40. Memorandum of Conversation1


  • France
    • Minister Giscard d’Estaing
    • Mr. Claude Pierre-Brossolette
    • Mr. Jean-Pierre Brunet
  • U.S.
    • Secretary George P. Shultz
    • Under Secretary Paul A. Volcker
    • Ambassador Irwin (for part of the afternoon session)
    • Ambassador Harald Malmgren
    • Mr. Sam Y. Cross
    • Mr. Robert Hormats
    • Mr. De Seabra (Interpreter)


  • Trade and Monetary Issues

After exchange of greetings, it was agreed that the group would discuss monetary reform in the morning session and trade matters in the afternoon.

Minister Giscard suggested that Mr. Volcker and Mr. Pierre-Brossolette comment on the meeting of the C–20 Deputies last week.2

Mr. Volcker thought the meeting had been the most useful of the Deputies’ meetings thus far. The technique of discussion in smaller groups was an improvement and permitted relevant debate. He thought the meeting had brought better understanding on some issues and perhaps a little congruence of views. On the adjustment process, he detected a rather widespread view that countries did not want the IMF telling them what to do, and he was encouraged that our reserve indicator proposal was a way of instituting discipline in the system without the reliance on an international institution to tell countries what to do.3 On consolidation, there were difficult problems of how [Page 147] the costs should be shared. On the SDR, he thought there were signs of a basis for agreement on making that the main asset of the system, but there were still problems of the valuation of the SDR. On gold, there was an interesting discussion, but it was not conclusive; there was recognition of the need to build a system not dependent on gold but a lot remained to be done on working out just how.

Mr. Pierre-Brossolette said one important question was how the exchange rate system would operate. Some countries such as France and Japan, and much of Europe, would prefer a system of rather fixed par values. He could see a risk of too much flexibility in exchange rates. The French were not clear what the U.S. view was on this question.

Secretary Shultz said the system in our view should be a great deal more flexible than in the past. We thought relatively more frequent and relatively small exchange rate changes would be helpful and desirable in a future system.

Minister Giscard said he thought U.S. thinking was too much influenced by U.S. experience of the past 10 years. Once the U.S. balance of payments is back in equilibrium, the U.S. might take a different view on some of these questions. He was concerned about the dangers of a system in which the first element of adjustment would be exchange rate changes, and he thought that could lead to too much competitive devaluation.

Secretary Schultz said we recognized the risk of a system biased toward competitive devaluation and we were trying to get symmetry of adjustment by use of reserve indicators.

Minister Giscard said he did not think the international community would accept reserve indicators. The danger was that countries would accept some ineffective form of indicators, and would have the freedom to change parities but without any rules preventing competitive devaluation and other unwarranted changes.

Mr. Volcker said that the question of changes in exchange parities was not the only aspect to consider. For one thing, we envisaged the need for floating exchange rates in particular situations. Also, we envisaged that the choice of adjustment policies would be left as much as possible to the country taking those policies. We accepted in our proposal a system of convertibility which effectively applied adjustment pressures to deficit countries. We need to build on the convertibility discipline and apply adjustment pressures also to surplus countries. Otherwise, the system would fall apart.

[Page 148]

Mr. Pierre-Brossolette said the reserve indicators proposal was not realistic. There was always room for discussion as to whether a country should act when the indicators so suggested. Also, the indicators did not work the same for a large country and for a small country—they allowed greater freedom for the large country.

Secretary Shultz asked how the French envisaged that pressures would be applied on surplus countries to adjust.

Mr. Pierre-Brossolette said pressures had been applied effectively in the case of Japan.

Minister Giscard said we had to think of a new world. The old system had defects in that exchange rate margins were too narrow, and there was no pressure on surplus countries. He had no specific answer on how to apply pressures to surplus countries, but he thought the system needed to be one of few rather than frequent parity changes, particularly if heavy speculation was to be avoided. He thought the main technique of adjustment should be internal policies rather than exchange rates.

