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

146. Memorandum of Conversation¹

Camp David, Maryland, May 3-5, 1970.

PARTICIPANTS

• France
  • Valery Giscard d’Estaing, Minister of Economy and Finance
  • Olivier Wormser, Governor of the Bank of France
  • Rene Larre, Director of the Treasury
  • Georges Plescoff, Finance Minister, French Embassy
  • Claude Pierre-Brossolette, Special Assistant to Giscard d’Estaing
• United States
  • Secretary Kennedy
  • Under Secretary Volcker
  • Assistant Secretary Petty
  • Deputy Under Secretary MacLaury
  • Donald J. McGrew, U.S. Treasury Representative, Paris.

SUBJECTS

• Part I: French and U.S. Economic Prospects
• Part II: Interest Rates
• Part III: Outlook for International Payments Equilibrium
• Part IV: Future of the International Monetary System
• Part V: European Monetary Union
• Part VI: SDR Link to Development Finance and Use
• Part VII: IDA Replenishment
• Part VIII: Bank Secrecy
• Part IX: Approval by Under Secretary Volcker

[Omitted here are Parts I and II.]

III. Outlook for International Payments Equilibrium

Secretary Kennedy suggested that Mr. Volcker should lead off on this topic.

Mr. Volcker said that in the first quarter of 1970 our official settlements deficit was about $3 billion. This resulted partly from a reversal of year-end window dressing by U.S. corporations to meet the direct investment control requirements. About one-third of the deficit was accounted for by a reduction of U.S. bank borrowing from overseas branches. The liquidity deficit in the first quarter was around $2 billion. It also was influenced by the window dressing operations. A better picture is given by averaging the fourth and first quarters. This gives an official settlements deficit of just over $1 billion per quarter and a liquidity deficit of several hundred million dollars.

In other words, we got what we had anticipated. With the downward movement of U.S. interest rates, there was a reversal of capital flows. This would continue if there were to be a continued downward movement in our rates. However, with the recent rise in U.S. interest rates there has been no further drop of U.S. bank borrowings from overseas branches. In fact, there has been some increase. The slowdown in the U.S. economy has had the natural result of improving our trade balance. The trade surplus for the first quarter was about $500 million, or an annual rate of $2 billion. Repayment of foreign bank loans also helped our situation in this period.

Looking further ahead, we want to see an increase in our trade balance over the next several years, so as to restore the level of the mid-1960’s. This together with gains on remittances of profits should lead to an improvement of the current account. While the capital accounts have been abnormally favorable in the recent past, we would not expect them to be so adverse as they were in the early 1960’s. The development of foreign capital markets means that there should be less reliance on the American market. The narrowing of the interest rate spread between the U.S. and the rest of the world works in the same direction. We do, however, expect a chronic deficit on the capital and aid accounts.

In summary, our long-term outlook is for a stronger trade position and current account, with some capital outflow but less than in the early 1960’s. We have no illusion that this objective can be achieved this year or next. We will continue to have an underlying deficit, and the question is whether or not it will be aggravated by abnormal outflows of short-term money.

Our basic accounts are showing an improvement. Whether or not this will continue depends upon what happens abroad. All of the major countries except Canada want to run current account surpluses. Even Canada wants to move from deficit to equilibrium. Japan, the other country which affects us most, is moving from equilibrium to a large surplus. European countries are also seeking to strengthen their position.

The fundamental question is whether or not we can restore our traditional competitive position by better price policies than elsewhere. In 1959 our trade position was similar to the present situation. Some five years later we have built our trade surplus back up to $6.5 billion. However, that was a period of underemployment of U.S. resources, and the prospects are admittedly less favorable today.

We do not want to restore our trade position through the use of import restrictions, and the President is determined to resist pressures in the U.S. for such restrictions. We are concentrating on two areas to help improve our trade balance:

1. In the field of export credit, we have traditionally placed great reliance on the fact that our interest rates were lower than those prevailing elsewhere. With the present high rates in the United States this advantage has been lost. We are therefore providing more budget money to the Export-Import Bank, which is also undertaking to liberalize its lending policies.

