87. Memorandum From Secretary of the Treasury Simon to President Ford 1
Need for Your Advice on Next Week’s Monetary Negotiations
I would like very much to meet with you this week to get your advice on the important negotiations which I shall be participating in next week in Paris. The ministers and Central Bank governors of 20 representative developed, LDC, and OPEC countries will be meeting all week in the so-called IMF Interim and the IMF/IBRD Development Committee. I want you to know that on one important aspect of these negotiations I have not been able to gain the concurrence of Arthur Burns on the position which I feel strongly that I must be able to take. Arthur is sending you a separate memorandum on the subject.2 My views are set out below.
There is general agreement between Arthur and me—and I believe with all the foreign officials as well—that it would be desirable for agreement to be reached in these meetings both on some gradual steps to update the international monetary system and on some practical measures of financial assistance for a number of LDC’s hardest hit by the increase in commodity prices, primarily oil. Such an agreement now looks far from assured even though progress in reducing differences has been made in the many high-level meetings on the subject over the last few years.[Page 291]
At this point agreement has literally not been reached on the distribution among member countries of the proposed one-third increase in the IMF quotas, which measure shared participation in the rights of governments to borrow from the IMF in case of need and the obligation of governments to lend to the IMF when other governments are judged deserving of assistance. But at this point I believe the differences on this subject have been narrowed sufficiently that I am fairly confident agreement on this aspect can be reached if the wider differences on two others can be overcome. In the quota discussion I have indicated that, in order to make a contribution toward allowing the OPEC country quota to be doubled from about 5% to about 10%, we would recommend to Congress that the U.S. subscribe to less than a third of the new quota increase, in the process reducing our quota share from 22.9% to 21.9%. This offer I think is now judged reasonable by most other countries.
The second issue is one on which I—and I believe almost all other ministers—feel that the French are taking an extreme position. Despite the fact that all major governments are today allowing the foreign exchange market values of their currencies to float to some degree, the French are attempting to insist that the revised IMF Articles of Agreement must state that each government should be obligated, through intervention in the foreign exchange markets or by other means, to maintain the foreign exchange value of its currency within a narrow band around some par value established with the concurrence of the IMF. Deviation from this practice could be made only in extraordinary circumstances, only for a temporary period, and only with the permission of the IMF. My predecessors and I have agreed that governments should collaborate through the IMF to avoid disorderly foreign exchange market conditions, but we have rejected the French position for a number of reasons. First, any prompt attempt to set up a rigid structure of par values in this period of rapid change in international economic affairs would probably backfire and cause disruption and disturbance both to exchange markets and to international business operations. Second, while it is possible that over time the international monetary system may evolve toward par values, the probability or desirability of that evolution is by no means generally agreed, so that it would be premature to attempt to base the revised IMF articles on that presumption. Third, Henry Reuss, who is generally deferred to on the Hill on international monetary matters, has warned us repeatedly against coming to Congress with any amendments to the IMF articles which do not make clear that continued floating of the U.S. dollar is fully legitimate and not subject to any license from the IMF. We have indicated flexibility regarding the exact wording of the exchange rate amendment but have indicated to other governments that we feel they should join with us in attempting to persuade the French to modify [Page 292]their position and, if necessary, should join with us in simply outvoting the French. Success in this effort is not assured but seems probable at this point if a way can be found around the difficulty on a third matter, gold.
The Interim Committee has already agreed that the official international price for gold should be abolished and that the monetary role of gold should be phased down. It is already agreed that governments can sell gold in the market as they see fit, and that ultimately gold should probably have a legal status no different from that of other commodities. It is also agreed that the substantial amount of gold held by the IMF should not be immobilized forever. But there is no agreement on exactly how the IMF gold will be put to use and on what constraints, if any, should be applied to government purchases of gold in the near future.
Publicly the French are still taking what both Arthur and I regard as the extreme position that all IMF gold, about $7 billion, at the official price of $42 per ounce, must be returned promptly to the member governments. We have told the other governments that we have no basic objection in principle to this restitution of gold but that, in view of the strong opposition to it by most governments, including in particular the majority of the LDC governments, the effort at total restitution should be abandoned. Last week in Paris we got the impression the French might now be willing to accept—as I suggest we should be—a German-proposed compromise that involves restituting a part of the IMF gold, using some for trust funds to help selected LDC’s, and setting aside the rest for later decision by an 85% majority. The French also now seem to have come to the point of accepting a rule, which most other governments seem ready to accept, that in future no government would buy gold when the effect would be to increase total gold holdings of all governments combined. This rule applies a global limit on official gold holdings but does not impose separate limits on individual countries operating within the global limit. In addition, the French are willing to agree that no government should trade in gold with the objective of attempting to peg the price of gold. All of these are concessions from the traditional French theological position with respect to gold.