Mr. Volcker said the reserve indicator was the skeleton of the system we proposed, and it was necessary to apply flesh to that skeleton in the form of consultations and pressures from the international community. But consultation and pressures would not succeed without the backbone in the form of reserve indicators.

Minister Giscard said in the future, the system was more likely to be one of major groups—Europe, Japan, the United States—and the question was whether there would be need for par value changes frequently among those big blocs.

Mr. Volcker said his personal view was there would not be large and frequent exchange rate changes between the U.S. and Europe. He thought the U.S. would do as well as Europe on inflation.

Secretary Shultz asked how Minister Giscard would have handled the Japanese surplus problem.

Mr. Pierre-Brossolette said that was a new phenomenon. Only a few years ago there had been concern about Japan’s weak balance of payments. Then there had been a sudden explosion. This was a special situation which may not occur again.

Minister Giscard said the dollar should have been devalued several years ago. It had been difficult to push Japan because there were really two problems in the international payments situation—the over-valuation of the dollar and the undervaluation of the yen. If the U.S. had been willing to devalue, it would have been easier to push Japan. Without U.S. devaluation, it was unfair to push Japan.

Mr. Volcker said that depended on how one read history. It was certainly not clear that the dollar was out of line several years ago, and [Page 149] many people, not just in the U.S., would have strongly resisted a dollar devaluation and felt it to be extremely disruptive for the monetary system. Even if some way were found to deal with the Japanese surplus, there was the risk of new similar situations arising. Brazil, Australia, and Spain, for example, all had very sharp reserve increases and such countries need to be brought into the monetary system’s discipline.

Mr. Pierre-Brossolette said another point his government was concerned about was the future role of the dollar. If the dollar were widely used as a reserve asset, it would have less flexibility, and new dollar balances would be a source of instability. While the U.S. might like widespread use of the dollar for prestige and other reasons, a buildup of dollar balances would not help a future monetary system.

Mr. Volcker said the U.S. proposal contained safeguards to prevent excessive build-up of currency balances. We envisaged a convertibility system. Some countries might prefer to hold currencies, and currency holdings might provide needed elasticity in the system. If a surplus country preferred not to draw excessively on the world’s primary assets, but rather to finance its surplus through a more or less temporary increase in currency holdings in order to avoid having to adjust in a situation when it might not be appropriate to adjust, why not allow the surplus country that flexibility? If the surplus country were not converting into primary assets, then those primary assets would be left with the country issuing the currency, since the reserves would still be in the system. An important element of the U.S. proposal was that there be a consistency between the total assets in the system and the scope for running payments imbalances.

Minister Giscard asked how would we prevent the creation of SDR’s when they are not needed, to prevent a recurrence of the situation in 1968, 1969, and 1970.

Mr. Volcker said the world needed those SDR’s in those years. The problem was that the world had too many dollars, not too many SDR’s.

Minister Giscard asked what would be the U.S.’s “second attitude,” if countries would not accept reserve indicators.

Mr. Volcker said that was an impossible question. If countries were not willing to adjust, it was difficult to see how any system would work.

Minister Giscard said he was concerned that the C–20 would accept the U.S. plan but with weak indicators, which would leave countries to change rates as they pleased.

Mr. Volcker said he was less pessimistic about the prospects for gaining acceptance of the U.S. proposal. He thought that if the French would agree, we could get the rest of the world to agree. Some of the LDC’s had begun to see some of the advantages of the U.S. system to them, in that it did not leave them at the mercy of IMF control.

[Page 150]

Minister Giscard asked what kind of convertibility the U.S. envisaged.

Mr. Volcker said we envisaged the traditional kind where a country brings the currency of a second country to that second country and is given primary assets, presumably SDR’s, or its own currency in exchange.

Minister Giscard asked why we should seek to discourage the SDR by a low interest rate.

Mr. Volcker said it was a matter of who is paying the interest rate. Minister Giscard said if the U.S. did not want to pay a high interest rate on SDR’s, we could encourage use of SDR’s by limiting currency balances.

Mr. Volcker said that would leave too little elasticity in the system.