2. During his visit to Paris last December, Secretary Kennedy mentioned our concern about the effect on our export position, stemming from the differences between the U.S. tax system and foreign tax systems. At that time we indicated that we were studying the possibility of providing the same facility for exports as we give to a U.S. subsidiary manufacturing abroad. This means taxing the profits only when they are remitted to the parent company. We have now developed a concrete proposal in this regard, and we hope it will help shift the focus of our producers somewhat from the domestic to the export market. This is a chronic problem for us. U.S. producers have tended to look upon the export market as marginal, whereas in many European countries it is the market towards which producers make their major effort. The proposed measure is designed to bring about a change in U.S. business psychology, and in the short run this will certainly be as important as any real results.

Our very heavy military expenditures abroad are also an important element in our balance of payments outlook. They have tended to increase in recent years because of rising costs and the Vietnam effort. Even if we succeed in disengaging ourselves from Vietnam, there will still be outlays of about $1.5 billion a year in Europe, mostly in Germany. It would be our hope to get some better offset to that than we have had in the past.

Secretary Kennedy said he had had talks on these matters with a number of countries. Take the case of Japan. They have become a world economic power, but their people have not yet grasped the implications of the change in their position. Whereas before, our trade with Japan was in equilibrium or even in surplus, it has now moved into deficit. There are a number of problem areas. In the field of electronics, they have taken the entire U.S. market for radios and most of the market for black and white T.V. sets. They are even moving into the colored T.V. market. We find that their producers follow different pricing policies as regards the domestic and export markets. We have emphasized to them the difficulties of resisting pressures in the U.S. for quantitative restrictions in the face of such practices.

The point is that a country can’t have closed markets at home and expect to enjoy open markets elsewhere. Capital and equity markets should be open. Similar considerations apply in the case of development aid. With respect to the Asian Development Bank, we are keeping our share equal to that of Japan rather than taking the lion’s share.

Then look at the question of defense expenditures. Japan has virtually no defense budget. Likewise defense expenditures in Europe are much smaller proportionately than those of the U.S. We are working on this matter in NATO, but it is an uphill struggle. It is always difficult to bring about a shift, when that means budget increases for others.

In the matter of trade, as Mr. Volcker said, U.S. producers are oriented towards the domestic market. Their approach to foreign markets has been to put plants abroad instead of direct selling of U.S. products. We have done quite of bit of work during the past year to find some tax techniques which would encourage a shift in attitudes. However, this is not much of an answer if other countries do better at controlling inflation than the U.S. We recognize that success on this front is fundamental.

In conclusion, it is simply not possible for all countries to realize surpluses simultaneously. If all industrial countries are in surplus, it would simply have to come out of the hide of the developing countries.

Mr. Giscard d’Estaing asked whether or not the U.S. authorities regarded the level of U.S. prices as being competitive.

Secretary Kennedy said the situation varied from product to product. Our prices certainly are competitive in the case of sophisticated products and primary products. We were less competitive in many other lines. Agriculture gives us great concern, for as the EC moves to the CAP, high prices in Europe affect our agricultural exports. If the U.K. enters the Common Market, there would be a big problem for us were we to lose the British market for agricultural commodities.

Mr. Volcker said our agricultural exports were down slightly over the past five years. Japan is a good example. They have insisted on achieving self-sufficiency in rice, even though their price is about double the world price. In other commodity areas our exports have held up well. The root of our trade account problem has been the growth of imports.

Mr. Giscard d’Estaing said the American people seem to think that the U.S. trade problem is with the Common Market. The figures show the contrary, however. Between 1958 and 1969 U.S. exports increased by 118 percent to the rest of the world, 145 percent to EFTA, and 182 percent to the EC.

