128. Telegram From the Department of State to the Embassy in Germany1

89501. Subject: Kennedy-Schiller Talks on Monetary Cooperation. Pass to Deputy Under Secretary Samuels. Although no attempt was made to reach any firm agreements on controversial questions, we are convinced that Secretary Kennedy’s meeting with Schiller was extremely [Page 335] useful. Schiller was apparently pleased with his reception, and enjoyed the atmosphere of Camp David. He also seems to have “hit if off well” with Secretary Kennedy.2

Separate cable being sent covering references to military offset negotiations3 and memcon will be forthcoming at later date. Following highlights may be useful to Under Secretary Samuels for scheduled meetings with Blessing and with Schiller if he returns in time.

Talks concentrated on improvement of international monetary system. Schiller would like to see three major actions—(1) activation of SDR, (2) general realignment of exchange rates, and (3) increased rate flexibility. While his preference would be for simultaneous action on these measures, he recognized this unrealistic. Schoellhorn indicated belief that activation could be made acceptable in Germany provided there was public acknowledgement that other steps to strengthen monetary system were contemplated. In drafting a brief communique, key point for Schiller was that “establishment of the special drawing rights facility in the IMF will be one important step in the orderly evolution of that system.” Germans were particularly concerned to get proper translation of word “one.” Word “establishment” is also interpreted by Schiller to include both ratification and activation.

No effort made during talks to reach agreement on amount of activation. Volcker explained rationale for figures used in document which U.S. has submitted to G-10 Deputies4 and urged Germans to focus on arithmetic. Schiller did not press case for only small amount, or for delay, but neither did he respond positively to U.S. arguments.

Schiller is still looking for sizable family of fellow travelers for proposed currency realignment, but ideas not concrete. Mentioned U.K. (where he seems to be pushing for further small devaluation), plus France, Japan, Switzerland, and Austria. Made vague references to “special position of United States” but gave no indication that he was advocating change in price of gold.

[Page 336]

Schiller also appeared to be thinking that it might be possible to reach agreement on some form of crawling peg system after realignment. He recognized there is still need for extensive technical studies on flexibility proposals, and Kennedy urged concentration on getting decision on activation at end-September IMF meeting. Timetable would necessitate ratification by 67 countries by end-June, or early July, and completion of preliminary steps before summer vacations. Schiller indicated that he was prepared to work on matter through July, but not available in August or September, the months of active political campaigning. Schiller hoped no G-10 Ministerial meeting would be needed, but expressed concern at Italian delay in ratification. Schiller considered activation of SDR could be expected “this year.”

It was agreed that timing of rate realignment question dependent on further education of German opposition and in any case not likely before German election except in dramatic international crisis. Technical studies on flexibility should proceed though no technicians yet designated by Schoellhorn. Secretary Kennedy cautioned that several countries were still very anxious that nothing be said publicly about these studies or to indicate that serious consideration being given to flexibility. Believe Germans are prepared proceed on this basis. Significantly, Schiller indicated that while his position with respect to three steps in reform of monetary system shared by Bundesbank and academic institutes in Germany, same elements in Cabinet and public, which strongly and effectively opposed revaluation, oppose all proposals on flexibility. Nevertheless, he saw merit in proceeding with studies and plans, which he agreed to keep secret until after IMF meetings.

Schiller indicated that, if at all possible, he would attend American Bankers Association meetings in Copenhagen week of June 15 in anticipation that he and Secretary Kennedy might discuss these problems further with each other and with other key Ministers.

  1. Source: National Archives, RG 59, Central Files 1967-69, FN 10. Confidential; Priority; Limdis; Greenback. Drafted by Widman (Treasury); cleared by Volcker and Willis (Treasury), Heginbotham (E/OMA), and Kornblum (EUR/GER); and approved by Quinn (S/S-O)
  2. Secretary Kennedy and Under Secretary Volcker, accompanied by Willis and Widman, met with Minister Schiller and Johann Schoellhorn at Camp David June 1-2. A memorandum of conversation, dated June 13, is in the Washington National Records Center, Department of the Treasury, Secretary’s Memos/Correspondence: FRC 56 74 7, Memo of Conversation (1) 1969.
  3. Not found.
  4. The paper, entitled “The Need for Reserve Creation in the Next Five Years,” dated May 28, was distributed in Washington to members of the Volcker Group and Working Group II as VG/WG II/69-8 on May 29. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30) Earlier drafts, beginning on May 12 and including one dated May 26 revised by Volcker, are ibid., VG/WG II/69-1-VG/WG II, 69-13. Volcker Group Working Group II was concerned with reserve asset creation, particularly SDR activation. Several different scenarios were examined in the papers, and in one, where all additions to reserves were to be SDRs, the annual SDR requirement was put at $4.5 billion. According to the memorandum of conversation of the June 1-2 meeting (see footnote 2 above), Schoellhorn found the higher estimates “shocking.”