113. Memorandum From the Deputy to the Assistant Secretary of the Treasury for International Affairs (Willis) to the Under Secretary of the Treasury for Monetary Affairs (Volcker)1

SUBJECT

  • Note on Justification for SDR Activation

The overall preliminary impression that I have from our useful round of talks with Ossola and Van Lennep 2 is that we have a fair chance to get an activation of SDR somewhere in the range of $1 to $2 billion by sometime in the fourth quarter in 1969. I am left somewhat uncertain as to what kind of performance on our balance of payments figures would have to be shown to achieve this. On the whole I don’t believe that the amount of activation will vary too much if we show a better performance, but activation could be deferred if our results are too bad.

The main result of Van Lennep’s effort to find a role for WP-3 in the activation process will probably be that he himself will have to be consulted by Schweitzer, and will have a somewhat stronger voice in determining [Page 300]the amount and timing under Schweitzer’s proposal. On the whole this influence will probably be exerted to delay the activation somewhat and hold the amount down to the range that Van Lennep considers desirable. On the other hand, his endorsement may be of some value in influencing the Dutch position favorably and possibly that of some other countries, although the latter should not be exaggerated. The key factors remain the attitudes of Schiller, Colombo, Carli, Blessing, Emminger, and Ossola. Schoellhorn of Germany, the Adviser to Schiller, is also important.

After September 1969, Van Lennep will no longer be a representative of the Dutch Government, so his personal influence will be increasingly limited to the role of WP-3 and OECD in general.3

We are working on a paper to build up the argumentation for a large activation figure in 1969-70. I believe it is important to base our argumentation on the two legs. The first is the fundamental justification which has been built into the SDR plan and is now accepted by most of the Europeans. This is that SDR creation is required to meet the secular need for growth in reserves. This should provide a basic minimum figure every year of something like at least 3-4 percent of reserves.

The second justification would be a temporary one, that of providing reserves to cover the losses of reserves in recent years through gold sales, and to replace reserves cancelled by repayment of short- and medium-term credit. My worry is that Van Lennep will try to over-emphasize this second reason. Throughout the negotiations, Van Lennep and McKay of the Netherlands Bank have had a strong tendency to favor this second approach and to reject or play down the first justification. I think this is dangerous for us, because it leads to the conclusion that reserves are created only when there is clearly evidence of serious disinflation in the world, as a kind of cyclical interjection of purchasing power on a fine tuning basis in the world’s economy. We struggled a long time to get away from this view and to build up the need for a secular trend of growth in world reserves.

I would strongly urge that we maintain the primary emphasis on the first justification and not allow Van Lennep and his concern with the adjustment process to push us too far into the second philosophy.

  1. Source: Washington National Records Center, Department of the Treasury, Deputy to the Assistant Secretary for International Affairs: FRC 56 83 26, Contingency Planning 1965-1973, Sensitive Documents 1-4/69. Confidential; Limdis. Sent through Assistant Secretary Petty. Copies were sent to Daane at the Federal Reserve, Dale at the IMF, and a number of others in Treasury. The memorandum is marked “For information.”
  2. Ossola and Van Lennep met with Treasury Secretary Kennedy, Volcker, and Willis at 3 p.m. on February 5. At 4 p.m. they met in Volcker’s office with Volcker, Federal Reserve Governor Daane, and Willis. Memoranda of these conversations are ibid., Secretary’s Memos/Correspondence:FRC 56 74 7, Memcons 1969.
  3. Van Lennep was slated to become Secretary General of the OECD in September. At the time of the February 5 conversations in Washington he was a senior Finance Ministry official in the Netherlands Government and Chairman of the OECD’s WP-3 that studied balance-of-payments adjustment needs and policies.