But the French say vehemently that they will never accept two rules proposed by us in addition to the global limit and other rules mentioned above. The proposed additional rules, which I have put forward strongly at Arthur’s urging, would prohibit an individual government from buying gold which would increase its holdings above an initial level—say, 105% of its May, 1975 holdings—unless the gold were being bought from another government which was faced with an emergency need to liquidate some of its gold holdings.[Page 293]
The rules would also prevent a government from buying gold directly from another government unless the gold were being bought from a selling government faced with an emergency need to sell some of its gold holdings or unless the gold were being bought to recover gold which the purchasing government had earlier sold in emergency circumstances.
In rejecting these U.S. proposed rules the French have been supported also by the other European nations. On these particular suggestions it is probably the U.S. which is in an isolated position, and perseverance in insisting that these U.S. proposals be adopted would probably prevent agreement next week, even if—as now seems likely—the French can be brought around on the other points.
My recommendation is that we be willing next week to drop our proposed limitations on gold purchases by individual nations if a satisfactory package in all other respects can be negotiated and if our failure to drop the limitations would be the deciding factor in preventing total agreement.
- First, I think failure of the week’s meeting, for which high hopes have long been held out, would be a very serious blow to our influence abroad, particularly since it would come so soon after the Indo-China tragedy and so soon after we issued in Paris last week all sorts of glowing promises of increased cooperation with the LDC’s.3 It is my impression that the Secretary of State would strongly concur in this judgment.
- Second, I suspect failure in this effort by the finance ministers would undermine the future usefulness of their moderate international forum and would inevitably lead to greater emphasis on other much more politicized meetings such as those of the UN General Assembly, the Producer/Consumer Conference, and the UNCTAD. The U.S. took a leading role in urging establishment of the Interim Committee and the Development Committee and should not now seriously undermine its own struggling offspring.
- Third, I do not believe the proposed individual limits are needed. What difference does it make if some government increases its gold holdings to, say, 125% of its present holdings given the strong possibility that other governments, including the U.S. and also the IMF, [Page 294]will be disposing in the market of far more than that government’s purchases? I agree with Arthur that there probably are some foreign officials who would like to find some loopholes for trying to nudge the system back toward a rigid gold base by encouraging government-to-government transactions in gold, but the danger of that type of thing happening is greater if we don’t make further progress through an agreement which ties down the consensus we have now that some IMF gold should be sold, that governments should not try to peg the price of gold, and that total combined holdings of gold by governments cannot be increased. Moreover, the present time is a favorable time for relaxation of restraints since there appears to be no major government which today has the spare funds and the inclination to add to its gold stock.
- Fourth, failure to conclude an agreement now tying down all the other useful aspects of apparent agreement would also run the risk of evaporation of other important areas of consensus before we could ever get this close to over-all agreement again some day. These other areas of consensus are important to our economic and political interests. They include the quota increase, the introduction of greater flexibility and effectiveness into the IMF exchange rate provisions, and the establishment of an effective permanent policy-level council in the IMF to insure more meaningful collaboration on future international monetary problems which may arise. Agreement on gold and these other matters has been considered, and I am convinced should continue to be considered, an integrated package.
Arthur has suggested that we might try to avoid the blame for a "failure" in the meetings by splitting the package apart, agreeing on the quota increase now, while putting aside the other aspects of amending the Articles to some future time. I doubt whether this approach would work in any event since the French are strongly insisting on a comprehensive package or none at all. The approach would have the disadvantage of giving away our principal bargaining strength, since the other countries are primarily interested in the quota increase and we have been the one primarily interested in the other amendments. Our credibility for the future would also be undermined, since the centerpiece of our position for several years has been the need for a comprehensive package. We need it in part because of the desirability of not approaching the Congress piecemeal, and in part because the other amendments are very desirable steps in the gradual evolution of the monetary system toward a more smoothly adaptable mechanism.
Finally, agreement by the U.S. not to insist on the individual gold limits would not be viewed as weakness or withdrawal by other governments. Their overwhelming view at the moment is impatience with what they regard as the theological squabbling between the U.S. and [Page 295]France. They would receive a U.S./French agreement with great acclaim.
I am sorry to drag you into this degree of detail, but I believe the issues are important and despite months of trying Arthur and I haven’t yet been able to arrive at a fully coincident view. Your advice would be helpful.
- Source: Ford Library, U.S. Council of Economic Advisers Records, Alan Greenspan Files, Box 1, L. William Seidman II. Confidential. Copies were sent to Kissinger, Greenspan, Lynn, and Seidman.↩
- Document 86.↩
- From May 26 to 28, Kissinger and Simon were in Paris attending meetings of the International Energy Agency Governing Board and the Organization for Economic Cooperation and Development Council. For the texts of Kissinger’s statements and informal remarks, as well as the IEA communiqué and the OECD communiqué and declaration, see Department of State Bulletin, June 23, 1975, pp. 837–858.↩