Mr. Pierre-Brossolette said there were other means of adding the elasticity such as Fund drawings, swaps, and controls.

Mr. Volcker said debtor countries would not always be willing to use those techniques.

Minister Giscard raised the question of the value of the SDR. He mentioned the proposal of linking the SDR to the “most appreciating” currency to make the SDR a preferred asset. He also asked why in an SDR based system, the U.S., since it favored flexibility and freedom, did not want to give central bankers the liberty to use their gold.

Mr. Volcker said that there were a number of possible ways of valuing the SDR. Some felt it could be valued simply as 1 SDR equals 1 SDR. It could be valued with a basket of currencies. Tying it to the most appreciating currency raised a number of problems. With respect to gold, it might be possible to envisage central bankers selling gold in the private market, but if central banks bought or sold gold to each other, this would raise serious questions about the role of gold in the system and our objective was to diminish that role.

Afternoon Session

Minister Giscard asked the U.S. view about a C–20 Ministerial meeting before Nairobi.4

Secretary Shultz said he would favor a meeting if some good could be accomplished, but there was a question whether a meeting before Nairobi would be useful. We wanted to work as hard as possible to get the job done, but a meeting which resulted in a big failure could adversely affect the monetary arrangements now operating which hold prospect of working satisfactorily while we seek reform.

[Page 151]

Mr. Volcker said the timing of the meeting was important and a meeting in early September might be more useful than in July, as we would be better prepared.

Minister Giscard said early September was impossible because of the GATT meeting in Tokyo.5

Mr. Pierre-Brossolette said a July meeting would help to avoid giving the world the view that we are discouraged about reform.

Mr. Volcker said that would depend on the outcome of the meeting.

Secretary Shultz said perhaps we should say in advance that no communiqué would come out of such a meeting, since that would dampen expectations of results, and since preparing a communiqué takes so much of the available time which could better be devoted to substance.

Minister Giscard said there was no serious chance of reaching substantive agreement by Nairobi, but that the world was expecting it. We had to dissipate that illusion. We needed at least two full ministerial meetings and some restricted contacts before agreements could be reached, which would mean early 1974 at best. Instead of having a full report from the Chairman of the Deputies to consider after the July Deputies’ meeting,6 we should concentrate on one or two issues, such as the exchange rate regime and convertibility, and leave out two or three, such as the link, IMF structure, and numeraire.

Secretary Shultz said if we are convinced we cannot reach agreement by Nairobi, focusing on a few items might be a good approach.

Mr. Volcker said it would be very important to determine which issues on which to focus attention. He thought perhaps the structure of the IMF might be easier than many other issues.

Secretary Shultz asked if the French had any problems operating with the existing system while work proceeded on reform.

Minister Giscard said the present weakness of the dollar was not a problem for France. However, it might be useful for the U.S. to let the market know that the U.S. would intervene from time to time in order to show U.S. support of confidence in the existing exchange rate structure. Also it would be helpful to indicate that the U.S. contemplated a return to convertibility in the new system.

Secretary Shultz said intervention might do more harm than good, but there might be times when it would be appropriate to nudge the market.

[Page 152]

Minister Giscard said that it would not be possible to keep gold frozen as a permanent feature of the monetary system.

Secretary Shultz asked if the French would support the idea of eliminating the present two-tier agreement7 and go back to the old IMF rule.

Minister Giscard said the IMF rules also call for convertibility and perhaps we should go back to that. Any change in the existing gold arrangement must provide a two-way freedom—buying as well as selling.

Mr. Volcker said the object of agreeing to sales but not purchases would be to settle and calm the situation. Agreement to buy and sell might be counter-productive and stir things up.

Mr. Pierre-Brossolette said the market had already gone far higher than any change in official price contemplated.

Minister Giscard said if there were an understanding to keep the present arrangements until full agreement on the new system is reached, in six months or so, France would participate. But France would not accept or agree to a relaxation just on the selling side.

