133. Volcker Group Paper1
DRAFT SUMMARY OF ALTERNATIVE U.S. POSITIONS FOR DISCUSSION AT VOLCKER MEETING
July 17, 1969
The following alternatives are suggested for the consideration of the Volcker Group:
Alternative A—Minimum Position
$4 billion in Year I; $3 billion in Years II and III; Years IV and V left open, but with understanding that decision will be made on Years IV and V no later than the September Annual Meeting in 1971.[Page 356]
Chairman Ossola of the Deputies appears to have indicated some willingness to try to reach agreement on this proposal, if it would be acceptable to the United States. The United States has not given him encouragement to do so. The amount, totaling $10 billion in three years, is somewhat larger than the figure of $3 billion for two or three years mentioned by the German Delegation at the June Deputies Meeting. It is considerably above the Belgian and Dutch figure, though it applies to a shorter period than the Dutch proposal. It could conceivably be defended by the Europeans as coinciding with the $10 billion figure discussed last year, even though telescoped into a shorter time period. It is conceivable that, if the Finance Ministers of the Six do not agree on a more stringent position in their meeting on July 21-22, this alternative could be accepted by the Deputies without an August Deputies Meeting or an appeal to the Ministers. It is not certain that this could be done, however, because of Dutch and Belgian resistance. There is no clear additional sweetener for the Dutch and Belgians, unless it lies in support for a conservative approach to quota increases, discussed below.
Alternative B—Intermediate Position
$4 billion in Year I, $4 billion in Year II, and $4 billion in Year III. Decision Years IV and V no later than September 1971.
This position would result in $2 billion more of SDRs than Alternative A in the first three years. The U.S. share would be approximately $500 million, or conceivably more if some members of the Fund did not participate in the SDRs. (It is assumed in Alternatives A amp; B that the amount of activation is fixed absolutely, and would not be increased if additional participants joined in at a later date.)
While this position might conceivably be sold to the Europeans in July, it seems more likely that adoption of Alternative B would lead to a Deputies Meeting at the end of August 1969, for further negotiation. An important question is whether the U.S. is likely to lose or gain if agreement is postponed in July.
There are several reasons why postponement may prove disadvantageous to the U.S. In the first place, allowing more time to elapse before committing the European Deputies permits opposition elements in those countries to organize more effective pressure against a substantial activation figure. This opposition may result from political rivalries, electoral strategy, or genuine fear that a large activation would contribute to inflation or unduly impair international monetary discipline. In the second place, by mid-August, if not earlier, the unprecedentedly [Page 357] large U.S. liquidity deficit will become known to the Europeans. This could be embarrassing to the European Deputies who are most inclined to take a liberal view of activation, and cause them to be less venturesome in leading their own governments. It appears to be well substantiated, for example, that Emminger, Schoellhorn and Schiller have already mentioned activation figures which are about twice as high as the figures generally talked about in other German Ministries and at lower levels in the Bundesbank.
On the other hand, the possible advantages of deferring a decision until August relate to the uncertain results of an appeal to Chancellor Kiesinger during his August 7 visit to Washington and a judgment as to the effectiveness and usefulness of a threat to insist upon a Ministerial Meeting at the end of August.
In this alternative a different approach would be taken arithmetically. The amount proposed for SDR activation would be based on the assumption that all members of the Fund would participate, and the amount would be written down proportionately if the actual participation were less than 100 percent of IMF membership. If at a later stage other countries opted in, the amount allocated would be increased and the same procedure would be followed if there were selective quota increases. This means that the figures cited would not be a maximum, but could be exceeded if there were selective quota increases, though presumably not by a large amount. Under this alternative, the U.S. might propose $4-1/2 billion a year for three years, with decision on Year IV and Year V to be taken before September 1971. The United States share would be about $1,125 mil., and would not vary depending upon the number of participants in a given year or the adoption of selective quota increases.
It may be recalled that the United States at present has legal authority to participate during the initial activation in an amount up to our present quota of $5,160 million. Over a five-year period, an annual allocation of $1,125 million a year would be beyond our present authority. This was pointed out to Mr. Dale by the Japanese Executive Director, whose legislation apparently parallels ours. This may be true of some other countries as well. For this reason it would be desirable to reduce the U.S. asking figure to bring it within our present legal authority. In this alternative, this is done by reducing the period to three years.
This alternative also would quite probably mean no agreement at the July meeting and a continuation of negotiations in August. At the August meeting the United States would probably have to move [Page 358] toward Alternative A in order to reach agreement, by reducing the amount. Under no conditions should the U.S. agree to any activation period shorter than three years.
The considerations noted in Alternative B above would apply to this alternative.
In the initial discussion in the Executive Board, Mr. Schweitzer suggested the possibility of an allocation for five years at the mid-point of a range between $2.5 billion a year and $4.0 billion a year, or about $3.25 billion a year for five years. He indicated that an additional amount might be added at the beginning of the period to make up for deficient permanent reserve creation in recent years.
The Fund Staff has been very reluctant to give up the principle of five-year allocation. The reasons cited for this view are that:
- three years is too short a time to provide adequate experience with the reconstitution provisions and with the SDR transactions in general, and
- the governments would find themselves in a rather awkward position to take a decision for the remaining two years without casting doubt on the value of the SDR, if the annual allocations were reduced.
