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

81. Telegram From the Mission to the OECD to the Department of State ¹

Paris, October 20, 1971, 1617Z.

17682. Subject: WP-3 Meeting October 18-19.

1. WP-3 discussion of required balance of payments adjustments was recognized by all as prelude to exchange rate negotiations. Thus members protected their positions with zeal which resulted in wide discrepancies and inconsistencies in estimates of total adjustment required and in allocation of shares to individual countries.

2. Need for $13 billion turn-around in U.S. position² (and corresponding adjustment by other OECD countries) was disputed by others on variety of grounds:

A. That U.S. projection of $4 billion C/A cyclically adjusted deficit in 1972 was too high; did not appropriately judge 1971 situation; was based on extrapolation of existing trends without sufficient account of self-correcting factors,

B. That might not be necessary to assume total OECD surplus limited at $11 billion,

C. That other OECD countries would not willingly accept situation whereby U.S. would have C/A surplus of $9 billion out of total OECD surplus of $11 billion,

D. That U.S. surplus of $9 billion was excessive in terms of GNP,

E. That policies needed to be considered to reduce net U.S. long-term capital outflow to contribute to solution,

F. That in calmer international situation, and appropriate U.S. monetary policy, portion of turnaround would be covered by return flows of funds, and by normal demand for dollars by dollar area countries and others,

G. That while small countries needed surpluses to protect currency, situation was different for large country with long-term deficit whose currency not presently convertible,

H. That SDR allocations might cover part of gap,

I. That account not taken of likely change in competitiveness resulting from improving relative price-wage performance of U.S.

3. These points were answered by U.S. and to some extent by Chairman and others.³ U.S. pointed out reasons why $13 billion turnaround was conservative estimate; noted IMF estimate of starting point close to U.S. estimate of $4 billion deficit for 1972; that aim of $9 billion C/A surplus was for transitional period and not forever; that proposed U.S. share of total OECD C/A surplus was no higher than in the mid-60’s; that return flows of funds and increased demand for dollars could not cover adjustment gap since there would be no such flow in absence of convincing elimination of U.S. deficit and in any event would be needed for financing of deficit in interval before impact of rate adjustment was fully felt; that our estimates took full account of expected strengthening of U.S. competitiveness; that no reason to assume every WP-3 member needed the same size surplus relative to GNP; that we looked toward situation of market equilibrium which required less rather than more reliance on capital restrictions. In response to suggestions by some delegates that “interim financing” might be available to ease U.S. transition during adjustment period, U.S. responded that we wanted to cover deficit by reversal of trade position rather than interim financing; i.e., “trade not aid.”

4. On discussion of other countries “aims” and allocation of “required adjustment”:

A. Germany accepted Secretariat allocation (which called for $1-1/4 billion adjustment by Germany) conditioned on acceptance of Secretariat figures by all,

B. Japan estimated adjustment need in range of zero to $1-1/2 billion (compared with Secretariat estimate of $3-1/4 billion),

C. Canada estimated adjustment need of zero (compared with Secretariat $1/2 billion),

D. Switzerland estimated adjustment need of $1/2 billion, which it said was covered by recent revaluation,

E. Italy estimated adjustment need of zero (compared with Secretariat $3/4 billion) and IMF zero, conditional on acceptance of OECD figures by all others. Otherwise Italians wanted improvement in their position of $.3 billion,

F. Netherlands agreed with Secretariat estimate of zero adjustment need,

G. France and U.K. estimated adjustment need in opposite direction, i.e., they wanted to increase their C/A surpluses (by about $1 billion together, according to Secretariat) whereas Secretariat called for $3/4 billion reduction in surplus for France and zero for U.K.,

H. Belgians appeared to acknowledge no need for adjustment (compared with Secretariat estimate $.6 billion) although statement not entirely clear.

6. In sum, others in total estimated adjustment need of only $3-1/4 billion before reducing that amount by $1 billion to cover France and U.K. estimates. (Secretariat estimated adjustment of $1/2 billion by small OECD countries not represented.) This meant discrepancy of almost $11 billion from U.S. estimate of $13 billion. Total estimates surplus of all OECD countries cyclically adjusted 1972 added to $5-1/2 billion total of targets added to $16-1/2 billion.

7. Revelation of such extreme differences made it clear to all that it was pointless to try to reach agreement on a set of numbers.

8. U.S. pointed out very hard to rationalize discussions with facts in real world; cited articles in papers about large Japanese and Canadian trade surpluses; noted countries apparently trying to use C/A surplus to stimulate domestic growth and expecting U.S. to absorb the unemployment consequences; said no question of dollar gold price arising since number of other OECD countries apparently wanted to devalue their currencies, and apparently U.S. could best help in their view by running deficit.

9. Several delegates (Sweden, Canada, U.K., etc.) and Chairman said results not surprising in view of fact that delegates were deputies, not ministers, and purpose was not to negotiate but to clarify issues. Could not expect agreement on figures at time exchange rate negotiations starting, and meeting had served useful purpose in better understanding of issues and each country’s position.

10. Secretariat distributed projections of growth rates for major countries in 1st half 1971 which indicated adjustment could begin in context expanding economies. Conclusions, while not formally accepted, were warmly welcomed and given special emphasis by Emminger in subsequent press conference.

11. Secretariat pressed for experts meeting for further examination of estimates. Although U.S. indicated readiness have multilateral or bilateral review, others showed amusing reluctance to submit to technical examination of their calculations and proposal was dropped.

Greenwald

1. Source: Washington National Records Center, Department of the Treasury, Office of International Monetary Affairs: FRC 56 77 68, Briefing Books, 1970-1975, EPC Meeting 11/18-19/71. Limited Official Use. Repeated to Ankara, Athens, Bern, Bonn, Brussels, Copenhagen, Dublin, The Hague, Helsinki, Lisbon, London, Luxembourg, Madrid, Oslo, Ottawa, Reykjavik, Stockholm, Tokyo, and USEC.
2. See Documents 76 and 78.
3. Under Secretary Volcker was head of the U.S. Delegation. Emminger was the WP-3 Chairman. Emminger’s November 10 report on the October 18-19 WP-3 meeting is in the Washington National Records Center, Department of the Treasury, Office of International Monetary Affairs: FRC 56 77 68, Briefing Books, 1970-1975, EPC Meeting 11/18-19/1971.