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.
