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 You are in: Under Secretary for Public Diplomacy and Public Affairs > Bureau of Public Affairs > Bureau of Public Affairs: Office of the Historian > Foreign Relations of the United States > Nixon-Ford Administrations > Volume III
Foreign Relations, 1969-1976, Volume III, Foreign Economic Policy, 1969-1972; International Monetary Policy, 1969-1972
Released by the Office of the Historian
Documents 145-157


145. Editorial Note

The gold communique of March 17, 1968, established the two-tier gold market where monetary gold would be exchanged among official authorities at the official price and the free market would determine the price for all other uses. Monetary authorities would no longer buy gold from the private market, including new production. See Foreign Relations, 1964-1968, volume VIII, Documents 187-191 for background on the creation of the two-tier gold market. 

How gold from South Africa, the largest producer, would be marketed was not settled at the time of the March 1968 communique and was under discussion until resolved in December 1969. In fact, all signatories of the communique and most other members of the IMF eschewed purchases of gold from South Africa but, according to a July 30, 1969, memorandum from T. Page Nelson, Director of the Office of International Gold and Foreign Exchange Operations, to Treasury Under Secretary Volcker, there were at least three exceptions, Portugal, Congo (Kinshasa), and Singapore. Nelson suspected the South Africans had made a vigorous effort to sell gold to monetary authorities and concluded the amount sold, perhaps $80 million, was a very poor showing. This memorandum, documentation on exchanges between Under Secretary Volcker and South African authorities, and a December 9 report to the President from Acting Treasury Secretary Charls Walker entitled "Possible Understanding with South Africa on Handling of Gold" are in the Washington National Records Center, Department of the Treasury, Files of Under Secretaries Deming and Volcker: FRC 56 79 14, Subject Files, South African Gold.

During 1969 there was an active exchange of cables between Washington and the Embassy in Kinshasa with instructions for the Embassy to protest Congolese purchases of South African gold with Congo's Central Bank Governor Ndele and, on at least one occasion, President Mobutu. This exchange of cables and related memoranda are in the National Archives, RG 59, Central Files 1967-69, FN 19, FN 17, FN 10, and FN 10 IMF. Some of the outgoing messages were drafted in the Treasury Department and forwarded to the State Department for clearance and transmission; others were drafted in State and cleared with Treasury. 

Early in the exchange Washington agencies noted, for Ndele's information, that the purchase by the Congo Central Bank was in violation of the U.S. understanding of Congo's intentions and was upsetting the international monetary system. In addition, Congolese gold purchases might cause problems elsewhere in the bilateral relationship as Congress, questioning the propriety of a less-developed country holding its reserves in a non-earning asset, had sometimes considered amendments to the Foreign Assistance Act prohibiting aid to countries buying monetary gold. Since Congo had purchased the South African gold at $35 per ounce and the free market was then at $42, the Embassy was instructed to request that Ndele resell that gold in the free market, reap the profit, and be in conformity with the communique. (Telegram 17644 to Kinshasa, February 4, 1969; ibid., FN 19)

In their rebuttal to Ndele's negative response to the Embassy's initial demarche, Washington agencies explained on February 19, in telegram 26264 to Kinshasa, that the position on purchase of newly-mined gold was not specifically spelled out in the March 17, 1968, communique because Canada and Switzerland had been unclear about their legal authority to refuse to purchase. Shortly after the two-tier system was established, however, four of the largest gold-producing countries after South Africa (Canada, the United States, Australia, and Japan) took steps to have their new production go into the free market and not into monetary reserves. Washington agencies pointed out that the signatories recognized that the two-tier system could not operate effectively if the world's largest gold producer could channel its output to either market depending on which would give it the greatest benefit. In support of that point they quoted from an August 1968 speech, which was not further identified, by Bundesbank Director Otmar Emminger: 

"At present it seems to be South Africa's main objective to obtain the right to sell gold at the fixed official price to the IMF at its own discretion. If this privilege were granted to South Africa it could decide at will what share of its newly mined gold to sell on the free market and what share at the fixed official price. As a monopolist it could thus reap the highest possible profit. Much more important, and objectionable from a monetary point of view, would be the possibility for South Africa, by manipulating its sales of gold on the free market in an erratic way, to keep the gold market in a state of constant unrest and thus make the gold price a subject of permanent discussion and speculation." (Ibid.)

The exchange between the Embassy and Ndele continued amid reports of additional Congolese gold purchases, and at one point it seemed agreement might be reached for Congo to sell its South African gold purchased after March 17, 1968, on the free market and replace that gold with monetary gold from the United States. 

On the fringes of the 1969 annual meetings of the IMF and the IBRD in Washington, Ndele met with Under Secretary Paul Volcker and Federal Reserve Board Chairman William McChesney Martin on October 1. According to the report of this meeting, Ndele told Volcker and Martin that he thought he was doing the United States a favor by not asking to buy U.S. gold in view of the pressure France and other governments were applying to U.S. gold reserves. Regarding the U.S. suggestion that Congo sell on the open market gold already purchased from South Africa and then purchase an equal amount from the United States, Ndele said he could not do that because he had given his word to the South Africans. Going back on his word, even to South Africans, would blot his personal integrity in international banking circles. Nonetheless Ndele said that he had no special interest in South Africa and would much prefer dealing with friends as long as he could be assured of having future gold needs met under the same conditions. Volcker said the United States would be happy to consult with Congo about future gold requirements, including buying and selling arrangements, provided Congo agreed to operate within the limits set by the two-tier system with respect to purchases from South Africa. Ndele finally agreed, and following a review of Congolese gold policy, during which Ndele revealed that gold was 40 percent of Congolese reserves, Ndele ended the discussion saying at that point he had no intention of purchasing more gold. (Telegram 170804 to Kinshasa, October 8; ibid., FN 17)

As discussions with South African officials on marketing new production and sales from South African reserves and the dialogue with the Congolese were ongoing during 1969, the free market price of gold declined, causing concern in some official circles that it might fall below the official monetary price of $35 per ounce. In early December 1969 Treasury Secretary Kennedy, accompanied by Under Secretary Volcker, traveled to Europe as part of the U.S. delegation to the December 4-5 NATO Ministerial meeting. They met with Belgian and European Commission officials in Brussels and, on side trips, Finance Ministers and Central Bank Governors in London, Paris, Bonn, The Hague, and Rome (Volcker only). The gold price and the marketing of South African gold featured prominently in their consultations. Memoranda of those conversations are in the Washington National Records Center, Department of the Treasury, Secretary's Memos/Correspondence: FRC 56 74 7, Memorandum of Conversations--1969.

Volcker met with South African officials in Rome on December 13-14, and the agreement they reached was ratified by the IMF on December 30. In effect, whenever the gold price was above $35, South Africa would market gold on the free market in amounts needed to meet its need for foreign exchange, and any additional production would be added to South African reserves. When the price was at $35 or below, South Africa would market newly-mined gold to the IMF at $35 to meet its foreign exchange needs, and if new production was less than adequate to meet current foreign exchange requirements, South Africa would be permitted to sell the IMF gold accumulated in South African reserves since March 17, 1968. See Margaret de Vries, The International Monetary Fund 1966-1971, Volume I: Narrative, pages 409-415, for the IMF's history of the resolution of the South African gold problem.

A number of U.S. Government, foreign government, and IMF papers on South African gold are also in the Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30.


146. Memorandum of Conversation/1/

Camp David, Maryland, May 3-5, 1970.

/1/Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, France. Confidential. Drafted by McGrew and approved by Volcker on May 20. Copies were distributed within Treasury and to the Executive Secretariat at State, Chairman Burns at the Federal Reserve, and Chairman McCracken at the Council of Economic Advisers.


Valery Giscard d'Estaing, Minister of Economy and Finance
Olivier Wormser, Governor of the Bank of France
Rene Larre, Director of the Treasury
Georges Plescoff, Finance Minister, French Embassy
Claude Pierre-Brossolette, Special Assistant to Giscard d'Estaing

United States
Secretary Kennedy
Under Secretary Volcker
Assistant Secretary Petty
Deputy Under Secretary MacLaury
Donald J. McGrew, U.S. Treasury Representative, Paris.

Part I: French and U.S. Economic Prospects
Part II: Interest Rates
Part III: Outlook for International Payments Equilibrium
Part IV: Future of the International Monetary System
Part V: European Monetary Union
Part VI: SDR Link to Development Finance and Use
Part VII: IDA Replenishment
Part VIII: Bank Secrecy
Part IX: Approval by Under Secretary Volcker

[Omitted here are Parts I and II.]

III. Outlook for International Payments Equilibrium

Secretary Kennedy suggested that Mr. Volcker should lead off on this topic.

Mr. Volcker said that in the first quarter of 1970 our official settlements deficit was about $3 billion. This resulted partly from a reversal of year-end window dressing by U.S. corporations to meet the direct investment control requirements. About one-third of the deficit was accounted for by a reduction of U.S. bank borrowing from overseas branches. The liquidity deficit in the first quarter was around $2 billion. It also was influenced by the window dressing operations. A better picture is given by averaging the fourth and first quarters. This gives an official settlements deficit of just over $1 billion per quarter and a liquidity deficit of several hundred million dollars.

In other words, we got what we had anticipated. With the downward movement of U.S. interest rates, there was a reversal of capital flows. This would continue if there were to be a continued downward movement in our rates. However, with the recent rise in U.S. interest rates there has been no further drop of U.S. bank borrowings from overseas branches. In fact, there has been some increase. The slowdown in the U.S. economy has had the natural result of improving our trade balance. The trade surplus for the first quarter was about $500 million, or an annual rate of $2 billion. Repayment of foreign bank loans also helped our situation in this period.

Looking further ahead, we want to see an increase in our trade balance over the next several years, so as to restore the level of the mid-1960's. This together with gains on remittances of profits should lead to an improvement of the current account. While the capital accounts have been abnormally favorable in the recent past, we would not expect them to be so adverse as they were in the early 1960's. The development of foreign capital markets means that there should be less reliance on the American market. The narrowing of the interest rate spread between the U.S. and the rest of the world works in the same direction. We do, however, expect a chronic deficit on the capital and aid accounts.

In summary, our long-term outlook is for a stronger trade position and current account, with some capital outflow but less than in the early 1960's. We have no illusion that this objective can be achieved this year or next. We will continue to have an underlying deficit, and the question is whether or not it will be aggravated by abnormal outflows of short-term money.

Our basic accounts are showing an improvement. Whether or not this will continue depends upon what happens abroad. All of the major countries except Canada want to run current account surpluses. Even Canada wants to move from deficit to equilibrium. Japan, the other country which affects us most, is moving from equilibrium to a large surplus. European countries are also seeking to strengthen their position.

The fundamental question is whether or not we can restore our traditional competitive position by better price policies than elsewhere. In 1959 our trade position was similar to the present situation. Some five years later we have built our trade surplus back up to $6.5 billion. However, that was a period of underemployment of U.S. resources, and the prospects are admittedly less favorable today.

We do not want to restore our trade position through the use of import restrictions, and the President is determined to resist pressures in the U.S. for such restrictions. We are concentrating on two areas to help improve our trade balance:

1. In the field of export credit, we have traditionally placed great reliance on the fact that our interest rates were lower than those prevailing elsewhere. With the present high rates in the United States this advantage has been lost. We are therefore providing more budget money to the Export-Import Bank, which is also undertaking to liberalize its lending policies.

2. During his visit to Paris last December, Secretary Kennedy mentioned our concern about the effect on our export position, stemming from the differences between the U.S. tax system and foreign tax systems. At that time we indicated that we were studying the possibility of providing the same facility for exports as we give to a U.S. subsidiary manufacturing abroad. This means taxing the profits only when they are remitted to the parent company. We have now developed a concrete proposal in this regard, and we hope it will help shift the focus of our producers somewhat from the domestic to the export market. This is a chronic problem for us. U.S. producers have tended to look upon the export market as marginal, whereas in many European countries it is the market towards which producers make their major effort. The proposed measure is designed to bring about a change in U.S. business psychology, and in the short run this will certainly be as important as any real results.

Our very heavy military expenditures abroad are also an important element in our balance of payments outlook. They have tended to increase in recent years because of rising costs and the Vietnam effort. Even if we succeed in disengaging ourselves from Vietnam, there will still be outlays of about $1.5 billion a year in Europe, mostly in Germany. It would be our hope to get some better offset to that than we have had in the past.