Secretary Kennedy said he was sure that this attitude was not prevalent in U.S. official circles. He had already cited Canada and Japan as major problem areas for us in the trade field. Of course, there were a few dramatic cases which had had a considerable influence on public attitudes. For example, when our poultry exporters were shut out of the EC market, this got considerable publicity and certainly was an irritant. However, we always supported a strong community with the idea that there would be an increase in demand in which all would share. This definitely remains our policy.

Mr. Volcker pointed out that in recent years trade in general had shown substantial increases. This particularly was the case as regards U.S. imports, including U.S. imports from the Common Market.

Mr. Giscard d’Estaing said that was the result of what had been happening in the U.S. and could scarcely be blamed upon the Common Market.

Mr. Larre asked if we had in mind a target surplus for our current account.

Mr. Volcker said we did not, but we certainly hoped that it would grow.

Mr. Petty said that it would, of course, not be one percent of GNP as in Japan.

Mr. Plescoff said he presumed we would be happy with one-half percent of GNP.

Mr. Volcker said that was true for the moment, but he not sure it would be enough over the longer run.

Mr. Larre asked what were our estimates of the current account for 1970.

Mr. Volcker said we were projecting a trade surplus of $2 billion or $2.5 billion and a surplus on goods and services of $3 billion. This would leave us with a current account surplus of $1.5 or $1.6 billion.

Mr. Petty said, with respect to the Minister’s question, that studies showed demand for our exports to be relatively inelastic. Secondly, U.S. opinion certainly does not attribute all of our problems to the Common Market. It is recognized that part of the difficulty stems from our inflation and from the Japanese problem.

Mr. Volcker said that over the last five years there had been a substantial deterioration of the U.S. trade position with Japan, Canada, Germany and Italy. With other countries the total had been steady, and there had been some gains.

Mr. MacLaury said that this pattern did not suggest that the dollar was overvalued.

Mr. Petty said that the problem with Japan arose from the restrictions which they maintained against outsiders and that in the case of Canada the automobile agreement had an asymmetrical effect, because U.S. cars imported into Canada were still subject to a 15 percent tariff.

Secretary Kennedy said there was a feeling of concern in Congress, which he shared, about the effect on trade of the differences between the U.S. and European tax systems. We have been studying what we might do in this regard, but it is hard to make a change in our system, which relies heavily on income taxes. Some people have suggested that we ought to introduce a value-added tax and some people think that we should adopt border taxes. However, we have not taken any decisions on these matters. So far the only proposal to be adopted is the DISC proposal.

Mr. Giscard d’Estaing said the value-added tax had considerable merits as a substitute for an ordinary sales tax. However, it was complicated and lent itself to fraud.

Secretary Kennedy expressed surprise at the Minister’s statement. He said that one of the arguments put forward by U.S. proponents of the tax was that it was difficult to evade.

Mr. Giscard d’Estaing said that was true for large industrial corporations but not in a number of other areas. He then referred to the situation of several years ago when the U.S. authorities repeatedly predicted that the deficit would be over in a year or so. At that time the problem was expressed in terms of much narrower margins. Now, however, the figures we hear are much higher, $5 billion or $10 billion. And in point of fact the U.S. had a surplus last year. Is there any way in which the problem could be put that would make it more understandable?

Mr. Volcker said the question raised by the Minister was a complicated and difficult one. There is no easy answer. It is true we had a surplus last year and the year before, but that surplus was unsatisfactory. It resulted from inflows of short-term money. It was interesting to see the problems which that surplus created for the rest of the world. The result was that we drew reserves from the rest of the world, and there were many complaints in WP-3 that our surplus was too large.

