230. Volcker Group Paper1




In formulating recommendations on the objectives which the U.S. Government should seek in the forthcoming economic reform negotiations the Alternates have proceeded on the basis of a number of important premises:

that these objectives must seek to serve the U.S. national interest both in terms of the health of the U.S. economy and in terms of U.S. political relations with foreign nations;
that the U.S. national interest would be served by an international economic system providing an environment which
facilitated international trade and capital flows among nations;
involved a minimum of governmental restraints and subsidies on international economic transactions;
preserved the habit of cooperations which has become established in international economic fields; and
did not contain features likely to lead to periodic political confrontations among governments; and
that, in the complex task of reshaping the world’s economic system, a balanced “package” approach must necessarily be employed in judging proposals on specific aspects of the system; the full implications of no part of a proposed system can be judged fully until the broad outlines of the whole package are in view; in order ultimately to reach an agreement embracing all major trading nations, the U.S. may be faced with the necessity of accepting less than full achievement of some objectives.


With the premises in mind the Alternates have agreed that the objectives they recommend for the U.S. Government in the coming negotiations may usefully be summarized as follows:


reform of the international monetary system in a manner which will increase the probability that changes in exchange rates among major currencies, including the dollar, will in future more promptly reflect changing circumstances, such for example as differential rates of inflation and productivity among nations;

(Comment: the Alternates are of the opinion that increased flexibility for exchange rates will:

enhance economic growth and stability through more efficient allocation of resources and avoidance of the disruptive effects on resource use and capital flows of delays in exchange rate changes followed by large discrete adjustments of exchange rates;
impose fewer restraints on governments in attempting to choose the mix of domestic fiscal and monetary policies best suited to the goals of price stability, high employment, and improving standards of life; and
create an environment more resistant to special interest efforts to promote controls, subsidies, and other forms of governmental interference in international trade and investment transactions.

The Alternates have not included a recommendation with respect to the extent to which multilateral agreement will be needed on the creation of additional international monetary reserves since it has been recognized that the extent of the need will depend upon the extent and nature of the additional rate flexibility provided in the reformed international monetary system. And the Alternates did not feel that either retention or phasing-out of the reserve currency role of the dollar should be regarded as a U.S. objective in the negotiations.)

a new international commitment to a set of basic guidelines and procedures:
which will both enhance economic standards of living and promote international payments equilibrium through reduction in governmental barriers and subsidies which distort international trade; (Comment: the Department of State recommends against inclusion of the reference to payments equilibrium in this paragraph.)2
which will avoid discrimination against or among investors from abroad while providing host governments with adequate control over business activities within their territories;
which will limit distortion of international transactions by tax and other forms of governmental incentives affecting location of economic activities and selection of markets for production.
agreement on procedures and guidelines for multilateral consultations and actions designed to stimulate corrective steps by governments pursuing seriously disruptive behavior in the international economic area; possible actions should include withholding of access to international assistance funds and placing burdens on the international transactions of the offending nations; and
provisions for continuing high level consultation with respect to the operations of and interrelations among the international monetary system and national laws and regulations affecting international trade and investment.

Continuing Work of the Alternates

In submitting these recommended general objectives the Alternates would like to make clear that they have not yet been able to reach agreement on:

  • —how the objective of flexibility can best be achieved in practice;
  • —how “presumptive,” i.e. how near to automatic, should the actions be to induce corrective steps by disruptive governments;
  • —how detailed would be the guidelines for governmental trade measures, investment controls, and domestic incentive programs; and
  • —by what means the role of gold can best be diminished in the international monetary system.

Work has begun and is continuing on these subjects.

  1. Source: Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, 1972, VGA/72-51-VGA/72-107. Limited Official Use. Drafted by Jack F. Bennett. “Draft” is typed above the date. Willis’ June 7 cover memorandum that circulated the paper to members of the VGAs indicated it was the latest version of the paper. Earlier drafts are ibid., and the text printed here seems to be the final revision. After the drafting exercise began in March, members of the VGAs contributed papers on U.S. objectives: Geza Feketekuty at OMB on March 6 (VGA/72-4); Robert Solomon at the Federal Reserve on March 6 (VGA/72-5); Jack Bennett at Treasury on March 13 (VGA/72-12); and Ralph Bryant at the Federal Reserve on April 5 (VGA/72-27). (All ibid., VGA/72-1-VGA/72-50)
  2. No further record of this dissent has been found.