A possible unspoken consideration is the desire to associate SDR allocations with quinquennial quota increases.
Alternative Positions on IMF Quota Increase
While the United States would have preferred to postpone a substantive decision on the amount of general and selective quota increases in the Fund, it now looks as though it may be necessary to reach a substantive agreement on the main outlines of a quota increase in order to settle the issue of SDR activation in July or August of this year. Several alternative U.S. approaches are briefly summarized below.
General increase of 15 percent in IMF quotas with selective increases totaling not more than 10 percent of present quotas, or about $2.1 billion. The United States could either (1) take no selective increase, (2) take enough increase to maintain its voting power, or (3) take its proportionate share of an overall 10 percent figure for world-wide selective increases. It is estimated that Alternative A (1) might result in gold sales of about $600 million, with Alternative A (3) adding another $75 million, for the U.S. selective increase, for which the United States would receive gold tranche claims. A [Page 359] 15 percent increase in our gold tranche would amount to about $193.5 million. The net reserve loss we could suffer could therefore be about $400 million, though our conditional drawing right would be enlarged by about $775 million. These estimates are based on the assumption that about 18 countries would not convert dollars into United States gold to make the requisite payments to the Fund, but would use their own resources.
This approach follows the suggestions of major European countries at the last meeting of the Deputies. It should be readily saleable to the Europeans, but could encounter rather strong opposition from the IMF staff and the Executive Directors of the non-Ten countries. Mr. Dale indicates that the Executive Directors of these non-Ten countries appear to be insistent on a 20 to 25 percent general increase for their own countries. While he does not think that they would openly refuse to go along with SDR activation if we supported Alternative A, the Europeans would probably realize that no agreement on quotas might be reached on this basis, at least without long and acrimonious negotiations. This might affect the willingness of the French, Italians, Japanese and Canadians to reach an understanding on SDR activation.
Under this approach there would be a general increase of 15 percent for the members of the Group of Ten plus not more than their share of selective increases totaling globally no more than 10 percent of existing quotas, or about $2.1 million. The rest of the world, however, would receive uniform quota increases of 20 percent, plus a proportionate share of the overall 10 percent selective increase.
We would estimate that this alternative would cost the United States approximately $770 million in gold, with our gold tranche and credit tranche drawing rights the same as in Alternative A above.
Mr. Dale has advised me2 that this suggestion has come up recently in the IMF staff, in an effort to deal with what is felt to be a European objection to a substantial increase in the United Kingdom quota. It is also felt that the United Kingdom is not enthusiastic about a substantial rise in its quota.
The advantages of this approach would be to satisfy both the Europeans and the non-members of the Ten with respect to the size of their general quota increases.[Page 360]
On the other hand this approach continues and emphasizes a trend in the Fund towards expanding the drawing rights of the non-G-10 more rapidly than those of the Group of Ten countries, and thus probably reduce the liquidity of the Fund. To some extent this tendency would be offset by large selective increases to some G-10 members. The United Kingdom would find its voting power reduced, and the United States would also be in this position unless it elected for some share in the selective quota increases. To maintain its voting power, it would need to take a selective increase of something like $400 million. It is also worth bearing in mind that a reduction in the relative share in IMF quotas for the United States means over time a fairly significant cumulative loss of SDR allocations, which are proportionate to relative quota shares.
A uniform general increase of 20 percent for all members, accompanied by selective increases not exceeding 10 percent of existing quotas or about $2.1 billion. Again the United States would have three options open to it with respect to its own selective quota.[Page 361]
We estimate that this approach would cost the United States approximately $810 million in gold sales to the Fund, against which the United States would receive an additional gold tranche claim of $258 million plus any allowance for selective increases, and additional credit tranche drawing rights of $1032 million plus any adjustment for a selective quota increase.
This approach would maintain the principle of uniform treatment of all IMF members for a general quota increase, and could probably be made acceptable as a minimum figure to the Executive Directors of non-G-10 countries.
On the other hand some difficulty might be encountered in gaining European acquiescence to such a figure, resulting in European delay in decision on SDR activation on this score. Adoption of this position might increase the likelihood of an appeal to Ministers to resolve the SDR and quota questions, although it is true that in the past the Europeans have proved reluctant to maintain a strong position in the face of a fairly determined stance on the part of the developing countries.
This would be a frankly compromise position, calling for a general quota enlargement of 17-1/2 percent, midway between the European maximum and the indicated minimum of the non-Ten countries. As before, the selective increases would be held within 10 percent of quotas.
We estimate the United States gold loss under this alternative at about $750 million. Our gold tranche claim would rise by about $225 million, plus any allowance for selective increases and our credit tranche drawing rights by something over $900 million, plus adjustment for a selective quota increase.
This alternative would preserve the principle of uniform treatment of IMF members in general quota increases. It would appear to be a reasonable compromise between the initial positions of the two factions and the Fund.
- Source: Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/WG II/69-14-VG/WG II/69-35. Confidential. The paper is marked “Willis Draft.” VG/WG II/69-24 was circulated to members of the Volcker Group and Working Group II under cover of a July 17 memorandum from Willis indicating the draft paper would be discussed at a 4:30 p.m. meeting of the Group that day, prior to the meeting of the G-10 Deputies in Paris July 23-24.↩