How should the U.S. basic position be measured? It is not easy to say. We should think in terms of a current account surplus, but we cannot say exactly how large this surplus should be beyond saying several billion dollars more than in the past. We had an overall surplus in 1968, but in fact our basic accounts were deteriorating. Last year we held our own, and this year we will show some improvement. Over a period of years official dollar holdings should not be increasing, and this will be a valid position if we create enough liquidity in other forms. Neither the liquidity nor the official settlements basis provides a figure that is understandable to the general public. We need to do much more work on this matter.

Mr. Giscard d’Estaing said it was important for the world to know where the U.S. was going. He hoped the U.S. authorities could find a meaningful balance of payments presentation.

Mr. Volcker said he thought attention should be focused on the current account. However, with a current account presentation it was important to keep in mind that equilibrium was not zero but a big positive number.

Secretary Kennedy said that we would have to spend a lot more time on this question.

Mr. Giscard d’Estaing said he would like to make a few remarks about the French balance of payments outlook. The trade account now shows a small surplus. This state of affairs will probably continue for several months but change later in the year. The swing to exports since the devaluation seems to have been abnormally high, and it would be reasonable to expect some downward correction. Other items will probably be about in balance for 1970. The present French projection is for an overall surplus of about $1 billion, or perhaps a little more, in 1970. However, if the present rate of foreign exchange inflows continues, the figure could turn out to be much higher.

For the next five years, the target is to keep a small trade surplus and to cut the deficit in services, mainly by improving the insurance and shipping accounts. The result would be a surplus of $500 million to $700 million per year in order to permit the outward flow of French investments. As Secretary Kennedy and Mr. Volcker remarked, France, like all other countries, is looking for a surplus.

Mr. Volcker said that with the devaluation of the French franc and the revaluation of the Deutschemark, financial opinion seems to feel that France has restored a strong competitive position.

Mr. Giscard d’Estaing said that French exporters generally agree with this assessment. In his talks with them, for virtually the first time, he hears no complaints about their competitive position.

IV. Future of the International Monetary System

Secretary Kennedy referred to the work which the IMF has been doing on the question of limited exchange flexibility. He commented that the techniques under consideration would involve no wide changes in the present exchange rate system. One matter which would have to be decided was whether these techniques could and should be put into effect without an amendment of the present Articles, or whether such an amendment was necessary or desirable. He asked Mr. Volcker to present the U.S. view of the matter.

Mr. Volcker recalled that the proposals under consideration involved widening exchange margins somewhat, the possibility of small and frequent changes in exchange parities, and facilitating transitional floating rates for countries moving to a new parity. A fourth possibility, some method of formal Fund approval for the so-called “trotting” rate systems, had found no support outside of the countries resorting to such techniques. In the G-10 Deputies Meeting in Paris last month there seemed to be fairly wide agreement that the first three possibilities might be permitted on the basis of the present Articles. The question is whether there should be an amendment to permit them more explicitly. Another point is whether or not the Fund can develop criteria for determining when small and frequent changes in parity might be appropriate. This is not something which can be solved quickly, but in the U.S. view it deserves further study.

It is important to recognize that we are not talking about freely floating rates or highly automatic systems. The initiative for rate changes would remain with the countries concerned, subject, of course, to Fund approval. Alternatively, the Fund might give a country a general authorization to move its parity within a limited range. Thus the proposals do not involve any change in fundamentals but they do involve a change in attitudes. The idea would be to try to develop a less rigid attitude toward exchange rate changes. Of course, no one can tell how much these proposals would be used if they were adopted. If they were not used very much, the result would be not much change in the system. The change would be greater if more use were made of them. In any case, it seems to us that there would be a net gain if the matter of exchange rate adjustments could be made less political.

The timetable calls for a report by the Fund in July or early August, which would spell out the three proposals for which there is support and make clear that the fourth is excluded. This would be a chance to state conclusions on limited flexibility modestly but positively. Then it would have to be decided whether the proposals would be given effect through amendment of the Articles or through a decision by the Executive Board to provide guidance for member countries on limited parity changes. The matter of amendment is in the first instance one of symbolic importance, but if it led to greater use of the facilities, it could have substantive implications for the future.

