50. Memorandum of Conversation1


  • United States
    • Frederick L. Deming, Under Secretary of the Treasury for Monetary Affairs
    • D. J. McGrew, U.S. Treasury Representative, Paris
  • France
    • Valéry Giscard d’Estaing, Minister of Finance and Economic Affairs
    • Maurice Perouse, Director of the Treasury, Ministry of Finance

Mr. Giscard d’Estaing opened the conversation with the remark that he had seen somewhere a report that Secretary Fowler would be coming to Europe later in the summer. He asked whether this was correct.

Mr. Deming replied that while it was possible the Secretary might make such a trip before the Bank and Fund meetings, the chances were rather against it.2 However, as it had been pointed out in the press communiquéon the Fowler-Callaghan talks,3 the Secretary did hope to have bilateral talks during the months ahead with other Finance Ministers, including of course Mr. Giscard d’Estaing. The Bank and Fund meetings would provide one opportunity for such discussions, and we had been glad to learn from Mr. Larre that the Minister was planning to attend those meetings. On his side, the Secretary was hoping he would be able to make a trip to Europe for further discussions with some of his European colleagues sometime later in the year.

Mr. Giscard d’Estaing said, apropos of the Fowler-Callaghan talks, that there had seemed to the French to be some contradiction between the impression given by the communiquéand the remarks made by Chancellor Callaghan following his return to London on the question of international liquidity and the reform of the monetary system.

Mr. Deming said there had been some discussion during the talks of the liquidity problem, but it had been one among several items on the agenda, and had not consumed a disproportionate amount of time. Much of the discussion had been devoted to specific problems: e.g., the action being taken by the British to liquify their official portfolio of U.S. [Page 100] securities and its effects on the U.S. balance of payments, and the revision that would be needed in the Anglo-American Tax Treaty as a result of the reform which the British had undertaken of their corporate tax law. The communiquéwas a fairly accurate summary of the talks, naturally not going into the details of the discussion, but reflecting quite well the amount of time devoted to the various topics discussed.

Mr. Giscard d’Estaing said he had two points which he wished to discuss with Mr. Deming: the current international payments situation, as reflected in the position of France herself, and the problem of international monetary reform. On the first topic, the French were continuing to experience heavy inflows of foreign exchange. In June, French reserves had, it is true, increased by only $9 million. However, after adjusting for the scheduled payments of $33 million in principal and interest on the debt to the U.S. and Canada, and for the purchase by the British of $100 million against francs received in the IMF drawing, the real inflow had been $142 million. On last Wednesday (July 7)—the day of the week on which foreign exchange receipts are concentrated—they had taken in $19 million. Thus the trend seemed to be continuing in July. The impression of the French authorities is that this continued inflow is the counterpart of the weakness of sterling. For their part, they have done what they could to discourage the movement of foreign money to Paris: They have reduced their interest rate levels, forbidden the payment of interest on foreign-owned franc balances and taken steps to curb foreign investment operations in France. They do not feel that the problem of the persistent payments imbalance is their concern. But they continue to be aware of its existence through the growth of their reserves, and the Minister wanted to flag this point for his American friends.

Mr. Deming said on the subject of the growth of French reserves there was one technical point which he would like to raise. We understand the reasons behind the French policy of converting all reserve increases into gold. Thus the present question is not directed at the rationale of that policy; we would, however, appreciate knowing whether the French authorities, in deciding each month on how much to convert, make their calculations of reserve increases on a gross or a net basis.

Mr. Giscard d’Estaing said this was indeed an important point. In the case of the June figures, if the calculations were made on a gross basis, the conversion would be $109 million, whereas, calculating on a net basis, it would be only $33 million. On this point, the Minister continued, his staff favored using the net basis, whereas in theory he felt the gross basis was the proper one. After all, the gross figure represented the amounts of reserve currency which France had received as a result of its external economic and financial operations during any given month. It was a point to which the French authorities would have [Page 101] to devote a little further thought. In the case of June, however, to convert on a gross basis would mean losing the good effects of the $178 million debt prepayment. For this reason it seemed likely that the July conversion would be effected on a net basis and would thus amount to $33 million. In other words, the French authorities were leaning towards the net basis for practical rather than theoretical considerations.

Mr. Deming recalled the Minister’s earlier comment that on a net basis, the growth of French reserves in June had been only about $9 million.

Mr. Giscard d’Estaing said that while this was true, it had been decided at the beginning of the year, as we knew, that the Bank of France would continue, as in 1964, to purchase 30 tons of gold every month and then in the following month would adjust its purchase to make up the difference between the 30-ton minimum and the actual growth of reserves during the month in question. Thus the monthly conversion figure for July would be 30 tons, or about $33 million, rather than $9 million. Moreover, it was certain that the inflow of foreign exchange during July, even if it continued to be heavy, would not exceed the $178 million outflow represented by the debt prepayment, so that in August the conversion would also be $33 million.