Minister Giscard said that in the final system a “normal attitude” toward gold should be re-adopted. The French Treasury took a budget loss on the dollar holdings of the Bank of France at the time of the last U.S. dollar devaluation. He said the problem will not be simple to resolve in the final system. The East European countries would be coming more into the monetary system and they would want some reference to gold in the future system. A one-way sales system would not work, since no one would be prepared to sell gold.

Mr. Volcker said there appeared to be an impasse until the basic issue was resolved.

Turning to discussion of trade matters, Secretary Shultz said the Congressional response to the Trade Bill was encouraging. The proposed legislation was moving along as well or better than we had suggested in our earlier discussions with Giscard. One controversial point was the tax on foreign source income.

Minister Giscard said one point it would be difficult to accept was the proposed general surtax which had been included in the proposed legislation. He understood that if there were a false appreciation of the U.S. currency, the U.S. could impose a general surcharge on imports.

Secretary Shultz said the surcharge provision was permissible under certain conditions but not required. We hoped it would not be necessary actually to put the tax on, but rather that it would be possible [Page 153] to negotiate a resolution of the situation leading to consideration of the surcharge.

Under Secretary Volcker said that genus of the concept was that GATT already provided authority for QR’s, and everyone agreed surcharges were a more effective instrument than QR’s.

Minister Giscard said the EC and others would need to introduce the same surcharge authority as the U.S. It would not improve the climate for negotiations.

Under Secretary Volcker said surcharges were not a preferred technique. Our proposal was consistent with the C–20 Communiqué,8 which said there should be a strong presumption against the use of trade controls. We would not want the surcharge to be put on freely and frequently.

Minister Giscard said that the use of surcharges had in most cases—including France and the United States—preceded devaluation. The GATT provision to which Mr. Volcker referred had not been used by any industrial countries for a long time. He thought the U.S. wanted to move toward freer trade and to define rules, and he thought the surcharge proposal was a powerful weapon in the opposite direction.

Ambassador Malmgren said that the United States was in a unique position in that we did not have the same presidential powers as did the parliamentary governments in Europe and elsewhere. We could not easily impose a surcharge whereas the European governments could. Although the EC itself did not have such authority, EC surcharges could nonetheless be approved by the relatively simple matter of a Council meeting.

Minister Giscard said the U.S. must already have surcharge authority since we imposed a surcharge in 1971.

Ambassador Malmgren said the matter was in the courts at the present time.

Secretary Shultz said that we did not have the authority to apply discriminatory surcharges. Although use of surcharges had frequently preceded parity changes, it was not quite the same as a parity change since only certain transactions were affected. In any case we would expect to use surcharge authority only as the last resort.

Minister Giscard said the proposal would help the French since they favored not so liberal an approach to the trade negotiations.

Minister Giscard said that on the question of tariff reductions France would favor progressive reductions in the sense that nations [Page 154] with higher tariffs should undertake greater percentage reductions than those countries with lower tariffs in order to eliminate the ups and downs and move toward harmonization.

Ambassador Malmgren said we would not be idealistic about the question but we needed to see just what it meant.

Minister Giscard said it would be difficult to agree to balanced percentage reductions since U.S. tariffs on some items were much higher than European tariffs. He said all had agreed that the negotiations must be based on reciprocity but it was not clear whether that meant reciprocity on the whole, or reciprocity in tariff and in non-tariff barriers or reciprocity in groups of products. The EC had not yet agreed among its members on the point.

Ambassador Malmgren said the U.S. meant global, overall reciprocity covering all aspects of the negotiation.

Minister Giscard said this would be technically difficult. Each part of the negotiation would be discussed by different groups and at different levels. The U.S. might envisage giving up something in terms of harmonization of tariffs in exchange for some concessions in agriculture. However, if one country’s main export was, for example, some type of machinery, that country would be unwilling to agree to large concessions in that area in exchange for concession on items which it did not produce.

Ambassador Malmgren said the negotiations would have to be based on mutual concessions broadly speaking and that the more that EC looked at each slice of the negotiations separately the more difficult the negotiations would be. A slice approach would result in much more difficult negotiation than a harmonized approach.