Secretary Kennedy said he had had talks on these matters with a number of countries. Take the case of Japan. They have become a world economic power, but their people have not yet grasped the implications of the change in their position. Whereas before, our trade with Japan was in equilibrium or even in surplus, it has now moved into deficit. There are a number of problem areas. In the field of electronics, they have taken the entire U.S. market for radios and most of the market for black and white T.V. sets. They are even moving into the colored T.V. market. We find that their producers follow different pricing policies as regards the domestic and export markets. We have emphasized to them the difficulties of resisting pressures in the U.S. for quantitative restrictions in the face of such practices.

The point is that a country can't have closed markets at home and expect to enjoy open markets elsewhere. Capital and equity markets should be open. Similar considerations apply in the case of development aid. With respect to the Asian Development Bank, we are keeping our share equal to that of Japan rather than taking the lion's share.

Then look at the question of defense expenditures. Japan has virtually no defense budget. Likewise defense expenditures in Europe are much smaller proportionately than those of the U.S. We are working on this matter in NATO, but it is an uphill struggle. It is always difficult to bring about a shift, when that means budget increases for others.

In the matter of trade, as Mr. Volcker said, U.S. producers are oriented towards the domestic market. Their approach to foreign markets has been to put plants abroad instead of direct selling of U.S. products. We have done quite of bit of work during the past year to find some tax techniques which would encourage a shift in attitudes. However, this is not much of an answer if other countries do better at controlling inflation than the U.S. We recognize that success on this front is fundamental.

In conclusion, it is simply not possible for all countries to realize surpluses simultaneously. If all industrial countries are in surplus, it would simply have to come out of the hide of the developing countries.

Mr. Giscard d'Estaing asked whether or not the U.S. authorities regarded the level of U.S. prices as being competitive.

Secretary Kennedy said the situation varied from product to product. Our prices certainly are competitive in the case of sophisticated products and primary products. We were less competitive in many other lines. Agriculture gives us great concern, for as the EC moves to the CAP, high prices in Europe affect our agricultural exports. If the U.K. enters the Common Market, there would be a big problem for us were we to lose the British market for agricultural commodities.

Mr. Volcker said our agricultural exports were down slightly over the past five years. Japan is a good example. They have insisted on achieving self-sufficiency in rice, even though their price is about double the world price. In other commodity areas our exports have held up well. The root of our trade account problem has been the growth of imports.

Mr. Giscard d'Estaing said the American people seem to think that the U.S. trade problem is with the Common Market. The figures show the contrary, however. Between 1958 and 1969 U.S. exports increased by 118 percent to the rest of the world, 145 percent to EFTA, and 182 percent to the EC.

Secretary Kennedy said he was sure that this attitude was not prevalent in U.S. official circles. He had already cited Canada and Japan as major problem areas for us in the trade field. Of course, there were a few dramatic cases which had had a considerable influence on public attitudes. For example, when our poultry exporters were shut out of the EC market, this got considerable publicity and certainly was an irritant. However, we always supported a strong community with the idea that there would be an increase in demand in which all would share. This definitely remains our policy.

Mr. Volcker pointed out that in recent years trade in general had shown substantial increases. This particularly was the case as regards U.S. imports, including U.S. imports from the Common Market.

Mr. Giscard d'Estaing said that was the result of what had been happening in the U.S. and could scarcely be blamed upon the Common Market.

Mr. Larre asked if we had in mind a target surplus for our current account.

Mr. Volcker said we did not, but we certainly hoped that it would grow.

Mr. Petty said that it would, of course, not be one percent of GNP as in Japan.

Mr. Plescoff said he presumed we would be happy with one-half percent of GNP.

Mr. Volcker said that was true for the moment, but he not sure it would be enough over the longer run.

Mr. Larre asked what were our estimates of the current account for 1970.

Mr. Volcker said we were projecting a trade surplus of $2 billion or $2.5 billion and a surplus on goods and services of $3 billion. This would leave us with a current account surplus of $1.5 or $1.6 billion.

Mr. Petty said, with respect to the Minister's question, that studies showed demand for our exports to be relatively inelastic. Secondly, U.S. opinion certainly does not attribute all of our problems to the Common Market. It is recognized that part of the difficulty stems from our inflation and from the Japanese problem.

Mr. Volcker said that over the last five years there had been a substantial deterioration of the U.S. trade position with Japan, Canada, Germany and Italy. With other countries the total had been steady, and there had been some gains.

Mr. MacLaury said that this pattern did not suggest that the dollar was overvalued.

Mr. Petty said that the problem with Japan arose from the restrictions which they maintained against outsiders and that in the case of Canada the automobile agreement had an asymmetrical effect, because U.S. cars imported into Canada were still subject to a 15 percent tariff.

Secretary Kennedy said there was a feeling of concern in Congress, which he shared, about the effect on trade of the differences between the U.S. and European tax systems. We have been studying what we might do in this regard, but it is hard to make a change in our system, which relies heavily on income taxes. Some people have suggested that we ought to introduce a value-added tax and some people think that we should adopt border taxes. However, we have not taken any decisions on these matters. So far the only proposal to be adopted is the DISC proposal.

Mr. Giscard d'Estaing said the value-added tax had considerable merits as a substitute for an ordinary sales tax. However, it was complicated and lent itself to fraud.

Secretary Kennedy expressed surprise at the Minister's statement. He said that one of the arguments put forward by U.S. proponents of the tax was that it was difficult to evade.

Mr. Giscard d'Estaing said that was true for large industrial corporations but not in a number of other areas. He then referred to the situation of several years ago when the U.S. authorities repeatedly predicted that the deficit would be over in a year or so. At that time the problem was expressed in terms of much narrower margins. Now, however, the figures we hear are much higher, $5 billion or $10 billion. And in point of fact the U.S. had a surplus last year. Is there any way in which the problem could be put that would make it more understandable?

Mr. Volcker said the question raised by the Minister was a complicated and difficult one. There is no easy answer. It is true we had a surplus last year and the year before, but that surplus was unsatisfactory. It resulted from inflows of short-term money. It was interesting to see the problems which that surplus created for the rest of the world. The result was that we drew reserves from the rest of the world, and there were many complaints in WP-3 that our surplus was too large.

How should the U.S. basic position be measured? It is not easy to say. We should think in terms of a current account surplus, but we cannot say exactly how large this surplus should be beyond saying several billion dollars more than in the past. We had an overall surplus in 1968, but in fact our basic accounts were deteriorating. Last year we held our own, and this year we will show some improvement. Over a period of years official dollar holdings should not be increasing, and this will be a valid position if we create enough liquidity in other forms. Neither the liquidity nor the official settlements basis provides a figure that is understandable to the general public. We need to do much more work on this matter.

Mr. Giscard d'Estaing said it was important for the world to know where the U.S. was going. He hoped the U.S. authorities could find a meaningful balance of payments presentation.

Mr. Volcker said he thought attention should be focused on the current account. However, with a current account presentation it was important to keep in mind that equilibrium was not zero but a big positive number.

Secretary Kennedy said that we would have to spend a lot more time on this question.

Mr. Giscard d'Estaing said he would like to make a few remarks about the French balance of payments outlook. The trade account now shows a small surplus. This state of affairs will probably continue for several months but change later in the year. The swing to exports since the devaluation seems to have been abnormally high, and it would be reasonable to expect some downward correction. Other items will probably be about in balance for 1970. The present French projection is for an overall surplus of about $1 billion, or perhaps a little more, in 1970. However, if the present rate of foreign exchange inflows continues, the figure could turn out to be much higher.

For the next five years, the target is to keep a small trade surplus and to cut the deficit in services, mainly by improving the insurance and shipping accounts. The result would be a surplus of $500 million to $700 million per year in order to permit the outward flow of French investments. As Secretary Kennedy and Mr. Volcker remarked, France, like all other countries, is looking for a surplus.

Mr. Volcker said that with the devaluation of the French franc and the revaluation of the Deutschemark, financial opinion seems to feel that France has restored a strong competitive position.

Mr. Giscard d'Estaing said that French exporters generally agree with this assessment. In his talks with them, for virtually the first time, he hears no complaints about their competitive position.

IV. Future of the International Monetary System

Secretary Kennedy referred to the work which the IMF has been doing on the question of limited exchange flexibility. He commented that the techniques under consideration would involve no wide changes in the present exchange rate system. One matter which would have to be decided was whether these techniques could and should be put into effect without an amendment of the present Articles, or whether such an amendment was necessary or desirable. He asked Mr. Volcker to present the U.S. view of the matter.

Mr. Volcker recalled that the proposals under consideration involved widening exchange margins somewhat, the possibility of small and frequent changes in exchange parities, and facilitating transitional floating rates for countries moving to a new parity. A fourth possibility, some method of formal Fund approval for the so-called "trotting" rate systems, had found no support outside of the countries resorting to such techniques. In the G-10 Deputies Meeting in Paris last month there seemed to be fairly wide agreement that the first three possibilities might be permitted on the basis of the present Articles. The question is whether there should be an amendment to permit them more explicitly. Another point is whether or not the Fund can develop criteria for determining when small and frequent changes in parity might be appropriate. This is not something which can be solved quickly, but in the U.S. view it deserves further study.

It is important to recognize that we are not talking about freely floating rates or highly automatic systems. The initiative for rate changes would remain with the countries concerned, subject, of course, to Fund approval. Alternatively, the Fund might give a country a general authorization to move its parity within a limited range. Thus the proposals do not involve any change in fundamentals but they do involve a change in attitudes. The idea would be to try to develop a less rigid attitude toward exchange rate changes. Of course, no one can tell how much these proposals would be used if they were adopted. If they were not used very much, the result would be not much change in the system. The change would be greater if more use were made of them. In any case, it seems to us that there would be a net gain if the matter of exchange rate adjustments could be made less political.

The timetable calls for a report by the Fund in July or early August, which would spell out the three proposals for which there is support and make clear that the fourth is excluded. This would be a chance to state conclusions on limited flexibility modestly but positively. Then it would have to be decided whether the proposals would be given effect through amendment of the Articles or through a decision by the Executive Board to provide guidance for member countries on limited parity changes. The matter of amendment is in the first instance one of symbolic importance, but if it led to greater use of the facilities, it could have substantive implications for the future.

Another meeting of the Deputies is scheduled for early July. This would give them a chance to take up any hard core questions on the matter, so that the IMF Board could finish its report by the end of that month. The report would be transmitted to the Governors, and would be the subject of a G-10 Ministerial Meeting in Brussels on Saturday, September 19. Then the Ministers would be in a position to voice their opinions on the question at the IMF Meeting in Copenhagen the following week. Presumably the major issue in Brussels would be whether to undertake an amendment of the Articles or not.

Mr. Larre commented as follows regarding the French views:

1. It is not clear whether widening exchange margins would discourage or encourage speculation. Both official and academic opinion are about evenly divided. The EC has a special interest in this particular matter. The Six have the feeling that if they could reach a certain degree of monetary union, their currencies might fluctuate as a bloc against the dollar. In the interim they fear that a facility for widening exchange margins could work havoc with the CAP and with their efforts towards economic union. They realize that the facility would be permissive, but if there were troubles within the EC, some countries might wish to make use of the facility with resulting tensions. Moreover, some countries might seek to make use of the facility to gain an advantage for trade purposes.

2. The present Articles are no obstacle to putting into effect the proposal for small and frequent changes in parity. For years the Fund pressed the U.K., Germany, Japan, the Netherlands, and others, on the matter of exchange rates. The Articles did not prevent changes from being made. The real obstacle was internal political problems in the countries in question. In the French view there would be no harm in saying that there can be small and frequent parity changes.

3. There seems to be more substance to the proposal for a transitional floating rate. We saw in the German case that it was useful. However, it was accomplished with the Articles as they are. The Fund could say that such transitional arrangements would be encouraged, provided they were kept within certain limits and did not upset the general exchange rate situation.

4. In summary, the French authorities see no need for a change in the Articles in connection with the limited flexibility exercise. They do not share the view that it would be useful to dramatize the issue through amendment of the Articles.

Mr. Volcker recalled that the EC had been discussing narrowing intra-Community margins within the framework of the present system. If they solved the technical problems, which are admittedly difficult, it would appear that they could also do so if there were a facility for widening margins generally.

Mr. Larre said that the technical problem could be handled. But there is also an economic problem: What will be the level of the six currencies in relation to the rest of the world? With harder and softer currencies within the Six, the level chosen will inevitably place strain on some of those currencies as against others. Such strain would not be welcome to the EC.