Another meeting of the Deputies is scheduled for early July. This would give them a chance to take up any hard core questions on the matter, so that the IMF Board could finish its report by the end of that month. The report would be transmitted to the Governors, and would be the subject of a G-10 Ministerial Meeting in Brussels on Saturday, September 19. Then the Ministers would be in a position to voice their opinions on the question at the IMF Meeting in Copenhagen the following week. Presumably the major issue in Brussels would be whether to undertake an amendment of the Articles or not.

Mr. Larre commented as follows regarding the French views:

1. It is not clear whether widening exchange margins would discourage or encourage speculation. Both official and academic opinion are about evenly divided. The EC has a special interest in this particular matter. The Six have the feeling that if they could reach a certain degree of monetary union, their currencies might fluctuate as a bloc against the dollar. In the interim they fear that a facility for widening exchange margins could work havoc with the CAP and with their efforts towards economic union. They realize that the facility would be permissive, but if there were troubles within the EC, some countries might wish to make use of the facility with resulting tensions. Moreover, some countries might seek to make use of the facility to gain an advantage for trade purposes.

2. The present Articles are no obstacle to putting into effect the proposal for small and frequent changes in parity. For years the Fund pressed the U.K., Germany, Japan, the Netherlands, and others, on the matter of exchange rates. The Articles did not prevent changes from being made. The real obstacle was internal political problems in the countries in question. In the French view there would be no harm in saying that there can be small and frequent parity changes.

3. There seems to be more substance to the proposal for a transitional floating rate. We saw in the German case that it was useful. However, it was accomplished with the Articles as they are. The Fund could say that such transitional arrangements would be encouraged, provided they were kept within certain limits and did not upset the general exchange rate situation.

4. In summary, the French authorities see no need for a change in the Articles in connection with the limited flexibility exercise. They do not share the view that it would be useful to dramatize the issue through amendment of the Articles.

Mr. Volcker recalled that the EC had been discussing narrowing intra-Community margins within the framework of the present system. If they solved the technical problems, which are admittedly difficult, it would appear that they could also do so if there were a facility for widening margins generally.

Mr. Larre said that the technical problem could be handled. But there is also an economic problem: What will be the level of the six currencies in relation to the rest of the world? With harder and softer currencies within the Six, the level chosen will inevitably place strain on some of those currencies as against others. Such strain would not be welcome to the EC.

Mr. Giscard d’Estaing said that obviously when countries decide to achieve common monetary policies, they accept the political consequences. However, if there is a widening of margins in the rest of the world and if the EC maintains margins or narrows them within the Six, and if there is only a halfhearted monetary union, there will be difficulties. It does not seem likely that there will be a common monetary policy very soon. This is mainly due to the troubles in Italy. There is also the matter of the U.K. They have said that they are ready to take a view similar to that of the EC and not open the margins. Thus the technical and political aspects are mixed together.

Mr. Volcker said it was clear that the proposal for wider margins was not of much interest if neither the Common Market nor the U.K. wanted to make use of it. That left nobody.

Mr. Giscard d’Estaing said it left the U.S.

Mr. Volcker said the U.S. in effect maintained no margins. Our exchange rate is the result of what the others do. With the U.K., the Common Market, and Japan out of the wider margin proposal there was no important country left.

However, the proposal took on greater interest in combination with the proposal for small and frequent parity changes. That proposal also appears to create difficulties for the Common Market. However, if there are no common policies for a number of years or for as long as a decade, it must be assumed that there will be parity changes. With the high degree of discipline they will have, the Six may be one group that would be able to make a crawling peg system work fairly well, but there is a philosophical problem. The crawling peg seems to run in the opposite sense to the EC objective of fixed parities. It does not offer the same incentive to harmonization of policies. It is hard to see how this philosophical problem can be solved.

