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January I6f S &I? .Vf. The French Govtoraaent (Council of Ministers) h&ss decided %® request til® approval of the Xnteroatioa-il Monetary Fund for a substantial devaluation of tin French franc, accompanied by the institution of & "floating rate" far most transactions vith the dollar area. Yhis a*V tor if being taken up in advance vith the U.S» Government through the treasury, stad the &©nior N«A«C. staff mesbera, together with.ftr«Overby amd Mr, Latbringer, hssve beon m^otiiig in e-«ecutivo ^©ssioia IQ consider vh*t attitude the &•&• Goraroae&t should tske# li h^-.v@ acw met tvice and will soot again tlii« afternoon^ w# 4r@ b&Ting groot difficulty in rooching agreoaont aaoag Briefly the freach proposal ie as follow«i 1# To devalue ths franc by 80 psr caiat vith ronpoet to all "soft curr«»ci®»B, This laenjit that the nev r*to on tfeej?€ curr©nel#s vould correspoad to a dollar rat® of 214 franc®• The French proposo to doclaro thi© rate m tholr nov B|>&r valuo" In the Fund* 2« To institute s ^fio^tiog rato« for tho U.S. dollar and other "iMird c\trr«nci©sfl (at prooont the ?ortu^e»* aad the Svi*8 franc). As open s&rkot vould b<? 1 B France for the dollar (ftfti other *h&rd curis which ©porter® to tho dollar ?*r#a would t>© p0rmitt«d to tell 50 per c@nt of tholr dollar s^port proc#od» (tho r«aml&i&jg; 50 p«r cent would har© to bo cold to the g©vera&#!si at tho official parity)* la sdditioiii those receiving dollar paystonte for ^«riric®« (eeyoci&ily from tb© tourist trado} *nd poraons i*ep&tri«.tijag dollar capital froai abroad vtMM itii »« allowed to sell their dollars for franca in thie open a*rket* All iaportart froa. tho dollar &roa (except importer* of coal, vtmA f fortlllftorf aad petroleum—-see b^lov) would have to buy their dollar oxchaago in thi» mrkot. Although laportt from tho dollar area would ooiitiuua under liftfflfcftj it i* apparently e^p«ated that thi© dea».nd for dollars vould be miffieieotly large in relation to the supply to a*sure the establishment of a substantial pronitta for the dollar in the open market* S E C R K T -2~ It is essential to the plan that s, premium arise, because only through a presium would recipients of tourist dollars and parsons repatriating capital be induced to sell their dollars for francs. It should be recognised, therefore, that this would b© a controlled presto*, imd not in any sease S premium arising out of the operation of a *fre@ market*. The French C/orernaent could raise (or lower) the preisium by allocating fever (or sore) import licenses* It might also intervene directly in the market, for example, by selling is the market dollars obtained from exporters (s&ounting to 50 per cent of dollar export proceeds)• 3. To retain the rate of 119 francs to the dollar vith respect to imports payable in dollars of specified essential eossaodities (coal, wheat, fertiliser, and petroleua products) in order to prevent tha inflationary increase in franc prices of these commodities vhich would occur if they were imported at the nev official r&te* In considering this proposal, we (the U.S. technical group) have broken the problem into tvo parts% (l) is it necessary for the French to adopt differential rates of exchange for .export** «&d (2) is it necessary for them to institute an open market for dollar imports, dollar invisibles, and dollar capital repatriation. Vith respect to the first question, we have reached agreement that as a minima we should object to the allocation of 50 per cent of dollar export proceeds to the open a&rket. The effect of this, assuming tttet the opQtL market dollar rate is around 300, is to a&ke the effective rate of exchange on dollar exports 257 (half at 214 and half at 300)• The French argue that they nefid & relatively higher r&te on dollar exports than on exports to 8goft currency* countries} they point out that "soft currencies* are in turn over-valued in relation to the dollar, &n& that appropriate adjustment to the "soft currencies" would still h&ve the franc over-valued vis-a-vis the dollar, While granting the logic of this, position, we feel that complete chaos would develop in international exchange rates if each country vere allowed to adopt • discriminatory system of exchange' rates based upon the presumed over-valuation or undervaluatioa of each foreign currency, the only real answer to the problem Is devaluation of the other "soft currencies", which may in fact follow fast if the French now act, furthermore, while it would undoubtedly be desirable to stimulate French e;jcparts to the dollar area, we doubt whether more than 1-2 million dollars of additional exports per month would develop as a result of the proposed special premium on dollar exports If half of the dollar export proceeds no longer flowed to the open market, it would be necesss&ry, is order to preierve tfet b&i&noe la that Market, to withdraw from it an equivalent amount of demand by !»• porter*. In other words, instead of all Importers (other than of the specified egeentinl commodities) having to buy their dollar exchange in that market, ssoiae importers (presumably of additional essential eoa&aodities) could be allocated dollar exchange at the official rate. On the second question, there is considerable difference of view. In general, Horman Kegs of the State impartsent ^nd I are Tory skeptical as to whether the "floating rate* system is justifiable at all. If 50 per cent of the dollar export proceeds were not sold on the open aarket, that market would becom© ©imply a deviee to assure that certain importer© froa the dollar area would p&y the premium required to Induce offerings from recipients of tourist dollars and persona repatriating dollar capital, and pay the cost of subsidising the specified essential imports. (The government, vhich would be buying all dollar proceeds of exports at the official rate, could sell aom© of the$@ proceed*! on the open market at a premium in order to cover its losses fro® the subsidy exchange rat© granted to lBtportert of specified essential eonaodities») In short, the whole differential exeh&ng<§ rat© system would be revealed as siaiply a fiscal device. Ejjiotly the same purposes could be accomplished through the imposition of speelal duti©» on certain Imports fro» the dollar area, and the payment by tbe government of straight subsidies to importers of the specified essential commodities and outright bonuses for dollars orlgin&ting froa the tourist trade or from capital repatriation• However, (1) the government has only recently abandoned aott of its Iat6?a&l aubsldl®8# sad would ht rsluotant to resume this practice openly; and (2) it might be cult© awkward for ttem to pay an outright bonus on "tourist dollars* and "capital dollars** These circimstanees apparently incline the Treasury to be willing to accept the French proposals (as modified vith rsgpect to exports). However, ay feeling 1© that the French government ought tofeub&idlzeIft* port« of the specified ©ssentisi commodities through a tux on certain imports from the dollar area, and try to recapture tourist dollars and capital abroad through dlreet action rather than exchange rate inducements or bonuses in other forms. Here again Mr. Kegs and I are in agr-esaeat that the French holders of "tourist daLUrr* and of dollar capital located abroad will probably aot be induced to give up their dollar holdings through exchange rate premiums or other bomisee.
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