Mr. Giscard d'Estaing said that obviously when countries decide to achieve common monetary policies, they accept the political consequences. However, if there is a widening of margins in the rest of the world and if the EC maintains margins or narrows them within the Six, and if there is only a halfhearted monetary union, there will be difficulties. It does not seem likely that there will be a common monetary policy very soon. This is mainly due to the troubles in Italy. There is also the matter of the U.K. They have said that they are ready to take a view similar to that of the EC and not open the margins. Thus the technical and political aspects are mixed together.

Mr. Volcker said it was clear that the proposal for wider margins was not of much interest if neither the Common Market nor the U.K. wanted to make use of it. That left nobody.

Mr. Giscard d'Estaing said it left the U.S.

Mr. Volcker said the U.S. in effect maintained no margins. Our exchange rate is the result of what the others do. With the U.K., the Common Market, and Japan out of the wider margin proposal there was no important country left.

However, the proposal took on greater interest in combination with the proposal for small and frequent parity changes. That proposal also appears to create difficulties for the Common Market. However, if there are no common policies for a number of years or for as long as a decade, it must be assumed that there will be parity changes. With the high degree of discipline they will have, the Six may be one group that would be able to make a crawling peg system work fairly well, but there is a philosophical problem. The crawling peg seems to run in the opposite sense to the EC objective of fixed parities. It does not offer the same incentive to harmonization of policies. It is hard to see how this philosophical problem can be solved.

Mr. Giscard d'Estaing said the two recent rate changes within the EC had greatly disturbed the Common Market. Admittedly, the disturbance might have been less if the magnitude of the changes had been smaller.

Over the next five or ten years the EC will be moving towards fixed parities, and this will take the monetary variable out of the system. It is true that with no coordinated policies, as now is the case, events could force a substantial parity change. The remaining problem is Italy, and that is almost purely a political problem. Who could forecast the Italian outlook for the next ten years? For the EC members, a change of 2 or 3 percent per year does not seem a very valuable tool. The normal aim of economic policy is to accommodate adjustments of 2 or 3 percent a year. For trade and the common farm prices it is much easier to have a fixed parity. Therefore, the EC has to keep open the possibility that there may be one major rate adjustment, but they have no interest in small parity changes. This was the view expressed at the last EC Finance Ministers Meeting in Paris.

As for the rest of the world, exchange rate changes have been delayed too long in the past with bad results. However, France does not want a system where currencies move against one immovable currency: the dollar. In the recent Deputies Meeting this was the U.S. thesis, and it is just not acceptable to France. The French authorities recognize that it is often difficult to determine whether an imbalance is the responsibility of the deficit or the surplus country. However, if as in 1968 the imbalance is clearly due to the U.S., France would not accept that the deficit situation be dealt with by moving currencies against the dollar.

France does not want its exchange rate always being corrected to keep French products in an under-competitive position. If they have an abnormally large surplus because they had followed policies that were too deflationary, of course it would be up to them to revalue. But if their policies and payments position are normal, and if the imbalance is created by inflationary demand in the U.S., it would be unfair to expect France to cut its surplus by revaluation.

The French authorities want to know whether the U.S. stands by the basic principle that it is up to the country where the imbalance arises to adjust, either through its fiscal and monetary policies or through an exchange rate change. If this principle is accepted, then we can study ways in which the change might be facilitated--for example, the transitional floating rate. However, this does not seem to be Mr. Volcker's point of view. His ideas are very plausible, but France will not accept the proposition that in a system with only one reserve currency all parities have to be corrected to make the system function.

Secretary Kennedy asked how, with such a position, there would be a revaluation. Why with their good record would the Germans ever revalue? In such a world there could only be devaluations by countries said to be causing the imbalances. Why should countries ever revalue?

Mr. Larre said the reason would be to protect themselves, not to relieve others of the necessity to devalue.

Mr. Giscard d'Estaing said he recognized it was difficult to say where the responsibility for imbalances lay. However, during the last 18 months the growth of European exports had been due more to the U.S. inflation than to the economic position of the European countries. In such a case it was clear where the responsibility lay. Or take the French situation. If there were reserve gains due to hot money, France would look like a surplus country and would have to revalue.

Mr. Volcker said that was not correct. Whether or not to revalue would be a decision for France. If the reserve gains resulted from inflows of hot money there would be no reason to revalue. On the other hand, the French authorities might want to revalue if the French competitive position was strengthening and the rise of exports was creating a danger of inflation.

Mr. Larre said that a rate change of this kind would be acceptable under the present Articles.

Mr. Giscard d'Estaing asked what was new in the limited flexibility proposals.

Mr. Volcker said that the present Fund Articles specified that a rate change could be made only to correct a fundamental disequilibrium. A change of one or two percent a year could not be called a fundamental disequilibrium. Take the German case. They expect to achieve a better price performance over time than other countries. In that situation it would be better not to let the gap accumulate. It would be better to make changes of one or two percent a year. Such a change could be made in the first year, and then if the price performance was not so good in the following year, the rate could be held. This could be a desirable option for some countries.

Mr. Giscard d'Estaing referred to the argument that the proposal for small and frequent parity changes would discourage speculation. It seemed to him that, on the contrary, the speculators would come to expect small and frequent changes, and speculation would thus be encouraged. At the last IMF meeting the French delegation said there could be a study of wider margins, but they are reluctant, for general philosophical reasons, about the proposal for small and frequent parity charges.

Mr. Volcker said that was why the two proposals were in a single package. The wider margins would tend to offset any encouragement given to speculation by the technique of small and frequent parity changes.

Governor Wormser said that in his view the present Articles gave latitude to put into effect all the proposals. He also felt an amendment would have to be symmetrical to allow for revaluation as well as devaluation. However, the U.S. seems to be shifting the emphasis. The principle laid down at Bretton Woods was that fixed parities should be defended to the end. The idea was that the national economy and the level of prices should be adapted to fixed parities through the adjustment process. Such a process will always be painful.

An amendment on limited flexibility would lead countries to give up the adjustment process. It would offer them another way out of their difficulties. Henceforth they could adjust parities to their prices. This would be a very serious change. It would destroy the forces against a permanent system of devaluation. When Mr. Giscard d'Estaing devalued the franc in 1969, he also put into effect stringent adjustment policies. What would be the behavior of a Finance Minister ten years hence where parity changes had become the habit? These proposals for limited flexibility are very dangerous ground.

Secretary Kennedy said the discussion had been very helpful. It was the clearest exposition he had heard of the doubts about the limited flexibility proposals. The French authorities had some reservations on the matter of amendment, and not a closed mind to the idea of small and frequent parity changes. Perhaps this would do it.

Mr. Volcker said that on the matter of symmetry the U.S. certainly agreed that the limited flexibility techniques should not be asymmetrical. On the other hand, we had the feeling that the present system worked asymmetrically against us. Countries that are forced to the wall do devalue. But a country with a good performance rarely revalues. If this could be changed, it would be a net gain to get rid of the devaluation bias against the dollar. Mr. Giscard d'Estaing asked why an exception was made for the U.S. as regards the limited flexibility proposals.

Mr. Volcker said that the U.S. can change the price of gold but it cannot change its exchange rate. That can only be done through the decision of others.

Mr. Giscard d'Estaing asked why there could not be small and frequent changes in the price of gold.

Mr. Petty referred to the possibility that the U.S. economic performance might be better than other countries. He asked whether in this hypothesis the Minister would be willing to see the dollar price of gold crawl downward.

Mr. Giscard d'Estaing said he did not see why not.

Mr. Volcker said we should be careful not to confuse the question of gold price and the question of exchange rates.

Mr. Larre said that technically the devaluation of the franc last August was a change in the franc price of gold.

Mr. Volcker said that if other countries had followed France by increasing the price of gold in their currencies, France would have had to devalue all over again.

Mr. Larre said that if the U.S. felt the problem of the dollar was a matter for discussion in the G-10, that would be all right with France. However, he presumed that U.S. did not want such a discussion.

Secretary Kennedy said that a change in the price of gold would require Congressional action. There was absolutely no doubt on that score. If the objective was to upset markets this would certainly be an effective way to do it, for Congressional action would require considerable time. Indeed, a proposal for a major change in the gold price could well lead Congress to impeach the President. This was less an economic than psychological and emotional matter.

Mr. Giscard d'Estaing said that if these limited improvements are intended to make for easier rate changes and if there is no need for amendment of the Articles, that could be a matter of practical discussion. But the U.S. presentation evokes another atmosphere. It seems to involve a fundamental change from Bretton Woods. If there is an intention to depart from support of the adjustment process, it ought to be presented as such.

Mr. Volcker said these proposals were not regarded as a great solution for the U.S. competitive position. We couldn't stand repeated revaluations against the dollar. The proposals would be helpful to us directly if they squeezed out the devaluation bias in the present system, but they stand or fall on whether they could help the system as a whole in terms of speculation and in terms of the adjustment process.

[Omitted here is Part V.]

VI. SDR Link to Development Finance and Use of SDR in Lieu of Gold

Secretary Kennedy referred to the proposal for using SDRs to provide financing for economic development. Our view has been that it is premature to consider such a link. We have felt that it was better first to get SDRs established as a new supplement to international reserves. Therefore, we have taken the position that there should be no action now on the link proposal and perhaps not even in the future.

Mr. Volcker said that we are committed to the idea of amending the IMF Articles at some future date to permit the use of SDRs as well as gold in payment of IMF quota subscriptions. For us the question was one of timing.

Secretary Kennedy said that Congressman Reuss has been pushing us very hard on this question. At the time of the SDR legislation he wanted to introduce a provision that would have required us to take SDRs instead of gold.

Mr. Volcker said that he thought there was a consensus for such an amendment and that it ought to be done at some convenient time prior to the next increase in Fund quotas. This change would make it possible to avoid gold payments to the Fund and the problem of mitigation. 

On the matter of the SDR link to development financing, the proposal has been that this should be studied in an appropriate international forum. We are reluctant to get into such a discussion with a large group of developing countries at this time for fear of where it might lead. However, when this matter comes up in international meetings, we have sometimes felt that we were the only country resisting the idea of a study. If the French authorities agree with our position, we hope they will instruct their delegations to support us.

Mr. Larre said the French feel they have a good control over their delegations. The U.S. may be sure that it is not alone in opposing discussion. As a matter of fact, their delegations have sometimes reported to them the fear that the U.S. delegation would be the one to give ground on this point.

VII. IDA Replenishment

Secretary Kennedy said he had talked recently with Mr. McNamara, who may also have talked to the Minister. He would like to ask Mr. Petty to make a few comments on where the problem stood.

Mr. Petty said that at the recent meeting in Vienna Mr. de Larosiere had made an excellent presentation of the special problems confronting France because of its large aid program as a percentage of GNP and because of the difference between its share in IDA and its voting rights in the IBRD. However, it would be difficult to achieve a $1 billion replenishment if the final French position were limited to an annual French budgetary expenditure of $40 billion. Perhaps the way out of the difficulty would be for France to take a selective increase in its IBRD capital subscription and for the increase in its IDA contribution to be limited to 90 or 100 percent compared to the increase of 150 percent which other countries are accepting. Such an increase for France would greatly help us to reach the replenishment target. A $1 billion replenishment would mean more IDA money for the franc area countries, and this would rebound to the benefit of France.

Secretary Kennedy said that another possibility would be to do something on the timing of the French payments. They would not necessarily have to be the same amount each year.

Mr. Giscard d'Estaing said the matter of IDA replenishment was discussed at the last meeting of the Common Market Finance Ministers. Mr. Schiller proposed that the Six support a level of $500 million, and the others decided to accept his proposal. Subsequently, the French had heard at Vienna that the Germans had moved to support a higher figure. The Ministers will meet again at the end of the month. If this report about the change in the German position is confirmed, the Ministers from the other EC countries will have to decide what position they should take.

Mr. Petty said that Italy had now indicated support for the $1 billion figure, and the Netherlands had confirmed their support of that level of replenishment. The Belgians had not yet taken a decision. The Japanese said they could support $1 billion if all Part I countries did. We pointed out to the Japanese that the French had a unique position, and they said they recognized this. Therefore, the outcome turns on what the French and the Germans do.

Secretary Kennedy said we could not settle the matter today. However, we were getting close to an agreement. The U.S. has supported the $1 billion figure because of our feeling that it was important to have a large volume of aid through multilateral channels. Our purpose in raising the question was to ask the French to think about what they could do to help us reach a satisfactory agreement.