Mr. Giscard d’Estaing said the two recent rate changes within the EC had greatly disturbed the Common Market. Admittedly, the disturbance might have been less if the magnitude of the changes had been smaller.

Over the next five or ten years the EC will be moving towards fixed parities, and this will take the monetary variable out of the system. It is true that with no coordinated policies, as now is the case, events could force a substantial parity change. The remaining problem is Italy, and that is almost purely a political problem. Who could forecast the Italian outlook for the next ten years? For the EC members, a change of 2 or 3 percent per year does not seem a very valuable tool. The normal aim of economic policy is to accommodate adjustments of 2 or 3 percent a year. For trade and the common farm prices it is much easier to have a fixed parity. Therefore, the EC has to keep open the possibility that there may be one major rate adjustment, but they have no interest in small parity changes. This was the view expressed at the last EC Finance Ministers Meeting in Paris.

As for the rest of the world, exchange rate changes have been delayed too long in the past with bad results. However, France does not want a system where currencies move against one immovable currency: the dollar. In the recent Deputies Meeting this was the U.S. thesis, and it is just not acceptable to France. The French authorities recognize that it is often difficult to determine whether an imbalance is the responsibility of the deficit or the surplus country. However, if as in 1968 the imbalance is clearly due to the U.S., France would not accept that the deficit situation be dealt with by moving currencies against the dollar.

France does not want its exchange rate always being corrected to keep French products in an under-competitive position. If they have an abnormally large surplus because they had followed policies that were too deflationary, of course it would be up to them to revalue. But if their policies and payments position are normal, and if the imbalance is created by inflationary demand in the U.S., it would be unfair to expect France to cut its surplus by revaluation.

The French authorities want to know whether the U.S. stands by the basic principle that it is up to the country where the imbalance arises to adjust, either through its fiscal and monetary policies or through an exchange rate change. If this principle is accepted, then we can study ways in which the change might be facilitated—for example, the transitional floating rate. However, this does not seem to be Mr. Volcker’s point of view. His ideas are very plausible, but France will not accept the proposition that in a system with only one reserve currency all parities have to be corrected to make the system function.

Secretary Kennedy asked how, with such a position, there would be a revaluation. Why with their good record would the Germans ever revalue? In such a world there could only be devaluations by countries said to be causing the imbalances. Why should countries ever revalue?

Mr. Larre said the reason would be to protect themselves, not to relieve others of the necessity to devalue.

Mr. Giscard d’Estaing said he recognized it was difficult to say where the responsibility for imbalances lay. However, during the last 18 months the growth of European exports had been due more to the U.S. inflation than to the economic position of the European countries. In such a case it was clear where the responsibility lay. Or take the French situation. If there were reserve gains due to hot money, France would look like a surplus country and would have to revalue.

Mr. Volcker said that was not correct. Whether or not to revalue would be a decision for France. If the reserve gains resulted from inflows of hot money there would be no reason to revalue. On the other hand, the French authorities might want to revalue if the French competitive position was strengthening and the rise of exports was creating a danger of inflation.

Mr. Larre said that a rate change of this kind would be acceptable under the present Articles.

Mr. Giscard d’Estaing asked what was new in the limited flexibility proposals.

Mr. Volcker said that the present Fund Articles specified that a rate change could be made only to correct a fundamental disequilibrium. A change of one or two percent a year could not be called a fundamental disequilibrium. Take the German case. They expect to achieve a better price performance over time than other countries. In that situation it would be better not to let the gap accumulate. It would be better to make changes of one or two percent a year. Such a change could be made in the first year, and then if the price performance was not so good in the following year, the rate could be held. This could be a desirable option for some countries.

Mr. Giscard d’Estaing referred to the argument that the proposal for small and frequent parity changes would discourage speculation. It seemed to him that, on the contrary, the speculators would come to expect small and frequent changes, and speculation would thus be encouraged. At the last IMF meeting the French delegation said there could be a study of wider margins, but they are reluctant, for general philosophical reasons, about the proposal for small and frequent parity charges.