Mr. Giscard d’Estaing then turned to the question of the international monetary system. He recalled that the French experts had put forward certain ideas concerning how this reform might be accomplished. It was not the intention of the French monetary authorities to continue pressing any specific scheme, however. What they would continue to do was to point out the need for reform, for they were convinced that the events of recent days had not made that need any less urgent—indeed, quite the contrary. They continued to be concerned regarding the weakness of the British position from both an economic and a political viewpoint. The timid deflationary measures taken by the British authorities would probably have whatever effects they would be going to on the British internal economic situation during the present third quarter of the year. Seasonally this quarter was the least favorable for the British balance of payments. Thus the prospects were for the conjunction of an unfavorable domestic economic performance and poor balance of payments results. This could very well produce a new currency crisis of a considerable magnitude before the end of the year. In the French view, such an outcome would be a real pity, for a reform of the international monetary system could not be carried out in such an atmosphere. No matter what was said, public opinion would interpret any “reform” undertaken in the wake of a currency crisis as merely a camouflage of a new set of measures taken to shore up the British position. The French authorities recognized that it was not for them to initiate the necessary action to deal with the unhealthy [Page 102] situation. They had done what they could to call attention to the problem. Now it was up to those upon whom fell the major responsibility for the functioning of the present system—namely, the reserve currency countries—to accept that responsibility and decide how they wanted to deal with the problem.

Mr. Deming said that he was pleased to hear the Minister say that the French did not intend to press for the acceptance full-blown of their particular proposals. In the U.S. view, the fastest and best way to make progress in considering international monetary problems was for all those participating in discussion of the matter to keep an open mind. For its part, the U.S. Government had no specific “plan” for reforming the monetary system. We had been considering the problem, and we felt that by continuing the exchange of views with the other countries principally concerned, we could during the months ahead move closer to a meeting of the minds than might seem possible today.

Mr. Deming said that as for the British problem,4 he did not share the Minister’s forebodings. He expected that the measures already taken by the British authorities, together with such additional measures as they might see fit to take in the period ahead to reinforce their program, would begin to show results in the near future. If one agreed with the analysis that the problem of sterling was to a considerable extent a matter of confidence, the evidence that the British authorities were succeeding in their efforts to bring the economy under control could result in a substantial turn-around in their foreign exchange situation.

Mr. Giscard d’Estaing said that he nevertheless feared a new crisis of confidence in sterling and he did not know how it could be handled. The British had now exhausted their drawing rights on the IMF. Moreover, even if there were someone willing to lend them the means to weather the storm, they could not forever keep going further into debt. They had already piled up more than $4 billion in debts in the last two or three years, which it was clear they would have a most difficult time paying off. They could turn to the United States for some help, but the result would be to put additional dollars into circulation which would flow, for example, to France, where it would be necessary to convert them into gold. France did not, of course, feel particularly troubled by the prospects of a crisis insofar as she herself was concerned. She was not a disturbing element in the international payments situation. Her trade account was in balance. While her balance of payments was in surplus, this resulted not so much from the current account as from the inflow of investments—above all American [Page 103] capital—and there was reason to hope that that inflow had moderated since the first quarter. She had ample reserves to carry her through the storm. The French authorities knew they did not have the responsibility for the management of the system. But they could not help regretting the failure of those who did—the reserve currency countries—to grasp the opportunity now presented to them to make reforms in the system and thereby avert disaster.

Mr. Deming recalled that if a new sterling crisis should arise, the British were not without the means to cope with it. In addition to the official reserves of the Bank of England in gold and foreign exchange, they had about $1.2 billion in U.S. securities, which, as the Minister knew, they had been putting into liquid form but none of which had yet been taken into their reserves. Part of these liquifying operations had already affected the U.S. balance of payments accounts, although it was true that the dollars in question were still in the hands of the British and had not yet been put into circulation. There were also the Anglo-American swap and the $250 million Export-Import Bank credit. We were of course aware that the use by the British of these facilities would mean putting new amounts of dollars into circulation, which might, as the Minister had suggested, come into the hands of France and other countries that would feel called upon to convert them into gold. At the same time, we were encouraged by the evolution of our own balance of payments. Mr. Deming said he had informed WP-3 and the Economic Policy Committee of the OECD that for the first half of the current year we estimated a deficit of $500 million on a seasonally adjusted basis, compared to about $1 billion in the first half of 1964 and $2 billion in the second half of last year. This $500 million did not of course include the French debt prepayment of $178 million, which we were glad the French had agreed should take place on July 1—that is, in the second half of the year. We had deliberately avoided making any forecasts regarding our balance of payments for the remainder of the year. In general terms, however, we expected that despite the less favorable seasonal factors in the second half, it would continue to show improvement as a result of the President’s program.