[Omitted here are Parts VIII and IX.]


147. Editorial Note

On May 31, 1970, Canada floated the Canadian dollar, in large part because of large capital inflows and concerns about inflationary consequences. Secretary Kennedy informed President Nixon of the float in a May 31 memorandum. (National Archives, Nixon Presidential Materials, NSC Files, Country Files--Europe, Box 670, Canada, Volume II 3/70-8/71) On June 5 Acting Secretary of the Treasury Charls Walker sent a follow-up memorandum to the President informing him that exchange markets were settled and the Canadian dollar was now trading about 5 percent above its previous par value. Walker debunked suspicions that the United States may have influenced the Canadians to float. (Ibid.)

Foreign exchange markets were otherwise relatively quiet following the major currency adjustments in 1969, and remained so until the spring of 1971. During this time U.S. policymakers' concerns with international monetary reform focused on limited exchange rate flexibility. In January 1970 the Department of State sent an airgram to the Embassies and Consulates in major financial centers and industrial countries, as well as the Missions to the OECD and the European Community, informing them the United States fully supported discussion of limited exchange rate flexibility in the IMF. The addressees were cautioned, however, that the United States had no fixed views on what the outcome of the discussions should be and was not seeking systematically to initiate bilateral discussions at that time. The airgram then provided extensive background material addressees could use sparingly to underscore U.S. interest in the subject, but requested that specific issues or technical points raised by host country officials be referred to Washington for reply. (CA-279, January 16, 1970; National Archives, RG 59, Central Files 1970-73, FN 10-1)

On February 25 U.S. Executive Director Dale made a statement in the IMF Board setting out five areas in which the United States thought efforts should be concentrated: somewhat wider bands, flexible authority to depart from generally applicable rules of the game, the concept of fundamental disequilibrium, upward and downward bias in the system, and presumptive criteria for changes in exchange rates. Dale said he entered the discussions "with the view that rate changes should not be the only--and perhaps seldom the primary--element of the adjustment process, but that governments should consider exchange rate adjustment in appropriate circumstances as an entirely respectable and useful policy measure." Dale then elaborated on each of the five areas, without taking a position, and concluded by saying that the United States expected to benefit from the views of other Fund members. The full text of Dale's statement was sent to the Embassies in G-10 capitals and to USOECD and USEC in telegram 28440, February 26. (Ibid., Nixon Presidential Materials, NSC Files, Agency Files, Box 216, Council of Economic Advisers)

The G-10 Deputies met in Paris on April 23 to discuss limited exchange rate flexibility. The opening paragraph of a summary of the meeting read: "The general consensus was that this one-day meeting had given a significant new impetus to the international discussion of limited exchange flexibility. Though there continue to be negative and cautious views within the Group of Ten, positive views were expressed by important members (Germany, U.S., Italy). General agreement was reached to pursue the subject further in the Deputies and to bring it before the Ministers of the Group of Ten on September 19 in Brussels, prior to the IMF Annual Meeting." (Airgram CA-2600 to Bern, Bonn, Brussels (also for USEC), The Hague, London, Ottawa, Paris (also for USOECD), Rome, Stockholm, and Tokyo, May 9; ibid., RG 59, Central Files 1970-73, FN 10 IMF)

At the April 23 meeting Under Secretary Volcker "stressed the importance of a change in attitude towards exchange rate adjustment . . . . Under Secretary Volcker favored a wider band of an approximately 2 percent margin for countries that wish to use it. This was not essential but would be helpful as an adjunct to small and frequent parity changes in the form of a discretionary crawling peg at the rate of about 2 to 3 percent over a 12-month period. . . . The crawling parity raises two important sub-points. First, can criteria be developed. . . ? The second sub-point is the concept of fundamental disequilibrium. . . . As to a transitional period of flexibility, should there not be a legal option for a move like the recent German one? We do not have views as to the length of a transition period or how firmly it should be limited in time and extent." (Volcker Group Paper VG/LIM/70-14, April 29; Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, 1970, VG/LIM/70-1-VG/LIM/70-)

Of the 92 papers distributed during 1970 to the Volcker Group Working Group (in effect WG I as there were three others whose records are listed as WG II (reserve asset creation), WG III (balance of payments current account objectives), and WG IV (balance of payments statistical presentation)) on limited exchange rate flexibility, at least 90 were circulated before completing the September 10 U.S. Position Paper, Document 148, for use at the September meeting of G-10 Ministers in Brussels and at the IMF Annual Meeting in Copenhagen. These papers helped establish the context for the U.S. position in Brussels and Copenhagen. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/WG/70)

During the summer of 1970 there were numerous bilateral and multilateral consultations on limited exchange rate flexibility. Reporting cables on these consultations, as well as a number of cables reporting on consultations and positions regarding the SDR-AID link, are in the National Archives, RG 59, Central Files 1970-73, FN 10.


148. Volcker Group Paper/1/


Washington, September 10, 1970.

/1/Source: Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, 1970, VG/LIM/70-1-VG/LIM/70. Confidential. Circulated to members of the Volcker Group under cover of a September 14 note from George Willis that indicated a shortened version of the paper was contemplated for use by the delegations in Brussels (G-10 Ministerial) and Copenhagen (IMF Annual Meeting). No shortened version was found. On August 7 Willis had circulated to members of the Group (VG/LIM/70-21) papers by Bergsten and Wonnacott advocating, respectively, the aggressive and low key approaches. (Ibid.) On August 28 Volcker had sent a copy of the Position Paper, dated August 26, to Secretary Kennedy for his approval, under cover of an August 28 memorandum indicating it had been thoroughly discussed in the Group where there was general agreement on the low key approach. (Ibid.) Volcker also told Kennedy he was sending copies to all members of the Group for concurrence, and did so on August 31. (Ibid.) There are no significant differences between the August 26 and the September 10 versions of the paper.


(For meeting of Group of Ten and IMF Annual Meeting)


1. Decisions are needed on three questions:

(a) Should the United States push for an early Amendment/2/ at this fall's meetings?

/2/Reference is to an Amendment of the IMF Articles of Agreement. Several papers circulated to the Volcker Group Working Group examined whether or not amendment of the Articles of Agreement would be legally required to permit greater, limited exchange rate flexibility.

(b) What instructions should the G-10 Ministers and Governors give their Deputies?/3/

/3/The G-10 Ministers were to meet in Brussels on September 19; see Document 149.

(c) What posture should the Secretary take at the IMF meeting in commenting on the IMF Report on Exchange Flexibility?/4/

/4/"The Role of Exchange Rates in the Adjustment of International Payments: A Report by the Executive Directors" was circulated by Willis to members of the Volcker Group and the Working Group as VG/WG/70-90 on September 2. (Ibid., VG/WG/70-82-VG/WG/70-) Willis noted that the IMF report was for release September 13 at 6 p.m. Washington time. Several earlier drafts of the IMF report, along with commentaries on the drafts, are ibid. See Department of State Bulletin, October 12, 1970, pp. 431-435, for Secretary Kennedy's September 22 statement during the September 21-25 IMF Annual Meeting in Copenhagen.

2. Underlying all three of these questions is a basic decision as to whether the United States is pushing hard for some positive action in the form of an Amendment (or possibly a formal IMF decision) in 1971, or whether it is prepared to accept no formal action in 1971 and to rest for the time being on the existing IMF Report, with or without some relatively low-key additional studies or discussion in the IMF and/or the Deputies.

3. All of these questions are related to our underlying objective with respect to exchange flexibility as part of the continuing process of improving the functioning of the international monetary and exchange system. This has two aspects--(a) strengthening the process of balance of payments adjustment by facilitating the ready use of exchange rate changes in appropriate circumstances, and (b) enabling the major countries to cope more effectively with mobile capital movements and exchange speculation, through somewhat wider margins and other changes to facilitate more timely parity changes when necessary. These broad objectives should be as important to other countries as to the United States.

4. In recent years exchange rate policy has played a difficult and frequently disturbing role in the process of balance of payments adjustment. There has been a growing feeling among economists and some officials that more prompt adjustment of exchange rates might have been helpful, if the rigidity resulting from publicized political commitments and Cabinet decisions could have been tempered by the techniques of wider margins, or small adjustments, or transitional floats. Such limited decisions might, for example, be made by monetary authorities rather than dramatically announced by heads of state. There has, however, been as yet only limited official acceptance of the arguments put forward by private economists for this point of view. The Fund report is a first and useful step in giving formal official consideration to these possibilities.

5. The second aspect is related to the first, but is less dependent upon the element of prompt action. Here it is argued that the techniques of limited exchange flexibility, and especially wider margins and/or other techniques for changing parities can be technically helpful in inhibiting disequilibrating movements of relatively liquid funds, and in decreasing speculation by increasing the risks associated with it.

6. The United States would not look to the techniques envisaged in the Fund report as an active tool for improving its basic balance of payments position. To the extent that a bias toward devaluation has existed, these techniques may be useful in reducing this bias, and hence would tend to be a favorable factor in our longer-term need to adjust our balance of payments position. However, looked upon as an active means of correcting our own position and a substitute for other action, these techniques would have serious offsetting disadvantages to the United States. Specifically, repeated use of these techniques among other important industrialized countries in the direction of appreciation against the dollar could easily create a strong presumption of further changes adverse to the dollar, eroding the dollar as a vehicle and reserve currency, sharply curtailing our financing flexibility in a monetary regime in which large financing capability would still be required, and possibly fomenting renewed speculation in gold. Consequently, our approach must stand on more general considerations than on any presumption that these techniques--or any series of revaluations--provide an acceptable means for escaping balance of payments constraints. [In presenting the U.S. position, U.S. officials should counteract any impression that these small changes are being encouraged by the United States as a substitute for corrective measures on our part.]/5/ 

/5/Brackets in the source text.

7. The appropriate posture for the United States is to continue to seek the objective of a more receptive international attitude toward the use of the techniques of limited exchange flexibility. However, because of the still substantial resistance to limited exchange flexibility in most developing and developed countries, conscious of the efforts to interpret the U.S. position as a desire to avoid other balance of payments constraints, the United States pursuit of this objective would best be carried on persistently but in a low key. Such an approach also carries with it the advantage of minimizing bargaining tactics by the French and the developing countries, which would otherwise be placed in the position of being able to demand substantial rewards in other areas for not exercising a "veto" power.

Elements of An Aggressive Approach

8. An aggressive drive for action in 1971 could ideally follow a sequence along the following lines:

(a) The EC countries would be told that they should try to agree on a position favoring an Amendment, prior to September 18 (which is regarded as very unlikely in any case, because of resistance from France and Belgium).

(b) An appropriate instruction to the Deputies in the Communique of the Group of Ten at Brussels, directing them to work toward an Amendment in 1971. The French, Belgians and Japanese (?) might reserve on this paragraph.

(c) Positive references to an Amendment in G-10 Governors' speeches at Copenhagen.

(d) A negotiated report by the Deputies supporting an Amendment. Here the question could be what concessions would persuade the French, Belgians, and possibly other unenthusiastic members to acquiesce in a positive report.

(e) Further negotiations with the developing countries, which would be likely to press for an Amendment establishing an SDR link and possibly other concessions.

9. The listing of these points makes rather clear that a successful push for an Amendment would be a very difficult bargaining process.

Elements of a Low-Key Approach

10. A low-key approach in 1971 is more difficult to chart in its specifics. Perhaps the main question is whether or not to give the subject the mild emphasis of a technical report of some kind by the Deputies. If this were to be done, the following would be the steps in a low-key approach:

(a) Ossola, Chairman of the G-10 Deputies, would be advised that it is not necessary to push hard for an agreed EC view on an Amendment by urging German and Italian concessions to the French "monetary" view of European unity, as he has been doing up to now.

(b) The Group of Ten Ministers in their Brussels Communique would note the importance of and welcome the IMF report and ask their Deputies to keep the subject under review, in particular appraising on the basis of experience the possible future need for amendment. The Deputies might also analyze the advantages and disadvantages of the three techniques in restraining disequilibrating capital movements, and their effects on the degree of independence possible in national monetary policies among the Group of Ten countries without offsetting capital movements.

(c) The U.S. would welcome the positive aspects of the Fund report and note flexibility within present Articles. References to the subject in Ministers' speeches at Copenhagen should avoid staking out hard positions.

