162. Telegram From the Department of State to the Embassy in France1

135133. Ref: Paris 12595.2 Subject: Limited Exchange Rate Flexibility.

Deliver McGrew 9:00 A.M. Tuesday, July 27.

Following is message from Under Secretary Volcker to Giscard d’Estaing in response to his message to U.S. financial authorities on limited flexibility exercise:

“We appreciate your concern and the difficulties to which you alluded. We recognize that pressing for a decision on limited exchange rate flexibility can create problem not only for you, but possibly also for others because of more general speculative pressure that could be induced by discussion of this matter. For that reason, our initiative in [Page 450]the Fund Board3 has not been paralleled by public discussion. Nevertheless, we felt several factors made it desirable to present to the IMF Board more concrete proposals on the flexibility question at this time.

“From past discussion, we were particularly aware of the problems which the French authorities have raised with respect to flexibility, and we felt important elements in our proposal would be more acceptable to French view than other flexibility proposals which have been discussed. Speaking frankly, we hoped we could identify some areas of common ground.

“In particular, wider bands would under our approach not be generalized but would be adopted at the option of an individual IMF member (or group of members) where, for example, that member felt the wider margins would be useful in dealing with disequilibrating movements of mobile capital.

“In the case of the transitional float, our approach envisages the float essentially as a method of changing exchange rates. Thus a finding of fundamental disequilibrium would be required (as with any exchange rate change). A Fund review process is envisaged, and the Fund would be empowered to set conditions on the float or to withdraw authority for a continuation of the float. This should provide protection against too frequent or too long floats.

“These conditions are designed to recognize and encourage fixed parities as the norm, with an explicit international code of good behavior with respect to the use of ‘flexible’ options.

“On the other hand, we recognize that the width of the band mentioned in our approach—up to 2-1/2 or 3 percent on either side of parity—goes beyond French thinking. Our view is that the short-term capital flow problem is of serious concern and that an option for margins of this size may be needed as one of the tools for dealing with it. We understand, of course, that the EC faces problems in dealing with the question of wider margins which do not confront individual countries. However, the framework we have proposed was designed to avoid any special difficulty for the EC beyond those posed by other proposals for wider margins.

“Throughout the discussions in the Fund and G-10, the U.S. had, as you know, refrained from presenting its views with any precision, in part to see whether a broader consensus might emerge among the G-10 members. However, if progress is to be achieved in September, we felt that this was the last opportunity to table a clear statement of U.S. thinking, prior to the August vacation period, in order to give foreign officials [Page 451]time to reflect on a specific proposal. We have no intention of pressing for agreement within the IMF Board during the present discussions; now that our suggested approach is on the table, we do not intend to take further initiative in the matter until we can see whether there is a possibility of reconciling present differences among the G-10 members in the G-10 meetings to be held in September. Meanwhile, the EC can shape its own views with some clearer indications of the views of its trading partners.

“I would not pretend that the approach we have outlined necessarily represents our final thinking on the subject. Nevertheless, we have been concerned that in the absence of some consensus on appropriate rules of conduct, individual countries, in response to speculative pressures or otherwise, may revert excessively to use of exchange rates as a supplementary tool of domestic policy, as recent events have demonstrated. We have tried to set forth an approach consistent with the general thrust and spirit of the Bretton Woods objectives. We are interested in hearing the reactions of others in the hope that a broad consensus can be reached in September. Certainly, an early resolution of this matter would be in the interest of all.”4

  1. Source: National Archives, RG 59, Central Files 1970-73, FN 10. Confidential; Priority; Limdis; Greenback. Drafted in Treasury by Cross and cleared in draft by Volcker; cleared in State by Beigel (EUR/FBX) and approved by L. Kennon (E/IFD/OMA).
  2. Telegram 12595 from Paris transmitted a message from Giscard. (Ibid.)
  3. Reference is to the initiative of July 19; see Document 163.
  4. In Giscard’s absence, the Embassy passed Volcker’s message to Deputy Director of Treasury for International Affairs Larosiere on July 27, who said he would bring it to Giscard’s urgent attention when he returned to Paris the next day. (Telegram 12952 from Paris, July 28; National Archives, RG 59, Central Files 1970-73, FN 10) Telegram 13154 from Paris, July 30, reported a discussion of Volcker’s reply with Giscard on July 30. Giscard seemed to have a more open mind on limited exchange rate flexibility than his advisers. (Ibid.) In a July 22 letter to Sam Cross in the Office of the Assistant Secretary for International Affairs, Treasury Attache McGrew reported that a key member of Giscard’s staff was as rigid as ever on limited exchange rate flexibility and speculated that at decision time Giscard had been unable to convince Pompidou on a compromise. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, France)