Foreign Relations of the United States, 1977–1980, Volume III, Foreign Economic Policy

226. Memorandum From the Assistant Secretary of the Treasury for International Affairs (Bergsten) to Secretary of the Treasury Miller¹

Washington, August 29, 1979

SUBJECT

• Supplemental Points for EPG—Solomon Speech on International Monetary System, Substitution Account

1. Speech elaborates view on long-term evolution of monetary system in context of increasingly interdependent world.² Two basic elements:

—Adjustment. We support a strong IMF surveillance role in promoting smoothly-functioning balance of payments adjustment process, involving stronger policy coordination.

—Liquidity. We should work toward enhancing the role of SDR in system, reducing system’s reliance on dollar and averting a move to an unstable multiple currency system.

2. Substitution account represents one possible step in liquidity area. Could, over time, contribute to several improvements:

—Provide off-market, non-disruptive means of diversification out of dollars.

—Reduce system’s overwhelming reliance on dollars, and thus our exposure to exchange market pressures from shifts in foreign dollar balances.

—Ultimately, development of SDR as main reserve asset, whose creation would be subject to conscious international decision.

3. Reports of “shift” in U.S. position on substitution account overstated. Current discussions have been going on for nearly a year, with consistent U.S. support.

4. Speech does, however, for first time, a) elaborate broad systemic framework in which we view the substitution account possibility, and b) set out certain basic principles that would have to be incorporated to make such an account acceptable to the U.S. (permanence, wide participation, mutually acceptable financial characteristics, support development of SDR, sharing of any costs).

5. U.S. has an interest in seeing such an account established—on certain conditions—but must not appear as demandeur, or we will not be able to negotiate acceptable conditions. The principles we have set out will ultimately determine the detailed financial conditions.

6. This general approach, and basic principles, have been discussed extensively and agreed in the IMG.³

7. Key decisions to be taken at Belgrade on whether this approach and these principles will be broadly acceptable.⁴ If so, subsequent detailed work by IMF Executive Board. If not, U.S. will at least have shown positive, constructive attitude, leadership role in monetary negotiations.

1. Source: National Archives, RG 56, Office of the Under Secretary of the Treasury for Monetary Affairs, Subject Files of Anthony Solomon, 1977–1980, Box 1, EPG. Confidential. Drafted by Widman. Printed from a copy bearing Bergsten’s stamped initials. The memorandum was forwarded to Solomon under cover of a September 5 note from an unidentified Treasury official, who wrote: “After the press coverage of your Alpbach speech, some of which indicated that this represented a shift in U.S. policy, Stu Eizenstat apparently raised questions about the speech at an EPG meeting last week. Miler apparently indicated that this did not represent a shift in U.S. policy, but he subsequently asked for supplemental briefing on the issue in case it came up again.” (Ibid.)
2. According to IMF historian Boughton, Solomon’s August 27 speech in Alpbach, Austria, constituted the “definitive statement of U.S. support for establishing a substitution account.” (Boughton, Silent Revolution, p. 940) Boughton indicates that a copy of the speech is in the Carter Library, Anthony Solomon Collection, 1977–1980, Box 12, Alpbach Monetary Conference, 8/27/79. A copy was reportedly released in Washington. (“U.S., in Shift, to Weigh Dollar Substitution Plan,” The New York Times, August 28, 1979, p. D1) Solomon sent Miller a more detailed paper on the substitution account under cover of a September 5 memorandum. (Carter Library, Anthony Solomon Collection, 1977–1980, Chronological File, Box 6, 9/79)
3. In a May 17 memorandum to Cooper, Clark reported on a May 10 IMG meeting on the substitution account, during which Solomon explained his support for the initiative. (National Archives, RG 59, Office of the Under Secretary for Economic Affairs, 1978–1980 Files Pertaining to International Monetary Affairs, OECD, Documents, External Research, Etc., Lot 81D145, Box 2, IMG—International Monetary Group)
4. The Interim Committee met in Belgrade on October 1. At the conclusion of the meeting, the Committee announced its agreement that the creation of a substitution account should be given “priority attention.” (“Substitution Fund Set By I.M.F.,” The New York Times, October 2, 1979, p. D15)