(d) The report of the Deputies could be a divided report, with no strong effort to reach a consensus, but with the hope that further exposure to the subject would lead to more receptive and less dogmatic attitudes.

11. Principal General Arguments for an Aggressive Approach

(a) There is danger that momentum will be lost and public and official attitudes toward exchange flexibility will retrogress, in the absence of U.S. pressure for an Amendment to focus discussion and marshall public support.

(b) Wider margins are useful in themselves to help deal with capital movements and permit more independence in national interest rates; as well as facilitating moving parities; wider margins require an Amendment.

(c) If it is subsequently forced by pressures on our gold stock to take abrupt action, the U.S. can point to its efforts to develop a cooperative system of limited flexibility.

(d) At least one other amendment seems desirable, such as one permitting use of SDRs in lieu of gold at the time of the next IMF quota increase, so the "flexibility" amendment need not be presented to governments "naked."

(e) Even if an amendment does not prove feasible, overt and strong U.S. pressure might help move world attitudes toward receptivity to exchange adjustments in appropriate situations and encourage officials to use exchange rates more promptly to correct imbalances.

12. Arguments for "Low-Key" Approach

(a) The only support for an amendment now comes from some quarters in Germany and Italy, and an aggressive push would be resented and would entail bargaining in other areas (e.g., SDR link, Fund voting, and Common Market exchange rate and reserve management policies) that could be against our interests. Most specifically--almost certainly--an amendment "bargain" would rule out unilateral action by an individual EC country, and that group (as expanded) has the only important candidates at present.

(b) The Fund report and recent exchange actions already signalize substantive changes in attitudes. Thus, much of our objective can potentially be achieved by a case-by-case approach over time. In a struggle over a specific amendment, the progress made toward a more fluid interpretation of a fundamental disequilibrium could be reversed, and tight interpretation of a limited amendment could produce retrogression rather than advance in world practices toward exchange flexibility.

(c) Immediate action on limited rate flexibility is not worth the risk of failure of a major U.S. effort; failure would set back chances of practical application within present Articles and public failure could strengthen protectionist sentiments at home.

(d) An aggressive U.S. approach creates strong suspicion abroad as to our motives and the value of the dollar, leading to counter pressure for an overt depreciation of the dollar in terms of gold and exchange market instability.

(e) U.S. pressure for an amendment enables the French to exact concessions from the Germans and Italians in the EC negotiations for European unity.

(f) An aggressive U.S. push opens the way to strong and premature pressure for the SDR link by the developing countries as a bargaining tactic and other undesirable amendments such as changes in voting rights in the IMF.

The Special Factor of the Effects on European Monetary Unification

13. One strand of thought in Europe is typified by Mr. Ossola, Chairman of the Deputies. This is a proposal for a common EC position on limited exchange flexibility. It is designed to get agreement of the French and Belgians to support an IMF Amendment permitting all three types of limited exchange flexibility, by bartering in return a commitment within the EC to use not only wider margins but also moving parities and transitional floats only when the EC countries move together as a unit, with decisions to move taken by some as yet unspecified procedure within the Six. This approach may well prove unacceptable to the French and Belgians, who, for example, could bargain to restrict the Amendment to cover only wider margins.

14. To some extent, the motivation for pushing rapidly toward an EC position may be related to the degree of pressure the U.S. exerts for an Amendment. It can be argued that the price being offered to the French is rather high. It appears to embody commitments among the Six going well beyond the present commitment not to use wider margins within the Six. That is, the ability of an EC country acting alone to use a moving parity or a transitional float would apparently be given up right now, instead of some years hence.

15. The proposal also would include a move toward the establishment of narrower margins among the EC currencies than those applicable to the dollar. This would enforce some adjustment of individual dollar intervention points to conform to EC limits, and open the way to an EPU type of EC credit system, concerted intervention, and not far off, common reserve management policies. The French apparently consider that this would help to dethrone the dollar both as a reserve and vehicular currency. This suggests that the U.S. needs to determine whether it is in its interest to expedite this process, recognizing that this will probably be the course of evolution over time within the EC countries.

Recommended Position

A. The United States regards the Report of the Fund as fairly representing the prevailing state of opinion--which has moved forward by quite considerable steps:

(1) It recognizes that there is a place in the monetary system for very limited changes in parities. Smaller and more frequent changes in parity can be approved by the Fund.

(2) It recognizes that the transitional float has been useful in some circumstances.

(3) Members do not need to wait for crises to adjust exchange rates. The concept of fundamental disequilibrium is broad enough to allow members to anticipate maladjustment.

B. The Fund report indicates that there is a good deal of leeway under the present Articles, except for the widening of margins. As for the other two techniques, questions remain as to the adequacy of the present scope, and these questions will need to be looked into over time to determine whether the scope now available is broad enough under today's conditions. The United States is prepared to suspend judgment now on the need for amendment, until experience can answer these questions. Fund procedures can presumably be adapted so as to give more encouragement than in the past to countries proposing to make small and frequent changes in their parities, or to adopt a transitional float under appropriate safeguards.

C. The United States would suggest that the Ministers of the Group of Ten, in their Communique:

(1) Take note of and welcome the important contribution of the IMF report to the objective of a more smoothly functioning international monetary system.

(2) Request their Deputies to keep the subject under review (or at least welcome such a review by the ED's), in particular appraising on the basis of experience the possible future need for Amendment. The Deputies might also analyze the advantages and disadvantages of the three techniques in restraining disequilibrating capital movements, and their effects on the degree of independence with which national monetary policies can be pursued without offsetting capital movements. The Deputies should keep the Ministers and Governors informed of their collective views on these matters during the ensuing year.

D. The United States would urge the Fund to present a supplementary progress report in 1971.


149. Telegram From the Embassy in Belgium to the Department of State/1/

Brussels, September 20, 1970, 1123Z. 

/1/Source: National Archives, RG 59, Central Files 1970-73, FN 10. Confidential; Limdis; Greenback. Repeated to London, Stockholm, Bonn, Paris, USOECD, Tokyo, The Hague, Bern, Ottawa, and Rome.

4303. Subject: Highlights of Meetings of Group of Ten. From: Treasury Under Secretary Volcker for MacLaury.

1. Ministers and Governors of Group of Ten met for three hours and issued communique reported separately./2/ Following report by Chairman Ossola of Deputies, which termed problem not urgent or ripe for final decision and indicated main differences of emphasis among Deputies, they termed IMF report/3/ "useful" and agreed to further study by Executive Directors of Fund. They also directed their Deputies specifically to continue work on this subject, as well as to review from time to time working of international monetary system more generally.

/2/The G-10 Ministers met in Brussels on September 19, prior to the IMF-IBRD Annual Meetings in Copenhagen September 21-25. The communique has not been found.

/3/See footnote 4, Document 148.

2. French and Belgians most guarded in approval of report and wanted social and economic consequences of exchange policies examined and also effect of proposed techniques on sharing of burden of adjustment between surplus and deficit countries. Also, Deputies should follow up SDR and international liquidity developments in relation to forecasts made at time of initial allocation decision. EC countries noted lack of fully agreed EC position which hoped to achieve later.

3. Secretary Kennedy commented on flexibility along following lines (not verbatim text):

"My delegation welcomes the report by the Executive Directors on the role of exchange rates in the adjustment of international payments. We are glad to see that this subject has been examined in the executive board for the first time since Bretton Woods in a thoroughgoing way, and through a special report. This report puts the subject in proper perspective. During the past five years there has been some evidence of rigidity in the system, and delay in the use of exchange rates for adjustment purposes on occasion. A study of this sort was long overdue, and we must not take it up and then simply drop it. We must face up to this question.

4. The report is judicious and in no sense radical. It stresses the preservation of the basic principles of exchange stability, so long as they correspond to economic realities. The report is the kind of analysis we expect to have clarify many of the issues with which we must deal. It rejects extreme measures but does broaden the concept of the adaptability of the par value system. It recognizes that the transitional float has been and may be useful in minimizing economic disruption and helping restrain domestic inflation in those cases where a change is necessary.

5. As the report suggests, my delegation is prepared to suspend judgment on the legal questions related to possible future amendments, so that we may determine whether the scope now available under the Fund's articles will prove adequate. In this connection, I hope the Deputies will keep the subject under review as it is examined by the Executive Directors and inform the Ministers and Governors of their collective or individual views on the need for an amendment during the ensuing year.

6. I think that we will all agree that the work of the Deputies has been very useful. I hope they will continue to meet and to report to us. It has been demonstrated that they can do so without giving the appearance of crisis.

7. Members of my delegation have made it clear that the United States does not look to the techniques examined in the report as a means of bringing about major improvements in our own balance of payments or those of other countries. We rather think of them as helping to loosen tendencies towards excessive rigidity in the exchange structure, and possibly leavening past tendencies for exchange depreciation to be more frequent than appreciation. In a broader sense, we believe these exchange techniques deserve our more careful consideration to make us better prepared to deal with the strains arising from international movements of funds. I believe that it is most helpful to have any differences of view expressed.

8. The United States fully appreciates that the Community wishes to progress toward exchange stability within that group."

9. Chairman Emminger (German) of WP-3, in general review of world monetary situation, noted recent tendency for inflationary pressures to continue stronger in Europe than in North America, increasingly severe international limitations on autonomy of national monetary policies, and that outflow of dollars into foreign reserves would no longer be offset as in January-June 1970 by "mitigating influences" of repayment of official reserve credits. Ministers and Governors commented at some length on economic and monetary situations their countries. Secretary Kennedy expressed belief United States on way to resumption of growth without excessive price rises, though adjustment had been long and hard. Said U.S. not satisfied with balance of payments situation, though trade position improving, and exerting efforts expand exports. Chairman Burns stressed recent "dramatic" improvement in productivity and said policy objective is gradual rather than too rapid recovery. He looked forward to a prosperous world and did not want to see very high interest rates much longer. Over two-year period U.S. balance of payments not as bad as it looks in last six months. Canadian Minister said Canada hoped to return to fixed level when a sustainable level reached, and not wise attempt to do so now.

10. Netherlands Minister said Bretton Woods philosophy was that stability of exchange rates should not require countries to deflate or inflate domestically and that exchange adjustment could therefore be used to avoid inflationary domestic policies as it has in past been used to avoid deflationary policies. 

11. At meeting on September 18, Deputies discussed position of industrial countries on possible pressure by LDCs for study of SDR-aid link in IMF or elsewhere. All Deputies supported U.S. view that study is clearly premature until SDRs firmly established as monetary instrument. Germans, Dutch, Japanese, French felt U.S. position not strong enough, question decided in 1968 and should not be reopened, and study of link should not be undertaken at any future time. U.K. position weakest and could not commit Chancellor. French and some others noted that positions expressed in other international forums, especially UN bodies, did not always coincide with views of Treasuries.

12. We are told here that communique of Commonwealth Finance Ministers meeting at Cyprus endorsed study of SDR-aid link prior to 1972 allocation. British say resolution for IMF study may be put in by Latin Americans or others at Copenhagen, but no confirmation this from Fund staff here at present time.



150. Memorandum From the U.S. Executive Director of the International Monetary Fund (Dale) to the Under Secretary of the Treasury for Monetary Affairs (Volcker)/1/

Washington, November 23, 1970.

/1/Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, 1971 Contingency Planning Papers. Confidential; Limdis.

Contingency Planning

I did the attached note over the weekend mainly because of a feeling that a very large one-time SDR allocation as a part of Scenario II/2/ looks pretty unrealistic. But a substantial U.S. official settlements surplus combined with a much larger rate of SDR allocation--both of them by virtue of international agreement--might not be so wholly unrealistic.

/2/Presumably reference is to one of several scenarios in an options paper. The paper has not been found.



A Rationale for a Major Exchange Rate Realignment/3/

/3/A substantially expanded version of this paper, dated January 28, 1971, entitled "Scenario III--Exchange Rate Realignment and Related Matters," is in the Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker:  FRC 56 79 15, 1971 Contingency Planning Papers.

The relationship between the stock of total U.S. international reserve assets and the stock of U.S. reserve liabilities is not satisfactory, either for the United States or for the international community. Except for 1968 and 1969--when this result was clearly seen as a temporary aberration--the trend in this relationship has not been satisfactory for a number of years. Both of these factors make the international monetary system vulnerable to speculative influences.

It has been accepted for some time that a necessary,  though in itself perhaps not a sufficient, condition for a sustained zero balance of the United States on the official settlements basis would be the satisfaction of the world's "demand" for official reserve assets from a source other than an official settlements deficit in the U.S. external balance. That source of satisfaction is now available in the SDR.

