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


  • Contingency Planning

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.


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:

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.
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.
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.
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 [Page 421] 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.
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.
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.

  1. Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, 1971 Contingency Planning Papers. Confidential; Limdis.
  2. Presumably reference is to one of several scenarios in an options paper. The paper has not been found.
  3. A substantially expanded version of this paper, dated January 28, 1971, entitled “Scenario III—Exchange Rate Realignment and Related Matters,” is in the Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, 1971 Contingency Planning Papers.
  4. The Annual Meetings of the IMF-IBRD were held September 21-25, 1970, in Copenhagen.