Mr. Volcker said that was why the two proposals were in a single package. The wider margins would tend to offset any encouragement given to speculation by the technique of small and frequent parity changes. Governor Wormser said that in his view the present Articles gave latitude to put into effect all the proposals. He also felt an amendment would have to be symmetrical to allow for revaluation as well as devaluation. However, the U.S. seems to be shifting the emphasis. The principle laid down at Bretton Woods was that fixed parities should be defended to the end. The idea was that the national economy and the level of prices should be adapted to fixed parities through the adjustment process. Such a process will always be painful.

An amendment on limited flexibility would lead countries to give up the adjustment process. It would offer them another way out of their difficulties. Henceforth they could adjust parities to their prices. This would be a very serious change. It would destroy the forces against a permanent system of devaluation. When Mr. Giscard d’Estaing devalued the franc in 1969, he also put into effect stringent adjustment policies. What would be the behavior of a Finance Minister ten years hence where parity changes had become the habit? These proposals for limited flexibility are very dangerous ground.

Secretary Kennedy said the discussion had been very helpful. It was the clearest exposition he had heard of the doubts about the limited flexibility proposals. The French authorities had some reservations on the matter of amendment, and not a closed mind to the idea of small and frequent parity changes. Perhaps this would do it.

Mr. Volcker said that on the matter of symmetry the U.S. certainly agreed that the limited flexibility techniques should not be asymmetrical. On the other hand, we had the feeling that the present system worked asymmetrically against us. Countries that are forced to the wall do devalue. But a country with a good performance rarely revalues. If this could be changed, it would be a net gain to get rid of the devaluation bias against the dollar. Mr. Giscard d’Estaing asked why an exception was made for the U.S. as regards the limited flexibility proposals.

Mr. Volcker said that the U.S. can change the price of gold but it cannot change its exchange rate. That can only be done through the decision of others.

Mr. Giscard d’Estaing asked why there could not be small and frequent changes in the price of gold.

Mr. Petty referred to the possibility that the U.S. economic performance might be better than other countries. He asked whether in this hypothesis the Minister would be willing to see the dollar price of gold crawl downward.

Mr. Giscard d’Estaing said he did not see why not.

Mr. Volcker said we should be careful not to confuse the question of gold price and the question of exchange rates.

Mr. Larre said that technically the devaluation of the franc last August was a change in the franc price of gold.

Mr. Volcker said that if other countries had followed France by increasing the price of gold in their currencies, France would have had to devalue all over again.

Mr. Larre said that if the U.S. felt the problem of the dollar was a matter for discussion in the G-10, that would be all right with France. However, he presumed that U.S. did not want such a discussion.

Secretary Kennedy said that a change in the price of gold would require Congressional action. There was absolutely no doubt on that score. If the objective was to upset markets this would certainly be an effective way to do it, for Congressional action would require considerable time. Indeed, a proposal for a major change in the gold price could well lead Congress to impeach the President. This was less an economic than psychological and emotional matter.

Mr. Giscard d’Estaing said that if these limited improvements are intended to make for easier rate changes and if there is no need for amendment of the Articles, that could be a matter of practical discussion. But the U.S. presentation evokes another atmosphere. It seems to involve a fundamental change from Bretton Woods. If there is an intention to depart from support of the adjustment process, it ought to be presented as such.

Mr. Volcker said these proposals were not regarded as a great solution for the U.S. competitive position. We couldn’t stand repeated revaluations against the dollar. The proposals would be helpful to us directly if they squeezed out the devaluation bias in the present system, but they stand or fall on whether they could help the system as a whole in terms of speculation and in terms of the adjustment process.

[Omitted here is Part V.]