We can, if we and the rest of the world agree on it as a mutual objective, go much further. What is now necessary is a large and sustained U.S. official settlements surplus, so that both the relationship between our reserve assets and liabilities and the stock position will be greatly improved. What I would suggest is that:

1. It should be agreed internationally that for a sustained period of time--say, five years at a minimum--the United States and the world should aim for a U.S. official settlements surplus in the range of $2-3 billion per year, abstracting from short-term deviations.

2. This should be aimed at by an immediate major realignment of exchange rates, and any exchange rate changes proposed later during the quinquennium should be judged importantly against this generally-agreed objective. Adding up the "underlying" U.S. deficit (i.e., abstracting from existing cyclical and random factors in the present deficit) together with the balance of payments cost of completely liberalizing capital flows and other transactions as well as allowing for an average surplus of $2.5 billion per year, this would probably mean the need for an annual improvement in our balance of payments on the order of $6-8 billion. It is this range of figures at which a realignment of exchange rates must be targeted.

3. The present rate of SDR allocations is undoubtedly too small. In addition, it is based on the assumption that net additions to world reserves in the form of U.S. dollars will be $0.5-1.0 billion, rates which are presently being greatly exceeded and which are likely to be exceeded for the whole of the first basic period. If the figure +1.0 billion (the top of the range in the Managing Director's proposal) were replaced by -2.5 billion, the present allocation rate of $3.0 billion would have to be boosted to $6.5 billion to produce the same aggregate results in terms of world reserves. In the context of an agreed exchange rate policy aimed at producing a sustained U.S. official settlements surplus of $2-3 billion per year, other countries would necessarily be much more vulnerable to balance of payments difficulty, and might well be willing to support a higher rate of SDR allocation. Even at an allocation rate of $6.5 billion, the United States would receive around $1.6 billion per year, so that our net reserve position would be improving by around $4 billion per year.

4. Our willingness and wish to aim for such a surplus would represent, by comparison with the situation today, the provision of substantial additional real resources to the rest of the world--something in the neighborhood of 3/4 of one per cent of our GNP and around half that proportion of world GNP. For the rest of the world, that would represent some help in dealing with the inflation that nearly all of their Governors complained about at Copenhagen./4/ For us, it would involve somewhat more of an export-led upturn, and the price changes involved (in the form of an exchange rate realignment) could assist materially in resisting protectionist pressures.

/4/The Annual Meetings of the IMF-IBRD were held September 21-25, 1970, in Copenhagen.

5. We could say that only after such a sustained period of official settlement surplus would we be willing to look seriously at a negotiation looking toward putting the world, including the United States, on a full reserve asset settlement basis. In other words, we would be willing to try to work ourselves out of the reserve currency business--always abstracting from reasonable working balances--but other countries would have to be prepared to accept the implications of this.


6. An indirect SDR-aid link, but one of substantial quantitative importance, would also be involved in this procedure. The LDC's would receive about one-fourth of any increase in SDR allocations resulting from the proposed shift in the U.S. position. If the assumption is made that their absolute reserve targets (whether implicit or explicit) would not change, the additional SDR allocations would--in effect--be the same as an equivalent amount of program aid. If the figures given above have some validity, the additional SDR allocations to the LDC's could be in the range of at least three-quarters of a billion dollars per year, an amount of no mean importance when compared with IDA plans.


151. Editorial Note

On March 22, 1971, Charles A. Coombs at the Federal Reserve Bank of New York sent a memorandum to the President of the New York Bank, Alfred Hayes, entitled "The Outlook for the Dollar." In his memorandum Coombs noted that the United States could probably finance its balance-of-payments deficit in 1970 and early 1971, but reported the 1971 deficit seemed to be running well above the 1970 levels and thought the United States was "moving into the danger zone." Coombs discussed ways to obtain balance-of-payments equilibrium and defend the dollar, but then went on to consider options in the event the judgment was made that "the dollar was hopelessly overvalued." After reviewing the options, he concluded that suspending the dollar's convertibility to gold, "which could be made effective by executive decision from one minute to the next without prior consultations abroad," would be the preferred course over arduous and possibly confrontational negotiations for currency realignments that would be disruptive of foreign exchange markets. (Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, 1971 Contingency Planning Papers) Federal Reserve Chairman Arthur Burns provided a copy of Coombs' memorandum to Treasury Under Secretary Paul Volcker on March 24. (Ibid.)

At this time many G-10 countries were faced with rising dollar inflows. These inflows were discussed by European Community Finance Ministers when they met in Hamburg on April 26 and 27. The Embassy in Bonn provided a summary of the meeting in telegram 5156 from Bonn, April 30. German Finance Minister Schiller reportedly suggested two approaches to dealing with the dollar inflows, a temporary joint float of EEC currencies or a multilateral parity adjustment, and personally preferred the former. Only the Netherlands supported Schiller's position, and France was opposed to any measures that would reduce the competitiveness of French export industries "and when pressed declared that if the choice were between inflation and a parity adjustment, they would prefer inflation." (National Archives, RG 59, Central Files 1970-73, FN 10)

The dollar inflows continued, and on May 5 Henry Kissinger sent a memorandum to President Nixon advising him that "Germany, Switzerland, The Netherlands, Belgium and Austria today suspended dollar operations of their central banks. They did so because of the tremendous inflow of dollars which reached $1 billion in Germany yesterday. It now appears that the dollar operation will continue suspended at least through this weekend." Kissinger informed the President that the capital inflows were due to speculation that the Mark, and perhaps other European currencies, would be appreciated against the dollar. He posited possible approaches by France and Germany and suggested that France might use its veto power over British entry into the European Community "to get German acquiescence on French monetary views." In the end, however, Kissinger concluded no U.S. action was required at that time and "we need only watch the situation carefully and await word on what the Europeans plan to do." (Ibid., Nixon Presidential Materials, NSC Files, Subject Files, Box 309, Balance of Payments)

When foreign exchange markets reopened on May 10, the Mark was allowed to float (see Document 155). The Embassy in Bonn on June 15 reported one responsible German official's view that the Mark would float for an extended period, possibly beyond the end of the year, and that German industry was becoming reconciled to the float as preferable to exchange controls or a large revaluation. (Telegram 7249 from Bonn, June 15; National Archives, RG 59, Central Files 1970-73, FN 10)

Continuing throughout the summer of 1971 until the New Economic Policy was announced on August 15 and beyond, the visible thrust of U.S. activity on international monetary policy continued to be the initiative for greater exchange rate flexibility. The Volcker Group discussed the subject on June 29, and draft position papers reflecting that discussion and proposed amendments to the Articles of Agreement on wider margins and floating rates were circulated to members of the Group as VG/LIM/71-21 on July 2. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/LIM/71-1) See Documents 162 and 163 regarding the U.S. initiative at the IMF Board meeting on July 19.


152. Paper Prepared in the Department of the Treasury/1/

Washington, May 8, 1971.

/1/Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, 1971 Contingency Planning Papers. Confidential; Eyes Only.


1. Our Basic Objective

To take advantage of the present crisis to achieve a (i) lasting improvement in the balance-of-payments position of the United States, (ii) a more equitable sharing of the responsibilities for world security and economic progress and (iii) a basic reform of the international monetary system.

2. Our Basic Premise

Given our defense and economic assistance burden, the underlying balance of payments of the United States is in basic disequilibrium and likely to get worse rather than better without substantial realignment of exchange rates of a number of countries. Even then a lasting equilibrium may depend on a reassessment of defense and other burdens. Furthermore, it is only in an atmosphere of crisis and disturbance that other important changes in the policies of European countries and Japan can be brought about.

3. Specific Objectives

To achieve:

a) A significant revaluation of the currencies of major European countries and Japan as a result of floating rates or other actions. (See Tab A for an analysis of U.S. balance-of-payments trends and the need for corrective action.)/2/

/2/Not printed.

(b) A fairer sharing of the balance of payments and budgetary costs of the military burden. (See Tab B.)/3/

/3/Not printed. Tab B, entitled "Sharing the Cost and Defense of the Free World," discussed issues similar to those raised in the offset and burdensharing negotiations with the Federal Republic of Germany and the NATO allies. See Documents 18, 22, and 50.

(c) An improvement in the trade policies of the European countries and Japan. (See Tab C.)/4/

/4/Not printed. Tab C, entitled "Trade Portion of a General Negotiation," discussed the essential improvement in the U.S. trade balance and trading rules vis-a-vis the major U.S. trading partners.

(d) A sharing of foreign aid, which takes into account U.S. defense burdens. (See Tab D.)/5/ 

/5/Tabs D and E were not found.

(e) Monetary improvements, including greater rate flexibility and phasing out of gold and avoidance of excessive use of controls. (See Tab E.)

The U.S. should prepare for intensive negotiations with other industrial countries in each of these areas.

4. Basic Approach

Accept and use the opportunity provided by the monetary crisis to undertake negotiations on these major issues. While it is hoped that the disturbances will not be great, one must be prepared for such a contingency.

5. Foreign Objectives

Generally speaking, the other major industrial countries can be expected to pursue the following objectives:

(a) to maintain their competitive positions in international trade;

(b) to minimize adverse effects of international trade and payments on their domestic economies; and

(c) to minimize the assumption of financial burdens for military purposes, and to keep their economic aid burdens relative and modest.

The Common Market countries will attach great importance to the preservation of EC objectives, particularly the common agricultural policy and their hopes for establishing monetary unity. In the effort to preserve internal harmony, they may seek solutions through common, discriminatory controls on transactions with non-member countries. France, in particular, is likely to attempt to take advantage of the opportunity, for political reasons, to reduce U.S. hegemony in the international economic and financial area and to restrict U.S. freedom of action. These countries also wish to restore gold to the central role in the monetary system. They can be expected to seek to capitalize on any frictions which may develop to weaken U.S. ties with other European nations and to urge the use of restrictions on capital transactions as a device for restricting the operations of U.S. firms in Europe and reducing European dependence on U.S. high technology equipment (e.g., aircraft).

6. U.S. Tactics

(a) Permit foreign exchange crisis to develop without action or strong intervention by the U.S.

(b) At an appropriate time when there is growing realization that substantial changes will need to be made, the U.S. should indicate its own preferred solution.

(c) At that time, the U.S. should be prepared to indicate and, if necessary, use the following measures as negotiating leverage:

(i) suspension of gold convertibility;/6/
(ii) imposition of trade restrictions;
(iii) diplomatic and financial intervention to frustrate foreign activities which interfere with the attainment of our objectives; and
(iv) reduction of the U.S. military presence in Europe and Japan.

/6/On June 3 Congressman Henry Reuss introduced a "Sense of Congress Resolution" that said that if an international monetary conference was not promptly convened, the United States should terminate the convertibility of the dollar to gold; permit the dollar to float until any disequilibrium had been removed; and entertain claims for compensation by foreign official dollar holders only for those who cooperate on proper exchange rates and adhere to the March 1969 two-tier gold agreement (see Document 145). A copy of Reuss' resolution was circulated to members of the Volcker Group and its Working Groups as VG/Uncl. INFO/71-30 on June 4. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/Uncl. INFO/70-1-) See also The New York Times, June 4, 1971, p. 45. No record of a vote on the resolution was found.

(d) In the monetary area the "fall back" position would be simply to remain on the system of "floating rates" already largely in place under this scenario. It would be necessary in order to maintain our bargaining position taken through inconvertibility under (i) above, that the U.S. make clear from the start that the U.S. would be prepared to live with the floating rate systems indefinitely.

7. Procedure

(a) The Secretary of the Treasury will be prepared, on short order, to begin negotiations on the monetary issues should the timing for such negotiations appear appropriate. While it seems likely that the Group of Ten (the EEC, the U.K., Canada, Japan, Sweden, Switzerland and the U.S.) would be the best forum in which to begin the negotiations, the Secretary of the Treasury should give consideration to the negotiating forum as well as strategy. Negotiations on the monetary issues should take into account the progress being made in the separate negotiations on the other issues.

(b) To prepare for negotiations on the related issues the President should direct:

(1) The Council on International Economic Policy to develop positions with respect to trade relationships with the European Common Market and Japan;

(2) The National Security Council to develop positions designed to achieve objectives with respect to the sharing of the defense burden;

(3) The Secretaries of State and Treasury to develop positions with respect to the redistribution of the burden of foreign aid for review by the Council on International Economic Policy.

