150. Memorandum From the U.S. Executive Director of the International
Monetary Fund (Dale)
to the Under Secretary of the Treasury for Monetary Affairs (Volcker)1
Washington, November 23, 1970.
SUBJECT
I did the attached note over the weekend mainly because of a feeling that
a very large one-time SDR allocation as
a part of Scenario II2 looks pretty unrealistic. But a substantial
U.S. official settlements surplus combined with a much larger rate of
SDR allocation—both of them by
virtue of international agreement—might not be so wholly
unrealistic.
Attachment
A Rationale for a Major Exchange Rate Realignment3
The relationship between the stock of total U.S. international
reserve assets and the stock of U.S. reserve liabilities is not
satisfactory, either for the United States or for the international
community. Except for 1968 and 1969—when this result was clearly
seen as a temporary aberration—the trend in this relationship has
not been satisfactory for a number of years. Both of these factors
make the international monetary system vulnerable to speculative
influences.
It has been accepted for some time that a necessary, though in itself
perhaps not a sufficient, condition for a sustained zero balance of
the United States on the official settlements basis would be the
satisfaction of the world’s “demand” for official reserve assets
from a source other than an official settlements deficit in the U.S.
external balance. That source of satisfaction is now available in
the SDR.
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We can, if we and the rest of the world agree on it as a mutual
objective, go much further. What is now necessary is a large and
sustained U.S. official settlements surplus, so that both the
relationship between our reserve assets and liabilities and the
stock position will be greatly improved. What I would suggest is
that:
- 1.
- It should be agreed internationally that for a sustained
period of time—say, five years at a minimum—the United
States and the world should aim for a U.S. official
settlements surplus in the range of $2-3 billion per year,
abstracting from short-term deviations.
- 2.
- This should be aimed at by an immediate major realignment
of exchange rates, and any exchange rate changes proposed
later during the quinquennium should be judged importantly
against this generally-agreed objective. Adding up the
“underlying” U.S. deficit (i.e., abstracting from existing
cyclical and random factors in the present deficit) together
with the balance of payments cost of completely liberalizing
capital flows and other transactions as well as allowing for
an average surplus of $2.5 billion per year, this would
probably mean the need for an annual improvement in our
balance of payments on the order of $6-8 billion. It is this
range of figures at which a realignment of exchange rates
must be targeted.
- 3.
- The present rate of SDR
allocations is undoubtedly too small. In addition, it is
based on the assumption that net additions to world reserves
in the form of U.S. dollars will be $0.5-1.0 billion, rates
which are presently being greatly exceeded and which are
likely to be exceeded for the whole of the first basic
period. If the figure +1.0 billion (the top of the range in
the Managing Director’s proposal) were replaced by-2.5
billion, the present allocation rate of $3.0 billion would
have to be boosted to $6.5 billion to produce the same
aggregate results in terms of world reserves. In the context
of an agreed exchange rate policy aimed at producing a
sustained U.S. official settlements surplus of $2-3 billion
per year, other countries would necessarily be much more
vulnerable to balance of payments difficulty, and might well
be willing to support a higher rate of SDR allocation. Even at an
allocation rate of $6.5 billion, the United States would
receive around $1.6 billion per year, so that our net
reserve position would be improving by around $4 billion per
year.
- 4.
- Our willingness and wish to aim for such a surplus would
represent, by comparison with the situation today, the
provision of substantial additional real resources to the
rest of the world—something in the neighborhood of 3/4 of
one per cent of our GNP and
around half that proportion of world GNP. For the rest of the world, that would
represent some help in dealing with the inflation that
nearly all of their Governors complained about at
Copenhagen.4
For us, it would involve
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somewhat more of an export-led upturn,
and the price changes involved (in the form of an exchange
rate realignment) could assist materially in resisting
protectionist pressures.
- 5.
- We could say that only after such a sustained period of
official settlement surplus would we
be willing to look seriously at a negotiation looking toward
putting the world, including the United States, on a full
reserve asset settlement basis. In other words, we would be
willing to try to work ourselves out of the reserve currency
business—always abstracting from reasonable working
balances—but other countries would have to be prepared to
accept the implications of this.
- 6.
- An indirect SDR-aid link,
but one of substantial quantitative importance, would also
be involved in this procedure. The LDC’s would receive about one-fourth of any
increase in SDR allocations
resulting from the proposed shift in the U.S. position. If
the assumption is made that their absolute reserve targets
(whether implicit or explicit) would not change, the
additional SDR allocations
would—in effect—be the same as an equivalent amount of
program aid. If the figures given above have some validity,
the additional SDR
allocations to the LDC’s
could be in the range of at least three-quarters of a
billion dollars per year, an amount of no mean importance
when compared with IDA
plans.
