43. Letter From French President Pompidou to President Nixon 1
Dear Mr. President:
During our discussions in Reykjavik, we mentioned certain monetary and economic problems about which I think it is useful to give my thoughts on a confidential basis, as you requested.2
The basic principles that should inspire future international monetary order seem now to be sufficiently well outlined, although the question of how to implement them should be the object of discussions. These principles are essentially the adoption of fixed, although adjustable parities, the return to general convertibility among various currencies, the equality of rights and obligations of all the participants in the system, which implies a reduction of the de facto role of national currencies as reserve instruments. An agreement which is fundamental for the equilibrium of this construction should be based on the definition of a new reserve instrument which could play its role as a measure of value.[Page 170]
The delays which will still be necessary in order to adopt a new international monetary system make an examination and solution of transitory problems very important. In effect, the crisis of confidence which is the basic cause of present monetary disorders could, if the economic situation were to become less favorable than at present, lead to a very serious situation. We should, therefore, and without waiting any longer, demonstrate we are not incapable of progressing toward the reestablishment of a more satisfactory monetary order.
First, our national economic and monetary policies should demonstrate that our efforts to fight inflation are real and capable of being effective.
The parities which the Ministers of Finance agreed upon at the conference in Paris in March 19733 should be progressively stabilized and defended by the most appropriate means. The erratic and destabilizing movement of short term capital should be fought in a coordinated manner, which requires the generalization of effective controls. Finally, it is necessary to end the de facto freeze on central bank reserves which has posed the problem of the convertibility of both the dollar and of gold. Several solutions can be envisaged to reach a result which will return us to an international monetary equilibrium.
These actions seem so essential that it seems unreasonable to exclude a priori the hypothesis of an eventual Soviet demand to join the International Monetary Fund, or in any event, to participate in the future international monetary system. This would have important consequences for the functioning of the international economy.
The evolution of the Soviet Union and its satellites toward an accelerated development of their exchanges with countries with free economies is in effect irreversible since it corresponds to the satisfaction of their priority needs.
Politically, it is difficult to imagine that the Soviet Union will not seek sooner or later to have its voice heard, directly or indirectly, in an organization which constitutes a means of essential information and cooperation, both with the developing countries and the major countries of the free world who are becoming important political and economic partners in the realization of their five-year plan. This may also be true in a more distant future for China.
However this may be, a similar evolution is already perceptible in the more active participation of the Soviet Union in the activities of the economic organizations depending upon the United Nations.[Page 171]
Without a doubt important obstacles still remain in the way of an eventual request by the Soviets to join the IMF. There are also problems of communication of information considered secret and in the constraints imposed by annual consultations. Other problems arise from the very organization of the Communist bloc: the absence of a coherent and uniform price system, the practice of bilateral agreements, and the absence of a true multilateralization of payments even among the COMECON countries.
The obstacles do not, however, seem insurmountable if a determined political will exists. I have noticed that these obstacles were not judged sufficiently important to block the demand by Romania to join the IMF in September 1972. It is quite probable that this action was taken only with the agreement of the Soviet Union.
If this political will exists, numerous other problems will still be posed for the member countries of the IMF; the distribution of permanent administrative seats, the determination of quotas.
Whether the Soviet Union does or does not seek to join the IMF, one can anticipate that in the future they will attach a growing importance to three particular aspects of a system in which they will take part or to which they will be associated:
- —the agreement on fixed exchange rates, which is indispensable in economies as fully planned as theirs.
- —the definition of a numeraire which will be a desirable reserve instrument acceptable to them.
- —the restriction of the de facto role of certain national monies as numeraire.
These reflections are not meant to be predictions. The evolution of international economic and political relations seems to me to be such that some of these long-term developments are no longer unlikely. It no longer seems premature to think about them or their consequences. This is an added reason why we should try among the countries of the free world to reach an agreement on the organization of the future international monetary system and on the problems of the transitional period.
As I indicated to you during our discussion in Reykjavik, the present situation of the agricultural markets, and especially those of meat and dairy products, is also a matter that preoccupies me.
The opinion is widespread that these markets are and will remain in a state of over-production. Some producing countries have, therefore, adopted a Malthusian policy and are engaging in an uncoordinated competition in their exports which leads them to sell below the normal price and sometime even below the cost. This competition essentially benefits the purchaser, developed countries, or those with large reserves. At the same time, an important part of the world population continues to suffer from under-nourishment.[Page 172]
Some specialized international organizations bear the responsibility for spreading the opinion that the world is threatened with overproduction of food. For example, the United Nations Organization for Food and Agriculture stated in 1971 that substantial excess production would exist for such products as wheat, rice, other cereals, vegetables and bananas.
These forecasts seem to me to be open to criticism on several grounds:
- —the anticipated demographic evolution during the decade seems to have been underestimated and should already be corrected upward as a function of recent censuses.
- —on the other hand, the estimates of gross production seems to have been overestimated for numerous developing countries and in certain groups of developed countries. For example, the FAO envisaged a “growth in available exports” of milk and milk products from the Soviet Union (as well as from Poland and Romania) and substantial cereal surpluses. These predictions were based on the goals of the production plan communicated by these countries and were not verified. The climatic reasons advanced as an explanation of recent Soviet purchases do not entirely provide a satisfactory explanation. The Soviet Union seems to be in an agricultural crisis, as their importations of wheat and butter indicate, as do the shortages of meat that they are experiencing.
Finally, and above all, the predicted excess in agricultural production resulted from the confrontation between production—which was overestimated—and “effective” demand. Now, this demand is considerably below nutritional needs as a whole for world population. The international organization itself remarked on this by saying: “Projections show that in 1960 42 developing countries with 1.4 billion inhabitants will still have insufficient caloric intake, even if demand is fully satisfied. The planned economies of Asia would add another one billion to the number of individuals in this situation.”
The excessive importance given to the notion of so-called “effective” demand therefore hides the real problem which confronts our country [which] is hunger or the insufficiency of food which strikes nearly 2-½ billion people.
In these circumstances, the problem of competition for third [country] markets seems to me to be badly posed. It is necessary to reexamine it completely. Presently most transactions take place between developed countries or countries with adequate monetary reserves: on the one hand, essentially the United States, the countries of Western Europe, Canada, and, on the other hand, the Soviet Union, China, and Japan, for whose markets there is costly competition.
Such a situation is doubly abnormal: On the one hand, the producing countries, contrary to the normal case, must subject their interests [Page 173] to the important and urgent needs of the consuming countries and the financial burden this will place on them. On the other hand, one tries to plan the future of western agriculture in terms of overproduction even though, in fact, we are in a situation of underproduction if one looks at things from a global point of view.
It is true that among the consumers there will be more and more underdeveloped countries with few means of payment, but it is precisely these countries which it will be necessary to systematically aid to insure their subsistence, which will insure the equilibrium of European and American agriculture.
Therefore, it seems to me that our common interest and that of humanity will be to study as soon as possible the prospects for concluding certain agreements on regulating agricultural markets and on stabilization with respect to cereals and milk products in particular. These agreements could include:
- —fixing an international price at a reasonable level corresponding to the actual tendencies of the market.
- —coordination of the export policies of principal producing countries, without having this lead to a division of markets.
- —the regulation of production, notably in the form of stockpile agreements, annually renewable, and whose costs would be equitably shared among the producing countries.
In addition, food aid to developing countries should be substantially increased and the actions of various exporting countries should be coordinated so that the progress of our agriculture can effectively help solve the problem of the third world.
I propose to raise this problem publicly as we agreed in Iceland.
Please be assured, Mr. President, of my highest consideration.