Positions on these issues should be developed and approved by June 30 in order that international negotiations may begin shortly thereafter.

8. Probable Foreign Response

Other countries, led by the EC, would be likely to respond by:

(a) Public attempts to place all responsibility for the monetary crisis on the U.S. as the deficit country and to argue that corrective action is a U.S. responsibility. The French would offer a change in the price of gold as the required action;

(b) Introduction of common EC exchange controls on capital flows or a dual exchange rate market with a penalty rate for inward capital transactions (though the effectiveness would be uncertain);

(c) Possible drive to exclude and isolate U.S. from the bulk of the trading world through enlargement of and association with the EC on a preferential basis;

(d) Seeking to discuss the issues of trade policy, military expenditures and aid burdens in separate channels, wholly divorced from the monetary problems. They would hold that--

(1) the U.S. has more restrictions on trade than the EC and any reduction of barriers must be matched by reductions in U.S. barriers of equal value;

(2) they are already contributing larger shares of GNP to foreign aid than does the U.S. and military expenditures are not relevant.

Increases in defense budgets beyond those contemplated are not politically feasible in the present world climate and in any event increased expenditures designed to ease the financial burden on the U.S. are out of the question in part because of the appearance of paying "occupation" costs and in part because of public antipathy toward support of the U.S. while it continues to be involved in Viet Nam.


153. Paper Prepared in the Department of the Treasury/1/

Washington, May 9, 1971.

/1/Source: Washington National Records Center, Department of the Treasury, Deputy to the Assistant Secretary for International Affairs: FRC 56 83 26, Contingency Planning 1971. Confidential. A typed note at the top of the page reads: "2nd Draft 5:00 p.m."


The official dollar gold price would not change

The United States would make clear at the outset of negotiations that it does not regard any change in the official price of gold as part of the negotiations. This posture will be necessary because the French, with varying degrees of support from countries such as Belgium, Switzerland and certain elements in the United Kingdom, may seek a devaluation of the United States dollar in terms of gold. French private citizens hold large amounts of gold on which they would like to make a profit, and Swiss bankers have substantial holdings for their clients and have been managing South African gold sales and on occasion, trying to stimulate gold speculation by their actions and speeches. Both French and British financial interests hold large blocks of South African gold mining stocks. A rise in the official gold price would help the private holders by raising the private market price and enlarging the scope of that market, in the judgment of the French and Swiss.

Fortunately the Germans and Italians do not favor an increase in the gold price, so that the French are unlikely to achieve a unified position in the European Community. The Germans and Italians hold very large reserves in dollars, on which they would gain no profit if the official gold price rose. Their officials might even incur criticism because other countries had profited by holding a larger share of their reserves in gold. The Japanese and even the Canadians could also be embarrassed.

The French argument

The main argument that the French may make is that the United States as the deficit country should devalue, because we have sinned and should expiate. Other countries (France) have devalued and the United States should behave like other countries and do so. Surplus countries should not have to revalue because the United States does not wish to change the price of gold, particularly since these surplus countries have followed virtuous anti-inflation policies and kept their balances of payments in order.

The French suggest a moderate increase in the official dollar price, while other countries maintain their existing gold prices or raise them to a lesser degree than the United States thus effecting a change in IMF parities (which are stated in gold) that would depreciate the dollar exchange rate in terms of their currencies.

In effect, the French attitude boils down to the suggestion that if the United States does penance and helps the private gold holders to make a bigger capital gain, this would ease the discomfort of appreciating their exchange rate and becoming less competitive with the U.S. in the U.S. market and world markets.

U.S. counter arguments

Against this point of view, the United States would make the following counter arguments:

1) The deficit is only partly due to U.S. economic policies. While the United States at some periods has augmented its balance of payments deficits by inflationary policies, our record of price stability was much better than all major countries except Belgium and Germany in 1950-65, and slightly better than these two. U.S. deficits have also been forcefully affected by (a) our heavy external costs for military expenditures to protect Europe and Japan, (b) by trade practices abroad that have cut back the growth trend in our agricultural and other exports, and (c) especially by the undervalued exchange rates which were fixed in the forties and fifties, at a time when foreign productive capacity was abnormally low relative to foreign demand, and which have been jealously preserved for trading advantage. Moreover, the recent large short-term flows have been due to divergent monetary policies in the U.S. and Germany--both needed for their domestic situations.

2) Other countries decided to peg to the dollar long ago. Other countries decided long ago to use the dollar as a reserve currency and to peg their currencies to the dollar. By doing so, they took to themselves the responsibility for fixing exchange rates, leaving the U.S. in a passive position, and have prevented their currencies from rising in response to natural market pressures that would have caused these currencies to appreciate. Some have devalued whenever their competitive position was weakened, and this fact raises questions as to whether they could be counted on to maintain their initial appreciation vis-a-vis the dollar under the French scheme.

3) A moderate gold price increase would be unstable. A moderate increase in the official gold price would be analogous to the "Munich settlement"; it could quite likely last only a short time--perhaps less than a year. It would establish a strong presumption that the prescription would be repeated if speculative pressures again became strong, and dollar reserves built up abroad again. Because central banks holding gold would have gained a gold profit, while holders of dollars would not, many central bankers would face public criticism for holding dollars. This would be likely to induce substantial requests for conversion of dollars into gold, especially by smaller central banks. U.S. gold reserves could shrink fairly quickly, offsetting or more than offsetting the devaluation gold profit (which itself would be about matched by a write-up in our gold guaranteed liabilities to the IMF and other international agencies). This factor of additional drain on U.S. reserves for conversion arises from the re-emphasis on gold inherent in the change in the U.S. official gold price. It would not be present if exchange rates are adjusted without a change in the dollar price of gold.

4) SDRs are better reserves for the future than gold. It is highly desirable to continue the trend toward greater reliance on SDRs than gold for international reserves. The fact that there has been a private commodity market for gold, in competition with monetary use of gold, subjected the monetary system before the two-tier system to speculative drains of gold to private hands, which weakened all currencies. The SDR and the two-tier gold system recognized that gold was no longer satisfactory as a source of reserve growth, and, if so, there is no logic to increasing the official gold price. It would be turning back the clock.

5) A gold price increase would be hard on those who have held dollars.  An increase in the gold price is discriminatory and inequitable. It enlarges the reserves of those countries that hold gold, while leaving unchanged reserves held in the form of dollars. This is unfair to some of our closest cooperators, and benefits a few large gold holders who do not need reserve writeups.

6)  It could weaken the two-tier gold system and benefit gold producers and speculators. The psychological reaction of raising the commodity price of gold would benefit Russia, South Africa and other producers as well as private hoarders and speculators. The spread between the official and private price might well widen, and this could make it harder to maintain the two-tier system. The system was regarded as favoring the United States rather than the French gold philosophy, and a gold price rise would sow new doubts.

7) Differential rather than a uniform exchange rate adjustment is needed. The Japanese adjustment, for example, might need to be steeper than the European, and all the Europeans might not be the same. To cover this spread the U.S. change in gold price could be undesirably large.

8) The U.S. would convert dollars into SDRs instead of gold. With major modifications in exchange rates and other improvements that should make the future drain on U.S. reserves manageable, the U.S. is prepared to resume responsibility for conversion of dollars into international reserve assets, which it alone has carried since 1945. But it would convert official dollars into SDRs or other claims on the Fund, rather than gold. We would use gold as needed to acquire these assets from the IMF. This procedure would continue the gradual evolution of the monetary system toward SDRs as the basic reserve asset, with gold gradually declining as a portion of world reserves. This process has already gone a long way, since gold reserves represented only 40 percent of global reserves at the end of 1970, as compared with 70 percent in 1948. Turning back the clock would be a very serious decision, and would be resisted in many quarters of the academic, banking and Congressional world.

9) Congressional opposition could be strong. A number of influential members of Congress (Patman, Widnall, Senator Long, Reuss, Senator Bennett) seem likely to be doubtful or critical. Some don't like to pay out gold to foreigners. Some want to de-emphasize gold. Many are likely to feel that the Executive should have specific Congressional authority, and a Congressional debate could lead to very serious market uncertainty and speculation. The attached correspondence with Congressman Reuss has been accepted by Congressman Reuss as indicating that action would not be taken without Congressional approval. If this were not the Treasury view, he had indicated that he would submit legislation making this quite specific. (See attached correspondence.)/2/

/2/Not printed. Attached were a February 6, 1969, letter from Secretary Kennedy to Congressman Reuss reaffirming the position taken in a January 23, 1968, letter from Under Secretary Barr to Reuss, and a copy of Barr's letter. It was Barr's view that the $35 per ounce price of gold notified to the IMF could only be changed by Congressional action.

10) A massive gold price increase would be generally rejected in a worldwide inflationary period. A doubling of the price of gold at one swoop, as recommended by Rueff of France for many years, is probably not likely to be put forward now. We understand Rueff himself no longer puts it forward, as it is too unrealistic. It would be resisted very widely as it would enlarge world reserves by about $40 billion all at once. The 1970 addition to world reserves was $14 billion. Such a large increment to world reserves, even though initially immobilized in central bank reserves, would have a marked inflationary potential. It would probably be resisted by most members of the Fund, and by U.S. public opinion. One danger of a moderate change in the gold price is that by a series of crises, the same result might be approached.


154. Information Memorandum From Ernest Johnston of the National Security Council Staff to the President's Assistant for National Security Affairs (Kissinger)/1/

Washington, May 10, 1971.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 32, European Common Market, Volume II 1971-1972. Confidential. Concurred in by Sonnenfeldt.

Political Repercussions of the European Monetary Crisis

Though somewhat bypassed by events, attached at Tab A is a memorandum to the Acting Secretary of State by the Bureau of European Affairs on possible political repercussions of the European monetary crisis./2/ The situation will take time to become clear, but after the joint Community decisions over the weekend, State's memorandum seems a bit alarmist. Nevertheless, it raises fundamental problems which will persist.

/2/Not printed. A copy of the undated memorandum for the Acting Secretary of State was forwarded to Kissinger without comment under cover of a May 8 memorandum that Robert Brewster signed on behalf of Executive Secretary Theodore L. Eliot, Jr. (Ibid.)

The memorandum lists four political trouble points:

--European resentment against the United States for our balance of payments policy, which contributed to the crisis.

--U.S. Congressional hostility toward a German revaluation, which will increase costs of troop support in Europe.

--Internal strains within the Common Market over delay in EC monetary unity and particularly over inevitable adjustments in the Common Agricultural Policy.

--Spill over effects on British entry negotiations.

The markets today have been relatively quiet with a comparatively small transfer of money. Though the Germans got pretty much what they wanted--Community agreement to their float--the agreement was dressed up in such a way that the Community appeared to reach a collective decision. The Germans did promise to put into effect some of the controls the other members wanted and to aim at restoration of the previous exchange parities. Consequently, since there is no public admission that the other members were faced down, some of the bitterness mentioned in State's memorandum may be avoided.

Most of the European central bankers do blame the United States for the underlying circumstances that brought on the revaluation, but generally the governments have avoided pointing too much in our direction.

We should be able to counter any Congressional reaction on higher troop costs with the solid economic argument that the German revaluation will contribute to improved U.S. balance of payments. We shall, however, definitely feel this pressure in regard to German offset arrangements.

Community disputes over the Common Agricultural Policy would be dampened by a reasonable German position at Tuesday's meeting of the Agricultural Ministers although much will depend here on how much the Germans insist upon avoiding any lowering of their farmers' high agricultural prices. However, France will resent the delay in implementation of EC monetary unity. The weekend's events made it obvious that such unity would at best be tenuous until closer agreement is reached on common monetary and fiscal policies, as the Germans had clearly prophesied.

Reports from France so far do not indicate that the French will seize the revaluation as an excuse to fight the Germans on UK entry, but this issue will not be clear for some time. The final result may even favor French support for British entry, since the German power play will alert the French that they may need help in controlling a stubborn and strong Germany.

Though the German/Dutch float and the Austrian/Swiss 5 to 7 percent revaluations have undoubtedly caused great turmoil in financial circles, we have definitely gained on the economic front because of the impetus that these moves will give toward greater exchange flexibility, which is an essential element for continued liberal trade policies. In addition, German and French persistence in appearing to reach accord within the framework of the Community policy apparatus will have a positive effect despite the fact that the currency crisis has shaken some of the substance of agreed Community policies.


