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

231. Telegram From the Embassy in France to the Department of State ¹

Paris, June 15, 1972, 1011Z.

11472. Treasury pass Under Secretary Volcker from Bennett. Subject: Highlights of G-10 Deputies meeting, June 13, 1972.

1. Summary: G-10 Deputies held half-day meeting June 13 under chairmanship Ossola (Italy). Bennett and Daane represented U.S. Principal subject for discussion was allocation SDRs in second basic period. Chairman emphasized this was first exchange of views without commitment. Deputies generally favored short allocation period, two years being most frequently cited. Views on amount varied rather widely from zero through “token” and “modest” to normal (i.e., approximately 3 billion SDR rate of first allocation period). U.S. leaned toward normal and indicated that if there were a zero allocation in 1973, it should be followed by 3 billion SDR creation in 1974. Little support for attaching to this transitional activation either SDR-aid link or proposal that industrial countries agree use at least portion their allocations to redeem foreign official balances in their own currencies. Chairman suggested another session at time IMF annual meeting in Washington, but timing and place left open. End summary.

2. Group first exchanged views on IMF projections re future reserve needs. IMF had calculated that global reserves at end March 1972, totaling 125 billion SDR, were about 15 or 20 billion SDR in excess of needed reserves. Extrapolating from three historical data series (global reserve growth, ratios of reserves to imports, and ratios of reserves to money), IMF estimated global reserve needs in 1977 in range of 150-185 billion SDR, meaning needed reserve creation in range of 6-12 billion SDR annually over next five years. IMF representative pointed out decisions on amount SDR allocations required to meet these needs would have to take account of expected changes in other forms of reserves, which IMF staff did not attempt to project.

3. In discussion on IMF projections, several Deputies emphasized that creation of reserves in other forms was very important element. There was, however, general recognition of difficulties in estimating this factor. Chairman suggested that perhaps SDR creation could be corrected year by year as function of reserve creation in other forms. Several speakers also expressed doubts about whether or not future needs could be extrapolated from past experience, citing possibility that reformed monetary system might be one that could be operated with lower level of global reserves than in past. Brossolette (France) and Emminger (Germany) both questioned whether or not any past period could be assumed to be one in which there was equilibrium between need for, and supply of, reserves. While questioning assumptions in this particular exercise, Oort (Netherlands) said methodology was sound.

4. Discussion then turned to exchange of views on length of next allocation period, amounts, criteria for distribution (whether on basis of existing quotas, as provided in Fund articles, or whether there should be some SDR-aid link favoring LDCs), and possible conditions, such as gentlemen’s agreement among industrial countries to devote part of their allocations to redemption or balances of their currencies held by other central banks or IMF. Chairman emphasized this was first exchange of views without commitment.

5. In view of Chairman, principal conclusions of this phase of discussion were:

(A) Generally agreed that this was worst possible period in which to try to evaluate long-term reserve needs, given transitional phase through which monetary system passing and many uncertainties about its future shape.

(B) Probably not desirable that G-10 Deputies should reach unanimous conclusion on all questions re second SDR allocation period. In particular, G-10 must keep in mind sensitivities of LDCs. Aim should be to make G-10 views available to IMF managing director, so that he can take them into account, along with views of other IMF member countries, in formulating his proposals re next activation.

(C) Widely held feeling monetary system should be based on SDRs, and that SDRs should be strengthened. (In subsequent comment on Chairman’s summary, Bennett cautioned against overstating, during this transitional period, desirability of strengthening SDRs, lest we prejudge shape of future monetary system; in U.S. view best way to avoid prejudging would be to continue allocations in previous range.)

(D) Gilbert (BIS) and Handfield-Jones (Canada) felt composition of reserves was important consideration bearing on decision re further allocations. If objective was system which relied less on reserve currencies, it was important to continue creation SDRs in significant quantities, regardless of additional reserves that might be created through U.S. deficits.

(E) Most Deputies favored short allocation period. Two years was length most frequently cited. Reasons advanced were transitional phase through which monetary system now moving and coincidence of this time period with next review of IMF quotas and GAB renewal.

(F) Views on amount were varied. Germany, Netherlands and Belgium favored zero. France said 2 billion SDR over two years could be considered for essentially political rather than economic reasons, but that an alternative would be simply to defer decision until economic need clearly emerged. U.K. favored “modest” amount (2 billion over two years). Italy suggested “disguised token” creation, which would consist of zero allocation for first year and 2 or 3 billion in second. Canada, Japan and Sweden favored “normal” amount, described as rate of creation during three-year period now ending. While preferring normal creation, U.S. said it could understand reasons why some countries advocated zero creation for one year; in that case, however, would want to see creation at normal rate of around 3 billion in second year.

(G) Italy, with support from France, argued merits SDR-aid link, at least on voluntary or indirect basis. However, prevailing feeling in group was that no attempt should be made to establish such a link for upcoming allocation period, and that link question was properly for agenda of long-term monetary reform.

(H) Suggestion that industrial countries agree utilize some portion of their allocation to redeem foreign official holdings of their own currencies received little support. Hosomi (Japan) said he had no objection if others agreed.

6. In presenting U.S. position, Bennett made following points:

(A) In present period of negotiation and discussion re future trading and payments system, we should avoid decisions on future SDR allocations that would prejudge long-term reform issues. Thus, next allocation period should not extend beyond two years, and U.S. could see merit in one year.

(B) U.S. recognized that SDR-aid link and “redemption” or “consolidation” were issues to be considered under heading of long-term reform, but they would not be suitable for inclusion in any decision on allocations during this transitional period.

(C) Re amounts for 1973 and 1974, strong economic case for activation at present is absent. However, positive decision would indicate continued interest in SDR as reserve asset and lessening dependence on gold, as well as underlining continued monetary cooperation.

(D) Taking all these factors into account, U.S. could support positive decision for next year or next two years. But we can understand why others may feel no allocation warranted in present circumstances. Since we believe choice would not have important economic impact, we could also join in decision to take no action for 1973, although we have slight preference for activation. Pure “token” allocation does not appeal to us, either psychologically or logically. Not clear whether “token” would be regarded as act of faith or lack of faith.

(E) In any case, we would want to review this year’s decision again next year in light of both reform discussions and new developments.

7. Strongest plea for substantial allocations in next basic period came from Sjonander (Sweden), who based his argument on premise that SDRs were designed meet long-term reserve needs, and that dollar reserves, even if now excess, did not meet that need, especially considering possible extinction through reversal of capital flows. However, he also favored period of not more than two or three years, while labeling this issue as “minor.” Handfield-Jones (Canada) also strongly advocated continuing at least allocation rate of first period.

8. Chairman raised briefly question of future role for G-10, both at Ministerial and Deputy level. He pointed out Deputies would presumably continue function as representatives of GAB participants if IMF had need for new call on GAB resources and would also be concerned with GAB renewal. He asked Deputies to reflect on what other tasks group might perform in connection with monetary reform process.

9. Chairman asked IMF representatives to report substance of discussion on SDR activation to Managing Director. Chairman suggested group might meet again for further exchange of views in Washington at time of IMF annual meeting. Was agreed date and place would be left open in light of further developments.

Watson

1. Source: National Archives, RG 59, Central Files 1970-73, FN 10. Confidential; Limdis; Greenback. Repeated to Bern, Bonn, Brussels, The Hague, London, Ottawa, Rome, Stockholm, Tokyo, and USEC.