has made a further contribution in the negative interest rate on foreign funds which is unpleasant and dirigiste. Germany would even go further and use tax relief for capital exports to the United States, but not retroactively. No other country has offered anything to solve the problem. The French 15 per cent is too high and should be carefully studied. Other countries cannot decide what Germany will do. The 1961 revaluation did not work. Measures must be taken by all countries to avoid realignment of parities. Germany has struggled against inflation and this should be a common goal. Germany had tried to eliminate the domestic recession, but domestic demand and foreign trade have not reacted as wished. Revaluation to 7–1/2 percent could be done without Parliamentary approval but would increase the budget deficit by DM 5 billion and break confidence internally between the government and Parliament, thus eliminating possibility of fiscal discipline in Germany. Both U.S. parties have indicated they will impose border taxes of 8 to 20 percent—a serious matter for Germany. Germany also carries the burden of military offset. The German basic balance has been equilibrium of deficit from 1962 to 1965 and thus Germany does not have a structural problem. The U.S. buys German companies at three to four times the price Europeans would pay. This makes it hard to understand U.S. balance of payments problems. Germany cannot go beyond what we have said. It is impossible. Please accept this.

At this point Schiller wanted to bring in the European Community representatives, but Ortoli and Witteveen objected. Finally Barre³ alone was admitted.

Governor Carli made two points. He agreed that any discussion of a general realignment of parities was not necessary or desirable, and would be disastrous at present. The Italians survived a crisis in 1964 without devaluation. Parity changes should be made only in extraordinary circumstances. We should defeat the speculators. Secondly, he supported Secretary Fowler’s proposal for rechanneling funds to support currencies under pressure and suggested that Ministers and Governors decide on a statement on this point. They should give a mandate to the BIS to offset these movements. Central banks should support it by depositing a portion of their reserves with the BIS.

Emminger discussed technical monetary arrangements. He had no authority to commit the Bundesbank, but probably special reserve requirements could be placed on foreign deposits. He would try to follow this up today and thought the requirement could be placed at a very high level.

Secondly, credit arrangements should be taken only in the context of an overall package endorsed and defended by the Group of 10. The Bundesbank on this basis would assume its full share of a $2 billion credit package though he could not make a formal commitment now.

Third, Emminger said the rechanneling proposal raised technical problems. It could not go beyond short-term arrangements having some quantitative limitation, but he hoped something could be done.

Governor Rasminsky (Canada)⁴ asked what proportion of short-term capital inflow into Germany came to rest in the banking system. Would negative interest and reserve requirements really work? Emminger could not give precise answer for last two weeks, but said negative interest would apply not merely to inflow but to all foreign deposits, and would have very sizable effect. Reserve requirements would apply only to new capital inflow. There were other forms of liquidity that would escape these measures but banks get most of the influx.

Governor Ansiaux⁵ asked these questions:

(1) Would new accumulation have 100 percent reserve requirement?

(2) Would banks or government receive the negative interest payments if the former banks would not refuse deposits?

(3) Does Carli assume all central banks would deposit with BIS or just those receiving funds? If decision on this point was accepted there should be no quantitative limit.

Emminger said it was very difficult to identify the direction of the inflow and the reserve losses due to speculation were also hard to identify. He proposed that the rechanneling suggestion be discussed in the central banks and in the BIS before putting anything in a communique. Governor Zijlstra agreed with Emminger and undertook to get the central bankers together to work at it today. Secretary Fowler endorsed Zijlstra’s suggestion, remarking that the technicians needed the advice of the governors.

Baron Snoy (Belgium) said that Minister Schiller and Secretary Fowler had chosen the right road to reach agreement on a package deal. He had one comment. There was an overriding need for credibility, and all the elements in the package seemed to be short term in nature. We should say firmly that when a country like the Federal Republic of Germany is in structural difficulty it should follow expansionary policies and vice versa. Belgium was now in deficit and it was not proper for Belgium to contribute.

On the whole the ideas in the package deal seemed well chosen. The level of effort needs to be examined. He had been shocked by Minister Ortoli’s statement.

Governor Stopper (Switzerland) said that since November 8 Switzerland had received no inflow of funds until yesterday. The amount yesterday was $50 million. The commercial banks had received funds but had merely transmitted them onward to Germany, with some to the U.S. Switzerland was studying the possibility of a rule for handling foreign deposits but paying no interest on them. This was a standby possibility only. Switzerland was ready to participate in a study of credit arrangements but had some technical questions.

1. Source: Johnson Library, National Security File, Subject File, Monetary Crisis, November 1968, Cables and Memos, Vol. 1 [2 of 2], Box 22. Secret. The source text, identified as “Bonn Telecon 24,” bears no additional information on the place, date, or time of transmission, but the telegram was received at the White House on November 21, 2:53 p.m., as identified in a Washington-Bonn Telecon Chronology of Events for November 21. (Ibid.)
2. Reference is presumably to an “outline of points,” not attached, which Fowler used as the basis for his opening statement at this restricted session. (Bonn Telecon 23, November 21; ibid.)
3. Raymond Barre, Vice President of the Commission of the European Community.
4. Louis Rasminsky, Governor of the Bank of Canada.
5. Hubert J. N. Ansiaux, Governor of the National Bank of Belgium.