155. Editorial Note

On May 12, 1971, German Chancellor Brandt wrote President Nixon to inform him that the monetary crisis had "created great difficulties for the Federal Government" and several other European governments. He noted the importance his government attached to "the development of a European economic and monetary union" and thought the fact that President Pompidou and Prime Minister Heath had agreed to meet boded well for British entry into the Community. He looked forward to discussing these and other matters with the President during a mid-June visit to the United States. (National Archives, RG 59, S/S Files: Lot 73 D 288, Box 836, NSC Misc. Memos)

On May 28 Secretary Connally gave a major speech at the International Banking Conference of the American Bankers Association in Munich, Germany. Connally reviewed the evolution of economic power centers in the postwar era, noted U.S. concerns on burdensharing and trade issues, and said there "is a clear and present danger to our monetary system . . . . Flexibility is essential . . . . We are not going to devalue. We are not going to change the price of gold . . . . No longer can considerations of friendship, or need, or capacity justify the United States carrying so heavy a share of the common burdens . . . no longer will the American people permit their government to engage in international actions in which the true long-run interests of the U.S. are not just as clearly recognized as those of the nations with which we deal . . . increased cooperation among us all must play a key role in maintaining a stable monetary system." The full text of Connally's speech, circulated to the Volcker Group as VG/Uncl. INFO/71-28, is in the Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30. The text is also printed in Department of State Bulletin, July 12, 1971, pages 42-46.

Chancellor Brandt made a private visit to the United States in mid-June to receive an honorary degree from Yale. He continued on to Washington for an unofficial visit on June 15 and 16. He met with President Nixon at the White House on June 15 from 11:02 a.m. to 12:34 p.m., and was the guest of honor at a White House dinner that evening. (National Archives, Nixon Presidential Materials, White House Central Files, President's Daily Diary) A taped recording of his meeting with President Nixon, which included discussion of monetary matters, is ibid., White House Tapes, Recording of Conversation between President Nixon and Chancellor Brandt, June 15, 1971, 11:02 a.m.-12:34 p.m., Oval Office, Conversation No. 520-6.


156. Memorandum of Conversation/1/

Washington, May 20, 1971, 11:30 a.m.

/1/Source: Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, France. Confidential. The meeting was held in Secretary Connally's office. Drafted on May 21 by Cates and approved, as amended, by Volcker.


Giscard d'Estaing, Minister of Economy and Finance
Marc Vienot, IMF Executive Director

United States
Secretary of the Treasury Connally
Under Secretary for Monetary Affairs Volcker
Assistant Secretary Petty
Deputy Assistant Secretary Cates

M. Giscard explained that he was here to promote a French export drive in the United States, adding that France is one of the U.S.'s best trading partners. The U.S. has a surplus of $800 million in trade. Secretary Connally asked if this included tourism and remarked that tourism was a sizable offset to the trade surplus. M. Giscard remarked that the U.S. main bilateral deficit was with Japan and Canada. He added that France is not bilateral minded, but he believes that exports are a good test of competitiveness. He is promoting sales of electrical and other machinery and also steel. Secretary Connally remarked that the Japanese will run both the U.S. and France out of business in steel if we are not careful. There was a discussion of Japanese wage levels and competitive ability.

M. Giscard turned to the subject of the recent monetary turmoil saying that this had been felt much more acutely in Europe than in the U.S., insofar as he gathered from reading the U.S. press. In Europe there was a feeling of real crisis. France, however, had remained calm as she was not directly concerned, having been insulated from the monetary flows. While France agreed with her Common Market partners not to let her views be openly known, Giscard felt that some parts of the German Government want the float to end up in a revaluation while other parts do not. This ambiguity on the part of the Germans is likely to impair the European monetary union.

M. Giscard felt there was a new feeling in the (Saturday night) Ministerial meeting./2/ Hitherto the French had been the "bad boys," by being relatively inflexible in their views while the Germans were in part more flexible. In the recent crisis the Germans spread rumors and declared that the real cause of inflation was the inflow of dollars. The American attitude for some time, said Giscard, had been to pursue discussions of exchange flexibility in the expectation that other countries could be induced to revalue their currencies from time to time as necessary, but for the first time Giscard detects a willingness in Europe not to revalue. Notably, the Italians were very firm on this point and some of the Germans as well. Therefore, said Giscard, the route of revaluation is closed.

/2/Presumably a reference to a May 8 European Community Ministerial meeting; see Document 154.

At the same time the attitude of central banks will change. They will not want to accumulate any more dollars. This will lead us to a multiplication of restrictions and regulations in the Western world, a very unpleasant development in Giscard's view. While France has maintained currency restrictions, Giscard does not feel they are a good thing in the long run and if they proliferate it would be very damaging.

Mr. Volcker objected to the idea that the U.S. had engaged in discussions of exchange flexibility in an effort to induce expected revaluations. He could understand confusion on this point because some individuals have made statements to this effect, but it is not the view of the government. Indeed, it was difficult for him to visualize effective arrangements if other currencies were repeatedly revalued against the dollar. Secretary Connally expressed his agreement with Mr. Volcker's statement emphasizing that he could name individuals who believe in a high degree of exchange rate flexibility and that revaluation by other countries are the basic answer to our problems. These statements are misleading because they do not represent government policy. Government policy, the Secretary added, was made in the Treasury, the White House and the Federal Reserve Board. He had had many discussions with Dr. Burns and the two were in agreement in opposing floating rates. 

The Secretary added that it is, in his opinion, impossible to expect monetary arrangements to deal with all of the economic conflicts among nations. For example, the Germans have their problems with inflation. We have ours, which are the reverse. Many of the problems are political in nature. The Secretary pointed out that the U.S. Government had taken very tough political decisions in 1969 and 1970. In order to cure inflation we have a 6 percent unemployment rate, which is a politically difficult situation.

The Secretary emphasized that we have not been practicing benign neglect for the past 25 years. He reiterated that monetary means alone are not enough to solve the problem. He added that we do not like to see $50 billion in the Eurodollar market with no controls. The steps we have taken during the crisis were designed to calm the waters, but it might be that greater flexibility around parities would serve to counter the enormous capital flows of the type we have been seeing. The U.S. does not want to see exchange controls if they can be avoided.

The Secretary pointed out that the monetary system is tied to the dollar not because we wanted it that way, but because it grew up that way. What good would it do, he asked rhetorically, if we should devalue? He pointed out for example that yen revaluation would in itself not much help the U.S. because of the many Japanese restrictions on imports.

The Secretary emphasized that this government does not want go back to isolationism and that the Mansfield Amendment/3/ defeat was a reflection of that. However, basic trade adjustments are needed and the U.S. spends too much abroad. As an example of the needed adjustments in trade, he cited the fact that five years ago Canada was in trouble while we had a $640 million surplus with Canada. As a result we signed the Auto Agreement and now that surplus has been turned into a substantial deficit. This Agreement was unfair and has to be restructured.

/3/Not further identified. Mansfield and a number of other members of Congress had proposed amendments restricting U.S. activities overseas to curtail U.S. involvement in Southeast Asia.

Turning to the subject of inflation, the Secretary complimented the Minister on his recent analysis of his internal inflation problem, pointing out that the U.S. and France had the same problems--built in wage demands by labor. He cited in the U.S. the construction industry, the railroads and steel. He added that with regard to incomes policies, President Nixon does not want to take half-way measures. But if the President decides to have an incomes policy, he will go all the way to some kind of mandatory system rather than take half-way measures such as some wage price advisory board where he could not enforce the recommendation. This is the reason for the President's hesitation.

The Secretary said that we are trying to expand the economy gradually. The inflation rate is down to 3 percent in the first quarter but will go up somewhat for the year. We will stabilize, but we cannot expect to cure the balance of payments problem this year. That situation should be a lot better in 1972 and 1973. In the meantime, we must get back to stability with perhaps a little more flexibility by way perhaps of wider bands or otherwise.

M. Giscard said that he does not oppose wider bands per se. However, the problem lies in whether international public opinion will believe that a currency going to one margin of a wider band will return to its parity again. Otherwise flexibility may lead to further speculation. For example, if the DM after the present float returns to its former parity, this will be a good lesson and a good argument for greater flexibility. If however the DM does not, the speculators will remember and will not believe that the next currency which floats or moves will return to its parity.

M. Giscard pointed out that over the past ten years there has been a U.S. balance of payments deficit. This gives rise to skepticism about the U.S. desire not to have others revalue. It also has given rise to saturation of the rest of the world with dollars. Now, said M. Giscard, we need proposals for the use of the dollars thus accumulated. Others do not want to hold more dollars. The recent problems are likely to recommence and therefore we must think about this in advance.

Secretary Connally pointed out that in 1969 we had sopped up dollars from the Eurodollar market and in 1970-71 we paid them back again. Now we will have to prove to the skeptics about our balance of payments. To do this we must cut back foreign spending and that means other countries, in particular Japan, Canada and Germany, must contribute more to defense and aid. Twenty years ago, said the Secretary, we were relatively rich in productive capacity and reserves but this is no longer the case. The Mansfield Amendment is in part a reflection of the reality that we have been spending too much.

M. Giscard warned that if there are no joint actions to stabilize the international monetary system he foresaw increasing exchange controls on the European side.

(N.B. During his press conference/4/ M. Giscard said it was regrettable that the European monetary union had been damaged, the more so because of (interesting phrase, spoken in French and not translated) Britain's imminent entry into the Common Market.)

/4/Not further identified.

William C. Cates


157. Memorandum From the Chairman of the Council of Economic Advisers (McCracken) to President Nixon/1/

Washington, June 2, 1971.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 218, Council on International Economic Policy. No classification marking. A stamped notation reads: "The President has seen." He wrote extensive marginal notes which were covered over and cannot be read on the source text, but see Document 159. 

International Monetary Reform

We have just muddled through another international monetary crisis. We can congratulate ourselves that we have so far escaped the worst of outcomes--which would have been commitment to restriction of the domestic economy and widespread controls both at home and abroad. However, we cannot be sure of having escaped entirely or permanently. Several countries, notably Japan, have introduced new controls. Protectionists in Congress and elsewhere interpret the event as additional evidence that the U.S. cannot hold its own in an open world economy. On the other hand the experience of the last few months, allowing a "crisis" to develop and then floating outside the rules of the system, is too uncertain and risky to be repeated.

A system that combines rigidly fixed exchange rates with free trade and capital movements appears to be unworkable. But the recent practice of unregulated exchange rate changes and floating disrupts the monetary order that has generally prevailed so far. There seem to be two alternatives--either more extensive use of direct controls to support a system of fixed exchange rates or an internationally--agreed upon system of greater flexibility. You recognized this two years ago and opted for the second alternative when you decided (in June 1969)/2/ that the U.S. would propose and support a study of greater flexibility in the IMF. This study was made but it has not so far led to concrete results because some countries do not like its conclusions while the attitude of some of our own representatives has been lukewarm at best.

/2/Presumably a reference to the international monetary policy meeting on June 26, 1969; see Documents 131 and 140.

If we allow things to drift further we may well wind up with more extensive use of direct controls, which would be highly burdensome to our trade and investment interests. Our businessmen and bankers also appear to be generally opposed to wider use of floating rates./3/ However, the prospects of going back to the existing rules are dim. Unless timely reforms are made the IMF could easily go the way of the United Nations. 

/3/A handwritten note in the margin reads: "not so clear."

I believe a decision has to be made urgently on the direction in which we would like the international monetary system to develop. In my opinion our best course would be to support implementation of the IMF's flexibility study, published last year./4/ This requires prompt action since the IMF annual report is now being written. Unless recommendations can be brought before the IMF meeting this coming September the public is likely to assume that the flexibility study is dead.

/4/Presumably a reference to the paper for the Annual Meeting in Copenhagen; see footnote 4, Document 148.

I recommend that you convene the Council on International Economic Policy to reassert our position in favor of an updating of the IMF rules. Most of the preparatory work has already been done so there is no need for another lengthy in-house study. The immediate result of the CIEP meeting could be a public statement reaffirming our attachment to the basic principles of the Bretton Woods System, our opposition to extensive controls, and our interest in working with other nations to adapt the international monetary system to contemporary needs./5/

/5/A handwritten note in the margin reads: "I doubt usefulness of CIEP but such a statement would be good."

Paul W. McCracken/6/

/6/The memorandum bears McCracken's handwritten signature despite the typed postscript.

P.S. Read to Paul McCracken, who is currently in Europe, and approved by him. 

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