Secretary Shultz said his comments on reciprocity had upset some people but he felt they were right. We recognized the need for overall reciprocity but as we looked at the problem, say with Japan, the present relative liberalization of trade between ourselves and Japan is not equivalent and we should not make equivalent concessions.

Minister Giscard wondered whether the Japanese case was one which needed to be dealt with separately and not as part of the worldwide negotiations. He noted that when the Japanese do liberalize they find ways to keep out the imports nonetheless.

Turning to the question of Article XXIV 6,9 Mr. Brunet said the EC had made a very generous offer to bind their industrial tariffs even [Page 155] though U.K. tariffs were high and they could not see why the U.S. should not accept that generous offer. U.S. agricultural exports had risen to the Six since the establishment of the EC, and the same would also happen with the Nine. He hoped the U.S. would accept the EC offer and, with bound tariffs, he could not see why we felt the U.S. would be disadvantaged by British entry.

Secretary Shultz said that under the EC proposal if a German company and a U.S. company were competing in the U.K., the tax for the U.S. company might be reduced from say 15 percent to say 10 percent, but the tax for the German company would be reduced from 15 percent to zero. It was obvious that the competitive position of the U.S. firm would be harmed.

Mr. Brunet said that was the essence of the Common Market. The same situation had occurred when the Common Market was created.

Under Secretary Volcker said we were very much concerned about the possible trade diversion of some of the EC arrangements and we felt this was a major problem. He noted that even in the case of Sweden it was estimated that the special arrangements with the EC would result in several hundred million dollars of trade diversion.10

Ambassador Malmgren said the matter of trade diversion or creation as a result of the Common Market had been widely debated without any agreement. We saw serious impairments to our trade and we needed satisfaction or else we would have to withdraw concessions. We hoped this matter could be resolved through calm discussion. There was an important question of timing related to our need to get our trade legislation passed. The EC approach was aimed not at resolving the problem but at making good debating points. Our side could do the same but it would take too long to get the matter resolved that way, and we would have a political problem. He noted there had been a grains standstill since 1960 which we had now called up. These were important issues, and we hoped they could be resolved calmly and without confrontation.

Minister Giscard asked why the U.S. should want to export grains to Europe. Europe itself exported large amounts. In the oil business Saudi Arabia and Kuwait did not try to export oil to each other but made arrangements to provide for the best return on the oil both of them exported to the rest of the world. Europe exported much grain. Perhaps the idea should be explored of an agreement between the U.S. and the Europeans to organize the export market. Ambassador Malmgren said this was hard to do and previous attempts had failed.

[Page 156]

Minister Giscard said some of the U.S. experts talk about the CAP in ways which lead him to fear the negotiations were a Trojan Horse for the CAP. The CAP was the only means Europe had to create a single market.

Under Secretary Volcker said that it was not a question of attacking common pricing in Europe but the situation was not comparable to Kuwait and Saudi Arabia. Our costs were ½ or 2/3 as high as European costs, yet those markets were isolated and we were not allowed access in an area where we had very important competitive advantages.

Minister Giscard said Europe had good facilities for producing agricultural products. The high European prices resulted from the social structure. It was not French pressure which pushed CAP prices up but pressure from others. When the historic process of shifting people off the farms ended the north of France could certainly compete.

Secretary Shultz said we had a very good market in agricultural products in the U.K. and we were concerned that with British entry into the EC we would lose that market.

Minister Giscard asked when the multilateral trade negotiation would start.

Ambassador Malmgren said we intended to begin technical discussions in late October or early November.

Minister Giscard said substantive negotiation could not start until after the vote on the U.S. trade legislation.

Ambassador Malmgren said we intended to stick to our timetable irrespective of the timing of the U.S. legislative process.

Minister Giscard asked whether on NTB’s we proposed to concentrate on a few items or cover them all.

Ambassador Malmgren said we would deal with them all but we would put more energy on some than others.

