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

215. Telegram From the Embassy in the Netherlands to the Department of State¹

The Hague, December 6, 1971, 1315Z.

4366. Pass Treasury for Connally and Federal Reserve for Burns. Subject: Dutch views on monetary and trade settlement.

Summary: Zijlstra and Oort, chief architects of Dutch monetary policy, are convinced from outcome of Rome G-10 meeting that all parties now have political will for early solution. Main imponderables now are how far dollar can devalue without pulling sterling, franc, lire, and krona down too, how far US is willing to pare down 11 percent revaluation demand, and how much further revaluation Canada can stand. Dutch feel issues of margins and IMF convertibility of dollar must also be addressed at next G-10. For their part, Dutch are ready to accept revaluation of 9-11 percent if necessary to early settlement. End summary.

1. Ambassador Middendorf, accompanied by Econ Counselor, met Dec 3 with Treasurer General Oort and Dec 4 with Central Bank Governor Zijlstra and received following impressions on what transpired at Rome G-10 meeting and what is likely to happen next. In single instance where their accounts differed Oort’s version is shown in parentheses but we consider Zijlstra’s version more reliable as he was present in executive sessions.

2. Both paid high tribute to Connally’s chairmanship. Zijlstra called it “masterful display of leadership.” Both felt that high degree of secrecy maintained and discussion of key issues in executive session were vital preconditions for success achieved.

3. Meeting got off to unpromising start because of tough US proposal unofficially surfaced at Deputies’ meeting, but things went smoother at Ministerial meeting where discussion focused on Zijlstra’s package proposal.² On monetary side this called in essence for 5-1/2 percent devaluation of dollar and weighted average revaluation of major currencies against dollar of 11 percent over 1970 parities. This formula modified during discussion to permit possibility of deeper dollar devaluation and use of May 1, 1971 as base date for 11 percent revaluation (i.e. require that 11 percent be over and above Canadian revaluation of 8 percent accomplished prior that date). Since this would have effect of raising US BOP swing from $8.9 billion under Zijlstra formula to $10.5 billion, most members thought it excessive (Oort said, on other hand, that no one seemed “shocked” at figure).

4. Discussion then centered on Zijlstra formula for splitting bill among other nine. This formula, which Zijlstra said he developed after extensive discussions with all Governors and Ministers involved, would call for dirty float currencies (UK, France, Italy and Sweden) to maintain gold parity (i.e. revalue by 5-1/2 percent against dollar), Germany, with weight of 10 percent in US imports, to revalue by 12-15 percent against dollar, Japanese, with weight of 19 percent, to revalue by 15-20 percent against dollar, and Benelux to revalue halfway between “dirty four” and D-Mark, i.e. 8-10 percent. No one flinched audibly at this formula, including Dutch, but it was soon obvious that unless Canada, with weight in US imports of 25-36 percent (depending on definition) is in position to contribute additional 4 percent more in revaluation, other countries would have to push their revaluation to unacceptable levels to reach US 11 percent target. Monetary discussion terminated at this point and discussion on trade ensued along lines of State 219288 (Exdis).³ Elements of Zijlstra package covering burden sharing, agriculture, margins, and convertibility were not seriously addressed.

5. Zijlstra considers there are three variables in monetary formula to be resolved between now and Dec. 17. He is uncertain what his role can or should be in bringing his considerable influence to bear on these issues in interim period but Ambassador expressed hope he would leave no stone unturned to promote their satisfactory resolution. Zijlstra commented that happy coincidence of BIS meeting next week will provide good opportunity for further missionary work. Three variables are:

A. How much less than 11 percent average revaluation ($10.5 billion BOP swing) is US prepared to accept?

B. How much more revaluation can Canada stand and how can floating Canadian dollar be strengthened even if this is intent?

C. How far can dollar be devalued in terms of gold without triggering pursuit by “dirty four”?

6. Zijlstra anticipates that Dec 17-18 G-10 will concentrate on four issues: monetary variables, progress on trade negotiations, margins, and restoration of limited dollar convertibility in IMF.

7. On margins, Dutch favor 2-2-1/2 percent maximum and maintenance of 1/2 percent in EEC.

8. On convertibility, Dutch see no reason why dollar could not become convertible for minor IMF debt repayments. Zijlstra feels US should have enough assets to absorb this in view of (1) additional SDRs forthcoming Jan 1, (2) availability of gold tranche and (3) likelihood of early repatriation of up to $10 billion in speculative dollars invested abroad as soon as new fixed parities are established. Zijlstra considers fixed parities without convertibility unworkable and over longer haul favors his own proposal to let IMF decide what mix of assets Central Banks must accept in conversions through Fund, although he recognized some ad hoc arrangements will have to be made to accommodate British debt to IMF and to pare down $59 billion (as of Aug 18) in hands of non-residents. (According to Zijlstra, $45 billion in hands of Central Banks, $14 billion in individual hands.)

9. Perhaps most significant observation Zijlstra made about Rome meeting was that he is convinced that all ten major currency countries now have political will and strong desire to achieve immediate settlement of monetary and trade issues. Dutch, who have so much to lose from international trade war, clearly share this will and desire. Although Dutch are deeply concerned about present downward trend in their business cycle, which up to now has been due to excessive wage settlements, they are even more fearful of growing atmosphere of corporate uncertainty engendered by floating exchange rates. Their improving BOP outlook for 1970 gives them little comfort because it is due more to declining imports of investment goods than to rising exports (except to Germany). Thus we are inclined to believe that they would now settle for guilder revaluation in terms of dollar of as much as 11 percent, provided this is essential to agreement and provided D-Mark revaluation is at least 3 points higher.

Bovey

1. Source: National Archives, RG 59, Central Files 1970-73, FN 10. Secret; Exdis. Repeated to Bern, Bonn, Brussels, London, Luxembourg, Ottawa, Paris for Deputy Under Secretary Samuels and Ambassador Middendorf, Rome, Stockholm, Tokyo, USEC, and USOECD.
2. Presumably Zijlstra’s undated paper entitled “Working Paper,” a copy of which he sent Secretary Connally under cover of a November 23 letter. Zijlstra noted that he had prepared the paper in compliance with a request made at the Annual Meeting of the IMF in Washington in September. (Washington National Records Center, Department of the Treasury, Records of Secretary Shultz: FRC 56 80 1, Rome G-10 Meeting 11/30-12/1/71) For the U.S. proposal at the G-10 Deputies meeting, see Document 211.
3. Document 213.