Mr. Deming noted, with reference to the Minister’s comments on the French balance of payments, that in the WP-3 and EPC meetings, the OECD Secretariat had forecast a considerable increase of the surplus, compared to 1964.

Mr. Perouse explained to the Minister that the forecast of the OECD Secretariat was for a surplus in 1965 of around $1 billion for the franc area as a whole. He said that the French experts thought that figure was too high. He reiterated the French analysis that the surplus arose less from the current account, which he described as showing only a modest surplus, than from capital inflows and from the overseas franc [Page 104] area. He emphasized the efforts of the French authorities to discourage capital inflows and labeled a part of the capital account surplus as the counterpart of the continued weakness of sterling.

Mr. Deming asked the Minister what he thought would be the outcome of the sterling crisis he foresaw.

Mr. Giscard d’Estaing replied that, speaking frankly, he thought devaluation of the pound would be inevitable if a crisis did in fact arise. The present Labor Government would certainly not survive any such foreign exchange crisis. Whatever the complexion of the Government that followed them, its first act would certainly be an adjustment of the exchange rate in order to get some breathing space in which to formulate its own economic program and in order to pin the responsibility for the devaluation on its predecessor.

Mr. Deming asked what the Minister thought would be the reaction of the Continent to a sterling devaluation.

Mr. Giscard d’Estaing replied that without question the Scandinavian countries would follow sterling to the full extent. The reaction of the Continent would depend upon the state of its own economic situation at the time the British move took place. If—as it seemed likely would be the case—economic activity on the Continent were rather slow, the tendency for most countries would be to follow the British.

Mr. Deming asked if the French authorities wanted to see sterling devalued.

Mr. Giscard d’Estaing replied that they emphatically did not. However, they feared that the consequences of a continued lack of confidence in the pound, both within and outside the sterling area, would leave the British monetary authorities no alternative.

Mr. Deming said that this seemed to us to argue that the United States, France and other countries which played an important role in the monetary system should do their best to insure that the British were not forced into such a corner. He asked how the Minister envisaged that reform of the international monetary system could help the British out of their difficulties.

Mr. Giscard d’Estaing said he was convinced that the burden of the sterling balances was such that confidence in sterling could never be restored, unless and until the British external accounts were relieved of that burden. The only way he saw to accomplish this objective was to “multi-lateralize” the sterling balances by consolidating them through some international institution and allowing the British to pay them off over the long term. Such a consolidation could be included as one feature of a reform of the international monetary system. If this reform also included measures to deal with the other problems of the present monetary system and was carried out in an atmosphere of calm deliberation rather than one of crisis, the consolidation would be [Page 105] greeted by the public as an important strengthening of the British position and would do much to restore confidence in sterling.

Mr. Deming said he had read with interest the account published in the Economist of a week or so ago on the Callaghan-Giscard talks. That article had mentioned the possible consolidation of the sterling balances.

Mr. Perouse interjected to say that while this possibility had been touched upon in the Callaghan-Giscard conversations, it had not been explored in any detail.

Mr. Deming expressed the view that working out an agreement on international monetary reform would require considerable time. He thought it very doubtful that anything could be concluded quickly enough to be of any assistance to the British in dealing with a new sterling crisis in the months ahead if that were indeed what was going to take place.

Mr. Giscard d’Estaing said that he had two points by way of conclusion. First, he had found the present exchange of views extremely useful and he hoped they could be continued on future occasions, either with Secretary Fowler or with Mr. Deming. Second, he wanted again to make clear the position of France in these international monetary matters. While she had done what she could to focus attention on the dangers she saw in the present situation, she realized that she did not have the responsibility for initiating and putting into effect a program to ward off those dangers. That responsibility belonged to the reserve currency countries. Now, they could attempt to consolidate the present system, and that seemed to be the import of the communiquéon the Fowler-Callaghan talks, or they could undertake a reform of the system. There was nothing wrong with consolidating the present system, provided it could be accomplished successfully. For their part, the French authorities thought reform would be the more prudent course.

Frederick L. Deming 5
  1. Source: Johnson Library, National Security File, Country File, France, Vol. 7. Confidential. Drafted by McGrew on July 12. The memorandum is an “Uncleared Draft.”
  2. Fowler attended the IMF meetings. Deming reported on his talks with Giscard in telegram 1091 from Paris, August 31. (Ibid.)
  3. Not found. A memorandum of Fowler’s conversation with Callaghan, July 1, is ibid., Bator Papers, Callaghan Visit.
  4. Reference is to the third emergency budget announced by the British Government on July 27. For documentation, see Foreign Relations, 1964–1968, vol. VIII, Documents 66 ff.
  5. Printed from a copy that indicates Deming signed the original.