Secretary Shultz said he regarded the NTB negotiations as very important. The world had gotten tariffs down but NTB’s had been a continuing or even increasing impediment to trade and hard to get at.

Ambassador Malmgren said with respect to the zero tariff we wanted room to maneuver. It was better that both sides be quiet on how far they expected to go, and then to go as far as they could.

Minister Giscard said that the East European countries would become a more important part of the trading world and if we had zero duties we would have to extend those to the East European countries even though those countries were in a position to adopt any price structure they might want.

Minister Giscard asked when the multilateral trade negotiations would reach decisions.

[Page 157]

Secretary Shultz said we had sought 5 years authority on tariff changes and unlimited authority on NTB’s.

Ambassador Malmgren said the negotiations might take two years. Minister Giscard asked what if the U.S. were in balance of payments surplus at that time.

Secretary Shultz said we viewed the proposed reduction of trade barriers as long term and structural changes as appropriate whether the U.S. were in deficit or surplus.

Ambassador Irwin said he had noticed in his short time in Paris11 the depth of suspicion of U.S. motives in both trade and monetary matters. That suspicion was not justified. He hoped both sides could speak frankly with each other on these matters and not feed those suspicions.

Minister Giscard said in the monetary field there were disagreements of judgment but he thought we would find agreement. He was concerned that the accusations in the U.S. that the CAP represented French protectionism should be answered.

Minister Giscard asked about the SDR–aid link.

Secretary Shultz said he and Under Secretary Volcker had taken a rather firm line in recent discussion at the ADB and IDB. Ministers would agree with the U.S. view privately but they would not admit it publicly.

Under Secretary Volcker asked the French view on IDA replenishment.

Minister Giscard said that he thought an increase of 50 percent was the very maximum acceptable [apparently to $1.2 billion (Smithsonian $)].12

Under Secretary Volcker said at some point we would have to deal with serious questions as to whether we wanted IDA to get bigger and bigger as President McNamara wanted.

Minister Giscard said he was very much concerned about that matter. He had noticed on a recent trip to Tunisia that the World Bank was getting into all kinds of financing that they should not get into.

Sam Y. Cross
  1. Source: National Archives, RG 56, Office of the Under Secretary of the Treasury, Files of Under Secretary Volcker, 1969–1974, Accession 56–79–15, Box 2, PAV, Iceland May 31, 1973. Confidential. The meeting took place at the Kjarvalsstadir, the Reykjavik Art Museum. A stamped notation on the memorandum reads: “Jun 18 1973.” Volcker initialed “Approve as amended” at the end of the memorandum, although no changes are marked.
  2. The C–20 Deputies met in Washington May 21–25.
  3. The reserve indicator proposal addressed the question of when a country should adopt policy measures to correct for large-scale deficits or surpluses in its balance of payments. As Shultz put it in his September 1972 speech to the IMF and World Bank: “I believe disproportionate gains or losses in reserves may be the most equitable and effective single indicator we have to guide the adjustment process.” See Document 1.
  4. The IMF and World Bank Boards of Governors held their annual meeting in Nairobi, Kenya, from September 24 to 28.
  5. A GATT Ministerial meeting was held in Tokyo September 12–14.
  6. The C–20 Deputies met in Washington July 11–13.
  7. See footnote 5, Document 4.
  8. For the text of the communiqué, see de Vries, The International Monetary Fund, 1972–1978, Volume III, pp. 197–199.
  9. In January 1973, the EC expanded its membership from six to nine countries, adding Denmark, Ireland, and the United Kingdom. When these countries joined the EC, they abandoned their previous tariff schedules vis-à-vis the rest of the non-EC world and adopted the EC common external tariff. Under Article 24:6 of the GATT, the United States was seeking compensation for the likely loss of markets American exporters would suffer as a result of the changes in the Danish, Irish, and British tariff schedules.
  10. A free trade agreement between the EC and Sweden came into effect in January 1973.
  11. John N. Irwin II presented his credentials as Ambassador to France on March 23.
  12. Brackets are in the original.