VI. SDR Link to Development Finance and Use of SDR in Lieu of Gold

Secretary Kennedy referred to the proposal for using SDRs to provide financing for economic development. Our view has been that it is premature to consider such a link. We have felt that it was better first to get SDRs established as a new supplement to international reserves. Therefore, we have taken the position that there should be no action now on the link proposal and perhaps not even in the future.

Mr. Volcker said that we are committed to the idea of amending the IMF Articles at some future date to permit the use of SDRs as well as gold in payment of IMF quota subscriptions. For us the question was one of timing.

Secretary Kennedy said that Congressman Reuss has been pushing us very hard on this question. At the time of the SDR legislation he wanted to introduce a provision that would have required us to take SDRs instead of gold.

Mr. Volcker said that he thought there was a consensus for such an amendment and that it ought to be done at some convenient time prior to the next increase in Fund quotas. This change would make it possible to avoid gold payments to the Fund and the problem of mitigation.

On the matter of the SDR link to development financing, the proposal has been that this should be studied in an appropriate international forum. We are reluctant to get into such a discussion with a large group of developing countries at this time for fear of where it might lead. However, when this matter comes up in international meetings, we have sometimes felt that we were the only country resisting the idea of a study. If the French authorities agree with our position, we hope they will instruct their delegations to support us.

Mr. Larre said the French feel they have a good control over their delegations. The U.S. may be sure that it is not alone in opposing discussion. As a matter of fact, their delegations have sometimes reported to them the fear that the U.S. delegation would be the one to give ground on this point.

VII. IDA Replenishment

Secretary Kennedy said he had talked recently with Mr. McNamara, who may also have talked to the Minister. He would like to ask Mr. Petty to make a few comments on where the problem stood.

Mr. Petty said that at the recent meeting in Vienna Mr. de Larosiere had made an excellent presentation of the special problems confronting France because of its large aid program as a percentage of GNP and because of the difference between its share in IDA and its voting rights in the IBRD. However, it would be difficult to achieve a $1 billion replenishment if the final French position were limited to an annual French budgetary expenditure of $40 billion. Perhaps the way out of the difficulty would be for France to take a selective increase in its IBRD capital subscription and for the increase in its IDA contribution to be limited to 90 or 100 percent compared to the increase of 150 percent which other countries are accepting. Such an increase for France would greatly help us to reach the replenishment target. A $1 billion replenishment would mean more IDA money for the franc area countries, and this would rebound to the benefit of France.

Secretary Kennedy said that another possibility would be to do something on the timing of the French payments. They would not necessarily have to be the same amount each year.

Mr. Giscard d’Estaing said the matter of IDA replenishment was discussed at the last meeting of the Common Market Finance Ministers. Mr. Schiller proposed that the Six support a level of $500 million, and the others decided to accept his proposal. Subsequently, the French had heard at Vienna that the Germans had moved to support a higher figure. The Ministers will meet again at the end of the month. If this report about the change in the German position is confirmed, the Ministers from the other EC countries will have to decide what position they should take.

Mr. Petty said that Italy had now indicated support for the $1 billion figure, and the Netherlands had confirmed their support of that level of replenishment. The Belgians had not yet taken a decision. The Japanese said they could support $1 billion if all Part I countries did. We pointed out to the Japanese that the French had a unique position, and they said they recognized this. Therefore, the outcome turns on what the French and the Germans do.

Secretary Kennedy said we could not settle the matter today. However, we were getting close to an agreement. The U.S. has supported the $1 billion figure because of our feeling that it was important to have a large volume of aid through multilateral channels. Our purpose in raising the question was to ask the French to think about what they could do to help us reach a satisfactory agreement.

[Omitted here are Parts VIII and IX.]

1. Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, France. Confidential. Drafted by McGrew and approved by Volcker on May 20. Copies were distributed within Treasury and to the Executive Secretariat at State, Chairman Burns at the Federal Reserve, and Chairman McCracken at the Council of Economic Advisers.