Foreign Relations of the United States, 1969–1976, Volume III, Foreign Economic Policy; International Monetary Policy, 1969–1972

120. Telegram From the Embassy in Italy to the Department of State ¹

Rome, March 27, 1969, 1445Z.

1809. Pass Treasury for Petty.

1. Following is summary (cleared with Volcker) of conversation held March 26 by Volcker, Danne and Willis with Treasury Minister Colombo (including Treasury DirGen Nuvoloni and Treasury official Palumbo). Meeting took place at Chamber of Deputies where Colombo had to be on hand for vote of confidence.²

2. Volcker asked about Italian timetable for ratifying SDRs. Colombo replied subject had been scheduled for discussion this very day in Chamber Committee but had to be postponed because of confidence vote issue. Hoped would be approved at next meeting of committee and then go to floor, with approval both Chamber and Senate as soon as possible before end of spring.

3. Volcker explained US thinking on SDR activation, stressing that while SDRs could not be looked upon as answer to all problems besetting monetary system, would be important contribution to stability if activation decision would be taken at September meeting IMF. If this to be achieved would be useful for leading countries to begin to discuss matter so as to reach consensus among themselves by say June, or at least before vacation period begins. Volcker also emphasized that while US by no means feels SDRs are method of solving US balance of payments problems, US does have need, over time, to increase its own reserves and SDR creation would help achieve this. In terms amount SDR creation, Volcker indicated had no specific number in mind, but argued average annual amount to be created should be significantly larger than two billion dollar figure that has been mentioned widely. This would show governments are willing to act boldly to combat tensions in monetary system and would provide needed liquidity to compensate for fact gold had not recently been flowing into monetary reserves and that much of recent liquidity creation has been crisis borne, e.g., credits extended to assist sterling and franc.

4. Colombo replied he shared belief that SDR creation, while not panacea, would have both psychological value in alleviating speculation and other strains and constituted innovation which gradually can bring about change in monetary system. In beginning Italy had shared view that achievement US balance of payments equilibrium should be precondition to activation, but at last year’s IMF meeting Italy stated that SDR creation and re-establishment US B/P equilibrium should take place simultaneously. If US and other deficit countries were to achieve B/P equilibrium, without SDR creation, repercussions on world liquidity would be too drastic. Italy ready to begin talks among G-10 countries on activation, even in advance of completion of requisite number of ratifications, but question of amount, of whether creation should be on one-year or on multi-year basis and of how creation should be distributed over years must be carefully considered. There is a range of divergent views in Europe. Kind of magnitudes Volcker had alluded to could be discussed on way to achieving a compromise. By way of “friendly advice” Colombo urged that question of activation should not be pushed so hard and fast within G-10 as to create new obstacles to idea of activation, since there were countries in Europe that did not look at this question “with same objectivity as Italy.”

5. Volcker emphasized that major problem in US was getting control of inflation and thereby placing US balance of payments on a healthy, long-term basis. This is intention of administration. Colombo said he shared this view, and did not wish to suggest US had any other alternative. He did want US to know that Italy is somewhat concerned about difficulties for its own B/P caused by lop-sided structure US payments. High world interest rates caused by tight money in US are attracting capital from Italy. On other hand, if US should re-establish B/P equilibrium too abruptly, this would have adverse effects on Italy’s exports and trade position. These double dangers argued for gradualism in US action to achieve better balance.

6. Volcker described US thinking on proceeding soon to a limited relaxation of controls on capital exports, mentioning that liberalizing move in this direction would also help in stemming pressures for trade protectionism in US, which new administration determined to combat. Colombo replied that if such measures could be taken without substantial detrimental effect on US B/P and if thereby protectionist pressure in US could be resisted more successfully, Italy could have no reservations about such step.

7. Colombo asked Volcker to keep in mind Italian views on two matters (said would not raise question of flexible rates, et cetera, since Volcker would undoubtedly discuss this with Carli at meeting scheduled for afternoon). First he would like us to study Italian proposal of making available to LDCs, through IBRD and IDA, a contribution in dollars corresponding to given proportion of SDR allocations received by industrialized countries (mentioned as purely illustrative example that if Italy received $100 million equivalent SDR allocation, could agree set aside $10 million from its non-SDR reserves in favor LDCs).³ Colombo said did not have any preconceptions about how contribution should be determined, e.g., as straight proportion of SDR allocations or mixture of proportion allocations combined with factor taking account of balance of payments situation of donor country. Believe would be good idea study this proposal in G-10 forum. Secondly, Colombo wanted US to know that Italy interested in having its IMF quota increased. Italy knows Japan interested in increasing its quota. Italy believes its place should not be lower than seventh among IMF countries. It will ask for this and hopes US will support.

8. Volcker said, in principle, Italian idea of contribution to LDCs at time SDR creation could be studied, but he was fearful this would complicate question of proceeding with SDR activation. Just as Colombo had asked US not to press too hard on question of amount of SDR activation, Volcker wanted to ask Colombo not to press too hard on examination contribution to LDCs before activation question settled. On IMF quota matter, Volcker said US had not had chance think about this question, but we would proceed to examine it and look at as sympathetically as possible. Again, however, while this should be examined on its own merits, he did not want to burden activation question by tie to quota question.

Ackley

1. Source: National Archives, RG 59, Central Files 1967-69, FN 10. Confidential; Limdis; Greenback.
2. Volcker visited a number of European capitals to consult with officials there on revisions in the U.S. balance-of-payments program (see footnote 4, Document 8 and Document 14) and to take soundings on SDR activation, limited exchange rate flexibility, and other matters. Telegrams reporting on Volcker’s conversations in Bern, Bonn, Brussels, The Hague, and Stockholm are in the National Archives, RG 59, Central Files 1967-69, FN 10.
3. The Italians took the lead in official international monetary circles in promoting the SDR-aid link. The Nixon administration was not opposed to the idea but did not want to weaken its priority for SDR activation by linking it to aid.