14. Telegram From the Embassy in Italy to the Department of State1

1803. Pass Treasury for Secretary Kennedy and Petty from Volcker. Subject: Summary of European reaction to relaxation of capital controls.

I have now completed consultations with all countries visited re proposed relaxation of capital controls. At my instruction, McGrew also consulted Larre of French Treasury in Paris.2 This will summarize reactions and my conclusions: [Page 36]

Major countries (Germany, France, Italy) expressed least concern, all noting desirability in principle of relying on less controls and recognizing value of clear signal to that effect. Italian Treasury Minister Colombo and Blessing nonetheless specifically noted adverse impact on balance of payments would make SDR activation more difficult and weaken U.S. bargaining position in other respects.
Swedes expressed their concern most forcibly and openly, against background of full support for basic U.S. position re SDRs and other matters.
Dutch, Belgians and Swiss in varying degrees counseled caution and delay pending clear signs of balance of payments improvement, particularly in trade accounts. Impression left was that we will be reminded of “premature” easing during future bargaining on monetary reform if overall balance of payments fails to improve.
These reactions were received in context of my presentation that strongly emphasized: (1) value of “concrete” move to signify long-term objective to minimize reliance on controls, (2) “limited” and “prudent” nature of move, (3) decision to retain basic control apparatus for time being and to request renewal of IET authority, and (4) possible value of affirming in this way commitment to liberal trade and payments at a time when protectionist pressures are rising world wide.
My conclusion is that we should go ahead on agreed basis against background of strongest possible stance re monetary and fiscal restraint. Announcement should be related to surtax announcement and presidential endorsement of spending restraint. Timing and nature of future moves should be left vague. It seems to me essential that President request renewal of IET authority to avoid any impression of “recklessness” or implication that controls will be entirely dismantled at an early date. Statement should clearly recognize that U.S. accepts, as corollary of relaxation of controls, additional burden on monetary and fiscal policies as basic tools for dealing with balance of payments.
Alternative approach would be to forego inclusion of Federal Reserve program in package at this time. This would certainly ease European concerns over possible balance of payments impact. However, I do not feel this compromise approach essential in light of reactions received. European attitudes do confirm, however, that proposed actions, while useful, do carry some risk of weakening our bargaining position.

  1. Source: National Archives, RG 59, Central Files 1967-69, FN 10 IMF. Confidential; Priority; Limdis/Greenback. Other Limdis/Greenback cables from a number of European posts reporting Under Secretary Volcker’s conversations with foreign officials are ibid. The Limdis/Greenback series was a specialized series of cables, distribution of which was limited in Washington to the Volcker Group and overseas to the Ambassador, Economic Minister, and the Treasury representative. The Limdis/Greenback caption had been used during the Johnson administration as well.
  2. Donald McGrew was the Treasury Attache at the Embassy in Paris. Volcker did not visit Paris.